1
SCHEDULE 14C
(RULE 14C-101)
INFORMATION REQUIRED IN INFORMATION STATEMENT
SCHEDULE 14C INFORMATION
INFORMATION STATEMENT PURSUANT TO SECTION 14(C) OF THE SECURITIES
EXCHANGE ACT OF 1934
Check the appropriate box:
[ ] Preliminary information statement [ ] Confidential, for use of
the Commission only (as
permitted by Rule
14c-5(d)(2))
[X] Definitive information statement
DLB Oil & Gas, Inc.
__________________________________________________
(Name of Registrant as Specified in Its Charter)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14-c-5(g) and 0-11.
(1) Title of each class of securities to which transaction
applies:
(2) Aggregate number of securities to which transaction applies:
(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):
(4) Proposed maximum aggregate value of transaction:
(5) Total fee paid:
[ ] 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:
(2) Form, Schedule or Registration Statement No:
(3) Filing Party:
(4) Date Filed:
2
INFORMATION STATEMENT FOR SHAREHOLDERS OF
DLB OIL & GAS, INC.
---------------------
PROSPECTUS
CHESAPEAKE ENERGY CORPORATION
This Information Statement/Prospectus ("Information Statement/Prospectus")
is being furnished to the shareholders of DLB Oil & Gas, Inc., an Oklahoma
corporation ("DLB"), in connection with the proposed merger (the "Merger") of
Chesapeake Merger Corp. ("Merger Sub"), an Oklahoma corporation and an indirect
wholly owned subsidiary of Chesapeake Energy Corporation, an Oklahoma
corporation ("CHK"), with and into DLB, with DLB continuing as the surviving
corporation. The Merger will be effected pursuant to an Agreement and Plan of
Merger, dated as of October 22, 1997, among CHK, Merger Sub and DLB as amended
by Amendment No. 1 thereto, dated as of December 22, 1997, Amendment No. 2
thereto, dated as of February 11, 1998, and Amendment No. 3 thereto, dated as of
March 24, 1998 (as so amended, the "Merger Agreement"). A conformed copy of the
Merger Agreement is attached hereto as Annex A.
Immediately prior to the Merger, DLB will distribute to DLB's shareholders
(the "WRT Spin-Off") all of DLB's equity interest in DLB's 48.8%-owned
subsidiary, WRT Energy Corporation ("WRT"), consisting of 10,792,220 shares of
WRT common stock, par value $0.01 per share ("WRT Common Stock"). In the Merger,
each share of DLB Common Stock (other than shares held by dissenting
shareholders and shares to be canceled pursuant to the Merger Agreement) will be
converted into the right to receive approximately (i) $1.35 in cash, (ii) 0.3854
share of common stock, par value $.01 per share, of CHK ("CHK Common Stock"),
(iii) 0.2277 share of the common stock, par value $.01 per share, of Bayard
Drilling Technologies, Inc. ("Bayard Common Stock"), and (iv) certain contingent
payment rights described herein. In the WRT Spin-Off, a holder of DLB Common
Stock will receive approximately 0.8318 share of WRT Common Stock for each share
of DLB Common Stock held. The foregoing per share amounts are based on the
assumption that there will be 12,975,000 shares of DLB Common Stock outstanding
immediately prior to the effective time ("Effective Time") of the Merger. To the
extent outstanding options to acquire up to 1,713,750 shares of DLB Common Stock
are exercised prior to the Effective Time, the per share amounts of cash and
stock to be received in the Merger and the WRT Spin-Off will be proportionately
reduced. See "Summary -- Merger Agreement -- Consideration." In addition, the
number of shares of Bayard Common Stock and of WRT Common Stock that any holder
of DLB Common Stock would otherwise be entitled to receive will be rounded to
the nearest whole number of such shares, and in no event will the number of
shares of Bayard Common Stock or WRT Common Stock distributed in the Merger or
WRT Spin-Off, as the case may be, exceed the number of such shares owned by DLB
immediately prior to the Effective Time.
Assurance of Votes Required. The Merger Agreement and the Merger have each
been approved by the Board of Directors of DLB. Under Oklahoma law, the
affirmative vote of the holders of a majority of the outstanding shares of DLB
Common Stock is required to approve the Merger. Charles E. Davidson, Mike
Liddell and Mark Liddell, who collectively own 10,077,500 shares of DLB Common
Stock representing approximately 77.7% of the DLB Common Stock outstanding as of
the close of business on March 20, 1998 (the "Record Date"), entered into
irrevocable proxy agreements with CHK whereby such shareholders agreed to vote
(or to execute a written consent in lieu of a vote with respect to) all shares
of DLB Common Stock owned by them in favor of the proposal to approve the Merger
Agreement and the Merger (the "DLB Proposal") and each granted CHK a proxy to
vote (or to execute a written consent in lieu of a vote with respect to) such
shares in favor of the DLB Proposal. For a description of such irrevocable
proxies, see "Summary -- Certain Other Agreements -- Proxy Agreements." On March
25, 1998, CHK, as attorney-in-fact, executed a written consent in lieu of a vote
with respect to the shares of DLB Common Stock owned by each of Charles E.
Davidson, Mike Liddell and Mark Liddell approving the DLB Proposal. As a result,
the approval of the DLB Proposal is assured. ACCORDINGLY, WE ARE NOT ASKING YOU
FOR A PROXY AND YOU ARE REQUESTED NOT TO SEND US A PROXY.
Under applicable federal securities laws, the Merger cannot be effected
until at least twenty business days after this Information Statement/Prospectus
has been sent or given to DLB's shareholders. CHK and DLB expect that the Merger
will be consummated on April 28, 1998, assuming that the conditions to the
Merger set forth in the Merger Agreement have been satisfied.
SHAREHOLDERS OF DLB WILL BE ENTITLED TO PURSUE DISSENTERS' RIGHTS OF
APPRAISAL UNDER SECTION 1091 OF THE OKLAHOMA GENERAL CORPORATION ACT (THE
"OGCA"). SEE "SHAREHOLDERS' RIGHTS OF APPRAISAL."
SEE "RISK FACTORS" COMMENCING ON PAGE 16 FOR A DESCRIPTION OF CERTAIN
MATTERS THAT SHOULD BE CONSIDERED BY DLB SHAREHOLDERS IN CONNECTION WITH THEIR
CONSIDERATION OF THE DLB PROPOSAL.
This Information Statement/Prospectus also constitutes the Prospectus of CHK
filed as part of a Registration Statement on Form S-4 (the "Registration
Statement") with the Securities and Exchange Commission (the "SEC" or the
"Commission") under the Securities Act of 1933, as amended (the "Securities
Act"), relating to the shares of CHK Common Stock to be issued to holders of DLB
Common Stock in connection with the Merger. This Information
Statement/Prospectus also includes as Annex D a copy of the Prospectus relating
to the Bayard Common Stock (the "Bayard Prospectus") constituting a portion of
the Merger Consideration.
This Information Statement/Prospectus is first being mailed to the
shareholders of DLB on or about March 31, 1998.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS INFORMATION STATEMENT/PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this Information Statement/Prospectus is March 31, 1998.
3
AVAILABLE INFORMATION
DLB and CHK are subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith file reports and other information with the Commission relating to
their business, financial position, results of operations and other matters.
Such reports, proxy statements and other information can be inspected and copied
at the Public Reference Section maintained by the Commission at Judiciary Plaza,
450 Fifth Street, N.W., Washington, D.C. 20549 and at its Regional Offices
located at The Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661-2511, and 7 World Trade Center, New York, New York 10048. Copies
of such material also can be obtained from the Public Reference Section of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed
rates. CHK Common Stock and DLB Common Stock are listed for trading on the New
York Stock Exchange (the "NYSE") and the National Association of Securities
Dealers Automated Quotation System National Market (the "NASDAQ NMS"),
respectively. Such reports, proxy statements and other materials can also be
inspected at the offices of the NYSE, 20 Broad Street, New York, New York 10005
(in the case of CHK) and at the offices of the National Association of
Securities Dealers, Inc., 1735 K Street, N.W., Washington, D.C. 20006 (in the
case of DLB). In addition, WRT and Bayard Drilling Technologies, Inc. ("Bayard")
are also subject to the informational requirements of the Exchange Act and in
accordance therewith file reports and other information with the Commission
relating to their business, financial position, results of operations and other
matters. Such reports, proxy statements and other information can be inspected
and copied at the Public Reference Section maintained by the Commission at
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at its
Regional Offices located at The Citicorp Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661-2511, and 7 World Trade Center, New York, New York
10048. Copies of such material also can be obtained from the Public Reference
Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at
prescribed rates. Bayard Common Stock is listed for trading on the American
Stock Exchange ("AMEX"). Reports, proxy statements and other materials of Bayard
can also be inspected at the offices of the American Stock Exchange, 86 Trinity
Place, New York, New York 10006-1881. Such reports, proxy statements and other
information of DLB, CHK, WRT and Bayard can be reviewed through the Commission's
Electronic Data Gathering Analysis and Retrieval System, which is publicly
available through the Commission's web site (http://www.sec.gov).
CHK has filed with the Commission a Registration Statement on Form S-4,
Commission File No. 333-48735 under the Securities Act with respect to the CHK
Common Stock offered hereby. This Information Statement/Prospectus does not
contain all the information set forth in the Registration Statement, certain
parts of which are omitted in accordance with the rules and regulations of the
Commission. Reference is made to the Registration Statement and to the exhibits
relating thereto for further information with respect to DLB, CHK and the CHK
Common Stock offered hereby.
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION NOT CONTAINED IN THIS INFORMATION STATEMENT/PROSPECTUS AND, IF
GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION SHOULD NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY DLB, CHK OR ANY OTHER PERSON. THIS INFORMATION
STATEMENT/PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF
AN OFFER TO BUY ANY SECURITIES IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS
NOT LAWFUL TO MAKE ANY SUCH OFFER OR SOLICITATION IN SUCH JURISDICTION. NEITHER
THE DELIVERY OF THIS INFORMATION STATEMENT/PROSPECTUS NOR ANY DISTRIBUTION OF
THE SECURITIES MADE UNDER THIS INFORMATION STATEMENT/PROSPECTUS SHALL, UNDER ANY
CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF DLB OR CHK SINCE THE DATE OF THIS INFORMATION STATEMENT/PROSPECTUS.
ii
4
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
THIS INFORMATION STATEMENT/PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS
AND INCORPORATES BY REFERENCE CERTAIN FORWARD-LOOKING STATEMENTS WITHIN THE
MEANING OF THE SECURITIES ACT, THE EXCHANGE ACT AND THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995 WITH RESPECT TO THE FINANCIAL CONDITION, RESULTS
OF OPERATIONS AND BUSINESS OF DLB AND CHK, INCLUDING STATEMENTS UNDER THE
CAPTIONS "RISK FACTORS," "DESCRIPTION OF MERGER -- DLB'S REASONS FOR THE MERGER;
RECOMMENDATION OF THE DLB BOARD OF DIRECTORS," "DLB MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS," "SUMMARY -- DLB'S
REASONS FOR THE MERGER; RECOMMENDATION OF THE DLB BOARD OF DIRECTORS,"
"SUMMARY -- CHK'S REASONS FOR THE MERGER," "SUMMARY -- OPINION OF LEHMAN
BROTHERS," AND "SUMMARY -- RISK FACTORS." THESE FORWARD-LOOKING STATEMENTS
INVOLVE CERTAIN RISKS AND UNCERTAINTIES. NO ASSURANCE CAN BE GIVEN THAT SUCH
RESULTS WILL BE REALIZED. FACTORS THAT MAY CAUSE ACTUAL RESULTS TO DIFFER
MATERIALLY FROM THOSE CONTEMPLATED BY SUCH FORWARD-LOOKING STATEMENTS INCLUDE,
AMONG OTHERS, THE FOLLOWING: (1) EXPECTED COST SAVINGS FROM THE MERGER MAY NOT
BE FULLY REALIZED; (2) COSTS OR DIFFICULTIES RELATED TO THE INTEGRATION OF THE
BUSINESSES OF DLB AND CHK COULD BE GREATER THAN EXPECTED; AND (3) GENERAL
ECONOMIC CONDITIONS MAY BE LESS FAVORABLE THAN EXPECTED. FURTHER INFORMATION ON
SUCH FACTORS AND OTHER FACTORS WHICH COULD AFFECT THE FINANCIAL RESULTS OF CHK
AFTER THE MERGER AND SUCH FORWARD-LOOKING STATEMENTS IS INCLUDED IN THE SECTION
HEREIN ENTITLED "RISK FACTORS." IN ADDITION, FOR A DESCRIPTION OF CERTAIN RISK
FACTORS AFFECTING THE BUSINESS OF BAYARD, SEE THE INFORMATION INCLUDED UNDER THE
CAPTION "RISK FACTORS" IN THE BAYARD PROSPECTUS ATTACHED HERETO AS ANNEX D.
INCORPORATION OF DOCUMENTS BY REFERENCE
The following documents filed with the Commission by CHK (File No. 1-13726)
pursuant to the Exchange Act are incorporated by reference in this Information
Statement/Prospectus:
1. Annual Report, as amended, on Form 10-K for the fiscal year ended
June 30, 1997;
2. Quarterly Report on Form 10-Q for the quarter ended September 30,
1997;
3. Current Reports on Form 8-K filed September 9, 1997, October 1,
1997, October 31, 1997, November 5, 1997, November 6, 1997, November 20,
1997, December 11, 1997, December 24, 1997, January 15, 1998, January 26,
1998, February 5, 1998, February 13, 1998, March 5, 1998 (four reports),
March 20, 1998, March 23, 1998, and March 25, 1998; and
4. Proxy Statement on Schedule 14A dated November 12, 1997 and
Supplement to Proxy Statement dated November 28, 1997 for 1997 Annual
Meeting on December 12, 1997.
On March 25, 1998, CHK filed a Transition Report on Form 10-K which
includes the audited financial results for the six-month transition period ended
December 31, 1997. Such audited financial results are incorporated by reference
herein.
All documents and reports filed by CHK pursuant to Section 13(a), 13(c), 14
or 15(d) of the Exchange Act after the date of this Information
Statement/Prospectus shall be deemed to be incorporated by reference in this
Information Statement/Prospectus and to be a part hereof from the dates of
filing of such documents or reports. Any statement contained in a document
incorporated or deemed to be incorporated by reference herein shall be deemed to
be modified or superseded for purposes of this Information Statement/Prospectus
to the extent that a statement contained herein or in any other subsequently
filed document which also is or is deemed to be incorporated by reference herein
modifies or supersedes such statement. Any such statement so modified or
superseded shall not be deemed, except as so modified or superseded, to
constitute a part of this Information Statement/Prospectus.
THIS INFORMATION STATEMENT/PROSPECTUS INCORPORATES DOCUMENTS BY REFERENCE
RELATING TO CHK WHICH ARE NOT PRESENTED HEREIN OR DELIVERED HEREWITH. SUCH
DOCUMENTS (OTHER THAN EXHIBITS TO SUCH DOCUMENTS UNLESS SUCH EXHIBITS ARE
SPECIFICALLY INCORPORATED BY REFERENCE) ARE AVAILABLE, WITHOUT CHARGE, TO ANY
PERSON, INCLUDING ANY BENEFICIAL OWNER OF DLB COMMON STOCK, TO WHOM THIS
INFORMATION STATEMENT/PROSPECTUS IS DELIVERED, ON WRITTEN OR ORAL REQUEST TO
CHESAPEAKE ENERGY CORPORATION, 6100 NORTH WESTERN AVENUE, OKLAHOMA CITY,
OKLAHOMA 73118, ATTENTION: CORPORATE SECRETARY (TELEPHONE NUMBER: (405)
848-8000, EXTENSION 212). IN ORDER TO ENSURE TIMELY DELIVERY OF THE DOCUMENTS,
ANY REQUEST SHOULD BE MADE BY APRIL 13, 1998.
iii
5
TABLE OF CONTENTS
PAGE
-----
AVAILABLE INFORMATION....................................... ii
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS... iii
INCORPORATION OF DOCUMENTS BY REFERENCE..................... iii
SUMMARY..................................................... 1
The Companies............................................. 1
DLB.................................................... 1
CHK.................................................... 1
Recent Developments.................................... 1
Merger Agreement.......................................... 3
Consideration.......................................... 3
Barbados Contingent Payment Rights..................... 4
Liquidating Trust Contingent Payment Rights............ 4
WRT Spin-Off........................................... 5
Exchange of Certificates............................... 5
Fractional Shares...................................... 6
Conditions............................................. 6
Termination............................................ 6
Required Vote; Action by Written Consent.................. 6
DLB's Reasons for the Merger; Recommendation of the DLB
Board of Directors..................................... 7
CHK's Reasons for the Merger.............................. 7
Opinion of Lehman Brothers................................ 7
Interests of Certain Persons in the Merger................ 7
Indemnification........................................ 8
Stock Options.......................................... 8
Employment Agreements.................................. 8
Stay-on Bonus.......................................... 8
Registration Rights Agreement.......................... 8
Barbados Assets........................................ 8
Certain Other Agreements.................................. 9
Proxy Agreements....................................... 9
Goodwill Protection Agreement.......................... 9
Government and Regulatory Approvals....................... 9
Certain Federal Income Tax Consequences................... 9
Accounting Treatment...................................... 10
Shareholders' Rights of Appraisal......................... 10
Risk Factors.............................................. 10
Market Price and Dividend Data; Stock Exchange Listing.... 10
Selected Historical Financial Information................. 11
Selected Consolidated Financial Data for DLB Oil & Gas,
Inc.................................................... 12
Selected Combined Financial Data for Chesapeake Energy
Corporation............................................ 14
Comparative Per Share Data................................ 15
RISK FACTORS................................................ 16
DESCRIPTION OF MERGER....................................... 21
Background................................................ 21
DLB's Reasons for the Merger; Recommendation of the DLB
Board of Directors..................................... 25
Opinion of Lehman Brothers................................ 25
Resales of CHK Common Stock Received in the Merger........ 30
Delisting and Deregistration of DLB Common Stock.......... 30
BUSINESS OF CHK............................................. 30
BUSINESS OF DLB............................................. 31
DLB MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS....................... 43
iv
6
PAGE
-----
INTERESTS OF CERTAIN PERSONS IN THE MERGER.................. 50
MERGER AGREEMENT............................................ 52
General................................................... 52
Merger Consideration...................................... 52
Barbados Contingent Payment Rights........................ 53
Liquidating Trust Contingent Payment Rights............... 54
Exchange of Certificates.................................. 54
Conditions to the Consummation of the Merger.............. 55
Accounting Treatment...................................... 56
Effect on DLB Employee Benefit Plans and Employee
Agreements............................................. 56
DLB Stock Options......................................... 57
Restrictions on Resales by Affiliates..................... 57
Registration Rights Agreement............................. 58
Goodwill Protection Agreement............................. 58
Conduct of Business of DLB Prior to the Merger............ 59
Conduct of Business of CHK Prior to the Merger............ 60
No Solicitation of Acquisition Transactions............... 61
Termination............................................... 62
Termination Fees; Expenses................................ 63
Amendment and Waiver...................................... 63
Representations and Warranties............................ 64
SECURITY OWNERSHIP OF DIRECTORS, OFFICERS AND CERTAIN
BENEFICIAL OWNERS......................................... 64
DESCRIPTION OF CHK CAPITAL STOCK............................ 66
SHAREHOLDERS' RIGHTS OF APPRAISAL........................... 69
GOVERNMENT REGULATION....................................... 71
CERTAIN FEDERAL INCOME TAX CONSEQUENCES..................... 71
MARKET PRICE AND DIVIDEND DATA; STOCK EXCHANGE LISTING...... 72
COMPARISON OF SHAREHOLDER RIGHTS............................ 73
DESCRIPTION OF WRT SPIN-OFF................................. 76
VALIDITY OF SECURITIES...................................... 78
EXPERTS..................................................... 78
INDEX TO FINANCIAL STATEMENTS............................... F-1
ANNEX A Agreement and Plan of Merger among Chesapeake Energy
Corporation, Chesapeake Merger Corporation and DLB Oil &
Gas, Inc., dated as of October 22, 1997, as amended by
Amendment No. 1 thereto dated as of December 22, 1997,
Amendment No. 2 thereto dated as of February 11, 1998, and
Amendment No. 3 thereto dated as of March 24, 1998.......... A-1
ANNEX B Opinion of Lehman Brothers Inc. dated February 11, 1998..... B-1
ANNEX C Section 1091 of the Oklahoma General Corporation Act........ C-1
ANNEX D Prospectus of Bayard Drilling Technologies, Inc., dated
March 30, 1998.............................................. D-1
v
7
SUMMARY
The following is a summary of, and is qualified in its entirety by, the
more detailed information contained elsewhere in this Information
Statement/Prospectus, the Annexes hereto and the documents incorporated by
reference herein. Certain terms used herein are defined elsewhere in this
Information Statement/Prospectus. Shareholders of DLB are urged to read this
Information Statement/Prospectus, the Annexes hereto and the documents
incorporated herein by reference in their entirety. Shareholders of DLB should
carefully consider the information set forth below under the heading "Risk
Factors" beginning on page 16 hereof.
THE COMPANIES
DLB. DLB is an independent energy company engaged primarily in the
exploration, development, production and acquisition of oil and gas properties
in the Mid-Continent region and the coastal and shallow onshore regions of south
Louisiana. DLB's principal producing fields are presently concentrated in
Oklahoma.
DLB was incorporated in Oklahoma in 1990 as DLB Operating, Inc. In 1995 its
name was changed to DLB Oil & Gas, Inc. DLB's principal executive offices are
located at 1601 Northwest Expressway, Suite 700, Oklahoma City, Oklahoma
73118-1401, and its telephone number is (405) 848-8808.
For additional information concerning DLB and its subsidiaries, see
"Business of DLB" and "Available Information."
CHK. CHK is an independent oil and gas company engaged in the exploration,
production, development and acquisition of oil and natural gas in major onshore
producing areas of the United States and Canada.
Despite its overall favorable record of growth, in the fiscal year ended
June 30, 1997 CHK incurred a net loss of $183 million primarily as a result of a
$236 million impairment of its oil and gas properties. The impairment was the
amount by which CHK's capitalized costs of oil and gas properties exceeded the
estimated present value of future net revenue from CHK's proved reserves at June
30, 1997.
In response to the fiscal 1997 loss, CHK significantly revised its fiscal
1998 business strategy. These revisions include slowing its exploration pace in
the Louisiana Austin Chalk Trend ("Louisiana Trend") and concentrating its
Louisiana Trend drilling activities in Masters Creek; utilizing more extensively
3-D seismic technology prior to conducting drilling operations; reducing the
acquisition of additional unproven leasehold; and selectively acquiring proved
reserves as a complement to its primary strategy of developing reserves through
the drillbit.
CHK's principal executive offices are located at 6100 North Western Avenue,
Oklahoma City, Oklahoma 73118, and its telephone number at that location is
(405) 848-8000.
For additional information concerning CHK and its subsidiaries, see
"Available Information."
RECENT DEVELOPMENTS. On December 16, 1997, CHK acquired AnSon Production
Company ("AnSon"), a privately owned oil and gas producer that owned
approximately 30 Bcfe of proved reserves (based upon estimates reported by AnSon
as of September 30, 1997), undeveloped mineral interests, and a gas marketing
subsidiary based in Oklahoma City. Consideration for the AnSon acquisition was
approximately $43 million, consisting of (i) the issuance of 3,792,724 shares of
CHK Common Stock and (ii) a cash payment to be determined by the difference, if
any, of the value realized from the future sale of such shares by AnSon and the
value of such shares agreed upon by the parties at the time of the execution of
the AnSon merger agreement.
On March 10, 1998, after obtaining the required approval by the affirmative
vote of a majority of the outstanding shares of CHK common stock and Hugoton
common stock, respectively, CHK completed the acquisition of Hugoton Energy
Corporation ("Hugoton"). Pursuant to the Agreement and Plan of Merger by and
among CHK, Chesapeake Acquisition Corp., and Hugoton, as amended (the "Hugoton
Merger Agreement") Chesapeake Acquisition Corp. merged with and into Hugoton,
which became a wholly owned
1
8
subsidiary of CHK (the "Hugoton Merger"). Each share of Hugoton common stock was
converted into the right to receive 1.3 shares of CHK Common Stock, and up to
27,193,664 shares of CHK Common Stock (which amount includes shares issuable
upon exercise of outstanding replacement options which were issued to former
Hugoton optionholders pursuant to the Hugoton Merger Agreement) have been
reserved for issuance to former shareholders of Hugoton.
On December 5, 1997, CHK purchased from Pan East Petroleum Corporation, a
Canadian exploration and production company ("Pan East"), 11.9 million treasury
shares of Pan East's common stock at a price per share of $2.50 (Cdn) in a
private placement. Based on Pan East's existing 48 million outstanding shares,
CHK will own approximately 12 million shares, or 19.9% of Pan East's outstanding
common stock, for an investment of $30 million (Cdn), or $22 million (U.S.). The
purpose of CHK's investment is to assist Pan East in financing its share of the
exploration, development and acquisition activities under a proposed joint
venture whereby CHK will have the right to participate as a non-operator with up
to a 50% interest in all drilling activities and acquisitions made by Pan East
during the next two years. During the nine months ended September 30, 1997, Pan
East reported total revenues, operating and net losses of $10.5 million (Cdn),
$2.4 million (Cdn) and $2.6 million (Cdn), respectively.
On January 30, 1998, CHK entered into an alliance with Calgary-based Ranger
Oil Company ("Ranger") to jointly develop a 3.2 million acre area of mutual
interest in the Helmet, Midwinter, and Peggo areas of northeastern British
Columbia. In addition, CHK paid Ranger $50 million to acquire 67 Bcfe of
reserves, 5.2 Bcfe of anticipated 1998 production, and approximately 160,000 net
acres of primarily undeveloped leasehold. The effective date of the transaction
is December 1, 1997.
In February 1998, CHK purchased the Mid-Continent properties of privately
owned EnerVest Management Company, L.C. for $38 million. The properties include
approximately 40 Bcfe of proved reserves and are expected to produce
approximately 4.5 Bcfe in 1998.
On March 5, 1998, CHK agreed to acquire, effective January 1, 1998, all of
the outstanding capital stock of MC Panhandle Corp., a wholly owned subsidiary
of Occidental Petroleum Corporation ("Occidental"), for a purchase price of $105
million in cash (the "Panhandle Acquisition"). In the Panhandle Acquisition, CHK
will acquire estimated proved reserves of approximately 100 Bcf of natural gas
(85% of which are proved developed producing) with an estimated
reserve-to-production index of eight years. The natural gas properties to be
acquired in the Panhandle Acquisition are located in the West Panhandle Field in
the Carson, Gray, Hutchinson and Moore counties of the Texas Panhandle in close
proximity to the Texas Panhandle properties acquired from Hugoton on March 10,
1998. During 1997, the wells to be acquired by CHK in the Panhandle Acquisition
produced approximately 13 Bcf (36 million cubic feet per day) of natural gas net
to Occidental's interest from a total of 256 wells, 254 of which are currently
operated by Occidental. After the closing of the Panhandle Acquisition, which is
scheduled for May 29, 1998, CHK will assume operations of the wells currently
operated by Occidental and will own an average working interest of 99.5% and an
average net revenue interest of 85.2%.
On March 5, 1998, CHK reported preliminary financial results for the
six-month transition period ended December 31, 1997. CHK had previously
announced a change in its year-end from June 30 to December 31. As a result,
CHK's transition period results cover only the six-month period described above
and there are no directly comparable prior year results. CHK anticipates
releasing final results for the transition period in late March. CHK expects to
report a $110 million impairment of oil and gas assets under the ceiling test
provisions of full-cost accounting rules which will result in a net loss of
approximately $32 million on revenue of approximately $233 million for the six
months ended December 31, 1997. CHK expects to report operating cash flow for
this period of approximately $141 million (including $74 million from the Bayard
transaction) on production of approximately 39 Bcfe. Under the rules mandated by
the Commission, to the extent the carrying cost of CHK's oil and gas assets
associated with its proved reserves exceeds the discounted present value of its
proved reserves, the difference must be recognized as an additional charge to
earnings. Because of the steep decline in oil prices and higher finding and
drilling costs in the second half of 1997, at year end CHK's capitalized costs
exceeded the discounted present value of its proved reserves, resulting in the
impairment.
2
9
CHK's Louisiana properties produce approximately 60% oil and the value
associated with the reserves is therefore particularly sensitive to changes in
oil prices. Future full-cost ceiling writedowns could be caused by further
declines in oil and/or gas prices, by the accounting adjustments associated with
CHK's ongoing acquisition strategy, or by downward revisions in reserve
estimates. Any such additional writedowns would also be non-cash charges and
would result in a decrease in CHK's earnings and shareholders' equity for the
period of the writedown, but would increase CHK's subsequent earnings over what
they would have been without the writedowns because of decreased depletion and
depreciation charges.
CHK continues to evaluate from time to time other acquisition opportunities
which may include, if opportunities so arise, the acquisition of oil and gas
assets or other oil and gas producing companies.
On March 9, 1998, Chesapeake Acquisition Corporation and Chesapeake
Mid-Continent Corp., each a wholly owned subsidiary of CHK, as borrowers and
Chesapeake Merger Corp., Chesapeake Acquisition Corp., Chesapeake Columbia
Corp., Mid-Continent Gas Pipeline Company and AnSon Gas Marketing, each an
indirect wholly owned subsidiary of CHK, as initial guarantors entered into a
credit agreement with Union Bank of California, N.A. as agent and certain
financial institutions named therein as lenders, providing for a $500 million
facility (the "Credit Facility") with a current borrowing base of $168 million,
which increases to $220 upon consummation of the Merger. The Credit Facility
matures on March 9, 2002. Borrowings under the Credit Facility are secured by
Chesapeake Acquisition Corporation's pledge of its subsidiaries' capital stock
and bear interest currently at a rate equal to the Eurodollar Rate (as defined)
plus 1.5%. Amounts currently outstanding under the Credit Facility were incurred
to fund the assumption of debt in connection with the Hugoton Merger.
MERGER AGREEMENT
CONSIDERATION. In the Merger, each outstanding share of DLB Common Stock
(other than shares held by dissenting shareholders ("Dissenting Shares") and
other shares to be canceled pursuant to the Merger Agreement) will be converted
into the right to receive approximately the following consideration (the "Merger
Consideration"):
BEFORE MERGER AFTER MERGER ESTIMATED VALUE(1)
------------- ------------ ------------------
One share of DLB Common Stock $1.35 cash $1.35
0.3854 share of CHK Common Stock $2.17
0.2277 share of Bayard Common Stock $3.53
1 Barbados Contingent Payment Right --(2)
1 Liquidating Trust Contingent Payment Right --(2)
- ---------------
(1) On March 30, 1998 the closing sales price per share of CHK Common Stock and
Bayard Common Stock was $5.625 and $15.50, respectively.
(2) As explained more fully below, the Barbados Contingent Payment Rights and
the Liquidating Trust Contingent Payment Rights represent the right to
receive certain payments that are subject to a number of contingencies.
Therefore, no estimated value for such rights is presented.
In addition, immediately prior to the Merger, DLB will effect the WRT
Spin-Off pursuant to which it will distribute all the shares of WRT Common Stock
that DLB owns to the shareholders of record of DLB immediately prior to the
Effective Time. It is estimated that DLB shareholders will receive 0.8318 share
of WRT Common Stock (estimated value of $2.87 based on the last sales price of
$3.45 per share of WRT Common Stock on March 27, 1998 as reported on the OTC
Bulletin Board for each share of DLB Common Stock held). The foregoing per share
amounts of cash and stock are based on the assumption that there will be
12,975,000 shares of DLB Common Stock outstanding immediately prior to the
Effective Time. To the extent outstanding options to acquire up to 1,713,750
shares of DLB Common Stock are exercised prior to the Effective Time, the per
share amounts of cash and stock will be proportionately reduced. If all such
options were exercised by the payment of the exercise price in cash, the
consideration received per share of DLB Common Stock would be $1.19 in cash,
0.3404 share of CHK Common Stock, 0.2012 share of Bayard
3
10
Common Stock and 0.7347 share of WRT Common Stock. In addition, the number of
shares of Bayard Common Stock that any holder of DLB Common Stock would
otherwise be entitled to receive will be rounded to the nearest whole number of
shares of Bayard Common Stock, and in no event will the number of shares of
Bayard Common Stock subject to issuance as Merger Consideration exceed the
number of shares of Bayard Common Stock owned by DLB immediately prior to the
Effective Time. For a further description of the Merger Consideration, see
"Merger Agreement -- Merger Consideration."
The 5,000,000 shares of CHK Common Stock to be issued in the Merger
represent approximately 5% of the CHK Common Stock outstanding as of March 30,
1998.
BARBADOS CONTINGENT PAYMENT RIGHTS. As explained more fully below, as part
of the Merger Consideration, DLB shareholders will receive Barbados Contingent
Payment Rights which will represent the DLB shareholders' right to receive their
pro-rata share of the approximately $2.5 million of sale proceeds, less
transaction costs, from the sale of DLB's debt and equity interests (the
"Barbados Assets") in Waggoner (Barbados), Ltd. ("Waggoner"). Each DLB
shareholder will receive one Barbados Contingent Payment Right for each share of
DLB Common Stock held of record immediately prior to the Effective Time.
Assuming transaction costs of approximately $25,000, each Barbados Contingent
Payment Right will represent the right to receive approximately $0.19 if the
sale of the Barbados Assets is consummated. If the sale of the Barbados Assets
is not consummated, DLB shareholders will have only an indirect interest in the
Barbados Assets as shareholders of WRT. The Barbados Assets consist of a 20.8%
equity interest in Waggoner and a promissory note in the principal amount of
$2.4 million issued by Waggoner. The Barbados Assets are held by DLB's wholly
owned subsidiary, DLB International, Inc. ("DLB International"). DLB
International has entered into an agreement with Waggoner dated March 24, 1998
(the "Waggoner Agreement") providing for the purchase of the Barbados Assets for
an aggregate purchase price of approximately $2.5 million.
Immediately prior to the Effective Time, DLB International will assign to
DLB its right to receive the net cash proceeds from the sale of the Barbados
Assets pursuant to the Waggoner Agreement and DLB will then transfer the stock
of DLB International to WRT. The Barbados Contingent Payment Rights will
represent only the right to receive a pro rata portion of the net cash proceeds
from the sale of the Barbados Assets pursuant to the Waggoner Agreement.
Waggoner's obligation to purchase the Barbados Assets is subject to numerous
conditions, including the ability of Waggoner to obtain the necessary financing,
and there can be no assurance that such sale of the Barbados Assets will be
completed. In the event that the sale of the Barbados Assets to Waggoner is
completed, the proceeds from such sale, net of all related transaction costs,
will be received by an escrow agent (the "Barbados Escrow Agent") which will
distribute such net cash proceeds pro rata to the holders of the Barbados
Contingent Payment Rights. If such sale does not occur, the Barbados Contingent
Payment Rights will be extinguished, the Barbados Assets will be owned by DLB
International which will be a wholly-owned subsidiary of WRT, and former DLB
shareholders will have only an indirect ownership interest in the Barbados
Assets as shareholders of WRT. Prior to the Effective Time, DLB intends to enter
into an Escrow Agreement (the "Barbados Escrow Agreement") with WRT pursuant to
which WRT would act as the Barbados Escrow Agent.
The Barbados Contingent Payment Rights will not be assignable or
transferable except by operation of law (including the laws of descent and
distribution) or by intestacy and will not be evidenced by any certificate or
other instrument. The Barbados Contingent Payment Rights will not pay any
dividends or bear any stated rate of interest and will have no voting or other
rights. The Barbados Contingent Payment Rights will represent only the
contingent right to receive a pro rata portion of the net proceeds from the sale
of the Barbados Assets to Waggoner under the circumstances described above. The
Barbados Escrow Agent will be required to report to the holders of Barbados
Contingent Payment Rights semi-annually on June 30 and December 31 of each year
the status of the proposed sale of the Barbados Assets to Waggoner pursuant to
the Waggoner Agreement.
LIQUIDATING TRUST CONTINGENT PAYMENT RIGHTS. As part of the Merger
Consideration, each DLB shareholder will receive one Liquidating Trust
Contingent Payment Right for each share of DLB Common Stock held of record
immediately prior to the Effective Time. Each Liquidating Trust Contingent
Payment Right will represent the right to receive a pro rata share of any net
distributions made in respect of DLB's
4
11
interest in a liquidating trust (the "WRT Liquidating Trust") established for
the sole purpose of coordinating the prosecution, direction, settlement or
compromise of certain causes of actions of WRT's predecessor ("Old WRT"). In
February 1996, Old WRT had commenced a voluntary reorganization case under
Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy
Court for the Western District of Louisiana (the "Bankruptcy Court"). The WRT
Liquidating Trust was created pursuant to a joint plan of reorganization that
was approved by the Bankruptcy Court and became effective in July 1997. DLB's
interest in the WRT Liquidating Trust is evidenced by 2,803,880 Certificates of
Beneficial Interest representing 20.3% of all such Certificates.
Immediately prior to the Effective Time, DLB will assign all of its
Certificates of Beneficial Interest to an escrow agent (the "Liquidating Trust
Escrow Agent"). The Liquidating Trust Escrow Agent, promptly after its receipt
of any distributions made in respect of such Certificates of Beneficial
Interest, will distribute such distributions, net of the Liquidating Trust
Escrow Agent's fee of 1% of such distributions and its costs and expenses in
acting as escrow agent, pro rata to the holders of Liquidating Trust Contingent
Payment Rights. DLB intends to enter into an Escrow Agreement (the "Liquidating
Trust Escrow Agreement") with WRT pursuant to which WRT would serve as the
Liquidating Trust Escrow Agent.
The rights of the holders of the Liquidating Trust Contingent Payment
Rights to receive funds from the Liquidating Trust Escrow Agent will be
represented by the Liquidating Trust Escrow Agreement. The Liquidating Trust
Contingent Payment Rights will not be assignable or transferable except by
operation of law (including the laws of descent and distribution) or by
intestacy and will not be evidenced by any certificate or other instrument. The
Liquidating Trust Contingent Payment Rights will not pay any dividends or bear
any stated rate of interest and will have no voting or other rights. The
Liquidating Trust Contingent Payment Rights will represent only the contingent
right to receive a pro rata portion of the distributions received in respect of
the DLB Certificates of Beneficial Interest under the circumstances described
above. The Liquidating Trust Escrow Agent will be required to forward promptly
to the holders of Liquidating Trust Contingent Payment Rights any reports it
receives from the Trustee of the WRT Liquidating Trust.
WRT SPIN-OFF. Immediately prior to the Merger, DLB will effect the WRT
Spin-Off pursuant to which it will distribute all of the shares that DLB owns of
WRT to the shareholders of record of DLB as of immediately prior to the
Effective Time. DLB owns 10,792,220 shares of WRT Common Stock, representing
48.8% of the WRT Common Stock outstanding as of March 30, 1998. The WRT Spin-Off
will be done on a pro-rata basis such that the DLB shareholders will have the
same proportionate interest in DLB and WRT immediately after the WRT Spin-Off as
they have in DLB and WRT immediately prior to the WRT Spin-Off. At the Effective
Time of the WRT Spin-Off, the DLB shareholders will receive approximately 0.8318
share of WRT Common Stock for each share of DLB Common Stock held, assuming that
there are 12,975,000 shares of DLB Common Stock issued and outstanding
immediately prior to the Effective Time. No fractional shares will be
distributed in the WRT Spin-Off. The aggregate number of shares of WRT Common
Stock that any DLB shareholder would otherwise be entitled to receive will be
rounded to the nearest whole number of shares of WRT Common Stock, and in no
event will the number of shares of WRT Common Stock distributed in the WRT
Spin-Off exceed the number of shares of WRT Common Stock owned by DLB
immediately prior to the WRT Spin-Off. For a further description of the WRT
Spin-Off, see "Description of WRT Spin-Off."
EXCHANGE OF CERTIFICATES. The Merger Agreement provides for CHK to deposit
the aggregate cash and stock portions of the Merger Consideration with the UMB
Bank, N.A. (the "Exchange Agent") for the benefit of the holders of DLB Common
Stock. As soon as practicable after the Effective Time, each holder of an
outstanding certificate which prior thereto represented DLB Common Stock will,
upon proper surrender to the Exchange Agent of such certificate, be entitled to
an amount of cash and a certificate representing the number of shares of CHK
Common Stock to which such holder is entitled. Certificates for the Bayard
Common Stock constituting a portion of the Merger Consideration to which holders
of DLB Common Stock are entitled will not be distributed until May 4, 1998, the
date of the expiration of a period of 180 days from the date of the initial
public offering of Bayard Common Stock. The Barbados Contingent Payment Rights
and the Liquidating Trust Contingent Payment Rights will not be evidenced by any
certificate or other instrument. The Exchange Agent may impose reasonable terms
and conditions to accept the surrender of a
5
12
certificate in accordance with normal exchange practices. If any certificate for
CHK Common Stock or Bayard Common Stock is to be issued in, or if cash is to be
remitted to, a name other than that in which the surrendered certificate
representing DLB Common Stock is registered, the certificate so surrendered
shall be properly endorsed, with signature guaranteed or otherwise in proper
form for transfer. Until surrendered, each certificate representing shares of
DLB Common Stock shall be deemed at any time after the Effective Time to
represent only the right to receive the Merger Consideration upon surrender. For
a further description of the exchange of certificates for the Merger
Consideration, see "Merger Agreement -- Exchange of Certificates."
FRACTIONAL SHARES. Each holder of DLB Common Stock after the Effective Time
who would otherwise have been entitled to receive as Merger Consideration a
fraction of a share of CHK Common Stock (after taking into account all shares of
DLB Common Stock delivered by such holder) shall receive, in lieu thereof, a
cash payment (without interest) equal to such fraction multiplied by the average
of the closing prices of CHK Common Stock, rounded to three decimal places, as
reported by The Wall Street Journal -- Composite Transactions, for each of the
first 20 consecutive trading days in the period commencing 25 trading days prior
to the earliest date on which the Merger may be consummated (the "Closing
Price"). DLB shareholders are not entitled to any fractional shares of Bayard
Common Stock.
CONDITIONS. The obligations of DLB or CHK to effect the Merger are subject
to the satisfaction or waiver (in whole or in part) by either party, at or prior
to the Effective Time of the Merger, of a number of conditions including, but
not limited to, the following: (i) the representations and warranties of CHK,
DLB and Merger Sub set forth in the Merger Agreement shall be true and correct
in all material respects as of the Closing Date (as defined in the Merger
Agreement) as though made at that time (unless such representation or warranty
specifies that it is given as of or with respect to a specific date); and (ii)
DLB and CHK shall have performed in all material respects all agreements and
covenants required to be performed under the Merger Agreement prior to the
Effective Time. For a complete list of such conditions, see "Merger
Agreement -- Conditions to the Consummation of the Merger."
TERMINATION. The Merger Agreement may be terminated and the Merger may be
abandoned at any time prior to the Effective Time, whether before or after any
necessary shareholder approvals, upon the occurrence of certain events. Under
certain conditions generally related to the termination due to the consummation
of an acquisition proposal by a third party that the DLB Board of Directors (the
"DLB Board") deems more favorable to the shareholders of DLB and the withdrawal
of the recommendation of the DLB Board in favor of the Merger or the failure of
the shareholders of DLB to approve and adopt the Merger Agreement, DLB will be
obligated to pay CHK a $5 million termination fee. See "Merger
Agreement -- Termination" and "-- Termination Fees; Expenses."
REQUIRED VOTE; ACTION BY WRITTEN CONSENT
Under the OGCA, the affirmative vote of the holders of a majority of the
outstanding shares of DLB Common Stock is required to approve and adopt the
Merger and the Merger Agreement at a duly convened meeting of the shareholders
of DLB called for such purposes. Pursuant to Section 1073 of the OGCA, any
action required by the OGCA to be taken at any meeting of shareholders of DLB
may be taken without a meeting, without prior notice and without a vote of the
shareholders of DLB if a written consent, setting forth the action to be taken,
is signed by the holders of a majority of the votes entitled to be cast at such
meeting of shareholders. On the Record Date, Charles E. Davidson, Mike Liddell
and Mark Liddell collectively owned 10,077,500 shares of DLB Common Stock,
representing a majority of the votes entitled to be cast at a shareholder
meeting to consider the proposal to approve the DLB Proposal. Each of Messrs.
Davidson, Mike Liddell and Mark Liddell entered into irrevocable proxy
agreements with CHK whereby such shareholders agreed to vote (or to execute a
written consent in lieu of a vote with respect to) all shares of DLB Common
Stock owned by them in favor of the DLB Proposal and each granted CHK a proxy to
vote (or to execute a written consent in lieu of a vote with respect to) such
shares in favor of the DLB Proposal. On March 25, 1998, CHK, as attorney-in-fact
for Charles E. Davidson, Mike Liddell and Mark Liddell, executed and delivered
to DLB a written consent in lieu of meeting of the shareholders of DLB approving
and adopting the DLB Proposal.
6
13
DLB'S REASONS FOR THE MERGER; RECOMMENDATION OF THE DLB BOARD OF DIRECTORS
The DLB Board believes that the terms of the Merger are fair to, and in the
best interests of, DLB and its shareholders. Accordingly, the DLB Board
unanimously recommends that the DLB shareholders approve the Merger Agreement
and the Merger.
In its deliberations and in making its determination and recommendation,
and in authorizing and approving the Merger Agreement and the Merger, the DLB
Board consulted with Lehman Brothers Inc. ("Lehman Brothers") and with DLB's
outside counsel. The DLB Board considered a number of factors as described in
"Description of Merger-- DLB's Reasons for the Merger; Recommendation of the DLB
Board of Directors."
CHK'S REASONS FOR THE MERGER
CHK believes that the Merger is in the best interests of CHK and its
shareholders because it will create a company with greater asset value, greater
oil and gas reserves and increased opportunities for the exploration,
development, production and acquisition of oil and gas properties. The Merger
demonstrates CHK's commitment to selectively acquiring proven reserves on
attractive terms as a complement to its traditional strategy of developing
reserves using advanced drilling and completion technologies. CHK intends to
capitalize on its experience in these advanced drilling technologies to maximize
the production, reserves and value available from all properties of the combined
company.
CHK's acquisition of DLB's Mid-Continent assets will lengthen the average
reserve life of CHK's properties and diversify CHK's existing reserve profile by
adding DLB's approximately 130 Bcfe of estimated proved reserves (as of June 30,
1997), resulting in an increase of CHK's estimated proved reserves by
approximately 30%. Further, DLB's Mid-Continent proved reserves are generally
considered low-risk and are complementary to CHK's current areas of operation.
CHK's management believes that the acquisition of the Mid-Continent oil and gas
assets of DLB will benefit CHK's shareholders by increasing the net asset value
per share and the cash flow from operations on a per share basis.
The Hugoton Merger added approximately 300 Bcfe of estimated proved
reserves (as of June 30, 1997), resulting in an increase of CHK's estimated
proved reserves by approximately 57%. The Merger and the Hugoton Merger are
expected to result in an aggregate increase of CHK's estimated proved reserves
by approximately 100%.
OPINION OF LEHMAN BROTHERS
On February 11, 1998, Lehman Brothers delivered its oral opinion to the DLB
Board (which opinion was subsequently confirmed in writing) (the "Opinion"),
that, as of such date and subject to the assumptions, limitations and
qualifications set forth therein, the CHK Common Stock and cash to be received
by the shareholders of DLB for each share of DLB Common Stock in exchange for
the sale of DLB's Mid-Continent operations (the "Operations") to CHK (the
"Transaction Consideration") was fair, from a financial point of view, to such
shareholders. The Opinion does not in any manner address, and Lehman Brothers
was not asked to consider, the value or the fairness to the shareholders of DLB
of the Bayard Common Stock or the WRT Common Stock to be received by such
shareholders in the Merger and the WRT Spin-Off. A copy of the Opinion is
attached to this Information Statement/Prospectus as Annex B. DLB shareholders
should read the Opinion in its entirety for a discussion of the assumptions
made, procedures followed, matters considered and limitations on the review by
Lehman Brothers in rendering the Opinion. See "Description of Merger -- Opinion
of Lehman Brothers."
INTERESTS OF CERTAIN PERSONS IN THE MERGER
In considering the recommendation of the DLB Board with respect to the
Merger, the shareholders of DLB should be aware that certain members of DLB's
management and the DLB Board have certain interests in the Merger separate from
the interests of the DLB shareholders generally. See "Interests of Certain
Persons in the Merger." These separate interests are summarized below.
7
14
INDEMNIFICATION. CHK has agreed that, for a period of not less than three
years following the Effective Time, it will cause the director and officer
liability insurance coverage of DLB to continue in effect. CHK has agreed that,
from and after the consummation of the Merger, for a period of six years it will
indemnify each person who is, has been at any time prior to the date of the
Merger Agreement, or becomes prior to the Effective Time, an officer or director
of DLB or any of its subsidiaries, with respect to his service prior to the
Effective Time to the extent permitted by applicable law.
STOCK OPTIONS. The Merger Agreement provides that DLB may amend its
existing stock option plans and stock option agreements to provide that each
outstanding option to purchase shares of DLB Common Stock granted under DLB's
stock option plans and stock option agreements shall be exercisable at the
optionee's election prior to the Effective Time (notwithstanding any vesting or
exercisability provisions) such that each optionee shall have the right to
receive an amount in respect thereof equal to the product of (x) the excess, if
any, of the fair market value of DLB Common Stock over the respective exercise
price thereof and (y) the number of shares of DLB Common Stock subject thereto.
EMPLOYMENT AGREEMENTS. Messrs. Mike Liddell and Mark Liddell have entered
into employment agreements with DLB which provide for severance payments upon
termination of employment by DLB without cause. The severance payments consist
of an aggregate amount equal to 12 months of their then current base salary. For
each of Messrs. Mike Liddell and Mark Liddell, the severance payment would equal
$157,869.
STAY-ON BONUS. Prior to the date of the Merger Agreement, the DLB Board
determined and announced to certain employees of DLB, including certain
executive officers, that DLB would pay to each such employee, who is still
employed by DLB at the closing date of the Merger, a stay-on bonus in order to
provide such employees with an incentive to remain in the employ of DLB and to
help prepare DLB for sale. The aggregate amount of such bonuses to be paid
immediately prior to the closing date is $682,500.
REGISTRATION RIGHTS AGREEMENT. CHK and Charles E. Davidson, a member of the
DLB Board and owner of 57.8% of the issued and outstanding shares of DLB Common
Stock, have entered into a Registration Rights Agreement (the "Registration
Rights Agreement") pursuant to which CHK has granted Mr. Davidson certain
registration rights in respect of the shares of CHK Common Stock Mr. Davidson
will receive upon consummation of the Merger. Such registration will relieve Mr.
Davidson from certain restrictions to which he would otherwise be subject with
respect to resales of such CHK Common Stock. For a description of such
registration rights, see "Merger Agreement -- Registration Rights Agreement."
BARBADOS ASSETS. Immediately prior to the Merger, DLB International will
assign to DLB its right to the net cash proceeds from the sale of the Barbados
Assets pursuant to the Waggoner Agreement and DLB will then transfer to its
48.8%-owned subsidiary WRT all of the outstanding capital stock of DLB
International. DLB will then distribute all of the shares of WRT Common Stock
owned by DLB to DLB's shareholders. WRT will not pay any consideration to DLB
for the transfer of the DLB International capital stock. CHK did not assign any
value to the Barbados Assets and none of the parties that visited DLB's data
rooms expressly to evaluate the acquisition of the Barbados Assets made any bid
on these assets. If the sale of the Barbados Assets to Waggoner pursuant to the
Waggoner Agreement does not occur, WRT will be entitled to retain the Barbados
Assets without paying any consideration to DLB or the former DLB shareholders
and the indirect ownership interest of the former DLB shareholders in such
assets will be reduced from 100% to 48.8%. However, by transferring DLB's
interest in the Barbados Assets to WRT immediately prior to the Merger, former
DLB shareholders will have a greater percentage interest in these assets if the
sale pursuant to the Waggoner Agreement does not close than if such assets had
remained in DLB and became assets of CHK. Wexford Management LLC, of which
Charles E. Davidson is the general partner, beneficially owns 10.4% of the
outstanding shares of WRT Common Stock. Mr. Davidson is also a member of the DLB
Board and owner of 57.8% of the outstanding shares of DLB Common Stock. In
addition, Messrs. Mike Liddell and Mark Liddell, who are directors and executive
officers of DLB, also serve as directors of WRT. WRT will serve as the Barbados
Escrow Agent and the Liquidating Trust Escrow Agent. See "Merger
Agreement -- Barbados Contingent Payment Rights" and "-- Liquidating Trust
Contingent Payment Rights."
8
15
CERTAIN OTHER AGREEMENTS
PROXY AGREEMENTS. As a condition and inducement to entering into the Merger
Agreement, CHK required that Messrs. Mike Liddell, Mark Liddell and Charles E.
Davidson, who own an aggregate of approximately 77.7% of the issued and
outstanding shares of DLB Common Stock, enter into proxy agreements (the "Proxy
Agreements") pursuant to which each of them agreed to grant CHK a proxy to vote
all of their shares of DLB Common Stock (or to execute a written consent with
respect to such shares) in favor of the Merger.
GOODWILL PROTECTION AGREEMENT. Concurrently with the closing of the Merger,
CHK will enter into a Goodwill Protection Agreement with Charles E. Davidson,
Mike Liddell and Mark Liddell as the majority owners of DLB Common Stock. Such
agreement will prohibit Messrs. Davidson, Mark Liddell and Mike Liddell from
directly or indirectly owning, acquiring or soliciting the acquisition of, or
conducting any oil and gas business or developing any oil or gas interests with
respect to any land in Dewey, Major, Woods or Woodward County, Oklahoma.
GOVERNMENT AND REGULATORY APPROVALS
The Merger is subject to the requirements of the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended (the "HSR Act") and the
regulations that have been promulgated thereunder by the Federal Trade
Commission (the "FTC"). The HSR Act requires, among other things, that certain
information regarding the Merger be furnished to the FTC and the Antitrust
Division of the Department of Justice (the "Antitrust Division") and that
certain waiting period requirements be satisfied before the Merger can be
consummated. Pursuant to the HSR Act, CHK and DLB filed the required
notification and report forms with the FTC and the Antitrust Division, and
requested early termination of the waiting period, which is discretionary with
the FTC and the Antitrust Division. Early termination of the waiting period was
granted on January 12, 1998.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The receipt by DLB shareholders of the Merger Consideration pursuant to the
Merger will be treated as a taxable transaction for Federal income tax purposes.
In general, DLB shareholders will recognize a gain equal to the fair market
value of the Merger Consideration over the adjusted tax basis of shares of DLB
Common Stock deemed sold in the taxable Merger. Such gain will be treated as a
capital gain if the shares of DLB Common Stock are capital assets in the hands
of the DLB shareholder. DLB shareholders should have a tax basis in each
component of the Merger Consideration equal to its fair market value at the
Effective Time.
Any capital gain will be (a) long-term capital gain if the DLB shareholder
held shares of DLB Common Stock for more than 18 months, (b) mid-term capital
gain if the DLB shareholder held shares of DLB Common Stock more than 12 months
but not more than 18 months or (c) short-term capital gain if the DLB
shareholder held shares of DLB Common Stock for 12 months or less as of the
effective date of the Merger. Long-term capital gain of individuals currently is
taxed at a maximum rate of 20%. Mid-term capital gain of individuals is
currently taxed at a maximum rate of 28%. Short-term capital gain of individuals
is taxed as ordinary income. Ordinary income of individuals is currently taxed
at a maximum rate of 39.6%.
The tax consequences described in the preceding paragraphs may not apply to
certain non-resident aliens and foreign corporations and shareholders who are
otherwise subject to special tax treatment under the Internal Revenue Code of
1986, as amended (the "Code").
The Federal income tax consequences set forth above are for general
information only. Each DLB shareholder is urged to consult his own tax advisor
to determine the particular tax consequences to him of the Merger, including the
applicability and effect of state, local and other tax laws. See "Certain
Federal Income Tax Consequences."
9
16
ACCOUNTING TREATMENT
The Merger will be accounted for as a purchase by CHK in accordance with
generally accepted accounting principles.
SHAREHOLDERS' RIGHTS OF APPRAISAL
Following a statutory appraisal proceeding in Oklahoma district court,
holders of shares of DLB Common Stock who do not vote for the Merger (or who do
not execute a written consent in lieu thereof) and who perfect their appraisal
rights in accordance with Section 1091 of the OGCA will be entitled to receive,
in lieu of the Merger Consideration, cash in the amount of the fair value of
their shares (exclusive of any element of value arising from the accomplishment
or expectation of the Merger), as determined by the court in such appraisal
proceeding, plus interest, if any, at such rate as shall be determined by such
court. Because of the complexity of the procedures for exercising these rights,
DLB shareholders who consider exercising such rights are urged to seek the
advice of counsel. A shareholder who votes for the Merger or executes a written
consent will be deemed to have accepted the consideration to be paid pursuant to
the Merger Agreement and to have waived appraisal rights with respect to the
shares of DLB Common Stock so voting or consenting. In addition, pursuant to the
Merger Agreement, it is a condition to CHK's obligation to close the Merger that
the number of shares of DLB Common Stock held by DLB shareholders who exercise
their appraisal rights does not exceed 5% of the number of shares of DLB Common
Stock outstanding as of October 22, 1997. FAILURE TO TAKE ANY REQUIRED STEP ON A
TIMELY BASIS IN CONNECTION WITH THE EXERCISE OF APPRAISAL RIGHTS MAY RESULT IN
THE TERMINATION OR WAIVER OF SUCH RIGHTS. SEE "SHAREHOLDERS' RIGHTS OF
APPRAISAL" AND ANNEX C HERETO.
RISK FACTORS
DLB shareholders are urged to consider the matters set forth under "Risk
Factors," beginning on page 16.
MARKET PRICE AND DIVIDEND DATA; STOCK EXCHANGE LISTING
DLB Common Stock is listed for quotation under the symbol "DLBI" on the
NASDAQ NMS. DLB Common Stock commenced trading on the NASDAQ NMS on July 25,
1995. CHK Common Stock has been trading under the symbol "CHK" on the NYSE since
April 28, 1995. Prior to such date, CHK Common Stock was listed for quotation on
the NASDAQ NMS. The following table sets forth, for each of DLB Common Stock and
CHK Common Stock, for the calendar quarters indicated, the high and low closing
sales price per share and the dividends paid (in the case of CHK, adjusted for a
3-for-2 stock split June 28, 1996, and a 2-for-1 stock split on December 31,
1996). DLB has not paid a cash dividend during any of the relevant periods. CHK
initiated a quarterly dividend with the payment of $.02 per share of CHK Common
Stock on July 15, 1997. The payment of future cash dividends, if any, will be
reviewed by the board of directors of CHK (the "CHK Board") and will depend
upon, among other things, CHK's financial condition, funds from operations, the
level of its capital and development expenditures, its business prospects and
any contractual restrictions. In addition, certain of the indentures governing
CHK's indebtedness contain certain restrictions
10
17
on CHK's ability to declare and pay dividends. All prices set forth below are as
reported in published financial sources.
DLB CHK
COMMON STOCK COMMON STOCK
---------------- ----------------
CALENDAR QUARTER HIGH LOW HIGH LOW
---------------- ------ ------ ------ ------
1996
First Quarter............................... $10.75 $ 6.69 $16.50 $10.67
Second Quarter.............................. 8.00 6.88 30.38 15.50
Third Quarter............................... 8.50 7.13 34.00 21.00
Fourth Quarter.............................. 11.00 8.13 34.13 25.69
1997
First Quarter............................... $18.25 $10.50 $31.50 $19.88
Second Quarter.............................. 17.25 12.75 22.38 9.25
Third Quarter............................... 17.25 14.00 11.50 6.31
Fourth Quarter.............................. 16.50 8.75 12.94 7.00
1998
First Quarter (through March 30, 1998)...... $10.00 $ 7.88 $ 7.63 $ 5.56
On October 21, 1997, the last trading day prior to the announcement of the
execution of the Merger Agreement, the last sales prices per share of DLB Common
Stock and CHK Common Stock, as reported by the NASDAQ NMS and the NYSE Composite
Tape, were $16.50 and $12.75, respectively. On March 30, 1998, the last trading
day prior to the date of this Information Statement/Prospectus, the last sales
prices per share of DLB Common Stock and CHK Common Stock, as reported by the
NASDAQ NMS and the NYSE Composite Tape, were $9.00 and $5.625, respectively. As
of March 30, 1998, there were approximately 39 stockholders of record of DLB
Common Stock, which does not include shares held in securities position
listings.
Bayard Common Stock has been listed for trading on the AMEX since November
4, 1997 (the first trading day in connection with its initial public offering).
Bayard Common Stock commenced trading on November 4, 1997 at $23.00 on the AMEX.
On March 30, 1998, the last trading day prior to the date of this Information
Statement/Prospectus, the last sales price per share of Bayard Common Stock was
$15.50.
CHK has agreed to use commercially reasonable efforts to cause the shares
of CHK Common Stock issued in the Merger to be listed for trading on the NYSE.
At the Effective Time of the Merger, the DLB Common Stock will cease trading and
be delisted from the NASDAQ NMS.
SELECTED HISTORICAL FINANCIAL INFORMATION
The following tables set forth certain selected historical consolidated
financial information for DLB and CHK which is based upon the respective
historical financial statements of each company included in or incorporated by
reference in this Information Statement/Prospectus. Selected consolidated
financial data for Bayard is included in the Bayard Prospectus included in this
Information Statement/Prospectus as Annex D.
11
18
SELECTED CONSOLIDATED FINANCIAL DATA FOR DLB OIL & GAS, INC.
The following selected consolidated financial data for DLB as of and for
each of the years in the five-year period ended December 31, 1996, were derived
from DLB's consolidated financial statements. The data for the nine months ended
September 30, 1996 and 1997 were derived from the unaudited consolidated
financial statements of DLB which, in the opinion of DLB's management, contain
all adjustments (consisting of normal recurring adjustments) necessary for a
fair presentation of DLB's financial position and results of operations. The
information in the table gives effect to the July 20, 1995 merger of Davidson
Oil & Gas Company, Inc. with and into DLB (the "Davidson Merger") as if such
event had occurred as of January 1, 1992. The selected consolidated financial
and operating data set forth below should be read in conjunction with "DLB
Management's Discussion and Analysis of Financial Condition and Results of
Operations" and DLB's consolidated financial statements and notes included
elsewhere in this Information Statement/Prospectus.
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
-------------------- ----------------------------------------------------
1997 1996 1996(5) 1995 1994 1993 1992
-------- -------- -------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Revenues:
Oil and natural gas sales............. $ 33,573 $ 17,730 $ 27,194 $17,860 $17,826 $10,264 $ 5,824
Contract drilling..................... 12,644 -- -- -- -- -- --
Natural gas gathering, processing and
transportation, net................. 1,207 586 821 3,293 1,652 764 --
Natural gas contract settlement....... -- -- 3,343 -- --
Interest income and other............. 300 351 400 899 334 281 383
-------- -------- -------- ------- ------- ------- -------
Total revenues.................. $ 47,724 $ 18,667 $ 28,415 $22,052 $23,155 $11,309 $ 6,207
-------- -------- -------- ------- ------- ------- -------
Expenses:
Lease operating....................... 8,508 3,923 5,539 3,579 4,461 1,704 1,157
Gross production taxes................ 2,280 1,202 1,843 1,366 1,009 718 408
Contract drilling..................... 8,916 -- -- -- -- -- --
Depreciation, depletion and
amortization........................ 14,398 6,695 8,938 7,368 6,553 3,270 1,369
General and administrative............ 3,738 1,985 2,485 1,486 549 446 73
Interest.............................. 4,790 801 1,582 529 677 38 11
Loss on sale of assets................ -- 208 208 -- -- -- --
-------- -------- -------- ------- ------- ------- -------
Total expenses.................. 42,630 14,814 20,595 14,328 13,249 6,176 3,018
Income before income taxes.............. 5,094 3,853 7,820 7,724 9,906 5,133 3,189
Minority interest....................... 994 -- -- -- -- -- --
Pro forma income taxes(1)............... -- -- -- -- 3,962 2,054 1,276
Income taxes(1)......................... 2,654 1,454 2,951 12,900 -- -- --
-------- -------- -------- ------- ------- ------- -------
Net income (loss)............... $ 3,434 $ 2,399 $ 4,869 $(5,176) $ 5,944 $ 3,079 $ 1,913
======== ======== ======== ======= ======= ======= =======
Net income (loss) per common
share......................... $ 0.25 $ 0.18 $ 0.38 $ (0.46) $ 0.59 $ 0.31 $ 0.19
======== ======== ======== ======= ======= ======= =======
Weighted average common shares
outstanding(2)........................ 13,488 12,979 12,978 11,250 10,000 10,000 10,000
======== ======== ======== ======= ======= ======= =======
CASH FLOW DATA:
Net cash provided by operating
activities............................ $ 17,445 $ 9,579 $ 19,559 $13,395 $17,261 $ 8,076 $ 5,700
Capital expenditures (3)................ 21,455 45,739 57,165 19,852 26,291 17,529 9,169
Distributions to shareholders
(pre-Initial Public Offering)......... -- -- -- 1,192 3,196 710 252
EBITDA (4).............................. 24,282 11,349 18,340 15,621 17,143 8,441 4,569
BALANCE SHEET DATA:
Cash and cash equivalents............... $ 11,814 $ 4,756 $ 4,060 $14,313 $ 3,059 $ 4,475 $ 965
Working capital......................... 8,204 11,928 1,237 13,724 773 2,591 (1,023)
Property and equipment, net............. 208,387 96,144 104,958 58,661 46,375 26,637 12,554
Total assets............................ 239,153 115,203 129,441 78,207 54,041 35,084 15,506
Long-term debt, including current
portion............................... 100,631 32,000 37,200 -- 8,231 483 --
Shareholders' equity.................... 67,666 61,762 64,232 59,544 39,012 30,164 11,690
- ---------------
(1) Pro forma income taxes were computed at a blended statutory rate of 40% (34%
Federal rate and a composite 6% state rate) of income before income taxes.
DLB was subject to Subchapter S of the internal revenue code and,
accordingly, was not a tax paying entity. Prior to its July 1995 public
equity offering, DLB terminated its S corporation election and recognized
$11.5 million of deferred income taxes at that time.
(2) As a result of the Davidson Merger, 10,000,000 shares of common stock were
issued to the prior shareholders of DLB and Davidson Oil & Gas Company, Inc.
The Davidson Merger was accounted for as a reorganization of interests in a
manner similar to a pooling of interests. Accordingly, 10,000,000 shares of
common stock were considered outstanding for all periods prior to the
Davidson Merger.
12
19
(3) Capital expenditures include those expenditures for oil and gas properties,
leaseholds, gas processing plants, saltwater disposal systems and other
property and equipment.
(4) EBITDA is earnings before interest, taxes, depreciation, depletion and
amortization. EBITDA is an analytical measure frequently used by securities
analysts and is presented to provide additional information about DLB's
ability to meet its future debt service, capital expenditure and working
capital requirements. See "DLB Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Capital Expenditures,
Capital Resources and Liquidity." EBITDA should not be considered as a
better measure of DLB's operating performance than net income or as a better
measure of liquidity than cash flow from operations. See the cash flow data
table for the nine months ended September 30, 1997 and 1996 and the year
ended December 31, 1996, 1995 and 1994 under the caption "DLB Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Capital Expenditures, Capital Resources and Liquidity."
(5) On May 31, 1996, DLB purchased for approximately $32.1 million substantially
all of the Oklahoma oil and gas producing properties, mineral rights and
leasehold acreage of Amerada Hess Corporation.
13
20
SELECTED COMBINED FINANCIAL DATA FOR CHESAPEAKE ENERGY CORPORATION
The following table sets forth selected combined financial data of CHK for
each of the three fiscal years ended June 30, 1997, 1996 and 1995 and the three
months ended September 30, 1997 and 1996. The data is derived from the combined
financial statements of CHK, including the notes thereto, incorporated by
reference herein. The data set forth in this table should be read in conjunction
with the combined financial statements, including the notes thereto,
incorporated by reference herein. The pro forma financial data should be read in
conjunction with the Unaudited Pro Forma Combined Financial Data appearing
elsewhere in this Information Statement/Prospectus. On June 13, 1997, CHK
declared a dividend of $0.02 per share of CHK Common Stock which was paid on
July 15, 1997.
THREE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED JUNE 30,
--------------------- -------------------------------
1997 1996 1997 1996 1995
---------- -------- --------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Revenues:
Oil and gas sales......................................... $ 45,667 $ 36,753 $ 192,920 $110,849 $ 56,983
Oil and gas marketing sales............................... 26,865 12,184 76,172 28,428 --
Oil and gas service operations............................ -- -- -- 6,314 8,836
Interest and other........................................ 5,878 848 11,223 3,831 1,524
---------- -------- --------- -------- --------
Total revenues...................................... 78,410 49,785 280,315 149,422 67,343
---------- -------- --------- -------- --------
Costs and expenses:
Production expenses and taxes............................. 5,180 2,530 15,107 8,303 4,256
Oil and gas marketing expenses............................ 26,690 11,866 75,140 27,452 --
Oil and gas service operations............................ -- -- -- 4,895 7,747
Impairment of oil and gas properties...................... -- -- 236,000 -- --
Oil and gas depreciation, depletion and amortization...... 28,550 17,029 103,264 50,899 25,410
Depreciation and amortization of other assets............. 1,142 952 3,782 3,157 1,765
General and administrative................................ 2,760 1,671 8,802 4,828 3,578
Provision for legal and other settlements................. -- -- -- -- --
Interest and other........................................ 8,575 2,817 18,550 13,679 6,627
---------- -------- --------- -------- --------
Total costs and expenses............................ 72,897 36,865 460,645 113,213 49,383
---------- -------- --------- -------- --------
Income (loss) before income taxes and extraordinary item.... 5,513 12,920 (180,330) 36,209 17,960
Provision (benefit) for income taxes........................ -- 4,716 (3,573) 12,854 6,299
---------- -------- --------- -------- --------
Income (loss) before extraordinary item..................... 5,513 8,204 (176,757) 23,355 11,661
Extraordinary item:
Loss on early extinguishment of debt, net of applicable
income taxes of $3,804.................................. -- -- (6,620) -- --
---------- -------- --------- -------- --------
Net income (loss)................................... $ 5,513 $ 8,204 $(183,377) $ 23,355 $ 11,661
========== ======== ========= ======== ========
Earnings (loss) per common and common equivalent share:
Income (loss) before extraordinary item..................... $ 0.08 $ 0.13 $ (2.69) $ 0.40 $ 0.21
Extraordinary item.......................................... -- -- (0.10) -- --
---------- -------- --------- -------- --------
Net income (loss)................................... $ 0.08 $ 0.13 $ (2.79) $ 0.40 $ 0.21
========== ======== ========= ======== ========
CASH FLOW DATA:
Cash provided by (used in) operating activities............. $ 42,624 $ 25,953 $ 84,089 $120,972 $ 54,731
Cash used in investing activities........................... 114,265 83,123 523,854 344,389 112,703
Cash provided by (used in) financing activities............. (1,194) 7,976 512,144 219,520 97,282
BALANCE SHEET DATA (at the end of period):
Total assets................................................ $ 931,669 $595,551 $ 949,068 $572,335 $276,693
Long-term debt, net of current maturities................... 508,971 277,323 508,950 268,431 145,754
Shareholders' equity........................................ 291,208 186,657 286,889 177,767 44,975
PRO FORMA FINANCIAL DATA -- As Further
Adjusted(1):
Total assets................................................ $1,498,587
Long term debt, net of current maturities................... 698,971
Shareholders' equity........................................ 603,373
Income (loss) before extraordinary item..................... 3,986 $(173,641)
Earnings (loss) per common share............................ 0.04 (1.80)
- ---------------
(1) The unaudited pro forma financial data is derived from the historical
financial statements of CHK incorporated by reference in this Information
Statement/Prospectus and the historical financial statements of DLB
appearing elsewhere herein as further adjusted to reflect the acquisition of
Hugoton. The pro forma statements of operations data for the three months
ended September 30, 1997 and for the year ended June 30, 1997 reflect the
DLB acquisition (accounted for as a purchase) and the Hugoton acquisition
(accounted for as a purchase) as if the acquisitions occurred on July 1,
1996. The pro forma balance sheet data at September 30, 1997 reflects the
consummation of the DLB acquisition and the Hugoton acquisition as if the
acquisitions had occurred on September 30, 1997. See "Unaudited Pro Forma
Combined Financial Data" included elsewhere herein.
14
21
COMPARATIVE PER SHARE DATA
(UNAUDITED)
The following table summarizes the per share information for CHK and DLB on
a historical, pro forma combined and equivalent pro forma combined basis, and as
further adjusted to give effect to the consummation of the Hugoton Merger. The
pro forma and as further adjusted information gives effect to the Merger and as
further adjusted for the Hugoton Merger accounted for by CHK as purchase
business combinations. This information should be read in conjunction with the
consolidated financial statements (and related notes) of CHK incorporated by
reference herein and the historical financial statements (and related notes) of
DLB appearing elsewhere in this Information Statement/Prospectus. The pro forma
combined information may not be indicative of the results that would have been
achieved had the companies been combined for the periods indicated or the future
results that the combined company will experience after the Merger.
THREE MONTHS
ENDED YEAR ENDED
SEPTEMBER 30, JUNE 30,
1997 1997
------------- ----------
HISTORICAL PER COMMON SHARE-DLB:
Income (loss) from continuing operations(1)............... $(0.05) $ 0.57
Book value(2)............................................. 5.22 5.27
Dividends declared........................................ -- --
EQUIVALENT PRO FORMA COMBINED-PER DLB COMMON SHARE(3):
Income from continuing operations......................... $ 0.02 $ (0.97)
Book value................................................ 2.02 2.00
Dividends declared........................................ 0.01 0.01
HISTORICAL PER COMMON SHARE-CHK(4):
Income (loss) from continuing operations (before
extraordinary item)(1)................................. $ 0.08 $ (2.69)
Book value(2)............................................. 4.14 4.08
Dividends declared........................................ 0.02 0.02
PRO FORMA COMBINED-PER CHK COMMON SHARE(4)(5):
Income (loss) from continuing operations (before
extraordinary items)(1)................................ $ 0.06 $ (2.52)
Book value(2)............................................. 5.24 5.19
Dividends declared........................................ 0.02 0.02
EQUIVALENT PRO FORMA COMBINED -- PER DLB COMMON
SHARE(3) -- AS FURTHER ADJUSTED:
Income (loss) from continuing operations.................. $ 0.01 $ (0.69)
Book value................................................ 2.30 2.28
Dividends declared........................................ 0.01 0.01
PRO FORMA COMBINED -- PER CHK COMMON SHARE(4)(5) -- AS
FURTHER ADJUSTED:
Income (loss) from continuing operations (before
extraordinary items)(1)................................ $ 0.04 $ (1.80)
Book value(2)............................................. 5.96 5.93
Dividends declared........................................ 0.02 0.02
- ---------------
(1) This calculation uses the weighted average number of common shares
outstanding, including common share equivalents, if dilutive.
(2) Computed by dividing shareholders' equity by the number of shares of common
stock outstanding at the end of the period on a historical or pro forma
combined basis.
(3) Amounts are calculated by multiplying the respective unaudited pro forma
combined CHK per share amounts by an assumed exchange ratio of .3854.
(4) Adjusted to reflect CHK's three-for-two stock splits on December 15, 1995
and June 28, 1996 and a two-for-one stock split on December 31, 1996.
(5) Merger-related fees and expenses and termination payments to executives and
employees of DLB are estimated to be approximately $2.8 million. These
charges are not reflected in the pro forma combined statements of income
data and will be capitalized as part of the purchase.
15
22
RISK FACTORS
Shareholders of DLB should carefully consider the matters discussed in this
section of the Information Statement/Prospectus and, with respect to the risk
factors regarding the businesses of Bayard, shareholders of DLB should carefully
consider the matters discussed under the caption entitled "Risk Factors" in the
Bayard Prospectus included as Annex D to this Information Statement/Prospectus.
These matters should be considered in conjunction with the other information
included and incorporated by reference in this Information Statement/Prospectus.
INTEGRATION OF OPERATIONS
While DLB will continue to operate as a wholly owned subsidiary of CHK
after the consummation of the Merger, the success of the Merger will depend upon
the ability of management to integrate two companies that have previously
operated independently. The integration of the operations of CHK and DLB will
require substantial attention of management, and no assurance can be given that
such integration may be accomplished without encountering difficulties or
experiencing the loss of key DLB employees, customers or suppliers, or that the
benefits expected from such integration will be realized. Any inability of CHK
to integrate the operations of the two companies in a timely and efficient
manner would adversely affect its abilities to realize planned synergies, cost
savings, increased earnings and cash flow per share of CHK Common Stock.
STOCK OWNERSHIP IN CHK, BAYARD AND WRT
Upon completion of the Merger, DLB shareholders will become shareholders of
Bayard and CHK. In addition, by virtue of the WRT Spin-Off to be effected by DLB
immediately prior to the Effective Time DLB shareholders will become
shareholders of WRT. CHK's business, although similar in many respects, is
different from that of DLB, as is Bayard's. CHK's and Bayard's results of
operations, as well as the price of each of CHK and Bayard Common Stock, will be
affected by many factors different than those affecting DLB's results of
operations and the price of DLB Common Stock.
See the information under the heading "Cautionary Statement Regarding
Forward-Looking Statements" on page iii for a summary of many of the key factors
that might affect CHK and the price at which CHK Common Stock may trade from
time to time. See also "Summary -- Market Price and Dividend Data; Stock
Exchange Listing" on page 10 for a table listing the prices at which DLB Common
Stock and CHK Common Stock have traded in recent periods.
For a description of certain risk factors affecting the business of Bayard
and the factors that might affect the prices at which Bayard Common Stock may
trade from time to time, see the information included under the captions "Risk
Factors" and "Market Price and Dividend Data; Stock Exchange Listing,"
respectively, in the Bayard Prospectus attached hereto as Annex D.
LOUISIANA TREND -- CONCENTRATION OF UNEVALUATED LEASEHOLD, POOR DRILLING RESULTS
IN 1997, IMPAIRMENT OF ASSET VALUE
CHK's future performance is dependent on the development of its existing
proved undeveloped reserves and its inventory of unproved drilling locations,
particularly in the Louisiana Trend. As of September 30, 1997, CHK had an
investment in total unevaluated and unproved leasehold of approximately $131
million, of which approximately $70 million was located in the Louisiana Trend.
Approximately 40%, or $90 million, of CHK's 1998 drilling budget is associated
with drilling, construction of production facilities and seismic activity in the
Louisiana Trend including exploratory drilling in the Austin Chalk and
Tuscaloosa formations. Failure of these drilling activities to achieve
anticipated quantities of economically attractive reserves and production would
have a material adverse impact on CHK's liquidity, operations and financial
results and could result in future full-cost ceiling writedowns. Any full-cost
ceiling writedown negatively impacts shareholders' equity and reported earnings.
16
23
CHK reported a full-cost ceiling writedown of $236 million in its fiscal
year ended June 30, 1997, a substantial portion of which was caused by
uneconomic drilling results in the Louisiana Trend during fiscal 1997. Beginning
in the quarter ended September 30, 1997, CHK reduced its drilling budget for the
Austin Chalk in the Louisiana Trend overall and concentrated remaining Austin
Chalk drilling activity in the Masters Creek area. In addition, CHK began to
pursue a strategy to replace and expand its oil and gas reserves through
acquisitions as a complement to its historical strategy of adding reserves
through drilling. CHK has also reduced its emphasis on acquiring unproved
leasehold acreage to be developed through exploratory drilling. While these
actions are intended to mitigate the higher risks associated with a growth
strategy based on significant exploratory drilling, there can be no assurance
that this change in strategy will result in enhanced future economic results or
will prevent additional leasehold impairment and/or full-cost ceiling
writedowns. See "Primary Operating Areas" in Item 1. "Business" of CHK's Form
10-K, as amended, which is incorporated by reference herein.
Following CHK's announcement in late June 1997 of disappointing drilling
results in the Louisiana Trend and a full-cost ceiling writedown, a number of
purported class action lawsuits alleging violations of Sections 10(b) and 20(a)
of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder were filed
against CHK and certain of its officers and directors. See "-- Patent and
Securities Litigation."
NEED TO REPLACE RESERVES; SUBSTANTIAL CAPITAL REQUIREMENTS
As is customary in the oil and gas exploration and production industry,
CHK's future success depends upon its ability to find, develop or acquire
additional oil and gas reserves that are economically recoverable. Unless CHK
successfully replaces the reserves that it produces through successful
development, exploration or acquisition, CHK's proved reserves will decline.
Further, approximately 56% of CHK's estimated proved reserves at September 30,
1997 were located in the Austin Chalk formation in Texas and Louisiana, where
wells are characterized by relatively rapid decline rates. Additionally,
approximately 51% of CHK's total estimated proved reserves at September 30, 1997
were undeveloped. Recovery of such reserves will require significant capital
expenditures and successful drilling operations. CHK was unsuccessful in its
effort to develop and replace its proved reserves economically during fiscal
1997. There can be no assurance that CHK will be successful in its efforts to
find and produce reserves economically in the future.
CHK has made and intends to make substantial capital expenditures in
connection with the exploration and production of its oil and gas properties.
Historically, CHK has funded its capital expenditures through a combination of
internally generated funds, equity and long-term debt financing, and short-term
financing arrangements. Future cash flows are subject to a number of variables,
such as the level of production from existing wells, prices of oil and gas and
CHK's success in developing, acquiring and producing new reserves. If revenue
were to decrease as a result of lower oil and gas prices, decreased production
or otherwise, and CHK's access to capital were limited, CHK would have a reduced
ability to replace its reserves or to maintain production at current levels,
resulting in a decrease in production and revenue over time. If CHK's cash flow
from operations is not sufficient to satisfy its capital expenditure budget,
there can be no assurance that additional debt or equity financing will be
available to meet these requirements.
SUBSTANTIAL INDEBTEDNESS
As of December 31, 1997, and as a result of the loss incurred during the
six month period ended December 31, 1997, CHK's shareholders' equity was $280
million, versus long-term indebtedness of $509 million. Long-term indebtedness
represented approximately 65% of total book capitalization. If CHK incurs
additional full-cost ceiling writedowns, shareholders' equity will be further
reduced. Standard & Poor's and Moody's Investors Service have recently indicated
that CHK's credit ratings are under review with negative implications as a
result of CHK's amount of indebtedness and full-cost ceiling writedowns.
CHK anticipates funding announced acquisitions and potential future
acquisitions with a combination of commercial bank debt, long-term debt or
preferred or common equity. If, as a result of general market conditions,
additional losses, reduced credit ratings or for any other reason, CHK is unable
to issue additional
17
24
securities or borrow from commercial banks, CHK's liquidity would be impaired
and growth potential reduced resulting in reduced earnings or losses.
COMMODITY PRICE FLUCTUATIONS
CHK's revenue, profitability and future rate of growth are substantially
dependent upon prevailing prices for oil, gas and natural gas liquids, which are
dependent upon numerous factors such as weather, economic, political and
regulatory developments and competition from other sources of energy. The
volatile nature of the energy markets makes it particularly difficult to
estimate future prices of oil, gas and natural gas liquids. Prices of oil, gas
and natural gas liquids are subject to wide fluctuations in response to
relatively minor changes in circumstances, and there can be no assurance that
future prolonged decreases in such prices will not occur. All of these factors
are beyond the control of CHK. Any significant decline in oil and gas prices
could have a material adverse effect on CHK's operations, financial condition
and level of expenditures for the development of its oil and gas reserves, and
may result in violations of certain covenants contained in CHK's credit
agreements or in the writedown of carrying value of CHK's investments due to
ceiling test limitations.
INCREASING DRILLING AND DEVELOPMENT COSTS
In accordance with customary industry practice, CHK relies on independent
third party service providers to provide most of the services necessary to drill
new wells, including drilling rigs and related equipment and services,
horizontal drilling equipment and services, trucking services, tubulars, fracing
and completion services and production equipment. The industry has experienced
significant price increases for these services during the last year and this
trend is expected to continue into the future. These cost increases could in the
future significantly increase CHK's development costs and decrease the return
possible from drilling and development activities, and possibly render the
development of certain proved undeveloped reserves uneconomical.
UNCERTAINTY OF ESTIMATES OF OIL AND GAS RESERVES
There are numerous uncertainties inherent in estimating quantities of
proved oil and gas reserves, including many factors beyond the control of CHK.
Williamson Petroleum Consultants, Inc. ("Williamson") evaluated most of CHK's
Texas oil and gas reserves and all of its Louisiana oil and gas reserves as of
June 30, 1997, together representing approximately 50% of CHK's total proved
reserves as of that date. CHK internally evaluated the remaining reserves, which
were subsequently evaluated by Williamson with a variance of approximately 4% of
total proved reserves. These estimates rely upon various assumptions, including
assumptions required by the Commission as to constant oil and gas prices,
drilling and operating expenses, capital expenditures, taxes and availability of
funds. The process of estimating oil and gas reserves is complex, requiring
significant decisions and assumptions in the evaluation of available geological,
geophysical, engineering and economic data for each reservoir. As a result such
estimates are subject to great uncertainty, and this is particularly true as to
proved undeveloped reserves which comprise a significant portion of CHK's proved
reserves. Actual future production, revenue, taxes, development expenditures,
operating expenses and quantities of recoverable oil and gas reserves may vary
substantially from those estimated by CHK. Any significant variance in these
assumptions could materially affect the estimated quantity and value of reserves
set forth in this Information Statement/Prospectus. In addition, CHK's reserves
may be subject to downward or upward revision, based upon production history,
results of future exploration and development, prevailing oil and gas prices,
development costs and other factors, many of which are beyond CHK's control.
DRILLING AND OPERATING RISKS
Oil and gas drilling activities are subject to numerous risks, many of
which are beyond CHK's control. CHK's operations may be curtailed, delayed or
canceled as a result of title problems, weather conditions, compliance with
governmental requirements, mechanical difficulties and shortages or delays in
the delivery of equipment. In addition, CHK's properties may be susceptible to
hydrocarbon drainage from production by other operators on adjacent properties.
Industry operating risks include the risk of fire, explosions, blow-outs, pipe
failure, abnormally pressured formations and environmental hazards such as oil
spills, gas leaks, ruptures
18
25
or discharges of toxic gases, the occurrence of any of which could result in
substantial losses to CHK due to injury or loss of life, severe damage to or
destruction of property, natural resources and equipment, pollution or other
environmental damage, clean-up responsibilities, regulatory investigation and
penalties and suspension of operations.
CHK has been among the most active drillers of horizontal wells and expects
to drill a significant number of deep horizontal wells in the future. CHK's
horizontal drilling activities involve greater risk of mechanical problems than
conventional vertical drilling operations.
In accordance with customary industry practice, CHK maintains insurance
against some, but not all, of the risks described above. There can be no
assurance that any insurance will be adequate to cover losses or liabilities.
CHK cannot predict the continued availability of insurance, or its availability
at premium levels that justify its purchase.
RESTRICTIONS IMPOSED BY LENDERS; RESTRICTIONS IMPOSED BY LENDERS UNDER CERTAIN
CIRCUMSTANCES
The instruments governing the indebtedness of CHK and certain of its
subsidiaries impose significant operating and financial restrictions on CHK,
affecting, and in many respects significantly limiting or prohibiting, among
other things, the ability of CHK to incur additional indebtedness, pay
dividends, repay indebtedness prior to its stated maturity, sell assets or
engage in mergers or acquisitions. These restrictions could also limit the
ability of CHK to effect future financings, make needed capital expenditures,
withstand a future downturn in CHK's business or the economy in general, or
otherwise conduct necessary corporate activities. A failure by CHK to comply
with these restrictions could lead to a default under the terms of such
indebtedness. In the event of default, the holders of such indebtedness could
elect to declare all of the funds borrowed pursuant thereto due and payable
together with accrued and unpaid interest. In such event, there can be no
assurance that CHK would be able to make such payments or borrow sufficient
funds from alternative sources to make any such payment. Even if additional
financing could be obtained, there can be no assurance that it would be on terms
that are favorable or acceptable to CHK.
PATENT AND SECURITIES LITIGATION
On October 15, 1996, Union Pacific Resources Company ("UPRC") filed suit
against CHK in the U.S. District Court for the Northern District of Texas, Fort
Worth Division alleging (a) infringement and inducing infringement of UPRC's
claim to a patent (the "UPRC Patent") for an invention involving a method of
maintaining a borehole in a stratigraphic zone during drilling, and (b) tortious
interference with certain business relations between UPRC and certain of its
former employees. UPRC's claims against CHK are based on services provided by a
third party vendor to CHK. UPRC is seeking injunctive relief, damages of an
unspecified amount, including actual, enhanced, consequential and punitive
damages, interest, costs and attorneys' fees. CHK believes that it has
meritorious defenses to UPRC's allegations and has requested the court to
declare the UPRC Patent invalid. CHK has also filed a motion to limit the scope
of UPRC's claims and for summary judgment. No prediction can be made as to the
outcome of this matter.
A consolidated class action suit alleging violations of Sections 10(b) and
20(a) of the Exchange Act and Rule 10b-5 thereunder has been filed against CHK
and certain of its officers and directors. The plaintiffs assert that the
defendants made materially false and misleading statements and failed to
disclose material facts about the success and future prospects of CHK's
exploration efforts, principally in the Louisiana Trend. As a result, the
complaints allege, the price of CHK Common Stock was artificially inflated
during periods beginning as early as January 25, 1996 and ending on June 27,
1997, when CHK issued a press release announcing disappointing drilling results
in the Louisiana Trend and a full-cost ceiling writedown to be reflected in its
June 30, 1997 financial statements. The plaintiffs further allege that certain
of the named individual defendants sold CHK Common Stock during the class period
when they knew or should have known adverse nonpublic information. The
plaintiffs seek a determination that the suit is a proper class action and
damages in an unspecified amount, together with costs of litigation, including
attorneys' fees.
19
26
The defendants have filed a motion to dismiss. Briefing on such motion should be
concluded by June 15, 1998. All discovery will be stayed pending the Court's
ruling on the motion to dismiss. CHK and the individual defendants believe that
these actions are without merit, and intend to defend against them vigorously.
No estimate of loss or range of estimate of loss, if any, can be made at this
time.
Certain purported class actions alleging violations of Sections 11,
12(a)(2) and 15 of the Securities Act of 1933 and Section 408 of Title 71 of the
Oklahoma Statutes have been filed against CHK, Bayard and others in connection
with the initial public offering of Bayard Common Stock on November 4, 1997. As
a selling shareholder, CHK received approximately $90 million of net proceeds
from the sale of Bayard Common Stock in the offering. Plaintiffs allege that CHK
was a controlling shareholder of Bayard and that the Bayard prospectus contained
material omissions and misstatements relating to CHK's financial situation, its
drilling contracts with Bayard and certain related party transactions. At
present, CHK is aware of three such class actions. Two have been filed in the
District Court of Oklahoma County, Oklahoma, and one in the U.S. District Court
for the Western District of Oklahoma. CHK has not yet filed a response in these
actions. CHK believes that these actions are without merit and intends to defend
against them vigorously. No estimate of loss or range of estimate of loss, if
any, can be made at this time.
GOVERNMENTAL REGULATION
Oil and gas operations are subject to various federal, state and local
governmental regulations which may be changed from time to time in response to
economic or political conditions. From time to time, regulatory agencies have
imposed price controls and limitations on production in order to conserve
supplies of oil and gas. In addition, the production, handling, storage,
transportation and disposal of oil and gas, by-products thereof and other
substances and materials produced or used in connection with oil and gas
operations are subject to regulation under federal, state and local laws and
regulations primarily relating to protection of human health and the
environment. To date, expenditures related to complying with these laws and for
remediation of existing environmental contamination have not been significant in
relation to the results of operations of CHK. There can be no assurance that the
trend of more expansive and stricter environmental legislation and regulation
will not continue.
COMPETITION
CHK operates in a highly competitive environment. CHK competes with major
and independent oil and gas companies for the acquisition of desirable oil and
gas properties, as well as for the equipment and labor required to develop and
operate such properties. Many of these competitors have financial and other
resources substantially greater than those of CHK.
RELIANCE ON KEY PERSONNEL; CONFLICTS OF INTEREST
CHK is dependent upon its Chief Executive Officer, Aubrey K. McClendon, and
its Chief Operating Officer, Tom L. Ward. The unexpected loss of the services of
either of these executive officers could have a detrimental effect on CHK. CHK
maintains $20 million key man life insurance policies on the life of each of
Messrs. McClendon and Ward.
Messrs. McClendon and Ward, together with another executive officer of CHK,
have rights to participate in wells drilled by CHK on a quarter-by-quarter
basis. Messrs. McClendon and Ward have elected to participate during all periods
since CHK's initial public offering with individual interests of between 1.0%
and 1.5%. Such participation may create interests that conflict with those of
CHK.
CONTROL BY CERTAIN SHAREHOLDERS
At March 25, 1998, Aubrey K. McClendon, Tom L. Ward, the McClendon
Children's Trust and the Ward Children's Trust beneficially owned an aggregate
of 24,707,666 shares (including outstanding vested options) representing
approximately 25% of outstanding CHK Common Stock, and members of CHK's Board of
Directors and senior management, including Messrs. McClendon and Ward and their
respective children's trusts, beneficially owned an aggregate of 28,215,486
shares (including outstanding vested options), which
20
27
represented approximately 28% of outstanding CHK Common Stock. As a result,
Messrs. McClendon and Ward, together with other officers and directors of CHK,
are in a position to significantly influence matters requiring the vote or
consent of CHK's shareholders.
Assuming that CHK issues 5,000,000 shares of CHK Common Stock in the
Merger, the ownership of Messrs. McClendon and Ward and their respective
children's trusts, respectively, will decrease to approximately 23% and the
ownership of CHK's Directors and Executive Officers as a group will decrease to
approximately 26% of the issued and outstanding shares of CHK Common Stock,
respectively.
FORWARD-LOOKING STATEMENTS
All statements other than statements of historical fact contained in this
Information Statement/Prospectus and incorporated by reference herein, are
forward-looking statements. When used herein, the words "budget," "budgeted,"
"anticipates," "expects," "believes," "seeks," "goals," "intends," or "projects"
and similar expressions are intended to identify forward-looking statements. It
is important to note that CHK's actual results could differ materially from
those projected by such forward-looking statements. Although CHK believes that
the expectations reflected in such forward-looking statements are reasonable, no
assurance can be given that such expectations will prove correct. Factors that
could cause CHK's results to differ materially from the results discussed in
such forward-looking statements include the aforementioned risks described under
"Risk Factors," including, but not limited to, the following: Production
variances from expectations, volatility of oil and gas prices, the need to
develop and replace its reserves, the substantial capital expenditures required
to fund its operations, environmental risks, drilling and operating risks, risks
related to exploration and development drilling, uncertainties about estimates
of reserves, competition, government regulation, and the ability of CHK to
implement its business strategy. All forward-looking statements in this
Information Statement/Prospectus are expressly qualified in their entirety by
the cautionary statements in this paragraph.
DESCRIPTION OF MERGER
BACKGROUND
At its May 5, 1997 meeting, the DLB Board reviewed DLB's business plan and
its resources to fund that plan. DLB's business plan was based on maximizing
shareholder value through exploration and strategic acquisitions. At this
meeting, the DLB Board noted that $8.8 million of borrowing capacity remained
under DLB's existing credit facility. Without expanding the borrowing base, DLB
would be precluded from participating in future exploration activities or
acquisitions in excess of such available borrowings. DLB's liquidity constraints
arose primarily as a result of capital expenditures it made in connection with
property acquisitions and exploration activities that did not generate
sufficient cash flow within the projected time frames. In light of these
factors, the DLB Board determined that it was in the interest of DLB and its
shareholders to engage the services of investment bankers to counsel DLB on
capitalization alternatives.
In mid-May, 1997, the management of DLB met with Donaldson, Lufkin &
Jenrette Securities Corporation ("DLJ") to discuss available capitalization
strategies. After analyzing the market performance of DLB's Common Stock and
other similarly situated companies, it was concluded that the market did not
value diverse energy companies such as DLB as highly as companies focused on one
primary area of the energy business. DLB's structure included Mid-Continent oil
and gas properties; a wholly owned contract drilling company, Bonray Drilling
Corporation ("Bonray"); a 20.8% interest in Waggoner; and a 46.8% equity
interest in WRT. The analysis concluded that neither an equity offering nor a
high yield bond offering would maximize shareholder value. The recommended
alternative was for DLB to sell selected assets, beginning with the sale of
Bonray.
In late May, 1997, the DLB Board concluded that the recommended alternative
would best maximize shareholder value. To insure sufficient liquidity during the
bidding process, the decision was made to seek
21
28
additional debt financing. After an analysis of DLB's financial and operating
data, DLJ informed DLB that it was not in a position to provide DLB with the
requested financing. DLB then contacted Lehman Brothers, which agreed to provide
$23 million through a second bank loan.
On May 27, 1997, management and certain members of the DLB Board met with
representatives of Lehman Brothers to review the company's strategic
alternatives. Lehman Brothers was authorized to begin contacting potential
parties who might be interested in acquiring some or all of the assets of DLB.
It was also decided to continue to pursue a separate sale of Bonray. During the
period from May 27, 1997 to July 7, 1997, Lehman Brothers contacted 196
potential purchasers. On June 30, 1997, DLB issued a press release stating that
it had engaged Lehman Brothers to act as its financial advisor in exploring
strategic alternatives, including the sale of some or all of its assets. Of the
parties expressing initial indications of interest, 52 executed confidentiality
agreements. Between July 14, 1997 and September 29, 1997, 22 parties conducted
formal due diligence reviews at data rooms established by DLB.
On September 4, 1997, bid letters were sent to the 15 parties indicating an
interest after a data room visit. The letters requested bids for the stock
purchase of (1) DLB in its entirety; (2) DLB excluding Bonray; (3) the
Mid-Continent operations; (4) DLB's interest in WRT; and/or (5) DLB's interest
in Waggoner. A deadline for bids was set for September 15, 1997.
As part of DLB's pursuit of alternatives for Bonray, inquiries were made
with Bayard. On September 15, 1997, DLB received a letter of intent from Bayard
regarding the proposed merger of Bonray with Bayard. No other bids were made for
Bonray. On September 16, 1997, DLB announced that Bonray would merge into Bayard
in exchange for approximately three million shares of Bayard Common Stock
representing 16.4% of the beneficial ownership of Bayard. Negotiation of the
terms of a definitive merger agreement ("the Bonray Merger Agreement") ensued
between representatives of DLB and Bayard, and their respective attorneys, based
on the letter of intent. The Bonray Merger Agreement was approved by the DLB
Board on September 29, 1997, and executed on October 9, 1997. On November 4,
1997, Bayard completed an initial public offering of Bayard Common Stock at $23
per share, which began trading on the AMEX under the ticker symbol BDI.
Between September 15, 1997 and October 1, 1997, management of DLB met with
Lehman Brothers to review the results of the auction process, which results were
communicated to members of the DLB Board. A total of six bids were received for
the Mid-Continent and Barbados properties, including proposals for all cash, all
stock and combination cash/stock transactions. All of the bids were based on the
assumption by the bidder of $80 million of DLB debt. After consultation with
Lehman Brothers, it was concluded that four of the bids did not offer adequate
value and that two of the bids were sufficiently attractive to warrant further
discussions. DLB senior management and Lehman Brothers were authorized to
continue negotiations with the two selected potential purchasers, one of which
was CHK.
CHK's initial bid consisted of a proposed stock-for-stock merger in which
$70 million of CHK Common Stock would be issued in exchange for the outstanding
DLB Common Stock, and the shares of Bayard Common Stock and WRT Common Stock
owned by DLB would be distributed to the DLB shareholders. CHK's initial bid
valued DLB at approximately $170 million (excluding any value attributable to
the Bayard Common Stock and WRT Common Stock), consisting of $70 million of CHK
Common Stock to be issued to DLB shareholders, the assumption of the $80 million
of DLB debt and the assumption of tax liabilities relating to the Bayard and WRT
transactions estimated at $20 million based on an assumed $25 per share Bayard
initial public offering price and a 35% tax rate, with no adjustment if the tax
liabilities were ultimately lower or higher.
The other bidder initially offered to exchange 37.5 million shares of its
publicly-traded shares for the outstanding DLB Common Stock, to be followed by
the distribution of the Bayard and WRT Common Stock to the DLB shareholders. The
bid was nominally valued at $150 million (excluding any value attributable to
the Bayard Common Stock and WRT Common Stock), based on the market price of the
bidder's shares and the assumption of the $80 million of DLB debt, less a
reduction for tax liabilities relating to the Bayard and WRT transactions,
payment of stock options, severance payments, stay-on bonuses and other
negotiated amounts. Further negotiations with this bidder resulted in an offer
of an aggregate value for DLB of
22
29
approximately $165 million (excluding any value attributable to the Bayard
Common Stock and WRT Common Stock), consisting of $63.6 million in cash, the
assumption of the $80 million of DLB debt and the assumption of the Bayard/WRT
tax liabilities of $16.8 million, based on an assumed $22 per share Bayard
initial public offering price and 35% tax rate. On October 15, 1997, this
potential purchaser informed DLB that it was withdrawing from the bidding
process because it could not absorb the tax liability associated with the
transaction.
After CHK completed a due diligence review of DLB in mid-September,
negotiations between representatives of CHK progressed from mid-September to
early October, and representatives of the respective parties negotiated the
terms of a definitive merger agreement. During negotiations with CHK, the DLB
assumed debt figure was revised to $85 million, with the amount of CHK Common
Stock offered by CHK subsequently reduced to $65 million. The CHK offer fixed
the stock component at $65 million, without future adjustments for changes in
debt levels. Throughout the negotiation process, members of the DLB Board were
kept apprised of developments through various meetings and telephone
conversations.
On October 15, 1997, the DLB Board held a telephonic meeting to review
CHK's proposal and a proposed Merger Agreement (the "Initial Merger Agreement").
The Initial Merger Agreement provided that the total number of shares of CHK
Common Stock to be issued in the Merger would be valued at $65 million based on
the Closing Price of CHK Common Stock and also provided for the distribution of
the Bayard Common Stock in the Merger and the WRT Common Stock in the WRT
Spin-Off at the ratios set forth in this Information Statement/Prospectus.
Members of DLB's management, together with DLB's legal and financial advisors,
reviewed the background of the proposed Merger, the potential benefits of the
Merger to the shareholders of DLB, financial and valuation analyses of the
transaction, and the terms of the Initial Merger Agreement. On October 15, 1997,
Lehman Brothers delivered its oral opinion to the DLB Board (which opinion was
subsequently confirmed in writing) that, as of such date and subject to the
assumptions, limitations and qualifications set forth therein, the ratio of CHK
Common Stock to be received for each share of DLB Common Stock (the "Exchange
Ratio") was fair, from a financial point of view, to the shareholders of DLB.
After considering the presentation of senior management and DLB's legal advisors
and the presentation and opinion of Lehman Brothers, along with various other
factors, the DLB Board unanimously approved the Initial Merger Agreement and the
transactions contemplated thereby, authorized the officers of DLB to execute the
Initial Merger Agreement on behalf of DLB, approved the Proxy Agreements and
recommended that the shareholders of DLB approve the Merger and the Initial
Merger Agreement.
Subsequent to the October 15, 1997 DLB Board meeting, CHK submitted a
revised proposal that included an option to pay a total of $65 million in cash
instead of the CHK Common Stock as part of the Merger Consideration to prevent
further dilution of the CHK shareholders in the event that the market value of
the CHK Common Stock decreased. As a result, DLB requested that Lehman Brothers
address the ratio of cash to be received for each share of DLB Common Stock (the
"Cash Exchange Ratio") in its opinion. On October 21, 1997, Lehman Brothers
delivered its written opinion to the DLB Board that, as of such date and subject
to the assumptions, limitations and qualifications set forth therein, the
Exchange Ratio and the Cash Exchange Ratio, as applicable, were fair, from a
financial point of view, to the shareholders of DLB.
On October 22, 1997, officers of DLB and CHK executed and delivered the
Initial Merger Agreement pursuant to which, in the Merger, each DLB shareholder
would be entitled to receive in exchange for each of its shares of DLB Common
Stock a pro rata portion of (i) CHK Common Stock with an aggregate market value
of $65 million, (ii) the Bayard Common Stock owned by DLB at the time of the
Merger and (iii) the WRT Common Stock owned by DLB at the time of the Merger;
provided, however,that CHK had the option to substitute $65 million in cash for
the CHK Common Stock referred to in clause (i) above. As a result of the Initial
Merger Agreement, pursuant to which CHK agreed to issue CHK Common Stock valued
at $65 million (or to pay such amount in cash) and to assume $85 million of DLB
debt, the aggregate value of the transaction as of such date (excluding any
value attributable to Bayard Common Stock and WRT Common Stock) was $150
million. Also on October 22, 1997, Messrs. Mike and Mark Liddell and Charles E.
Davidson executed and delivered the Proxy Agreements.
23
30
On December 22, 1997, DLB and CHK executed and delivered Amendment No. 1 to
the Initial Merger Agreement. To facilitate an expeditious distribution of the
WRT Common Stock to the DLB shareholders, the amendment provided, among other
things, that the WRT Spin-Off would occur immediately prior to, rather than
after, the Merger. Amendment No. 1 to the Initial Merger Agreement did not
change the merger consideration and therefore did not alter the aggregate value
of the transaction as of such date.
The Initial Merger Agreement provided that either party could terminate the
Merger Agreement if the average of the closing prices of CHK Common Stock for a
specified twenty-day trading period prior to the Merger fell below $7.50 per
share. Following the execution of the Initial Merger Agreement, the trading
price for CHK Common Stock declined. During January 1998, the high and low
closing prices for CHK Common Stock, as reported by The Wall Street
Journal -- Composite Transactions, were $7.63 and $5.56, respectively.
In view of the decline in trading prices for the CHK Common Stock, which
had been below $7.50 per share since January 6, 1998, CHK representatives
approached DLB's management asking that DLB reconsider the proposed Merger
consideration. During February 4 through 6, 1998, Messrs. Mike Liddell and
Charles E. Davidson, directors of DLB, met with management of CHK to discuss
potential revisions to the terms of the Merger Agreement. At these meetings, and
through the course of negotiations, representatives of CHK proposed revising the
terms of the Merger Agreement to provide for Merger Consideration consisting of
an aggregate of $17.5 million cash, five million shares of CHK Common Stock and
the Bayard Common Stock, to provide for the transfer of DLB International to
WRT, and to eliminate the right of either party to terminate the Merger if the
trading price of CHK Common Stock fell below $7.50 per share.
On February 10 and 11, 1998, the DLB Board held telephonic meetings to
consider the proposed revisions to the terms of the Merger Agreement at which
management presented a detailed discussion of the Merger, the transfer of DLB's
equity interest in DLB International to WRT and the WRT Spin-Off, and at the
February 11, 1998 telephonic meeting Lehman Brothers made a presentation and
delivered its oral opinion to the DLB Board (which opinion was subsequently
confirmed in writing) that, as of such date and subject to the assumptions,
limitations and qualifications set forth therein, the Transaction Consideration
was fair, from a financial point of view, to the shareholders of DLB. After such
presentations and a discussion and consideration of various factors, including
those described under "-- DLB's Reasons for the Merger; Recommendation of the
DLB Board of Directors," the DLB Board unanimously approved the proposed
revisions to the terms of the Merger Agreement and authorized the officers of
DLB to execute and deliver Amendment No. 2 to the Merger Agreement.
On February 11, 1998, DLB and CHK executed and delivered Amendment No. 2 to
the Merger Agreement pursuant to which, in the Merger, each DLB shareholder
would be entitled to receive in exchange for each of its shares of DLB Common
Stock a pro rata portion of (i) $17.5 million in cash, (ii) five million shares
of CHK Common Stock (with an aggregate value of $29.7 million on February 11,
1998 based on the closing price of $5 15/16 per share for CHK Common Stock on
such date) and (iii) the Bayard Common Stock owned by DLB at the time of the
Merger. In addition, each DLB shareholder would continue to be entitled to its
pro rata portion of the WRT Common Stock owned by DLB, but pursuant to Amendment
No. 1 to the Merger Agreement such distribution of WRT Common Stock would occur
immediately prior to the Merger rather than as part of the Merger. As a result
of Amendment No. 2 to the Merger Agreement, pursuant to which CHK agreed to pay
for DLB's Mid-Continent operations $17.5 million in cash, to issue CHK Common
Stock valued at $29.7 million as of February 11, 1998, and to assume $85 million
of DLB debt, the aggregate value of the transaction as of such date (excluding
any value attributable to Bayard Common Stock and WRT Common Stock) was $132.2
million.
Even though CHK did not assign any value to the Barbados Assets and none of
the parties that visited DLB's data rooms expressly to evaluate the acquisition
of the Barbados Assets submitted a bid for such assets, DLB's Board continued to
seek a potential buyer for the Barbados Assets in an effort to maximize value
for the DLB shareholders. On March 24, 1998, DLB International and Waggoner
entered into the Waggoner Agreement which, subject to the terms and conditions
thereof, provides for the sale of the Barbados Assets to Waggoner for
approximately $2.5 million. Concurrently with the execution of the Waggoner
Agreement, DLB and CHK executed and delivered Amendment No. 3 to the Merger
Agreement which, among other things,
24
31
provides for the addition to the Merger Consideration of the Barbados Contingent
Payment Rights and the Liquidating Trust Contingent Payment Rights. As a result
of Amendment No. 3 to the Merger Agreement, the aggregate value of the
transaction as of March 24, 1998 (excluding any value attributable to the Bayard
Common Stock and WRT Common Stock and valuing the CHK Common Stock at its
closing price on such date) was $135.2 million, assuming the sale of the
Barbados Assets is consummated and assigning no value to the Liquidating Trust
Contingent Payment Rights. There can be no assurance that the sale of the
Barbados Assets will be consummated. See "Summary -- Merger
Agreement -- Consideration."
DLB'S REASONS FOR THE MERGER; RECOMMENDATION OF THE DLB BOARD OF DIRECTORS
The DLB Board has approved the Merger and the Merger Agreement, has
determined that the Merger and the Merger Agreement are in the best interests of
DLB and its shareholders, and has recommended that the DLB shareholders approve
the Merger and the Merger Agreement. In its deliberations and in making its
determination and recommendation, and in authorizing and approving the Merger
Agreement and the Merger, the DLB Board consulted with Lehman Brothers and with
DLB's outside counsel. The DLB Board considered a number of factors including
the following:
(i) the view of the DLB Board that in light of DLB's capital needs and
the marketplace's undervaluation of DLB's stock, the sale or spin-off of
all or various parts of DLB's businesses was in the best interests of DLB
shareholders and would best achieve shareholder value;
(ii) the fact that DLB conducted a public auction process and no other
bidder submitted a proposal having terms more favorable than those
ultimately proposed by CHK;
(iii) the presentation made by Lehman Brothers to the DLB Board at its
February 11, 1998 meeting and the oral opinion (which opinion was
subsequently confirmed in writing) of Lehman Brothers delivered to the DLB
Board at that meeting that, as of such date and subject to the assumptions,
limitations and qualifications set forth therein, the Transaction
Consideration was fair, from a financial point of view, to the shareholders
of DLB;
(iv) the opportunity for DLB shareholders to participate as holders of
CHK in a larger company and to participate in the value that may be
generated through the combination of the two companies;
(v) the opportunity for DLB shareholders to participate, as holders of
Bayard Common Stock and WRT Common Stock, in the future value of Bayard and
WRT, respectively;
(vi) the familiarity of DLB's Board of Directors with the business,
results of operations, properties, financial condition and prospects of
DLB, including the fact that, without increased liquidity, DLB would be
constrained in its growth; and
(vii) the Board's review of certain publicly available information
with respect to the financial condition and results of operations of CHK.
In view of the variety of factors considered in connection with its
evaluation of the Merger, the DLB Board of Directors did not find it practicable
to and did not quantify or otherwise assign relative weights to the specific
factors considered in reaching its decision.
OPINION OF LEHMAN BROTHERS
On February 11, 1998, Lehman Brothers delivered its oral opinion to the DLB
Board (which opinion was subsequently confirmed in writing) (the "Opinion")
that, as of such date and subject to the assumptions, limitations and
qualifications set forth therein, the Transaction Consideration was fair, from a
financial point of view, to the shareholders of DLB. The Opinion does not in any
manner address, and Lehman Brothers was not asked to consider, the value or the
fairness to the shareholders of DLB of the Bayard Common Stock or the WRT Common
Stock to be received by such shareholders in the Merger and the WRT Spin-Off.
A copy of the Opinion is attached to this Information Statement/Prospectus
as Annex B. DLB shareholders should read the Opinion in its entirety for a
discussion of the assumptions made, procedures
25
32
followed, matters considered and limitations on the review by Lehman Brothers in
rendering the Opinion. This summary of the Opinion set forth in this Information
Statement/Prospectus is qualified by reference to the full text of the Opinion
attached hereto.
No limitations were imposed by DLB on the scope of the investigation or the
procedures to be followed by Lehman Brothers in rendering the Opinion. Lehman
Brothers was not requested to and did not make any recommendation to the DLB
Board as to the form or amount of the consideration to be received for the
Operations in the transactions contemplated by the Merger Agreement (the
"Proposed Transaction"), which was determined through arm's-length negotiations
between DLB and CHK. In arriving at the Opinion, Lehman Brothers did not ascribe
a specific range of values to the Operations, but made a determination as to the
fairness, from a financial point of view, to the shareholders of DLB of the
Transaction Consideration on the basis of the financial and comparative analyses
summarized below. The Opinion was for the use and benefit of the DLB Board in
connection with its consideration of the Proposed Transaction and does not
constitute a recommendation to any shareholder of DLB as to how such shareholder
should vote with respect to the Proposed Transaction. Lehman Brothers was not
requested to opine as to, and the Opinion does not in any manner address, (1)
the value, or the fairness, from a financial point of view, to the shareholders
of DLB of, the Bayard Common Stock or the WRT Common Stock to be received by
such shareholders in the Proposed Transaction, (2) the fairness, from a
financial point of view, to the shareholders of DLB of the transfer of DLB's
interest in Waggoner to WRT or the WRT Spin-Off or (3) DLB's underlying business
decision to proceed with or effect the transfer of the Operations to CHK or the
Proposed Transaction.
In arriving at the Opinion, Lehman Brothers reviewed and analyzed: (1) the
Merger Agreement, Amendment No. 1 thereto and a draft dated February 10, 1998 of
Amendment No. 2 thereto and the specific terms of the Proposed Transaction, (2)
publicly available information concerning DLB, the Operations and CHK that
Lehman Brothers believed to be relevant to its analysis, (3) financial and
operating information with respect to the business, operations and prospects of
the Operations and CHK furnished to Lehman Brothers by DLB and CHK,
respectively, including reserve estimates prepared by DLB, DeGolyer and
MacNaughton and H.J. Gruy and Associates, Inc. (collectively, "DLB's Petroleum
Engineers") for the Operations and reserve estimates prepared by CHK and
Williamson Petroleum Consultants, Inc. ("CHK's Petroleum Engineers," and
together with DLB's Petroleum Engineers, the "Petroleum Engineers") for CHK
(collectively, the "Reserve Reports"), (4) a trading history of the DLB Common
Stock from February 9, 1996 to February 10, 1998, (5) a trading history of the
CHK Common Stock from February 9, 1996 to February 10, 1998 and a comparison of
that trading history with those of other companies that Lehman Brothers deemed
relevant, (6) a comparison of the historical financial results and present
financial condition of the Operations and CHK with those of other companies that
Lehman Brothers deemed relevant, (7) a comparison of the financial terms of the
transfer of the Operations to CHK with the financial terms of certain other
transactions that Lehman Brothers deemed relevant, and (8) the results of its
efforts to solicit indications of interest from third parties with respect to a
purchase of all or a portion of DLB's business. In addition, Lehman Brothers had
discussions with the managements of DLB and CHK concerning their respective
businesses, operations, assets, financial condition and prospects and undertook
such other studies, analyses and investigations as Lehman Brothers deemed
appropriate.
In arriving at the Opinion, Lehman Brothers assumed and relied upon the
accuracy and completeness of the financial and other information used by it
without assuming any responsibility for independent verification of such
information and further relied upon the assurances of the managements of DLB and
CHK that they were not aware of any facts or circumstances that would make such
information inaccurate or misleading. With respect to the operating projections
of the Operations and CHK, upon advice of DLB and CHK, Lehman Brothers assumed
that such projections were reasonably prepared on bases reflecting the best
currently available estimates and judgments of the managements of DLB and CHK,
as the case might be, as to the future performance of the Operations and CHK,
respectively, and that the Operations and CHK would perform substantially in
accordance with such projections. Lehman Brothers also assumed that the Reserve
Reports had been reasonably prepared and reflected the best currently available
estimates and judgments of DLB and CHK and their respective Petroleum Engineers
as to their respective reserves, their future hydrocarbon production and
associated costs. In addition, Lehman Brothers assumed that the aggregate
26
33
amount of indebtedness of DLB to be assumed by CHK upon consummation of the
Merger would be at least $85 million. In arriving at the Opinion, Lehman
Brothers did not conduct a physical inspection of the properties and facilities
of DLB or CHK and did not make or obtain any evaluations or appraisals of the
assets or liabilities of DLB or CHK (other than the Reserve Reports). Lehman
Brothers' Opinion necessarily was based upon market, economic and other
conditions as they existed on, and could be evaluated as of, the date of the
Opinion and does not give effect to events that occurred subsequent to the
delivery of the Opinion.
In connection with rendering the Opinion, Lehman Brothers performed a
variety of financial and comparative analyses, as described below and presented
to the DLB Board on February 11, 1998. The preparation of a fairness opinion
involves various determinations as to the most appropriate and relevant methods
of financial analysis and the application of those methods to the particular
circumstances and, therefore, such an opinion is not readily susceptible to
summary description. Furthermore, in arriving at the Opinion, Lehman Brothers
did not attribute any particular weight to any analysis or factor considered by
it, but rather made qualitative judgments as to the significance and relevance
of each analysis and factor.
Accordingly, Lehman Brothers believes that its analyses must be considered
as a whole and that considering any portion of such analyses and of the factors
considered, without considering all analyses and factors, could create a
misleading or incomplete view of the process underlying the Opinion. In its
analyses, Lehman Brothers made numerous assumptions with respect to industry
performance, general business and economic conditions and other matters, many of
which are beyond the control of DLB and CHK. Any estimates contained in these
analyses are not necessarily indicative of actual values or predictive of future
results or values, which may be significantly more or less favorable than as set
forth therein. In addition, analyses relating to the value of businesses do not
purport to be appraisals or to reflect the prices at which such businesses may
actually be sold.
Discounted Cash Flow Analysis of the Operations. Using a discounted cash
flow analysis, Lehman Brothers calculated the present value of the after-tax
future cash flows that the proved reserves of the Operations could be expected
to generate after January 1, 1998 based upon (a) the DLB Reserve Reports and (b)
oil and gas price forecasts under two distinct pricing scenarios, a low price
case and a high price case. Lehman Brothers estimated ranges of values for the
probable reserves and undeveloped acreage of DLB, which were added to the values
determined based on a discounted cash flow analysis of the proved reserves.
Production forecasts, associated production costs, operating expenses and
maintenance capital expenditures necessary to lift and produce the proved
reserves were taken from engineering reports prepared by DLB's Petroleum
Engineers which contained estimates developed with DLB's management. The
after-tax cash flows were discounted at rates ranging from 9% to 12.5%.
By discounting all of the after-tax cash flows generated by the Operations'
proved reserves as of January 1, 1998 and adding estimated values for probable
reserves and undeveloped acreage, Lehman Brothers arrived at a value range for
the Operations of $100 million to $120 million in the low price case and $110
million to $135 million in the high price case.
Analysis of Selected Comparable Acquisition Transactions for the
Operations. Lehman Brothers reviewed publicly available information regarding
the following acquisitions that involved oil and gas properties similar to those
of the Operations and consideration in excess of $100 million that were
announced between May 1994 and February 1998 (sellers listed second): Gothic
Energy Corporation/Amoco Production Company, Coho Energy Inc./Amoco Production
Company, Belco Oil and Gas Corp./Coda Energy Company, Magnum Hunter Resources,
Inc./Burlington Resources, Inc., KCS Energy, Inc./InterCoast Energy Company, HS
Resources, Inc./Tide West Oil Company, National Energy Group, Inc./Alexander
Energy Corporation, Amoco Corp./Sante Fe Minerals, Inc. and MCN Energy Group,
Inc./(seller undisclosed).
Lehman Brothers calculated multiples based on the consideration
attributable to oil and gas reserves for each of the transactions of, among
other things, such acquired properties' respective proved reserves. In
particular, Lehman Brothers calculated the consideration in such comparable
transactions expressed in terms of dollars per BOE of proved reserves. Lehman
Brothers derived an aggregate $5.50 to $7.00 per BOE reserve
27
34
multiple for the comparable acquisitions. Applying such multiples to the
Operations' 20.3 MMBOE proved reserves at January 1, 1998, the imputed value for
the Operations ranged from $110 million to $140 million.
Because the market conditions, rationale and circumstances surrounding each
of the transactions analyzed were specific to each transaction and because of
the inherent differences between the businesses, operations and prospects of the
Operations and the acquired properties analyzed, Lehman Brothers believed that
it was inappropriate to, and therefore did not, rely solely on the quantitative
results of the analysis, and accordingly, also made qualitative judgments
concerning differences between the characteristics of these transactions and the
Merger that would affect acquisition values of the Operations and such acquired
properties.
Analysis of Selected Publicly Traded Comparable Companies for the
Operations. Lehman Brothers calculated the market capitalization and market
value for each of the following publicly traded companies: HS Resources, Inc.,
Lomak Petroleum, Inc., Patina Oil & Gas Corporation, and Wiser Oil Company
(collectively, the "Operations Comparable Companies"). For this purpose, Lehman
Brothers defined "market capitalization" as market value of the relevant
company's common equity plus total debt less cash and cash equivalents. Lehman
Brothers then calculated the market capitalization of each of the Operations
Comparable Companies as a multiple of each such company's December 31, 1996
proved reserves and the latest twelve months earnings (as of September 30, 1997)
before interest, taxes, depreciation, depletion, exploration expense and
amortization ("EBITDE"). The multiples yielded by such calculations for the
Operations Comparable Companies were (i) with respect to proved reserves,
between $4.11 per BOE and $6.29 per BOE, and (ii) with respect to the latest
twelve months EBITDE, between 4.2x and 9.7x. Lehman Brothers also calculated the
equity market value of each of the Operations Comparable Companies as a multiple
of the latest twelve months cash flow (as of September 30, 1997) from
operations. The multiples yielded by such calculations for the Operations
Comparable Companies were between 2.0x and 4.3x. Applying these multiples to the
Operations yielded a value range of $115 million to $140 million.
Because of the inherent differences between the businesses, operations and
the prospects of the Operations and the businesses, operations and prospects of
the Operations Comparable Companies, Lehman Brothers believed that it was
inappropriate to, and therefore did not, rely solely on the quantitative results
of the analysis, and accordingly also made qualitative judgments concerning
differences between the financial and operating characteristics of the
Operations and the Operations Comparable Companies that would affect the public
trading values of the Operations and the Operations Comparable Companies.
Discounted Cash Flow Analysis of CHK. Using a discounted cash flow
analysis, Lehman Brothers calculated the present value of the after-tax future
cash flows that the proved reserves of CHK, including on a pro forma basis,
Anson Production Corporation, EnerVest Management Company, L.C. and Ranger Oil
Company, could be expected to generate after January 1, 1998 based upon (a) the
CHK Reserve Reports and (b) oil and gas price forecasts under the same two
pricing scenarios that were applied to the reserves of the Operations. Lehman
Brothers estimated ranges of values for the probable reserves, undeveloped
acreage and recent new discoveries of CHK, which were added to the values
determined based on a discounted cash flow analysis of the proved reserves.
Production forecasts, associated production costs, operating expenses and
maintenance capital expenditures necessary to lift and produce the proved
reserves were taken from engineering reports prepared by CHK's Petroleum
Engineers which contained estimates developed with CHK's management. The
after-tax cash flows were discounted at rates ranging from 9% to 12.5%.
By discounting all of the after-tax cash flows generated by CHK's pro forma
proved reserves as of January 1, 1998 and adding estimated values for probable
reserves, undeveloped acreage and new discoveries, Lehman Brothers arrived at a
value range per share for the CHK Common Stock of $3.72 to $5.59 for the low
price case and $4.46 to $6.32 for the high price case. In each of the analyses
performed with respect to CHK, per share amounts were calculated assuming 74.88
million shares of CHK Common Stock outstanding on a pro forma basis.
Analysis of Selected Comparable Acquisition Transactions for CHK. Lehman
Brothers reviewed publicly available information regarding the following
acquisitions that involved oil and gas properties similar to those of CHK or oil
and gas companies similar to CHK and consideration in excess of $100 million
that were
28
35
announced between February 1996 and February 1998 (sellers listed second):
Gothic Energy Corporation/ Amoco Production Company, Coho Energy Inc./Amoco
Production Company, Belco Oil and Gas Corp./ Coda Energy Company, KCS Energy,
Inc./InterCoast Energy Company, Forest Oil Corporation/LLOG Exploration Company,
Sonat, Inc./Zilkha Energy Company , Denbury Resources, Inc./Chevron Corporation,
Kelley Oil and Gas Corporation/SCANA Petroleum Resources, Inc. and HS Resources,
Inc./Tide West Oil Company.
Lehman Brothers calculated multiples based on the consideration
attributable to oil and gas reserves for each of such transactions of, among
other things, such acquired properties' or companies' respective proved
reserves. In particular, Lehman Brothers calculated the consideration in such
comparable transactions expressed in terms of dollars per BOE of proved
reserves. Lehman Brothers derived an aggregate $8.00 to $9.50 per BOE reserve
multiple for the comparable acquisitions. Applying such multiples to CHK's pro
forma 91.1 MMBOE proved reserves, the imputed value for CHK Common Stock ranged
from $4.72 per share to $7.19 per share.
Because the market conditions, rationale and circumstances surrounding each
of the transactions analyzed were specific to each transaction and because of
the inherent differences between the businesses, operations and prospects of CHK
and the acquired properties or companies analyzed, Lehman Brothers believed that
it was inappropriate to, and therefore did not, rely solely on the quantitative
results of the analysis, and accordingly, also made qualitative judgments
concerning differences between the characteristics of these transactions and the
Merger that would affect acquisition values of CHK and such acquired properties
or companies.
Analysis of Selected Publicly Traded Comparable Companies for CHK. Lehman
Brothers calculated the market capitalization and market value for each of the
following publicly traded companies: Belco Oil & Gas Corp., Devon Energy
Corporation, Stone Energy Corporation and Swift Energy Company (collectively,
the "CHK Comparable Companies"). For this purpose, Lehman Brothers defined
"market capitalization" as marked value of the relevant company's common equity
plus total debt less cash and cash equivalents. Lehman Brothers then calculated
the market capitalization of each of the CHK Comparable Companies as a multiple
of each such company's December 31, 1996 Pre-tax SEC Value, December 31, 1996
proved reserves and the latest twelve months (as of September 30, 1997) EBITDE.
The multiples yielded by such calculations for the CHK Comparable Companies were
(i) with respect to 1996 Pre-tax SEC Value, between 0.66x and 1.07x, (ii) with
respect to proved reserves, between $6.65 per BOE and $10.46 per BOE, and (iii)
with respect to the latest twelve months EBITDE, between 5.7x and 14.9x.
Applying these multiples to the pro forma CHK values yielded a value range per
share for the CHK Common Stock of $6.00 to $7.66.
Because of the inherent differences between the businesses, operations and
the prospects of CHK and the businesses, operations and prospects of the CHK
Comparable Companies, Lehman Brothers believed that it was inappropriate to, and
therefore did not, rely solely on the quantitative results of the analysis, and
accordingly also made qualitative judgments concerning differences between the
financial and operating characteristics of CHK and the CHK Comparable Companies
that would affect the public trading values of CHK and the CHK Comparable
Companies.
Lehman Brothers is an internationally recognized investment banking firm
engaged in the valuation of businesses and their securities in connection with
mergers and acquisitions, negotiated underwritings, competitive bids, secondary
distributions of listed and unlisted securities, private placements and
valuations for corporate and for other purposes. DLB selected Lehman Brothers to
act as its financial advisor in connection with its review of strategic
alternatives because of Lehman Brothers' reputation and substantial experience
in transactions similar to the Merger.
In compensation for Lehman Brothers' services as financial advisor to DLB,
DLB has agreed to pay Lehman Brothers a fee, which is contingent upon the
consummation of the Merger, of approximately $1.6 million. DLB has also agreed
to indemnify Lehman Brothers for certain liabilities that may arise out of
Lehman Brothers' engagement as financial advisor to DLB, including certain
liabilities under the federal securities laws.
29
36
Lehman Brothers also has performed in the past and continues to perform
various investment banking services for DLB and has, in the past, performed
various investment banking services for CHK and has received customary fees for
such services. An affiliate of Lehman Brothers provides debt financing to DLB
which will be assumed by Merger Sub and repaid upon consummation of the Merger.
In the ordinary course of business, Lehman Brothers actively trades in the debt
and equity securities of DLB and CHK for its own account and for the accounts of
its customers and, accordingly, Lehman Brothers may at any time hold a long or
short position in such securities.
RESALES OF CHK COMMON STOCK RECEIVED IN THE MERGER
Shares of CHK Common Stock issued in connection with the Merger will be
freely tradeable except for shares issued to affiliates of DLB, which will be
subject to the provisions of Rule 145 under the Securities Act. Subject to the
terms of the Registration Rights Agreement between CHK and Charles E. Davidson,
Mr. Davidson may, at any time during the period that commences 60 days prior to
the Effective Time and continues until 5:00 p.m. on the day immediately
preceding the Effective Time, demand registration of not less than 200,000
shares of CHK Common Stock received pursuant to the terms of the Merger. In
addition, if CHK at any time after the Effective Time proposes to register any
of its equity securities under the Securities Act (other than by registration on
Form S-4 or Form S-8) on a form and in a manner that would permit registration
of Mr. Davidson's shares, Mr. Davidson will have the right to request that CHK
register any of his shares which he requests be registered (the "Piggyback
Registration Right"). Such Piggyback Registration Right is subject to certain
limitations including, but not limited to, priority for the shares to be sold by
CHK in such registration and a pro rata allocation among Mr. Davidson and other
shareholders, if any, entitled to Piggyback Registration Rights. Mr. Davidson
has given notice to CHK demanding the registration of all of the shares of CHK
Common Stock he is to receive in the Merger. For more information, see "Merger
Agreement -- Registration Rights Agreement."
DELISTING AND DEREGISTRATION OF DLB COMMON STOCK
Following the consummation of the Merger, the DLB Common Stock will be
delisted from the NASDAQ NMS and deregistered under the Exchange Act.
BUSINESS OF CHK
CHK is an independent oil and gas company engaged in the exploration,
production, development and acquisition of oil and natural gas in major onshore
producing areas of the United States and Canada.
Despite its overall favorable record of growth, in the fiscal year ended
June 30, 1997 CHK incurred a net loss of $183 million primarily as a result of a
$236 million impairment of its oil and gas properties. The impairment was the
amount by which CHK's capitalized costs of oil and gas properties exceeded the
estimated present value of future net revenue from CHK's proved reserves at June
30, 1997.
In response to the fiscal 1997 loss, CHK significantly revised its fiscal
1998 business strategy. These revisions include slowing its exploration pace in
the Louisiana Austin Chalk Trend ("Louisiana Trend") and concentrating its
Louisiana Trend drilling activities in Masters Creek; utilizing more extensively
3-D seismic technology prior to conducting drilling operations; reducing the
acquisition of additional unproven leasehold; and selectively acquiring proved
reserves as a complement to its primary strategy of developing reserves through
the drillbit.
CHK's principal executive offices are located at 6100 North Western Avenue,
Oklahoma City, Oklahoma 73118, and its telephone number at that location is
(405) 848-8000.
For additional information concerning CHK and its subsidiaries, see
"Available Information."
30
37
BUSINESS OF DLB
GENERAL
DLB is an independent energy company engaged primarily in the exploration,
development, production and acquisition of oil and gas properties in the
Mid-Continent region and the coastal and shallow onshore regions of south
Louisiana. Since commencing operations in 1991, DLB has experienced rapid growth
as a result of its strategic acquisitions and exploration and development
drilling programs. As of January 1, 1997, DLB had estimated proved reserves of
20.1 MMBOE, which consisted of 6.7 MMBbls of oil and 80.4 Bcf of gas, with a
present value of future net reserves of $204.8 million and a reserve life of 9.7
years. On a BOE basis, 33% of DLB's estimated proved reserves as of January 1,
1997 were oil and 67% were natural gas, and 72% of DLB's proved reserves were
classified as proved developed. In addition, through its wholly owned subsidiary
Gathering Energy Marketing Company, LLC ("GEMCO"), DLB is engaged in the
gathering, processing, transportation and marketing of hydrocarbons.
BACKGROUND
DLB was formed by Mike Liddell and Mark Liddell and commenced operations in
1991. Prior to forming DLB, Mike Liddell and Mark Liddell were the controlling
shareholders and principal officers of DLB Energy Corporation ("DLB Energy").
From 1980 through 1990, DLB Energy drilled over 240 wells for itself, Davidson
Oil & Gas, Inc. ("Davidson") (DLB Energy's largest and most active participant)
and third party, non-industry participants. These wells were primarily
developmental wells located in the Mid-Continent region. DLB Energy generated
prospect locations and operated a majority of the completed wells.
In December 1990, DLB Energy, Davidson and certain other third party
participants sold their oil and gas properties to Louis Dreyfus Natural Gas
Corp. for approximately $35 million, and DLB Energy discontinued substantially
all of its operations. Shortly after that sale, DLB commenced operations and
entered into a joint venture with Davidson to conduct exploratory activities in
the Mid-Continent region. Since then, DLB has been one of the most active
independent operators in the Mid-Continent region. Making extensive use of
technological advances in geological and geophysical applications and utilizing
a regional perspective in managing prospects and related petroleum assets, DLB's
approach has led to 23 new field discoveries in the Mid-Continent region. DLB's
activities have also involved the gathering, processing, transportation and
marketing of hydrocarbons, the acquisition of mineral interests and secondary
oil recovery.
On July 20, 1995, in connection with its initial public offering, DLB
effected the Davidson Merger pursuant to which Davidson was merged with and into
DLB. Charles E. Davidson, the sole shareholder of Davidson, received an
aggregate of 7,400,000 shares of DLB Common Stock in exchange for his common
stock in Davidson. Mike Liddell and Mark Liddell, the sole shareholders of DLB
prior to the Davidson Merger, each received 1,300,000 shares of DLB Common Stock
in exchange for 250 shares of common stock held by each of them prior to the
Davidson Merger. Unless the context otherwise requires, the consolidated
historical financial and other business information presented in this
Information Statement/Prospectus give effect to the Davidson Merger as if such
event occurred as of January 1, 1992.
DLB's principal executive offices are located at 1601 Northwest Expressway,
Suite 700, Oklahoma City, Oklahoma 73118-1401, and its telephone number at that
location is (405) 848-8808.
RECENT EVENTS
Sale of Bonray to Bayard. In October 1997, DLB acquired 2,955,000 shares of
common stock of Bayard as consideration for the merger of Bonray, a wholly owned
subsidiary of DLB, with a subsidiary of Bayard. Bayard is a leading provider of
contract drilling services to major and independent oil and gas companies and
operates the fifth largest land drilling fleet in the United States. As of
August 15, 1997, the Bayard fleet consisted of 54 rigs primarily focused on deep
drilling applications (well depths of 15,000 feet or greater). DLB had acquired
Bonray in February 1997, in a negotiated $12.7 million transaction involving a
cash tender offer and subsequent merger of Bonray with a wholly owned subsidiary
of DLB.
31
38
West Cote Blanche Bay Acquisition. On March 11, 1997, DLB purchased from
Texaco an undivided 50% interest in approximately 4,600 producing acres in the
West Cote Blanche Bay field, which includes 53 producing and 343 shut-in wells
as well as certain related equipment and facilities and 3-D and 2-D seismic,
geophysical, geological and other technical data. The interest in the West Cote
Blanche Bay field purchased by DLB from Texaco contained estimated proved
reserves of 12.2 MMBOE as of January 1, 1997, all of which are oil and 71% of
which are classified as proved developed.
As discussed below, DLB contributed its 50% interest in the West Cote
Blanche Bay field and certain related assets to WRT as part of the joint
reorganization plan proposed for WRT by DLB, Wexford Capital LLC, on behalf of
certain affiliated funds (collectively, "Wexford"), and WRT.
WRT. During 1996, DLB and Wexford acquired $34.3 million principal amount
of WRT debt securities and $2.2 million of secured claims. DLB's share of the
debt securities and liens was $21.5 million for which it paid $7.9 million.
Subsequently, DLB and Wexford, together with WRT, proposed a joint plan of
reorganization for WRT. WRT is an independent energy company that owns and
operates mature oil and gas properties primarily in the Louisiana Gulf area. WRT
has reported estimated proved reserves as of December 31, 1996 of 16.4 MMBOE as
determined by an independent engineering firm.
On February 14, 1996, WRT commenced a voluntary reorganization case under
Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy
Court for the Western District of Louisiana, Lafayette-Opelousa Division (the
"Bankruptcy Court"), Case No. 96BK-50212. After formal efforts were taken by WRT
and its financial advisor to seek a restructuring partner, on or about October
1996, WRT's Board of Directors selected the joint restructuring proposal of DLB
and Wexford. In connection therewith, WRT, DLB and Wexford filed with the
Bankruptcy Court the Second Amended Joint Plan Of Reorganization Under Chapter
11 of The United States Bankruptcy Code, dated March 11, 1997 (the "WRT Plan").
On April 28, 1997, the Bankruptcy Court approved the WRT Plan, which became
effective on July 11, 1997. As a result of the consummation of the WRT Plan, DLB
acquired approximately 10.35 million shares of common stock of WRT, in part for
the contribution of DLB's 50% interest in the West Cote Blanche Bay field and
certain related assets.
Barbados Transaction. On November 27, 1996, DLB purchased a 20.8% equity
interest in Waggoner and a promissory note of Waggoner in the principal amount
of $2.4 million payable to DLB for approximately $3.2 million. Waggoner has
entered into a series of agreements with the Barbados National Oil Company, Ltd.
and one of its subsidiaries (together, "BNOC") relating to the exploration,
development and production of the onshore oil and gas reserves of Barbados by
applying advanced technological methods. Pursuant to the terms of these
agreements, Waggoner will be entitled to 60% of the profits, if any, from the
joint venture, after the recovery of costs and subject to a production bonus
paid to BNOC and an overriding royalty of 3% of certain revenues from sales. On
March 24, 1998, DLB entered into the Waggoner Agreement providing for the sale
to Waggoner of DLB's interest in Waggoner and the promissory note for an
aggregate purchase price of approximately $2.5 million.
PRINCIPAL PRODUCING AREAS
The following table presents information regarding DLB's estimated proved
reserves in its principal producing areas as of January 1, 1997 and the present
value of future net revenues attributable thereto.
NET PROVED RESERVES
----------------------------------------- PRESENT VALUE OF
OIL GAS TOTAL PERCENTAGE OF FUTURE NET
PRODUCING AREA (MBBLS) (MMCF) (MBOE) TOTAL REVENUES(1)
-------------- ------- ------ ------ ------------- ----------------
(IN THOUSANDS)
Anadarko Basin and Shelf............... 2,691 55,771 11,986 60% $134,014
Golden Trend and Southern Oklahoma..... 3,379 20,458 6,789 34% 57,764
All Other.............................. 600 4,128 1,288 6% 12,985
----- ------ ------ ---- --------
Total........................ 6,670 80,357 20,063 100% $204,763
===== ====== ====== ==== ========
- ---------------
(1) Present value of future net revenues is before income taxes and discounted
at 10% per annum.
32
39
MID-CONTINENT REGION. Mid-Continent producing properties are primarily
located in two geological areas: (i) the Anadarko Basin and Shelf and (ii) the
Golden Trend and Southern Oklahoma.
Anadarko Basin and Shelf. The Anadarko Basin is a major Mid-Continent oil
and natural gas producing area in western Oklahoma and the Texas Panhandle. The
greatest concentration of oil fields occurs on the eastern flank of the basin,
with natural gas fields dominating the shelf to the west, the Texas Panhandle
area and the deep basin located in southwestern Oklahoma. Oil and natural gas
are produced in this area from depths of only a few hundred feet to over 20,000
feet. DLB's wells in this area produce from depths between 6,000 and 16,000
feet. Since 1991, DLB has drilled 101 gross (40.08 net) exploratory wells and 89
gross (35.75 net) development wells in the Anadarko Basin and Shelf area and, as
of September 30, 1997, held interests in 175,983 gross (92,084 net) leasehold
acres. As of the same date, DLB held interests in 463 gross (144.91 net) wells
in this area, 152 gross (86.69 net) of which it operated.
Golden Trend and Southern Oklahoma. The Golden Trend and Southern Oklahoma
area is a highly faulted, geologically complex province that extends across 11
counties in south-central Oklahoma. Production in this area is mainly from the
Pennsylvanian Hoxbar, Deese, Simpson and Springer sands and the Hunton and Viola
carbonates. DLB's wells in this region produce from depths ranging from 5,000 to
17,000 feet. Since 1991, DLB has drilled 15 gross (4.96 net) exploratory wells
and 14 gross (6.29 net) development wells in the Golden Trend and Southern
Oklahoma area and, as of September 30, 1997, held interests in 70,622 gross
(40,757 net) leasehold acres. As of the same date, DLB held interests in 878
gross (144.2 net) wells in this area, 100 gross (73.92 net) of which it
operated.
DLB has over 42,000 miles of 2-D, and over 325 square miles of 3-D, seismic
data over significant portions of the Anadarko Basin and Shelf and Golden Trend
areas. The application of technology to these areas has resulted in DLB
experiencing success rates of 53% and 89% on exploratory and development
drilling, respectively, through September 30, 1997. These areas are serviced by
interstate pipelines and numerous intrastate pipelines and gathering facilities
providing DLB with multiple marketing options.
OIL AND GAS MARKETING
General. Revenues from DLB's oil and gas operations are highly dependent on
the prices of, and the demand for, oil and gas. Oil and gas pricing depends on
numerous factors beyond DLB's control, including seasonal demand, political
conditions in the predominant oil producing countries, the actions of the
Organization of Petroleum Exporting Countries, the health of the domestic
economy and Federal and state laws and regulations. Decreases in the price of
oil and gas will adversely affect the carrying value of DLB's proved properties
and its revenues, profitability and cash flow from operations.
Oil Sales. In 1996, 1995 and 1994, oil sales accounted for 51%, 69% and
66%, respectively, of DLB's oil and gas sales revenues. DLB sells its oil
production under short-term purchase contracts. Before 1994, these contracts
were based on field posted prices established by the purchasers within the
market area. The sales price was typically the field posted price, plus an
agreed premium, which price was adjusted for quality and gravity of the oil
sold. In February 1994, DLB began selling oil under contracts based on New York
Mercantile Exchange ("NYMEX") oil futures contract pricing rather than field
posted pricing. Under NYMEX pricing, the sales price is typically the calendar
month average NYMEX prompt month settle price, subject to an agreed discount and
adjusted for the quality and gravity of the oil sold. The NYMEX prompt month
settle price is the closing price during the trading month of production. DLB
has pursued NYMEX pricing because it believes the NYMEX market is more efficient
than the field posted market and offers DLB a better net price for its product.
During 1995, DLB began to market a portion of its oil through its wholly
owned subsidiary, GEMCO. In 1996 and 1995, oil sales to Conoco, Inc. ("Conoco")
accounted for approximately 35% and 46% of DLB's oil sales revenues. During the
same period, oil sales to Koch Oil Company ("Koch") accounted for approximately
20% and 21% of DLB's oil sales revenues. Both the Conoco contract and the Koch
contract are based on NYMEX pricing. No other single purchaser accounted for
more than 10% of DLB's oil sales revenues during such years. Since the oil
purchase markets within DLB's principal areas of production are highly
33
40
competitive, DLB believes it can replace any of its purchase contracts with
other contracts on substantially similar terms and without a significant
disruption in oil sales revenues.
Gas Sales. In 1996, 1995 and 1994, gas sales accounted for 49%, 31% and
34%, respectively, of DLB's oil and gas sales revenues. DLB's gas is sold under
short-term contracts based on spot market pricing. During 1996 and 1995, Oneok
Gas Marketing accounted for approximately 38% and 28%, respectively, of DLB's
gas sales. No other purchaser accounted for more than 10% of DLB's gas sales
revenues during such years. During 1996, DLB began to market a portion of its
gas through GEMCO, with pricing based upon the appropriate posted index price.
DLB may hedge its oil and gas sales through futures contracts from time to
time as it deems appropriate. Its futures contracts positions will be primarily
on a short-term basis. DLB does not intend to contract for positions that it
cannot offset against actual production.
COMPETITION
The exploration and production business is highly competitive. In seeking
to obtain desirable new leases and exploration prospects, DLB faces competition
from both major and independent oil and gas companies. Many of these competitors
have financial and other resources substantially in excess of those available to
DLB and may, accordingly, be better positioned to take advantage of industry
opportunities and better able to withstand the effect of changes in factors such
as worldwide oil and gas prices and levels of production, the availability of
alternative energy sources and the application of government regulations.
Increases in worldwide energy production capability, decreases in energy
consumption as a result of conservation efforts and the continued development of
alternate energy sources have brought about substantial surpluses in oil and gas
supplies in recent years, resulting in substantial competition for the marketing
of oil and gas. As a result, there have been reductions in oil and gas prices
and delays in producing and marketing gas after it is discovered. Changes in
government regulations relating to the production, transportation and marketing
of gas have also resulted in significant changes in the historical marketing
patterns of the industry. Generally, these changes have resulted in the
abandonment by many pipeline companies of long-term contracts for the purchase
of gas, the development by gas producers of their own marketing programs to take
advantage of new regulations requiring pipelines to transport gas for regulated
fees and an increasing tendency to rely on short-term sales contracts priced at
spot market prices.
REGULATION
General. The oil and gas industry, and thus DLB's operations, are
extensively regulated by Federal, state and local authorities. Legislation
affecting the oil and gas industry is under continuous review and statutes are
constantly being adopted, expanded or amended. Numerous departments and
agencies, both Federal and state, have issued rules and regulations binding on
the oil and gas industry, some of which contain substantial penalties for the
failure to comply. The regulatory burden on the oil and gas industry increases
DLB's cost of doing business and consequently affects its profitability. Because
the laws, rules and regulations in this area are continuously changing, DLB is
unable to predict the future cost and impact of complying with them. DLB does
not believe, however, that it will be affected in a manner significantly
different than its competitors.
Exploration and Production. Regulation of DLB's exploration, production and
related activities includes: requiring permits for the drilling of wells;
maintaining bonding and insurance requirements to drill or operate wells; and
requiring periodic reports about activities and regulating the location of
wells, the method of drilling and casing wells, the surface use and restoration
of properties upon which wells are drilled, the plugging and abandoning of wells
and the disposal of fluids used in connection with operations. DLB's operations
are also subject to various conservation laws, regulations and requirements.
These include the regulation of the size and shape of drilling and spacing units
or proration units and the density of wells which may be drilled and the
unitization or pooling of oil and gas properties. In this regard, some states,
such as Oklahoma, allow the forced pooling or integration of tracts to
facilitate exploration, while other states rely on voluntary pooling of lands
and leases. In addition, state conservation laws establish maximum rates of
production from oil and gas wells, generally prohibit the venting or flaring of
gas and impose requirements regarding the ratability of production.
34
41
State statutes and regulations subject companies to various judicial and
administrative hearings to resolve issues between producers, landowners,
adjacent leaseholders, mineral interest owners and non-operating working
interest owners.
Environmental Matters. DLB's operations and properties are subject to
extensive and changing Federal, state and local laws and regulations relating to
environmental protection, including the generation, storage, handling, emission,
transportation and discharge of materials into the environment, and relating to
safety and health. The recent trend in environmental legislation and regulation
generally is toward stricter standards, and this trend will likely continue.
These laws and regulations may require the acquisition of a permit or other
authorization before construction or drilling commences and for certain other
activities; restrict the types, quantities and concentration of various
substances that can be released into the environment in connection with
exploration and production activities; limit or prohibit construction, drilling
and other activities on certain lands lying within wilderness or wetlands and
other protected areas; and impose substantial liabilities for pollution
resulting from DLB's operations. The permits required for various of DLB's
operations are subject to revocation, modification and renewal by issuing
authorities. DLB believes that its operations currently are in substantial
compliance with applicable environmental regulations.
Governmental authorities have the power to enforce compliance with their
regulations, and violations are subject to fines or injunction, or both. DLB has
adopted programs that it believes are appropriate and does not expect
environmental compliance matters to have a material adverse effect on its
financial position. It is also not anticipated that DLB will be required in the
near future to expend amounts that are material to the financial condition or
operations of DLB by reason of environmental laws and regulations, but because
such laws and regulations are frequently changed, and may impose increasingly
stricter requirements, DLB is unable to predict the ultimate cost of complying
with such laws and regulations.
In addition, it is not uncommon for landowners and other third parties to
make demands and to file lawsuits claiming personal injuries and property
damages allegedly caused by spills or other releases of solid wastes or
hazardous substances into the environment in oil and gas operations.
The following are examples of environmental, safety and health laws that
potentially relate to DLB's operations:
Solid Waste. DLB's operations may generate and result in the
transportation, treatment and disposal of both hazardous and nonhazardous solid
wastes that are subject to the requirements of the Federal Resource Conservation
and Recovery Act ("RCRA") and comparable state and local requirements. The
Environmental Protection Agency ("EPA") is currently considering the adoption of
stricter disposal standards for nonhazardous waste. Further, legislation has
been proposed in Congress from time to time that would reclassify certain oil
and gas wastes, including wastes generated during pipeline, drilling and
production operations, as "hazardous wastes" under RCRA, which reclassification
would make such solid wastes subject to much more stringent handling,
transportation, storage, disposal and clean-up requirements. If such legislation
were to be enacted, it could have a significant impact on DLB's operating costs,
as well as the oil and gas industry in general. State initiatives to further
regulate oil and gas wastes could have a similar impact.
Hazardous Substances. The Comprehensive Environmental Response,
Compensation and Liability Act ("CERCLA") and comparable state statutes, also
known as "Superfund" laws, impose joint and several liability, without regard to
fault or the legality of the original conduct, on certain classes of persons for
the release of a "hazardous substance" into the environment. These persons
include the owner or operator of a site, and companies that transport, dispose
of or arrange for the disposal of, the hazardous substances found at the site.
CERCLA also authorizes the EPA, and in some cases, third parties to take actions
in response to threats to the public health or the environment and to seek to
recover from the classes of responsible persons the costs they incur. Although
"petroleum" is currently excluded from CERCLA's definition of a "hazardous
substance," in the course of its ordinary operations DLB may generate other
materials which may fall within the definition of a "hazardous substance." DLB
may be responsible under CERCLA for all or part of the costs required to clean
up sites at which such wastes have been disposed and for natural resource
damages. DLB has not received any notification that it may be potentially
responsible for cleanup costs and liabilities under CERCLA or any comparable
state law but it is possible that it could be named in the future.
35
42
Air. DLB's operations may be subject to the Clean Air Act ("CAA") and
comparable state and local requirements. Amendments to the CAA were adopted in
1990 and contain provisions that may result in the gradual imposition of certain
pollution control requirements with respect to air emissions from DLB's
operations. The EPA has been developing regulations to implement these
requirements. DLB may be required to incur certain capital expenditures in the
next several years for air pollution control equipment in connection with
maintaining or obtaining operating permits and approvals addressing other air
emission-related issues. However, DLB does not believe its operations will be
materially adversely affected by any such requirements.
Water. The Federal Water Pollution Control Act ("FWPCA") imposes
restrictions and strict controls regarding the discharge of polluted waters and
other oil and gas wastes into navigable waters. The FWPCA provides for civil,
criminal and administrative penalties for any unauthorized discharges of oil and
other hazardous substances in reportable quantities and, along with the Oil
Pollution Act of 1990, imposes substantial potential liability for the costs of
removal, remediation and damages. State laws for the control of water pollution
also provide varying civil, criminal and administrative penalties and
liabilities in the case of a discharge of petroleum or its derivatives into
state waters. Although future costs of compliance with water pollution
requirements under federal or state law may be significant, the entire industry
will experience similar costs and DLB believes that these costs will not have a
material adverse impact on DLB's financial conditions and operations.
Gas Sales and Transportation. The Federal Energy Regulatory Commission
("FERC") regulates the transportation and sale for resale of gas in interstate
commerce pursuant to the Natural Gas Act of 1938 ("NGA") and the Natural Gas
Policy Act of 1978 ("NGPA"). In the past, the Federal government has regulated
the prices at which oil and gas could be sold. Deregulation of wellhead sales in
the gas industry began with the enactment of the NGPA in 1978. Commencing in
1985, the FERC promulgated a series of orders (among others are Order Nos. 380,
436, 500, 528, 547 and, ultimately, 636) and regulations adopting changes that
significantly affect the transportation and marketing of gas. These changes were
intended to foster competition in interstate gas sales resulting in
market-driven pricing and open and accessible transportation. Similar efforts
have been made with respect to intrastate gas sales. In 1989, Congress enacted
the Natural Gas Wellhead Decontrol Act (the "Decontrol Act"). The Decontrol Act
removed all NGA and NGPA price and nonprice controls affecting wellhead sales of
gas effective January 1, 1993. Although sales by producers of gas can currently
be made at uncontrolled market prices, Congress could reenact price controls in
the future.
Virtually all aspects of Order Nos. 636, 636-A and 636-B were opposed by
various segments of the oil and gas industry and a number of parties sought
judicial appeals of those orders. Furthermore, after the FERC issued orders
approving the individual pipeline restructuring plans authorized pursuant to
Order No. 636, various parties sought court review of certain of those
individual pipeline restructuring orders. The United States Court of Appeals for
the District of Columbia Circuit issued a decision in United Distribution
Companies v. FERC, 88 F.3d 1105 (D.C. Cir. 1996) which upheld Order No. 636
generally, as well as most of the specific provisions of Order No. 636. A
limited number of issues, however, were remanded to the FERC for further
consideration, although the court permitted the orders to stand as formulated,
pending Commission action on the issues remanded to it. Petitions for certiorari
have been filed with the Supreme Court, 65 U.S.L.W. 3531-32 (U.S. Jan. 27, 1997)
(No. 96-1186, et al.). On February 27, 1997, the FERC issued Order No. 636-C to
address the issues remanded to it by the D.C. Circuit. The FERC reaffirmed
certain of its previous rulings on those issues and reversed others. Order No.
636-C is subject to further review by the FERC should parties file for rehearing
of that order. Order No. 636-C is also subject to review by the courts, which
could reverse Order No. 636-C, or an order on rehearing, in whole or in part and
remand the matter to the FERC. Additionally, the individual pipeline
restructuring plans authorized by Order No. 636 that were appealed to various
courts are still pending before those courts. Moreover, any or all of the
decision of the Court of Appeals in United Distribution Companies could be
reversed if the Supreme Court grants certiorari to review Order Nos. 636, 636-A
and 636-B. It is impossible for DLB to predict the ultimate outcome regarding
FERC review of Order No. 636-C or the various petitions for judicial review. In
addition, DLB cannot predict whether changed circumstances might cause the FERC
to reverse or revise the current unbundled regulatory regime contemplated by
Order No. 636 et al. All of the above matters have resulted in a
36
43
degree of uncertainty with respect to interstate gas sales and transportation.
DLB does not believe, however, that it will ultimately be affected any
differently than its competitors.
Additional proposals and proceedings that might affect the gas industry are
considered from time to time by Congress, the FERC, state regulatory bodies and
the courts. DLB cannot predict when or if any such proposals might become
effective, or their effect, if any, on DLB's operations. The gas industry
historically has been very heavily regulated; therefore, there is no assurance
that the less stringent regulatory approach recently pursued by the FERC and
Congress will continue indefinitely into the future.
State Regulation of Gas Production. Certain producing states, including
Oklahoma, have adopted or considered adopting measures that alter the methods
used to prorate gas production from wells located in these states, including
those in their territorial waters. These measures may limit the rate at which
gas may be produced from the wells in which DLB might acquire an interest.
Congress recently considered, but rejected, legislation that would have limited
the states' rights to prorate production. DLB cannot predict whether such
legislation will be reintroduced or what effect the new state rules may have on
gas production in producing states. At the present time there are no allowables
which would limit the production of oil or gas leases in which DLB presently
owns an interest.
Sales and Transportation of Petroleum. Sales of oil, condensate and natural
gas liquids by DLB are not regulated and are made at market prices. The price
DLB receives from the sale of these products is affected by the cost of
transporting the products to market.
Gathering. Under the NGA, facilities used for and operations involving the
production and gathering of gas are exempt from FERC jurisdiction, while
facilities used for and operations involving interstate transmission are not.
However, the FERC's determination of what constitutes exempt gathering
facilities as opposed to interstate transmission facilities has evolved over
time. With respect to facilities owned by non-interstate pipeline companies,
such as DLB's gathering facilities, the FERC has historically distinguished
between these types of activities on a very fact-specific basis that makes it
difficult to predict with certainty the status of DLB's gathering facilities. In
1994, the FERC issued a series of orders that modified the test it uses to
determine whether facilities are classified as gathering or transmission. The
change in that test that could be applicable to DLB's facilities involves a
redefinition by the FERC of its "behind the plant" factor. Specifically, the
FERC held that gathering facilities downstream of a processing plant would be
considered exempt from FERC jurisdiction only if those facilities are an
incidental extension of the plant operation or an extension of a gathering
system located behind (or "upstream" of) such a plant. This holding was based,
in part, upon the FERC's observation that, in recent years, its "behind the
plant" factor had eroded into a "behind the interstate pipeline" factor and the
FERC wanted to turn to an approach which gave greater emphasis to its
traditional "behind the plant" factor. Although the FERC has not issued, or been
requested to issue, any order or opinion declaring DLB's facilities as gathering
rather than transmission facilities, DLB believes that these systems meet the
currently applied tests that the FERC uses to establish a pipeline's status as a
gatherer. State regulation of gathering facilities generally includes various
safety, environmental and, in some circumstances, nondiscriminatory take
requirements. Although some states provide for the rate regulation of pipelines
engaged in the intrastate transportation of gas, such regulation has not
generally been applied against gatherers of gas. Oklahoma has recently enacted
legislation, however, that prohibits the imposition of unjustly or unlawfully
discriminatory gathering rates. Gas gathering may receive greater regulatory
scrutiny as a result of the pipeline restructuring implemented under Order No.
636. DLB's gathering operations could be adversely affected should they be
subject in the future to the application of state or Federal regulation of rates
and services.
Safety and Health Regulations. DLB is also subject to laws and regulations
concerning occupational safety and health. It is not anticipated that DLB will
be required in the near future to expend amounts that are material in the
aggregate to DLB's overall operations by reason of occupational safety and
health laws and regulations, but inasmuch as such laws and regulations are
frequently changed, DLB is unable to predict the ultimate cost of compliance.
37
44
OPERATIONAL RISKS AND INSURANCE
The oil and gas industry involves a variety of operating risks, including
the risk of fire, explosions, blowouts, pipe failure, casing collapse,
abnormally pressured formations and environmental hazards such as oil spills,
gas leaks, ruptures and discharges of toxic fluids and gases. The occurrence of
any of these events could result in substantial losses to DLB from loss of life
or destruction of property, loss of production or equipment, or liability for
pollution or other environmental damage. To protect against these risks, DLB
insures against some, but not all, potential hazards. Its insurance coverages
include physical damage on certain assets, employer's liability, comprehensive
general liability, automobile, workers compensation, and loss of production
income insurance. Although DLB believes its insurance is adequate and customary
for similarly situated companies, due to deductibles, policy limits, excluded
hazards and other insurance limitations, such insurance does not fully cover all
risks that DLB might incur. As a result, DLB could incur substantial liabilities
to third parties or governmental entities, the payment of which could reduce or
eliminate the funds available for development, acquisitions or exploration, or
result in the loss of properties. Moreover, no assurance can be given that DLB
will be able to maintain adequate insurance in the future at rates it considers
reasonable.
EMPLOYEES
As of March 24, 1998, DLB employed 60 people on a full-time basis,
including contract personnel. Seven employees are located in GEMCO's Houston,
Texas office and all others are located in DLB's principal offices in Oklahoma
City.
HEADQUARTERS AND OTHER FACILITIES
DLB leases its Oklahoma City, Oklahoma headquarters under a lease covering
approximately 20,100 square feet that expires in 2003. The monthly rent is
approximately $20,600. DLB also leases office space in Houston, Texas.
OIL AND GAS PROPERTIES
Estimates of DLB's net proved developed and undeveloped oil and gas
reserves as of December 31, 1996, and the present value (discounted at 10%) of
estimated future net revenues before income tax from those reserves are set
forth in the following table. This information is derived from the engineering
reports of DeGolyer and MacNaughton ("D&M") and H.J. Gruy and Associates, Inc.
("Gruy").
AS OF DECEMBER 31, 1996
NET PROVED RESERVES
------------------------- PRESENT VALUE
OIL GAS TOTAL OF FUTURE
PRODUCING AREA (MBBLS) (MMCF) (MBOE) NET REVENUES
-------------- ------- ------ ------ --------------
(IN THOUSANDS)
Proved Developed........................... 5,234 54,797 14,367 $154,978
Proved Undeveloped......................... 1,436 25,560 5,696 49,785
----- ------ ------ --------
Total............................ 6,670 80,357 20,063 $204,763
===== ====== ====== ========
Estimated future net revenues represent estimated future gross revenues
from the production of proved reserves, net of estimated production and future
development costs, using prices and costs in effect as of January 1, 1997. These
prices were held constant throughout the life of the properties except where
different prices were fixed and determinable from applicable contracts. These
price assumptions result in weighted average prices of $25.14 per barrel for oil
and $3.70 per Mcf for gas over the life of the properties that DLB owned at
December 31, 1996. The amounts shown do not reflect non-property related costs,
such as general and administrative expenses, debt service, and future income tax
expense or depreciation, depletion and amortization. The present value of
estimated future net revenues is calculated by discounting estimated future net
revenues by 10% annually. Prices used in calculating the estimated future net
revenues attributable to proved reserves do not necessarily reflect market
prices for oil and gas production subsequent to January 1, 1997. There can be no
assurance that all of the proved reserves will be produced and sold within the
periods assumed, that the assumed prices will actually be realized for such
production, or that existing contracts will
38
45
be honored. For supplemental information about the oil and gas activities of
DLB, see Note 16 to DLB's Consolidated Financial Statements and Notes thereto
included elsewhere in this Information Statement/ Prospectus.
There are numerous uncertainties inherent in estimating oil and gas
reserves and their estimated values, including many factors beyond the control
of the producer, and such estimates are affected by oil and gas prices which
have fluctuated widely in recent years. There can be no assurance that these
reserves will be realized as expected. The reserve data set forth in this
Information Statement/Prospectus represent only estimates. Reserve engineering
is a subjective process of estimating underground accumulations of oil and gas
that cannot be measured in an exact manner. The accuracy of any reserve estimate
is a function of the quality of available data and of engineering and geological
interpretation and judgment. As a result, estimates prepared by different
reserve engineers often vary. In addition, estimates of reserves are subject to
revisions based on actual production, results of future exploration and
development activities, prevailing oil and gas prices, operating costs and other
factors. These revisions may be material. Accordingly, reserve estimates are
often different from the quantities of oil and gas that are ultimately
recovered. The meaningfulness of such estimates is highly dependent on the
accuracy of the assumptions on which they are based.
DLB has not filed reports containing estimates of its total proved net oil
and gas reserves with any Federal agency.
ACREAGE
DLB's developed and undeveloped oil and gas acreage as of September 30,
1997 is set forth in the following table.
DEVELOPED UNDEVELOPED TOTAL
---------------- ---------------- -----------------
GROSS NET GROSS NET GROSS NET
------- ------ ------- ------ ------- -------
Oklahoma............................... 167,457 90,130 138,017 69,284 305,474 159,474
Texas.................................. 5,220 1,719 24,210 3,175 29,430 4,894
Kansas................................. 1,080 1,013 1,235 1,054 2,315 2,067
Louisiana.............................. 1,650 146 -- -- 1,650 146
Barbados(1)............................ -- -- 92,160 24,883 92,160 24,883
------- ------ ------- ------ ------- -------
175,407 93,008 255,622 98,396 431,029 191,464
======= ====== ======= ====== ======= =======
- ---------------
(1) Owned through DLB's interest in Waggoner.
DLB's oil and gas leases are for varying primary terms and may require the
payment of delay rentals to continue the primary term. The leases may be
surrendered by the operator at any time by notice to the lessors, by the
cessation of production or by failure to make timely payments of delay rentals.
As of September 30, 1997, DLB held royalty, overriding royalty and other
mineral interests in 11,943 net acres in addition to the developed and
undeveloped acreage indicated above.
39
46
PRODUCTION, PRICES AND PRODUCTION COSTS
Information concerning DLB's oil and gas production, average sales prices
and average lease operating expense is set forth below for the periods
indicated. Information relating to gas includes natural gas liquids.
NINE MONTHS
ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
--------------- ------------------------
1997 1996 1996 1995 1994
------ ------ ------ ------ ------
Production:
Oil (MBbls........................................ 780 479 664 708 663
Gas (MMcf)........................................ 6,875 3,606 5,603 3,022 3,187
Total (MBOE)...................................... 1,926 1,080 1,598 1,212 1,194
Average Sales Prices:
Oil ($/Barrel).................................... $20.41 $20.20 $20.84 $17.45 $17.61
Gas ($/Mcf)....................................... 2.57 2.23 2.38 1.82 1.93
Total ($/BOE)..................................... 17.43 16.42 17.02 14.74 14.93
Lease operating expense:
($/BOE)(1)........................................ 4.42 3.63 4.62 4.08 4.58
- ---------------
(1) The components of lease operating expense may vary substantially among wells
depending on the methods of recovery employed and other factors, but
generally include production taxes, administrative overhead, maintenance and
repairs, labor and utilities.
Since DLB conducts much of its exploratory activities in and about mature
fields, existing markets are often nearby, thereby reducing transportation
costs, which are a component of lease operating expense.
DRILLING ACTIVITY AND PRODUCTIVE WELL SUMMARY
The following table sets forth DLB's exploration and development drilling
activity expressed on a well basis for the periods indicated.
NINE MONTHS
ENDED
SEPTEMBER 30,
1997 YEAR ENDED DECEMBER 31,
-------------- ------------------------------------------
1996 1995 1994
------------ ------------ ------------
GROSS NET GROSS NET GROSS NET GROSS NET
------ ----- ----- ---- ----- ---- ----- ----
Exploratory Wells:
Oil/Gas.............................. 8 4.2 7 5.3 7 3.6 17 8.7
Dry.................................. 2 1.0 14 11.4 12 10.7 14 8.4
-- ---- -- ---- -- ---- -- ----
Total........................ 10 5.2 21 16.7 19 14.3 31 17.1
== ==== == ==== == ==== == ====
Development Wells:
Oil/Gas.............................. 27 13.1 23 8.5 12 5.1 10 4.1
Dry.................................. -- -- 1 0.3 1 -- 6 4.3
-- ---- -- ---- -- ---- -- ----
Total........................ 27 13.1 24 8.8 13 5.1 16 8.4
== ==== == ==== == ==== == ====
"Gross wells" refers to the total wells in which DLB has a working
interest. "Net wells" refers to these gross wells multiplied by DLB's percentage
working interest.
In 1996, 1995 and 1994, the average well depths for all exploratory wells
drilled were approximately 4,900, 6,900 and 8,600 feet, respectively, and the
average well depths for all development wells drilled in such years were
approximately 9,400, 9,800 and 8,100 feet, respectively.
40
47
The following table sets forth the number of productive oil and gas wells
in which DLB owned an interest as of September 30, 1997.
DLB OPERATED TOTAL PRODUCTIVE
WELLS WELLS
-------------- ----------------
GROSS NET GROSS NET
----- ----- ------ ------
Productive Wells:
Oil....................................................... 166 108.0 1,285 210.5
Gas....................................................... 101 72.6 405 111.6
--- ----- ----- -----
Total............................................. 267 180.6 1,690 322.1
=== ===== ===== =====
DLB seeks to act as operator of the wells in which it owns a significant
interest. As operator of a well, DLB manages drilling and production operations
for itself and the other working interest owners in the well. As compensation
for its services, it receives operating fees from the other working interest
owners. Acting as operator enables DLB to increase its revenue base, control the
progress of drilling and production activity and enhance its knowledge and
expertise.
The following table sets forth DLB's historical finding and development
costs and proved reserve changes.
YEAR ENDED DECEMBER 31,
--------------------------------------
1996 1995 1994
---------- ---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT $/BOE)
Finding and Development Costs(1):
Exploration costs......................................... $ 9,161 $ 6,283 $ 7,694
Development costs......................................... 10,015 5,177 6,510
Acquisition costs......................................... 27,893 39 8,849
------- ------- -------
Total costs....................................... $47,069 $11,499 $23,053
------- ------- -------
Proved Reserve Changes (MBOE):
Extensions and discoveries................................ 5,301 2,097 2,878
Revisions of previous estimates........................... 138 (1,000) --
Purchases................................................. 6,830 265 1,093
------- ------- -------
Total reserve additions........................... 12,269 1,362 3,971
======= ======= =======
Finding and Development Costs ($/BOE)(1).................... $ 3.84 $ 8.44 $ 5.81
======= ======= =======
- ---------------
(1) Excludes costs of oil and gas properties not subject to amortization, which
consist of the cost of undeveloped leaseholds, wells-in-progress and
secondary recovery projects before the assignment of proved reserves.
TITLE TO PROPERTIES
Following industry practices, DLB conducts a cursory review of title to
undeveloped oil and gas leases and farm out acreage upon execution of the
contracts. Before beginning drilling operations, a thorough title examination is
conducted and curative work is performed to correct material title defects. If
material title defects are present, DLB typically is responsible for curing the
defects at its expense. If DLB were unable to cure a material defect, it could
suffer the loss of its investment in the leasehold. DLB has obtained title
opinions on substantially all its producing properties and believes that it has
satisfactory title to such properties in accordance with industry standards.
Before making any significant acquisition of producing properties, DLB obtains
opinions of counsel as to title. DLB's leasehold interests are subject to
customary royalty interests, liens for current taxes and other burdens not
affecting the use or value of the interests. Substantially all of DLB's oil and
gas properties are mortgaged to secure borrowings under DLB's credit facility.
See "DLB Management's Discussion and Analysis of Financial Condition and Results
of Operations -- Capital Expenditures, Capital Resources and Liquidity."
41
48
LEGAL PROCEEDINGS
On July 15, 1996, a lawsuit known as Samson Resources Company et al v.
Amerada Hess Corporation and DLB Oil & Gas, Inc. (CJ-96-38) was filed in the
District Court of Ellis County. Samson claims that is has been denied it
preferential rights to purchase certain properties under various operating
agreements with Amerada Hess. DLB acquired such properties in its Amerada Hess
acquisition. DLB contends that Samson's preferential right elections were
invalid as to the majority of such interests. On January 21, 1997, a hearing was
held before the District Court of Ellis County on cross motions for summary
judgment of DLB and Samson. The Court ruled in favor of DLB on most of Samson's
claims against DLB. However, the Court appeared to orally adopt Samson's method
of preferential right election. Samson maintained that it could choose any
interest it wanted from the list of properties offered by Amerada Hess without
regard to the unitization or unitary nature of such properties. The Court has
not however committed its oral ruling to writing. If the Court's oral ruling is
ultimately upheld, DLB will lose certain interests in properties acquired in the
Amerada Hess acquisition. Samson, however, will then be required to pay for such
interests pursuant to such agreement. DLB is considering all its options in
light of the Court's ruling. Total value of the properties covered by Samson's
elections is $775,915.
On June 6, 1997, the Plaintiffs, Kevin Churchill, Kathleen H. Kendall, Anne
A. Churchill, Ron Churchill, Teri Churchill, Philadep & Co. and Cede & Co.,
filed their Petition for Appraisal in the Court of Chancery of the State of
Delaware, New Castle County, Case No. 15729-NC. Collectively, these Plaintiffs
are the owners of 5,000 shares of common stock of Bonray Drilling Corporation.
On or about January 6, 1997, Bonray entered into a merger agreement with DLB Oil
& Gas, Inc. and Acquisition Drilling, Inc. with a tender offer of $30.00 per
share. Plaintiffs received notice advising of the tender offer and proposed
merger. The notice stated Plaintiffs' outstanding shares of common stock not
acquired in connection with the $30.00 tender offer would be converted into the
right to receive the $30.00 consideration in the merger. Plaintiffs also
received the offer to purchase for cash all outstanding shares at $30.00 net per
share. On February 14, 1997, Bonray mailed to the Plaintiffs a Notice of Merger
stating the effective time of the merger as February 10, 1997, and that
appraisal rights were available to dissenting shareholders. The Plaintiffs have
brought this action because they believe the $30.00 per share price paid is
inadequate and unfair. Plaintiffs have complied with all conditions to exercise
their appraisal rights and are requesting determination of the fair value of the
Bonray stock and direct payment of same, together with costs and attorney's
fees. On June 30, 1997, Defendant Bonray filed its answer to Plaintiffs'
Petition.
DLB is also involved in routine judicial and administrative proceedings
that are common to companies of its size in the oil and gas industry. None of
these proceedings or the proceedings related above are believed, either
individually or in the aggregate, to be material to DLB's financial condition,
liquidity or results of operations.
42
49
DLB MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion is intended to assist in an understanding of DLB's
financial position as of December 31, 1996 and 1995, September 30, 1997 and
1996, and its results of operations for each year in the three year period ended
December 31, 1996, and for the nine months ended September 30, 1997 and 1996.
The consolidated financial statements of DLB and notes thereto included
elsewhere in this Information Statement/Prospectus contain additional
information and should be referred to in conjunction with this discussion.
GENERAL
Since commencing operations in 1991, DLB's primary focus has been to
explore for oil and gas primarily in the Mid-Continent region utilizing 3-D and
high resolution 2-D seismic technology. DLB believes that this focus has
provided and will continue to provide DLB with numerous exploratory prospects.
By combining its advanced technologies with both proprietary and public data and
successfully applying such technology to its exploration activities, DLB has
made 23 new field discoveries since January 1991, seven of which were made in
1996. During 1996, DLB initiated efforts in adding the Louisiana Gulf Coast as a
core area. DLB intends to apply the same concentrated area approach used by DLB
in Oklahoma to the area in Louisiana.
Management believes DLB's involvement in a number of ancillary activities
distinguishes DLB from many of its competitors. Through the active marketing of
DLB's oil and gas production, management believes DLB obtains prices that, on
the whole, are more favorable than those received by its regional competitors.
DLB also attempts to gain ownership of gathering, processing, transportation and
saltwater disposal facilities when it believes such ownership can enhance net
margins per BOE. DLB also seeks to control costs by focusing DLB's oil and gas
operations in areas subject to less competitive pressure. The costs of acquiring
leasehold and mineral interests are generally lower in these areas.
The markets for oil and gas have been volatile and are likely to remain so
in the future. Prices for oil and gas are subject to wide fluctuations in
response to relatively minor changes in the supply and demand for oil and gas,
market uncertainty and a variety of additional factors that are beyond the
control of DLB. In the future, lower oil and gas prices may reduce (i) the
attractiveness or viability of exploration prospects and the amount of oil and
gas reserves that may be produced economically, (ii) DLB's cash flow from
operations, (iii) the amount of outstanding borrowings under DLB's credit
facility and (iv) DLB's net income and capital expenditures.
DLB may from time to time enter into certain swap or hedge transactions in
an attempt to mitigate such price volatility on production that is subject to
market sensitive pricing. To the extent DLB is unable to effect such
transactions, continued fluctuations in oil and gas prices could have an effect
on DLB's operating results. DLB had no hedge positions affecting results of
operations for the year ended December 31, 1996. DLB entered into futures
contracts to fix the sales price of certain of its oil and gas production during
1997. DLB entered into oil futures contracts for the months of January through
August, with volumes ranging from 48,000 to 53,000 Bbls per month, and prices
ranging from $25.47 per Bbl in January to $21.37 per Bbl in August. DLB also
entered into gas futures contracts for the months of January through September,
with volumes ranging from 187,000 to 636,000 Mcf of gas per month and prices
ranging from $4.47 per Mcf in January to $1.95 per Mcf in September. These
futures contracts partially mitigated the effect of lower product prices during
1997. The Company recorded as an increase in revenues $0.1 million and $2.3
million related to commodity hedging activities for the three months and nine
months ended September 30, 1997, respectively.
DLB uses the full cost method of accounting for its investment in oil and
gas properties. Under the full cost method of accounting, all costs of
acquisition, exploration and development of oil and gas reserves are capitalized
into a "full cost pool" as incurred, and properties in the pool are depleted and
charged to operations using the units-of-production method based on the ratio of
current production to total proved oil and gas reserves. To the extent that such
capitalized costs, net of depreciation, depletion and amortization, exceed the
present value of estimated future net revenues, discounted at 10%, from proved
oil and gas reserves, after income tax effects, such excess costs are charged to
operations. Once incurred, a write down of oil and gas properties is not
reversible at a later date, even if oil or gas prices increase.
43
50
RESULTS OF OPERATIONS
The following table sets forth certain operating information with respect
to the oil and gas operations of DLB.
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
----------------- ---------------------------
1997 1996 1996 1995 1994
------- ------- ------- ------- -------
(IN THOUSANDS OF DOLLARS, EXCEPT PER UNIT AND
PRODUCTION DATA)
OPERATING DATA:
Oil and gas sales revenues..................... $33,573 $17,730 $27,194 $17,860 $17,826
Lease operating expense........................ 8,508 3,923 5,539 3,579 4,461
Gross production taxes......................... 2,280 1,202 1,843 1,366 1,009
Depreciation, depletion and amortization(1).... 12,306 6,268 8,364 6,687 6,185
General and administrative expense(1).......... 3,061 1,985 2,485 1,486 549
PRODUCTION DATA:
Oil ($/BBl).................................... 780 479 664 708 663
Gas (Mmcf)..................................... 6,875 3,606 5,603 3,022 3,187
Total (MBOE)................................... 1,926 1,080 1,598 1,212 1,194
AVERAGE SALES PRICE DATA:
Oil ($/BBl).................................... $ 20.41 $ 20.20 $ 20.84 $ 17.45 $ 17.61
Gas (Mcf)...................................... 2.57 2.23 2.38 1.82 1.93
Total (MBOE)................................... 17.43 16.42 17.02 14.74 14.93
EXPENSE DATA ($/BOE):
Lease operating expense (2).................... 4.42 3.63 3.47 2.95 3.74
Gross production taxes......................... 1.18 1.11 1.15 1.13 0.84
Depreciation, depletion and amortization(1).... 6.39 5.80 5.23 5.52 5.18
General and administrative..................... 1.59 1.84 1.56 1.23 0.46
- ---------------
(1) Includes only depreciation, depletion and amortization and general and
administrative expenses associated with oil and gas properties. Amounts of
DD&A pertaining to property and equipment other than oil and gas properties
were $0.6 million, $0.7 million and $0.4 million for the years 1996, 1995
and 1994, respectively, and $2.1 million and $0.4 million for the nine
months ended September 30, 1997 and 1996, respectively, and including all
depreciation, depletion and amortization, the results were $5.59, $6.08 and
$5.49 on a BOE basis for the years 1996, 1995 and 1994, respectively, and
$7.48 and 6.20 on a BOE basis for the nine months ended September 30, 1997
and 1996, respectively. Amounts of general and administrative expenses
pertaining to property and equipment other than oil and gas properties were
$0.7 million for the nine months ended September 30, 1997.
(2) The components of lease operating expense may vary substantially among wells
depending on the methods of recovery employed and other factors, but
generally include administrative overhead, maintenance and repairs, and
labor and utilities.
NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED WITH THE NINE MONTHS ENDED
SEPTEMBER 30, 1996
Revenues. Total revenues for the nine months ended September 30, 1997 were
$47.7 million, an increase of $29.0 million from the comparable period in 1996.
The 155% increase in revenues was primarily related to the inclusion of revenues
during the full period from the production of the Amerada Hess properties, which
were acquired in May 1996 and operations of Bonray Drilling Corporation which
were acquired in February 1997 and production of the WRT properties acquired in
July 1997. In addition, a 6% increase in product prices contributed to increased
revenues during the nine months ended September 30, 1997 as compared to the same
period in 1996. Revenues attributable to Bonray Drilling Corporation for the
nine month period ended September 30, 1997 were $12.6 million.
Production of oil and gas was 780 Mbbl and 6,875 Mmcf, respectively, during
the nine months ended September 30, 1997 as compared to 479 Mbbl and 3,606 Mmcf,
respectively, during the same period of 1996.
44
51
The increases in production primarily caused oil and gas sales revenues to
increase $15.9 million to $33.6 million in 1997. The average price received for
oil increased slightly to $20.41 per barrel during the nine months ended
September 30, 1997 from $20.20 for the nine months ended September 30, 1996. The
average price received for natural gas increased slightly to $2.57 per Mcf
during the nine months ended September 30, 1997 from $2.23 per Mcf for the same
period of 1996.
Lease operating expense. Lease operating expense increased to $8.5 million
for the nine months ended September 30, 1997 from $3.9 million for the same
period of 1996. On a Boe basis, lease operating expenses were $4.42 per Boe for
the nine months ended September 30, 1997 as compared to $3.63 per Boe for the
comparable period of 1996. This increase per Boe was a result of the acquisition
of the WRT properties in the nine months ended September 30, 1997 as compared to
the same period in 1996.
Gross production taxes. Gross production taxes increased 90% to $2.3
million during the nine months ended September 30, 1997 from $1.2 million during
the same period of 1996. This increase was due to increased oil and gas sales
revenues.
Contract drilling expense. Contract drilling expense was $8.9 million for
the nine months ended September 30, 1997. This expense relates to the operation
of the drilling rigs acquired in the acquisition of Bonray Drilling Corporation
in February 1997. See Note 2 to DLB's Consolidated Financial Statements,
September 30, 1997 and 1996.
Depreciation, depletion and amortization expense. Depreciation, depletion
and amortization ("DD&A") expense was $14.4 million and $6.7 million for the
nine months ended September 30, 1997 and 1996, respectively. The increase in
DD&A was primarily a result of the increased production due to the acquisition
of WRT in July 1997. The DD&A rate per Boe related to oil and gas properties
increased to $6.39 from $5.80 for the nine months ended September 30, 1997 and
1996, respectively, resulting primarily from the increase in capitalized costs
due to the acquisition of WRT.
General and administrative expense. General and administrative expense
increased 88% to $3.7 million for the nine months ended September 30, 1997 from
$2.0 million during the same period of 1996. The increase was primarily
attributable to $0.7 million in general and administrative expenses as a result
of DLB's drilling rig operations and $0.6 million of general and administrative
expenses related to WRT acquired in July 1997.
Interest expense. Interest expense for the nine months ended September 30,
1997 was $4.8 million. DLB's average debt outstanding was $77.1 million for the
nine months ended September 30, 1997 compared to $14.5 million for the nine
months ended September 30, 1996. The average amount of debt outstanding
increased due to the 1996 acquisition of the Amerada Hess properties and the
1997 acquisitions of Bonray Drilling Corporation, and West Cote Blanche Bay, as
well as 1996 and 1997 investments in WRT. See Note 2 to DLB's Consolidated
Financial Statements, September 30, 1997 and 1996.
Net loss on sale of assets. DLB recognized a net loss of $0.2 million on
the sale of assets for the nine months ended September 30, 1996 as a result of
the dissolution of the Carmen Field Joint Venture and the related sale of
gathering, processing and compression facilities. See Note 5 to DLB's
Consolidated Financial Statements, September 30, 1997 and 1996.
Income before income taxes. Income before income taxes increased to $5.1
million for the nine months ended September 30, 1997 from $3.9 million for the
same period of 1996 primarily due to the factors described above, including
increased oil and gas revenues due to the acquisition of the Amerada Hess
properties and Bonray Drilling. This increase in revenues was partially offset
by increased lease operating expenses, contract drilling expenses, depreciation
and interest expense.
Net income. Net income increased to $3.4 million for the nine months ended
September 30, 1997 from $2.4 million the same period in 1996 as a result of the
items described above, primarily increased production and increased prices and
the effect of DLB's drilling operations. The effective income tax rate is higher
than the corresponding period in 1996, as the loss incurred by WRT creates a net
operating loss carryforward that pursuant to the provisions of Statement of
Financial Accounting Standards No. 109, "Accounting for Income
45
52
Taxes" is not probable of being utilized and is therefore fully allowed for and
not available to provide a financial income tax benefit that would reduce DLB's
consolidated financial income tax provision.
YEAR ENDED DECEMBER 31, 1996 COMPARED WITH THE YEAR ENDED DECEMBER 31, 1995
Revenues. Total revenues for the year ended December 31, 1996 were $28.4
million, an increase of $6.4 million from $22.0 million in 1995. Oil and gas
sales revenues were $27.2 million in 1996 as compared to $17.9 million in 1995.
Production of oil and gas was 664 Mbbl and 5,603 Mmcf, respectively, in 1996, as
compared to 708 Mbbls and 3,022 Mmcf, respectively, for 1995. The increase in
oil and gas revenues was due to the June 1996 acquisition of the Amerada Hess
properties and an increase in product prices. The properties acquired from
Amerada Hess produced 173 Mbbls of oil and 2,153 Mmcf of gas for the seven
months during 1996 that DLB owned the properties. Increases in gas production
offset decreases in oil production on a BOE basis. Oil production decreased in
1996 primarily from natural production declines. The average price received for
oil increased to $20.84 per barrel in 1996 from $17.45 per barrel in 1995. The
average price received for natural gas was $2.38 per Mcf for 1996 as compared to
$1.82 per Mcf for 1995. Gathering, dehydration and compression fees decreased
$2.5 million to $0.8 million in 1996 as compared to $3.3 million in 1995
primarily due to the sale of assets related to dissolution of the Carmen Field
Joint Venture ("CFJV"). On February 7, 1996 DLB settled claims against a joint
venture partner pertaining to the Carmen Field Joint Venture Agreement. DLB
received $3.3 million as part of the settlement and CFJV was dissolved. DLB
earned net income before income taxes from gathering, dehydration and
compression fees, and demand charges of $2.9 million for 1995 from the assets
subject to the settlement. See Note 13 to DLB's Consolidated Financial
Statements, December 31, 1996, 1995 and 1994.
Lease operating expense. Lease operating expense increased to $5.5 million
for 1996 from $3.6 million in 1995 primarily due to the addition of lease
operating expenses associated with the operation of the acquired Amerada Hess
properties. On a BOE basis, lease operating expense was $3.47 per BOE for 1996
as compared to $2.95 per BOE in 1995. The increase in per BOE lease operating
expense was attributable to decreased production from existing wells without a
corresponding decrease in operating expense.
Gross production taxes. Gross production taxes increased $0.5 million to
$1.8 million for 1996 from $1.3 million for 1995. The increase in gross
production taxes for 1996 was related to the increase in oil and gas sales for
1996. On a BOE basis, gross production taxes were $1.15 in 1996 and $1.13 in
1995.
Depreciation, depletion and amortization expense. DD&A expense for 1996
totaled $8.9 million as compared to $7.4 million for 1995. The increase in DD&A
is primarily attributable to the increase in DLB's oil and natural gas
properties subject to amortization. The DD&A rate decreased to $5.59 per BOE for
1996, from $6.08 per BOE for 1995. The decrease in DD&A per BOE resulted
primarily from an increased level of reserves at December 31, 1996.
General and administrative expense. General and administrative expense
increased to $2.5 million for 1996 from $1.5 million for 1995. This increase was
primarily attributable to staffing increases and additional corporate expenses
to handle higher levels of activity following the July 1995 initial public
offering and the $32.1 million acquisition of properties from Amerada Hess on
May 31, 1996. On a BOE basis, general and administrative expenses increased 23%
from 1995 as compared to a 142% increase from 1994 to 1995.
Interest expense. Interest expense increased to $1.6 million for 1996 from
$0.5 million for 1995 as a result of an increase in the average amount of debt
outstanding due to the acquisition of the Amerada Hess properties. See Note 2 to
DLB's Consolidated Financial Statements, December 31, 1996, 1995 and 1994.
Income before income taxes. Income before income taxes increased to $7.8
million for 1996 from $7.7 million for 1995, primarily due to the factors
described above, including increased oil and gas revenues due to the acquisition
of the Amerada Hess properties which were partially offset by the decreased
revenues due to the dissolution of the CFJV and the increased interest and
general and administrative expense.
Income taxes. The effective tax rate for 1996 was approximately 38%. The
deferred income tax expense for 1995 included a $11.5 million charge for a
required change in tax status from an S corporation (which is not taxed
directly) to a C Corporation (which is taxed directly) and, as such, the
effective tax rate for 1995
46
53
was not meaningful. See Note 7 to DLB's Consolidated Financial Statements,
December 31, 1996, 1995 and 1994.
Net income (loss). Net income increased 3% to $4.9 million for 1996 from
$4.7 million for 1995 before the non-recurring deferred tax charge. DLB incurred
a non-recurring charge of $11.5 million for deferred income tax expense in 1995,
of which $9.9 million was attributed to periods prior to 1995. As a result of
this item, net income increased to $4.9 million for 1996 from a loss of $5.2
million in 1995.
YEAR ENDED DECEMBER 31, 1995 COMPARED WITH THE YEAR ENDED DECEMBER 31, 1994
Revenues. Total revenues for the year ended December 31, 1995 were $22.1
million, a decrease of $1.1 million from $21.0 million in 1994. During 1994, DLB
recognized $3.3 million from a settlement of a natural gas sales contract.
Excluding the effect of this non-recurring item, total revenues for 1995 would
have increased by $2.2 million. Production of oil and gas was 708 MBbl and 3,022
MMcf, respectively, in 1995, as compared to 663 MBbls and 3,187 MMcf,
respectively, in 1994. The increase in equivalent barrel production was a result
of the completion of 19 wells in 1995. However, this production increase was
offset by a $0.16 and $0.11 decrease in the average price received per barrel
and Mcf to $17.45 and $1.82, respectively, during 1995. A $1.3 million increase
in revenues from gathering, dehydration and compression fees, and demand charges
under a contract which commenced in July 1994 also contributed to the increase
in total revenues. Also contributing to the increase in total revenues were
increases of $0.3 million of interest income, and $0.4 million of other revenue
that resulted from the termination of DLB's management agreement with LEDCO in
connection with the sale of LEDCO in January 1995.
Lease operating expense. Lease operating expense decreased $0.9 million to
$3.6 million in 1995. On a BOE basis, lease operating expense decreased 21% in
1995 to $2.95 per BOE from $3.74 per BOE from $4.5 million in 1994. The decrease
in such expense primarily related to decreased saltwater disposal expenses due
to DLB's development of a saltwater disposal facility located in the Ames Field.
Previously, DLB had to transport the saltwater to other disposal facilities
further away.
Gross Production Taxes. Gross production taxes increased $0.4 million to
$1.4 million in 1995. This increase was primarily due to the expiration of the
incremental tax credit for a water flood project.
Depreciation, depletion and amortization expense. DD&A increased $0.8
million to $7.4 million in 1995 from $6.6 million in 1994. The DD&A rate
increased to $6.08 per BOE for 1995, from $5.49 per BOE for 1994. The 11%
increase in DD&A per BOE resulted primarily from an increased level of capital
expenditures for proved reserves in 1995 as compared to 1994.
General and administrative expense. General and administrative expense
increased $1.0 million to $1.5 million in 1995 from $0.5 million in 1994. This
increase was a result of DLB hiring additional employees and taking larger
working interest positions in its wells. DLB had 50 employees at December 31,
1995 as compared to 35 employees at December 31, 1994. Third-party operating
reimbursements represented 15% of gross general and administrative expense in
1995 as compared to 36% in 1994. DLB received operating reimbursements from
third-party working interest participants which reduced overall general and
administrative expense.
Interest expense. Interest expense decreased to $0.5 million in 1995 from
$0.7 million in 1994 primarily as a result of fully paying down DLB's credit
facility with proceeds of the July 1995 equity offering.
Income before income taxes. Due to the factors described above, primarily
the $3.3 million non-recurring natural gas contract settlement, income before
income taxes decreased 22% to $7.7 million in 1995 from $9.9 million in 1994.
Income taxes. As a result of the Davidson Merger and termination of DLB's
Subchapter S election, DLB recognized a charge against operations in the amount
of $11.5 million for deferred income taxes in 1995. The charge represented the
tax effect of the difference between the financial statement carrying values and
the income tax bases of DLB's assets and liabilities on the date the election
was terminated. This expense is a non-cash expense. Approximately $9.9 million
of the 1995 provision relates to financial and tax differences
47
54
generated prior to 1995. DLB's effective tax rate after removing the impact of
the differences generated prior to 1995 was approximately 39% which is
comparable to the 40% estimated tax rate used in calculating pro forma income
taxes in 1994.
Net income (loss). Primarily as a result of the recognition of income taxes
in 1995, a net loss of $5.2 million was incurred. During 1994, net income (after
pro forma income taxes) was $5.9 million.
CAPITAL EXPENDITURES, CAPITAL RESOURCES AND LIQUIDITY
The following summary table presents comparative cash flows of DLB for the
nine months ended September 30, 1997 and 1996 and for each of the three years
ended December 31, 1996.
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
------------------- ------------------------------
1997 1996 1996 1995 1994
-------- -------- -------- -------- --------
(IN THOUSANDS)
Net cash provided by operating activities... $ 17,445 $ 9,579 $ 19,559 $ 13,395 $ 17,261
Net cash used in investing activities....... (54,934) (50,955) (66,831) (19,618) (25,367)
Net cash provided by financing activities... 45,242 31,819 37,019 17,477 6,690
As of September 30, 1997, DLB had cash balances of $11.8 million and
working capital of $8.2 million. The increase in working capital of $7.0 million
as of September 30, 1997, from $1.2 million as of December 31, 1996, is
primarily a result of financing activities and reduced capital expenditures
during the latter portion of the nine months ended September 30, 1997. Net cash
provided from operating activities increased $7.9 million to $17.4 million
during the nine months ended September 30, 1997 from $9.6 million during the
same period of 1996, relating to an increase in net income as well as positive
changes in working capital components.
As of December 31, 1996, DLB had cash balances of $4.1 million and working
capital of $1.2 million. The decrease in working capital to $1.2 million as of
December 31, 1996, from $13.7 million as of December 31, 1995, reflects the
increased level of capital expenditures during 1996. The increase in working
capital to $13.7 million as of December 31, 1995, from $0.8 million as of
December 1994, reflected the net proceeds of $15.7 million from the July 1995
public offering of common stock after debt repayment. For 1996, net cash
provided by operating activities was $19.6 million, as compared to $13.4 million
in 1995. The increase in net cash provided by operating activities in 1996
relates primarily to the timing of receipts and disbursements relating to
working capital as DLB's income before income taxes was substantially similar
for 1996 and 1995.
Net cash used in investing activities was $54.9 million for the nine months
ended September 30, 1997, as compared to $51.0 million during the same period of
1996. The increase of $3.9 million was primarily attributable to acquisitions of
Bonray Drilling Corporation and WRT and expenditures for the exploration,
development and acquisitions of other property and equipment.
Net cash used in investing activities was $66.8 million in 1996 as compared
to $19.6 million in 1995. This increase of $47.2 million in 1996 was primarily
related to the acquisition of the Amerada Hess properties for $32.1 million, the
acquisition of senior unsecured notes and other credit obligations of WRT for
$7.9 million (see "Business of DLB -- Recent Events -- WRT") and the acquisition
of a 20.8% equity interest in Waggoner for $3.2 million. (See "Business of
DLB -- Recent Events -- Barbados Transaction.")
The majority of the $19.6 million spent on capital expenditures in 1995
related to exploration and production activity with $4 million for seismic
surveys and other preliminary costs. During 1994, DLB expended the majority of
the $25.4 million of capital expenditures on exploration and production
activity. Additionally, DLB spent $8.5 million for property acquisitions
including $2.1 million for producing properties and $6 million for undeveloped
leaseholds through the net acquisition of additional interests in the Ames
Field.
48
55
Net cash provided by financing activities was $45.2 million for the nine
months ended September 30, 1997, as compared to $31.8 million during the same
period of 1996. This increase is primarily a result of additional financing
required for the WRT and Bonray acquisitions during 1997. During 1996, net cash
provided by financing activities rose to $37 million as compared to $17.5
million in 1995. This increase was due to borrowings under the 1995 credit
facility during 1996. In 1995, the amounts provided by financing activities
primarily consisted of the proceeds of the July 1995 issuance of common stock
after payment of debt.
Capital expenditures. DLB's capital expenditures to date have focused
primarily on the exploration, acquisition and development of oil and gas
properties. The following table sets forth DLB's expenditures for exploration,
development, property acquisitions and drilling equipment for each of the three
years ended December 31, 1996, and the nine months ended September 30, 1997 and
1996. The table includes costs of oil and gas properties not subject to
amortization, which consist of the cost of undeveloped leaseholds, wells-in-
progress and secondary recovery projects before the assignment of proved
reserves.
NINE MONTHS ENDED
SEPTEMBER 30,(1) YEAR ENDED DECEMBER 31,
----------------- ---------------------------
1997 1996 1996 1995 1994
------- ------- ------- ------- -------
(IN THOUSANDS)
Exploration costs.............................. $ 5,366 $ 7,727 $ 9,605 $12,482 $ 8,551
Development costs.............................. 9,414 4,256 11,503 5,884 7,688
Property acquisition costs..................... 329 33,133 34,476 39 8,849
Drilling equipment............................. 17,889 -- -- -- --
------- ------- ------- ------- -------
Total................................ $32,998 $45,116 $55,584 $18,405 $25,088
======= ======= ======= ======= =======
- ---------------
(1) This table includes WRT's capital expenditures since July 11, 1997. This
table does not include the costs to acquire WRT.
DLB had budgeted up to a total of $66.0 million in capital expenditures in
1997, which included $27 million for the WRT acquisition. In addition to the
capital expenditures set forth in the table above, DLB anticipated additional
capital expenditures for oil and gas exploration activities. However, capital
expenditures have been substantially reduced as a result of capital constraints
and the proposed Merger. DLB anticipates that total capital expenditures for
1997 will be $44 million.
Capital Resources. Prior to the July 1995 equity offering, DLB's cash
requirements had been met primarily through capital contributions from
shareholders, cash generated from operations and borrowings under credit
facilities.
In May 1997, the DLB Board concluded that DLB lacked sufficient capital
resources to fund its acquisition plans, exploratory activities and other
capital expenditures. The DLB Board began exploring strategic alternatives for
the company, which ultimately culminated in the proposed Merger and WRT Spin-
Off. See "Description of Merger -- Background."
On March 5, 1997, DLB established a new revolving credit facility with a
group of financial institutions, which, as amended, provides for aggregate
borrowings of up to $85.0 million (the "1997 Credit Facility"). Borrowings under
the 1997 Credit Facility were used to refinance indebtedness under the 1995
credit facility and to fund the West Cote Blanche Bay Acquisition. The aggregate
borrowing base was changed to $65.0 million effective July 11, 1997.
Under the terms of the 1997 Credit Facility, DLB may elect to be charged at
the bank's prime rate plus 50 basis points plus the applicable margin or the
rate at which Eurodollar deposits for one, two, three, six or twelve months are
offered to the bank in the Interbank Eurodollar market plus the applicable
margin. Loans made under the 1997 Credit Facility are payable in full on March
2002, the maturity date. The 1997 Credit Facility is secured by substantially
all of DLB's assets and contains various restrictive covenants. As of November
30, 1997, outstanding borrowings under the 1997 Credit Facility were $62.0
million.
On July 11, 1997, DLB established an additional credit facility (the "New
Credit Facility"), via one of its wholly owned subsidiaries, with an affiliate
of Lehman Brothers, which provides for borrowings of up to
49
56
$23 million. This facility was used to finance DLB's obligations under the WRT
rights offering and to partially refinance indebtedness under the 1997 Credit
Facility. The maturity date of this facility is January 11, 1999. As of November
30, 1997, outstanding borrowings were $23.0 million.
Under the terms of the New Credit Facility, DLB may elect to be charged the
ABR rate plus a specified margin or the Eurodollar rate plus a specified margin.
The loan agreement contains restrictive covenants requiring among other things,
maintenance at specific levels of tangible net worth, working capital and
specific financial ratios, as well as limiting payment of dividends.
Liquidity. DLB intends to meet its capital requirements and other
obligations pending completion of the Merger primarily from existing cash
balances, cash flow from operations and borrowings to the extent of availability
under the 1997 Credit Facility and the New Credit Facility. DLB's cash flow from
operations will be dependent upon its future performance, which will be subject
to prevailing economic conditions and to financial and business conditions and
other factors, many of which are beyond its control.
DLB does not intend to pay dividends on its common stock in the near
future.
In future periods, DLB expects to recognize deferred income taxes of
approximately 37% to 39% of income before income taxes. The majority of DLB's
income tax expense is expected to be recognized as deferred income tax expense
due to the current tax treatment of oil and gas exploration costs.
Year 2000 Compliance. Currently, there is significant uncertainty among
software users regarding the impact of the year 2000 on installed software. DLB
does not have any proprietary software and only uses software that has been
licensed from third party vendors. DLB is in the process of determining the
extent to which its licensed software is year 2000 compliant and the cost of
obtaining such compliance. DLB does not believe that the effects of any year
2000 non-compliance in any software will result in any material adverse impact
on DLB's business or financial condition.
Impact of Recently Issued Accounting Standards Not Yet Adopted. In February
1997, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards ("SFAS") No. 128, "Earnings Per Share." SFAS No. 128 is
effective for financial statements issued for periods ending after December 15,
1997, and restatement of prior-period earnings per share data is required. The
new standard will not apply to DLB's financial statements until the fourth
quarter of 1997. SFAS No. 128 revises the current calculation methods and
presentation of primary and fully diluted earnings per share. DLB has reviewed
the requirements of SFAS No. 128, and has concluded that they will increase
DLB's historical primary earnings per share amounts by $0.01 per share for the
first quarter of 1997.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
In considering the recommendation of the DLB Board with respect to the
Merger, the shareholders of DLB should be aware that certain members of DLB's
management and the DLB Board have certain interests in the Merger separate from
the interests of the DLB shareholders generally. These separate interests are
summarized below.
Indemnification. CHK has agreed that, for a period of not less than three
years following the Effective Time, it will cause the director and officer
liability insurance coverage of DLB to continue in effect. CHK has agreed that,
from and after the consummation of the Merger, for a period of six years it will
indemnify each person who is, has been at any time prior to the date of the
Merger Agreement, or becomes prior to the Effective Date, an officer or director
of DLB and its subsidiaries, with respect to his service prior to the Effective
Time to the extent permitted by applicable law.
Stock Options. The Merger Agreement provides that DLB may amend its
existing stock option plans and stock option agreements to provide that each
outstanding option to purchase shares of DLB Common Stock granted under DLB's
stock option plans and stock option agreements shall be exercisable at the
optionee's election prior to the Effective Time (notwithstanding any vesting or
exercisability provisions) such that each optionee shall have the rights to
receive an amount in respect thereof equal to the product of (x) the excess, if
50
57
any, of the fair market value of DLB Common Stock over the respective exercise
price thereof and (y) the number of shares of DLB Common Stock subject thereto.
The following table sets forth with respect to Messrs. Mike Liddell and
Mark Liddell and all other executive officers of DLB as a group based on the
closing price per share of DLB Common Stock of $9.00 on March 30, 1998, (i) the
number of shares of DLB Common Stock subject to options held by such persons
that will become exercisable immediately prior to the Effective Time, (ii) the
weighted average exercise price for such exercisable options held by such
persons, and (iii) the aggregate value of such exercisable options.
OPTIONS WHICH BECOME WEIGHTED AVERAGE AGGREGATE
EXERCISABLE IMMEDIATELY EXERCISE PRICE VALUE
PRIOR TO THE EFFECTIVE TIME PER SHARE OF OPTIONS
--------------------------- ---------------- ----------
Mike Liddell.................................... 650,000 $10.00 --
Mark Liddell.................................... 650,000 $10.00 --
All executive officers as a group (9 persons)... 1,555,625(1) $10.04 --
- ---------------
(1) Includes options held by Mike Liddell and Mark Liddell.
Employment Agreements. Messrs. Mike Liddell and Mark Liddell have entered
into employment agreements with DLB which provide for severance payments upon
termination of employment by DLB without cause. The severance payments consist
of an aggregate amount equal to 12 months of their then current base salary. For
each of Messrs. Mike Liddell and Mark Liddell, the severance payment would equal
$157,869.
Stay-on Bonus. Prior to the date of the Merger Agreement, the DLB Board
determined and announced to certain employees of DLB, including certain
executive officers, that DLB would pay to each such employee, who is still
employed by DLB at the Closing Date, a stay-on bonus in order to provide such
employees with an incentive to remain in the employ of DLB and to help prepare
DLB for sale. The aggregate amount of such bonuses to be paid immediately prior
to the Closing Date is $682,500. Executive officers Gary Hanna, Ron Youtsey and
Rick Carlson will each receive $30,000 bonuses.
Registration Rights Agreement. CHK has agreed with Charles E. Davidson, a
member of the DLB Board and DLB's largest shareholder pursuant to Registration
Rights Agreements, to prepare and file, under certain prescribed conditions, a
registration statement under the Securities Act covering the shares of CHK
Common Stock that Mr. Davidson receives in the Merger. Such registration will
relieve Mr. Davidson from certain restrictions to which he would otherwise be
subject with respect to resales of such CHK Common Stock.
Barbados Assets. Immediately prior to the Merger, DLB International will
assign to DLB its right to the net cash proceeds from the sale of the Barbados
Assets and DLB will then transfer to its 48.8%-owned subsidiary WRT all of the
outstanding capital stock of DLB International. DLB will then distribute all of
the shares of WRT Common Stock owned by DLB to DLB's shareholders. WRT will not
pay any consideration to DLB for the transfer of the DLB International capital
stock. If the sale of the Barbados Assets to Waggoner pursuant to the Waggoner
Agreement does not occur, WRT will be entitled to retain the Barbados Assets
without paying any consideration to DLB or the former DLB Shareholders and the
indirect ownership interest of the former DLB Shareholders in such assets will
be reduced from 100% to 48.8%. CHK did not assign any value to the Barbados
Assets and none of the parties that visited DLB's data rooms expressly to
evaluate the acquisition of the Barbados Assets made any bid on these assets.
However, by transferring DLB's interest in the Barbados Assets to WRT
immediately prior to the Merger, former DLB shareholders will have a greater
percentage interest in these assets if the sale pursuant to the Waggoner
Agreement does not close than if such assets had remained in DLB and became
assets of CHK. Wexford Management LLC, of which Charles E. Davidson is the
general partner, beneficially owns 10.4% of the outstanding shares of WRT Common
Stock. Mr. Davidson is also a member of the DLB Board and owner of 57.8% of the
outstanding shares of DLB Common Stock. In addition, Messrs. Mike Liddell and
Mark Liddell, who are directors and executive officers of DLB, also serve as
directors of WRT. WRT will serve as the Barbados Escrow Agent and the
Liquidating Trust Escrow Agent. See "Merger Agreement --Barbados Contingent
Payment Rights" and "-- Liquidating Trust Contingent Payment Rights."
51
58
MERGER AGREEMENT
GENERAL
CHK, DLB and Merger Sub have entered into the Merger Agreement which
provides that, subject to the satisfaction of the conditions thereof (see
"-- Conditions to the Consummation of the Merger"), Merger Sub will be merged
with and into DLB. DLB will be surviving entity and will continue as an indirect
wholly owned subsidiary of CHK. The time of filing of the Certificate of Merger
with the Secretary of State of the State of Oklahoma will be the Effective Time
of the Merger unless otherwise provided in the Certificate of Merger.
THE DESCRIPTION OF THE MERGER AGREEMENT CONTAINED IN THIS INFORMATION
STATEMENT/PROSPECTUS IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE MERGER
AGREEMENT, A COPY OF WHICH IS INCLUDED AS ANNEX A TO THIS INFORMATION
STATEMENT/PROSPECTUS AND IS INCORPORATED HEREIN BY REFERENCE IN ITS ENTIRETY.
MERGER CONSIDERATION
At the Effective Time, by virtue of the Merger, each share of DLB Common
Stock that is issued and outstanding immediately prior to the Effective Time
(other than shares of DLB Common Stock held by dissenting shareholders and other
than shares of DLB Common Stock to be canceled pursuant to the Merger Agreement)
shall be converted into the right to receive: (i) a fractional interest in a
share of CHK Common Stock equal to 5,000,000 shares of CHK Common Stock divided
by the number of fully diluted shares of DLB Common Stock issued and outstanding
at the Effective Time (the "CHK Common Stock Consideration"), (ii) an amount in
cash equal to $17.5 million divided by the number of fully diluted shares of DLB
Common Stock issued and outstanding at the Effective Time (the "Cash
Consideration"), (iii) that number of shares of Bayard Common Stock owned by DLB
immediately prior to the Effective Time divided by the number of shares of DLB
Common Stock issued and outstanding immediately prior to the Effective Time,
(iv) one Barbados Contingent Payment Right, and (v) one Liquidating Trust
Contingent Payment Right; provided that the number of shares of Bayard Common
Stock to be issued as Merger Consideration shall be rounded to the nearest whole
number of shares, and provided further that the number of shares of Bayard
Common Stock subject to issuance as Merger Consideration is limited to the
number of shares of Bayard Common Stock owned by DLB immediately prior to the
Effective Time. In the event of any stock split, stock dividend, reverse stock
split or other change in the number of shares of CHK Common Stock, DLB Common
Stock or Bayard Common Stock outstanding prior to Closing the consideration may
be subject to equitable adjustment.
Until surrendered, each certificate representing shares of DLB Common Stock
shall be deemed at any time after the Effective Time to represent only the right
to receive the Merger Consideration upon surrender.
No dividends or other distributions with respect to CHK and/or Bayard
Common Stock declared or made after the Effective Time with a record date after
the Effective Time shall be paid to the holder of any unsurrendered DLB Common
Stock certificate (a "DLB Certificate"). Subject to the effect of applicable
laws, (i) at the time of the surrender of a DLB Certificate for exchange, in
accordance with the provisions relating thereto in the Merger Agreement, there
shall be paid to the surrendering holder, without interest, the amount of
dividends or other distributions (having a record date after the Effective Time
but on or prior to surrender and a payment date on or prior to surrender)
previously paid with respect to the number of whole shares of CHK Common Stock
and Bayard Common Stock that such holder is entitled to receive (less the amount
of any withholding taxes that may be required with respect thereto); and (ii) at
the appropriate payment date, each surrendering holder will be paid without
interest, the amount of dividends or other distributions (having a record date
after the Effective Time but on or prior to surrender and a payment date
subsequent to surrender) payable with respect to the number of whole shares of
CHK Common Stock, Bayard Common Stock that such holder receives or, with respect
to Bayard Common Stock held by the Exchange Agent prior to the Bayard
Distribution Date that such holder is entitled to receive (less the amount of
any withholding taxes that may be required with respect thereto).
No certificates or scrip representing fractional shares of CHK or Bayard
Common Stock shall be issued in the Merger and, except as provided in this
paragraph, no dividend or other distribution, stock split or interest shall
relate to any such fractional share, and such fractional share shall not entitle
the owner thereof to
52
59
vote or to any other rights of a shareholder of CHK. In lieu of any fractional
share of CHK Common Stock to which a holder of DLB Common Stock would otherwise
be entitled, such holder, upon surrender of a DLB Certificate as described in
Article II of the Merger Agreement, shall be paid an amount in cash (without
interest) determined by multiplying (i) the Closing Price by (ii) the fractional
share of CHK Common Stock to which such holder would otherwise be entitled, in
which case DLB, as the surviving corporation (the "Surviving Corporation") shall
make available to the Exchange Agent, without regard to any other cash being
provided to the Exchange Agent, the amount of cash necessary to make such
payments. The Surviving Corporation shall retain all fractional shares of Bayard
Common Stock.
If any DLB Certificate is lost, stolen or destroyed (collectively a "Lost
Certificate"), upon the making of an affidavit of that fact by the Person (as
defined in the Merger Agreement) claiming such Lost Certificate and, if required
by the Surviving Corporation, the posting by such Person of a bond, in such
reasonable amount as the Surviving Corporation may direct, as indemnity against
any claim that may be made against it with respect to such DLB Certificate, the
Exchange Agent shall issue in exchange for such Lost Certificate the Merger
Consideration (along with any cash in lieu of fractional shares and any unpaid
dividends and distributions due) deliverable with respect thereto.
BARBADOS CONTINGENT PAYMENT RIGHTS
As part of the Merger Consideration, each DLB shareholder will receive one
Barbados Contingent Payment Right for each share of DLB Common Stock held of
record immediately prior to the Effective Time. Each Barbados Contingent Payment
Right will represent the right to receive a pro rata share of any net cash
proceeds that DLB may receive upon the sale of DLB's interests in the Barbados
Assets. The Barbados Assets, which consists of a 20.8% equity interest in
Waggoner and a promissory note in the principal amount of $2.4 million issued by
Waggoner, are held by DLB's wholly-owned subsidiary, DLB International. DLB
International and Waggoner have entered into the Waggoner Agreement providing
for the purchase of the Barbados Assets for an aggregate purchase price of
approximately $2.5 million.
Immediately prior to the Effective Time, DLB International will assign to
DLB its right to receive the net cash proceeds from the sale of the Barbados
Assets pursuant to the Waggoner Agreement and DLB will then transfer the stock
of DLB International to WRT. The Barbados Contingent Payment Rights will
represent only the right to receive a pro rata portion of the net cash proceeds
from the sale of the Barbados Assets pursuant to the Waggoner Agreement.
Waggoner's obligation to purchase the Barbados Assets is subject to numerous
conditions, including the ability of Waggoner to obtain the necessary financing,
and there can be no assurance that such sale of the Barbados Assets will be
completed. In the event that the sale of the Barbados Assets to Waggoner is
completed, the proceeds from such sale, net of all related transaction costs,
will be received by the Barbados Escrow Agent which will distribute such net
cash proceeds pro rata to the holders of the Barbados Contingent Payment Rights.
If such sale does not occur, the Barbados Contingent Payment Rights will be
extinguished, the Barbados Assets will be owned by DLB International which will
be a wholly-owned subsidiary of WRT, and former DLB shareholders will have only
an indirect ownership interest in the Barbados Assets as shareholders of WRT.
Prior to the Effective Time, DLB intends to enter into the Barbados Escrow
Agreement with WRT pursuant to which WRT would act as the Barbados Escrow Agent.
The Barbados Contingent Payment Rights will not be assignable or
transferable except by operation of law (including the laws of descent and
distribution) or by intestacy and will not be evidenced by any certificate or
other instrument. The Barbados Contingent Payment Rights will not pay any
dividends or bear any stated rate of interest and will have no voting or other
rights. The Barbados Contingent Payment Rights will represent only the
contingent right to receive a pro rata portion of the net proceeds from the sale
of the Barbados Assets to Waggoner under the circumstances described above. The
Barbados Escrow Agent will be required to report to the holders of Barbados
Contingent Payment Rights semi-annually on June 30 and December 31 of each year
the status of the proposed sale of the Barbados Assets to Waggoner pursuant to
the Waggoner Agreement.
53
60
LIQUIDATING TRUST CONTINGENT PAYMENT RIGHTS
As part of the Merger Consideration, each DLB shareholder will receive one
Liquidating Trust Contingent Payment Right for each share of DLB Common Stock
held of record immediately prior to the Effective Time. Each Liquidating Trust
Contingent Payment Right will represent the right to receive a pro rata share of
any net distributions made in respect of DLB's interest in the WRT Liquidating
Trust established for the sole purpose of coordinating the prosecution,
direction, settlement or compromise of certain causes of actions of Old WRT. In
February 1996, Old WRT had commenced a voluntary reorganization case under
Chapter 11 of the United States Bankruptcy Code in the Bankruptcy Court. The WRT
Liquidating Trust was created pursuant to a joint plan of reorganization that
was approved by the Bankruptcy Court and became effective in July 1997. DLB's
interest in the WRT Liquidating Trust is evidenced by 2,803,880 Certificates of
Beneficial Interest representing 20.3% of all such Certificates.
Immediately prior to the Effective Time, DLB will assign all of its
Certificates of Beneficial Interest to the Liquidating Trust Escrow Agent. The
Liquidating Trust Escrow Agent, promptly after its receipt of any distributions
made in respect of such Certificates of Beneficial Interest, will distribute
such distributions, net of the Liquidating Trust Escrow Agent's fee of 1% of
such distributions and its costs and expenses in acting as escrow agent, pro
rata to the holders of Liquidating Trust Contingent Payment Rights. DLB intends
to enter into the Liquidating Trust Escrow Agreement with WRT pursuant to which
WRT would serve as the Liquidating Trust Escrow Agent.
The rights of the holders of the Liquidating Trust Contingent Payment
Rights to receive funds from the Liquidating Trust Escrow Agent will be
represented by the Liquidating Trust Escrow Agreement. The Liquidation Trust
Contingent Payment Rights will not be assignable or transferable except by
operation of law (including the laws of descent and distribution) or by
intestacy and will not be evidenced by any certificate or other instrument. The
Liquidating Trust Contingent Payment Rights will not pay any dividends or bear
any stated rate of interest and will have no voting or other rights. The
Liquidating Trust Contingent Payment rights will represent only the contingent
right to receive a pro rata portion of the distributions received in respect of
the DLB Certificates or Beneficial Interest under the circumstances described
above. The Liquidating Trust Escrow Agent will be required to forward promptly
to the holders of Liquidating Trust Contingent Payment Rights any reports it
receives from the Trustee of the WRT Liquidating Trust.
EXCHANGE OF CERTIFICATES
As soon as reasonably practicable after the Effective Time, CHK shall cause
the Exchange Agent to mail to each holder of record of a DLB Certificate that,
immediately prior to the Effective Time represented outstanding shares of DLB
Common Stock, which was converted into the right to receive the Merger
Consideration: (i) a letter of transmittal; and (ii) instructions for use of
such letter of transmittal in effecting such exchange. Upon surrender of a DLB
Certificate for cancellation to the Exchange Agent, together with such letter of
transmittal, duly executed, and any other required documents, (A) the holder of
such DLB Certificate will be entitled to receive in exchange therefor cash and
stock certificates representing the number of whole shares of CHK Common Stock
and whole shares of Bayard Common Stock that such holder has the right to
receive pursuant to the terms of the Merger Agreement, as the case may be, any
cash in lieu of fractional shares of CHK Common Stock as provided in the Merger
Agreement, and any unpaid dividends and distributions that such holder has the
right to receive pursuant to the terms of the Merger Agreement (after giving
effect to any required withholding of taxes and subject to limitations on the
distribution of Bayard Common Stock); and (B) the DLB Certificate so surrendered
shall forthwith be canceled. Certificates for the Bayard Common Stock
constituting a portion of the Merger Consideration to which holders of DLB
Common Stock are entitled will not be distributed until May 4, 1998, the date of
the expiration of a period of 180 days from the date of the initial public
offering of Bayard Common Stock. No interest shall be paid or accrued on the
Merger Consideration, cash in lieu of fractional shares or unpaid dividends and
distributions, if any, payable to holders of DLB Certificates. The Barbados
Contingent Payment Rights and the Liquidity Trust Contingent Payment Rights will
not be evidenced by any certificate or other instrument.
54
61
CONDITIONS TO THE CONSUMMATION OF THE MERGER
The respective obligations of each party to effect the Merger are subject
to the satisfaction or waiver at or prior to the Closing Date of the Merger of
the following conditions: (i) the Merger shall have been approved by the
requisite vote of the holders of DLB Common Stock; (ii) no action shall have
been taken and no statute, rule, regulation, executive order, decree or
injunction shall have been enacted, entered, promulgated or enforced by any
court or governmental authority against CHK, DLB or Merger Sub that makes the
consummation of the Merger illegal or would otherwise prohibit or restrict the
consummation of the Merger; (iii) the registration statement of which this
Information Statement/Prospectus is a part shall have been declared effective by
the SEC under the Securities Act and shall be effective at the Effective Time,
and no stop order suspending such effectiveness shall have been issued, no
action, suit, proceeding or investigation by the SEC to suspend such
effectiveness shall have been initiated and be continuing, and all necessary
approvals under state securities laws relating to the issuance or trading of the
CHK Common Stock to be issued in the Merger shall have been received; (iv) the
applicable waiting periods under the HSR Act shall have expired or been earlier
terminated; (v) all filings required to be made with, and all consents,
approvals, authorizations and permits required to be obtained prior to the
Effective Time of the Merger from, any governmental authority in connection with
the consummation of the Merger shall have been made or obtained, except where
the failure to obtain such consents, approvals, authorizations and permits would
not be reasonably likely to result in a Material Adverse Effect (as defined in
the Merger Agreement) on DLB (assuming the merger has taken place) or to
materially adversely affect the consummation of the Merger; (vi) the shares of
CHK Common Stock issuable pursuant to the Merger, if any, shall have been
approved for listing on the New York Stock Exchange, subject to official notice
of issuance; (vii) an information statement relating to the spin-off of WRT
shall have been filed with the SEC (or such other information approved by the
SEC has been sent to the shareholders of DLB) and such spin-off shall have been
completed during the period commencing upon the determination of the closing
price and ending immediately prior to the Effective Time; (viii) a registration
statement on the appropriate form relating to the Bayard Common Stock to be
delivered in connection with the Merger shall have been declared effective by
the SEC under the Securities Act and shall be effective at the Effective Time,
no stop order suspending such effectiveness shall have been issued, no action,
suit, proceeding or investigation by the SEC to suspend such effectiveness shall
have been initiated and be continuing; (ix) DLB shall have promptly notified CHK
of (a) any written notice or other written communication from any third party
alleging that the consent of such third party is or may be required in
connection with the transactions contemplated by the Merger Agreement; (b) any
written notice or other written communication from any governmental authority in
connection with the transactions contemplated in the Merger Agreement; and (c)
any fact, development or occurrence that constitutes a Material Adverse Effect
with respect to DLB or is reasonably expected to result in such an effect; (x)
prior to the date of approval of the Merger by the shareholders of DLB and
Merger Sub, shall have corrected promptly any information provided by it to be
used specifically in the Information Statement/Prospectus and Registration
Statement that shall have become false or misleading in any material respect and
shall have taken all steps necessary to file with the SEC and have declared
effective or cleared by the SEC any amendment or supplement to the Information
Statement/Prospectus or the Registration Statement so as to correct the same and
to cause the Information Statement/Prospectus as so corrected to be disseminated
to the shareholders of DLB and CHK, in each case to the extent required by
applicable law; (xi) as promptly as practicable after the execution of the
Merger Agreement, DLB shall have taken all steps necessary to exercise its
registration rights under the Bayard Registration Agreement with respect to the
Bayard Common Stock to be delivered as Merger Consideration upon consummation of
the Merger, (xii) DLB shall have advised CHK promptly after it received notice
thereof, of the time when such registration statements shall become effective or
any supplement or amendment has been filed, the issuance of any stop order, the
suspension of the qualification of the Bayard Common Stock for offering or sale
in any jurisdiction, or any request by the SEC for amendment of such
registration statements or comments thereon and responses thereto or requests by
the SEC for additional information; and (xiii) prior to the Closing, DLB and WRT
will have terminated the Administrative Services Agreement ("Administrative
Services Agreement") between DLB and WRT dated as of July 10, 1997, and in
connection with such termination WRT shall have paid all amounts due under the
Administrative Services Agreement prior to Closing.
55
62
The obligation of DLB to effect the Merger also are subject to the
satisfaction or waiver (in whole or in part) by DLB of the following additional
conditions: (i) the representations and warranties of CHK and Merger Sub set
forth in the Merger Agreement shall be true and correct in all material respects
as of the Closing Date as though made at that time (unless such representation
or warranty specifies that it is given as of or with respect to a specific
date), and DLB shall have received a certificate signed by the chief executive
officer of CHK and Merger Sub to such effect; (ii) CHK shall have performed in
all material respects all agreements and covenants required to be performed by
it under the Merger Agreement at or prior to the Closing Date, and DLB shall
have received a certificate signed by the chief executive officer of CHK and
Merger Sub to such effect; and (iii) if prior to the Effective Time, Notice of
Demand (as defined in the Registration Rights Agreement) has been timely given,
CHK shall have taken all steps necessary or appropriate to assure that a
registration statement relating to the shares of CHK Common Stock in respect of
which such Notice of Demand is given is declared effective by the SEC promptly
after the Effective Time.
The obligation of CHK to effect the Merger is subject to the satisfaction
or waiver (in whole or in part) by CHK and Merger Sub of the following
additional conditions: (i) the representations and warranties of DLB set forth
in the Merger Agreement shall be true and correct in all material respects as of
the Closing Date as though made on and as of that time (unless such
representation or warranty specifies that it is given as of or with respect to a
specific date), and CHK shall have received a certificate signed by the chief
executive officer of DLB and Merger Sub to such effect; (ii) the affiliate
agreements referred to in the Merger Agreement (see "-- Restrictions on Resales
by Affiliates"), and the Goodwill Protection Agreements shall have been
delivered to CHK; (iii) DLB shall have performed in all material respects all
covenants and agreements required to be performed by it under the Merger
Agreement at or prior to the Closing Date and CHK shall have received a
certificate signed by the chief executive officer of DLB to such effect; (iv)
each outstanding DLB stock option shall have been either exercised or canceled;
(v) Bayard shall have completed an initial public offering of Bayard Common
Stock and be subject to Sections 13 or 15(d) of the Exchange Act; (vi) DLB shall
have received payment in full of all outstanding accounts receivable, notes
receivable and other loans and advances owed to DLB by, or due from, WRT or
Bayard; (vii) DLB shall have provided notice to Texaco, Inc. or its appropriate
subsidiary of the transactions contemplated the Merger Agreement to the extent
required in accordance with the terms of that certain Purchase, Sale and
Cooperation Agreement by and between Texaco Exploration and Production, Inc. and
DLB; (viii) the number of shares held by dissenting shareholders shall not
exceed five percent of the total number of shares of DLB Common Stock
outstanding on the date of the Merger Agreement; and (ix) the severance
obligations of DLB to the employees listed in the Merger Agreement, and the
schedules thereto, shall have been paid.
ACCOUNTING TREATMENT
The Merger will be treated for accounting purposes in accordance with the
rules for purchase accounting. Accordingly, the assets and liabilities of DLB
will be recorded on CHK's books at their estimated fair market values with the
remaining purchase price reflected as an addition to oil and gas properties. See
the "Notes to Unaudited Pro Forma Combined Financial Statements" included
elsewhere in this Information Statement/ Prospectus.
EFFECT ON DLB EMPLOYEE BENEFIT PLANS AND EMPLOYEE AGREEMENTS
Benefit Maintenance. The Merger Agreement provides that from and after the
Effective Time of the Merger, CHK or the Surviving Corporation will, on an
at-will basis, provide those employees that are retained (the "Retained
Employees") with benefits substantially comparable in the aggregate, in CHK's
good faith judgment, to those provided to similarly situated employees of CHK
and (b) CHK will make available to WRT the services of each of the employees of
DLB and each of its subsidiaries (excluding WRT) (the "DLB Companies") specified
in the Merger Agreement and the schedules thereto for up to 10 hours per week
for a six-month period after the Closing Date (provided that WRT will reimburse
CHK for the time such persons spend on WRT business at rates to be mutually
agreed upon), in each case to the extent such persons accept CHK's or Surviving
Corporation's employment offer and are then employed by CHK or one of its
subsidiaries; provided, however, that in CHK's discretion, CHK may continue one
or more of the DLB Employee Benefit
56
63
Plans (as defined in the Merger Agreement) for the Retained Employees for such
period as it may choose, in lieu of providing participation in a similar plan of
CHK and such DLB Employee Benefit Plan will be deemed comparable to CHK's
similar plan.
Service Credit. Retained Employees will be credited for their service with
the DLB Companies, and their respective predecessor entities, for purposes of
eligibility and vesting (but not the accrual of benefits) in the employee plans
provided by CHK to the Retained Employees. Only if available to CHK at a cost
determined to be reasonable, in CHK's sole judgment, will the Retained
Employees' benefits under CHK's medical benefit plan not be subject to any
exclusions for any preexisting conditions. Credit will be received under the CHK
medical benefit plan for any deductibles or out-of-pocket amounts previously
paid by the Retained Employees during the 1997 coverage year. CHK will, or will
cause the Surviving Corporation to, fulfill all coverage continuation
obligations imposed by Section 4980B of the Code and Section 601 of ERISA for
those employees of the DLB Companies who are not Retained Employees.
Indemnification and Insurance. Prior to the Effective Time, DLB will take
such action(s) as may be necessary to cause the director and officer liability
insurance coverage currently maintained by DLB to continue in effect for a
period of not less than three years following the Effective Time (provided that
CHK may substitute therefor policies of at least the same coverage containing
terms and conditions which are no less advantageous to such former DLB officers
and directors) with respect to claims arising from facts or events that occurred
prior to the Effective Time; provided, however, that no more than $100,000 must
be spent by DLB on such coverage. From and after the Effective Time, CHK has
agreed to, for a period of six years, indemnify and hold harmless each person
who is, has been at any time prior to the date hereof, or becomes prior to the
Effective Time, an officer or director of any of the DLB Companies
(collectively, the "Indemnified Parties") to the extent permitted by applicable
law against all losses, claims, damages, liabilities, costs or expenses
(including attorneys' fees), judgments and amounts paid in settlement in
connection with any claim, action, suit, proceeding or investigation arising out
of or pertaining to acts or omissions, or alleged acts or omissions, by him in
his capacity as an officer or director of any of the DLB Companies, which acts
or omissions occurred prior to the Effective Time. Notwithstanding the
foregoing, CHK, as permitted by law, shall periodically advance expenses as
incurred with respect to any claim or potential claim; provided that the person
to whom expenses are advanced, if required by applicable law, provides an
undertaking to repay such advances if it is ultimately determined by a court of
competent jurisdiction that such person is not entitled to indemnification. The
provisions summarized in this subsection "Indemnification and Insurance" are
intended to be for the benefit of, and shall be enforceable by, the parties
thereto and each Indemnified Party and their respective heirs and
representatives.
DLB STOCK OPTIONS
Each outstanding DLB stock option shall be either exercised and exchanged
for shares of DLB Common Stock prior to the Effective Time or canceled in
accordance with its terms or with the agreement of the holder prior to the
Effective Time. Except as otherwise agreed to by the parties, (i) the provisions
in any plan, program or arrangement providing for the issuance or grant of any
interest in respect of the capital stock of DLB or any of the DLB Companies
shall be canceled as of the Effective Time, and (ii) DLB shall take all action
necessary to ensure that following the Effective Time no participant in any DLB
Employee Benefit Plan or other plans, programs or arrangements shall have any
right thereunder to acquire equity securities of DLB, the Surviving Corporation
or any subsidiary thereof and to terminate all such plans. CHK and Merger Sub
agree that prior to the Effective Time DLB may amend its existing stock option
plans or stock option agreements in respect of the options to purchase DLB
Common Stock outstanding on the date of the Merger Agreement to provide that the
optionee shall have the right (notwithstanding any delayed vesting or
exercisability provisions), exercisable at any time at the optionee's election
prior to the Effective Time, to effect a "cashless" exercise of such optionee's
option(s).
RESTRICTIONS ON RESALES BY AFFILIATES
CHK has registered under the Securities Act the shares of CHK Common Stock
that the shareholders of DLB will be entitled to receive upon consummation of
the Merger. Those DLB shareholders who are not
57
64
deemed to be "affiliates" of DLB may freely sell the shares of CHK Common Stock
they receive in the Merger, without additional registration under the Securities
Act or an exemption from the registration requirements thereunder (including
Rule 145 promulgated under the Securities Act). Shareholders of DLB who are
deemed to be "affiliates", as defined in the Merger Agreement with reference to
Annex C thereto, of DLB may resell the shares of CHK Common Stock received in
the Merger in transactions in compliance with Rule 145 under the Securities Act,
pursuant to an effective registration statement under the Securities Act or in
transactions exempt from registration, and may not use this Information
Statement/Prospectus to effect resales of the shares of CHK Common Stock that
they receive.
Rule 145, as currently in effect, imposes restrictions on the manner in
which such affiliates of DLB may make resales and also on the volume of resales
that such affiliates, and others with whom they may act in concert, may make in
any three-month period. The term "affiliates" as defined in the Securities Act
includes any person who, directly or indirectly, controls, is controlled by, or
is under common control with, DLB at the time the Merger is submitted to a vote
of the shareholders of DLB. Certain executive officers and directors of DLB will
be deemed "affiliates" of DLB for purposes of the Securities Act, each of whom
has, pursuant to the Merger Agreement, agreed to use commercially reasonable
efforts to cause each such person to have delivered an affiliate's agreement to
CHK on or prior to the Effective Time of the Merger in the form to be approved
by the parties to the Merger Agreement.
REGISTRATION RIGHTS AGREEMENT
As a covenant to the Merger Agreement, CHK has entered into a Registration
Rights Agreement with Mr. Charles E. Davidson, as amended by Amendment No. 1
thereto dated as of December 22, 1997 (as so amended, the "Registration Rights
Agreement"). Pursuant to the Registration Rights Agreement, Mr. Davidson may, at
any time during the period that commences 60 days prior to the Effective Time
and continues until 5:00 p.m. on the day immediately preceding the Closing Date,
demand registration of not less than 200,000 shares of common stock received
pursuant to the terms of the Merger. CHK has agreed to use commercially
reasonable efforts to effect such registration at the earliest possible date and
cause such registration to be effective promptly after the Effective Date
(subject to limits described in the Registration Rights Agreement). Mr. Davidson
has given notice to CHK of his demand that CHK register all shares of CHK Common
Stock Mr. Davidson is to receive in the Merger.
In addition, if CHK at any time proposes to register any of its equity
securities under the Securities Act (subject to limitations in the Registration
Rights Agreement) on a form and in a manner that would permit registration of
the Mr. Davidson's shares, Mr. Davidson will have the right to request that CHK
register any shares owned by Mr. Davidson which he requests be registered (the
"Piggyback Registration Right"). Mr. Davidson's Piggyback Registration Right is
subject to limitations referred to in the Registration Rights Agreement,
including the priority of the shares to be sold by CHK in such registration if
the underwriters in any offering inform CHK that the amount of shares that can
be sold in such offering is less than the amount of shares to be registered by
CHK and requested to be registered by Mr. Davidson. In such case, CHK's shares
have priority and Mr. Davidson's shares will be included along with all other
shares to be registered by other shareholders exercising similar piggyback
registration rights on a pro rata basis.
In addition to the provisions mentioned above, the Registration Rights
Agreement includes provisions on the registration terms and procedures to be
followed, the indemnification of CHK by Mr. Davidson, or vice versa, and
contribution with regards to any loss incurred by either party pursuant to
action taken under the Registration Rights Agreement, notices of claims, and the
payment of fees and expenses associated with registration.
GOODWILL PROTECTION AGREEMENT
Concurrently with the closing of the Merger, CHK will enter into a Goodwill
Protection Agreement with Charles E. Davidson, Mike Liddell and Mark Liddell as
the majority owners of DLB Common Stock. Such agreement will prohibit Messrs.
Davidson, Mark Liddell and Mike Liddell from directly or indirectly owning,
acquiring or soliciting the acquisition of, or conducting any oil and gas
business or developing any oil or gas interests with respect to any land in
Dewey, Major, Woods or Woodward County, Oklahoma.
58
65
CONDUCT OF BUSINESS OF DLB PRIOR TO THE MERGER
DLB has covenanted and agreed that, from the date of the Merger Agreement
to the Effective Time of the Merger, each of the DLB Companies will conduct its
business only in the ordinary course consistent with past practices.
Notwithstanding the foregoing, DLB covenants and agrees with CHK that, except as
expressly contemplated by the Merger Agreement from the date of the Merger
Agreement to the Effective Time, without the prior written consent of CHK: (a)
none of the DLB Companies will (i) amend its certificate or articles of
incorporation, by-laws or other organizational documents; (ii) split, combine or
reclassify any of its outstanding capital stock; (iii) declare, set aside or pay
any dividends or other distributions (whether payable in cash, property or
securities) with respect to its capital stock other than in connection with the
WRT Spin-Off; (iv) issue, sell or agree to issue or sell any securities,
including its capital stock, any rights, options or warrants to acquire its
capital stock, or securities convertible into or exchangeable or exercisable for
its capital stock (other than shares of DLB Common Stock issued pursuant to the
exercise of any DLB stock option); (v) purchase, cancel, retire, redeem or
otherwise acquire any of its outstanding capital stock or other securities; (vi)
merge or consolidate with, or transfer all or substantially all of its assets
to, another corporation or other business entity; (vii) liquidate, windup or
dissolve (or suffer any liquidation or dissolution); (viii) enter into any
contract, agreement, commitment or arrangement with respect to any of the
foregoing; (ix) acquire any corporation, partnership or other business entity or
any interest therein (other than interests in joint ventures, joint operation or
ownership arrangements or tax partnerships related to oil and gas exploration
and development, acquired in the ordinary course of business); (x) except as
required by or contemplated by the 1997 credit facility entered into by DLB and
the Chase Manhattan Bank as agent for itself and The Bank of Oklahoma, N.A. (the
"Credit Facilities"), sell, lease or sublease, transfer or otherwise dispose of
or mortgage, pledge or otherwise encumber any assets except in the ordinary
course of business and consistent with past practices; (xi) sell, transfer or
otherwise dispose of or mortgage, pledge or otherwise encumber any securities of
any other Person (other than the contribution of the capital stock of DLB
International, Inc. to WRT); (xii) except as specifically set forth in the
Merger Agreement and the schedules thereto, make any loans, advances or capital
contributions to, or investments in, or incur expenses on behalf of any Person
(other than loans, advances or contributions to a DLB Company excluding any
shares of Bayard or WRT Common Stock held by any DLB Company, and loans or
advances in the ordinary course of business and consistent with past practices,
excluding loans or advances to WRT or Bayard); (xiii) pay, discharge or satisfy
any claim, liability or obligation other than in the ordinary course of business
and consistent with past practice; (xiv) enter into any DLB Material Agreement
or any other agreement not terminable by any of the DLB Companies upon notice of
30 days or less and without penalty or other obligation (other than hydrocarbon
agreements entered into in the ordinary course of business and consistent with
past practices) or amend any DLB Material Agreement (as defined in the Merger
Agreement); (xv) enter into any contract, agreement, commitment or arrangement
with respect to any of the foregoing; provided that, notwithstanding anything in
this section to the contrary, DLB may sell, contribute or assign to WRT or any
other Person for consideration or without consideration, the WRT Claims Interest
(as defined in the Merger Agreement); (xvi) except to the extent required to
fund the obligations specified in the Merger Agreement, incur any indebtedness
for borrowed money or incur any other obligation or liability (other than
liabilities incurred in the ordinary course of business and consistent with past
practices, but in no event shall such liabilities exceed $50,000, individually
or in the aggregate); (xvii) assume, endorse (other than endorsements of
negotiable instruments in the ordinary course of business), guarantee or
otherwise become liable or responsible (whether directly, contingently or
otherwise) for the liabilities or obligations of any Person (other than
guarantees of indebtedness of a DLB Company excluding any shares of Bayard or
WRT Common Stock held by any DLB Company); or (xviii) enter into any contract,
agreement, commitment or arrangement with respect to any of the foregoing; (b)
the DLB Companies will operate, maintain and otherwise deal with the Oil and Gas
Properties of DLB in accordance with good and prudent oil and gas field
practices and in accordance with all applicable oil and gas leases and other
contracts or agreements and all applicable laws, rules and regulations; (c) none
of the DLB Companies shall resign, transfer or otherwise voluntarily relinquish
any right it has as of the date of the Merger Agreement, as operator of any oil
and gas interest of DLB; (d) none of the DLB Companies will (i) enter into, or
otherwise become liable or obligated under or pursuant to, (A) any employee
benefit, pension or other plan (whether or not subject to ERISA), (B) except to
the extent specifically
59
66
contemplated in the Merger Agreement, any other stock option, stock purchase,
incentive or deferred compensation plans or arrangements or other fringe benefit
plan, or (C) any consulting, employment, severance, termination or similar
agreement with any Person, or amend or extend any such plan, arrangement or
agreement other than as contemplated in the Merger Agreement, accelerating the
vesting of outstanding employee stock options or amending to cancel such options
at or prior to the Effective Time; provided, however, that DLB may amend its
"stay on" bonus plan so long as the maximum aggregate liability payable under
such plan does not exceed $682,500; (ii) except for payments made pursuant to
any DLB Employee Benefit Plan or any plan, agreement or arrangement described in
the Disclosure Schedule, grant, or otherwise become liable for or obligated to
pay, any severance or termination payments, bonuses or increases in compensation
or benefits (other than payments, bonuses or increases that are mandated by the
terms of agreements existing as of the date of the Merger Agreement or that are
paid in the ordinary course of business, consistent with past practices, and not
individually or in the aggregate material in amount) to, or forgive any
indebtedness of, any employee or consultant; or (iii) enter into any contract,
agreement, commitment or arrangement to do any of the foregoing; (e) the DLB
Companies will keep and maintain books, records and accounts in accordance with
good accounting practice and generally accepted accounting principles, as
recognized by the Financial Accounting Standards Board (or any generally
recognized successor) ("GAAP"); (f) none of the DLB Companies will create,
incur, assume or permit to exist any Lien on any of its assets, except for
Permitted Encumbrances, as defined in the Merger Agreement; (g) the DLB
Companies will (i) pay all Taxes, assessments and other governmental charges
imposed upon any of their assets or with respect to their franchises, business,
income or assets before any penalty or interest accrues thereon; (ii) pay all
claims (including claims for labor, services, materials and supplies) that have
become due and payable and which by law have or may become a Lien upon any of
their assets prior to the time when any penalty or fine shall be incurred with
respect thereto or any such Lien shall be imposed thereon; and (iii) comply in
all material respects with the requirements of all applicable laws, rules,
regulations and orders of any governmental authority, obtain or take all
governmental actions necessary in the operation of their businesses, and comply
with and enforce the provisions of all DLB Material Agreements, including paying
when due all rentals, royalties, expenses and other liabilities relating to
their businesses or assets; provided, however, the DLB Companies may incur
obligations for penalties and interest in connection with gross production tax
reporting in the ordinary course of business; and provided further, that the DLB
Companies may contest the imposition of any such Taxes, assessments and other
governmental charges, any such claim, or the requirements of any applicable law,
rule, regulation or order or any DLB Material Agreement if done so in good faith
by appropriate proceedings and if adequate reserves are established in
accordance with GAAP and as may be determined as sufficient by DLB's Board; (h)
none of the DLB Companies will settle or compromise any pending or threatened
suit, action or claim which is material or which relates to any of the
transactions contemplated in the Merger Agreement; (i) none of the DLB Companies
will undertake any expenditure in an amount greater than $50,000 individually or
in the aggregate (other than as specifically set forth in the Merger Agreement)
without the prior written approval of CHK; (j) prior to November 5, 1997, DLB
shall either have (i) committed to drill a well on the Whetstone/Sheridan
prospect or (ii) farmed out such prospect to CHK and retained no overriding
royalty interest in connection with such farmout and received from CHK no
compensation therefor; (k) the DLB Companies will maintain in full force and
effect the policies or binders of insurance described in the Merger Agreement;
and (l) the DLB Companies will at all times preserve and keep in full force and
effect their corporate existence and rights and franchises material to their
performance under the Merger Agreement. The DLB Companies will preserve
substantially intact the business organization of the DLB Companies, keep
available the services of the current officers, employees and consultants of the
DLB Companies and preserve the goodwill of those current relationships of the
DLB Companies with customers, suppliers and other persons with which any of the
DLB Companies has significant business relations.
CONDUCT OF BUSINESS OF CHK PRIOR TO THE MERGER
CHK has covenanted and agreed that, from the date of the Merger Agreement
to the Effective Time, CHK will conduct its business in the ordinary course
consistent with past practices and shall use its reasonable best efforts to
preserve intact its business organizations and relationships with third parties.
Without limiting
60
67
the generality of the foregoing, and except as expressly disclosed in the Merger
Agreement and the schedules thereto, from the date of the Merger Agreement until
the Effective Time (a) CHK will not (i) declare, set aside or pay any dividends
or other distributions (whether payable in cash, property or securities) with
respect to its capital stock other than a regular quarterly dividend not in
excess of $0.05 per share per quarter; (ii) merge or consolidate with, or
transfer all or substantially all of its assets to, another corporation or other
business entity; (iii) liquidate, wind-up or dissolve (or suffer any liquidation
or dissolution); or (iv) enter into any contract, agreement, commitment or
arrangement with respect to any of the foregoing; (b) CHK will not adopt or
propose any material change in its certificate of incorporation or bylaws; and
(c) CHK will not, and will not permit any of its subsidiaries to take any action
that would make any representation and warranty of CHK and Merger Sub under the
Merger Agreement inaccurate in any respect at, or as of any time prior to, the
Effective Time.
NO SOLICITATION OF ACQUISITION TRANSACTIONS
No Solicitation by DLB. On October 22, 1997, DLB (and all DLB
Representatives (as defined in the Merger Agreement)) terminated all and any
existing activities, discussions and negotiations with third parties (other than
CHK and Merger Sub) with respect to any possible transaction involving the
acquisition of the DLB Common Stock or the merger or other business combination
of DLB with or into any such third party and complied with all obligations in
this section. DLB has agreed to not (and has agreed to cause the DLB
Representatives not to) directly or indirectly, solicit, initiate, encourage or
otherwise facilitate (including by way of furnishing information) any inquiries
or the submission of, any offer or the making of any proposal to acquire all or
any part of the DLB Common Stock or all or any material portion of the assets or
business of DLB or any other transaction, the consummation of which would or
could reasonably be expected to impede, interfere with, prevent or materially
delay the consummation of the Merger or which would or could reasonably be
expected to materially dilute the benefits to CHK of the transactions
contemplated in the Merger Agreement (other than the transactions specifically
contemplated therein), whether by merger, purchase of assets, tender offer,
exchange offer or otherwise (an "Alternative Proposal"). DLB further agreed that
neither it nor any DLB Company will, and that it will cause each DLB
Representative not to, directly or indirectly, have any discussion with or
provide any confidential information or data to any Person relating to an
Alternative Proposal or engage in any negotiations concerning an Alternative
Proposal, or otherwise facilitate any effort or attempt to make or implement an
Alternative Proposal or accept an Alternative Proposal; provided, however, that
nothing contained in the Merger Agreement shall prevent DLB or DLB's Board from
(i) complying with Rule 14e-2 promulgated under the Exchange Act with regard to
an Alternative Proposal; (ii) engaging in any discussions or negotiations with,
or providing any information to, any Person in response to an unsolicited bona
fide written Alternative Proposal by any such Person; or (iii) recommending such
an unsolicited bona fide written Alternative Proposal to the holders of DLB
Common Stock if and only to the extent that, in any such case as is referred to
in clause (ii), (A) DLB's Board concludes in good faith (after consultation with
its legal counsel and financial advisors) that such Alternative Proposal is
reasonably capable of being completed, taking into account all legal, financial,
regulatory and other aspects of the Alternative Proposal and the Person making
the Alternative Proposal, and would, if consummated, result in a transaction
more favorable to holders of DLB Common Stock than the transaction contemplated
by the Merger Agreement (any such more favorable Alternative Proposal being
hereinafter referred to as a "Superior Proposal"), (B) DLB's Board determines in
good faith after consultation with legal counsel that such action is necessary
for it to act in a manner consistent with its fiduciary duties under applicable
law, (C) prior to providing any information or data to any Person pursuant to
clause (ii) or (iii) above in connection with a Superior Proposal by any such
Person, DLB's Board receives from such Person an executed confidentiality
agreement on terms substantially similar to those contained in the
Confidentiality Agreement referred to in the Merger Agreement and (D) prior to
providing any information or data to any Person or entering into discussions or
negotiations with any Person, DLB's Board notifies CHK promptly of such
inquiries, proposals or offers received by, any such information requested from,
or any such discussions or negotiations sought to be initiated or continued with
DLB, any DLB Company or any of the DLB Representatives indicating, in connection
with such notice, the name of such Person and the terms and conditions of any
proposals or offers and the status of any actions, including any discussions,
taken pursuant to such Alternative Proposal. DLB
61
68
agreed that it shall continue to keep CHK informed, on a current basis, of the
status and terms of any such proposals or offers and the status of any such
discussions or negotiations. DLB agreed that it would immediately cease and
cause to be terminated any existing activities, discussions or negotiations with
any parties conducted heretofore with respect to any Alternative Proposal.
TERMINATION
The Merger Agreement may be terminated and the Merger may be abandoned at
any time prior to the Effective Time of the Merger Agreement, whether before or
after approval by the shareholders of DLB and CHK (i) by mutual written consent
of CHK, Merger Sub and DLB; (ii) by either CHK or DLB if the Merger shall not
have been consummated on or before May 31, 1998, (provided that such right will
not be available to any party whose breach of any representation or warranty or
failure to perform any covenant or agreement under the Merger Agreement has been
the cause of, or resulted in the failure of the Merger to occur on or before
such date); (iii) by DLB or CHK if any governmental authority shall have issued
an order, decree or ruling or taken any other action permanently restraining,
enjoining or otherwise prohibiting the Merger and such order, decree, ruling or
other action shall have become final and nonappealable (the party seeking to
terminate the Merger Agreement pursuant to this clause must use all commercially
reasonable efforts to remove such injunction, order or decree); (iv) by DLB or
CHK if the shareholder approvals referred to in the Merger Agreement shall not
have been obtained by reason of the failure to obtain the requisite vote upon a
vote at a duly held meeting of DLB shareholders or at any adjournment or
postponement thereof; (v) by CHK if there has been a breach of the
representations and warranties made by DLB in the Merger Agreement (provided,
however, that CHK has provided notice to DLB, given requisite opportunity to
cure and all other requirements in the Merger Agreement are satisfied); (vi) by
CHK if DLB has failed to comply in any material respect with any of its
covenants or agreements contained in the Merger Agreement and such failure has
not been, or cannot be, cured within a reasonable time after notice and demand
for cure thereof; (vii) by DLB if as a result of a Superior Proposal received by
DLB from a Person other than a party to the Merger Agreement or any of its
Affiliates, DLB's Board determines in good faith that their fiduciary
obligations under applicable law require that such Superior Proposal be
accepted; provided, however, that the conditions specified in the Merger
Agreement have been satisfied; (viii) by DLB if CHK shall have breached any of
its representations, warranties or covenants under the Merger Agreement which
breach shall have caused a reasonable likelihood that CHK will not be able to
consummate the Merger (provided, however, that DLB has given CHK notice, given
requisite opportunity to cure, and all other requirements in the Merger
Agreements are satisfied); (ix) by CHK if the DLB Board accepts a Superior
Proposal in accordance with the terms of the Merger Agreement; (x) by CHK if the
DLB Board shall have withdrawn or modified in a manner adverse to CHK its
approval or recommendation of the Merger Agreement or the Merger, or, upon
request by CHK, shall fail to reaffirm such approval or recommendation; (xi) by
CHK if the DLB Board shall have resolved to take any of the actions in (ix) or
(x); or (xii) by DLB or CHK, as the case may be, as otherwise in accordance with
the terms of the Merger Agreement.
If the Merger Agreement is terminated by either DLB or CHK pursuant to the
foregoing provisions, the Merger Agreement will become void, and there will be
no further obligation on the part of any party thereto or its respective
Affiliates, directors, officers, or shareholders except as specifically
expressed in the Merger Agreement; provided, however, that a termination of the
Merger Agreement will not relieve any party to the Merger Agreement from any
liability for damages incurred as a result of a breach by such party of its
covenants, agreements or other obligations under the Merger Agreement occurring
prior to such termination. Prior to Closing, the sole and exclusive remedy of
any party to the Merger Agreement with respect to a breach of a representation
or warranty contained therein shall be the right to terminate the Merger
Agreement in accordance with and subject to the provisions of the Merger
Agreement; provided, however, that a termination of the Merger Agreement shall
not relieve any party from any liability for damages incurred as a result of a
breach by such party of its covenants under the Merger Agreement occurring prior
to such termination. Each of CHK, Merger Sub and DLB have covenanted never to
institute, directly or indirectly, any action or proceeding of any kind against
the other based on or arising out of, or in any manner related to, the breach of
a representation or warranty contained, in the Merger Agreement if the Merger
Agreement is terminated pursuant to the foregoing paragraph.
62
69
TERMINATION FEES; EXPENSES
Except as set forth in paragraphs (a) and (b) below, all expenses incurred
in connection with the Merger Agreement shall be paid by the party incurring
such expenses, whether or not the Merger is consummated, except that CHK and DLB
each shall pay one-half of all Expenses (as defined below) relating to printing,
filing and mailing the Registration Statement and the Information
Statement/Prospectus and all SEC and other regulatory filing fees incurred in
connection with the Registration Statement and the Information
Statement/Prospectus. "Expenses" as used in this section shall include all
reasonable out-of-pocket expenses (including all fees and expenses of counsel,
accountants, investment bankers, experts and consultants to any party to the
Merger Agreement and its affiliates) incurred by a party or on its behalf in
connection with or related to the authorization, preparation, negotiation,
execution and performance of the Merger Agreement, the preparation, printing,
filing and mailing of the Registration Statement and the Information
Statement/Prospectus, the solicitation of shareholder approvals and all other
matters related to the closing of the Merger.
(a) CHK and DLB have agreed that
(i) if DLB or CHK shall terminate the Merger Agreement pursuant to
a Superior Proposal (subject to lien actions expressed in the Merger
Agreement), or
(ii) if (A) DLB or CHK terminate the Merger Agreement due to the
failure of DLB's shareholders to approve and adopt the Merger Agreement,
the Merger and the transactions contemplated thereby, and (B) at the
time of such failure to so approve and adopt the Merger Agreement, the
Merger and the transactions contemplated thereby, there shall exist an
Alternative Proposal with respect to DLB and, within 12 months of the
termination of the Merger Agreement, DLB enters into a definitive
agreement with any third party with respect to an Alternative Proposal
with respect to DLB, then DLB shall pay to CHK an amount equal to
$5,000,000 (the "DLB Termination Fee").
(b) The DLB Termination Fee required to be paid pursuant to (a)(i)
above will be paid prior to, and will be a pre-condition to effectiveness
of termination of the Merger Agreement and the DLB Termination Fee to be
paid pursuant to (a)(ii) above will be paid to CHK on the next business day
after a definitive agreement is entered into with a third party with
respect to an Alternate Proposal with respect to DLB. Any payment of a DLB
Termination Fee otherwise required to be made pursuant to the Merger
Agreement shall be made not later than two Business Days after termination
of the Merger Agreement. All payments under the Merger Agreement shall be
made by wire transfer of immediately available funds.
AMENDMENT AND WAIVER
The Merger Agreement may be amended by the parties thereto at any time
before or after approval of the DLB Proposal by the shareholders of DLB;
provided, however, that after any such approval, no amendment shall be made that
by law requires further approval by such shareholders without such further
approval. The Merger Agreement may not be amended except by a written instrument
signed on behalf of each of the parties thereto.
At any time prior to the Effective Time, the parties to the Merger
Agreement may, to the extent legally allowed, (a) extend the time for the
performance of any of the obligations or other acts of the other parties to the
Merger Agreement, (b) waive any inaccuracies in the representations and
warranties contained in the Merger Agreement or in any document delivered
pursuant thereto, and (c) waive performance of any of the covenants or
agreements, or satisfaction of any of the conditions, contained therein. Any
agreement on the part of a party to the Merger Agreement to any such extension
or waiver must be in writing. Except as provided in the Merger Agreement, no
action taken pursuant to the Merger Agreement, including any investigation by or
on behalf of any party, shall be deemed to constitute a waiver by the party
taking such action of compliance with any representations, warranties, covenants
or agreements contained in the Merger Agreement. The
63
70
waiver by any party thereto of a breach of any provision thereof shall not
operate or be construed as a waiver of any prior or subsequent similar breach.
REPRESENTATIONS AND WARRANTIES
The Merger Agreement contains customary representations and warranties of
CHK and DLB relating to, among other things, (a) organization, good standing.
qualification to do business and other corporate matters, (b) capitalization,
(c) the authorization, execution, delivery and enforceability of the Merger
Agreement, the actions taken by the CHK and DLB Board of Directors with respect
thereto and related matters, (d) the absence of certain changes or events since
June 30, 1997, (e) reports filed by each company with the Commission and the
financial statements included therein, (f) information supplied by each company
for inclusion in the registration statement of which this Information
Statement/Prospectus is a part, (g) required consents and approvals, (h)
brokers, (i) employee benefit matters, (j) the absence of certain litigation,
(k) tax matters, (l) environmental compliance, (m) ownership of shares and (n)
the receipt by DLB of the opinion discussed above under "Description of
Merger -- Opinion of Lehman Brothers."
SECURITY OWNERSHIP
OF DIRECTORS, OFFICERS AND CERTAIN BENEFICIAL OWNERS
CHK. The table below sets forth as of March 25, 1998 (i) the name and
address of each person beneficially owning 5% or more of outstanding CHK Common
Stock, the number of shares beneficially owned by each such shareholder and the
percentage of outstanding shares owned and (ii) the number and percentage of
outstanding shares of CHK Common Stock beneficially owned by each of the
directors and executive officers and by all directors and executive officers of
CHK as a group. Unless otherwise noted, the persons named below have sole voting
and investment power with respect to such shares.
CHK
COMMON STOCK
----------------------------
NUMBER OF PERCENT OF
BENEFICIAL OWNER SHARES CLASS
---------------- ---------- ----------
Tom L. Ward*+............................................. 11,330,635(a)(b) 11%
6100 North Western Avenue
Oklahoma City, OK 73118
Aubrey K. McClendon*+..................................... 11,069,331(b)(c) 11%
6100 North Western Avenue
Oklahoma City, OK 73118
Pilgrim Baxter & Associates............................... 6,083,008(d) 6%
1255 Drummers Lane
Wayne, PA 19087-1590
Floyd C. Wilson........................................... 5,320,827(e) 5%
8400 Killarney
Wichita, Kansas 67206
Shannon T. Self*.......................................... 2,735,748(f) 3%
E. F. Heizer, Jr.*........................................ 1,058,150(g) 1%
Frederick B. Whittemore*.................................. 859,550(h) **
Steven C. Dixon+.......................................... 428,072(b)(i) **
Walter C. Wilson*......................................... 251,750(j) **
Breene M. Kerr*........................................... 204,500(k) **
J. Mark Lester+........................................... 113,849(b)(l) **
Marcus C. Rowland+........................................ 99,585(b) **
Henry J. Hood+............................................ 24,756(b)(m) **
All directors and executive officers as a group........... 28,215,486(n) 27%
64
71
- ---------------
* Director
+ Executive officer of CHK
** Less than 1%
(a) Includes 1,846,860 shares held by TLW Investments, Inc., an Oklahoma
corporation of which Mr. Ward is sole shareholder and chief executive
officer, and 909,000 shares which may be acquired pursuant to currently
exercisable stock options granted by CHK.
(b) Includes shares purchased on behalf of the executive officer in the
Chesapeake Energy Corporation Savings and Incentive Stock Bonus Plan (Tom
L. Ward, 3,585 shares; Aubrey K. McClendon, 1,639 shares; Steven C. Dixon,
950 shares; Marcus C. Rowland, 979 shares; J. Mark Lester, 1,081 shares and
Henry J. Hood, 1,187 shares).
(c) Includes 508,560 shares held by Chesapeake Investments, an Oklahoma limited
partnership of which Mr. McClendon is sole general partner, and 594,000
shares which may be acquired pursuant to currently exercisable stock
options granted by CHK.
(d) Based on information provided in the January 31, 1998 Schedule 13G as filed
with the SEC.
(e) Based on information provided in the March 18, 1998 Schedule 13D as filed
with the SEC.
(f) Includes 2,382 shares held by Pearson Street Limited Partnership, an
Oklahoma limited partnership of which Mr. Self is a general partner and the
remaining partners are members of Mr. Self's immediate family sharing the
same household; 1,098,600 shares held by Mr. Self as trustee of the Aubrey
K. McClendon Children's Trust, 1,209,100 shares held by Mr. Self as trustee
of the Tom L. Ward Children's Trust and 425,666 shares which Mr. Self has
the right to acquire pursuant to currently exercisable stock options
granted by CHK.
(g) Includes 348,500 shares subject to currently exercisable stock options
granted to Mr. Heizer by CHK.
(h) Includes 41,700 shares held by Mr. Whittemore as trustee of the Whittemore
Foundation and 377,750 shares subject to currently exercisable stock
options granted to Mr. Whittemore by CHK.
(i) Includes 326,767 shares subject to currently exercisable stock options
granted to Mr. Dixon by CHK.
(j) Includes 251,750 shares subject to currently exercisable stock options
granted to Mr. Wilson by CHK.
(k) Includes 31,250 shares subject to currently exercisable stock options
granted to Mr. Kerr by CHK.
(l) Includes 108,268 shares subject to currently exercisable stock options
granted to Mr. Lester by CHK.
(m) Includes 21,375 shares subject to currently exercisable stock options
granted to Mr. Hood by CHK.
(n) Includes shares subject to options which are currently exercisable.
DLB. The following table sets forth certain information regarding the
beneficial ownership of DLB Common Stock as of March 30, 1998, by (i) each
director of DLB, (ii) each executive officer of DLB whose total annual salary
and bonus for 1996 exceeded $100,000, (iii) each person known or believed by DLB
to own beneficially five percent or more of the DLB Common Stock and (iv) all
directors and executive officers as a group. Unless indicated otherwise, each
person has sole voting and dispositive power with respect to such shares.
BENEFICIAL OWNERSHIP(1)
---------------------------
NAME OF BENEFICIAL OWNER NUMBER OF SHARES PERCENT
------------------------ ---------------- -------
Charles E. Davidson......................................... 7,500,600 57.8%
Mike Liddell................................................ 1,621,900(2) 12.1%
Mark Liddell................................................ 1,605,000(3) 12.1%
Joel-Andre Ornstein......................................... 4,000 *
Martin L. Solomon........................................... 205,000 1.6%
Gary C. Hanna............................................... 27,675(4) *
Ronald D. Youtsey........................................... 22,562(5) *
Rick A. Carlson............................................. 21,312(6) *
All directors and officers as a group (13 persons).......... 11,220,133(7) 82.0%
65
72
- ---------------
* Less than one percent.
(1) Shares of DLB Common Stock that are not outstanding but that can be acquired
by a person upon exercise of an option within 60 days are included in
computing the percentage for such person, but are not included in computing
the percentage for any other person.
(2) Includes options for 325,000 shares, which are presently exercisable;
excludes options not exercisable within 60 days for 325,000 shares.
(3) Includes options for 325,000 shares, which are presently exercisable;
excludes options not exercisable within 60 days for 325,000 shares.
(4) Includes options for 24,375 shares, which are presently exercisable;
excludes options not exercisable within 60 days for 24,375 shares.
(5) Includes options for 20,312 shares, which are presently exercisable;
excludes options not exercisable within 60 days for 20,312 shares.
(6) Includes options for 20,312 shares, which are presently exercisable;
excludes options not exercisable within 60 days for 20,312 shares.
(7) Includes options for 715,000 shares, which are presently exercisable;
excludes options not exercisable within 60 days for 910,000 shares.
The business address of Charles E. Davidson is 411 West Putnam Avenue,
Greenwich, Connecticut 06830. The business address of Mike Liddell and Mark
Liddell is 1601 N.W. Expressway, Suite 700, Oklahoma City, Oklahoma 73118.
DESCRIPTION OF CHK CAPITAL STOCK
The authorized capital stock of CHK consists of 250,000,000 shares of CHK
Common Stock, par value $.01 per share, and 10,000,000 shares of Preferred
Stock, par value of $.01 per share ("Preferred Stock"). As of March 19, 1998,
the issued and outstanding capital stock of CHK (including the shares of CHK
Common Stock issued to former shareholders of Hugoton) consisted of 100,102,270
shares of CHK Common Stock. No shares of Preferred Stock are currently
outstanding. Also, an additional 2,746,685 shares of CHK Common Stock were
reserved for issuance upon the exercise of options granted and which may be
granted under CHK's stock option plans.
On December 31, 1996, CHK changed its state of incorporation from Delaware
to Oklahoma by the merger of Chesapeake Energy Corporation, a Delaware
corporation, with and into its newly formed wholly owned subsidiary, Chesapeake
Oklahoma Corporation. The surviving corporation changed its name to Chesapeake
Energy Corporation. Each outstanding share of CHK Common Stock, par value $.01,
of the merged Delaware corporation was converted into one share of CHK Common
Stock, par value $.01, of the surviving corporation. As a result of the merger,
the surviving corporation succeeded to all of the assets and is responsible for
all of the liabilities of the merged Delaware corporation. On matters of
corporate governance, the rights of CHK's security holders are governed by the
OGCA.
The following description of certain matters relating to the capital stock
of CHK is a summary and is qualified in its entirety by the provisions of CHK's
Certificate of Incorporation (the "Certificate") and Bylaws (the "Bylaws"),
which are incorporated by reference as exhibits to the Registration Statement of
which this Information Statement/Prospectus is a part.
COMMON STOCK
The holders of CHK Common Stock are entitled to one vote per share on all
matters submitted to a vote of shareholders of CHK. In addition, such holders
are entitled to receive ratably such dividends, if any, as may be declared from
time to time by the CHK Board out of funds legally available therefor, subject
to the payment of preferential dividends with respect to any Preferred Stock
that from time to time may be outstanding. In the event of the dissolution,
liquidation or winding-up of CHK, the holders of CHK Common
66
73
Stock are entitled to share ratably in all assets remaining after payment of all
liabilities of CHK and subject to the prior distribution rights of the holders
of any Preferred Stock that may be outstanding at that time. The holders of CHK
Common Stock do not have cumulative voting rights or preemptive or other rights
to acquire or subscribe for additional, unissued or treasury shares. All
outstanding shares of CHK Common Stock are fully paid and nonassessable.
PREFERRED STOCK
CHK has an authorized class of Preferred Stock consisting of 10,000,000
shares, none of which is issued and outstanding. The CHK Board is authorized,
subject to any limitations prescribed by law, without further shareholder
approval, to issue shares of Preferred Stock from time to time in one or more
new series as from time to time designated. Each such series of Preferred Stock
would have such number of shares, designations, preferences, voting powers,
qualifications and special or relative rights or privileges as shall be
determined by the CHK Board, which may include among others, dividend rights,
voting rights, redemption and sinking fund provisions, liquidation preferences
and conversion rights.
While providing desirable flexibility in connection with possible
acquisitions and other corporate purposes, and eliminating delays associated
with a shareholder vote on specific issuance, the issuance of Preferred Stock
could adversely affect the voting power of holders of CHK Common Stock and
decrease the likelihood that such holders of CHK Common Stock will receive
dividend payments and payments upon liquidation, and could have the effect of
delaying, deferring or preventing a change in control of CHK.
ANTI-TAKEOVER PROVISIONS
The Certificate and Bylaws of CHK, and the OGCA include a number of
provisions which may have the effect of encouraging persons considering
unsolicited tender offers or other unilateral takeover proposals to negotiate
with the CHK Board rather than pursue non-negotiated takeover attempts. These
provisions include a classified board of directors, authorized blank check
preferred stock, restrictions on business combinations and certain stock
repurchases, and the availability of authorized but unissued CHK Common Stock.
The CHK Charter opts out of the Oklahoma Control Share Acquisition Act. In
addition, the Oklahoma legislature enacted the Control Share Acquisition Act to
discourage hostile takeover attempts or the acquisition of a potentially
controlling ownership position without the approval of a company's board of
directors.
CLASSIFIED BOARD OF DIRECTORS
CHK's Certificate and Bylaws contain provisions for a staggered board of
directors with only one-third of the board standing for election each year.
Directors can only be removed for cause. A staggered board makes it more
difficult for shareholders to change the majority of the directors and instead
promotes a continuity of existing management.
BLANK CHECK PREFERRED STOCK
The Certificate authorizes blank check Preferred Stock. See "--Preferred
Stock." The Board can set the voting rights, redemption rights, conversion
rights and other rights relating to such Preferred Stock and could issue such
stock in either a private or public transaction. In some circumstances, the
blank check Preferred Stock could be issued and have the effect of preventing a
merger, tender offer or other takeover attempt which the board of directors
opposes.
TAKEOVER STATUTES
Section 1090.3 of the OGCA generally prevents an "interested shareholder"
from engaging in a "business combination" with a corporation for three years
following the date such person became an interested shareholder, unless (i)
prior to the time such person became in interested shareholder, the board of
directors of the corporation approved the transaction in which the interested
shareholder became an interested shareholder or approved the business
combination; (ii) upon consummation of the transaction that resulted in the
interested shareholder becoming an interested shareholder, the interested
shareholder owns at least 85% of
67
74
the voting stock of the corporation outstanding at the time the transaction
commenced, excluding stock held by directors who are also officers of the
corporation and stock held by certain employee stock plans; or (iii) on or
subsequent to the time of the transaction in which such person became an
interested shareholder, the business combination is approved by the board of
directors of the corporation and authorized at a meeting of shareholders by the
affirmative vote of the holders of two-thirds of the outstanding voting stock of
the corporation not owned by the interested shareholder.
The statute defines a "business combination" to include (i) any merger or
consolidation involving the corporation and an interested shareholder, (ii) any
sale, transfer, pledge or other disposition involving an interested shareholder
of 10% or more of the assets of the corporation, (iii) subject to certain
exceptions, any transaction which results in the issuance or transfer by the
corporation of any stock of the corporation to an interested shareholder, (iv)
any transaction involving the corporation which has the effect of increasing the
proportionate share of the stock of any class or series of the corporation
beneficially owned by the interested shareholder, (v) the receipt by an
interested shareholder of any loans, guarantees, pledges or other financial
benefits provided by or through the corporation or (vi) any share acquisition by
the interested shareholder pursuant to Section 1090.1 of the OGCA. For purposes
of Section 1090.3 of the OGCA, the term "corporation" also includes CHK's
majority-owned subsidiaries. In addition, the statutes define an "interested
shareholder" as any entity or person beneficially owning 15% or more of the
outstanding voting stock of the corporation and any entity or person affiliated
with or controlling or controlled by such entity or person.
STOCK PURCHASE PROVISIONS
The Certificate includes a provision which requires the affirmative vote of
two-thirds of the outstanding shares of capital stock entitled to vote generally
in the election of directors held by persons who are not interested shareholders
(as defined) to approve the repurchase of any equity securities of CHK from any
interested shareholder for a price in excess of fair market value, unless such
repurchase is either (i) made on the same terms offered to all holders of the
same securities or (ii) made on the open market and not the result of a
privately negotiated transaction.
SHAREHOLDER ACTION
With respect to any act or action required of or by the holders of the CHK
Common Stock, the affirmative vote of a majority of the shares of CHK Common
Stock present in person or represented by proxy at a meeting and entitled to
vote thereon is sufficient to authorize, affirm, ratify or consent to such act
or actions, except as otherwise provided by law or in the charter of CHK. The
OGCA requires the approval of the holders of a majority of the outstanding stock
entitled to vote for certain extraordinary corporate transactions, such as
merger, sale of substantially all assets, dissolution or amendment of the
Certificate. The Certificate provides for a vote of the holders of two-thirds of
the issued and outstanding stock having voting power, voting as a single class,
to amend, repeal or adopt any provision inconsistent with the provisions of the
Certificate limiting director liability and stock repurchases by CHK, and
providing for staggered terms of directors and indemnity for directors. Such
vote is also required for shareholders to amend, repeal or adopt any provision
of the Bylaws.
Shareholders may take actions without the holding of a meeting by written
consent or consents signed by the holders of a sufficient number of shares to
approve the transaction had all of the outstanding shares of the capital stock
of CHK entitled to vote thereon been present at a meeting.
BAYARD COMMON STOCK
For a description of the Bayard Common Stock see the Bayard Prospectus
which is attached hereto as Annex D.
68
75
SHAREHOLDERS' RIGHTS OF APPRAISAL
Pursuant to Section 1091 of the OGCA ("Section 1091"), any holder of DLB
Common Stock who does not vote in favor of the Merger may dissent from the
Merger and elect to have the fair value of such shareholder's shares of DLB
Common Stock (exclusive of any element of value arising from the accomplishment
or expectation of the Merger) judicially determined and paid to such shareholder
in cash, together with a fair rate of interest. The following discussion is not
a complete statement of the law pertaining to appraisal rights under Oklahoma
law, and is qualified in its entirety by the full text of Section 1091, which is
set forth in its entirety as Annex C to this Information Statement/Prospectus,
and any future amendments thereto.
Any DLB shareholder who wishes to exercise such appraisal rights or who
wishes to preserve the right to do so should review carefully Annex C to this
Information Statement/Prospectus because failure to comply with the procedures
specified in Section 1091 in a proper and timely fashion will result in the loss
of appraisal rights. Moreover, because of the complexity of the procedures for
exercising the right to seek appraisal of the DLB Common Stock, DLB recommends
that DLB shareholders who consider exercising such rights seek the advice of
counsel.
Any holder of record of DLB Common Stock wishing to exercise the right to
dissent from the Merger and demand appraisal under Section 1091 must satisfy
each of the following conditions:
(i) DLB shareholders wishing to dissent from the Merger must deliver
to DLB a written demand for appraisal of such shareholder's shares of the
DLB Common Stock within twenty (20) days after the date of mailing of this
Information Statement. Demand can only be made by the record owner.
Consequently, a beneficial owner who is not a record owner must instruct a
record owner to make appropriate demand on the beneficiary shareholder's
behalf. DLB shareholders should forward demands for appraisal to DLB Oil &
Gas, Inc., 1601 Northwest Expressway, Suite 700, Oklahoma City, Oklahoma
73118-1401, Attention: Secretary. Merely failing to consent to the approval
and adoption of the Merger will not constitute a demand for appraisal
within the meaning of Section 1091.
(ii) DLB shareholders wishing to dissent from the Merger must not
consent to the Merger in writing.
(iii) DLB shareholders wishing to dissent from the Merger must
continuously hold their shares of DLB Common Stock from the date of making
their demand through the Effective Time. Accordingly, a shareholder who is
the record holder of shares of DLB Common Stock on the date the written
demand for appraisal is made but who thereafter transfers such shares prior
to the Effective Time will lose any right to appraisal in respect of such
shares.
A demand for appraisal should be executed by or on behalf of the
shareholder of record, fully and correctly, as such shareholder's name appears
on such shareholder's stock certificates, should specify the shareholder's name
and mailing address, the number of shares of DLB Common Stock owned and that
such shareholder intends thereby to demand appraisal of such shareholder's
stock. However, such demand will be sufficient if it reasonably informs DLB of
the shareholder's identity and intent to demand the appraisal of his shares. Any
person signing a demand for appraisal on behalf of a partnership or corporation
or other entity must indicate that person's title. If the shares are owned of
record in a fiduciary capacity, such as by a trustee, guardian or custodian,
execution of the demand should be made in that capacity, and if the shares of
DLB Common Stock are owned of record by more than one person, as in a joint
tenancy or tenancy in common, the demand should be executed by or on behalf of
all joint owners. An authorized agent, including one or more joint owners, may
execute a demand for appraisal on behalf of a holder of record; however, the
agent must identify the record owner or owners and expressly disclose the fact
that in executing the demand for appraisal, the agent is agent for such owner or
owners. A record holder such as a broker who holds shares of DLB Common Stock as
a nominee for several beneficial owners may exercise appraisal rights with
respect to the shares of DLB Common Stock held for one or more beneficial owners
while not exercising such rights with respect to the shares of DLB Common Stock
held for other beneficial owners; in such case, the written demand should set
forth the number of shares as to which appraisal is sought. Holders of shares of
DLB Common Stock who hold their shares in brokerage accounts or nominee form and
who wish to exercise
69
76
appraisal rights are urged to consult promptly with their broker or nominee to
determine the appropriate procedures for the making of a demand for appraisal by
such broker or nominee.
Within ten days after the Effective Time, CHK must give written notice that
the Merger has become effective to each shareholder who has filed a written
demand meeting the requirements of Section 1091. Within 120 days after the
Effective Time, but not thereafter, either CHK or any former DLB shareholder who
has complied with the requirements of Section 1091 may file a petition in the
district court demanding a determination of the value of the shares of DLB
Common Stock held by all dissenting shareholders of DLB.
CHK does not presently intend to file such a petition, and DLB shareholders
seeking to exercise appraisal rights should not assume that CHK will file such
petition or that CHK will initiate any negotiations with respect to the fair
value of such shares. Accordingly, DLB shareholders who desire to have their
shares appraised should initiate any petition necessary for the perfection of
their appraisal rights within the time periods and in the manner prescribed in
Section 1091. Inasmuch as CHK does not have an obligation to file such a
petition, the failure of an DLB shareholder to do so within the period specified
could nullify such shareholder's previous written demand for appraisal.
Within 120 days after the Effective Time of the Merger, any DLB shareholder
who has complied with the provisions of Section 1091 to that point in time will
be entitled to receive from DLB, upon written request, a statement setting forth
the aggregate number of shares not voted in favor of the Merger and the
aggregate number of holders of such shares. DLB must mail such statement to the
requesting shareholder within ten days of receipt of such request or within ten
days of the expiration of the period for delivery of demands for appraisal
(whichever is later).
If a petition for an appraisal is timely filed, after a hearing on such
petition, the district court will determine which shareholders are entitled to
appraisal rights and will appraise the "fair value" of their shares, exclusive
of any element of value arising from the accomplishment or expectation of the
Merger, together with a fair rate of interest, if any, to be paid upon the
amount determined to be the fair value. The costs of the action may be
determined by the district court and taxed upon the parties as the district
court deems equitable. Upon application of a shareholder, the district court may
also order that all or a portion of the expenses incurred by any shareholder in
connection with the appraisal proceeding, including, without limitation,
reasonable attorneys' fees and expenses of experts, be charged pro rata against
the value of all of the shares entitled to appraisal. DLB SHAREHOLDERS
CONSIDERING SEEKING APPRAISAL WITH RESPECT TO THEIR SHARES OF DLB COMMON STOCK
SHOULD BE AWARE THAT THE FAIR VALUE OF THEIR SHARES AS DETERMINED UNDER SECTION
1091 COULD BE MORE THAN, THE SAME AS OR LESS THAN THE CONSIDERATION THEY WOULD
RECEIVE PURSUANT TO THE MERGER AGREEMENT IF THEY DID NOT SEEK APPRAISAL OF THEIR
SHARES.
In determining fair value, the district court is to take into account all
relevant factors.
Any shareholder who has duly demanded an appraisal in compliance with
Section 1091 will not, after the Effective Time, be entitled to vote the shares
subject to such demand for any purpose or be entitled to the payment of
dividends or other distributions on those shares (except dividends or other
distributions payable to holders of record of shares as of a record date prior
to the Effective Time) unless the demand is withdrawn, the appraisal rights are
not perfected by the filing of a petition or a court of competent jurisdiction
determines that the shareholder is not entitled to exercise dissenter's rights.
At any time within 60 days after the Effective Time any shareholder who has
demanded appraisal rights will have the right to withdraw such demand for
appraisal and to accept the terms offered in the Merger Agreement if such
withdrawal is made in writing to CHK; after this period, the shareholder may
withdraw such demand for appraisal only with the written consent of CHK. No
appraisal proceeding in the district court shall be dismissed as to any
shareholder without the approval of the district court, and such approval may be
conditioned upon such terms as the district court deems just. If no petition for
appraisal is filed with the district court within 120 days after the Effective
Time of the Merger, if such shareholder has withdrawn such demand for appraisal
as discussed in the preceding sentence, or if a court of competent jurisdiction
determines that the shareholder is not entitled to exercise dissenter's rights,
such shareholder's rights to appraisal shall
70
77
cease, and the shareholder will be entitled to receive the merger consideration
set forth in the Merger Agreement.
FAILURE TO COMPLY STRICTLY WITH THE PROCEDURES SET FORTH IN SECTION 1091
MAY RESULT IN THE LOSS OF A DLB SHAREHOLDER'S STATUTORY APPRAISAL RIGHTS WITH
RESPECT TO SHARES OF DLB COMMON STOCK. CONSEQUENTLY, ANY DLB SHAREHOLDER WISHING
TO EXERCISE APPRAISAL RIGHTS IS URGED TO CONSULT LEGAL COUNSEL BEFORE ATTEMPTING
TO EXERCISE SUCH RIGHTS. A VOTE AGAINST ADOPTION OF THE MERGER AGREEMENT ALONE
WILL NOT SATISFY THE REQUIREMENTS OF THE SEPARATE WRITTEN DEMAND FOR APPRAISAL
REFERRED TO IN THE STATUTORY PROCEDURE SUMMARIZED ABOVE.
GOVERNMENT REGULATION
REGULATORY APPROVALS
The Merger is subject to the requirements of the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended (the "HSR Act") and the
regulations that have been promulgated thereunder by the Federal Trade
Commission (the "FTC"). The HSR Act requires, among other things, that certain
information regarding the Merger be furnished to the FTC and the Antitrust
Division of the Department of Justice (the "Antitrust Division") and that
certain waiting period requirements be satisfied before the Merger can be
consummated. Pursuant to the HSR Act, CHK and DLB filed the required
notification and report forms with the FTC and the Antitrust Division and
requested early termination of the waiting period, which is discretionary with
the FTC and the Antitrust Division. Early termination of the waiting period was
granted on January 12, 1998.
However, notwithstanding such filings and expiration of any applicable
waiting periods, the FTC and the Antitrust Division have authority to challenge
the Merger on antitrust grounds at any time. In addition, each state in which
CHK or DLB has operations may also review the Merger under state antitrust laws.
Neither CHK nor DLB is aware of any other regulatory approvals or filings that
are required in connection with the Merger.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following discussion summarizes the material Federal income tax
considerations of the Merger that are generally applicable to holders of shares
of DLB Common Stock. This discussion is based on currently existing provisions
of the Code, existing and proposed Treasury Regulations and current
administrative rulings and court decisions, all of which are subject to change.
Any such change, which may or may not be retroactive, could alter the tax
consequences to the DLB shareholders. For a discussion of the Federal income tax
considerations of the distribution of the Bayard Common Stock to the holders of
DLB Common Stock, see the information under the caption "Certain Federal Income
Tax Consequences" in the Bayard Prospectus attached hereto as Annex D.
DLB shareholders should be aware that this discussion does not deal with
all Federal income tax considerations that may be relevant to particular DLB
shareholders in light of their particular circumstances, such as shareholders
who are dealers in securities, who are subject to the alternative minimum tax
provisions of the Code, who are foreign persons, or who acquired their shares in
connection with stock option or stock purchase plans or in other compensatory
transactions. The following discussion only addresses the Federal income tax
consequences of the Merger itself. It does not address the tax consequences of
the Merger under foreign, state or local tax laws.
The payment of the Merger Consideration to the DLB shareholders pursuant to
the Merger will be treated as a taxable transaction for Federal income tax
purposes. In general, DLB shareholders will recognize a gain equal to the fair
market value of the Merger Consideration over the adjusted tax basis of shares
of DLB Common Stock exchanged therefor. Such gain will be treated as a capital
gain if the shares of DLB Common Stock are capital assets in the hands of the
DLB shareholder. DLB shareholders should have a tax basis in each component of
the Merger Consideration equal to its fair market value at the Effective Time.
71
78
Any capital gain will be (a) long-term capital gain if the DLB shareholder
held shares of DLB Common Stock for more than 18 months, (b) mid-term capital
gain if the DLB shareholder held shares of DLB Common Stock more than 12 months
but not more than 18 months or (c) short-term capital gain if the DLB
shareholder held shares of DLB Common Stock for 12 months or less as of the
effective date of the Merger. Long-term capital gain of individuals currently is
taxed at a maximum rate of 20%. Mid-term capital gain of individuals is
currently taxed at a maximum rate of 28%. Short-term capital gain of individuals
is taxed as ordinary income. Ordinary income of individuals is currently taxed
at a maximum rate of 39.6%.
The Barbados Contingent Payment Rights and the Liquidating Trust Contingent
Payment Rights (for purposes of this paragraph, the "Rights") will likely be
treated as debt instruments for federal income tax purposes, subject to the
Treasury Regulations dealing with original issue discount. The application of
such Regulations to instruments such as the Rights is not clear, but DLB intends
to report original issue discount to the holders of Rights in accordance with a
comparable yield and projected payment schedule within the meaning of Treasury
Regulation section 1.1275-4 as determined by DLB. A holder of such Rights that
determines its own projected payment schedule must explicitly disclose this fact
and the basis for such schedule to the Internal Revenue Service. DLB will use
its best judgment based on the facts known to it at the Effective Time to
determine the fair market value of the Rights and the projected payment
schedule. No assurance can be given that the Internal Revenue Service will agree
with the determination of DLB. DLB shareholders holding such Rights will be
required to include these amounts in income prior to the receipt of cash, if
any, from the Rights. The tax basis of the DLB shareholder in the Rights
initially will be the fair market value of the Rights at the Effective Time and
will be increased by the amount of original issue discount that the holder is
required to include in income. Any cash received in excess of the fair market
value of the Rights at the Effective Time will likely be treated as ordinary
income to the DLB shareholder. If a DLB shareholder ultimately receives less
cash payments than expected under the projected payment schedule, then such DLB
shareholder will recognize a loss, part of which may be ordinary.
The Federal income tax consequences set forth above are for general
information only. Each DLB shareholder is urged to consult his own tax advisor
to determine the particular tax consequences to him or her of the Merger,
including the applicability and effect of state, local and other tax laws.
For a discussion of certain federal income tax consequences related to the
WRT Spin-Off, see "Description of WRT Spin-Off -- Federal Income Tax
Consequences."
MARKET PRICE AND DIVIDEND DATA; STOCK EXCHANGE LISTING
DLB Common Stock is listed for quotation under the symbol "DLBI" on the
NASDAQ NMS. DLB Common Stock commenced trading on the NASDAQ NMS on July 25,
1995. CHK Common Stock has been trading under the symbol "CHK" on the NYSE since
April 28, 1995. Prior to such date, CHK Common Stock was listed for quotation on
the NASDAQ NMS. The following table sets forth, for each of DLB Common Stock and
CHK Common Stock, for the calendar quarters indicated, the high and low closing
sales price per share and the dividends paid (in the case of CHK, adjusted for
3-for-2 stock splits on December 15, 1995, and June 28, 1996, and a 2-for-1
stock split on December 31, 1996). DLB has not paid a cash dividend during any
of the relevant periods. CHK initiated a quarterly dividend with the payment of
$.02 per share of CHK Common Stock on July 15, 1997. The payment of future cash
dividends, if any, will be reviewed by the board of directors of CHK (the "CHK
Board") and will depend upon, among other things, CHK's financial condition,
funds from operations, the level of its capital and development expenditures,
its business prospects and any contractual restrictions. In addition, certain of
the indentures governing CHK's indebtedness contain
72
79
certain restrictions on CHK's ability to declare and pay dividends. All prices
set forth below are as reported in published financial sources.
DLB CHK
COMMON STOCK COMMON STOCK
--------------- --------------
CALENDAR QUARTER HIGH LOW HIGH LOW
---------------- ------ ----- ----- -----
1996
First Quarter.................................... 10.75 6.69 16.50 10.67
Second Quarter................................... 8.00 6.88 30.38 15.50
Third Quarter.................................... 8.50 7.13 34.00 21.00
Fourth Quarter................................... 11.00 8.13 34.13 25.69
1997
First Quarter.................................... 18.25 10.50 31.50 19.88
Second Quarter................................... 17.25 12.75 22.38 9.25
Third Quarter.................................... 17.25 14.00 11.50 6.31
Fourth Quarter................................... 16.50 8.75 12.94 7.00
1998
First Quarter (through March 30, 1998)........... 10.00 7.88 7.63 5.56
On October 21, 1997, the last trading day prior to the announcement of the
execution of the Merger Agreement, the last sales prices per share of DLB Common
Stock and CHK Common Stock, as reported by the NASDAQ NMS and the NYSE Composite
Tape, were $16.50 and $12.75, respectively. On March 30, 1998, the last trading
day prior to the date of this Information Statement/Prospectus, the last sales
prices per share of DLB Common Stock and CHK Common Stock, as reported by the
NASDAQ NMS and the NYSE Composite Tape, were $9.00 and $5.625, respectively. As
of March 30, 1998, there were approximately 39 shareholders of record of DLB
Common Stock, which does not include shares held in securities position
listings.
Bayard Common Stock has been listed for trading on the American Stock
Exchange since November 4, 1997 (the first trading day in connection with its
initial public offering). Bayard Common Stock commenced trading on November 4,
1997 at $23.00 per share on the AMEX. On March 30, 1998, the last trading day
prior to the date of this Information Statement/Prospectus, the last sales price
of Bayard Common Stock was $15.50.
CHK has agreed to use commercially reasonable efforts to cause the shares
of CHK Common Stock issued in the Merger to be listed for trading on the NYSE.
At the Effective Time of the Merger, the DLB Common Stock will cease trading and
be delisted from the NASDAQ NMS.
COMPARISON OF SHAREHOLDER RIGHTS
Following the Merger, holders of record of DLB Common Stock as of
immediately prior to the Effective Time of the Merger will become holders of CHK
Common Stock and the rights of such holders will be governed by the certificate
of incorporation and bylaws of CHK. The rights of CHK's shareholders differ in
certain respects from the rights of DLB's shareholders. Because both DLB and CHK
are organized and exist under Oklahoma law and are subject to the corporate laws
of Oklahoma, these differences arise from various provisions of the certificates
of incorporation (the "CHK Certificate" or the "DLB Certificate") and bylaws of
the two companies. Certain of the differences are summarized below, and such
summary is qualified in its entirety by reference to the full text of such
documents.
AMENDMENTS TO CERTIFICATE OF INCORPORATION
Under the OGCA any amendment to a certificate of incorporation must be
approved at a special or annual meeting by a majority of the outstanding shares
of each class entitled to vote. The holders of the outstanding shares of a class
are entitled to vote as a class upon a proposed amendment, whether or not
73
80
entitled to a vote by the provisions of the certificate of incorporation, if the
amendment would increase or decrease the aggregate number of authorized shares
or par value or adversely affect the powers, preferences or special rights of
the shares of such class. The DLB Certificate reserves for DLB shareholders the
right to amend, alter, change or repeal any provisions of the DLB Certificate.
Likewise, the CHK Certificate reserves for CHK shareholders the right to amend,
alter, change or repeal, from time to time, any provision contained in the CHK
Certificate. The CHK Certificate provides that the affirmative vote of the
holders of at least 66 2/3% of the issued and outstanding shares having voting
power, voting together as a single class, is required to amend, repeal or adopt
any provisions inconsistent with certain provisions of the CHK Certificate. The
required approval of holders of more than a majority of the outstanding CHK
Common Stock makes it more difficult for shareholders to make changes to the CHK
Certificate.
AMENDMENTS TO BYLAWS
Pursuant to the OGCA, the power to adopt, amend or repeal bylaws is vested
in the shareholders entitled to vote on such matters; provided, however, any
corporation may confer the power to adopt, amend or repeal bylaws upon the
directors in the corporation's certificate of incorporation. However, the fact
that this power is conferred upon the directors of a corporation will not divest
the shareholders of the power, nor limited their power to adopt, amend or repeal
the bylaws. The DLB Certificate and Bylaws grant the shareholders or the DLB
Board the power to amend or repeal the DLB Bylaws at any meeting or by written
consent. Pursuant to the CHK Bylaws, the CHK Bylaws may be altered, amended or
repealed or new bylaws may be adopted in accordance with the CHK Certificate,
which provides that, in the furtherance and not in limitation of the powers
conferred by statute, the CHK Board is expressly authorized to adopt, repeal,
alter, amend or rescind the CHK Bylaws.
SHAREHOLDER ACTION
Under the OGCA, the certificate of incorporation or bylaws may specify the
number of shares and/or the amount of other securities having voting power
required to be present or represented by proxy at a meeting in order to
constitute a quorum for, and the votes that are necessary for, the transaction
of any business, but in no event may a quorum consist of less than 1/3 of the
shares entitled to vote at the meeting. In the absence of any specification in
the certificate of incorporation or bylaws, a majority of the shares entitled to
vote, present or represented by proxy, constitutes a quorum and action requires
the affirmative vote of the majority of shares present or represented by proxy
at the meeting. Unless otherwise provided in the certificate of incorporation,
any action that is required or which may be taken at any annual or special
meeting of the shareholders of a corporation, may be taken without a meeting,
without prior notice and without a vote, if a consent or consents in writing,
setting forth the action so taken, is signed by the holders of outstanding
shares having not less than the minimum number of votes that would be necessary
to authorize or take such action at a meeting at which all shares entitled to
vote thereon were present and voted. The DLB Bylaws provide that the presence in
person or by proxy of holders of a majority of all of the shares of DLB Common
Stock entitled to vote at a shareholders' meeting shall constitute a quorum, and
a majority of all votes cast shall determine all matters other than elections.
Except for procedural matters, a shareholder entitled to vote or his proxy must
vote by ballot. The DLB Bylaws have a provision allowing for shareholder action
without a meeting, without prior notice and without a vote, if a consent or
consents in writing, setting forth the action so taken, is signed by the holders
of the minimum number of shares that would be necessary to authorize the taking
of such action at a meeting at which all shares entitled to vote thereon were
present and voted.
The CHK Bylaws provide that the holders of a majority of the shares of CHK
Common Stock entitled to vote, present in person or by proxy, constitute a
quorum for the transaction of business at all meetings of the shareholders. The
affirmative vote of a majority of the shares of present in person or represented
by proxy at a meeting and entitled to vote thereon is sufficient to authorize an
act or action. The CHK Certificate provides that any action required or
permitted to be taken at a meeting of the shareholders may be taken without a
meeting, without prior notice and without a vote, if a consent in writing,
setting forth the action so taken, is signed by the holders of outstanding
Common Stock having not less than the minimum number of votes which
74
81
would be necessary to authorize or take such action at a meeting at which all
shares entitled to vote thereon were present and voted.
SPECIAL SHAREHOLDER MEETINGS
Under the OGCA, special meetings of the shareholders may be called by the
board of directors or by such person or persons as may be authorized by the
certificate of incorporation or by the bylaws. The DLB Bylaws provide that the
DLB Board or a committee of the DLB Board duly designated and whose powers and
authority include the power to call meetings may call special meetings of the
shareholders at such places as the DLB Board or a committee of the DLB Board
specify in the notice or waiver of notice for such meetings. The DLB Bylaws
require written notice of meetings be given to shareholders not less than 20 nor
more than 60 days before the date of the meeting. The CHK Bylaws provide that
special meetings may be called only by the chairman of the board or by the
president or secretary, at the request, in writing, of a majority of the board
of directors or by shareholders who are the record owners of 10% or more of the
outstanding shares of CHK Common Stock entitled to vote at the election of
directors. The CHK Bylaws require written notice of meetings be given to
shareholders not less than 10 nor more than 60 days before the date of the
meeting.
NUMBER AND ELECTION OF DIRECTORS
Under the OGCA, the board of directors must consist of one or more members
and the number must be fixed by or in a manner provided for in the bylaws,
unless the number is fixed by the certificate of incorporation in which case a
change in the number of directors requires the amendment of the certificate of
incorporation. All elections of directors must be by written ballot, unless
otherwise provided for in the certificate of incorporation, directors must be
elected by a plurality of the votes of the shares present in person or
represented by proxy at the meeting and entitled to vote on the election of
directors. The DLB Bylaws provide that the number of directors constituting the
board shall not be less than three nor more than 15, as the DLB Board may
determine by resolution from time to time. The DLB shareholders elect directors
at the annual meeting by a plurality of the votes cast by written ballot. The
CHK Bylaws, like that of the DLB Bylaws, provide that the number of directors
constituting the board shall not be less than three nor more than 15. The number
of directors is determined by resolution adopted by a vote of 2/3 of the entire
board or at an annual or special meeting of the shareholders by the affirmative
vote of 66 2/3% of the outstanding shares entitled to vote.
SHARE PURCHASE PROVISION
The CHK Certificate includes a provision which requires the affirmative
vote of 2/3 of the outstanding shares of capital stock entitled to vote
generally in the election of directors held by persons who are not interested
shareholders (as defined) to approve the repurchase of any equity securities of
CHK from any interested shareholder for a price in excess of fair market value,
unless such repurchase is either (i) made on the same terms offered to all
holders of the same securities or (ii) made on the open market and not the
result of a privately negotiated transaction. The DLB Certificate and Bylaws do
not have a similar provision.
ANTITAKEOVER PROVISIONS
The DLB Certificate authorizes its board of directors to issue preferred
stock, without further shareholder approval, which could have dividend,
redemption, liquidation, conversion, voting or other rights that could adversely
affect the voting power or other rights of holders of DLB Common Stock. The DLB
shareholders holding a majority of the outstanding shares entitled to vote at an
election of directors may remove any director at any time with or without cause.
DLB does not have a classified board of directors. The DLB Certificate opts out
of the Oklahoma Control Share Acquisition Act. The Oklahoma legislature enacted
the Control Share Acquisition Act to discourage hostile takeover attempts or the
acquisition of a potentially controlling ownership position without the approval
of a company's board of directors.
The CHK Bylaws contain certain antitakeover provisions which establish an
advance notice procedure regarding the nomination of directors by shareholders
and shareholder proposals to be brought before an annual meeting. Like the DLB
Certificate, the CHK Certificate authorizes the board to issue preferred stock,
75
82
without further shareholder approval, in one or more series and to determine the
designation, powers, preferences and rights of the shares of each such series
and the qualifications, limitations or restrictions thereof which could
adversely affect the voting power or other rights of holders of CHK Common Stock
and impede the completion of a merger, tender offer or other takeover attempt.
Unlike the DLB board, the CHK board of directors is divided into three classes.
The directors of each class are elected for three-year terms, with the terms of
the three classes staggered so that directors from a single class are elected at
each annual meeting of shareholders. The classification of directors has the
effect of making it more difficult for shareholders to change the composition of
the board of directors. Also, directors may only be removed for cause from a
classified board. In addition, the CHK Certificate opts out of the Oklahoma
Control Share Acquisition Act.
DESCRIPTION OF WRT SPIN-OFF
THE WRT SPIN-OFF
Immediately prior to the Merger, DLB will effect the WRT Spin-Off by
distributing all of the shares that it owns of its subsidiary WRT to the
shareholders of record of DLB as of immediately prior to the Effective Time. DLB
currently owns 10,792,220 shares of WRT Common Stock, representing approximately
48.8% of the outstanding shares of WRT Common Stock. The DLB Board will set a
record date for the DLB shareholders entitled to receive their pro rata share of
the WRT Common Stock, which record date shall be the Closing Date, and will
authorize the distribution of the WRT Common Stock as of immediately prior to
the Effective Time. No holder of DLB Common Stock will be required to pay any
cash or other consideration for the shares of WRT Common Stock to be received in
the WRT Spin-Off or to take any other action in order to receive WRT Common
Stock in the WRT Spin-Off. WRT is a reporting company subject to the
informational requirements of the Exchange Act. See "Available Information."
PRO-RATA DISTRIBUTION
The WRT Spin-Off will be done on a pro-rata basis such that the DLB
shareholders will have the same proportionate interest in DLB and WRT both
immediately after the WRT Spin-Off as they had in DLB and WRT immediately prior
to the WRT Spin-Off. At the time of the WRT Spin-Off, the DLB shareholders will
receive for each share of DLB Common Stock held that number of shares of WRT
Common Stock obtained by dividing 10,792,220 by the number of shares of DLB
Common Stock issued and outstanding immediately prior to the Effective Time (the
"Spin-Off Ratio"). As of March 30, 1998, there were 12,975,000 shares of DLB
Common Stock issued and outstanding and options relating to 1,713,750 shares of
DLB Common Stock issued and outstanding, all of which will accelerate and become
exercisable immediately prior to the Effective Time. Assuming that no options
for DLB Common Stock are exercised, the Spin-Off Ratio would be equal to 0.8318
share of WRT Common Stock for each share of DLB Common Stock held. In the event
that all of the outstanding options for DLB Common Stock are exercised by the
payment of the exercise price in cash prior to the WRT Spin-Off, the Spin-Off
Ratio would be equal to 0.7347 share of WRT Common Stock for each share of DLB
Common Stock held. No fractional shares will be distributed in the WRT Spin-Off.
The aggregate number of shares of WRT Common Stock that any DLB shareholder
would otherwise be entitled to receive shall be rounded to the nearest whole
number of shares of WRT Common Stock and in no event will the number of shares
of WRT Common Stock distributed in the WRT Spin-Off exceed the number of shares
of WRT Common Stock owned by DLB immediately prior to the WRT Spin-Off.
LISTING AND TRADING OF WRT COMMON STOCK
There is currently no established public trading market for the WRT Common
Stock. WRT has applied to have the WRT Common Stock listed for trading on the
NASDAQ Small Cap Market under the symbol "WRTE." However, there can be no
assurance that the WRT Common Stock will be accepted for listing or, if it is,
that it will be able to maintain such listing. DLB shareholders receiving WRT
Common Stock in the WRT Spin-Off may incur tax liability in connection
therewith. See "-- Federal Income Tax Consequences." To the extent that a public
trading market does not exist at the time of the WRT Spin-Off, the DLB
76
83
shareholders may be unable to sell the WRT Common Stock received in the WRT
Spin-Off to satisfy any resulting tax liability.
The WRT Common Stock distributed to the DLB shareholders will be freely
transferable, except for WRT Common Stock received by persons who may be deemed
to be "affiliates" of WRT under the Securities Act and who may be a controlling
shareholder of DLB. Persons who may be deemed to be affiliates of WRT after the
WRT Spin-Off generally include individuals or entities that control, are
controlled by or under common control with WRT, and may include certain officers
and directors of WRT as well as principal shareholders of WRT. Affiliates of WRT
may not transfer the WRT Common Stock received in the WRT Spin-Off unless a
registration statement covering the securities is filed, the requirements of
Rule 144 of the Securities Act excluding the holding period requirement are
satisfied or an exemption from the registration requirements of the Securities
Act applies. A controlling shareholder of DLB who receives WRT Common Stock in
the WRT Spin-Off will receive restricted securities that may not be transferred
unless a registration statement covering the securities is filed, the
requirements of Rule 144 of the Securities Act are satisfied or an exemption
from the registration requirements of the Securities Act applies.
FEDERAL INCOME TAX CONSEQUENCES
The following discussion summarizes the principal federal income tax
consequences associated with the WRT Spin-Off of the WRT Common Stock to the DLB
shareholders. Such discussion is not based upon an opinion of counsel. The
following discussion applies only to a DLB shareholder who is a citizen or
resident of the United States, a corporation, partnership or other entity
created or organized in or under the laws of the United States and who holds
shares of DLB Common Stock as a capital asset. The following discussion does not
address the potential tax consequences applicable to DLB shareholders (i) who
have received such shares in connection with the performance of services, (ii)
who are dealers in securities or (iii) who are subject to special treatment
under the Code (such as insurance companies, tax-exempt organizations,
nonresident alien individuals or foreign entities).
The following summary is based on the Code, applicable Treasury
Regulations, judicial authority and administrative rulings and practice, all as
of the date hereof. There can be no assurance that future legislative, judicial
or administrative changes or interpretations will not materially alter the
statements and conclusions set forth herein. Any such changes or interpretations
could be applied retroactively and could affect the tax consequences of the WRT
Spin-Off to the DLB shareholders. No ruling has been requested from the IRS with
respect to any of the matters discussed herein and, thus, no assurance can be
provided that statements set forth herein (which do not bind the courts or the
IRS) will not be challenged by the IRS or would be sustained by a court if so
challenged. Furthermore, the following discussion addresses only certain federal
income tax matters and does not consider any state, local or foreign tax
consequences of the WRT Spin-Off.
EACH DLB SHAREHOLDER SHOULD CONSULT HIS OR HER TAX ADVISOR WITH RESPECT TO
THE TAX CONSEQUENCES OF THE WRT SPIN-OFF AND THE EFFECT OF FEDERAL, STATE, LOCAL
AND FOREIGN INCOME AND OTHER TAX LAWS.
Although the issue is not free from doubt, DLB believes that the WRT
Spin-Off of WRT Common Stock to the DLB shareholders should be treated as a
distribution to the DLB shareholders with respect to their DLB Common Stock in
an amount equal to the fair market value of the WRT Common Stock. DLB will
report consistently with such conclusion for federal income tax purposes. Under
the Code, a distribution may be treated in part as a dividend (taxable as
ordinary income), in part as a tax-free return of capital, and in part as a
capital gain, depending upon the amount of the distributing company's earnings
and profits for tax purposes and the basis that the shareholders have in their
stock. In this case, DLB believes that the distribution of the WRT Common Stock
would be treated (i) as a dividend taxable as ordinary income to the extent of
any current and accumulated earnings and profits of DLB, (ii) as a tax-free
return of capital to the extent of each DLB shareholder's basis in its DLB
Common Stock, and (iii) thereafter, as capital gain. DLB will report to the DLB
shareholders the portion of the distribution of the WRT Common Stock that is
taxable as a dividend.
However, the tax treatment of the WRT Spin-Off to the DLB shareholders is
not free from doubt. If the WRT Spin-Off were instead treated as a distribution
in redemption of a portion of shares of DLB held by a
77
84
DLB shareholder, such DLB shareholder would be required to recognize capital
gain or loss on the above described WRT Spin-Off equal to the difference between
(i) the fair market value of all of the WRT Common Stock received by such
shareholder pursuant to the WRT Spin-Off and (ii) such shareholder's adjusted
tax basis in the portion of his or her DLB Common Stock treated as being
exchanged for the WRT Common Stock in the WRT Spin-Off. In such case, each DLB
shareholder's portion of DLB Common Stock being exchanged for the WRT Common
Stock in the WRT Spin-Off should be determined by multiplying the total number
of shares of DLB Common Stock held by such DLB shareholder by a fraction, the
numerator of which is the fair market value of the WRT Common Stock being
spun-off and the denominator of which is the sum of the aggregate fair market
value of the Merger Consideration plus the fair market value of the WRT Common
Stock being spun-off.
Ordinary income is currently taxable at a maximum rate for noncorporate
shareholders of 39.6%. In accordance with recent changes in the capital gains
tax rate, capital gains of each noncorporate DLB shareholder generally will be
subject to tax at a rate of (i) 28% if such shareholder's shares of DLB Common
Stock have been held for more than 12 months but less than 18 months or (ii) 20%
if such shareholder's shares of DLB Common Stock have been held for more than 18
months. If a DLB shareholder has held its shares for 12 months or less, any such
capital gain recognized on the sale and redemption will be subject to tax at
ordinary income tax rates (of which the maximum rate is 39.6%).
The DLB shareholders will be considered to have a new holding period with
respect to each of the shares of WRT Common Stock received and will have an
adjusted tax basis in each such share equal to the fair market value thereof.
VALIDITY OF SECURITIES
The legality of the CHK Common Stock issued in the Merger will be passed
upon by Andrews & Kurth L.L.P., Houston, Texas.
EXPERTS
The consolidated financial statements of CHK as of June 30, 1997 and 1996
and for each of the two years in the period ended June 30, 1997, incorporated by
reference in this Information Statement/Prospectus, have been incorporated
herein in reliance on the report of Coopers & Lybrand L.L.P., independent
accountants, given on the authority of that firm as experts in accounting and
auditing.
The consolidated financial statements of CHK for the year ended June 30,
1995, incorporated by reference in this Information Statement/Prospectus, have
been so incorporated in reliance on the report of Price Waterhouse LLP,
independent accountants, given on the authority of said firm as experts in
auditing and accounting.
The consolidated financial statements of DLB as of December 31, 1996 and
1995, and for each of the years in the three-year period ended December 31, 1996
have been included herein in reliance upon the report of KPMG Peat Marwick LLP,
independent certified public accountants, appearing elsewhere herein, and upon
the authority of said firm as experts in accounting and auditing.
78
85
INDEX TO FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULES
CHESAPEAKE ENERGY CORPORATION & SUBSIDIARIES
Unaudited Pro Forma Combined Financial Data................. F-2
Unaudited Pro Forma Combined Balance Sheet as of September
30, 1997............................................... F-3
Unaudited Pro Forma Combined Statement of Operations for
the Quarter Ended September 30, 1997................... F-4
Unaudited Pro Forma Combined Statement of Operations for
the Year Ended June 30, 1997........................... F-5
Notes to Unaudited Pro Forma Combined Financial Data...... F-6
DLB OIL & GAS INC.
Independent Auditors' Report................................ F-10
Consolidated Balance Sheets, December 31, 1996 and 1995..... F-11
Consolidated Statements of Operations, Years Ended December
31, 1996, 1995 and 1994................................... F-12
Consolidated Statements of Shareholders' Equity, Years Ended
December 31, 1996, 1995, and 1994......................... F-13
Consolidated Statements of Cash Flows, Years Ended December
31, 1996, 1995 and 1994................................... F-14
Notes to Consolidated Financial Statements, December 31,
1996, 1995 and 1994....................................... F-15
Consolidated Balance Sheets, September 30, 1997 (Unaudited)
and December 31, 1996..................................... F-31
Consolidated Statements of Operations (Unaudited), Three
Months and Nine Months Ended September 30, 1997 and
1996...................................................... F-32
Consolidated Statements of Shareholders' Equity, Year Ended
December 31, 1996 and Nine Months Ended September 30, 1997
(Unaudited)............................................... F-33
Consolidated Statements of Cash Flows (Unaudited), Nine
Months Ended September 30, 1997 and 1996.................. F-34
Notes to Combined Financial Statements, September 30, 1997
and 1996 (Unaudited)...................................... F-35
All financial statement schedules are omitted, as the required information is
inapplicable or the information is presented in the consolidated financial
statements or related notes.
F-1
86
UNAUDITED PRO FORMA COMBINED FINANCIAL DATA
The following unaudited pro forma financial statements are derived from the
historical financial statements of CHK incorporated by reference in this
Information Statement/Prospectus and the historical financial statements of DLB
appearing elsewhere herein as further adjusted to reflect the planned
acquisition of Hugoton. The Pro Forma Combined Statements of Operations for the
quarter ended September 30, 1997 and for the year ended June 30, 1997 reflect
the DLB acquisition (accounted for as a purchase) and the Hugoton acquisition
(accounted for as a purchase) as if the acquisitions occurred on July 1, 1996.
The Pro Forma Balance Sheet at September 30, 1997 reflects the consummation of
the DLB acquisition and the Hugoton acquisition as if they had occurred on
September 30, 1997. The unaudited pro forma combined financial information
should be read in conjunction with the notes thereto and the historical
financial statements of CHK, including the notes thereto, which are incorporated
by reference in this Information Statement/Prospectus and the historical
financial statements of DLB which appear elsewhere in this Information
Statement/Prospectus.
The unaudited pro forma combined financial statements do not purport to be
indicative of the results of operations that would actually have occurred if the
transactions described had occurred as presented in such statements or that may
occur in the future. In addition, future results may vary significantly from the
results reflected in such statements due to general economic conditions, oil and
gas commodity prices, CHK's ability to successfully integrate the operations of
Hugoton and DLB with its current business and several other factors, many of
which are beyond CHK's control. See "Risk Factors."
The DLB Acquisition and the Hugoton Acquisition will be accounted for using
the purchase method. After the acquisitions, the purchase cost will be allocated
to the DLB and Hugoton assets and liabilities based on their respective fair
values. The final allocation of the actual purchase price for each acquisition
is subject to the final valuation of the acquired assets, but that allocation is
not expected to differ materially from the preliminary allocation.
F-2
87
CHESAPEAKE ENERGY CORPORATION & SUBSIDIARIES
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
AS OF SEPTEMBER 30, 1997
(IN THOUSANDS)
ASSETS
HISTORICAL PRO FORMA HISTORICAL PRO FORMA
-------------------- ------------------------------------------ ---------- -----------
DLB BAYARD HUGOTON
CHK DLB ADJUSTMENTS ADJUSTMENTS AS ADJUSTED HUGOTON ADJUSTMENTS
--------- -------- ----------- ----------- ----------- ---------- -----------
Current assets.................. $ 223,773 $ 24,590 $ (13,867)(e) $73,611(j) $ 290,607 $ 11,262 $ --
(17,500)(b)
Property, plant & equipment
Proved........................ 960,741 200,681 (13,125)(b) 1,072,075 291,249 34,318(a)
(76,222)(e)
Unproved...................... 131,194 20,672 (5,014)(e) 146,852 26,512 --
Accumulated DD&A.............. (460,534) (37,943) 34,826(b) (460,534) (71,657) 71,657(a)
3,117(e)
--------- -------- --------- ------- ---------- -------- --------
Net proved and unproved
properties.................. 631,401 183,410 (56,418) 758,393 246,104 105,975
Other, net.................... 57,898 24,977 (21,423)(e) 61,452 2,749 --
--------- -------- --------- ------- ---------- -------- --------
Total property, plant &
equipment, net........ 689,299 208,387 (77,841) 819,845 248,853 105,975
--------- -------- --------- ------- ---------- -------- --------
Other........................... 18,597 6,176 (4,403)(e) 20,370 1,675 --
--------- -------- --------- ------- ---------- -------- --------
Total assets............ $ 931,669 $239,153 $(113,611) $73,611 $1,130,822 $261,790 $105,975
========= ======== ========= ======= ========== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities............. $ 123,949 $ 16,386 $ 5,000(b) $ (229)(j) $ 134,261 $ 8,714 $ 15,000(a)
(10,845)(e)
Long-term debt.................. 508,971 100,631 (15,631)(e) 593,971 105,000 --
Deferred income tax
liabilities................... -- 18,502 (17,942)(b) -- 15,941 14,310(a)
(560)(e)
Other liabilities............... 7,541 35,968 (35,967)(e) 7,542 475 --
Stockholders' equity............
Common stock.................. 704 13 37(b) 754 198 60(a)
Paid-in capital............... 433,201 57,729 27,029(b) 463,151 135,615 72,452(a)
(54,808)(e)
Accumulated earnings
(deficit)................... (142,697) 9,924 (9,924)(b) 73,840(j) (68,857) (4,153) 4,153(a)
--------- -------- --------- ------- ---------- -------- --------
Total stockholder's
equity................ 291,208 67,666 (37,666) 73,840 395,048 131,660 76,665
--------- -------- --------- ------- ---------- -------- --------
Total liabilities and
stockholders'
equity................ $ 931,669 $239,153 $(113,611) $73,611 $1,130,822 $261,790 $105,975
========= ======== ========= ======= ========== ======== ========
PRO FORMA
----------
AS FURTHER
ADJUSTED
----------
Current assets.................. $ 301,869
Property, plant & equipment
Proved........................ 1,397,642
Unproved...................... 173,364
Accumulated DD&A.............. (460,534)
----------
Net proved and unproved
properties.................. 1,110,472
Other, net.................... 64,201
----------
Total property, plant &
equipment, net........ 1,174,673
----------
Other........................... 22,045
----------
Total assets............ $1,498,587
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities............. $ 157,975
Long-term debt.................. 698,971
Deferred income tax
liabilities................... 30,251
Other liabilities............... 8,017
Stockholders' equity............
Common stock.................. 1,012
Paid-in capital............... 671,218
Accumulated earnings
(deficit)................... (68,857)
----------
Total stockholder's
equity................ 603,373
----------
Total liabilities and
stockholders'
equity................ $1,498,587
==========
The accompanying notes are an integral part of these pro forma financial
statements.
F-3
88
CHESAPEAKE ENERGY CORPORATION & SUBSIDIARIES
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
QUARTER ENDED SEPTEMBER 30, 1997
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
HISTORICAL PRO FORMA HISTORICAL PRO FORMA
----------------- --------------------------------------- ---------- ------------------------
DLB BAYARD AS HUGOTON AS FURTHER
CHK DLB ADJUSTMENTS ADJUSTMENTS ADJUSTED HUGOTON ADJUSTMENTS ADJUSTED
------- ------- ----------- ----------- ----------- ---------- ----------- ----------
Revenues:
Oil and gas sales......... $45,667 $12,038 $ (4,330)(e) $ $53,375 $16,970 $ -- $ 70,345
Oil and gas marketing
sales................... 26,865 -- -- 26,865 -- -- 26,865
Interest and other........ 5,878 6,011 (5,510)(e) (495)(j) 5,884 135 -- 6,019
------- ------- -------- ------ ------- ------- ------- --------
78,410 18,049 (9,840) (495) 86,124 17,105 -- 103,229
------- ------- -------- ------ ------- ------- ------- --------
Costs and expenses:
Operating costs........... 31,870 4,990 (2,162)(e) 34,698 7,541 (756)(f) 41,483
Depreciation, depletion
and
amortization............ 29,692 6,969 (3,871)(e) 32,501 8,839 (400)(g) 40,940
(289)(g)
General and
administrative.......... 2,760 1,696 (904)(e) 3,552 2,289 (579)(f) 5,262
Interest.................. 8,575 2,059 (356)(e) 10,278 1,753 (394)(f) 11,637
Other..................... -- 2,890 (2,890)(e) -- (67) -- (67)
------- ------- -------- ------ ------- ------- ------- --------
Total costs and
expenses......... 72,897 18,604 (10,472) 81,029 20,355 (2,129) 99,255
------- ------- -------- ------ ------- ------- ------- --------
Income (loss) before income
taxes..................... 5,513 (555) 632 (495) 5,095 (3,250) 2,129 3,974
Income tax expense
(benefit)................. -- 147 253(h) (198)(j) 202 (1,065) 851(h) (12)
------- ------- -------- ------ ------- ------- ------- --------
Net income (loss)........... $ 5,513 $ (702) $ 379 $ (297) $ 4,893 $(2,185) $ 1,278 $ 3,986
======= ======= ======== ====== ======= ======= ======= ========
Earnings per share primary
and fully diluted......... $ 0.08 $ 0.06 $ 0.04
======= ======= ========
Weighted average shares
outstanding, primary and
fully diluted(i).......... 72,699 77,699 103,490
======= ======= ========
The accompanying notes are an integral part of these pro forma financial
statements.
F-4
89
CHESAPEAKE ENERGY CORPORATION & SUBSIDIARIES
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
YEAR ENDED JUNE 30, 1997
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
HISTORICAL PRO FORMA HISTORICAL PRO FORMA
------------------- ----------------------------------------- ---------- -------------------------
DLB BAYARD HUGOTON AS FURTHER
CHK DLB(D) ADJUSTMENTS ADJUSTMENTS AS ADJUSTED HUGOTON(C) ADJUSTMENTS ADJUSTED
--------- ------- ----------- ----------- ----------- ---------- ----------- ----------
Revenues:
Oil and gas sales... $ 192,920 $38,733 $ (859)(e) $ $ 230,794 $75,466 $ -- $ 306,260
Oil and gas
marketing sales... 76,172 -- -- 76,172 -- -- 76,172
Interest and
other............. 11,223 8,679 (7,245)(e) (330)(j) 12,327 2,140 -- 14,467
--------- ------- -------- -------- --------- ------- ------- ---------
280,315 47,412 (8,104) (330) 319,293 77,606 -- 396,899
--------- ------- -------- -------- --------- ------- ------- ---------
Costs and expenses:
Operating costs..... 90,247 10,379 (408)(e) 100,218 28,160 (3,753)(f) 124,625
Writedown........... 236,000 -- -- 236,000 -- -- 236,000
Depreciation,
depletion and
amortization...... 107,046 12,541 (1,109)(e) 132,027 26,902 7,083(g) 166,012
13,549(g)
General and
administrative.... 8,802 3,062 (415)(e) 11,449 8,587 (2,198)(f) 17,838
Interest............ 18,550 4,063 (28)(e) 22,585 6,220 (1,391)(f) 27,414
Other............... -- 5,031 (5,031)(e) -- -- -- --
--------- ------- -------- -------- --------- ------- ------- ---------
Total costs
and
expense.... 460,645 35,076 6,558 502,279 69,869 (259) 571,889
--------- ------- -------- -------- --------- ------- ------- ---------
Income (loss) before
income taxes and
extraordinary
item................ (180,330) 12,336 (14,662) (330) (182,986) 7,737 259 (174,990)
Income tax expense
(benefit)........... (3,573) 4,655 (5,865)(h) (132)(j) (4,915) 3,462 104(h) (1,349)
--------- ------- -------- -------- --------- ------- ------- ---------
Net income (loss)
before extraordinary
item................ $(176,757) $ 7,681 $ (8,797) $ (198) $(178,071) $ 4,275 $ 155 $(173,641)
========= ======= ======== ======== ========= ======= ======= =========
Earning (loss) per
share before
extraordinary
item -- primary and
fully diluted....... $ (2.69) $ (2.52) $ (1.80)
========= ========= =========
Weighted average
shares outstanding,
primary and fully
diluted(i).......... 65,767 70,767 96,558
========= ========= =========
The accompanying notes are an integral part of these pro forma financial
statements.
F-5
90
CHESAPEAKE ENERGY CORPORATION & SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL DATA
(IN THOUSANDS)
(a) Chesapeake will issue approximately 25.8 million shares of common stock at
an estimated $8 per share, give effect to the exchange and immediate vesting
of Hugoton stock options for Chesapeake stock options by recording a $2
million purchase price adjustment related to the estimated fair value of
such options and incur costs of approximately $15 million (including $7.5
million estimated termination costs for Hugoton executives and employees) to
acquire Hugoton. The following is the allocation of the purchase price:
Issuance of Common Stock.................................... $ 206,325
Fair value of converted Hugoton stock options............... 2,000
Other Acquisition Costs..................................... 15,000
---------
Purchase Price............................................ $ 223,325
=========
Current Assets.............................................. $ 11,262
PP&E -- Proved Properties................................... 325,567
PP&E -- Unevaluated Properties.............................. 26,512
Other PP&E.................................................. 2,749
Other Assets................................................ 1,675
Current Liabilities......................................... (8,714)
Debt........................................................ (105,000)
Deferred Income Taxes....................................... (30,251)
Other Liabilities........................................... (475)
---------
Purchase Price............................................ $ 223,325
=========
(b) Chesapeake will pay $17.5 million in cash, issue 5 million shares of common
stock at an estimated $6 per share plus incur costs of approximately $5
million to acquire DLB. The following is the allocation of the purchase
price:
Issuance of Common Stock.................................... $ 30,000
Cash payment................................................ 17,500
Other Acquisition Costs..................................... 5,000
--------
Purchase Price............................................ $ 52,500
========
Current Assets.............................................. $ 10,723
PP&E -- Proved Properties................................... 111,334
PP&E -- Unevaluated Properties.............................. 15,658
Other PP&E.................................................. 3,554
Other Assets................................................ 1,773
Current Liabilities......................................... (5,542)
Debt........................................................ (85,000)
--------
Purchase Price............................................ $ 52,500
========
(c) Hugoton reports its financial information on a calendar year basis which
must be converted to a June 30 year end to conform to CHK's presentation.
The following is a reconciliation of financial information, as reported, to
the Hugoton historical financial data included in this pro forma
information:
HUGOTON (AS REPORTED)
------------------------------------------------- TWELVE
SIX MONTHS TWELVE MONTHS SIX MONTHS MONTHS
ENDED ENDED ENDED ENDED
JUNE 30, 1997 DECEMBER 31, 1996 JUNE 30, 1996 JUNE 30, 1997
------------- ----------------- ------------- -------------
Revenues................. $41,417 $68,682 $(32,493) $77,606
Costs & expenses......... 39,309 61,163 (30,603) 69,869
Income tax............... 864 3,316 (718) 3,462
------- ------- -------- -------
Net income............... $ 1,244 $ 4,203 $ (1,172) $ 4,275
======= ======= ======== =======
F-6
91
CHESAPEAKE ENERGY CORPORATION & SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL DATA -- (CONTINUED)
(d) DLB reports its financial information on a calendar year basis which must be
converted to a June 30 year end to conform to CHK's presentation. The
following is a reconciliation of financial information, as reported, to the
DLB historical financial data included in this pro forma information:
DLB (AS REPORTED)
------------------------------------------------- TWELVE
SIX MONTHS TWELVE MONTHS SIX MONTHS MONTHS
ENDED ENDED ENDED ENDED
JUNE 30, 1997 DECEMBER 31, 1996 JUNE 30, 1996 JUNE 30, 1997
------------- ----------------- ------------- -------------
Revenues................. $29,675 $28,415 $(10,678) $47,412
Costs & expenses......... 23,031 20,595 (8,550) 35,076
Income tax............... 2,507 2,951 (803) 4,655
------- ------- -------- -------
Net income............... $ 4,137 $ 4,869 $ (1,325) $ 7,681
======= ======= ======== =======
(e) Immediately prior to the acquisition of DLB, DLB will distribute its shares
of WRT Common Stock to its shareholders. In addition, as part of the Merger
Consideration, the shares of Bayard Common Stock owned by DLB will be
distributed to DLB's stockholders. The Bayard Common Stock was received by
DLB in October 1997 in exchange for all Bonray shares owned by DLB. The
following adjustments reflect the distribution and deconsolidate WRT and
Bonray for the periods presented:
BALANCE SHEET
SEPTEMBER 30, 1997
-------------------------------------------
WRT
(INCLUDING BARBADOS) BONRAY TOTAL
-------------------- -------- ---------
Current Assets.................................... $ (8,664) $ (5,202) $ (13,866)
PP&E
Proved.......................................... (76,222) -- (76,222)
Unproved........................................ (5,014) -- (5,014)
Accumulated DD&A................................ 3,117 -- 3,117
-------- -------- ---------
Net..................................... (78,119) -- (78,119)
Other, Net...................................... (2,968) (18,455) (21,423)
-------- -------- ---------
Total PP&E, net......................... (81,087) (18,455) (99,542)
Other Assets.................................... (4,403) -- (4,403)
-------- -------- ---------
Total Assets............................ $(94,154) $(23,657) $(117,811)
======== ======== =========
Current Liabilities............................... $ (6,851) $ (3,994) $ (10,845)
Long Term Debt.................................... (15,561) (70) (15,631)
Deferred income taxes............................. -- (560) (560)
Other Liabilities................................. (35,967) -- (35,967)
-------- -------- ---------
Total Liabilities....................... (58,379) (4,624) (63,003)
Stockholders' Equity.............................. (35,775) (19,033) (54,808)
-------- -------- ---------
Total Liabilities and Stockholder's
Equity................................ $(94,154) $(23,657) $(117,811)
======== ======== =========
F-7
92
CHESAPEAKE ENERGY CORPORATION & SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL DATA -- (CONTINUED)
STATEMENT OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30,
1997
---------------------------------
WRT BONRAY TOTAL
-------- -------- ---------
REVENUES
Oil and Gas Sales.......................... $(4,330) $ -- $ (4,330)
Other...................................... (75) (5,435) (5,510)
------- ------- --------
Total Revenues..................... (4,405) (5,435) (9,840)
------- ------- --------
COSTS AND EXPENSES
Operating Costs............................ (2,162) -- (2,162)
Depreciation, Depletion and Amortization... (3,211) (660) (3,871)
General and Administrative................. (642) (262) (904)
Interest................................... (326) (30) (356)
Other...................................... 994 (3,884) (2,890)
------- ------- --------
Total Costs and Expenses........... (5,347) (4,836) (10,183)
------- ------- --------
Income (Loss) before income taxes............ $ 942 $ (599) $ 343
======= ======= ========
YEAR ENDED JUNE 30, 1997
------------------------------
WRT BONRAY TOTAL
------- ------- --------
REVENUES
Oil and Gas Sales.......................... $ (859) $ -- $ (859)
Other...................................... -- (7,245) (7,245)
------- ------- --------
Total Revenues..................... (859) (7,245) (8,104)
------- ------- --------
COSTS AND EXPENSES
Operating Costs............................ (408) -- (408)
Depreciation, Depletion and Amortization... (231) (878) (1,109)
General and Administrative................. -- (415) (415)
Interest................................... -- (28) (28)
Other...................................... -- (5,031) (5,031)
------- ------- --------
Total Costs and Expenses........... (639) (6,352) (6,991)
------- ------- --------
Income (Loss) before income taxes............ $ (220) $ (893) $ (1,113)
======= ======= ========
(f) Hugoton accounted for its oil and gas properties and results of operations
on the successful efforts method. The following reflects the entries to
convert Hugoton to the full cost method. The entries were derived from the
historical accounting records of Hugoton.
THREE MONTHS
ENDED YEAR ENDED
SEPTEMBER 30, 1997 JUNE 30, 1997
------------------ -------------
COSTS AND EXPENSES:
Exploration................................... $(756) $(3,753)
Internal Costs(1)............................. $(579) $(2,198)
Interest...................................... $(394) $(1,391)
- ---------------
(1) Internal Costs, consisting of costs directly related to acquisition,
exploration and development activities, were previously reported as
General and Administrative.
(g) To record Depreciation, Depletion and Amortization expense of oil and gas
properties using a $1.40 rate per Mcfe for CHK and DLB, and a rate of $1.33
per Mcfe for CHK, Hugoton and DLB.
(h) To record the tax effects of the pro forma adjustments at a statutory rate
of 40%.
F-8
93
CHESAPEAKE ENERGY CORPORATION & SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL DATA -- (CONTINUED)
(i) Earnings per Share has been calculated using the weighted average shares
outstanding assuming the transactions had been consummated at the beginning
of the period and is calculated as follows:
THREE MONTHS
ENDED YEAR ENDED
SEPTEMBER 30, 1997 JUNE 30, 1997
------------------ -------------
CHK's weighted average shares, outstanding, as
reported...................................... 72,699 65,767
Issuance of common stock to DLB................. 5,000 5,000
------- -------
Subtotal -- As Adjusted......................... 77,699 70,767
Issuance of common stock to Hugoton(1).......... 25,791 25,791
------- -------
Total -- As Further Adjusted.................... 103,490 96,558
======= =======
As of September 30, 1997, common shares outstanding for Hugoton and DLB
were 19,838,000 and 12,975,000, respectively.
(1) Does not include Hugoton stock options which will be exchanged for
Chesapeake stock options;
(j) In November 1997, Chesapeake received proceeds of approximately $90 million
in connection with the initial public offering of Bayard common stock. After
underwriting fees, Chesapeake received approximately $21.40 per share for
the 4,194,000 shares of Bayard it sold in the offering. In addition,
Chesapeake received $18 million as repayment of a loan made to Bayard during
fiscal 1997. The following adjustment is necessary to reflect the Bayard
transactions on a pro forma basis:
Total cash received......................................... $107,611
Less: Carrying value of Bayard investment................... (16,000)
Note receivable....................................... (18,000)
--------
Adjustment to current assets................................ 73,611
Other....................................................... 229
--------
Adjustment to stockholder's equity.......................... $ 73,840
========
(k) Estimated total proved pro forma reserves at September 30, 1997 were as
follows:
PROVED
RESERVES
(MMCFE)
--------
Chesapeake.................................................. 401,521
DLB......................................................... 126,407
--------
As adjusted....................................... 527,928
Hugoton..................................................... 297,378
--------
As further adjusted............................... 825,306
========
(l) On March 17, 1997, Chesapeake issued $150 million principal amount of 7.875%
Senior Notes due 2004 and $150 million principal amount of 8.5% Senior Notes
due 2012. Had Chesapeake issued the notes on July 1, 1996, Chesapeake would
have incurred additional interest costs of $17.4 million.
(m) Chesapeake, Hugoton and DLB account for stock options under APB Opinion No.
25. No compensation cost has been recognized by either Chesapeake, Hugoton
or DLB since the options granted were non-compensatory (as defined by APB
Opinion No. 25) at the date of grant.
As of September 30, 1997, the exercise price per option of all DLB stock
options outstanding was $10 and the fair value of DLB common stock was less
than $10. Accordingly, no compensation costs or additional DLB shares
related to the assumed exercise of DLB stock options at the time of the
merger have been included.
F-9
94
INDEPENDENT AUDITORS' REPORT
The Board of Directors
DLB Oil & Gas, Inc.:
We have audited the accompanying consolidated balance sheets of DLB Oil &
Gas, Inc. (as described in Note 1) as of December 31, 1996 and 1995, and the
related consolidated statements of operations, shareholders' equity, and cash
flows, for each of the years in the three-year period ended December 31, 1996.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with 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 DLB Oil &
Gas, Inc. as of December 31, 1996 and 1995, and the results of its operations
and its cash flows for each of the years in the three year period ended December
31, 1996, in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Oklahoma City, Oklahoma
March 12, 1997
F-10
95
DLB OIL & GAS, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
----------------------------
1996 1995
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents................................. $ 4,060,000 $ 14,313,000
Accounts receivable....................................... 8,998,000 4,850,000
Prepaid expenses.......................................... 337,000 324,000
------------ ------------
Total current assets................................. 13,395,000 19,487,000
------------ ------------
Property and equipment -- at cost, based on the full cost
method of accounting for oil and natural gas properties:
Oil and natural gas properties subject to
amortization......................................... 109,325,000 62,275,000
Oil and natural gas properties not subject to
amortization......................................... 18,570,000 10,037,000
Natural gas processing plants and gathering systems.... 1,728,000 3,094,000
Saltwater disposal system.............................. 1,119,000 1,119,000
Other property and equipment........................... 1,223,000 948,000
------------ ------------
131,965,000 77,473,000
Accumulated depreciation, depletion and amortization... (27,007,000) (18,812,000)
------------ ------------
104,958,000 58,661,000
------------ ------------
Investment in Waggoner (Barbados) Ltd....................... 3,186,000 --
Other assets................................................ 7,902,000 59,000
------------ ------------
Total assets...................................... $129,441,000 $ 78,207,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Trade accounts payable.................................... $ 8,119,000 $ 3,853,000
Revenue and royalty distributions payable................. 3,125,000 1,527,000
Drilling advances and other liabilities................... 42,000 190,000
Accrued liabilities....................................... 872,000 193,000
------------ ------------
Total current liabilities............................ 12,158,000 5,763,000
------------ ------------
Long-term debt.............................................. 37,200,000 --
Deferred income taxes....................................... 15,851,000 12,900,000
Shareholders' equity:
Preferred stock, 5,000,000 shares authorized; no shares
issued................................................. -- --
Common stock, 130,000,000 shares authorized; 13,000,000
shares issued; 12,975,000 and 13,000,000 outstanding at
December 31, 1996 and December 31 1995, respectively... 13,000 13,000
Treasury stock, at cost................................... (181,000) --
Additional paid in capital................................ 57,910,000 57,910,000
Retained earnings......................................... 6,490,000 1,621,000
------------ ------------
Total shareholders' equity........................... 64,232,000 59,544,000
Commitments and contingencies...............................
------------ ------------
Total liabilities and shareholders' equity........ $129,441,000 $ 78,207,000
============ ============
See accompanying notes to consolidated financial statements.
F-11
96
DLB OIL & GAS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31,
-----------------------------------------
1996 1995 1994
----------- ----------- -----------
Revenues:
Oil and natural gas sales......................... $27,194,000 $17,860,000 $17,826,000
Natural gas gathering, processing and
transportation,
net............................................ 821,000 3,293,000 1,652,000
Natural gas contract settlement................... -- -- 3,343,000
Interest income................................... 355,000 469,000 140,000
Other............................................. 45,000 430,000 194,000
----------- ----------- -----------
28,415,000 22,052,000 23,155,000
Expenses:
Lease operating................................... 5,539,000 3,579,000 4,461,000
Gross production taxes............................ 1,843,000 1,366,000 1,009,000
Depreciation, depletion and amortization.......... 8,938,000 7,368,000 6,553,000
General and administrative........................ 2,485,000 1,486,000 549,000
Interest.......................................... 1,582,000 529,000 677,000
Loss on sale of assets............................ 208,000 -- --
----------- ----------- -----------
20,595,000 14,328,000 13,249,000
----------- ----------- -----------
Income before income taxes.......................... 7,820,000 7,724,000 9,906,000
Pro forma income taxes.............................. -- -- 3,962,000
Income taxes........................................ 2,951,000 12,900,000 --
----------- ----------- -----------
Net income (loss)................................... $ 4,869,000 $(5,176,000) $ 5,944,000
=========== =========== ===========
Net income (loss) per common share.................. $ 0.38 $ (0.46) $ 0.59
=========== =========== ===========
Weighted average common shares outstanding.......... 12,978,000 11,250,000 10,000,000
=========== =========== ===========
See accompanying notes to consolidated financial statements.
F-12
97
DLB OIL & GAS, INC
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
ADDITIONAL COMBINED
NO. OF COMMON TREASURY PAID-IN RETAINED SHAREHOLDERS'
SHARES STOCK STOCK CAPITAL EARNINGS TOTAL EQUITY
---------- --------- --------- ----------- ---------- ----------- -------------
Balance, December 31, 1993.......... -- $ -- $ -- $ -- $ -- $ -- $ 30,164,000
Income before income taxes........ -- -- -- -- -- -- 9,906,000
Contributed capital............... -- -- -- -- -- -- 2,138,000
Distributions to shareholders..... -- -- -- -- -- -- (3,196,000)
---------- --------- --------- ----------- ---------- ----------- ------------
Balance, December 31, 1994.......... -- -- -- -- -- -- 39,012,000
Contributed capital............... -- -- -- -- -- -- 4,000
Distributions to shareholders..... -- -- -- -- -- -- (1,192,000)
Pre-public offering net loss...... -- -- -- -- -- -- (6,797,000)
Issuance of stock in connection
with merger of Davidson Oil and
Gas, Inc........................ 10,000,000 10,000 -- 31,017,000 -- 31,027,000 (31,027,000)
Sale of stock in connection with
public offering, net of costs... 3,000,000 3,000 -- 26,893,000 -- 26,896,000 --
Post-public offering net income... -- -- -- -- 1,621,000 1,621,000 --
---------- --------- --------- ----------- ---------- ----------- ------------
Balance, December 31, 1995.......... 13,000,000 13,000 -- 57,910,000 1,621,000 59,544,000 --
Purchase of treasury stock........ -- -- (181,000) -- -- (181,000) --
Net income........................ -- -- -- -- 4,869,000 4,869,000 --
---------- --------- --------- ----------- ---------- ----------- ------------
Balance, December 31, 1996.......... 13,000,000 $ 13,000 $(181,000) $57,910,000 $6,490,000 $64,232,000 $ --
========== ========= ========= =========== ========== =========== ============
See accompanying notes to consolidated financial statements.
F-13
98
DLB OIL & GAS, INC
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
------------------------------------------
1996 1995 1994
------------ ------------ ------------
Cash flows from operating activities:
Net income (loss)................................. $ 4,869,000 $ (5,176,000) $ 5,944,000
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation, depletion, and amortization.... 8,938,000 7,368,000 6,553,000
Pro forma income taxes....................... -- -- 3,962,000
Deferred income taxes........................ 2,951,000 12,900,000 --
Loss on sale of assets....................... 208,000 -- --
Increase in accounts receivable.............. (3,789,000) (676,000) (1,524,000)
(Increase) decrease in prepaid expenses...... (13,000) 14,000 (35,000)
Increase (decrease) in accounts payable,
distributions payable and accrued
liabilities............................... 6,543,000 (865,000) 2,459,000
Decrease in drilling advances................ (148,000) (170,000) (98,000)
------------ ------------ ------------
Net cash provided by operating
activities.............................. 19,559,000 13,395,000 17,261,000
------------ ------------ ------------
Cash flows from investing activities:
Expenditures for property and equipment........... (57,165,000) (19,852,000) (26,291,000)
Proceeds from sale of property and equipment...... 1,399,000 234,000 --
Purchase of investments and other assets.......... (11,065,000) -- (42,000)
Collection of note receivable..................... -- -- 966,000
------------ ------------ ------------
Net cash used in investing activities..... (66,831,000) (19,618,000) (25,367,000)
------------ ------------ ------------
Cash flows from financing activities:
Proceeds of long-term debt........................ 37,200,000 3,000,000 15,751,000
Payments of long-term debt........................ -- (11,231,000) (8,003,000)
Contributed capital............................... -- 4,000 2,138,000
Distributions to shareholders..................... -- (1,192,000) (3,196,000)
Proceeds from issuance of stock................... -- 26,896,000 --
Purchase of treasury stock........................ (181,000) -- --
------------ ------------ ------------
Net cash provided by financing
activities.............................. 37,019,000 17,477,000 6,690,000
------------ ------------ ------------
Net increase (decrease) in cash and cash
equivalents:...................................... (10,253,000) 11,254,000 (1,416,000)
Cash and cash equivalents beginning of year......... 14,313,000 3,059,000 4,475,000
------------ ------------ ------------
Cash and cash equivalents end of year............... $ 4,060,000 $ 14,313,000 $ 3,059,000
============ ============ ============
Supplemental cash flow information:
Cash payments for interest........................ $ 1,403,000 $ 541,000 $ 551,000
============ ============ ============
Supplemental schedule of noncash investing
activities:
Property and equipment received from settlement of
contingency.................................... $ 231,000 $ -- $ --
============ ============ ============
See accompanying notes to consolidated financial statements.
F-14
99
DLB OIL & GAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION, DESCRIPTION OF BUSINESS AND PRINCIPALS OF CONSOLIDATION
DLB Oil & Gas, Inc. (DLB or the Company) engages primarily in the exploration
for and development of crude oil and natural gas properties. The Company focuses
its efforts and is an active explorer in Oklahoma and Kansas. The Company also
engages to a lesser extent, in the gathering, processing, transportation and
marketing of hydrocarbons.
The accompanying consolidated financial statements covering periods prior to
July 20, 1995, the date of the merger of Davidson Oil and Gas, Inc. (Davidson)
into DLB, include each of their accounts and their proportionate share of a
venture involved in the production of oil and natural gas and in the gathering,
processing and transportation of natural gas. Due to the nature of a joint
venture agreement between the Company and Davidson, the Company and Davidson
were considered to be under common control prior to the merger. Accordingly, the
merger of Davidson into DLB was accounted for as a reorganization of interests
under common control in a manner similar to a pooling of interests.
The accompanying consolidated financial statements covering periods on or after
July 20, 1995, include the consolidated accounts of the Company and its wholly
owned subsidiaries, and its proportionate share of a venture involved in the
production of oil and natural gas and in the gathering, processing and
transportation of natural gas. The Company accounts for its investment in
Waggoner (Barbados) Ltd. using the equity method of accounting. All significant
intercompany transactions and balances have been eliminated in consolidation.
CASH AND CASH EQUIVALENTS
For purposes of the consolidated statements of cash flows, the Company considers
all short-term debt securities purchased with a maturity of three months or less
to be cash equivalents.
PROPERTY AND EQUIPMENT
The Company accounts for its oil and natural gas exploration and development
activities using the full cost method of accounting. Accordingly, all costs
including nonproductive costs and certain general and administrative costs
associated with acquisition, exploration and development of oil and natural gas
properties are capitalized. Net capitalized costs are limited to the estimated
future net revenues, after income taxes, discounted at 10% per year, from proved
oil and natural gas reserves and the cost of properties not subject to
amortization. Such capitalized costs including the estimated future development
costs and site remediation costs, if any, are depleted by an equivalent
units-of-production method, converting natural gas to barrels at the ratio of
six Mcf of natural gas to one barrel of oil. No gain or loss is recognized upon
disposal of oil and natural gas properties, unless such dispositions
significantly alter the relationship between capitalized costs and proved oil
and natural gas reserves. The cost of natural gas processing plants and gas
gathering systems is also being depreciated on the units-of-production method.
The cost of other property and equipment, including the saltwater disposal
system, is depreciated over estimated useful lives of five to seven years.
Oil and natural gas properties not subject to amortization consist of the cost
of undeveloped leaseholds, exploratory and developmental wells in progress, and
secondary recovery projects before the assignment of proved reserves. These
costs are reviewed periodically by management for impairment, with the
impairment provision included in the cost of oil and natural gas properties
subject to amortization. Factors considered by management in its impairment
assessment include drilling results by the Company and other operators, the
terms of oil and gas leases not held by production, production response to
secondary recovery activities and available funds for exploration and
development.
F-15
100
DLB OIL & GAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company adopted the provisions of Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of," on January 1, 1996. SFAS No. 121 requires
that long-lived assets and certain identifiable intangibles be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Due to the Company's use of
the full cost method of accounting for its oil and gas properties, SFAS No. 121
does not apply to the Company's oil and gas property assets which comprise
approximately 97% of the Company's net property and equipment. Accordingly, the
adoption of SFAS No. 121 did not have an impact on the Company's financial
position or results of operations in 1996.
INVESTMENTS AND OTHER ASSETS
The Company's investment in Waggoner (Barbados) Ltd. is accounted for by the
equity method. Other assets, including securities of WRT Energy Corporation, are
accounted for at cost.
REVENUE AND ROYALTY DISTRIBUTIONS PAYABLE
For certain oil and gas properties, the Company receives production proceeds
from the purchaser and further distributes such amounts to other revenue and
royalty owners. Production proceeds applicable to other revenue and royalty
owners are reflected as revenue and royalty distributions payable in the
accompanying consolidated balance sheets. The Company accrues revenue for only
its net revenue interest in its oil and natural gas properties.
NATURAL GAS IMBALANCES
Natural gas production imbalances arise during the course of production from
properties when owners produce more natural gas than their proportionate share
of reserves. The Company utilizes the sales method of accounting for natural gas
imbalances and, accordingly, has recognized revenue on all production delivered
to its purchasers. As long as the remaining reserves of the properties are
sufficient for the underproduced owners to recoup their share of production, no
cash repayment by the Company will be required. If the recoverable reserves are
insufficient for the underproduced owners to recoup their share of production,
the Company records a liability for the repayment of its share of
overproduction. No receivables are recorded for those wells where the Company
has taken less than its ownership share of natural gas production.
COMMITMENTS AND CONTINGENCIES
Liabilities for loss contingencies arising from claims, assessments, litigation
or other sources are recorded when it is probable that a liability has been
incurred and the amount can be reasonably estimated.
In October 1996, the American Institute of Certified Public Accountants issued
Statement of Position (SOP) 96-1, "Environmental Remediation Liabilities." SOP
96-1 was adopted by the Company on January 1, 1997. It requires, among other
things, that environmental remediation liabilities be accrued when the criteria
of SFAS No. 5, "Accounting for Contingencies," have been met. SOP 96-1 also
provides guidance with respect to the measurement of the remediation
liabilities. Such accounting is consistent with the Company's method of
accounting for environmental remediation costs. Therefore, adoption of SOP 96-1
will not have a material impact on the Company's financial position or results
of operations.
OTHER REVENUES
Included in other revenues in the 1995 consolidated statement of operations is
$370,000 for amounts received for the management of an intrastate pipeline
company engaged in the gathering, transmission and marketing of natural gas.
Earlier years did not include significant revenues associated with management
fees. This
F-16
101
DLB OIL & GAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
management agreement terminated in February 1995 upon sale of the intrastate
pipeline company by its owners.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses are reported net of amounts charged to other
working interest owners of the oil and natural gas properties operated by the
Company, and net of general and administrative expenses capitalized by the
Company as relating to its property exploration and development activities.
INCOME TAXES
Income taxes are accounted for under the asset and liability method. Deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and operating
loss and tax credit carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.
NET INCOME (LOSS) PER COMMON SHARE
Net income (loss) per common share is based upon the number of common shares
considered outstanding during each period after giving effect to the merger of
Davidson and the Company, as of the beginning of the earliest period presented.
Subsequent to the initial public offering of the Company's common stock, net
income (loss) per common share is based upon the weighted average number of
shares of common stock outstanding for the year.
For the year end December 31, 1996, shares represented by granted stock options
were not included in the net income per common share calculations as the option
price was in excess of the trading price of the Company's securities. For the
year ended December 31, 1995, shares represented by granted stock options were
antidilutive to the net income (loss) per common share calculation.
STOCK OPTIONS
With regard to the Company's stock options granted, no accounting is made until
such time as the options are exercised, in that the option price equaled the
market value of the option at the date of the grant. Upon exercise, the proceeds
are added to stockholders' equity, and no expense is recognized. Statement of
Financial Accounting Standards No. 123 "Accounting for Stock Issued to
Employees" provides companies with the option of expensing the "fair value" of
stock options granted. The Company has elected not to change its current
accounting method regarding stock options, and therefore SFAS No. 123 did not
impact the Company's 1996 operating results. The Company has adopted the
expanded disclosure requirements for stock options in 1996.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist of cash and cash equivalents, trade
receivables, payables and long-term debt. As of December 31, 1996 and 1995, the
consolidated financial statement carrying values of the Company's financial
instruments, approximate their respective estimated fair value, because of the
short maturity or the frequent interest rate repricing of these instruments.
F-17
102
DLB OIL & GAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DERIVATIVE FINANCIAL INSTRUMENTS
The Company has utilized derivative financial instruments, in the form of
futures contracts, on a limited basis to manage or hedge price risk associated
with oil and gas production. The Company does not utilize derivative financial
instruments for trading purposes. Gains and losses attributable to the Company's
hedging activities are recorded as increases and decreases in oil and gas sales
when the futures contracts are closed. When a futures contract ceases to qualify
as a hedge, the change in fair value is reflected in operations at that time.
USE OF ESTIMATES
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities, the disclosure of
contingent assets and liabilities, and the reported amounts of revenues and
expenses during the reporting periods, to prepare these consolidated financial
statements in conformity with generally accepted accounting principles. Actual
results could differ from those estimates.
RECLASSIFICATIONS
Certain reclassifications have been made to the 1995 and 1994 financial
statements to conform to the 1996 presentation.
(2) PROPERTY ACQUISITION
On May 31, 1996, the Company acquired certain Oklahoma oil and natural gas
properties from Amerada Hess Corporation ("Amerada Hess") for approximately
$32,100,000, with $25,500,000 allocated to producing properties and $6,600,000
allocated to undeveloped leasehold and to nonproducing minerals. The Company
funded the purchase through use of cash funds and borrowings of $30,000,000 from
its credit facilities.
Total estimated proved reserves as of May 31, 1996, net to the Company, were 6.8
Mmboe. Proved reserves attributable to the acquired properties were divided
approximately 43% oil and 57% natural gas. (The quantities of proved reserves in
this paragraph were prepared by the Company's internal engineers based upon
estimates made by independent engineers as of a prior date and are unaudited.)
The 1996 acquisition of the Amerada Hess properties described above was
accounted for by the purchase method of accounting for business combinations.
Accordingly, the accompanying 1996 Consolidated Statement of Operations does not
include any revenues or expenses associated with the Amerada Hess properties
prior to the acquisition date of May 31, 1996. Following are the Company's pro
forma results assuming the acquisition occurred at the beginning of 1995:
1996 1995
------- -------
Total revenues.............................................. $33,242 $31,780
Net income (loss)........................................... $ 5,655 $(5,485)
Net income (loss) per share................................. $ 0.44 $ (0.49)
(3) ACCOUNTS RECEIVABLE
Accounts receivable consisted of the following:
DECEMBER 31, DECEMBER 31,
1996 1995
------------ ------------
Joint interest billings.................................... $1,162,000 $ 945,000
Accrued oil and natural gas revenue........................ 7,340,000 3,905,000
Other...................................................... 496,000 --
---------- ----------
Total............................................ $8,998,000 $4,850,000
========== ==========
F-18
103
DLB OIL & GAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company requires other joint interest owners to pay drilling costs in
advance. The advances are recorded as liabilities by the Company. The Company
does not require parties to collateralize amounts owing to the Company for joint
interest billings after the completion of the well. To mitigate this credit
risk, the Company has the ability to offset amounts owed to the Company through
application of revenues owing to the other parties and has the ability to file
liens on the related properties.
(4) PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
DECEMBER 31, DECEMBER 31,
1996 1995
------------ ------------
Oil and natural gas properties:
Subject to amortization............................... $109,325,000 $ 62,275,000
Not subject to amortization:
Cost incurred in 1996.............................. 14,674,000 --
Cost incurred in 1995.............................. 1,278,000 7,419,000
Cost incurred in 1994.............................. 1,518,000 1,518,000
Cost incurred in 1993.............................. 715,000 715,000
Cost incurred in 1992.............................. 385,000 385,000
------------ ------------
18,570,000 10,037,000
------------ ------------
Accumulated depreciation, depletion and amortization.... (25,868,000) (17,505,000)
------------ ------------
Net oil and natural gas properties...................... 102,027,000 54,807,000
------------ ------------
Natural gas processing plants and gathering systems..... 1,728,000 3,094,000
Saltwater disposal system............................... 1,119,000 1,119,000
Other property and equipment............................ 1,223,000 948,000
------------ ------------
4,070,000 5,161,000
Accumulated depreciation................................ (1,139,000) (1,307,000)
------------ ------------
Net processing plants, gathering and disposal systems,
and other property and equipment...................... 2,931,000 3,854,000
------------ ------------
Property and equipment, net of accumulated depreciation,
depletion and amortization............................ $104,958,000 $ 58,661,000
============ ============
Depreciation, depletion and amortization expense
consisted of the following:
Depreciation, depletion and amortization of oil and
natural gas properties............................. $ 8,364,000 $ 6,687,000
Depreciation and amortization of processing plants,
gathering and disposal systems, and other property
and equipment...................................... 538,000 645,000
Amortization of other assets.......................... 36,000 36,000
------------ ------------
Total depreciation, depletion and
amortization................................ $ 8,938,000 $ 7,368,000
============ ============
(5) INVESTMENT IN WAGGONER (BARBADOS) LTD. AND OTHER ASSETS
On November 27, 1996, the Company purchased 21% of the equity of Waggoner
(Barbados) Ltd. which has a joint venture agreement with the Barbados National
Oil Company, Ltd. to more fully develop the onshore oil and gas reserves of
Barbados by applying state-of-the-art exploration, completion, and production
methods. As of December 31, 1996, Waggoner (Barbados) Ltd. had not begun
significant operations. The cost of the Company's investment equals its share of
the stockholders' equity of Waggoner (Barbados) Ltd. The assets of Waggoner
(Barbados) Ltd. are comprised principally of cash as of December 31, 1996.
Operations under the joint venture created by the agreements are expected to
commence in the first quarter of 1997. The initial work plan contemplates both
exploitation of existing fields and new exploration. The joint venture will
share in sixty percent of the production enhancements over and above current
volumes adjusted for normal production declines.
F-19
104
DLB OIL & GAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
During 1996, the Company acquired senior unsecured notes and other credit
obligations of WRT Energy Corporation ("WRT Energy"), an oil and gas company
operating under the provisions of Chapter 11 of the United States Bankruptcy
Code since February of 1996. These notes and other credit obligations are being
accounted for using the cost method. At December 31, 1996 the Company's cost of
these notes and other credit obligations was approximately $7.9 million.
On November 29, 1996 as amended on January 20, 1997, and March 11, 1997, the
Company and Wexford Management L.L.C. ("Wexford"), an entity affiliated with the
Chairman of the board of directors of the Company, filed a joint plan of
reorganization with WRT Energy. No competing reorganization plans have been
filed. The Company is anticipating confirmation of the plan during the second
quarter of 1997, although delays caused by motions requested by other creditors
could delay the proceedings. The plan is expected to go into effect sixty days
after confirmation of the plan. The Company has been in contact with other
creditors of WRT Energy and anticipates that the plan, substantially as filed,
will be approved by at least the minimum number of creditors required by
provisions of the United States Bankruptcy Code in order for the plan to be
confirmed. Under the plan, a new WRT Energy will be created with approximately
21.3 million shares of common stock outstanding and the Company will exchange
its WRT Energy notes, the Company's interest in the West Cote Blanche Bay Field
acquired in March of 1997 (described in Note 14) and other assets for an equity
interest in the new WRT Energy. In addition, the Company and Wexford have
committed to funding a rights offering associated with the reorganization plan
of WRT Energy. The rights to purchase new common stock of WRT Energy are being
offered to all unsecured creditors of WRT Energy. Pursuant to provisions of the
plan, the Company and Wexford have committed to purchase the rights not
exercised by other creditors. Based upon the notes and other credit obligations,
the Company's pro rata portion of the rights offering, as contemplated by the
plan, ranges from a minimum of $2.4 million to a maximum of $9.3 million. The
Company would own approximately 9.9 million to 11.8 million shares or between
46.2% and 55.4% of WRT Energy's equity.
(6) LONG-TERM DEBT
1995 Facility
Under the terms of the revolving loan agreement dated December 24, 1995, the
Company may borrow up to the borrowing base at either the banks' prime or
floating rate, the London Interbank Offered Rate ("LIBOR") plus 176 basis points
or a pricing grid rate with the rate determined by the percentage of borrowing
base commitment outstanding. As of December 31, 1996, borrowings of $37,200,000
were outstanding at a weighted average interest rate of 7.3%. No amounts were
borrowed as of December 31, 1995. As of December 31, 1996 and 1995, the
Company's borrowing base was $50,000,000 and $20,000,000, respectively.
Principal payments on the revolving loan are due at maturity or when the amounts
outstanding under the revolving loan agreements are in excess of the borrowing
base. Interest payments are due quarterly. The advances under the revolving
loans are collateralized by a mortgage on the Company's producing and
nonproducing oil and natural gas properties and are due in October 2000.
The revolving loan agreement requires the Company to pay commitment fees for
unused amounts. For 1996, 1995 and 1994, the Company's commitment fee expense
was $174,000, $44,000 and $70,000, respectively.
The revolving loan agreement contains restrictive covenants requiring, among
other things, maintenance at specific levels of tangible net worth, working
capital, and specific financial ratios, as well as limiting the payment of
dividends.
1997 Facility
On March 5, 1997, the Company established a new $85,000,000 revolving credit
facility with a group of financial institutions. This facility was used to
refinance indebtedness under the 1995 facility with the
F-20
105
DLB OIL & GAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
remainder to be used for funding of acquisitions and general corporate purposes.
The maturity of the 1997 facility is March 2002.
Under the terms of the 1997 facility, interest will be charged at the higher of
the bank's prime rate plus 1/2 of 1% plus the applicable margin or the rate at
which Eurodollar deposits for one, two, three, six or twelve months are offered
to the bank in the Interbank Eurodollar market plus the applicable margin. Loans
made under the 1997 facility are payable in full on the maturity date.
The new revolving credit facility contains similar restrictive covenants to the
1995 facility.
(7) INCOME TAXES
Prior to the July 1995 merger and initial public offering, the Company and
Davidson filed separate income tax returns as Subchapter S corporations under
the provisions of the Internal Revenue Code. The Company's S election terminated
in 1995 upon completion of the initial public offering. As a result of the
Company's termination of the S election, the Company recognized a charge against
operations in 1995 in the amount of $11,500,000 for deferred income taxes which
represented the tax effect of the difference between the financial statement
carrying values and the income tax basis of the Company's assets and liabilities
on the date the S election was terminated.
In addition to the $11,500,000 deferred income tax expense described above, the
Company recorded $1,400,000 in deferred income tax expense in 1995 related to
the period following the initial public offering.
Tax strategies implemented by the shareholders of the Company and Davidson prior
to the merger are not reflective of the results that the Company would have
achieved if the Company had been directly subject to income taxes. Therefore,
results of the operations for 1994, reflect a pro forma provision for income tax
expense at a rate of 40% (based upon blended Federal and state rates) of income
before taxes.
At December 31, 1996, the Company had the following carryforwards available to
reduce future federal and state income taxes:
YEAR OF CARRYFORWARD
TYPES OF CARRYFORWARD EXPIRATION AMOUNTS
--------------------- ------------- ------------
Net operating loss -- federal........................... 2010 and 2011 $2,201,000
Net operating loss -- various states.................... 2010 and 2011 $2,600,000
Statutory depletion..................................... None $ 290,000
Total income tax expense for 1996 and 1995 differed from the amounts computed by
applying the federal income tax rate of 34% to income before income taxes as a
result of the following:
1996 1995
---------- -----------
Computed "expected" federal income tax expense........... $2,659,000 $ 2,626,000
Effect of state income taxes............................. 292,000 289,000
Effect of change in tax status........................... -- 9,925,000
Other, net............................................... -- 60,000
---------- -----------
$2,951,000 $12,900,000
========== ===========
F-21
106
DLB OIL & GAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The tax effects of temporary differences that gave rise to significant portions
of the deferred tax assets and liabilities at December 31, 1996 and 1995 are
presented below:
1996 1995
------------ ------------
Deferred tax assets:
Net operating loss carryforwards...................... $ 831,000 $ 241,000
Statutory depletion carryforwards..................... 110,000 55,000
------------ ------------
Total deferred tax assets..................... $ 941,000 $ 296,000
Deferred tax liability:
Property and equipment, principally due to difference
in depreciation, and expensing of intangible
drilling cost, nonproductive well costs and general
and administrative expenses for tax purposes....... (16,792,000) (13,196,000)
------------ ------------
Net deferred tax liability.................... $(15,851,000) $(12,900,000)
============ ============
Because the temporary differences between financial carrying value and tax basis
are expected to reverse before the expiration of the net operating loss
carryforwards, management believes that it is more likely than not that the
benefits of these carryforwards will be realized. As such, there is no valuation
allowance for deferred tax assets at December 31, 1996.
(8) SHAREHOLDERS' EQUITY
Effective with the merger of DLB and Davidson, the capital structure of the
Company consisted of 130,000,000 authorized common shares ($.001 par value) with
10,000,000 shares outstanding along with 5,000,000 authorized preferred shares
with no preferred shares outstanding. For financial reporting purposes, combined
shareholder's equity at the date of the merger was converted into the Company's
common stock and additional paid-in-capital.
On February 7, 1996, the Company adopted a common stock repurchase plan. Under
the terms of the plan, up to $5,000,000 of common stock could have been
repurchased from time to time. Pursuant to the plan, 25,000 shares were
repurchased for $181,000. Repurchased stock is held as treasury stock by the
Company. The repurchase plan expired on August 5, 1996.
On July 25, 1995, the Company issued 3,000,000 shares of common stock through a
public offering at $10 per share. Net proceeds to the Company from the offering,
after selling and offering costs, were $26,896,000. The Company used $11,231,000
of these proceeds to retire then existing indebtedness under its revolving line
of credit facilities.
In 1995, the Company adopted a stock option plan ("the Plan") pursuant to which
the Company's Board of Directors may grant stock options to officers and key
employees. The Plan authorizes grants of options to purchase up to 1,625,000
shares of authorized but unissued common stock. Stock options are granted with
an exercise price equal to the stock's fair market value at the date of grant.
All stock options have ten year terms and vest ratably over a five year term.
No grants were made during 1996. The per share weighted-average fair value of
stock options granted during 1995 was $4.69 on the date of grant using the Black
Scholes option-pricing model with the following weighted-average assumptions:
expected dividend yield 0%, risk-free interest rate of 5.50%, expected
volatility of 45% and an expected life of five years.
The Company has elected to continue to apply APB Opinion No. 25 in accounting
for its granted stock options and, accordingly no compensation cost has been
recognized for the fair value of stock options in the financial
F-22
107
DLB OIL & GAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
statements. Had the Company determined compensation cost based on the fair value
at the grant date for its stock options under SFAS No. 123, the Company's net
income would have been reduced to the pro forma amounts indicated below:
1996 1997
---------- -----------
Net income (loss):
As reported.............................................. $4,869,000 $(5,176,000)
Pro forma................................................ 3,900,400 (5,362,093)
Net income (loss) per share:
As reported.............................................. $ 0.38 $ (0.46)
Pro forma................................................ 0.30 (0.48)
Pro forma net income reflects only options granted in 1995, as no options were
granted in 1996. The full impact of compensation cost for stock options under
SFAS No. 123 is not reflected in the pro forma net income amounts presented
above because compensation cost is reflected over the options vesting period of
five years.
Stock option activity during the years indicated is as follows:
NUMBER OF WEIGHTED-AVERAGE
SHARES EXERCISE PRICE
--------- ----------------
Balance as of December 31, 1994.......................... -- $ --
Granted................................................ 1,625,000 10
Exercised.............................................. -- --
Forfeited.............................................. -- --
Expired................................................ -- --
--------- ----
Balance as of December 31, 1995.......................... 1,625,000 10
Granted................................................ -- --
Exercised.............................................. -- --
Forfeited.............................................. -- --
Expired................................................ -- --
--------- ----
Balance as of December 31, 1996.......................... 1,625,000 $ 10
========= ====
At December 31, 1996, the exercise prices and weighted-average remaining
contractual life of outstanding options was $10 and 8.7 years, respectively.
At December 31, 1996 and 1995, the number of options exercisable was 390,000 and
65,000, respectively, and the weighted-average exercise price of those options
was $10.
(9) NATURAL GAS CONTRACT SETTLEMENT
During 1994, the Company entered into a settlement of a natural gas contractual
dispute. As a result of the settlement, the Company recognized a gain in 1994 of
$3,343,000 in a one time, lump sum payment which is not subject to any repayment
conditions.
(10) MAJOR CUSTOMERS
The Company markets its oil and natural gas production to numerous purchasers
under a combination of short-term and long-term contracts. During 1996, 1995 and
1994, the Company's largest purchasers accounted for 47%, 58% and 72%,
respectively, of oil and natural gas revenues of the Company. The Company had no
other purchasers that accounted for greater than 10% of its oil and natural gas
revenues. The Company does
F-23
108
DLB OIL & GAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
not believe that the loss of any single customer would have a material effect on
the results of the Company's operations.
(11) EMPLOYEE BENEFIT PLANS
In 1994, the Company adopted a qualified 401 (k) Profit Sharing Plan which
permits eligible employees to defer up to 10% of their compensation. All
employees over 18 years of age and with six months of service can participate in
the Plan. Employees vest in the Company's matching contributions at a rate of
25% per year. The Company is not obligated to match the employees'
contributions. During 1996, 1995 and 1994, the Company elected to make $35,000,
$25,000 and $14,000 in matching contributions, respectively.
Also in 1994, the Company adopted a money purchase pension plan, which commits
the Company to contribute 8.33% of employees compensation to the plan up to
maximum amounts allowed by regulation. All employees over 18 years of age and
employed on the first of January of the plan year are eligible to participate in
the plan. The plan does not permit employee contributions. Participants vest
immediately in the contributions made by the Company. During 1996, 1995 and
1994, the Company contributed to the plan $169,000, $144,000 and $90,000,
respectively.
Prior to the merger, the Company granted selected key employees various carried
interests in certain undeveloped and purchased producing oil and gas properties.
The carried interests, which range in the aggregate from 0.5% to 2.5% of the
properties, applied to wells drilled in certain areas of development and
purchased producing properties. Compensation expense equal to the fair value of
the grant of proved reserves was not recognized as the amount was not
significant. The granting of carried interest ceased at the merger effective
date. The employees' interests in the proved properties are not included in the
Company's estimated quantities of proved oil and gas reserves.
(12) RELATED PARTY TRANSACTIONS
A company, the owner of which is related to certain officers of the Company,
sold oil field equipment and provided oil field services which aggregated
$3,829,000, $1,481,000 and $1,784,000 to the Company for 1996, 1995, and 1994,
respectively. The transactions were settled on normal industry terms. As of
December 31, 1996 and 1995, the Company owed the supplier $484,000 and $105,000,
respectively. All amounts owed to the supplier related to sales of oil field
equipment and oil field services provided to the Company.
(13) COMMITMENTS AND CONTINGENCIES
Minimum future rental payments under noncancelable operating leases having
remaining terms in excess of one year as of December 31, 1996, for each of the
next three years and in the aggregate are as follows:
1997.............................................. $242,861
1998.............................................. 309,938
1999.............................................. 321,804
--------
$874,603
========
Rental expense for the years ended December 31, 1996, 1995 and 1994 was
$178,000, $140,000 and $104,000, respectively.
The Company is a defendant in two legal proceedings related to properties
purchased from Amerada Hess. One suit relates to the validity of a leasehold
interest. The claimants seek cancellation of the lease. The Company does not
agree with the claimants position. However, if the claimant prevails, the
Company would seek recovery from Amerada Hess pursuant to provisions of the
purchase agreement. The lease involved in this suit had an agreed upon value of
approximately $311,000 as documented in the purchase agreement.
F-24
109
DLB OIL & GAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The second suit relates to the Company's denial of an unrelated party's
preferential rights to purchase certain properties under various operating
agreements with Amerada Hess. DLB acquired such properties in the Amerada Hess
acquisition. DLB contends that the third party's preferential right elections
were invalid as to the majority of such interests. On January 21, 1997, a
hearing was held before the District Court of Ellis County, Oklahoma on cross
motions for summary judgment of the Company and the third party. The Court ruled
in favor of the Company on most of the third party's claims against the Company.
However, the Court did not rule on the validity of the preferential rights. If
the Court rules in the third party's favor, barring appeal, the Company would be
required to sell the certain properties for the values listed in the purchase
agreement, of approximately $1,123,000.
DLB is also involved in the routine judicial and administrative proceedings that
are common to companies of its size in the oil and gas industry. None of these
proceedings are believed, either individually or in aggregate, to be material to
DLB's financial condition, liquidity or results of operations.
As of December 31, 1996, the Company had outstanding letters of credit of
approximately $1,463,000. The letters of credit expire during the first quarter
of 1997.
In 1996, the Company settled claims submitted to arbitration against a joint
venture partner alleging breach of contract and tortuous conduct. The claims
arose under the terms of the Carmen Field Joint Venture Agreement dated May 26,
1993, between the Company and Magic Circle Acquisition Corporation ("Magic
Circle"). In the proceeding, the Company sought actual damages in excess of
$1,000,000, an accounting and other relief, including dissolution of the Carmen
Field Joint Venture ("CFJV"). The Company settled its claims by agreement dated
February 7, 1996. The settlement agreement provided for mutual releases of all
claims arising out of the CFJV, dissolution of the CFJV, distribution to the
Company of its interest in the CFJV oil and gas properties, the payment of
$3,349,000 to the Company and transfer to the Company of its share of a
gathering system in Stephens County, Oklahoma, and transfer to Magic Circle
gathering, processing and compression facilities in Alfalfa and Woodward
Counties, Oklahoma. As a result of the application of the settlement proceeds to
accounts receivable and to the assets transferred, the Company recognized a
$208,000 loss, including $212,000 of related legal fees. The Company earned net
revenues before income taxes of $2,933,000 and $1,151,000 during 1995 and 1994,
respectively, from its ownership of the assets transferred to Magic Circle as
part of the settlement.
(14) EVENTS OCCURRING SUBSEQUENT TO DECEMBER 31, 1996
Bonray Drilling Corporation
On February 10, 1997, the Company purchased the outstanding common stock of
Bonray Drilling Corporation through a tender offer. DLB paid $30.00 per share,
or approximately $12.7 million. As a result of the completed tender offer,
Bonray Drilling Corporation became a wholly-owned subsidiary of DLB.
Bonray owns a total of 15 rigs, including six rigs capable of drilling wells
over 20,000 feet and nine rigs capable of drilling wells from 7,500 to 15,000
feet. Two of the six deep drilling rigs are presently being remobilized. These
rigs are expected to be in operation by the second quarter of 1997. Ten rigs
were in service or available for service at the time of acquisition with three
in stacked status.
West Cote Blanche Bay Field
On March 11, 1997, the Company purchased Texaco Exploration and Production,
Inc.'s 50% interest in the shallow rights in the West Cote Blanche Bay Field
("WCBB") located in Saint Mary's Parish, Louisiana.
The purchase includes the right to operate existing and future wells completed
above the Robb "C" (a geologic marker located at approximately 10,500 feet) and
the right to operate the related production facilities which include oil and gas
pipelines, salt water disposal wells, compression facilities and related
equipment.
F-25
110
DLB OIL & GAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The purchase price was $12.3 million. Proved reserves attributable to the
acquisition were independently estimated at approximately 12.2 Mmboe (million
barrels of oil equivalent) as of January 1, 1997, and are essentially 100% oil.
(The quantities of proved reserves in this paragraph were prepared by the
Company's internal engineers and based on an independent reserve study prepared
as of January 1, 1996 by Netherland, Sewell and Associates, Inc. and are
unaudited.)
The remaining 50% working interest in the shallow rights to the WCBB property is
owned by WRT Energy. As part of the WRT Energy reorganization plan, DLB expects
to contribute the acquired interest in WCBB (described above) to WRT Energy in
exchange for 5.0 million shares in the reorganized WRT Energy. See Note 5.
Additionally, the Company purchased approximately $6.0 million of obligations of
WRT Energy that relate to the West Cote Blanche Bay Field properties. Such
obligations are expected to be converted into equity of the new WRT Energy and
are included in the equity percentages disclosed in Note 5.
(15) OIL AND NATURAL GAS OPERATIONS
Below is a summary of results of operations for oil and natural gas producing
activities. The results do not include any allocation of the Company's interest
costs or general corporate overhead and therefore, are not necessarily
indicative of the contribution to net income of the Company's oil and natural
gas operations. Income tax expense has been calculated by applying statutory
income tax rates to oil and gas sales after deducting costs, including
depreciation, depletion and amortization.
YEAR ENDED DECEMBER 31,
---------------------------------------
1996 1995 1994
----------- ----------- -----------
Income:
Oil and natural gas sales.................... $27,194,000 $17,860,000 $17,826,000
Expenses:
Lease operating expenses..................... 5,539,000 3,579,000 4,461,000
Gross production taxes....................... 1,843,000 1,366,000 1,009,000
Depreciation, depletion, and amortization.... 8,364,000 6,687,000 6,185,000
Income Tax................................... 5,936,000 4,385,000 4,662,000
Results of operations from oil and natural gas
producing activities......................... $11,448,000 $ 6,228,000 $ 6,171,000
=========== =========== ===========
Depreciation, depletion, and amortization per
equivalent barrel of production.............. $ 5.23 $ 5.52 $ 5.18
=========== =========== ===========
The following is a summary of costs incurred, all of which were capitalized, for
oil and natural gas property exploration, development, and acquisition
activities:
YEAR ENDED DECEMBER 31,
--------------------------------------
1996 1995 1994
----------- ----------- ----------
Exploration costs............................... $ 9,605,000 $12,482,000 $8,551,000
Development costs............................... 11,503,000 5,884,000 7,688,000
Acquisition costs:
Proved properties............................. 27,874,000 39,000 8,849,000
Unproved properties........................... 6,582,000 -- --
F-26
111
DLB OIL & GAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(16) SUPPLEMENTAL INFORMATION ON OIL AND NATURAL GAS OPERATIONS (UNAUDITED)
The following supplemental unaudited information regarding the oil and gas
activities of the Company is presented pursuant to the disclosure requirements
promulgated by the Securities and Exchange Commission and Statement of Financial
Accounting Standards No. 69 "Disclosures About Oil and Gas Producing
Activities".
Oil and Natural Gas Quantities
Substantially all reserve information for the year ended December 31, 1996,
presented below was prepared by the independent engineering firms of DeGolyer
and MacNaughton and H.J. Gruy & Associates, Inc. For the year ended December 31,
1995, substantially all reserve information presented was prepared by
Netherland, Sewell and Associates, Inc. and H.J. Gruy & Associates, Inc. There
are many uncertainties inherent in estimating reserve quantities, and in
projecting future production rates and the timing of future development
expenditures. In addition, reserve estimates of new discoveries are more
imprecise than those of properties with a production history. Accordingly, these
estimates are subject to change as additional information becomes available.
Proved oil and natural gas reserves are the estimated quantities of crude oil,
condensate, natural gas and natural gas liquids that 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 natural gas reserves are those reserves expected to be
recovered through existing wells with existing equipment and operating methods.
Estimates of net quantities of proved reserves and proved developed reserves of
crude oil, including condensate and natural gas liquids, and natural gas, as
well as the changes in proved reserves during the periods indicated, are set
forth in the tables below. All reserves are located in the United States.
F-27
112
DLB OIL & GAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company prepared the estimated reserves as of December 31, 1993 based on
geological and engineering evaluations performed as of December 31, 1994. The
reserve estimates as of December 31, 1993 were derived by analyzing actual
historical production amounts and by adjusting the reserves attributable to
wells acquired or disposed of during 1993. In addition, in deriving the
estimates as of December 31, 1993, the Company used production costs and the
estimated sales prices as of December 31, 1994. The Company has estimated its
reserves as of December 31, 1993 in this manner because the actual information
necessary to calculate estimated proved reserves and related information in
accordance with guidelines of the Securities and Exchange Commission (SEC) as of
December 31, 1993 was not available. Because the reserve estimates as of
December 31, 1994 are based on additional information gained from the result of
drilling, testing and production subsequent to the dates of the estimated
reserves, the reserve estimates as of December 31, 1993 are not necessarily
reflective of quantities that might have been estimated based on information
available as of such date had estimates in accordance with SEC guidelines been
made at such date. Management believes that, because of the methodology used,
the reserve information presented is more reflective of actual quantities than
estimates that might have been generated as of December 31, 1993.
OIL NATURAL GAS
(BBLS) (MCF)
--------- -----------
CHANGES IN PROVED RESERVES
Proved reserves, at December 31, 1993...................... 3,620,000 17,069,000
Extension and discoveries................................ 1,375,000 9,019,000
Purchase of reserves..................................... 514,000 3,476,000
Production............................................... (663,000) (3,187,000)
--------- ----------
Proved reserves, at December 31, 1994...................... 4,846,000 26,377,000
Extension and discoveries................................ 521,000 9,454,000
Purchase of reserves..................................... 130,000 803,000
Revisions of previous estimates.......................... (171,000) (4,969,000)
Production............................................... (708,000) (3,022,000)
--------- ----------
Proved reserves, at December 31, 1995...................... 4,618,000 28,643,000
Extension and discoveries................................ 270,000 30,186,000
Purchase of reserves..................................... 2,983,000 23,082,000
Revisions of previous estimates.......................... (537,000) 4,049,000
Production............................................... (664,000) (5,603,000)
--------- ----------
Proved reserves, at December 31, 1996...................... 6,670,000 80,357,000
========= ==========
OIL NATURAL GAS
(BBLS) (MCF)
--------- -----------
PROVED DEVELOPED RESERVES AS OF:
December 31, 1993........................................ 2,816,000 13,098,000
December 31, 1994........................................ 3,791,000 16,529,000
December 31, 1995........................................ 4,046,000 19,955,000
December 31, 1996........................................ 5,234,000 54,797,000
Standardized Measure of Discounted Future Net Cash Flows
The following table sets forth the standardized measure of the discounted future
cash flows attributable to the Company's proved oil and natural gas reserves.
Future cash inflows were computed by applying year-end prices of oil and natural
gas to the estimated future production of proved oil and natural gas reserves,
except as described above for 1993. All prices were held constant except where a
definite price escalation is provided in the sales contract. Contractually
provided natural gas prices in excess of estimated market prices were used in
F-28
113
DLB OIL & GAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
computing the future cash inflows only if the Company expects to continue to
receive higher prices under legally enforceable contract terms. Future prices
received may differ from the estimates in the standardized measure.
Future production and development costs represent the estimated future
expenditures (based on current costs) to be incurred in developing and producing
the proved reserves, assuming continuation of existing economic conditions.
Future income taxes were computed by applying the appropriate statutory tax
rates to the future pretax net cash flows relating to proved reserves, net of
tax basis of the properties involved and certain tax carryforwards. The future
income taxes give effect to permanent differences but do not include the impact
of future operations. The resulting periodic future net cash flows were
discounted using a 10% annual rate.
The additions to proved reserves from new discoveries and extensions could vary
significantly from year to year; additionally, the impact of changes to reflect
current prices and costs of reserves proved in prior years could be significant.
Accordingly, the information presented below should not be viewed as an estimate
of the fair value of the Company's oil and natural gas properties, nor should it
be considered indicative of any trends.
1996 1995 1994
------------- ------------ ------------
Future cash inflows....................... $ 464,712,000 $144,069,000 $125,546,000
Future production costs................... (106,027,000) (42,494,000) (32,021,000)
Future development costs.................. (17,180,000) (7,236,000) (7,053,000)
Future income taxes....................... (106,757,000) (27,265,000) (25,000,000)
------------- ------------ ------------
Future net cash flows..................... 234,748,000 67,074,000 61,472,000
10% discount to reflect timing of cash
flows................................... (93,996,000) (23,409,000) (16,055,000)
------------- ------------ ------------
Standardized measure of discounted future
cash flows.............................. $ 140,752,000 $ 43,665,000 $ 45,417,000
============= ============ ============
Discounted future net cash flows before
income taxes............................ $ 204,763,000 $ 61,501,000 $ 63,888,000
============= ============ ============
The net weighted average prices at December 31, 1996 used in the computations in
the table above were $25.14 per barrel of oil and $3.70 per Mcf of natural gas.
F-29
114
DLB OIL & GAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Changes Relating to Standardized Measure of Discounted Future Net Cash Flows
Principal changes in the standardized measure of discounted future net cash
flows attributable to the Company's proved reserves are as follows:
1996 1995 1994
------------ ------------ ------------
Beginning balance.......................... $ 43,665,000 $ 45,417,000 $ 27,957,000
Sales of oil and natural gas, net of
production costs......................... (19,812,000) (12,915,000) (12,356,000)
Net changes in prices and production
costs.................................... 81,807,000 4,787,000 --
Extensions, discoveries and improved
recovery, net of future development
costs.................................... 51,292,000 9,654,390 22,281,000
Purchase of reserves, net of future
development costs........................ 35,286,000 1,616,610 8,658,000
Development costs incurred during the
period................................... 1,178,000 1,993,000 --
Revisions of quantity estimates............ 916,000 (8,339,000) --
Change in income taxes..................... (47,662,000) (1,477,000) (5,635,000)
Accretion of discount...................... 6,150,000 6,388,000 4,512,000
Other, primarily changes in timing......... (12,068,000) (3,460,000) --
------------ ------------ ------------
Ending balance............................. $140,752,000 $ 43,665,000 $ 45,417,000
============ ============ ============
F-30
115
DLB OIL & GAS, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
(UNAUDITED)
Current assets:
Cash and cash equivalents................................. $ 11,814,000 $ 4,060,000
Accounts receivable....................................... 11,584,000 8,998,000
Prepaid expenses.......................................... 1,192,000 337,000
------------ ------------
Total current assets.............................. 24,590,000 13,395,000
------------ ------------
Property and equipment -- at cost, based on the full cost
method of accounting for oil and natural gas properties:
Oil and natural gas properties subject to amortization.... 200,681,000 109,325,000
Oil and natural gas properties not subject to
amortization........................................... 20,672,000 18,570,000
Natural gas processing plants and gathering systems....... 2,565,000 1,728,000
Saltwater disposal system................................. 1,119,000 1,119,000
Drilling equipment........................................ 19,244,000 --
Other property and equipment.............................. 5,261,000 1,223,000
------------ ------------
249,542,000 131,965,000
Accumulated depreciation, depletion and amortization...... (41,155,000) (27,007,000)
------------ ------------
208,387,000 104,958,000
------------ ------------
Other assets................................................ 6,176,000 11,088,000
------------ ------------
Total assets...................................... $239,153,000 $129,441,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Trade accounts payable.................................... $ 7,164,000 $ 8,119,000
Revenue and royalty distributions payable................. 3,699,000 3,125,000
Accrued liabilities....................................... 4,463,000 872,000
Income taxes payable...................................... 970,000 --
Drilling advances and other liabilities................... 90,000 42,000
------------ ------------
Total current liabilities......................... 16,386,000 12,158,000
------------ ------------
Long term debt.............................................. 100,631,000 37,200,000
Deferred income taxes....................................... 18,502,000 15,851,000
Minority Interest........................................... 35,968,000 --
Shareholders' equity:
Preferred stock, 5,000,000 shares authorized; no shares
issued and outstanding................................. -- --
Common stock, 130,000,000 shares authorized; 13,000,000
shares issued; 12,975,000 outstanding at September 30,
1997 and December 31, 1996............................. 13,000 13,000
Treasury stock (25,000 shares at September 30, 1997 and
December 31, 1996, at cost)............................ (181,000) (181,000)
Additional paid in capital................................ 57,910,000 57,910,000
Retained earnings......................................... 9,924,000 6,490,000
------------ ------------
Total shareholders' equity........................ 67,666,000 64,232,000
------------ ------------
Commitments and contingencies
Total liabilities and shareholders' equity........ $239,153,000 $129,441,000
============ ============
See accompanying notes to consolidated financial statements
F-31
116
DLB OIL & GAS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- --------------------------
1997 1996 1997 1996
----------- ---------- ----------- -----------
Revenues:
Oil and natural gas sales............ $12,038,000 $7,734,000 $33,573,000 $17,730,000
Contract drilling.................... 5,424,000 -- 12,644,000 --
Natural gas gathering, processing and
transportation, net............... 418,000 196,000 1,207,000 586,000
Interest and other................... 169,000 59,000 300,000 351,000
----------- ---------- ----------- -----------
18,049,000 7,989,000 47,724,000 18,667,000
Expenses:
Lease operating...................... 4,050,000 1,310,000 8,508,000 3,923,000
Gross production taxes............... 940,000 514,000 2,280,000 1,202,000
Control drilling..................... 3,884,000 -- 8,916,000 --
Depreciation, depletion, and
amortization...................... 6,969,000 2,870,000 14,398,000 6,695,000
General and administrative........... 1,696,000 520,000 3,738,000 1,985,000
Interest............................. 2,059,000 550,000 4,790,000 801,000
Loss on sale of assets............... -- -- -- 208,000
----------- ---------- ----------- -----------
19,598,000 6,264,000 42,630,000 14,814,000
----------- ---------- ----------- -----------
Income (loss) before income taxes...... (1,549,000) 1,725,000 5,094,000 3,853,000
Minority interest...................... 994,000 -- 994,000 --
Income taxes........................... 147,000 651,000 2,654,000 1,454,000
----------- ---------- ----------- -----------
Net income (loss)...................... $ (702,000) $1,074,000 $ 3,434,000 $ 2,399,000
=========== ========== =========== ===========
Net income (loss) per common share..... $ (0.05) $ 0.08 $ 0.25 $ 0.18
=========== ========== =========== ===========
Weighted average common and common
equivalent shares.................... 12,975,000 12,975,000 13,488,000 12,979,000
=========== ========== =========== ===========
See accompanying notes to consolidated financial statements.
F-32
117
DLB OIL & GAS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
ADDITIONAL
NO. OF COMMON TREASURY PAID-IN RETAINED
SHARES STOCK STOCK CAPITAL EARNINGS TOTAL
---------- ------ --------- ----------- ---------- -----------
Balance, December 31, 1995...... 13,000,000 13,000 -- 57,910,000 1,621,000 59,544,000
Purchase of treasury stock.... -- -- (181,000) -- -- (181,000)
Net income.................... -- -- -- -- 4,869,000 4,869,000
---------- ------ --------- ----------- ---------- -----------
Balance, December 31, 1996...... 13,000,000 13,000 (181,000) 57,910,000 6,490,000 64,232,000
Net income (Unaudited)........ -- -- -- -- 3,434,000 3,434,000
---------- ------ --------- ----------- ---------- -----------
Balance, September 30, 1997
(Unaudited)................... 13,000,000 13,000 $(181,000) $57,910,000 $9,924,000 $67,666,000
========== ====== ========= =========== ========== ===========
See accompanying notes to consolidated financial statements.
F-33
118
DLB OIL & GAS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30,
--------------------------------
1997 1996
-------------- --------------
Cash flows from operating activities:
Net income................................................ $ 3,434,000 $ 2,399,000
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation, depletion, and amortization.............. 14,398,000 6,695,000
Deferred income taxes.................................. 2,654,000 1,454,000
Minority interest...................................... (994,000) --
Loss on sale of assets................................. -- 208,000
Amortization of note issuance costs.................... 173,000 --
(Increase) decrease in accounts receivable............. 3,502,000 (2,560,000)
Increase in prepaid expenses........................... 100,000 59,000
Increase (decrease) in accounts payable, distributions
payable and accrued liabilities...................... (5,869,000) 1,108,000
Increase in drilling advances and other liabilities.... 47,000 216,000
------------ ------------
Net cash provided by operating activities......... 17,445,000 9,579,000
------------ ------------
Cash flows from investing activities:
Expenditures for property and equipment................... (21,455,000) (45,739,000)
Purchase of investments and other assets.................. (123,000) (6,596,000)
Proceeds from sales of assets............................. -- 1,380,000
Investment in WRT Energy Corporation, net of cash
acquired............................................... (20,532,000) --
Purchase of Bonray Drilling Corporation, net of cash
acquired............................................... (12,824,000) --
------------ ------------
Net cash used in investing activities............. (54,934,000) (50,955,000)
------------ ------------
Cash flows from financing activities
Proceeds of long-term debt................................ 122,692,000 32,000,000
Payments of long-term debt................................ (75,593,000) --
Payments of debt issuance costs........................... (1,857,000) --
Purchase of treasury stock................................ -- (181,000)
------------ ------------
Net cash provided by financing activities......... 45,242,000 31,819,000
------------ ------------
Net increase (decrease) in cash and cash equivalents:....... 7,753,000 (9,557,000)
Cash and cash equivalents beginning of period............... 4,060,000 14,313,000
------------ ------------
Cash and cash equivalents end of period..................... $ 11,813,000 $ 4,756,000
============ ============
Supplemental cash flow information:
Cash payments for interest................................ $ 3,986,000 $ 643,000
============ ============
Supplemental schedule of noncash investing activities:
Property and equipment received from settlement
of contingency......................................... $ -- $ 231,000
============ ============
See accompanying notes to consolidated financial statements.
F-34
119
DLB OIL & GAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997 AND 1996
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION, DESCRIPTION OF BUSINESS AND PRINCIPALS OF CONSOLIDATION
DLB Oil & Gas, Inc., ("DLB" or the "Company") is an independent energy
company engaged primarily in the exploration, development, production and
acquisition of oil and gas properties in the Mid-Continent region and the
coastal and shallow onshore regions of south Louisiana. In addition, through its
wholly owned subsidiaries, Bonray Drilling Corporation ("Bonray"), which was
acquired in February 1997, and Gathering Energy Marketing Company, LLC
("GEMCO"), the Company is engaged in the land contract drilling of oil and gas
wells and in the gathering, processing, transportation and marketing of
hydrocarbons, respectively.
The accompanying consolidated financial statements include the consolidated
accounts of the Company and its wholly owned subsidiaries. Based upon the
Company's 47% equity interest in WRT Energy, along with an affiliate's 11%
equity interest, substantially the same executive officer group, and other
factors indicating that the Company has a controlling interest in WRT Energy,
the Company consolidates the financial statements of WRT Energy subsequent to
the conversion of the Company investment in securities and other obligations
into common stock of WRT. See Note 2. The Company accounts for its investment in
Waggoner (Barbados) Ltd. using the equity method of accounting. All significant
intercompany transactions and balances have been eliminated in consolidation.
BASIS OF PRESENTATION
The accompanying consolidated financial statements and notes thereto have
been prepared pursuant to the rules and regulations of the Securities and
Exchange Commission. Accordingly, certain footnote disclosures normally included
in financial statements prepared in accordance with generally accepted
accounting principles have been omitted pursuant to such rules and regulations.
The accompanying consolidated financial statements and notes thereto should be
read in conjunction with the consolidated financial statements and notes
included in DLB's 1996 annual report on Form 10-K.
In the opinion of the Company's management, all adjustments (all of which
are normal and recurring) have been made which are necessary to fairly state the
consolidated position of the Company as of September 30, 1997, and the results
of operations and their cash flows for the three and nine months ended September
30, 1997 and 1996.
USE OF ESTIMATES
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities, the disclosure of
contingent assets and liabilities, and the reported amounts of revenues and
expenses during the reporting periods, to prepare these consolidated financial
statements in conformity with generally accepted accounting principles. Actual
results could differ from those estimates.
DERIVATIVE FINANCIAL INSTRUMENTS
The Company has utilized, on a limited basis, derivative instruments in the
form of futures contracts to manage or hedge price risk associated with oil and
natural gas production. To qualify as a hedge, these instruments must correlate
to anticipated future production such that the Company's exposure to the effects
of price changes is reduced. The Company uses the hedge or deferral method of
accounting for these instruments and, as a result, gains and losses are
generally offset by similar changes in the realized prices of oil and natural
gas produced. Income and costs related to these hedging activities are
recognized in oil and gas revenues when the commodities are produced. While
commodity derivative financial instruments are intended to reduce the Company's
exposure to declines in the market price of oil and natural gas, the commodity
derivative financial instruments may limit the Company's gain from increases in
those market prices.
F-35
120
DLB OIL & GAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company recorded as an increase in revenues $0.1 million and $2.3
million related to commodity hedging activities for the three months and nine
months ended September 30, 1997, respectively.
(2) ACQUISITIONS AND INVESTMENTS
AMERADA HESS PROPERTIES
On May 31, 1996, the Company acquired certain Oklahoma oil and natural gas
properties from Amerada Hess Corporation ("Amerada Hess") for approximately
$32,100,000, with $25,500,000 allocated to producing properties and $6,600,000
allocated to undeveloped leasehold and to nonproducing perpetual mineral
interests. The Company funded the purchase through use of cash funds and
borrowings of $30,000,000 from its credit facilities.
Total estimated proved reserves attributable to the acquired Amerada Hess
properties as of May 31, 1996, net to the Company, were 6.8 Mmboe. Proved
reserves attributable to such acquired properties were divided approximately 43%
oil and 57% natural gas. (The quantities of proved reserves in this paragraph
were prepared by the Company's internal engineers and are unaudited.) Results
prior to May 31, 1996 are not included in DLB's consolidated financial
statements.
BONRAY DRILLING CORPORATION
On February 10, 1997, the Company purchased approximately 98% of the
outstanding common stock of Bonray Drilling Corporation ("Bonray") through a
tender offer. DLB paid $30.00 per share, or approximately $12,700,000. Upon
completion of the tender offer and subsequent merger, Bonray Drilling
Corporation became a subsidiary of DLB.
Bonray owned a total of 13 rigs, including six rigs capable of drilling
wells over 20,000 feet and nine rigs capable of drilling wells from 7,500 to
15,000 feet. Two of the six deep drilling rigs were remobilized and placed in
operation during the second quarter of 1997. Ten rigs were in service or
available for service at the time of acquisition with three in stacked status.
This acquisition was accounted for using purchase accounting. As a result,
DLB's consolidated financial statements only include the results of operations
from February 10, 1997.
In October 1997, the Company exchanged on a tax-free basis the common
shares of Bonray owned by the Company for 2,955,000 common shares of Bayard
Drilling Technologies, Inc. ("Bayard"). The Company's ownership of the 2,955,000
common shares represented 21.2% of the then outstanding shares of Bayard. On
November 3, 1997, Bayard sold 4,000,000 common shares in an initial public
offering, reducing the Company's ownership in Bayard to 16.5%. The Company will
be using the equity method to account for the investment in Bayard subsequent to
the closing of the transaction and will record its relative share of Bayard's
operations in the Company's operations. The fair value of the Bayard common
shares owned by the Company at November 3, 1997 was approximately $68 million
using the initial public offering price.
WRT ENERGY
During 1996 and 1997, the Company acquired senior unsecured notes and other
credit obligations of WRT Energy Corporation ("WRT Energy"), an oil and gas
company operating under the provisions of Chapter 11 of the United States
Bankruptcy Code from February 1996 through July 1997. These notes and other
credit obligations were accounted for using the cost method. Prior to the
effective date of the reorganization plan of WRT Energy, the Company's cost of
these notes and other credit obligations was approximately $8,400,000.
F-36
121
DLB OIL & GAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Under the plan, a new WRT Energy was created with approximately 22.07
million shares of common stock outstanding. In addition, the Company and Wexford
funded a rights offering associated with the reorganization plan of WRT Energy.
The rights to purchase new common stock of WRT Energy were offered to all
unsecured creditors of WRT Energy. Pursuant to provisions of the plan, the
Company and Wexford committed to purchase the rights not exercised by other
creditors. The result of Company exchanging its WRT Energy notes, the Company's
interest in the West Cote Blanche Bay Field acquired in March of 1997 (described
below), other WRT Energy obligations, and acquiring stock through the rights
offering is an approximate 47% equity interest in the new WRT Energy.
An additional 1.41 million shares, currently in escrow, will be distributed
upon resolution of certain post closing matters.
WEST COTE BLANCHE BAY FIELD
On March 11, 1997, the Company purchased Texaco Exploration and Production,
Inc.'s 50% interest in the shallow rights in the West Cote Blanche Bay Field
("WCBB") located in Saint Mary's Parish, Louisiana.
The purchase includes the right to operate existing and future wells
completed above the Robb "C" (a geologic marker located at approximately 10,500
feet) and the right to operate the related production facilities which include
oil and gas pipelines, salt water disposal wells, compression facilities and
related equipment. The purchase price was approximately $12,300,000. Proved
reserves attributable to the acquisition were estimated at approximately 12.2
Mmboe (million barrels of oil equivalent) as of January 1, 1997, and are
essentially 100% oil. (The quantities of proved reserves in this paragraph were
prepared by the Company's internal engineers and based on an independent reserve
study prepared as of January 1, 1997 by Netherland, Sewell and Associates, Inc.
and are unaudited.)
The remaining 50% working interest in the shallow rights to the WCBB
property is owned by WRT Energy. As part of the WRT Energy reorganization plan,
DLB contributed the acquired interest in WCBB (described above) to WRT Energy in
exchange for 5.0 million common shares in the reorganized WRT Energy. (See Notes
3 and 7.)
Additionally, the Company purchased approximately $6,000,000 of obligations
of WRT Energy that relate to the West Cote Blanche Bay Field properties. Such
obligations were also converted into common shares of the new WRT Energy and are
included in the equity percentages disclosed above.
F-37
122
DLB OIL & GAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
PRO FORMA FINANCIAL INFORMATION
The following pro forma financial statement has been prepared under the
assumption that all 1997 acquisitions occurred as of January 1, 1997:
NINE MONTHS
ENDED
SEPTEMBER 30, 1997
(PRO FORMA)
------------------
(UNAUDITED)
Revenues:
Oil and natural gas sales................................. $44,433,000
Contract drilling......................................... 14,279,000
Interest and other........................................ 1,666,000
-----------
60,378,000
Expenses:
Lease operating........................................... 16,778,000
Contract drilling......................................... 10,293,000
Depreciation, depletion and amortization.................. 21,317,000
General and administrative................................ 5,728,000
Interest.................................................. 6,681,000
Other..................................................... 25,000
-----------
60,822,000
-----------
(Loss) before income taxes.................................. (444,000)
Minority interest........................................... 3,353,000
Deferred income taxes....................................... 2,654,000
-----------
Net income.................................................. 255,000
-----------
Net income per common share................................. $ 0.02
===========
Weighted average common shares outstanding.................. 13,488,000
===========
(3) LONG-TERM DEBT
On March 5, 1997, the Company established a revolving credit facility with
a group of financial institutions ("1997 Facility") in the amount of
$85,000,000, with an underlying borrowing base of $80,000,000. This facility was
used to refinance indebtedness under the Company's 1995 credit facility with the
remainder to be used for funding of acquisitions and general corporate purposes.
The maturity of the 1997 facility is March 2002. On July 11, 1997, the
underlying borrowing base was changed to $65,000,000.
Under the terms of the 1997 facility, the Company may elect to be charged
at the bank's prime rate plus 1/2 of 1% plus a specified margin or the rate at
which Eurodollar deposits for one, two, three, six or twelve months are offered
to the bank in the Interbank Eurodollar market plus a specified margin. Loans
made under the 1997 facility are payable in full on the maturity date.
The 1997 facility contains restrictive covenants requiring, among other
things, maintenance at specific levels of tangible net worth, working capital,
and specific financial ratios, as well as limiting the payment of dividends.
On July 11, 1997, the Company established an additional credit facility
("New Credit Facility"), which provides for borrowings up to $23,000,000. This
new facility was used to finance the Company's obligations under the WRT rights
offering and to partially refinance indebtedness under the 1997 Facility. The
maturity date of this facility is January 11, 1999.
F-38
123
DLB OIL & GAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Under the terms of the New Credit Facility, the Company may elect to be
charged interest at the higher of the rate of interest publicly announced by the
administrative agent at its prime rate in effect at its principal office in New
York City and the federal funds effective rate from time to time plus 0.5%
("ABR") plus a specified margin or the Eurodollar rate plus a specified margin.
The New Credit Facility contains restrictive covenants requiring among other
things, maintenance at specific levels of tangible net worth, working capital
and specific financial ratios, as well as limiting payment of dividends.
(4) SHAREHOLDERS' EQUITY
On February 7, 1996, the Company adopted a common stock repurchase plan.
Under the terms of the plan, up to $5,000,000 of common stock could have been
repurchased from time to time. Pursuant to the plan, 25,000 shares were
repurchased for $181,000. The Company holds repurchased stock as treasury stock.
The repurchase plan expired August 5, 1996.
In 1995, the Company adopted a stock option plan ("the Plan") pursuant to
which the Company's Board of Directors may grant stock options to officers and
key employees. Pursuant to the Plan, options were granted in 1995 to purchase up
to 1,625,000 shares of authorized but unissued common stock. Stock options are
granted with an exercise price equal to the stock's fair market value at the
date of grant. All stock options have ten year terms and vest ratably over a
five year term.
On February 9, 1997, the Plan was amended to permit the granting of options
to employees to purchase 325,000 additional shares under the Plan with basically
the same terms as the original grants (with the exception of the exercise
price). Of this amount, 40,000 and 48,750 options have been granted as of
September 30, 1997 at prices of $13.00 per share and $14.25 per share
respectively.
(5) COMMITMENTS AND CONTINGENCIES
In February 1996, the Company settled claims submitted to arbitration
against a joint venture partner alleging breach of contract and tortious
conduct. The claims arose under the terms of the Carmen Field Joint Venture
Agreement ("CFJV") dated May 26, 1993, between the Company and Magic Circle
Acquisition Corporation ("Magic Circle"). The settlement agreement provided for
mutual release of all claims arising out of the CFJV, dissolution of the CFJV,
distribution to the Company of its interest in the CFJV oil and gas properties,
the payment of $3,349,000 to the Company and transfer to the Company of its
share of a gathering system in Stephens County, Oklahoma, and transfer to Magic
Circle gathering, processing and compression facilities in Alfalfa and Woodward
Counties, Oklahoma. As a result of the settlement, the Company recognized a
$208,000 loss, including $212,000 of related legal fees.
(6) SUBSEQUENT EVENTS
On October 9, 1997, DLB Oil & Gas, Inc., its wholly-owned subsidiary,
Bonray Drilling Corporation ("Bonray"), Bayard Drilling Technologies, Inc.
("Bayard") and Bonray Acquisition Corp., a subsidiary of Bayard, entered into a
definitive Agreement and Plan of Merger (the "Merger Agreement") pursuant to
which Bayard would acquire Bonray. On October 16, 1997, the merger of Bonray
with Bonray Acquisition Corp. was consummated. In the merger, each share of
common stock of Bonray was canceled and converted into 30.15 shares of common
stock of Bayard and DLB received 2,955,000 shares of Bayard common stock in
consideration for its interest in Bonray.
On October 22, 1997, DLB entered into a definitive Agreement and Plan of
Merger, as amended by Amendment No. 1 thereto dated December 22, 1997, Amendment
No. 2 thereto dated February 11, 1998 and Amendment No. 3 thereto dated as of
March 24, 1998 ("Chesapeake Merger") with Chesapeake Energy Corporation and
Chesapeake Merger Corp. In the Chesapeake Merger, DLB shareholders will receive
approximately $133,000,000 of total consideration for DLB's Mid-Continent oil
and gas assets. Consideration
F-39
124
DLB OIL & GAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
will consist of $17,500,000 cash, 5,000,000 shares of Chesapeake common stock
and the assumption of approximately $85,000,000 million in debt and other
liabilities. In addition, as part of the transaction, DLB shareholders will
receive their proportionate share of the common stock of Bayard and WRT. DLB
currently owns 2,955,000 shares of Bayard and 10,792,220 shares of WRT, all of
which will be distributed to DLB shareholders.
Under the terms of the Chesapeake Merger, a subsidiary of Chesapeake will
merge with and into DLB. In the Chesapeake Merger, shares of DLB common stock
will be converted in to the right to receive: (1) a fractional interest in a
share of Chesapeake common stock equal to $5,000,000 divided by the number of
shares outstanding on the closing date, (2) an amount of cash equal to
$17,500,000 divided by the number of shares outstanding on the closing date, (3)
a number of shares of Bayard common stock equal to 2,955,000 divided by the
number of DLB's shares outstanding on the closing date, and (4) a number of
shares of WRT common stock equal to 10,792,220 divided by the number of DLB
shares outstanding on the closing date.
The merger is subject to approval of the holders of at least a majority of
the outstanding shares of DLB common stock as of the record date by the taking
of corporate action by written consent. The Company anticipates a late January
date for the corporate action by written consent. DLB currently has 12,975,000
shares outstanding. Option acceleration under existing incentive plans may
affect the shares outstanding at closing. Charles Davidson, Mark Liddell and
Mike Liddell, who collectively own over 75% of DLB's outstanding common stock,
each have entered into an agreement with Chesapeake pursuant to which, among
other things, they have agreed to vote all shares of common stock owned by them
in favor of the merger at the DLB special meeting or pursuant to a written
consent in lieu of meeting.
F-40
125
ANNEX A
AGREEMENT AND PLAN OF MERGER
126
ANNEX A
AGREEMENT
AND
PLAN OF MERGER
AMONG
CHESAPEAKE ENERGY CORPORATION
CHESAPEAKE MERGER CORP.
AND
DLB OIL & GAS, INC.
OCTOBER 22, 1997
As Modified by Amendment No. 1 to Agreement and Plan of Merger dated as of
December 22, 1997, Amendment No. 2 to Agreement and Plan of Merger dated as of
February 11, 1998 and Amendment No. 3 to Agreement and Plan of Merger dated as
of March 24, 1998.
A-1
127
TABLE OF CONTENTS
PAGE
----
ARTICLE I
DEFINITIONS....................................................... 2
1.1 Defined Terms............................................... 2
1.2 References and Titles....................................... 8
ARTICLE II
THE MERGER........................................................ 8
2.1 The Merger.................................................. 8
2.2 Effect of the Merger........................................ 8
2.3 Governing Instruments, Directors and Officers of the
Surviving Corporation....................................... 8
2.4 Effect on Securities........................................ 9
2.5 Exchange of Certificates.................................... 11
2.6 Closing..................................................... 14
2.7 Effective Time of the Merger................................ 14
2.8 Taking of Necessary Action: Further Action.................. 14
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF DLB............................. 14
3.1 Organization................................................ 14
3.2 Other Interests............................................. 14
3.3 Board Action, Authority and Enforceability.................. 14
3.4 No Violations............................................... 15
3.5 Consents and Approvals...................................... 15
3.6 SEC Documents............................................... 16
3.7 Financial Information and Reserve Reports................... 16
3.8 Capital Structure........................................... 16
3.9 No Undisclosed Liabilities.................................. 17
3.10 Absence of Certain Changes or Events........................ 17
3.11 Compliance with Laws, Material Agreements and Permits....... 18
3.12 Governmental Regulation..................................... 19
3.13 Litigation.................................................. 19
3.14 No Restrictions............................................. 19
3.15 Tax Audits and Settlements.................................. 19
3.16 Taxes....................................................... 19
3.17 Employee Benefit Plans...................................... 20
3.18 Employment Contracts and Benefits........................... 21
3.19 Labor Matters............................................... 22
3.20 Insurance................................................... 22
3.21 Intangible Property......................................... 22
3.22 Environmental Matters....................................... 22
3.23 Books and Records........................................... 23
3.24 Brokers..................................................... 23
3.25 Vote Required............................................... 23
3.26 Proxy Statement/Prospectus; Registration Statement.......... 23
3.27 Account Information......................................... 24
3.28 Powers of Attorney.......................................... 24
3.29 Plugging Status............................................. 24
i
128
PAGE
----
3.30 Equipment................................................... 24
3.31 Current Commitments......................................... 24
3.32 Payout Balances............................................. 24
3.33 Title....................................................... 24
3.34 Full Disclosure............................................. 25
3.35 Certain Agreements.......................................... 25
3.36 Shareholders Agreement...................................... 25
3.37 Affiliate Transactions...................................... 25
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF CHK AND MERGER SUB.............. 25
4.1 Organization................................................ 25
4.2 Authority and Enforceability................................ 25
4.3 No Violations............................................... 25
4.4 Consents and Approvals...................................... 26
4.5 SEC Documents............................................... 26
4.6 Financial Statements........................................ 26
4.7 Litigation.................................................. 27
4.8 Brokers..................................................... 27
4.9 Vote Required............................................... 27
4.10 Proxy Statement/Prospectus; Registration Statement.......... 27
ARTICLE V
COVENANTS......................................................... 27
5.1 Conduct of Business by DLB Pending Closing.................. 27
5.2 Conduct of Business by CHK Pending Closing.................. 30
5.3 Access to Assets, Personnel and Information................. 30
5.4 No Solicitation............................................. 30
5.5 Meeting of DLB's Stockholders............................... 31
5.6 Preparation of the Proxy Statement/Prospectus and
Registration Statement...................................... 32
5.7 Stock Listing............................................... 32
5.8 Additional Arrangements..................................... 32
5.9 Public Announcements........................................ 33
5.10 Payment of Expenses......................................... 33
5.11 Agreements of Affiliates.................................... 33
5.12 Insurance; Indemnification.................................. 34
5.13 DLB Employees............................................... 34
5.14 New Bank Credit Facility.................................... 34
5.15 Notice of Actions and Proceedings........................... 34
5.16 Notification of Certain Other Matters....................... 35
5.17 Corrections to the Proxy Statement/Prospectus and
Registration Statement...................................... 35
5.18 Bayard Common Stock and WRT Common Stock Registration
Statements.................................................. 35
5.19 Termination of Administrative Services Agreement............ 35
ARTICLE VI
CONDITIONS........................................................ 35
6.1 Conditions to Each Party's Obligation to Effect the
Merger...................................................... 35
6.2 Conditions to Obligations of CHK and Merger Sub............. 36
6.3 Conditions to Obligations of DLB............................ 37
ii
129
PAGE
----
ARTICLE VII
TERMINATION....................................................... 37
7.1 Termination Rights.......................................... 37
7.2 Effect of Termination....................................... 38
ARTICLE VIII
MISCELLANEOUS..................................................... 39
8.1 Nonsurvival of Representations, Warranties, Covenants and
Agreements.................................................. 39
8.2 Amendment................................................... 39
8.3 Notices..................................................... 39
8.4 Counterparts................................................ 39
8.5 Severability................................................ 39
8.6 Entire Agreement; No Third Party Beneficiaries.............. 39
8.7 Applicable Law.............................................. 39
8.8 No Remedy in Certain Circumstances.......................... 39
8.9 Enforcement of Agreement.................................... 40
8.10 Assignment.................................................. 40
8.11 Waivers..................................................... 40
8.12 Confidentiality Agreement................................... 40
8.13 Incorporation............................................... 40
LIST OF SCHEDULES
1.1(a) Equipment and Other Materials
1.1(b) Excluded Assets
1.1(c) DLB Companies' Net Revenue Interests
1.1(d) Liens
3.2 Other Interests
3.5 Consents and Approvals
3.6 DLB SEC Documents
3.8(b) Capital Structure
3.10 Absence of Certain Changes or Events
3.13 Litigation
3.14 No Restrictions
3.15 Tax Audits and Settlements
3.16 Taxes
3.17(a) Employee Benefit Plans
3.17(d) Accelerated Payment or Vesting of Employee Benefits
3.17(h) Litigation Regarding DLB Employee Benefit Plan
3.18 Employment Contracts and Benefits
3.20 Insurance
3.22 Environmental Matters
3.24 Brokers
3.27 Account Information
3.31 Current Commitments
3.32 Payout Balances
4.4 Consents and Approvals
iii
130
4.5 CHK SEC Documents
4.7 CHK Litigation
5.1(b) Loans, Advances and Contributions of DLB
5.1(k) Stipulated Expenditures in Excess of $50,000
5.2 Conduct of Business by CHK Pending Closing
5.13(a) Employees Not Retained
5.13(b) Employees Made Available to WRT
LIST OF ANNEXES
A Agreement and Irrevocable Proxy
B Goodwill Protection Agreement
C Form of Agreement of Affiliates
D Registration Rights Agreement
iv
131
AGREEMENT AND PLAN OF MERGER
This Agreement and Plan of Merger (this "AGREEMENT") is made and entered
into this 22nd day of October, 1997, by and among Chesapeake Energy Corporation,
an Oklahoma corporation (" CHK"), Chesapeake Merger Corp., an Oklahoma
corporation and an indirect wholly owned subsidiary of CHK ("MERGER SUB"), and
DLB Oil & Gas, Inc., an Oklahoma corporation ("DLB").
RECITALS:
A. The board of directors of each of CHK, Merger Sub and DLB has determined
that it is in the best interests of their respective stockholders to approve the
merger of Merger Sub with and into DLB upon the terms and subject to the
conditions set forth in this Agreement (the "Merger");
B. The board of directors of each of CHK, Merger Sub and DLB has
unanimously adopted resolutions approving the Merger, this Agreement and the
transactions contemplated hereby, and the board of directors of DLB has
unanimously agreed to recommend that the stockholders of DLB approve this
Agreement, the Merger and the transactions contemplated hereby;
C. CHK, Merger Sub and DLB desire to make certain representations,
warranties, covenants and agreements in connection with the Merger and also to
prescribe various conditions to the Merger;
D. CHK has advised DLB and the DLB Specified Stockholders (as hereinafter
defined) that it will not enter into this Agreement unless the DLB Specified
Stockholders execute and deliver to CHK an Agreement and Irrevocable Proxy in
the form set forth in Annex A to this Agreement;
E. CHK has advised DLB that it will not enter into this Agreement unless
Charles E. Davidson, Mike Liddell and Mark Liddell execute and deliver to CHK a
Goodwill Protection Agreement in the form set forth in Annex B to this
Agreement; and
F. CHK has agreed to execute and deliver a Registration Rights Agreement
with Charles E. Davidson in the form set forth in Annex D to this Agreement;
NOW, THEREFORE, for and in consideration of the recitals and the mutual
covenants and agreements set forth in this Agreement, the parties to this
Agreement hereby agree as follows:
ANNEX A
1
132
ARTICLE I
DEFINITIONS
1.1 DEFINED TERMS. As used in this Agreement, each of the following terms
has the meaning given in this Section 1.1 or in the Sections referred to below:
"AFFILIATE" means, with respect to any Person, each other Person that
directly or indirectly (through one or more intermediaries or otherwise)
controls, is controlled by, or is under common control with such Person.
"AGREEMENT" means this Agreement and Plan of Merger, as amended,
supplemented or modified from time to time.
"AGREEMENT AND IRREVOCABLE PROXY" means the agreement set forth in Annex A
to this Agreement.
"ALTERNATIVE PROPOSAL" has the meaning specified in Section 5.4(b).
"THE AMES COMPANY" means The Ames Company, Inc., an Oklahoma corporation
and a wholly owned subsidiary of DLB.
"AMES FIELD" means Ames Field, L.L.C., a limited liability company formed
under the laws of Oklahoma and a wholly owned subsidiary of DLB.
"BAYARD" means Bayard Drilling Technologies, Inc., a Delaware corporation.
"BAYARD COMMON STOCK" means the common stock, par value $.01 per share, of
Bayard.
"BAYARD DISTRIBUTION DATE" means the 180th day after the effective date of
that certain underwriting agreement to be entered into among Bayard, the
underwriters and the selling stockholders of Bayard in connection with the
pricing of Bayard's initial public offering of Bayard Common Stock.
"BAYARD MERGER AGREEMENT" means the Agreement and Plan of Merger, dated as
of October 9, 1997, among DLB, Bayard, Bonray Acquisition Corp. and Bonray
Drilling Corporation.
"BAYARD REGISTRATION AGREEMENT" means that certain Registration Rights
Agreement, dated October 16, 1997, by and among Bayard, DLB and Donaldson,
Lufkin & Jenrette Securities Corporation, as amended and in effect on the date
hereof.
"BUSINESS DAY" means any day that is not a Saturday, Sunday or other day on
which banking institutions in New York, New York are authorized or required by
law or executive order to close.
"CERCLA" means the Comprehensive Environmental Response, Compensation and
Liability Act of 1980, as amended, or any successor statutes and any regulations
promulgated thereunder.
"CERCLIS" means the Comprehensive Environmental Response, Compensation and
Liability Information System List.
"CERTIFICATE OF MERGER" means the certificate of merger, prepared and
executed in accordance with the applicable provisions of the OGCA, filed with
the Secretary of State of Oklahoma to reflect the consummation of the Merger.
"CHK" means Chesapeake Energy Corporation, an Oklahoma corporation.
"CHK CERTIFICATE" means a certificate representing shares of CHK Common
Stock.
"CHK COMMON STOCK" means the common stock, par value $0.01 per share, of
CHK.
"CHK COMMON STOCK CONSIDERATION" means $65,000,000 divided by the number of
fully diluted shares of DLB Common Stock issued and outstanding at the Effective
Time.
ANNEX A
2
133
"CHK FINANCIAL STATEMENTS" means the audited consolidated financial
statements of CHK and its subsidiaries (including the related notes) included
(or incorporated by reference) in CHK's Annual Report on Form 10-K for the year
ended June 30, 1997, as filed with the SEC.
"CHK MATERIAL SUBSIDIARY(IES)" means Chesapeake Operating, Inc., Chesapeake
Exploration Limited Partnership and Chesapeake Louisiana, L.P.
"CHK REPRESENTATIVE" means any director, officer, employee, agent, advisor
(including legal, accounting and financial advisors), Affiliate or other
representative of CHK or its subsidiaries.
"CHK SEC DOCUMENTS" has the meaning specified in Section 4.5.
"CLOSING" means the closing of the Merger and the consummation of the other
transactions contemplated by this Agreement.
"CLOSING DATE" means the date on which the Closing occurs, which date shall
not be later than the first Business Day following the day on which the last of
the conditions set forth in Article VI has been satisfied or waived.
"CLOSING PRICE" means the average of the closing prices of CHK Common
Stock, rounded to three decimal places, as reported by The Wall Street
Journal -- Composite Transactions, for each of the first 20 consecutive Trading
Days in the period commencing 25 Trading Days prior to the date of the DLB
Special Meeting.
"CODE" means the Internal Revenue Code of 1986, as amended.
"CONFIDENTIALITY AGREEMENT" means the letter agreement, dated October 21,
1997, between DLB and CHK or its Affiliate relating to DLB's furnishing of
information to CHK or such Affiliate in connection with CHK's or such
Affiliate's evaluation of a possible transaction between CHK and DLB.
"CREDIT FACILITIES" means the 1997 Credit Facility entered into in March
1997 by DLB and The Chase Manhattan Bank as agent for itself and the Bank of
Oklahoma, N.A., as amended, supplemented or modified from time to time and the
Credit Agreement dated as of July 11, 1997 between Bonray Drilling Corporation
and Lehman Commercial Paper Inc. as administrative agent and arranger, as
amended, supplemented or modified from time to time and the related Assumption
Agreement dated October 16, 1997 by and between Bonray Holding L.L.C., Bonray
Drilling Corporation, Lehman Commercial Paper, Inc. and DLB.
"DISCLOSURE SCHEDULE" means the Disclosure Schedule attached hereto and any
documents listed on such Disclosure Schedule and expressly incorporated therein
by reference.
"DISSENTING STOCKHOLDER(S)" means holder(s) of DLB Common Stock who have
validly perfected appraisal rights under Section 1091 of the OGCA.
"DLB" means DLB Oil & Gas, Inc., an Oklahoma corporation.
"DLB CERTIFICATE" means a certificate representing shares of DLB Common
Stock.
"DLB COMMON STOCK" means the common stock, par value $.001 per share, of
DLB.
"DLB COMPANIES" means DLB and each of its Subsidiaries (excluding WRT).
"DLB EMPLOYEE BENEFIT PLANS" has the meaning specified in Section 3.17(a).
"DLB FINANCIAL STATEMENTS" means the audited and unaudited consolidated
financial statements of DLB and its subsidiaries (including the related notes)
included (or incorporated by reference) in DLB's Annual Report on Form 10-K for
the year ended December 31, 1996 and Quarterly Reports on Form 10-Q for the
quarters ended March 31, 1997 and June 30, 1997, in each case as filed with the
SEC.
"DLB INTERNATIONAL" means DLB International, Inc., an Oklahoma corporation
and a wholly owned Subsidiary of DLB.
ANNEX A
3
134
"DLB MATERIAL AGREEMENT(S)" means (a) any written or oral agreement,
contract, commitment or understanding to which any of the DLB Companies is a
party, by which any of the DLB Companies is directly or indirectly bound, or to
which any asset of any of the DLB Companies may be subject, involving total
value or consideration in excess of $50,000, (b) the Credit Facilities, (c) the
Bayard Registration Agreement and (d) the WRT Registration Agreement, in each
case as amended and supplemented as of the date hereof.
"DLB MIDCON" means DLB and the DLB Companies, excluding any shares of
Bayard Common Stock or WRT Common Stock held by DLB or the DLB Companies.
"DLB PERMITS" has the meaning specified in Section 3.11.
"DLB PROPOSAL" means the proposal to approve this Agreement and the Merger,
which proposal is to be presented to the stockholders of DLB in the Proxy
Statement/Prospectus.
"DLB REPRESENTATIVE" means any director, officer, employee, agent, advisor
(including legal, accounting and financial advisors), Affiliate or other
representative of any of the DLB Companies.
"DLB SEC DOCUMENTS" has the meaning specified in Section 3.6.
"DLB SPECIAL MEETING" has the meaning specified in Section 5.5.
"DLB SPECIFIED STOCKHOLDERS" means Charles Davidson, Mike Liddell and Mark
Liddell.
"DLB STOCK OPTION" means an option, warrant or other right (issued and
outstanding on the date hereof and at the Effective Time) to acquire shares of
DLB Common Stock granted pursuant to a DLB Employee Benefit Plan.
"DLB STOCKHOLDERS' APPROVAL" has the meaning specified in Section 3.25.
"EFFECTIVE TIME" has the meaning specified in Section 2.7.
"ENVIRONMENTAL LAW" means any federal, state, local or foreign statute,
code, ordinance, rule, regulation, policy, guideline, permit, consent, approval,
license, judgment, order, writ, decree, common law, injunction or other
authorization in effect on the date hereof or at a previous time relating to (a)
emissions, discharges, releases or threatened releases of Hazardous Materials
into the natural environment, including into ambient air, soil, sediments, land
surface or subsurface, buildings or facilities, surface water, groundwater,
publicly-owned treatment works, septic systems or land, (b) the generation,
treatment, storage, disposal, use, handling, manufacturing, transportation or
shipment of Hazardous Materials, or (c) otherwise relating to the pollution of
the environment, solid waste handling treatment or disposal, or operation or
reclamation of mines. The term "Environmental Law" includes, without limitation,
(A) the Federal Comprehensive Environmental Response Compensation and Liability
Act of 1980, the Superfund Amendments and Reauthorization Act, the Federal Water
Pollution Control Act of 1972, the Federal Clean Air Act, the Federal Clean
Water Act, the Federal Resource Conservation and Recovery Act of 1976 (including
the Hazardous and Solid Waste Amendments thereto), the Federal Solid Waste
Disposal Act and the Federal Toxic Substances Control Act, the Federal
Insecticide, Fungicide and Rodenticide Act, and the Federal Occupational Safety
and Health Act of 1970, each as amended and as in effect on the Closing Date,
and (B) any common law or equitable doctrine (including, without limitation,
injunctive relief and tort doctrines such as negligence, nuisance, trespass and
strict liability) to the extent that same may impose liability or obligations
for injuries or damages due to, or threatened as a result of, the presence of,
effects of or exposure to any Hazardous Material.
"ENVIRONMENTAL RESPONSE MEASURE" means all actions in response to a matter
arising under any Environmental Law, including but not limited to remediation,
removal, emergency response, natural resource damages or measures, corrective
action, allocation proceedings, orphan share determinations, enforcement
proceedings, health and ecological studies, remedial investigations and
feasibility studies, and related investigative, technical and legal activities.
"EQUIPMENT" means (a) the equipment and other materials described in
Schedule 1.1(a) of the Disclosure Schedule and (b) all other equipment,
fixtures, physical facilities, tank batteries, improvements,
ANNEX A
4
135
surface and subsurface machinery, goods, inventory, spare parts, supplies, tools
and other tangible personal property, or interests (including all leasehold
rights and interests) therein, including all casing, tubing, tubular goods,
rods, pumping units and engines, Christmas trees, derricks, separators,
compressors, gun barrels, flow lines, gathering systems, tanks, chemicals,
communication systems and equipment, radio towers, remote terminal units, and
computer equipment of every type, nature, and description (including leasehold
interests therein), to the extent that, as of the Effective Time, the same were
owned or leased by DLB and used or held for use in connection with the
ownership, operation, maintenance, use, or development of the Lands, the Oil and
Gas Properties, and Wells, whether located on or off such Lands, but excluding
those assets set forth in Schedule 1.1(b) of the Disclosure Schedule.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended.
"EXCHANGE AGENT" means UMB Bank, N.A., the transfer agent for shares of CHK
Common Stock.
"EXCHANGE FUND" has the meaning specified in Section 2.5(a).
"EXCHANGE RATIO" has the meaning specified in Section 2.4(a).
"EXPENSES" has the meaning specified in Section 5.10(a).
"GAAP" means generally accepted accounting principles, as recognized by the
U.S. Financial Accounting Standards Board (or any generally recognized
successor).
"GEMCO" means Gathering & Energy Marketing Company, LLC, an Oklahoma
limited liability company and wholly owned subsidiary of DLB.
"GOODWILL PROTECTION AGREEMENT" means the agreement set forth in Annex B to
this Agreement.
"GOVERNMENTAL ACTION" means any authorization, application, approval,
consent, exemption, filing, license, notice, registration, permit or other
requirement of, to or with any Governmental Authority.
"GOVERNMENTAL AUTHORITY" means any national, state, county or municipal
government, domestic or foreign, any agency, board, bureau, commission, court,
department or other instrumentality of any such government, or any arbitrator in
any case that has jurisdiction over any of the DLB Companies or CHK or any of
their respective properties or assets.
"HAZARDOUS MATERIAL" means (a) any "hazardous substance," as defined by
CERCLA, (b) any "hazardous waste," as defined by the Resource Conservation and
Recovery Act, as amended, (c) any material within the meaning of and regulated
by any Environmental Law, (d) any radioactive material, including any naturally
occurring radioactive material, and any source, special or byproduct material as
defined in 42 U.S.C. 2011 et seq. and any amendments or authorizations thereof,
(e) any asbestos-containing materials in any form or condition, or (f) any
polychlorinated biphenyls in any form or condition.
"HSR ACT" means the Hart-Scott-Rodino Antitrust Improvements Act of 1976,
as amended.
"HYDROCARBONS" means all severed crude oil, natural gas, casinghead gas,
drip gasoline, natural gasoline, petroleum, natural gas liquids, plant products,
condensate, and other liquid and gaseous hydrocarbons and minerals of every kind
and description produced from or attributable to the Wells and the Oil and Gas
Properties.
"INDEMNIFIED PARTIES" has the meaning specified in Section 5.12.
"LANDS" means all lands described or referred to in the Oil and Gas
Properties, including, without limitation, all properties and lands pooled or
unitized with any of the Oil and Gas Properties.
"LIEN" means any lien, mortgage, security interest, pledge, deposit,
production payment, restriction, burden, encumbrance, rights of a vendor under
any title retention or conditional sale agreement, or lease or other arrangement
substantially equivalent thereto.
ANNEX A
5
136
"MATERIAL ADVERSE EFFECT" means (a) when used with respect to DLB, a result
or consequence that would materially adversely affect the condition (financial
or otherwise), results of operations or business of DLB MidCon (taken as a
whole) or the aggregate value of their assets, would materially impair the
ability of DLB MidCon (taken as a whole) to own, hold, develop and operate their
assets, or would impair DLB's ability to perform its obligations hereunder or
consummate the transactions contemplated hereby; and (b) when used with respect
to CHK, a result or consequence that would materially adversely affect the
condition (financial or otherwise), results of operations or business of CHK and
the CHK Material Subsidiaries (taken as a whole) or the aggregate value of their
assets, would materially impair the ability of CHK and the CHK Material
Subsidiaries (taken as a whole) to own, hold, develop and operate their assets,
or would impair CHK's ability to perform its obligations hereunder or consummate
the transactions contemplated hereby.
"MERGER" has the meaning specified in the recitals to this Agreement.
"MERGER CONSIDERATION" has the meaning specified in Section 2.4(a) or
2.4(f), as the case may be.
"MERGER SUB" means Chesapeake Merger Corp., an Oklahoma corporation.
"NET REVENUE INTEREST" means DLB's overall interest in Hydrocarbons
produced from or attributable to the Lands, Oil and Gas Properties, and Wells,
after deducting all lessors' royalties, overriding royalties, production
payments, and other interests or burdens on Hydrocarbons produced from the
Lands, Oil and Gas Properties, and Wells.
"OGCA" means the Oklahoma General Corporation Act.
"OIL AND GAS PROPERTIES" means all oil and gas leases, mineral interests,
fee interests, royalty interests, overriding royalty interests, production
payments, net profits interests, subleases, mineral servitudes, licenses,
easements and other rights and interests of DLB in and to the Lands.
"PERMITTED ENCUMBRANCES" means (a) Liens for Taxes, assessments or other
governmental charges or levies if the same shall not at the particular time in
question be due and delinquent, or if foreclosure, distraint, sale or other
similar proceedings shall not have been commenced or, if commenced, shall have
been stayed or are being contested in good faith by appropriate proceedings and
the DLB Companies shall have set aside on its books such reserves (segregated to
the extent required by sound accounting practices) as may be required by GAAP
and determined by the board of directors to be adequate with respect thereto;
(b) 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 hydrocarbon properties and related facilities and assets for sums
not yet due or being contested in good faith by appropriate proceedings and the
DLB Companies shall have set aside on their books such reserves (segregated to
the extent required by sound accounting practices) as may be required by GAAP
and determined by its Board of Directors to be adequate with respect thereto;
(c) Liens incurred in the ordinary course of business in connection with
worker's compensation, unemployment insurance and other social security
legislation (other than ERISA); (d) Liens incurred in the ordinary course of
business to secure the performance of bids, tenders, trade contracts, leases,
statutory obligations, surety and appeal bonds, performance and repayment bonds
and other obligations of a like nature; (e) Liens, easements, rights-of-way,
restrictions, servitudes, permits, conditions, covenants, exceptions,
reservations and other similar encumbrances incurred in the ordinary course of
business or existing on property and not in the aggregate materially impairing
the value of the assets of any of DLB Companies or interfering with the ordinary
conduct of the business of any of the DLB Companies or rights to any of their
assets, provided that same do not (i) reduce the DLB Companies' Net Revenue
Interests below that set forth on Schedule 1.1(c) to the Disclosure Schedule;
(ii) increase the DLB Companies' Working Interests in any Oil and Gas Property
above that set forth on Schedule 1.1(c) to the Disclosure Schedule or (iii)
impair the DLB Companies' right to use the affected asset in the manner and to
the extent currently utilized by the DLB Companies; (f) Liens arising pursuant
to Section 17 of the applicable Uniform Commercial Code, the Oil and Gas Owner's
Lien Act in Oklahoma Statutes Annotated
ANNEX A
6
137
(title 52, Section 548, et seq.) and all other similar Liens created or arising
by operation of law to secure a party's obligations as a purchaser of oil and
gas; (g) all rights to consent by, required notices to, filings with, or other
actions by Governmental Authorities to the extent customarily obtained
subsequent to closing; (h) farmout, carried working interest, joint operating,
unitization, royalty, overriding royalty, sales and similar agreements relating
to the exploration or development to or production from, hydrocarbon properties
entered into in the ordinary course of business, but only to the extent that
such interests do not cause the Net Revenue Interest or Working Interest for the
affected Oil and Gas Property to vary from that set forth on Schedule 1.1(c) to
the Disclosure Schedule; (i) DLB Companies' respective rights with regard to gas
imbalances to the extent set forth on Schedule 3.32 to the Disclosure Schedule;
(j) any defects, irregularities or deficiencies in title to easements,
rights-of-way or other surface use agreements that do not materially adversely
affect the value of any asset of any of the DLB Companies, provided that same do
not (i) reduce the DLB Companies' Net Revenue Interests below that set forth on
Schedule 1.1(c) to the Disclosure Schedule; (ii) increase the DLB Companies'
Working Interests in any Oil and Gas Property above that set forth on Schedule
1.1(c) to the Disclosure Schedule or (iii) impair the DLB Companies' right to
use the affected asset in the manner and to the extent currently utilized by the
DLB Companies; (k) preferential rights to purchase and Third-Party Consents; (l)
Liens arising under or created pursuant to the Credit Facilities; and (m) Liens
described on Schedule 1.1(d) to the Disclosure Schedule.
"PERSON" means any natural person, corporation, company, limited or general
partnership, joint stock company, joint venture, association, limited liability
company, trust, bank, trust company, land trust, business trust or other entity
or organization, whether or not a Governmental Authority.
"PROXY STATEMENT/PROSPECTUS" has the meaning specified in Section 3.26.
"REGISTRATION STATEMENT" means the Registration Statement on Form S-4 to be
filed by CHK in connection with the issuance of CHK Common Stock pursuant to the
Merger.
"RESPONSIBLE OFFICER" means, with respect to any corporation, the Chief
Executive Officer, President or any Vice President of such corporation.
"RETAINED EMPLOYEES" has the meaning specified in Section 5.13.
"SEC" means the Securities and Exchange Commission.
"SECURITIES ACT" means the Securities Act of 1933, as amended.
"SUBSIDIARY" means any Person with respect to which a specified Person (or
a Subsidiary thereof) controls a majority of the ownership or has the power to
vote or direct the voting of sufficient securities to elect a majority of the
board of directors or similar governing body.
"SURVIVING CORPORATION" has the meaning specified in Section 2.2.
"TAX RETURNS" has the meaning specified in Section 3.16(a).
"TAXES" means taxes of any kind, levies or other like assessments, customs,
duties, imposts, charges or fees, including income, gross receipts, and valorem,
value added, excise, real or personal property, asset, sales, use, federal
royalty, license, payroll, transaction, capital, net worth and franchise taxes,
estimated taxes, withholding, employment, social security, workers compensation,
utility, severance, production, unemployment compensation, occupation, premium,
windfall profits, transfer and gains taxes or other governmental taxes imposed
or payable to the United States or any state, local or foreign governmental
subdivision or agency thereof, and in each instance such term shall include any
interest, penalties or additions to tax attributable to any such Tax, including
penalties for the failure to file any Tax Return or report.
"THIRD-PARTY CONSENT" means the consent or approval of any Person other
than DLB, CHK or any Governmental Authority.
"TRADING DAY" means a day on which the New York Stock Exchange, Inc. (the
"NYSE") is open for trading.
ANNEX A
7
138
"WELLS" shall mean those oil, condensate, or natural gas wells, water
source wells, and water and other types of injection or disposal wells and
systems located on the Lands or used or held for use in connection with any
Lands, the Oil and Gas Properties, or wells, whether producing, shut-in, or
temporarily abandoned, including those wells identified on Schedule 1.1(c) to
the Disclosure Schedule.
"WORKING INTEREST" shall mean DLB's share of all of the costs, expenses,
burdens, and obligations of any type or nature attributable to DLB's interest in
any Lands, Oil and Gas Property, or Well.
"WRT" means WRT Energy Corporation, a Delaware corporation.
"WRT CLAIMS INTEREST" means DLB's right as a Class D-3 creditor under the
WRT Plan of Reorganization to receive its pro rata share of additional
distributions of shares of WRT Common Stock and its pro rata percentage of the
Litigation Entity Interests (as defined in the WRT Plan of Reorganization).
"WRT COMMON STOCK" means the common stock, par value $.01 per share, of
WRT.
"WRT PLAN OF REORGANIZATION" means the Second Amended Joint Plan of
Reorganization of WRT Energy Corporation filed with the United States Bankruptcy
Court for the Western District of Louisiana on March 11, 1997.
"WRT REGISTRATION AGREEMENT" means that certain Registration Rights
Agreement by and among WRT Energy Corporation, DLB Oil & Gas, Inc. and Wexford
Management LLC dated as of July 10, 1997.
1.2 REFERENCES AND TITLES. All references in this Agreement to Exhibits,
Schedules, Articles, Sections, subsections and other subdivisions refer to the
corresponding Exhibits, Schedules, Articles, Sections, subsections and other
subdivisions of or to this Agreement unless expressly provided otherwise. Titles
appearing at the beginning of any Articles, Sections, subsections or other
subdivisions of this Agreement are for convenience only, do not constitute any
part of this Agreement, and shall be disregarded in construing the language
hereof. The words "this Agreement," "herein," "hereby," "hereunder" and
"hereof," and words of similar import, refer to this Agreement as a whole and
not to any particular subdivision unless expressly so limited. The words "this
Article," "this Section" and "this subsection," and words of similar import,
refer only to the Article, Section or subsection hereof in which such words
occur. The word "or" is not exclusive, and the word "including" (in its various
forms) means "including without limitation." Pronouns in masculine, feminine or
neuter genders shall be construed to state and include any other gender, and
words, terms and titles (including term defined herein) in the singular form
shall be construed to include the plural and vice versa, unless the context
otherwise requires.
As used in the representations and warranties contained in this Agreement,
the phrase "to the knowledge" of the representing party shall mean that
Responsible Officers of such representing party, individually or collectively,
either (a) know that the matter being represented and warranted is true and
accurate or (b) have no reason to believe that the matter being represented and
warranted is not true and accurate.
ARTICLE II
THE MERGER
2.1 THE MERGER. Subject to the terms and conditions hereof, the Merger
shall be consummated in accordance with the OGCA as soon as practicable
following the satisfaction or waiver of the conditions set forth in Article VI
of this Agreement. At the Effective Time, subject to the terms and conditions of
this Agreement and in accordance with the OGCA, Merger Sub shall be merged with
and into DLB, which shall be the surviving corporation. Such merger is referred
to herein as the "MERGER."
2.2 EFFECT OF THE MERGER. Upon the effectiveness of the Merger, the
separate existence of Merger Sub shall cease and DLB, as the surviving
corporation in the Merger (the "SURVIVING CORPORATION"), shall
ANNEX A
8
139
continue its corporate existence under the laws of the State of Oklahoma. The
Merger shall have the effects specified in this Agreement and the OGCA.
2.3 GOVERNING INSTRUMENTS, DIRECTORS AND OFFICERS OF THE SURVIVING
CORPORATION.
(a) The certificate of incorporation of Merger Sub, as in effect
immediately prior to the Effective Time, shall be the certificate of
incorporation of the Surviving Corporation until duly amended in accordance with
its terms and applicable law, except that the name of the Surviving Corporation
shall be changed to "Chesapeake MidContinent Corporation."
(b) The by-laws of Merger Sub, as in effect immediately prior to the
Effective Time, shall be the by-laws of the Surviving Corporation until duly
amended in accordance with their terms and applicable law.
(c) The directors and officers of Merger Sub at the Effective Time shall be
the directors and officers, respectively, of the Surviving Corporation from the
Effective Time until their respective successors have been duly elected or
appointed and qualified or until their earlier death, resignation or removal in
accordance with the certificate of incorporation and by-laws of the Surviving
Corporation and applicable law.
2.4 EFFECT ON SECURITIES.
(a)(i) DLB COMMON STOCK. At the Effective Time, by virtue of the Merger and
without any action on the part of any holder thereof (but subject to the
provisions of Section 2.5(e)), each share of DLB Common Stock that is issued and
outstanding immediately prior to the Effective Time (other than shares of DLB
Common Stock held by Dissenting Stockholders and other than shares of DLB Common
Stock to be canceled pursuant to Section 2.4(b) hereof) shall be converted into
the right to receive; (w) a fractional interest in a share of CHK Common Stock
equal to the CHK Common Stock Consideration divided by the Closing Price (the
"EXCHANGE RATIO"); provided, however, that if the Closing Price is less than
$7.50, DLB, Merger Sub or CHK may terminate this Agreement by written notice to
the other parties to this Agreement (which notice shall be effective if
delivered to such other parties not later than 5:00 p.m. Oklahoma City time on
the Trading Day next preceding the date of the DLB Special Meeting); (x) that
number of shares of Bayard Common Stock owned by DLB immediately prior to the
Effective Time divided by the number of shares of DLB Common Stock issued and
outstanding immediately prior to the Effective Time; (y) that number of shares
of WRT Common Stock owned by DLB immediately prior to the Effective Time divided
by the number of shares of DLB Common Stock issued and outstanding immediately
prior to the Effective Time; and (z) the net proceeds, if any, consisting of
cash and/or other property, received by DLB prior to the Effective Time from the
sale or contribution of the WRT Claims Interest divided by the number of shares
of DLB Common Stock issued and outstanding immediately prior to the Effective
Time (collectively, the "MERGER CONSIDERATION"); provided that the number of
shares of Bayard Common Stock and WRT Common Stock that any holder of DLB Common
Stock would otherwise be entitled to receive shall be rounded to the nearest
whole number of shares of Bayard Common Stock and WRT Common Stock,
respectively, and in no event shall the number of shares of Bayard Common Stock
or the number of shares of WRT Common Stock subject to issuance as Merger
Consideration exceed the number of shares of Bayard Common Stock or the number
of shares of WRT Common Stock, respectively, owned by DLB immediately prior to
the Effective Time. Each share of DLB Common Stock, when so converted, shall
automatically be canceled and retired, shall cease to exist and shall no longer
be outstanding; and the holder of any certificate representing any such shares
shall cease to have any rights with respect thereto.
(ii) The Merger Consideration shall be subject to equitable adjustment in
the event of any stock split, stock dividend, reverse stock split or other
change in the number of shares of CHK Common Stock (unless the election to pay
cash is made in accordance with Section 2.4(f)), DLB Common Stock, Bayard Common
Stock or WRT Common Stock outstanding prior to Closing.
(b) DLB TREASURY STOCK. At the Effective Time, by virtue of the Merger, all
shares of DLB Common Stock that are issued and held as treasury stock shall be
canceled and retired and shall cease to exist, and no Merger Consideration or
other consideration shall be paid or payable in exchange therefor.
ANNEX A
9
140
(c) DLB STOCK OPTIONS. Each outstanding DLB Stock Option shall be either
exercised and exchanged for shares of DLB Common Stock prior to the Effective
Time or canceled in accordance with its terms or with the agreement of the
holder thereof prior to the Effective Time. Except as otherwise agreed to by the
parties, (i) the provisions in any plan, program or arrangement providing for
the issuance or grant of any interest in respect of the capital stock of DLB or
any of the DLB Companies shall be canceled as of the Effective Time, and (ii)
DLB shall take all action necessary to ensure that following the Effective Time
no participant in any DLB Employee Benefit Plan or other plans, programs or
arrangements shall have any right thereunder to acquire equity securities of
DLB, the Surviving Corporation or any subsidiary thereof and to terminate all
such plans. CHK and Merger Sub agree that prior to the Effective Time DLB may
amend its existing stock option plans or stock option agreements in respect of
the options to purchase DLB Common Stock outstanding on the date of this
Agreement to provide that the optionee shall have the right (notwithstanding any
delayed vesting or exercisability provisions), exercisable at any time at the
optionee's election prior to the Effective Time, to effect a "cashless" exercise
of such optionee's option(s).
(d) SHARES OF DISSENTING STOCKHOLDERS. Any issued and outstanding shares of
DLB Common Stock held by a Dissenting Stockholder shall be converted into the
right to receive such consideration as may be determined to be due to such
Dissenting Stockholder pursuant to the OGCA; provided, however that shares of
DLB Common Stock outstanding at the Effective Time and held by a Dissenting
Stockholder who shall, after the Effective Time, withdraw his demand for
appraisal or lose his right of appraisal as provided in the OGCA, shall be
deemed to be converted, as of the Effective Time, into the right to receive the
Merger Consideration (without interest) specified in Section 2.4(a) in
accordance with the procedures specified in Section 2.5(b). DLB shall give CHK
(A) prompt notice of any written demands for appraisal, withdrawals of demands
for appraisal and any other instruments served pursuant to the OGCA received by
DLB, and (B) the opportunity to direct all negotiations and proceedings with
respect to demands for appraisal under the OGCA. DLB will not voluntarily make
any payment with respect to any demands for appraisal and will not, except with
the prior written consent of CHK or Merger Sub, settle or offer to settle any
such demands. Notwithstanding anything contained in this Section 2.4, if (i) the
Merger is rescinded or abandoned or (ii) if the stockholders of DLB revoke the
authority to effect the Merger, then the right of any Dissenting Stockholder to
receive such consideration as may be determined to be due in respect of such
Dissenting Stockholder's DLB Common Stock pursuant to the OGCA shall cease.
(e) MERGER SUB COMMON STOCK. At the Effective Time, each outstanding share
of common stock of Merger Sub shall, by virtue of the Merger and without any
action on the part of the holder thereof, be converted into and become one share
of common stock of the Surviving Corporation.
(f) SUBSTITUTION OF CASH FOR CHK COMMON STOCK. At any time prior to 6:00
p.m. Oklahoma City time on the fifth Trading Day prior to the date of the DLB
Special Meeting, CHK and Merger Sub may elect, by delivering written notice to
DLB by facsimile transmission in accordance with Section 8.3(b) hereof, to pay
as Merger Consideration cash in lieu of CHK Common Stock. If CHK shall complete
an underwritten public offering of CHK Common Stock for its own account after
the date of this Agreement and on or before the fifth Trading Day prior to the
DLB Special Meeting and receives not less than $65 million in net cash proceeds
from such offering, CHK shall be deemed to have made an election to pay as
Merger Consideration cash in lieu of CHK Common Stock. If such an election is
made, such election shall be irrevocable and, effective upon such election, the
first sentence of Section 2.4(a)(i) shall be deemed modified and amended to read
in its entirety as follows:
At the Effective Time, by virtue of the Merger and without any action on
the part of any holder thereof (but subject to the provisions of Section
2.5(e)), each share of DLB Common Stock that is issued and outstanding
immediately prior to the Effective Time (other than shares of DLB Common
Stock held by Dissenting Stockholders and other than shares of DLB
Common Stock to be canceled pursuant to Section 2.4(b) hereof) shall be
converted into the right to receive (w) an amount in cash equal to the
CHK Common Stock Consideration (the "Cash Exchange Ratio"); (x) that
number of shares of Bayard Common Stock owned by DLB immediately prior
to the Effective Time
ANNEX A
10
141
divided by the number of shares of DLB Common Stock issued and
outstanding immediately prior to the Effective Time; (y) that number of
shares of WRT Common Stock owned by DLB immediately prior to the
Effective Time divided by the number of shares of DLB Common Stock
issued and outstanding immediately prior to the Effective Time; and (z)
the net proceeds, if any, consisting of cash and/or other property
received by DLB prior to the Effective Time from the sale or
contribution of the WRT Claims Interest divided by the number of shares
of DLB Common Stock issued and outstanding immediately prior to the
Effective Time, provided that the number of shares of Bayard Common
Stock and WRT Common Stock that any holder of DLB Common Stock would
otherwise be entitled to receive shall be rounded to the nearest whole
number of shares of Bayard Common Stock and WRT Common Stock,
respectively, and in no event shall the number of shares of Bayard
Common Stock or the number of shares of WRT Common Stock subject to
issuance as Merger Consideration exceed the number of shares of Bayard
Common Stock or the number of shares of WRT Common Stock, respectively,
owned by DLB immediately prior to the Effective Time.
The Parties hereto agree that if the election is made by CHK and Merger Sub in
accordance with this Section 2.4(f), the term Merger Consideration as used in
this Agreement shall thereafter be defined as, and shall consist of, the
consideration described in clauses (w), (x), (y) and (z) of this Section 2.4(f).
2.5 EXCHANGE OF CERTIFICATES.
(a) EXCHANGE FUND. Prior to the Effective Time, Merger Sub shall, and CHK
shall cause Merger Sub to, deposit with the Exchange Agent, for the benefit of
the holders of shares of DLB Common Stock and for exchange in accordance with
this Agreement, certificates representing the shares of CHK Common Stock to be
issued in exchange for shares of DLB Common Stock pursuant to Section 2.4(a)
(or, if the cash election is made in accordance with Section 2.4(f) hereof, cash
equal to the total amount of cash to be paid as Merger Consideration pursuant to
clause (w) of Section 2.4(f)), and DLB shall deposit with the Exchange Agent,
for the benefit of the holders of shares of DLB Common Stock and for delivery in
accordance with this Agreement, certificates representing the shares of Bayard
Common Stock, certificates representing the shares of WRT Common Stock and the
net proceeds, if any, from the sale or contribution of the WRT Claims Interest
to be delivered as part of the Merger Consideration pursuant to Section 2.4(a)
(or if the cash election is made, pursuant to Section 2.4(f)) and at the
Effective Time all such shares so deposited with the Exchange Agent shall be
free and clear of any Lien arising under CHK, Merger Sub or any of the DLB
Companies. Such shares of CHK Common Stock (or cash, if the cash election is
made in accordance with Section 2.4(f) hereof), Bayard Common Stock, WRT Common
Stock and the net proceeds, if any, from the sale or contribution of the WRT
Claims Interest together with any dividends or distributions with respect
thereto (as provided in Section 2.5(c)) are referred to herein as the "EXCHANGE
FUND." The Exchange Agent, pursuant to irrevocable instructions consistent with
the terms of this Agreement, shall deliver the CHK Common Stock (or cash, if the
cash election is made in accordance with Section 2.4(f) hereof), Bayard Common
Stock, the WRT Common Stock (and cash in lieu of fractional shares and any
unpaid dividends and distributions) and the net proceeds, if any, from the sale
or contribution of the WRT Claims Interest to be delivered pursuant to Section
2.4(a) or Section 2.4(f), as the case may be, out of the Exchange Fund, and the
Exchange Fund shall not be used for any other purpose whatsoever. Subject to
Section 2.5(b)(v) hereof, the Exchange Agent shall not be entitled to vote or
exercise any rights of ownership with respect to the CHK Common Stock, Bayard
Common Stock and the WRT Common Stock held by it from time to time hereunder,
except that it shall receive and hold all dividends or other distributions paid
or distributed with respect thereto for the account of Persons entitled thereto.
(b) EXCHANGE PROCEDURES.
(i) As soon as reasonably practicable after the Effective Time, CHK
shall cause the Exchange Agent to mail to each holder of record of a DLB
Certificate that, immediately prior to the Effective Time, represented
shares of DLB Common Stock, which was converted into the right to receive
the
ANNEX A
11
142
Merger Consideration pursuant to Section 2.4(a), a letter of transmittal to
be used to effect the exchange of such DLB Certificate for the Merger
Consideration (and cash in lieu of fractional shares and any unpaid
dividends and distributions), along with instructions for using such letter
of transmittal to effect such exchange. The letter of transmittal (or the
instructions thereto) shall specify that delivery of any DLB Certificate
shall be effected, and risk of loss and title thereto shall pass, only upon
delivery of such DLB Certificate to the Exchange Agent and shall be in such
form and have such other provisions as CHK may reasonably specify.
(ii) Upon surrender to the Exchange Agent of a DLB Certificate for
cancellation, together with a duly completed and executed letter of
transmittal and any other required documents (including, in the case of any
Person constituting an "affiliate" of DLB for purposes of Rule 145(c) and
(d) under the Securities Act, a written agreement from such Person as
described in Section 5.11 if not theretofore delivered to CHK), (A) the
holder of such DLB Certificate shall be entitled to receive in exchange
therefor stock certificates representing the number of whole shares of CHK
Common Stock (or cash in accordance with clause (w) in Section 2.4(f) if
the cash election is made in accordance with Section 2.4(f) hereof), whole
shares of Bayard Common Stock, whole shares of WRT Common Stock and the
portion of the net proceeds, if any, from the sale or contribution of the
WRT Claims Interest that such holder has the right to receive pursuant to
Section 2.4(a) or Section 2.4(f), as the case may be, any cash in lieu of
fractional shares of CHK Common Stock as provided in Section 2.5(e) (unless
the cash election is made in accordance with Section 2.4(f) hereof), and
any unpaid dividends and distributions that such holder has the right to
receive pursuant to Section 2.5(c) (after giving effect to any required
withholding of taxes); provided, however, that no certificates representing
shares of Bayard Common Stock (including, without limitation, any dividends
or distributions on the shares of Bayard Common Stock payable in shares of
Bayard Common Stock) shall be distributed by the Exchange Agent until the
Bayard Distribution Date and (B) the DLB Certificate so surrendered shall
forthwith be canceled. No interest shall be paid or accrued on the Merger
Consideration, cash in lieu of fractional shares or unpaid dividends and
distributions, if any, payable to holders of DLB Certificates. The Exchange
Agent shall accept such certificates upon compliance with such reasonable
terms and conditions as the Exchange Agent may impose to effect an orderly
exchange thereof in accordance with normal exchange practices. Until
surrendered as contemplated by this Section 2.5(b), each certificate for
shares of DLB Common Stock shall be deemed at any time after the Effective
Time to represent only the right to receive upon such surrender the Merger
Consideration as contemplated by Section 2.4(a) or Section 2.4(f), as the
case may be.
(iii) In the event of a transfer of ownership of DLB Common Stock that
is not registered in the transfer records of DLB, stock certificates
representing the appropriate number of shares of the Merger Consideration
(along with any cash in lieu of fractional shares and any unpaid dividends
and distributions that such holder has the right to receive) may be issued
or paid to a transferee if the DLB Certificate representing such shares of
DLB Common Stock is presented to the Exchange Agent properly endorsed, with
signature guaranteed or otherwise in proper form for transfer, accompanied
by all documents required to evidence and effect such transfer and to
evidence that any applicable stock transfer taxes have been paid.
(iv) Until surrendered as contemplated by this Section 2.5(b), each
DLB Certificate shall be deemed at any time after the Effective Time to
represent only the right to receive upon such surrender stock certificates
representing shares of the Merger Consideration as provided in Section
2.4(a) (or if the cash election is made in accordance with Section 2.4(f),
cash and stock certificates representing the Merger Consideration as
provided in Section 2.4(f)) in accordance with the provisions of this
Section 2.5 (along with any cash in lieu of fractional shares and any
unpaid dividends and distributions).
(v) Pending the distribution on the Bayard Distribution Date by the
Exchange Agent from the Exchange Fund of Bayard Common Stock, the shares of
Bayard Common Stock shall be voted by the Exchange Agent on any matter
submitted by Bayard to a vote of its stockholders during the period
ANNEX A
12
143
commencing at the Effective Time and ending on the Bayard Distribution Date
as directed by CHK, provided that CHK shall so direct the Exchange Agent to
vote such shares only in accordance with the instructions received by CHK
from the former holders of record of a majority of the outstanding shares
of DLB Common Stock, as determined immediately prior to the Effective Time.
Except to the extent specified in the preceding sentence, from and after
the Effective Time all beneficial interest in Bayard Common Stock shall be
deemed transferred to, and held by, the holders of shares of DLB Common
Stock immediately prior to the Effective Time.
(c) DISTRIBUTIONS WITH RESPECT TO UNEXCHANGED SHARES. No dividends or other
distributions with respect to CHK Common Stock, Bayard Common Stock and WRT
Common Stock declared or made after the Effective Time with a record date after
the Effective Time shall be paid to the holder of any unsurrendered DLB
Certificate. Subject to the effect of applicable laws, (i) at the time of the
surrender of a DLB Certificate for exchange in accordance with the provisions of
this Section 2.5, there shall be paid to the surrendering holder, without
interest, the amount of dividends or other distributions (having a record date
after the Effective Time but on or prior to surrender and a payment date on or
prior to surrender) theretofore paid with respect to the number of whole shares
of CHK Common Stock (unless the cash election is made in accordance with Section
2.4(f) hereof, in which case such dividends or other distributions on CHK Common
Stock shall not be paid to the surrendering holder), Bayard Common Stock and WRT
Common Stock that such holder is entitled to receive (less the amount of any
withholding taxes that may be required with respect thereto); and (ii) at the
appropriate payment date, there shall be paid to the surrendering holder,
without interest, the amount of dividends or other distributions (having a
record date after the Effective Time but on or prior to surrender and a payment
date subsequent to surrender) payable with respect to the number of whole shares
of CHK Common Stock (unless the cash election is made in accordance with Section
2.4(f) hereof), Bayard Common Stock and WRT Common Stock that such holder
receives or, with respect to Bayard Common Stock held by the Exchange Agent
prior to the Bayard Distribution Date that such holder is entitled to receive
(less the amount of any withholding taxes that may be required with respect
thereto).
(d) NO FURTHER OWNERSHIP RIGHTS IN DLB COMMON STOCK. All shares of the
Merger Consideration issued or delivered, upon the surrender for exchange of
shares of DLB Common Stock in accordance with the terms hereof (including any
cash paid pursuant to Section 2.5(c) or (e)) shall be deemed to have been
issued, delivered or paid in full satisfaction of all rights pertaining to such
shares of DLB Common Stock. After the Effective Time, there shall be no further
registration of transfers on the Surviving Corporation's stock transfer books of
the shares of DLB Common Stock that were outstanding immediately prior to the
Effective Time. If, after the Effective Time, a DLB Certificate is presented to
the Surviving Corporation for any reason, it shall be canceled and exchanged as
provided in this Section 2.5.
(e) TREATMENT OF FRACTIONAL SHARES. No certificates or scrip representing
fractional shares of CHK Common Stock, Bayard Common Stock or WRT Common Stock
shall be issued in the Merger and, except as provided in this Section 2.5(e), no
dividend or other distribution, stock split or interest shall relate to any such
fractional share, and such fractional share shall not entitle the owner thereof
to vote or to any other rights of a stockholder of CHK. In lieu of any
fractional share of CHK Common Stock to which a holder of DLB Common Stock would
otherwise be entitled, such holder, upon surrender of a DLB Certificate as
described in this Article II, shall be paid an amount in cash (without interest)
determined by multiplying (i) the Closing Price by (ii) the fractional share of
CHK Common Stock to which such holder would otherwise be entitled, in which case
the Surviving Corporation shall make available to the Exchange Agent, without
regard to any other cash being provided to the Exchange Agent, the amount of
cash necessary to make such payments. The Surviving Corporation shall retain all
fractional shares of Bayard Common Stock and WRT Common Stock and no DLB
stockholder shall be entitled to any such fractional shares.
(f) TERMINATION OF EXCHANGE FUND. Any portion of the Exchange Fund and cash
held by the Exchange Agent in accordance with the terms of this Section 2.5 that
remains unclaimed by the former stockholders of DLB for a period of one year
following the Effective Time shall be delivered to the Surviving Corporation,
ANNEX A
13
144
upon demand. Thereafter, any former stockholders of DLB who have not theretofore
complied with the provisions of this Section 2.5 shall look only to the
Surviving Corporation for payment of their claim for the Merger Consideration,
any cash in lieu of fractional share of CHK Common Stock and any dividends or
distributions with respect to CHK Common Stock, Bayard Common Stock and WRT
Common Stock (all without interest).
(g) NO LIABILITY. Neither CHK, DLB, the Surviving Corporation, the Exchange
Agent nor any other Person shall be liable to any former holder of shares of DLB
Common Stock for any amount properly delivered to any public official pursuant
to any applicable abandoned property, escheat or similar law. Any amounts
remaining unclaimed by former holders of DLB Common Stock for a period of three
years following the Effective Time (or such earlier date immediately prior to
the time at which such amounts would otherwise escheat to or become property of
any governmental entity) shall, to the extent permitted by applicable law,
become the property of Merger Sub, free and clear of any claims or interest of
any such holders or their successors, assigns or personal representatives
previously entitled thereto.
(h) LOST, STOLEN, OR DESTROYED DLB CERTIFICATES. If any DLB Certificate
shall have been lost, stolen or destroyed, upon the making of an affidavit of
that fact by the Person claiming such DLB Certificate to be lost stolen or
destroyed and, if required by the Surviving Corporation, the posting by such
Person of a bond, in such reasonable amount as the Surviving Corporation may
direct, as indemnity against any claim that may be made against it with respect
to such DLB Certificate, the Exchange Agent shall issue in exchange for such
lost, stolen or destroyed DLB Certificate the Merger Consideration (along with
any cash in lieu of fractional shares pursuant to Section 2.5(e) and any unpaid
dividends and distributions pursuant to Section 2.5(c)) deliverable with respect
thereto pursuant to this Agreement.
2.6 CLOSING. The Closing shall take place on the Closing Date at the
offices of Andrews & Kurth L.L.P., 600 Travis Street, Suite 4200, Houston, Texas
77002, unless another location is mutually agreed upon by CHK and DLB.
2.7 EFFECTIVE TIME OF THE MERGER. The Merger shall become effective
immediately upon the later to occur of (a) the time that the Certificate of
Merger is accepted for filing by the Secretary of State of Oklahoma, and (b)
such time thereafter as is provided in the Certificate of Merger (the "EFFECTIVE
TIME"). The Certificate of Merger shall be filed on the Closing Date or as soon
as practicable after the Closing; provided, however, that the Certificate of
Merger may be filed prior to the Closing Date or prior to the Closing so long as
it provides for an effective time that occurs on the Closing Date immediately
after the Closing.
2.8 TAKING OF NECESSARY ACTION: FURTHER ACTION. Each of CHK, Merger Sub
and the DLB Companies shall use all commercially reasonable efforts to take all
such actions as may be necessary or appropriate in order to effectuate the,
Merger under the OGCA as promptly as commercially practicable. If, at any time
after the Effective Time, any further action is necessary or desirable to carry
out the purposes of this Agreement and to vest the Surviving Corporation with
full right, title and possession to all assets, property, rights, privileges,
powers and franchises to either of Merger Sub or DLB, the officers and directors
of the Surviving Corporation are fully authorized in the name of their
corporation or otherwise to take, and shall take, all such lawful and necessary
action.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF DLB
DLB hereby represents and warrants to CHK and Merger Sub as follows:
3.1 ORGANIZATION. Each of the DLB Companies (a) is either a corporation or
a limited liability company duly organized, validly existing and in good
standing under the laws of its state of organization, (b) has the requisite
power and authority to own, lease and operate its properties and to conduct its
business as it is presently being conducted, and (c) is duly qualified to do
business as a foreign entity, and is in good standing, in each jurisdiction
where the character of the properties owned or leased by it or the nature of its
ANNEX A
14
145
activities makes such qualification necessary (except where any failure to be so
qualified as a foreign entity or to be in good standing would not, individually
or in the aggregate, have a Material Adverse Effect on DLB). Copies of the
certificates or articles of incorporation, by-laws or other organizational
documents of each of the DLB Companies have heretofore been delivered to CHK,
and such copies are accurate and complete as of the date hereof.
3.2 OTHER INTERESTS. None of the DLB Companies owns any general or limited
partner interest in any general or limited partnership (other than joint
venture, joint operating or ownership arrangements or tax partnerships entered
into in the ordinary course of business or other partnerships that, individually
or in the aggregate, are not material to the operations or business of the DLB
Companies, taken as a whole). Except as set forth on Schedule 3.2, none of the
DLB Companies owns directly or indirectly an interest or investment in any
corporation, partnership, joint venture, business, trust or entity.
3.3 BOARD ACTION, AUTHORITY AND ENFORCEABILITY. (a) The Board of Directors
of DLB (at a meeting duly called and held) has (i) determined that the Merger is
fair to and is in the best interests of the DLB stockholders and (ii) resolved
to approve the Merger and recommend the approval and adoption of this Agreement
by the DLB stockholders. Pursuant to its Amended and Restated Certificate of
Incorporation, DLB elected that it would not be governed by the Control Share
Acquisition Act, Sections 1145 through 1155 of Title 18 of the Oklahoma
Statutes, and Section 1090.3 of the Oklahoma General Corporation Act. Lehman
Brothers Inc., DLB's financial advisor, has delivered a written opinion to the
Board of Directors of DLB that, as of the date thereof and on the basis of and
subject to the matters set forth therein, the Exchange Ratio or Cash Exchange
Ratio was fair from a financial point of view to the holders of DLB Common
Stock.
(b) DLB has the requisite corporate power and authority to enter into and
deliver this Agreement and (with respect to consummation of the Merger, subject
to the valid approval of the DLB Proposal by the stockholders of DLB) to
consummate the transactions contemplated hereby. The execution and delivery of
this Agreement and (with respect to consummation of the Merger, subject to the
valid approval of the DLB Proposal by the stockholders of DLB) the consummation
of the transactions contemplated hereby have been duly and validly authorized by
all necessary corporate action on the part of DLB, including approval by the
board of directors of DLB, and no other corporate proceedings on the part of DLB
are necessary to authorize the execution or delivery of this Agreement or (with
respect to consumption of the Merger, subject to the valid approval of the DLB
Proposal by the stockholders of DLB) to consummate the transactions contemplated
hereby. This Agreement has been duly and validly executed and delivered by DLB
and (with respect to the Merger, subject to the valid approval of the DLB
Proposal by the stockholders of DLB and assuming that this Agreement constitutes
a valid and binding obligation of CHK and Merger Sub) constitutes a valid and
binding obligation of DLB enforceable against DLB in accordance with its terms.
3.4 NO VIOLATIONS. The execution and delivery of this Agreement does not,
and the consummation of the transactions contemplated hereby and compliance by
DLB with the provisions hereof will not, conflict with, result in any violation
of or default (with or without notice or lapse of time or both) under, give rise
to a right of termination, cancellation or acceleration of any obligation or to
the loss of a material benefit under, or result in the creation of any Lien on
any of the properties or assets of any of the DLB Companies under, any provision
of (a) the certificate or articles of incorporation, by-laws or other
organizational documents of any of the DLB Companies, (b) any loan or credit
agreement, note, bond, mortgage, indenture, lease, permit, concession,
franchise, license or other agreement, instrument or obligation applicable to
any of the DLB Companies, or (c) assuming the consents, approvals,
authorizations or permits and filings or notifications referred to in Section
3.5 are duly and timely obtained or made, any judgment, order, decree, statute,
law, ordinance, rule or regulation applicable to any of the DLB Companies or any
of their respective properties or assets, other than in the case of clause (b)
above, any such conflict, violation, default, right, loss or Lien that may arise
under the Credit Facilities and that, individually or in the aggregate, would
not have a Material Adverse Effect on DLB MidCon (taken as a whole).
3.5 CONSENTS AND APPROVALS. Except as otherwise set forth in Schedule 3.5
to the Disclosure Schedule, no consent, approval, order or authorization of,
registration, declaration or filing with, or permit from, any
ANNEX A
15
146
Governmental Authority is required by or with respect to any of the DLB
Companies in connection with the execution and delivery of this Agreement by DLB
or the consummation by DLB of the transactions contemplated hereby, except for
the following: (a) any such consent, approval, order, authorization,
registration, declaration, filing or permit which the failure to obtain or make
would not, individually or in the aggregate, have a Material Adverse Effect on
DLB MidCon (taken as a whole); (b) the filing of the Certificate of Merger with
the Secretary of State of Oklahoma pursuant to the provisions of the OGCA; (c)
the filing of a pre-merger notification report by DLB under the HSR Act and the
expiration or termination of the applicable waiting period; (d) the filing with
the SEC of the Proxy Statement Prospectus and such reports under Section 13(a)
of the Exchange Act and such other compliance with the Exchange Act and the
Securities Act and the rules and regulations of the SEC thereunder as may be
required in connection with this Agreement and the transactions contemplated
hereby and the obtaining from the SEC of such orders as may be so required; and
(e) such filings and approvals as may be required by any applicable state
securities, "blue sky" or takeover laws or Environmental Laws. Except as
otherwise set forth in Schedule 3.5 to the Disclosure Schedule, no Third-Party
Consent is required by or with respect to any of the DLB Companies in connection
with the execution and delivery of this Agreement or the consummation of the
transactions contemplated hereby, except for (i) any such Third-Party Consent
which the failure to obtain would not, individually or in the aggregate, have a
Material Adverse Effect on DLB MidCon (taken as a whole), adversely affect
DLB's, CHK's or Merger Sub's ability to consummate the transactions contemplated
hereby or materially adversely affect the Surviving Corporation's ability to
operate the assets of DLB in a manner consistent with their current operations,
(ii) the valid approval of the DLB Proposal by the stockholders of DLB, and
(iii) any consent, approval or waiver required by the terms of the Credit
Facilities.
3.6 SEC DOCUMENTS.
(a) DLB has made available to CHK a true and complete copy of each form,
report, schedule, registration statement, definitive proxy statement and other
documents filed by DLB with the SEC since December 31, 1994, and prior to the
date of this Agreement (the "DLB SEC DOCUMENTS"), which are all the documents
(other than preliminary material) that DLB was required to file with the SEC
since such date. Each of the DLB SEC Documents is identified in Schedule 3.6 to
the Disclosure Schedule. As of their respective dates, the DLB SEC Documents
complied in all material respects with the requirements of the Securities Act or
the Exchange Act, as the case may be, and the rules and regulations of the SEC
thereunder applicable to such DLB SEC Documents, and none of the DLB SEC
Documents contained any untrue statement of a material fact or omitted to state
a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading.
(b) DLB has heretofore furnished to CHK complete and correct copies of (i)
all agreements, documents and other instruments not yet filed by DLB with the
SEC but that are currently in effect and that DLB expects to file with the SEC
after the date of this Agreement and (ii) all amendments and modifications that
have not been filed by DLB with the SEC to all agreements, documents and other
instruments that previously have been filed by DLB with the SEC and are
currently in effect.
3.7 FINANCIAL INFORMATION AND RESERVE REPORTS.
(a) The DLB Financial Statements were prepared in accordance with GAAP
applied on a consistent basis during the periods involved (except as may be
indicated in the notes thereto or, in the case of unaudited statements, as
permitted by Rule 10-01 of Regulation S-X of the SEC) and fairly present, in
accordance with applicable requirements of GAAP (in the case of the unaudited
statements, subject to normal, recurring adjustments), the consolidated
financial position of DLB aid its subsidiaries as of their respective dates and
the consolidated results of operations and the consolidated cash flows of DLB
and its subsidiaries for the periods presented therein.
(b) The books of account and other financial records of the DLB Companies
from which the DLB Financial Statements were prepared (i) reflect all items of
income and expense and all assets and liabilities required to be reflected
therein in accordance with GAAP applied on a basis consistent with the past
practices
ANNEX A
16
147
of DLB, (ii) are in all material respects complete and correct, and do not
contain or reflect any material inaccuracies or discrepancies and (iii) have
been maintained in accordance with good business and accounting practices. DLB
has made available to CHK such books of account and other financial records as
reflect the basis, for federal income tax purposes, of the assets of each of the
DLB Companies, which records (i) are in all material respects complete and
correct, and do not contain or reflect any material inaccuracies or
discrepancies and (ii) have been maintained in accordance with good business and
accounting practices.
(c) DLB has made available to CHK certain reports dated February 2, 1997
prepared by the independent petroleum engineering firm of DeGoyler & MacNaughton
("D&M") (with respect to certain properties owned by DLB (other than the Ames
Hole Area) as of December 31, 1996) and dated January 16, 1997 by the
independent petroleum engineering firm of H. J. Gruy and Associates, Inc.
("GRUY") (with respect to the Ames Hole Area as of January 1, 1997), true and
correct copies of which have been previously provided to CHK (together, the "DLB
RESERVE REPORTS"). The DLB Reserve Reports are the latest reserve reports
prepared by an independent petroleum engineering firm that are available to DLB
relating to its and its Subsidiaries' reserves of oil and gas. DLB has not
withheld any material information from D&M or Gruy with respect to the
preparation of the DLB Reserve Reports.
3.8 CAPITAL STRUCTURE.
(a) The authorized capital stock of DLB consists of 130,000,000 shares of
DLB Common Stock and 5,000,000 shares of preferred stock, par value $.001 per
share.
(b) The only capital stock of DLB issued and outstanding as of the date
hereof consists of (i) 12,975,000 shares of DLB Common Stock and (ii) DLB Stock
Options relating to 1,713,750 shares of DLB Common Stock.
(c) Except as set forth in Section 3.8(b) there are outstanding (i) no
shares of capital stock or other voting securities of DLB, (ii) no securities of
DLB or any other Person convertible into or exchangeable or exercisable for
shares of capital stock or other voting securities of DLB, and (iii) no
subscriptions, options, warrants, calls, rights (including preemptive rights),
commitments, understandings or agreements to which DLB is a party or by which it
is bound obligating DLB to issue, deliver, sell, purchase, redeem or acquire
shares of capital stock or other voting securities of DLB (or securities
convertible into or exchangeable or exercisable for shares of capital stock or
other voting securities of DLB) or obligating DLB to grant, extend or enter into
any such subscription, option, warrant, call, right, commitment, understanding
or agreement.
(d) All outstanding shares of DLB capital stock are validly issued, fully
paid and nonassessable and not subject to any preemptive right.
(e) All outstanding shares of capital stock, other voting securities or
membership interests of each of GEMCO, DLB International, The Ames Company and
Ames Field are owned by DLB, which owns such shares and the shares of its other
Subsidiaries free and clear of all Liens, claims and options of any nature
(except for Permitted Encumbrances). There are outstanding (i) no securities of
any of the DLB Companies or any other Person convertible into or exchangeable or
exercisable for shares of capital stock or other voting securities of any of the
DLB Companies, and (ii) no subscriptions, options, warrants, calls, rights
(including preemptive rights), commitments, understandings or agreements to
which any of the DLB Companies is a party or by which it is bound obligating
such DLB Company to issue, deliver, sell, purchase, redeem or acquire shares of
capital stock or other voting securities of any of the DLB Companies (or
securities convertible into or exchangeable or exercisable for shares of capital
stock or other voting securities of any of the DLB Companies) or obligating any
of the DLB Companies to grant, extend or enter into any such subscription,
options warrant, call, right, commitment, understanding or agreement.
(f) Except as otherwise set forth in Schedule 3.8 to the Disclosure
Schedule, there is no stockholder agreement, voting trust or other agreement or
understanding to which DLB is a party or by which it is bound relating to the
voting of any shares of the capital stock of any of the DLB Companies.
ANNEX A
17
148
(g) As of the date of this Agreement, DLB owns, directly or indirectly,
10,354,199 shares of WRT Common Stock and the WRT Claims Interest and Bonray
Holding L.L.C., a wholly owned subsidiary of DLB, owns 2,955,000 shares of
Bayard Common Stock, subject in each case only to the Lien under the Credit
Facilities.
3.9 NO UNDISCLOSED LIABILITIES. Except as described in Schedule 5.1(k),
there are no liabilities of any of the DLB Companies of any kind whatsoever,
whether accrued, contingent, absolute, determined, determinable or otherwise,
that individually or in the aggregate would have a Material Adverse Effect on
DLB MidCon (taken as a whole), other than (a) liabilities adequately provided
for in the DLB Financial Statements in accordance with GAAP and disclosed in the
DLB SEC Documents, (b) liabilities incurred in the ordinary course of business
subsequent to June 30, 1997, none of which, individually or in the aggregate,
have a Material Adverse Effect on DLB MidCon (taken as a whole) and (c)
liabilities under this Agreement.
3.10 ABSENCE OF CERTAIN CHANGES OR EVENTS. Except as otherwise set forth
in Schedule 3.10 to the Disclosure Schedule or as contemplated by this
Agreement, since June 30, 1997, each of the DLB Companies has conducted its
respective business only in the ordinary course, and none of the DLB Companies
has done any of the following:
(a) Discharged or satisfied any Lien or paid any obligation or liability,
absolute or contingent, other than current liabilities incurred and paid in the
ordinary course of business and consistent with past practices;
(b) Paid or declared any dividends or distributions, purchased, redeemed,
acquired or retired any indebtedness, stock or other securities from its
stockholders or other security holders, made any loans or advances or guaranteed
any loans or advances to any Person (other than loans, advances or guaranties
made in the ordinary course of business and consistent with past practices), or
otherwise incurred or suffered to exist any liabilities (other than current
liabilities incurred in the ordinary course of business and consistent with past
practices);
(c) Except for Permitted Encumbrances, suffered or permitted any Lien to
arise or be granted or created against or upon any of its assets;
(d) Canceled, waived or released any rights or claims against, or
indebtedness owed by, third parties;
(e) Amended its certificate or articles of incorporation, by-laws or other
organizational documents;
(f) Made or permitted any amendment, supplement, modification or
termination of any DLB Material Agreement;
(g) Sold, transferred, assigned or otherwise disposed of any of its assets
or properties other than transactions within the ordinary course of business and
consistent with past practices;
(h) Made any investment in or contribution, payment or advance to any
Person (other than investments, contributions, payments or advances, or
commitments with respect thereto made in the ordinary course of business and
consistent with past practices);
(i) Paid, loaned or advanced (other than the payment, advance or
reimbursement of expenses in the ordinary course of business) any amounts to, or
sold, transferred or leased any of its assets to, or entered into any other
transactions with, any of its Affiliates;
(j) Waived any rights of material value;
(k) Made any change in any of the accounting principles followed by it or
the method of applying such principles except as required by GAAP;
(l) Declared, set aside or paid any dividend or distribution in respect of
shares of DLB Common Stock or redeemed, purchased or otherwise acquired any of
its securities;
ANNEX A
18
149
(m) Revalued any asset (including, without limitation, any writing down of
the value of inventory or writing off of notes or accounts receivable), other
than in the ordinary course of business consistent with past practice;
(n) Increased or established any bonus, insurance, severance, deferred
compensation, pension, retirement, profit sharing, stock option (including,
without limitation, the granting of stock options, stock appreciation rights,
performance awards, or restricted stock awards), stock purchase or other
employee benefit plan, or otherwise increased the compensation payable or to
have become payable to any officers or key employees of any of the DLB
Companies, except in the ordinary course of business consistent with past
practice;
(o) Incurred, assumed or guaranteed any indebtedness or obligation relating
to any lending or borrowing except current liabilities and commitments incurred
in the ordinary course of business consistent with past practice;
(p) Entered into any material transactions or commitments (other than this
Agreement) except in the ordinary course of business and consistent with past
practices;
(q) Agreed, whether in writing or otherwise, to do any of the foregoing; or
(r) Suffered any Material Adverse Effect (other than changes or trends,
including changes or trends in commodity prices, generally prevalent in or
affecting the oil and gas industry).
3.11 COMPLIANCE WITH LAWS, MATERIAL AGREEMENTS AND PERMITS. None of the
DLB Companies is in violation of, or in default in any material respect under,
and no event has occurred that (with notice or the lapse of time or both) would
constitute a violation of or default under, (a) its certificate or articles of
incorporation, by-laws or other organizational documents, (b) any applicable
law, rule, regulation, order, writ, decree or judgment of any Governmental
Authority, or (c) any DLB Material Agreement, except (in the case of clause (b)
or (c) above) for any violation or default that would not, individually or in
the aggregate, have a Material Adverse Effect on DLB. Each of the DLB Companies
has obtained and holds all permits, licenses, variances, exemptions, orders,
franchises, approvals and authorizations of all Governmental Authorities
necessary for the lawful conduct of its business or the lawful ownership, use
and operation of its assets ("DLB PERMITS"), except for DLB Permits which the
failure to obtain or hold would not, individually or in the aggregate, have a
Material Adverse Effect on DLB. Each of the DLB Companies is in compliance with
the terms of its DLB Permits, except where the failure to comply would not,
individually or in the aggregate, have a Material Adverse Effect on DLB. No
investigation or review by any Governmental Authority with respect to any of the
DLB Companies is pending or, to the knowledge of DLB, threatened, other than
those the outcome of which would not, individually or in the aggregate, have a
Material Adverse Effect on DLB. The representations and warranties made in this
Section 3.11 are in addition to those made with respect to Environmental Matters
in Section 3.22; in the event of a conflict between the provisions of such
Sections, the provisions of Section 3.22 shall govern.
3.12 GOVERNMENTAL REGULATION. Neither DLB nor any subsidiary of DLB is
subject to regulation under the Public Utility Holding Company Act of 1935, the
Federal Power Act, the Interstate Commerce Act, the Investment Company Act of
1940 or any state public utilities laws.
3.13 LITIGATION. Except as otherwise set forth in Schedule 3.13 to the
Disclosure Schedule, (a) no litigation, arbitration or other proceeding of any
Governmental Authority is pending or, to the knowledge of DLB, threatened
against any of the DLB Companies or their respective assets which, if adversely
determined, could reasonably be expected to have a Material Adverse Effect on
DLB and (b) DLB has no knowledge of any facts that are likely to give rise to
any litigation, arbitration or other proceeding of any Governmental Authority
which, individually or in the aggregate, is reasonably likely to have a Material
Adverse Effect on DLB. There is no litigation, proceeding or investigation
pending or, to the knowledge of DLB, threatened against or affecting any of the
DLB Companies that questions the validity or enforceability of this Agreement
ANNEX A
19
150
or any other document instrument or agreement to be executed and delivered by
DLB in connection with the transactions contemplated hereby.
3.14 NO RESTRICTIONS. Except as otherwise set forth in Schedule 3.14 to
the Disclosure Schedule, none of the DLB Companies is a party to (a) any
agreement, indenture or other instrument that contains restrictions with respect
to the payment of dividends or other distributions with respect to its capital,
(b) any financial arrangement with respect to or creating any indebtedness to
any Person (other than indebtedness reflected in the DLB Financial Statements or
indebtedness incurred in the ordinary course of business since June 30, 1997),
(c) any agreement, contract or commitment relating to the making of any advance
to, or investment in, any Person (other than advances in the ordinary course of
business), (d) any guaranty or other contingent liability with respect to any
indebtedness or obligation of any Person other than the endorsement of
negotiable instruments for collection in the ordinary course of business), or
(e) any agreement, contract or commitment limiting in any respect its ability to
compete with any Person or otherwise conduct business of any line or nature.
3.15 TAX AUDITS AND SETTLEMENTS. Except as otherwise set forth in Schedule
3.15 to the Disclosure Schedule, none of the DLB Companies is a party or subject
to any unresolved or incomplete tax audit settlement.
3.16 TAXES.
(a) Each of the DLB Companies and any affiliated, combined or unitary group
of which any such party is or was a member has (i) timely filed all federal and
all state, local and foreign returns, declarations, reports, estimates,
information returns and statements ("TAX RETURNS") required to be filed by it
with respect to any Taxes, which Tax Returns correctly and accurately reflect
the facts regarding the income, business and assets, operations, activities,
status or other matters of the DLB Companies or any other information required
to be shown thereon and are not subject to penalties under Section 6662 of the
Code, relating to accuracy-related penalties, or any corresponding provision of
applicable state, local or foreign tax law or any predecessor provision of law,
(ii) timely paid all Taxes that are due and payable (except for Taxes that are
being contested in good faith by appropriate proceedings and for which
sufficient reserves have been established) for which any of the DLB Companies
may be liable, and (iii) complied in all material respects with all applicable
laws, rules and regulations relating to the payment and withholding of Taxes,
and has in all material respects timely withheld from employee wages and paid
over to the proper governmental authorities all amounts required to be so
withheld and paid over.
(b) Except as otherwise set forth in Schedule 3.16 of the Disclosure
Schedule, (i) no audits or other administrative or court proceedings are
presently pending with regard to any federal, state or local income or franchise
Taxes for which any of the DLB Companies would be liable, the adverse outcome of
which could have a Material Adverse Effect on DLB, and (ii) there are no pending
requests for rulings from any taxing authority, no outstanding subpoenas or
requests for information by any taxing authority with respect to any Taxes, no
proposed reassessments by any taxing authority of any property owned or leased,
and no agreements in effect to extend the time to file any material Tax Return
or the period of limitations for the assessment or collection of any material
Taxes for which any of the DLB Companies, as the case may be, would be liable.
(c) There are no liens for Taxes (other than for current Taxes not yet due
and payable) on the assets of the DLB Companies.
(d) Except for the group of which DLB is presently a member, none of the
DLB Companies has ever been a member of an affiliated group of corporations,
within the meaning of Section 1504 of the Code, other than as a common parent
corporation.
(e) After the date hereof, except as set forth in Schedule 3.16 no election
with respect to Taxes will be made without the written consent of CHK.
(f) None of the assets of the DLB Companies is property that DLB is
required to treat as being owned by any other person pursuant to the "safe
harbor lease" provisions of former Section 168(f)(8) of the Code.
ANNEX A
20
151
(g) None of the assets of the DLB Companies directly or indirectly secures
any debt the interest on which is tax-exempt under Section 103(a) of the Code.
(h) None of the assets of the DLB Companies is "tax-exempt use property"
within the meaning of Section 168(h) of the Code.
(i) None of the DLB Companies has agreed to make nor is it required to make
any adjustment under Section 481(a) of the Code by reason of a change in
accounting method or otherwise.
(j) None of the DLB Companies has participated in nor will participate in
an international boycott within the meaning of Section 999 of the Code.
(k) None of the DLB Companies has nor has either had a permanent
establishment in any foreign country, as defined in any applicable tax treaty or
convention between the United States and such foreign country.
(l) Except as set forth in Schedule 3.16 of the Disclosure Schedule, none
of the DLB Companies is a party to any joint venture, partnership, or other
arrangement or contract that has been treated as a partnership for federal
income tax purposes.
(m) DLB's basis and excess loss account, if any, in each subsidiary as of
August 31, 1997 is set forth on Schedule 3.16 of the Disclosure Schedule. The
earnings and profits (and any adjustment required by Section 1503(e) of the
Code) for each subsidiary as of August 31, 1997 are set forth on Schedule 3.16
of the Disclosure Schedule.
3.17 EMPLOYEE BENEFIT PLANS.
(a) Schedule 3.17(a) of the Disclosure Schedule sets forth a complete and
accurate list of all severance pay, sick leave, vacation pay, salary
continuation for disability, compensation or employment agreements, retirement,
change in control, deferred compensation, profit sharing, bonus, long-term
incentive, stock option, stock purchase, hospitalization, medical insurance,
life insurance, fringe benefits, and scholarship programs and other "employee
benefit plans," as defined in Section 3(3) of ERISA, maintained by any of the
DLB Companies or to which any of the DLB Companies contributed or is obligated
to contribute, has any liability, including any contingent liability (the "DLB
EMPLOYEE BENEFIT PLANS"). Except for the DLB Employee Benefit Plans, none of the
DLB Companies maintains, or has any fixed or contingent liability with respect
to, any employee benefit, pension or other compensation plan.
(b) There is no violation of ERISA with respect to the filing of applicable
reports, documents and notices regarding any DLB Employee Benefit Plan with any
Governmental Authority or the furnishing of such documents to the participants
or beneficiaries of the DLB Employee Benefit Plans except for such violations
which, individually or in the aggregate, would not have a Material Adverse
Effect on DLB MidCon (taken as a whole).
(c) The DLB Employee Benefit Plans have been maintained, in all material
respects, in accordance with their terms and in accordance with all applicable
federal and state laws, and none of the DLB Companies nor any "party in
interest" or "disqualified person" with respect to the DLB Employee Benefit
Plans, has engaged in any "prohibited transaction" within the meaning of Section
4975 of the Code or committed a breach of their fiduciary duties for which any
of the DLB Companies could be directly or indirectly liable.
(d) Except as otherwise set forth in Schedule 3.17(d) of the Disclosure
Schedule, neither the execution and delivery of this Agreement nor the
consummation of the transactions contemplated hereby will result in any payment
or benefit becoming vested or due to any employee or group of employees of any
of the DLB Companies.
(e) No DLB Employee Benefit Plan is a "multi-employer plan," as defined in
Section 4001(a)(3) of ERISA, or a "multiple employer" plan.
ANNEX A
21
152
(f) There is no "accumulated funding deficiency," as defined in Section 412
of the Code, whether or not waived, with respect to any DLB Employee Benefit
Plan and the DLB Companies have made all contributions and other payments
required by or due under the DLB Employee Benefit Plans. No security is required
under Section 401(a)(29) of the Code as to any DLB Employee Benefit Plan.
(g) Each DLB Employee Benefit Plan that is intended to be "qualified" under
Section 401(a) of the Code is so "qualified."
(h) Except as set forth on Schedule 3.17(h), there is no action, suit,
proceeding, audit or claim, extant, pending, or, to the knowledge of the DLB
Companies, threatened with respect to any DLB Employee Benefit Plan.
(i) Each DLB Employee Benefit Plan may be unilaterally terminated by a DLB
Company at any time without any liability, except for such liability that would
not have a Material Adverse Effect on DLB MidCon (taken as a whole).
3.18 EMPLOYMENT CONTRACTS AND BENEFITS. Except as otherwise set forth in
Schedule 3.18 of the Disclosure Schedule or otherwise provided for in any DLB
Employee Benefit Plan, (a) none of the DLB Companies is subject to or obligated
under any consulting, employment, severance, "stay on" bonus, change in control,
termination or similar arrangement, any employee benefit, incentive or deferred
compensation plan with respect to any Person, or any bonus, profit sharing,
pension, stock option, stock purchase or similar plan or other arrangement or
other fringe benefit plan entered into or maintained for the benefit of any
employee of any of the DLB Companies or any other Person, and (b) no employee of
any of the DLB Companies or any other Person owns, or has any right granted by
any of the DLB Companies to acquire, any interest in any of the assets or
business of any of the DLB Companies. Schedule 3.18 identifies each employee of
any of the DLB Companies or other Person that will be entitled to a severance or
"stay on" bonus payment by DLB upon the termination of such employee's or
Person's employment with such DLB Company or upon consummation of the Merger,
and the amounts of such payment payable to such persons. DLB may modify Schedule
3.18 prior to the Closing Date provided that the aggregate amount payable in
respect of such modified Schedule shall not exceed the amounts stipulated in
Schedule 3.18 delivered on the Effective Date.
3.19 LABOR MATTERS.
(a) No employees of any of the DLB Companies are represented by any labor
organization. No labor organization or group of employees of any of the DLB
Companies has made a demand for recognition or certification as a union or other
labor organization, and there are no representation or certification proceedings
or petitions seeking a representation proceeding presently pending or threatened
in writing to be brought or filed with the National Labor Relations Board or any
other labor relations tribunal or authority. There are no organizing activities
involving any of the DLB Companies pending with any labor organization or group
of employees of any of the DLB Companies.
(b) Each of the DLB Companies is in compliance with all laws, rules,
regulations and orders relating to the employment of labor, including all such
laws, rules, regulations and orders relating to wages, hours, collective
bargaining, discrimination, civil rights, safety and health, workers'
compensation and the collection and payment of withholding or Social Security
Taxes and similar Taxes, except where the failure to comply would not,
individually or in the aggregate, have a Material Adverse Effect on DLB MidCon
(taken as a whole).
3.20 INSURANCE. Each of the DLB Companies maintains, and through the
Closing Date will maintain, insurance with reputable insurers (or pursuant to
prudent self-insurance programs) in such amounts and covering such risks as are
in accordance with normal industry practice for companies engaged in businesses
similar to those of the DLB Companies and owning properties in the same general
area in which the DLB Companies conduct their businesses. Schedule 3.20 of the
Disclosure Schedule lists all insurance policies maintained by the DLB
Companies. Each of the DLB Companies may terminate each of its insurance
policies or binders at or after the Closing and will incur no penalties or other
material costs in doing so. None of such
ANNEX A
22
153
policies or binders was obtained through the use of false or misleading
information or the failure to provide the insurer with all information requested
in order to evaluate the liabilities and risks insured. There is no default with
respect to any provision contained in any such policy or binder, except for
defaults that would not have a Material Adverse Effect on DLB MidCon (taken as a
whole), nor has any of the DLB Companies failed to give any notice or present
any claim under any such policy or binder in due and timely fashion. There are
no billed but unpaid premiums past due under any such policy or binder. Except
as otherwise set forth in Schedule 3.20 of the Disclosure Schedule, (a) there
are no outstanding claims under any such policies or binders and, to the
knowledge of DLB, there has not occurred any event that might reasonably form
the basis of any claim against or relating to any of the DLB Companies that is
not covered by any of such policies or binders, (b) no notice of cancellation or
non-renewal of any such policies or binders has been received, and (c) there are
no performance bonds outstanding with respect to any of the DLB Companies.
3.21 INTANGIBLE PROPERTY. There are no material trademarks, trade names,
patents, service marks, brand names, computer programs, databases, industrial
designs, copyrights or other intangible property that are necessary for the
operation, or continued operation, of the business of any of the DLB Companies
or for the ownership and operation, or continued ownership and operation, of any
of their assets, for which the DLB Companies do not hold valid and continued
authority in connection with the use thereof.
3.22 ENVIRONMENTAL MATTERS. Except as set forth in Schedule 3.22 of the
Disclosure Schedule:
(a) Each of the DLB Companies has conducted its business and operated its
assets and is conducting its business and operating its assets, in compliance
with all Environmental Laws, except where noncompliance would not have a
Material Adverse Effect on DLB;
(b) None of the DLB Companies has been notified nor has any reason to
believe that it may be notified by any Governmental Authority that any of the
operations or assets of any of the DLB Companies is the subject of any
investigation or inquiry by any Governmental Authority pursuant to any
Environmental Law;
(c) None of the DLB Companies has any contingent liability in connection
with (i) the release into the environment at, on or from any property now or
previously owned or leased by any of the DLB Companies, or (ii) the treatment,
storage, disposal or recycling of any Hazardous Material, except for any such
liability that would not have a Material Adverse Effect on DLB;
(d) None of the DLB Companies has received any claim, complaint, notice,
inquiry or request for information which remains unresolved as of the date
hereof with respect to any alleged violation of any Environmental Law or
regarding potential liability under any Environmental Law relating to operations
or conditions of any facilities or property owned, leased or operated by any of
the DLB Companies and, to the knowledge of the DLB Companies, there are no
outstanding consent orders, consent decrees, unilateral administrative orders or
schedules of compliance;
(e) No property now or previously owned, leased or operated by any of the
DLB Companies is listed on the National Priorities List pursuant to CERCLA or on
the CERCLIS or on any other federal or state list as sites requiring
investigation or cleanup;
(f) None of the DLB Companies is transporting, has transported, is
arranging for the transportation of, or has transported, any Hazardous Material
to any location which is listed or proposed for listing on the National
Priorities List pursuant to CERCLA, on the CERCLIS, or on any similar federal or
state list, or which is the subject of federal, state or local enforcement
actions;
(g) To DLB's knowledge, there are no sites, locations or operations at
which any of the DLB Companies may be subject to liability in whole or in part
that now or in the past have been the subject of Environmental Response
Measures;
(h) To DLB's knowledge, there are no sites, locations or operations for
which any of the DLB Companies may be subject to liability in whole or in part
presently subject to Risk Reduction or Brownfield
ANNEX A
23
154
measures that may host residual contamination that would require Environmental
Response Measures in the event the Risk Reduction or Brownfield conditions are
not fulfilled;
(i) To DLB's knowledge, all underground and above ground storage tanks and
solid waste disposal facilities owned or operated by the DLB Companies are used
and operated in compliance with Environmental Laws, except where the failure to
comply would not have a Material Adverse Effect on DLB MidCon (taken as a
whole); and
(j) To DLB's knowledge, there are no pending or anticipated federal or
state regulations that would have a Material Adverse Effect on the facility(ies)
that would be subject to the requirement.
3.23 BOOKS AND RECORDS. All books, records and files of the DLB Companies
(including those pertaining to DLB's Oil and Gas Properties, Wells and other
assets, those pertaining to the production, gathering, transportation and sale
of hydrocarbons, and corporate, accounting, financial and employee records) (a)
have been prepared, assembled and maintained in accordance with usual and
customary policies and procedures, and (b) fairly and accurately reflect the
ownership, use, enjoyment and operation by the DLB Companies of their respective
assets.
3.24 BROKERS. Except as set forth in Schedule 3.24 of the Disclosure
Schedule, no broker, finder, investment banker or other Person is or will be, in
connection with the transactions contemplated by this Agreement, entitled to any
brokerage, finder's or other fee or compensation based on any arrangement or
agreement made by or on behalf of DLB and for which CHK or any of the DLB
Companies will have any obligation or liability.
3.25 VOTE REQUIRED. The affirmative vote or written consent of the holders
of a majority of the outstanding shares of DLB Common Stock is the only vote or
consent of the holders of any class or series of DLB capital stock or other
voting securities necessary to approve this Agreement, the Merger and the
transactions contemplated hereby (the "DLB STOCKHOLDERS' APPROVAL").
3.26 PROXY STATEMENT/PROSPECTUS; REGISTRATION STATEMENT. None of the
information supplied or to be supplied by DLB for inclusion or incorporation by
reference in (a) the proxy statement relating to the DLB Special Meeting (also
constituting the prospectus in respect of CHK Common Stock into which shares of
DLB Common Stock will be converted) (the "PROXY STATEMENT/PROSPECTUS"), to be
filed by DLB and CHK with the SEC, and any amendments or supplements thereto, or
(b) the Registration Statement to be filed by CHK with the SEC in connection
with the Merger and the issuance of CHK Common Stock in connection therewith,
and any Amendments or supplements thereto, will, at the respective times such
documents are filed, and, in the case of the Proxy Statement/Prospectus, at the
time the Proxy Statement/Prospectus or any amendment or supplement thereto is
first mailed to stockholders of DLB, at the time such stockholders vote on
approval and adoption of this Agreement and at the Effective Time, and, in the
case of the Registration Statement, when it becomes effective under the
Securities Act, contain, in the case of the Proxy Statement/ Prospectus, any
untrue statement of a material fact or omit to state any material fact required
to be stated therein or necessary in order to make the statements made therein,
in light of the circumstances under which they were made, not misleading and, in
the case of the Registration Statement, any untrue statement of a material fact
or omit to state any material fact required to be stated therein or necessary to
make the statements therein not misleading. If at any time prior to the
Effective Time any event with respect to DLB, its officers and directors or any
of its subsidiaries shall occur which is required to be described in an
amendment of, or a supplement to, the Proxy Statement/Prospectus or the
Registration Statement, such event shall be so described, and such amendment or
supplement shall be promptly filed with the SEC and, as required by law,
disseminated to the stockholders of DLB. The Registration Statement will comply
(with respect to DLB) as to form in all material respects with the provisions of
the Securities Act, and the Proxy Statement/Prospectus will comply (with respect
to DLB) as to form in all material respects with the provisions of the Exchange
Act.
3.27 ACCOUNT INFORMATION. Schedule 3.27 contains an accurate list of the
names and addresses of every bank and other financial institution in which any
DLB Company maintains an account (whether checking,
ANNEX A
24
155
savings or otherwise), lock box or safe deposit box, and the account numbers and
persons having signature authority or legal access thereto.
3.28 POWERS OF ATTORNEY. There are no outstanding powers of attorney
relating to or affecting any DLB Company.
3.29 PLUGGING STATUS. All wells on the Lands that have been permanently
plugged and abandoned have been so plugged and abandoned in accordance in all
material respects with all applicable requirements of each Governmental
Authority having jurisdiction over the DLB Companies and the Oil and Gas
Properties, except where the failure to do so would not, individually or in the
aggregate, have a Material Adverse Effect on DLB MidCon (taken as a whole).
3.30 EQUIPMENT. The Equipment has been installed, maintained, and operated
by the DLB Companies as a prudent operator in accordance with oil and gas
industry standards, and is currently in a state of repair so as to be adequate
for normal operations by the DLB Companies, except where the failure to do so
would not, individually or in the aggregate, have a Material Adverse Effect on
DLB MidCon (taken as a whole).
3.31 CURRENT COMMITMENTS. Schedule 3.31 contains a true and reasonably
complete list as of September 30, 1997 of all oral or written commitments for
capital expenditures of more than $50,000 with respect to any of the Wells or
the Oil and Gas Properties for which all of the activities anticipated in such
commitments have not been completed by the Effective Time. Except for those set
forth in Schedule 3.31 as of Closing there are no oral or written commitments
for capital expenditures with respect to the Wells or the Oil and Gas
Properties.
3.32 PAYOUT BALANCES. Schedule 3.32 contains a reasonably complete and
accurate list of the status of any "payout" balance, as of July 31, 1997, for
each Well and Oil and Gas Property that is subject to a reversion or other
adjustment at some level of cost recovery or payout (or passage of time or other
event, other than cessation of production).
3.33 TITLE. The DLB Companies have good and indefeasible title to, and is
possessed in, all of the Oil and Gas Properties and Wells, free of all Liens,
other than Permitted Encumbrances, necessary for the DLB Companies to receive
from the Wells and all other wells to be located on the Lands, substantially and
materially not less than the Net Revenue Interests attributable thereto in
Schedule 1.1(c) to the Disclosure Schedule, without reduction, suspension, or
termination throughout the productive life of each such Oil and Gas Property or
Well. DLB's Working Interest in any Lands, Oil and Gas Property, or Well does
not substantially and materially exceed that attributable thereto in Schedule
1.1(c) to the Disclosure Schedule without a corresponding and proportional
increase in the DLB Companies' Net Revenue Interests applicable thereto.
3.34 FULL DISCLOSURE. The representations, warranties or other statements
by all DLB Companies in this Agreement or in the DLB Disclosure Schedule or
Exhibits hereto or any documents distributed generally to the DLB Stockholders,
taken as a whole, do not contain any untrue statement of a material fact or omit
to state a material fact necessary to make the statements contained therein not
misleading.
3.35 CERTAIN AGREEMENTS. There are no contracts, agreements, arrangements
or understandings to which any of the DLB Companies is a party which create,
govern or purport to govern the right of another party (other than CHK or Merger
Sub) to acquire any of the DLB Companies.
3.36 SHAREHOLDERS AGREEMENT. DLB has obtained from each DLB Specified
Stockholder and its affiliates and delivered to CHK an Agreement and Irrevocable
Proxy.
3.37 AFFILIATE TRANSACTIONS. There are no transactions between any of the
DLB Companies and any of their respective Affiliates, which are required to be
disclosed in the DLB SEC Documents which are not disclosed.
ANNEX A
25
156
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF CHK AND MERGER SUB
CHK and Merger Sub hereby represent and warrant to DLB as follows:
4.1 ORGANIZATION. Each of CHK and Merger Sub (a) is a corporation duly
organized, validly existing and in good standing under the laws of its state of
incorporation, (b) has the requisite power and authority to own, lease and
operate its properties and to conduct its business as it is presently being
conducted, and (c) is duly qualified to do business as a foreign corporation,
and is in good standing, in each jurisdiction where the character of the
properties owned or leased by it or the nature of its activities makes such
qualification necessary (except where any failure to be so qualified as a
foreign corporation or to be in good standing would not, individually or in the
aggregate, have a Material Adverse Effect on CHK and Merger Sub taken as a
whole). Copies of the certificate of incorporation and by-laws of each of CHK
and Merger Sub have heretofore been delivered to DLB, and such copies are
accurate, complete and in full force and effect as of the date hereof.
4.2 AUTHORITY AND ENFORCEABILITY. Each of CHK and Merger Sub has the
requisite corporate power and authority to enter into and deliver this Agreement
and to consummate the transactions contemplated hereby. The execution and
delivery of this Agreement and the consummation of the transactions contemplated
hereby have been duly and validly authorized by all necessary corporate action
on the part of CHK and Merger Sub, including approval by the board of directors
of each of CHK and Merger Sub and the sole stockholder of Merger Sub, and no
other corporate proceedings on the part of CHK or Merger Sub are necessary to
authorize the execution or delivery of this Agreement or to consummate the
transactions contemplated hereby. This Agreement has been duly and validly
executed and delivered by each of CHK and Merger Sub and (assuming that this
Agreement constitutes a valid and binding obligation of DLB) constitutes a valid
and binding obligation of CHK and Merger Sub enforceable against CHK and Merger
Sub in accordance with its terms.
4.3 NO VIOLATIONS. The execution and delivery of this Agreement does not,
and the consummation of the transactions contemplated hereby and compliance by
CHK and Merger Sub with the provisions hereof will not, conflict with, result in
any violation of or default (with or without notice or lapse of time or both)
under, give rise to a right of termination, cancellation or acceleration of any
obligation or to the loss of a material benefit under, or result in the creation
of any Lien on any of the properties or assets of CHK, Merger Sub or any CHK
Material Subsidiary under, any provision of (a) the certificate of incorporation
or by-laws of CHK or Merger Sub or any provision of the comparable charter or
organizational documents of any CHK Material Subsidiary, (b) any loan or credit
agreement, note, bond, mortgage, indenture, lease, permit, concession,
franchise, license or other agreement, instrument or obligation applicable to
CHK, Merger Sub or any CHK Material Subsidiary, or (c) assuming the consents,
approvals, authorizations or permits and filings or notifications referred to in
Section 4.4 are duly and timely obtained or made, any judgment, order, decree,
statute, law, ordinance, rule or regulation applicable to CHK, Merger Sub or any
CHK Material Subsidiary or any of their respective properties or assets, other
than, in the case of clause (b) above, any such conflict, violation, default,
right, loss or Lien that, individually or in the aggregate, would not have a
Material Adverse Effect on CHK and Merger Sub taken as a whole.
4.4 CONSENTS AND APPROVALS. Except as otherwise set forth in Schedule
4.4(a) to the Disclosure Schedule, no consent, approval, order or authorization
of, registration, declaration or filing with, or permit from, any Governmental
Authority is required by or with respect to CHK or Merger Sub in connection with
the execution and delivery of this Agreement by CHK and Merger Sub or the
consummation by CHK and Merger Sub of the transactions contemplated hereby,
except for the following: (a) any such consent, approval, order, authorization,
registration, declaration, filing or permit which the failure to obtain or make
would not, individually or in the aggregate, have a Material Adverse Effect on
CHK and Merger Sub taken as a whole; (b) the filing of the Certificate of Merger
with the Secretary of State of Oklahoma pursuant to the provisions of the OGCA;
(c) the filing of a pre-merger notification report by CHK under the HSR Act and
the expiration or termination of the applicable waiting period; (d) the filing
with the SEC of the Proxy
ANNEX A
26
157
Statement/Prospectus, the Registration Statement, registration statements with
respect to the Bayard Common Stock and the WRT Common Stock to be delivered as
Merger Consideration, and such reports under Section 13(a) or 13(d) of the
Exchange Act and such other compliance with the Exchange Act and the Securities
Act and the rules and regulations of the SEC thereunder as may be required in
connection with this Agreement and the transactions contemplated hereby and the
obtaining from the SEC of such orders as may be so required; (e) the filing with
the New York Stock Exchange of a listing application relating to the shares of
CHK Common Stock to be issued pursuant to the Merger and the obtaining from the
New York Stock Exchange of its approvals thereof; and (f) such filings and
approvals as may be required by any applicable state securities, "blue sky" or
takeover laws or Environmental Laws. Except as otherwise set forth in Schedule
4.4(b) to the Disclosure Schedule, no Third-Party Consent is required by or with
respect to CHK, Merger Sub or any CHK Material Subsidiary in connection with the
execution and delivery of this Agreement or the consummation of the transactions
contemplated hereby, except for consents or approvals of Bayard or WRT required
under the Bayard Registration Agreement or WRT Registration Agreement,
respectively, and any such Third-Party Consent which the failure to obtain would
not, individually or in the aggregate, have a Material Adverse Effect on CHK and
Merger Sub (taken as a whole), adversely affect DLB's or CHK's or Merger Sub's
ability to consummate the transactions contemplated hereby or materially
adversely affect the Surviving Corporation's ability to operate the assets of
DLB in a manner consistent with current operations.
4.5 SEC DOCUMENTS. (a) CHK has made available to DLB a true and complete
copy of each form, report, schedule, registration statement, and definitive
proxy statement and other documents filed by CHK with the SEC since June 30,
1996, and prior to the date of this Agreement (the "CHK SEC Documents"), which
are all the documents (other than preliminary material) that CHK was required to
file with the SEC since such date. Each of the CHK SEC Documents is identified
on Schedule 4.5 to the Disclosure Schedule. As of their respective dates, the
CHK SEC Documents complied in all material respects with the requirements of the
Securities Act or the Exchange Act, as the case may be, and the rules and
regulations of the SEC thereunder applicable to such CHK SEC Documents, and none
of the CHK SEC Documents contained any untrue statement of a material fact or
omitted to state a material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which they were
made, not misleading.
(b) CHK has heretofore furnished to DLB complete and correct copies of (i)
all agreements, documents and other instruments (other than this Agreement) not
yet filed by CHK with the SEC but that are currently in effect and that CHK
expects to file with the SEC after the date of this Agreement and (ii) all
amendments and modifications that have not been filed by CHK with the SEC to all
agreements, documents and other instruments that previously have been filed by
CHK with the SEC and are currently in effect.
4.6 FINANCIAL STATEMENTS. The CHK Financial Statements were prepared in
accordance with GAAP applied on a consistent basis during the periods involved
(except as may be indicated in the notes thereto or, in the case of unaudited
statements, as permitted by Rule 10-01 of Regulation S-X of the SEC) and fairly
present, in accordance with applicable requirements of GAAP (in the case of the
unaudited statements, subject to normal, recurring adjustments), the
consolidated financial position of CHK and its subsidiaries as of their
respective dates and the consolidated results of operations and the consolidated
cash flows of CHK and its subsidiaries for the periods presented therein.
4.7 LITIGATION. There is no litigation, proceeding or investigation
pending or, to the knowledge of CHK, threatened against or affecting CHK or
Merger Sub that questions the validity or enforceability of this Agreement or
any other document, instrument or agreement to be executed and delivered by CHK
or Merger Sub in connection with the transactions contemplated hereby. Except as
otherwise set forth in Schedule 4.7 to the Disclosure Schedule or the CHK SEC
Documents, no litigation, arbitration or other proceeding of any Governmental
Authority is pending, or to CHK's knowledge, threatened against CHK or any CHK
Material Subsidiary or their respective assets which, if adversely determined,
would, individually or in the aggregate, have a Material Adverse Effect on CHK.
ANNEX A
27
158
4.8 BROKERS. Except for Donaldson, Lufkin & Jenrette Securities
Corporation, no broker, finder, investment banker or other Person is or will be,
in connection with the transactions contemplated by this Agreement, entitled to
any brokerage, finders or other fee or compensation based on any arrangement or
agreement made by or on behalf of CHK or Merger Sub and for which CHK, Merger
Sub or any of the DLB Companies will have any obligation or liability.
4.9 VOTE REQUIRED. The affirmative vote or written consent of the holders
of a majority of the outstanding shares of the common stock of Merger Sub is the
only vote or consent of the holders of any class or series of Merger Sub capital
stock or other voting securities necessary to approve this Agreement, the Merger
and the transactions contemplated hereby (the " CHK Stockholders' Approval"). No
vote of the holders of any class or series of CHK capital stock or other voting
securities is necessary to approve this Agreement, the Merger and the
transactions contemplated hereby.
4.10 PROXY STATEMENT/PROSPECTUS; REGISTRATION STATEMENT. None of the
information supplied or to be supplied by CHK or Merger Sub for inclusion or
incorporation by reference in (a) the Proxy Statement/Prospectus to be filed by
DLB and CHK with the SEC, and any amendments or supplements thereto, or (b) the
Registration Statement to be filed by CHK with the SEC in connection with the
Merger and the issuance of CHK Common Stock in connection therewith, and any
amendments or supplements thereto, will, at the respective times such documents
are filed, and, in the case of the Proxy Statement/Prospectus, at the time the
Proxy Statement/Prospectus or any amendment or supplement thereto is first
mailed to stockholders of DLB, at the time such stockholders vote on approval
and adoption of this Agreement and at the Effective Time, and, in the case of
the Registration Statement, when it becomes effective under the Securities Act,
contain, in the case of the Proxy Statement/Prospectus, any untrue statement of
a material fact or omit to state any material fact required to be stated therein
or necessary in order to make the statements made therein, in light of the
circumstances under which they were made, not misleading and, in the case of the
Registration Statement, any untrue statement of a material fact or omit to state
any material fact required to be stated therein or necessary to make the
statements therein not misleading. If at any time prior to the Effective Time
any event with respect to CHK, its officers and directors or any of its
subsidiaries shall occur which is required to be described in an amendment of,
or a supplement to, the Proxy Statement/Prospectus or the Registration
Statement, such event shall be so described, and such amendment or supplement
shall be promptly filed with the SEC and, as required by law, disseminated to
the stockholders of DLB. The Registration Statement will comply (with respect to
CHK and Merger Sub) as to form in all material respects with the provisions of
the Securities Act, and the Proxy Statement/Prospectus will comply (with respect
to CHK and Merger Sub) as to form in all material respects with the provisions
of the Exchange Act.
ARTICLE V
COVENANTS
5.1 CONDUCT OF BUSINESS BY DLB PENDING CLOSING. DLB covenants and agrees
with CHK that, from the date of this Agreement until the Effective Time, each of
the DLB Companies will conduct its business only in the ordinary course
consistent with past practices. Notwithstanding the preceding sentence, DLB
covenants and agrees with CHK that, except as specifically contemplated in this
Agreement, from the date of this Agreement until the Effective Time, without the
prior written consent of CHK:
(a) None of the DLB Companies will (i) amend its certificate or articles of
incorporation, by-laws or other organizational documents; (ii) split, combine or
reclassify any of its outstanding capital stock; (iii) declare, set aside or pay
any dividends or other distributions (whether payable in cash, property or
securities) with respect to its capital stock; (iv) issue, sell or agree to
issue or sell any securities, including its capital stock, any rights, options
or warrants to acquire its capital stock, or securities convertible into or
exchangeable or exercisable for its capital stock (other than shares of DLB
Common Stock issued pursuant to the exercise of any DLB Stock Option); (v)
purchase, cancel, retire, redeem or otherwise acquire any of its outstanding
capital stock or other securities; (vi) merge or consolidate with, or transfer
all or substantially all
ANNEX A
28
159
of its assets to, another corporation or other business entity; (vii) liquidate,
windup or dissolve (or suffer any liquidation or dissolution); or (viii) enter
into any contract, agreement, commitment or arrangement with respect to any of
the foregoing.
(b) None of the DLB Companies will (i) acquire any corporation, partnership
or other business entity or any interest therein (other than interests in joint
ventures, joint operation or ownership arrangements or tax partnerships related
to oil and gas exploration and development, acquired in the ordinary course of
business); (ii) except as required by or contemplated by the Credit Facilities,
sell, lease or sublease, transfer or otherwise dispose of or mortgage, pledge or
otherwise encumber any assets except in the ordinary course of business and
consistent with past practices; (iii) sell, transfer or otherwise dispose of or
mortgage, pledge or otherwise encumber any securities of any other Person
(including any capital stock or other securities in GEMCO, DLB International,
The Ames Company or Ames Field); (iv) except as set forth on Schedule 5.1(b),
make any loans, advances or capital contributions to, or investments in, or
incur expenses on behalf of any Person (other than loans, advances or
contributions to a DLB Company included within DLB MidCon, and loans or advances
in the ordinary course of business and consistent with past practices, excluding
loans or advances to WRT or Bayard); (v) pay, discharge or satisfy any claim,
liability or obligation other than in the ordinary course of business and
consistent with past practice; (vi) enter into any DLB Material Agreement or any
other agreement not terminable by any of the DLB Companies upon notice of 30
days or less and without penalty or other obligation (other than hydrocarbon
agreements entered into in the ordinary course of business and consistent with
past practices) or amend any DLB Material Agreement; or (vii) enter into any
contract, agreement, commitment or arrangement with respect to any of the
foregoing; provided that, notwithstanding anything in this Section 5.1 to the
contrary, DLB may sell or contribute to WRT for consideration or without
consideration, or sell to any other Person for consideration, the WRT Claims
Interest.
(c) None of the DLB Companies will (i) except to the extent required to
fund the obligations specified in Schedule 5.1(k) hereto or the first sentence
of Section 5.12 hereto, incur any indebtedness for borrowed money or incur any
other obligation or liability (other than liabilities incurred in the ordinary
course of business and consistent with past practices, but in no event shall
such liabilities exceed $50,000, individually or in the aggregate); (ii) assume,
endorse (other than endorsements of negotiable instruments in the ordinary
course of business), guarantee or otherwise become liable or responsible
(whether directly, contingently or otherwise) for the liabilities or obligations
of any Person (other than guarantees of indebtedness of a DLB Company included
within DLB MidCon); or (iii) enter into any contract, agreement, commitment or
arrangement with respect to any of the foregoing.
(d) The DLB Companies will operate, maintain and otherwise deal with the
Oil and Gas Properties of DLB in accordance with good and prudent oil and gas
field practices and in accordance with all applicable oil and gas leases and
other contracts or agreements and all applicable laws, rules and regulations.
(e) None of the DLB Companies shall resign, transfer or otherwise
voluntarily relinquish any right it has as of the date of this Agreement, as
operator of any oil and gas interest of DLB.
(f) None of the DLB Companies will (i) enter into, or otherwise become
liable or obligated under or pursuant to, (A) any employee benefit, pension or
other plan (whether or not subject to ERISA), (B) except to the extent
contemplated in Section 2.4(c) hereof, any other stock option, stock purchase,
incentive or deferred compensation plans or arrangements or other fringe benefit
plan, or (C) any consulting, employment, severance, termination or similar
agreement with any Person, or amend or extend any such plan, arrangement or
agreement other than as contemplated in Section 2.4(c) hereof, accelerating the
vesting of outstanding employee stock options or amending to cancel such options
at or prior to the Effective Time; provided, however, that DLB may amend its
"stay on" bonus plan so long as the maximum aggregate liability payable under
such plan does not exceed $682,500; (ii) except for payments made pursuant to
any DLB Employee Benefit Plan or any plan, agreement or arrangement described in
the Disclosure Schedule, grant, or otherwise become liable for or obligated to
pay, any severance or termination payments, bonuses or increases in compensation
or benefits (other than payments, bonuses or increases that are mandated by the
terms of agreements existing as of the date hereof or that are paid in the
ordinary course of business, consistent with
ANNEX A
29
160
past practices, and not individually or in the aggregate material in amount) to,
or forgive any indebtedness of, any employee or consultant; or (iii) enter into
any contract, agreement, commitment or arrangement to do any of the foregoing.
(g) The DLB Companies will keep and maintain books, records and accounts in
accordance with good accounting practice and GAAP.
(h) None of the DLB Companies will create, incur, assume or permit to exist
any Lien on any of its assets, except for Permitted Encumbrances.
(i) The DLB Companies will (i) pay all Taxes, assessments and other
governmental charges imposed upon any of their assets or with respect to their
franchises, business, income or assets before any penalty or interest accrues
thereon; (ii) pay all claims (including claims for labor, services, materials
and supplies) that have become due and payable and which by law have or may
become a Lien upon any of their assets prior to the time when any penalty or
fine shall be incurred with respect thereto or any such Lien shall be imposed
thereon; and (iii) comply in all material respects with the requirements of all
applicable laws, rules, regulations and orders of any Governmental Authority,
obtain or take all Governmental Actions necessary in the operation of their
businesses, and comply with and enforce the provisions of all DLB Material
Agreements, including paying when due all rentals, royalties, expenses and other
liabilities relating to their businesses or assets; provided, however, DLB will
not be in violation of this Section 5.1(i) if any of the DLB Companies incur
obligations for penalties and interest in connection with gross production tax
reporting in the ordinary course of business; and provided further, that the DLB
Companies may contest the imposition of any such Taxes, assessments and other
governmental charges, any such claim, or the requirements of any applicable law,
rule, regulation or order or any DLB Material Agreement if done so in good faith
by appropriate proceedings and if adequate reserves are established in
accordance with GAAP and as may be determined as sufficient by DLB's board of
directors.
(j) None of the DLB Companies will settle or compromise any pending or
threatened suit, action or claim which is material or which relates to any of
the transactions contemplated hereby.
(k) None of the DLB Companies will undertake any expenditure in an amount
greater than $50,000 individually or in the aggregate (other than as set forth
in Schedule 5.1(k) hereto or the first sentence of Section 5.12 hereto), without
the prior written approval of CHK.
(l) Prior to November 5, 1997 DLB shall either have (i) committed to drill
a well on the Whetstone/Sheridan prospect or (ii) farmed out such prospect to
CHK and retained no overriding royalty interest in connection with such farmout
and received from CHK no compensation therefor.
(m) The DLB Companies will maintain in full force and effect the policies
or binders of insurance described in Section 3.20.
(n) The DLB Companies will at all times preserve and keep in full force and
effect their corporate existence and rights and franchises material to their
performance under this Agreement. The DLB Companies will preserve substantially
intact the business organization of the DLB Companies, keep available the
services of the current officers, employees and consultants of the DLB Companies
and preserve the goodwill of those current relationships of the DLB Companies
with customers, suppliers and other persons with which any of the DLB Companies
has significant business relations.
5.2 CONDUCT OF BUSINESS BY CHK PENDING CLOSING. CHK covenants and agrees
with DLB that, from the date of this Agreement until the Effective Time, CHK
will conduct its business only in the ordinary course consistent with past
practices and shall use its reasonable best efforts to preserve intact its
business organizations and relationships with third parties. Without limiting
the generality of the foregoing, and except as disclosed in Schedule 5.2 to the
Disclosure Schedule, from the date hereof until the Effective Time:
(a) CHK will not (i) declare, set aside or pay any dividends or other
distributions (whether payable in cash, property or securities) with respect to
its capital stock other than a regular quarterly dividend not in
ANNEX A
30
161
excess of $0.05 per share per quarter; (ii) merge or consolidate with, or
transfer all or substantially all of its assets to, another corporation or other
business entity; (iii) liquidate, wind-up or dissolve (or suffer any liquidation
or dissolution); or (iv) enter into any contract, agreement, commitment or
arrangement with respect to any of the foregoing;
(b) CHK will not adopt or propose any material change in its certificate of
incorporation or bylaws; and
(c) CHK will not, and will not permit any of its subsidiaries to, take any
action that would make any representation and warranty of CHK and Merger Sub
hereunder inaccurate in any respect at, or as of any time prior to, the
Effective Time.
5.3 ACCESS TO ASSETS, PERSONNEL AND INFORMATION.
(a) From the date hereof until the Effective Time, DLB shall afford to CHK
and the CHK Representatives, at CHK's sole risk and expense, reasonable access
to any of the assets, books and records, contracts, employees, representatives,
agents and facilities of the DLB Companies and shall, upon request, furnish
promptly to CHK (at CHK's expense) a copy of any file, book or record, contract
or other written information concerning any of the DLB Companies (or any of
their respective assets) that is within the possession or control of DLB. During
such period, DLB will make available to a reasonable number of CHK
Representatives adequate office space and facilities at the principal office
facility of DLB in Oklahoma City, Oklahoma, and will permit a reasonable number
of CHK Representatives to observe, but not participate in, staff meetings at
those facilities and other facilities of any of the DLB Companies.
(b) From the date hereof until the Effective Time, each of CHK and DLB
shall (i) furnish to the other, promptly upon receipt or filing (as the case may
be), a copy of each communication between such party and the SEC after the date
hereof relating to the Merger and each report, schedule, or other document filed
by such party with the SEC after the date hereof relating to the Merger, and
(ii) promptly advise the other of the substance of any oral communications
between such party and the SEC relating to the Merger.
(c) DLB will (and will cause GEMCO, DLB International, The Ames Company,
Ames Field and the DLB Representatives to) fully cooperate in all reasonable
respects with CHK and the CHK Representatives in connection with CHK's
examinations, evaluations and investigations described in this Section 5.3.
(d) CHK agrees that it will not (and will cause the CHK Representatives not
to) use any information obtained pursuant to this Section 5.3 for any purpose
unrelated to the consummation of the transactions contemplated by this
Agreement.
(e) Notwithstanding anything in this Section 5.3 to the contrary, DLB shall
not be obligated under the terms of this Section 5.3 to disclose to CHK or the
CHK Representatives, or grant CHK or the CHK Representatives access to,
information that is within DLB's possession or control but subject to a valid
and binding confidentiality agreement with a third party without first obtaining
the consent of such third party, and DLB, to the extent reasonably requested by
CHK, will use its best efforts to obtain any such consent.
(f) No investigation pursuant to this Section 5.3 will affect or be deemed
to modify any of the representations or warranties made by the DLB Companies in
this Agreement.
5.4 NO SOLICITATION.
(a) Immediately following the execution of this Agreement, DLB will (and
will cause each of the DLB Representatives to) (i) terminate any and all
existing activities, discussions and negotiations with third parties (other than
CHK and Merger Sub) with respect to any possible transaction involving the
acquisition of the DLB Common Stock or the merger or other business combination
of DLB with or into any such third party and (ii) comply with the obligations
undertaken in this Section 5.4.
(b) DLB will not (and will cause the DLB Representatives not to) directly
or indirectly, solicit, initiate, encourage or otherwise facilitate (including
by way of furnishing information) any inquiries or the submission of, any offer
or the making of any proposal to acquire all or any part of the DLB Common Stock
or all or any
ANNEX A
31
162
material portion of the assets or business of DLB or any other transaction, the
consummation of which would or could reasonably be expected to impede, interfere
with, prevent or materially delay the consummation of the Merger or which would
or could reasonably be expected to materially dilute the benefits to CHK of the
transactions contemplated hereby (other than the transactions contemplated by
this Agreement), whether by merger, purchase of assets, tender offer, exchange
offer or otherwise (an "ALTERNATIVE PROPOSAL"). DLB further agrees that neither
it nor any DLB Company shall, and that it shall cause each DLB Representative
not to, directly or indirectly, have any discussion with or provide any
confidential information or data to any Person relating to an Alternative
Proposal or engage in any negotiations concerning an Alternative Proposal, or
otherwise facilitate any effort or attempt to make or implement an Alternative
Proposal or accept an Alternative Proposal; provided, however, that nothing
contained in this Agreement shall prevent DLB or DLB's Board of Directors from
(i) complying with Rule 14e-2 promulgated under the Exchange Act with regard to
an Alternative Proposal; (ii) engaging in any discussions or negotiations with,
or providing any information to, any Person in response to an unsolicited bona
fide written Alternative Proposal by any such Person; or (iii) recommending such
an unsolicited bona fide written Alternative Proposal to the holders of DLB
Common Stock if and only to the extent that, in any such case as is referred to
in clause (ii), (A) DLB's Board of Directors concludes in good faith (after
consultation with its legal counsel and financial advisors) that such
Alternative Proposal is reasonably capable of being completed, taking into
account all legal, financial, regulatory and other aspects of the Alternative
Proposal and the Person making the Alternative Proposal, and would, if
consummated, result in a transaction more favorable to holders of DLB Common
Stock than the transaction contemplated by this Agreement (any such more
favorable Alternative Proposal being hereinafter referred to as a "SUPERIOR
PROPOSAL"), (B) DLB's Board of Directors determines in good faith after
consultation with legal counsel that such action is necessary for it to act in a
manner consistent with its fiduciary duties under applicable law, (C) prior to
providing any information or data to any Person pursuant to clause (ii) or (iii)
above in connection with a Superior Proposal by any such Person, DLB's Board of
Directors receives from such Person an executed confidentiality agreement on
terms substantially similar to those contained in the Confidentiality Agreement
and (D) prior to providing any information or data to any Person or entering
into discussions or negotiations with any Person, DLB's Board of Directors
notifies CHK promptly of such inquiries, proposals or offers received by, any
such information requested from, or any such discussions or negotiations sought
to be initiated or continued with, DLB, any DLB Company or any of the DLB
Representatives indicating, in connection with such notice, the name of such
Person and the terms and conditions of any proposals or offers and the status of
any actions, including any discussions, taken pursuant to such Alternative
Proposal. DLB agrees that it shall continue to keep CHK informed, on a current
basis, of the status and terms of any such proposals or offers and the status of
any such discussions or negotiations.
(c) Nothing in this Section 5.4 shall permit DLB to terminate this
Agreement except as specifically provided in Section 7.1.
(d) DLB agrees that it will immediately cease and cause to be terminated
any existing activities, discussions or negotiations with any parties conducted
heretofore with respect to any Alternative Proposal.
5.5 MEETING OF DLB'S STOCKHOLDERS. DLB shall, as promptly as reasonably
practicable after the date hereof, (a) take all steps reasonably necessary to
call, give notice of, convene and hold a special meeting of its stockholders
(the "DLB SPECIAL MEETING") for the purpose of securing the DLB Stockholders'
Approval, (b) distribute to its stockholders the Proxy Statement/Prospectus in
accordance with applicable Federal and state law and with its certificate of
incorporation and by-laws, which Proxy Statement/Prospectus shall contain the
recommendation of the Board of Directors of DLB that its stockholders approve
the Merger, this Agreement and the transactions contemplated hereby, (c) use all
reasonable efforts to solicit from its stockholders proxies in favor of the
approval and adoption of the Merger, this Agreement and the transactions
contemplated hereby and to secure the DLB Stockholders' Approval, and (d)
cooperate and consult with CHK with respect to each of the foregoing matters;
provided, that nothing contained in this Section 5.5 shall prohibit DLB's Board
of Directors from failing to make or from withdrawing or modifying its
recommendation to DLB's stockholders hereunder if the Board of Directors of DLB,
after consultation with and based upon
ANNEX A
32
163
advice of counsel, determines in good faith that such action is necessary for
such Board of Directors to comply with its fiduciary duties to its stockholders
under applicable law.
5.6 PREPARATION OF THE PROXY STATEMENT/PROSPECTUS AND REGISTRATION
STATEMENT.
(a) As promptly as practicable after the execution of this Agreement, CHK
and DLB shall prepare and file with the SEC preliminary proxy materials which
shall constitute the Proxy Statement/Prospectus and the Registration Statement
of CHK with respect to the CHK Common Stock to be issued in connection with the
Merger. As promptly as practicable after comments are received from the SEC
thereon and after the furnishing by CHK and DLB of all information required to
be contained therein, CHK and DLB shall file with the SEC a combined Proxy and
Registration Statement on Form S-4 (or on such other form as shall be
appropriate) relating to the adoption of this Agreement and approval of the
transactions contemplated hereby by the stockholders of DLB and shall use all
commercially reasonable efforts to cause the Registration Statement to become
effective, and DLB shall use all commercially reasonable efforts to mail the
Proxy Statement/Prospectus to its stockholders as soon thereafter as
practicable. CHK shall also take any action (other than qualifying to do
business in any jurisdiction in which it is not now so qualified or filing a
general consent to service of process in any jurisdiction) required to be taken
under any applicable state securities laws in connection with the issuance of
CHK Common Stock in the Merger, and DLB shall furnish all information concerning
DLB and the holders of shares of DLB's capital stock as may be reasonably
requested in connection with any such action. CHK shall advise DLB and DLB shall
advise CHK, as applicable, promptly after it receives notice thereof, of the
time when the Registration Statement shall become effective or any supplement or
amendment has been filed, the issuance of any stop order, the suspension of the
qualification of the CHK Common Stock for offering or sale in any jurisdiction,
or any request by the SEC for amendment of the Proxy Statement/Prospectus or the
Registration Statement or comments thereon and responses thereto or requests by
the SEC for additional information.
(b) LETTER OF CHK'S ACCOUNTANT. Following receipt by Coopers & Lybrand
L.L.P., CHK's independent auditors, of an appropriate request from DLB pursuant
to SAS No. 72, CHK shall use commercially reasonable efforts to cause to be
delivered to DLB a letter of Coopers & Lybrand L.L.P. dated as of the date the
Proxy Statement/Prospectus is first mailed to DLB's stockholders, and addressed
to DLB, in form and substance reasonable satisfactory to DLB and customary in
scope and substance for "cold comfort" letters delivered by independent public
accountants in connection with registration statements and proxy statements
similar to the Proxy Statement/Prospectus.
(c) LETTER OF DLB'S ACCOUNTANTS. Following receipt by KPMG Peat Marwick
LLP, DLB's independent auditors, of an appropriate request from CHK pursuant to
SAS No. 72, DLB shall use commercially reasonable efforts to cause to be
delivered to CHK a letter of KPMG Peat Marwick LLP, dated as of the date the
Proxy Statement/Prospectus is first mailed to DLB's stockholders, and addressed
to CHK, in form and substance satisfactory to CHK and customary in scope and
substance for "cold comfort" letters delivered by independent public accountants
in connection with registration statements and proxy statements similar to the
Proxy Statement/Prospectus.
5.7 STOCK LISTING. Unless the cash election is made in accordance with
Section 2.4(f) hereof, CHK shall use commercially reasonable efforts to cause
the CHK Common Stock to be issued in the Merger to be approved for listing on
the New York Stock Exchange prior to the Effective Time, subject to official
notice of issuance.
5.8 ADDITIONAL ARRANGEMENTS. Subject to the terms and conditions herein
provided, each of DLB and CHK shall take, or cause to be taken, all action and
shall do, or cause to be done, all things necessary, appropriate or desirable
under applicable laws and regulations or under applicable governing agreements
to consummate and make effective the transactions contemplated by this
Agreement, including using its commercially reasonable efforts to obtain all
necessary waivers, consents and approvals and effecting all necessary
registrations and filings, including, but not limited to, any filings require
under the HSR Act. Each of DLB and CHK shall use their commercially reasonable
efforts to take, or cause to be taken, all action or
ANNEX A
33
164
shall do, or cause to be done, all things necessary, appropriate or desirable to
cause the covenants and conditions applicable to the transactions contemplated
hereby to be performed or satisfied as soon as practicable. In addition, if any
Governmental Authority shall have issued any order, decree, ruling or
injunction, or taken any other action that would have the effect of restraining,
enjoining or otherwise prohibiting or preventing the consummation of the
transactions contemplated hereby, each of DLB and CHK shall use its commercially
reasonable efforts to have such order, decree, ruling or injunction or other
action declared ineffective as soon as practicable.
5.9 PUBLIC ANNOUNCEMENTS. Prior to the Closing, DLB and CHK will consult
with each other before issuing any press release or otherwise making any public
statements with respect to the transactions contemplated by this Agreement and
shall not issue any press release or make any such public statement prior to
obtaining the approval of the other party; provided, however, that such approval
shall not be required where such release or announcement is required by
applicable law; and provided further, that either DLB or CHK may respond to
inquiries by the press or others regarding the transactions contemplated by this
Agreement, so long as such responses are consistent with such party's previously
issued press releases.
5.10 PAYMENT OF EXPENSES.
(a) Except as set forth in this Section 5.10, all expenses incurred in
connection with this Agreement shall be paid by the party incurring such
expenses, whether or not the Merger is consummated, except that CHK and DLB each
shall pay one-half of all Expenses (as defined below) relating to printing,
filing and mailing the Registration Statement and the Proxy Statement/Prospectus
and all SEC and other regulatory filing fees incurred in connection with the
Registration Statement and the Proxy Statement/Prospectus. "EXPENSES" as used in
this Agreement shall include all reasonable out-of-pocket expenses (including,
without limitation, all fees and expenses of counsel, accountants, investment
bankers, experts and consultants to a party hereto and its affiliates) incurred
by a party or on its behalf in connection with or related to the authorization,
preparation, negotiation, execution and performance of this Agreement, the
preparation, printing, filing and mailing of the Registration Statement and the
Proxy Statement/Prospectus, the solicitation of stockholder approvals and all
other matters related to the closing of the Merger.
(b) CHK and DLB agree that
(i) if DLB shall terminate this Agreement pursuant to Section
7.1(d)(i) or
(ii) if CHK shall terminate this Agreement pursuant to Section 7.1(e)
or
(iii) if (A) DLB or CHK shall terminate this Agreement pursuant to
Section 7.1(b)(iii) due to the failure of DLB's stockholders to approve and
adopt this Agreement, the Merger and the transactions contemplated hereby,
and (B) at the time of such failure to so approve and adopt this Agreement,
the Merger and the transactions contemplated hereby, there shall exist an
Alternative Proposal with respect to DLB and, within 12 months of the
termination of this Agreement, DLB enters into a definitive agreement with
any third party with respect to an Alternative Proposal with respect to
DLB,
then DLB shall pay to CHK an amount equal to $5,000,000 (the "DLB TERMINATION
FEE").
(c) The DLB Termination Fee required to be paid pursuant to Section
5.10(b)(i) shall be paid prior to, and shall be a pre-condition to effectiveness
of termination of this Agreement pursuant to Section 7.1(d) and the DLB
Termination Fee required to be paid pursuant to Section 5.10(b)(iii) shall be
paid to CHK on the next Business Day after a definitive agreement is entered
into with a third party with respect to an Alternative Proposal with respect to
DLB. Any payment of a DLB Termination Fee otherwise required to be made pursuant
to Section 5.10 shall be made not later than two Business Days after termination
of this Agreement. All payments under this Section 5.10(b) shall be made by wire
transfer of immediately available funds to an account designated by CHK.
5.11 AGREEMENTS OF AFFILIATES. At least 30 days prior to the Effective
Time, DLB shall cause to be prepared and delivered to CHK a list identifying all
Persons who, at the time of the DLB Special Meeting,
ANNEX A
34
165
may be deemed to be "affiliates" of DLB as that term is used in paragraphs (c)
and (d) of Rule 145 under the Securities Act. DLB shall use its best efforts to
cause each Person who is identified as an affiliate of DLB in such list to
execute and deliver to CHK, on or prior to the Closing Date, a written agreement
in the form attached hereto as Annex C.
5.12 INSURANCE; INDEMNIFICATION. Prior to the Effective Time, DLB shall
take such action(s) as may be necessary to cause the director and officer
liability insurance coverage currently maintained by DLB to continue in effect
for a period of not less than three years following the Effective Time (provided
that CHK may substitute therefor policies of at least the same coverage
containing terms and conditions which are no less advantageous to such former
DLB officers and directors) with respect to claims arising from facts or events
that occurred prior to the Effective Time; provided, however, that in no event
shall expend pursuant to this Section 5.12 more than $100,000 in the aggregate.
From and after the Effective Time, CHK shall for a period of six years indemnify
and hold harmless each person who is, has been at any time prior to the date
hereof, or becomes prior to the Effective Time, an officer or director of any of
the DLB Companies (collectively, the "INDEMNIFIED PARTIES") to the extent
permitted by applicable law against all losses, claims, damages, liabilities,
costs or expenses (including attorneys' fees), judgments and amounts paid in
settlement in connection with any claim, action, suit, proceeding or
investigation arising out of or pertaining to acts or omissions, or alleged acts
or omissions, by him in his capacity as an officer or director of any of the DLB
Companies, which acts or omissions occurred prior to the Effective Time.
Notwithstanding the foregoing, CHK, to the fullest extent permitted under
applicable law, shall periodically advance expenses as incurred with respect to
any claim or potential claim; provided that the person to whom expenses are
advanced, if required by applicable law, provides an undertaking to repay such
advances if it is ultimately determined by a court of competent jurisdiction
that such person is not entitled to indemnification pursuant to this Section
5.12. The provisions of this Section 5.12 are intended to be for the benefit of,
and shall be enforceable by, the parties hereto and each Indemnified Party and
their respective heirs and representatives.
5.13 DLB EMPLOYEES. On the Effective Time, (a) CHK or the Surviving
Corporation shall offer employment to, or shall offer to continue the employment
of all employees (the "RETAINED EMPLOYEES") of the DLB Companies except those
employees listed on Schedule 5.13(a) and executive officers, on an at-will basis
and shall provide the Retained Employees with benefits substantially comparable
in the aggregate, in CHK's good faith judgment, to those provided to similarly
situated employees of CHK and (b) CHK shall make available to WRT the services
of each of the employees of the DLB Companies listed on Schedule 5.13(b) hereto
for up to 10 hours per week for a six-month period after the Closing Date
(provided that WRT shall reimburse the CHK for the time such persons spend on
WRT business at rates to be mutually agreed upon), in each case to the extent
such persons accept CHK's or Surviving Corporation's employment offer and are
then employed by CHK or one of its subsidiaries; provided, however, that in
CHK's discretion, CHK may continue one or more of the DLB Employee Benefit Plans
for the Retained Employees for such period as it may choose, in lieu of
providing participation in a similar plan of CHK and such DLB Employee Benefit
Plan shall be deemed comparable to CHK's similar plan. CHK further agrees that
the Retained Employees shall be credited for their service with the DLB
Companies, and their respective predecessor entities, for purposes of
eligibility and vesting (but not the accrual of benefits) in the employee plans
provided by CHK to the Retained Employees. Only if available to CHK at a cost
determined to be reasonable, in CHK's sole judgment, shall the Retained
Employees' benefits under CHK's medical benefit plan not be subject to any
exclusions for any preexisting conditions. Credit shall be received under the
CHK medical benefit plan for any deductibles or out-of-pocket amounts previously
paid by the Retained Employees during the 1997 coverage year. CHK shall, or
shall cause the Surviving Corporation to, fulfill all coverage continuation
obligations imposed by Section 4980B of the Code and Section 601 of ERISA for
those employees of the DLB Companies who are not Retained Employees.
5.14 NEW BANK CREDIT FACILITY. At or immediately after the Effective Time,
CHK shall repay or refinance the outstanding balance due under the Credit
Facilities and secure a release of all Liens under such Credit Facilities. DLB
undertakes and agrees to cooperate with CHK to assist CHK in making such
arrangements.
ANNEX A
35
166
5.15 NOTICE OF ACTIONS AND PROCEEDINGS. DLB will promptly notify Buyer of
any actions, suits, claims, investigations or proceedings commenced or, to the
knowledge of DLB, threatened against, relating to or involving or otherwise
affecting any of the DLB Companies which, if pending on the date hereof, would
have been required to have been disclosed in writing pursuant to any Disclosure
Schedule required hereby or which relates to the consummation of the Merger.
5.16 NOTIFICATION OF CERTAIN OTHER MATTERS. DLB will promptly notify CHK
of:
(a) any written notice or other written communication from any third party
alleging that the consent of such third party is or may be required in
connection with the transactions contemplated by this Agreement;
(b) any written notice or other written communication from any governmental
authority in connection with the transactions contemplated hereby; and
(c) any fact, development or occurrence that constitutes a Material Adverse
Effect with respect to DLB or is reasonably expected to result in such an
effect.
5.17 CORRECTIONS TO THE PROXY STATEMENT/PROSPECTUS AND REGISTRATION
STATEMENT. Prior to the date of approval of the Merger by their respective
stockholders, each of DLB, Merger Sub and CHK shall correct promptly any
information provided by it to be used specifically in the Proxy
Statement/Prospectus and Registration Statement that shall have become false or
misleading in any material respect and shall take all steps necessary to file
with the SEC and have declared effective or cleared by the SEC any amendment or
supplement to the Proxy Statement/Prospectus or the Registration Statement so as
to correct the same and to cause the Proxy Statement/Prospectus as so corrected
to be disseminated to the stockholders of DLB and CHK, in each case to the
extent required by applicable law.
5.18 BAYARD COMMON STOCK AND WRT COMMON STOCK REGISTRATION STATEMENTS. As
promptly as practicable after the execution of this Agreement, DLB shall take
all steps necessary to exercise its registration rights under the Bayard
Registration Agreement and WRT Registration Agreement with respect to the Bayard
Common Stock and the WRT Common Stock, respectively, to be delivered as Merger
Consideration upon consummation of the Merger, and shall use all reasonable
efforts to cause such registration statements to become effective prior to the
DLB Special Meeting. DLB shall advise CHK promptly after it receives notice
thereof, of the time when such registration statements shall become effective or
any supplement or amendment has been filed, the issuance of any stop order, the
suspension of the qualification of the Bayard Common Stock or WRT Common Stock
for offering or sale in any jurisdiction, or any request by the SEC for
amendment of such registration statements or comments thereon and responses
thereto or requests by the SEC for additional information.
5.19 TERMINATION OF ADMINISTRATIVE SERVICES AGREEMENT. Prior to the
Closing, DLB and WRT will terminate the Administrative Services Agreement
("Administrative Services Agreement") between DLB and WRT dated as of July 10,
1997 and in connection with such termination WRT shall pay all amounts due under
the Administrative Services Agreement prior to Closing.
ARTICLE VI
CONDITIONS
6.1 CONDITIONS TO EACH PARTY'S OBLIGATION TO EFFECT THE MERGER. The
respective obligations of each party to effect the Merger shall be subject to
the satisfaction, at or prior to the Closing Date, of the following conditions:
(a) STOCKHOLDER APPROVAL. The DLB Stockholders' Approval shall have been
obtained.
(b) OTHER APPROVALS. The waiting period applicable to the consummation of
the Merger under the HSR Act shall have expired or been terminated and all
filings required to be made prior to the Effective Time with, and all consents,
approvals, permits and authorizations required to be obtained prior to the
Effective Time
ANNEX A
36
167
from, any Governmental Authority in connection with the execution and delivery
of this Agreement and the consummation of the transactions contemplated hereby
by DLB, Merger Sub and CHK shall have been made or obtained (as the case may
be), except where the failure to obtain such consents, approvals, permits and
authorizations would not be reasonably likely to result in a Material Adverse
Effect on CHK (assuming the Merger has taken place) or to materially adversely
affect the consummation of the Merger.
(c) NO INJUNCTIONS OR RESTRAINTS. No statute, rule, regulation, executive
order, decree or injunction shall have been enacted, entered, promulgated or
enforced by any court or governmental authority against CHK, Merger Sub or DLB
and be in effect that prohibits or restricts the consummation of the Merger or
makes such consummation illegal (each party agreeing to use all reasonable
commercial efforts to have any such prohibition lifted).
(d) REGISTRATION STATEMENT. The Registration Statement shall have been
declared effective by the SEC under the Securities Act and shall be effective at
the Effective Time, and no stop order suspending such effectiveness shall have
been issued, no action, suit, proceeding or investigation by the SEC to suspend
such effectiveness shall have been initiated and be continuing, and all
necessary approvals under state securities laws relating to the issuance or
trading of the CHK Common Stock to be issued in the Merger shall have been
received.
(e) LISTING OF SHARES. The shares of CHK Common Stock issuable pursuant to
the Merger, if any, shall have been approved for listing on the New York Stock
Exchange, subject to official notice of issuance.
(f) WRT COMMON STOCK. A registration statement on the appropriate form
relating to the WRT Common Stock to be delivered in connection with the Merger
shall have been declared effective by the SEC under the Securities Act and shall
be effective at the Effective Time, no stop order suspending such effectiveness
shall have been issued, no action, suit, proceeding or investigation by the SEC
to suspend such effectiveness shall have been initiated and be continuing.
(g) BAYARD COMMON STOCK. A registration statement on the appropriate form
relating to the Bayard Common Stock to be delivered in connection with the
Merger shall have been declared effective by the SEC under the Securities Act
and shall be effective at the Effective Time, no stop order suspending such
effectiveness shall have been issued, no action, suit, proceeding or
investigation by the SEC to suspend such effectiveness shall have been initiated
and be continuing.
6.2 CONDITIONS TO OBLIGATIONS OF CHK AND MERGER SUB. The obligation of CHK
to effect the Merger is subject to the satisfaction of the following conditions,
any or all of which may be waived in whole or in part by CHK and Merger Sub:
(a) REPRESENTATIONS AND WARRANTIES. The representations and warranties of
DLB set forth in Article III shall be true and correct in all material respects
as of the Closing Date as though made on and as of that time (unless such
representation or warranty specifies that it is given as of or with respect to a
specific date), and CHK shall have received a certificate signed by the chief
executive officer of DLB to such effect.
(b) PERFORMANCE OF COVENANTS AND AGREEMENTS BY DLB. DLB shall have
performed in all material respects all covenants and agreements required to be
performed by it under this Agreement at or prior to the Closing Date, and CHK
shall have received a certificate signed by the chief executive officer of DLB
to such effect.
(c) DLB STOCK OPTIONS. Each outstanding DLB Stock Option shall have been
either exercised or canceled.
(d) BAYARD INITIAL PUBLIC OFFERING. Bayard shall have completed an initial
public offering of Bayard Common Stock and be subject to Sections 13 or 15(d) of
the Exchange Act.
(e) PAYMENT OF AMOUNTS DUE FROM BAYARD AND WRT. DLB shall have received
payment in full of all outstanding accounts receivable, notes receivable and
other loans and advances owed to DLB by, or due from, WRT or Bayard.
ANNEX A
37
168
(f) AGREEMENTS OF AFFILIATES AND GOODWILL PROTECTION AGREEMENTS. The
affiliate agreements referred to in Section 5.11 and the Goodwill Protection
Agreements referred to in the preamble to this Agreement shall have been
delivered to CHK.
(g) NOTICE BY WRT. DLB shall have provided notice to Texaco, Inc. or its
appropriate subsidiary of the transactions contemplated hereby to the extent
required in accordance with the terms of that certain Purchase, Sale and
Cooperation Agreement by and between Texaco Exploration and Production, Inc. and
DLB.
(h) DISSENTING SHARES. The number of shares held by Dissenting Stockholders
shall not exceed five percent of the total number of shares of DLB Common Stock
outstanding on the date hereof.
(i) The severance obligations of DLB to the employees listed on Schedule
5.13(a) shall have been paid.
6.3 CONDITIONS TO OBLIGATIONS OF DLB. The obligation of DLB to effect the
Merger is subject to the satisfaction of the following conditions, any or all of
which way be waived in whole or in part by DLB:
(a) REPRESENTATIONS AND WARRANTIES. The representations and warranties of
CHK and Merger Sub set forth in Article IV shall be true and correct in all
material respects as of the Closing Date as though made on and as of that time
(unless such representation or warranty specifies that it is given as of or with
respect to a specific date), and DLB shall have received a certificate signed by
the chief executive officer of CHK and Merger Sub to such effect.
(b) PERFORMANCE OF COVENANTS AND AGREEMENTS BY CHK. CHK shall have
performed in all material respects all covenants and agreements required to be
performed by it under this Agreement at or prior to the Closing Date, and DLB
shall have received a certificate signed by the chief executive officer of CHK
and Merger Sub to such effect.
(c) EFFECTIVENESS OF CHK REGISTRATION STATEMENT. If prior to the Effective
Time Mr. Davidson has timely given the Notice of Demand (as defined in the
Registration Rights Agreement), CHK shall have taken all steps necessary or
appropriate to assure that a registration statement relating to the shares of
CHK Common Stock in respect of which such Notice of Demand is given is declared
effective by the SEC promptly after the Effective Time.
ARTICLE VII
TERMINATION
7.1 TERMINATION RIGHTS. This Agreement may be terminated and the Merger
may be abandoned at any time prior to the Effective Time, whether before or
after approval by the stockholders of DLB and CHK:
(a) By mutual written consent of CHK, Merger Sub and DLB;
(b) By either DLB or CHK if (i) the Merger has not been consummated by
April 30, 1998 (provided, however, that the right to terminate this Agreement
pursuant to this clause (i) shall not be available to any party whose breach of
any representation or warranty or failure to perform any covenant or agreement
under this Agreement has been the cause of or resulted in the failure of the
Merger to occur on or before such date); (ii) any Governmental Authority shall
have issued an order, decree or ruling or taken any other action permanently
restraining, enjoining or otherwise prohibiting the Merger and such order,
decree, ruling or other action shall have become final and nonappealable
(provided, however, that the right to terminate this Agreement pursuant to this
clause (ii) shall not be available to any party until such party has used all
commercially reasonable efforts to remove such injunction, order or decree); or
(iii) the stockholder approvals referred to in Section 5.5 shall not have been
obtained by reason of the failure to obtain the requisite vote upon a vote at a
duly held meeting of DLB stockholders or at any adjournment or postponement
thereof;
(c) By CHK if (i) there has been a breach of the representations and
warranties made by DLB in Article III of this Agreement (provided, however, that
CHK shall not be entitled to terminate this Agreement pursuant to this clause
(i) unless CHK has given DLB at least 15 days prior notice of such breach
(except at
ANNEX A
38
169
closing, in which case no notice need be given), DLB has failed to cure such
breach within such 15-day period, and the condition described in Section 6.2(a),
other than the provision thereof relating to the certificate signed by the chief
executive officer of DLB, would not be satisfied if the Closing were to occur on
the day on which CHK gives DLB notice of such termination); or (ii) DLB has
failed to comply in any material respect with any of its covenants or agreements
contained in this Agreement and such failure has not been, or cannot be, cured
within a reasonable time after notice and demand for cure thereof;
(d) By DLB if (i) as a result of a Superior Proposal received by DLB from a
Person other than a party to this Agreement or any of its Affiliates, DLB's
Board of Directors determines in good faith that their fiduciary obligations
under applicable law require that such Superior Proposal be accepted; provided,
however, that (A) DLB's Board of Directors shall have concluded in good faith,
after considering provisions of applicable laws and after giving effect to all
concessions which may be offered by CHK pursuant to clause (B) below, on the
basis of advice of counsel, that such action is necessary for DLB's Board of
Directors to act in a manner consistent with its fiduciary duties under
applicable laws and (B) prior to the effective date of any such termination, DLB
shall provide CHK with an opportunity to make such adjustments in the terms and
conditions of this Agreement or the Merger as would enable DLB to proceed with
the transactions contemplated hereby; provided, further, that it shall be a
condition to the effectiveness of termination by DLB pursuant to this Section
7.1(d) that DLB shall have made the payment of the DLB Termination Fee to CHK
required by Section 5.10(b)(i); or (ii) CHK shall have breached any of its
representations, warranties or covenants under this Agreement which breach shall
have caused a reasonable likelihood that CHK will not be able to consummate the
Merger (provided, however, that DLB shall not be entitled to terminate this
Agreement pursuant to this clause (ii) unless DLB has given CHK at least 15 days
prior notice of such breach (except at closing, in which case no notice need be
given), CHK has failed to cure such breach within such 15-day period, and the
condition described in Section 6.3(a), other than the provisions thereof
relating to the certificate signed by the chief executive officer of CHK, would
not be satisfied if the Closing were to occur on the day on which DLB gives CHK
notice of such termination);
(e) By CHK if the Board of Directors of DLB (i) accepts a Superior Proposal
in accordance with Section 5.4(b), (ii) shall have withdrawn or modified in a
manner adverse to CHK its approval or recommendation of this Agreement or the
Merger, or, upon request by CHK, shall fail to reaffirm such approval or
recommendation, or (iii) shall have resolved to do any of the foregoing.
(f) By DLB or CHK, as the case may be, in accordance with the terms of
Section 2.4(a)(i), respectively.
7.2 EFFECT OF TERMINATION. If this Agreement is terminated by either DLB
or CHK pursuant to the provisions of Section 7.1, this Agreement shall forthwith
become void except for, and there shall be no further obligation on the part of
any party hereto or its respective Affiliates, directors, officers, or
stockholders except pursuant to, Sections 5.10, Article VIII and the
Confidentiality Agreement (which shall continue pursuant to their terms);
provided, however, that a termination of this Agreement shall not relieve any
party hereto from any liability for damages incurred as a result of a breach by
such party of its covenants, agreements or other obligations hereunder occurring
prior to such termination. CHK, Merger Sub and DLB acknowledge that, prior to
Closing, the sole and exclusive remedy of any party to this Agreement with
respect to a breach of a representation or warranty contained herein shall be
the right to terminate this Agreement in accordance with and subject to the
provisions of this Article VII; provided, however, that a termination of this
Agreement shall not relieve any party from any liability for damages incurred as
a result of a breach by such party of its covenants hereunder occurring prior to
such termination. Each of CHK, Merger Sub and DLB covenant never to institute,
directly or indirectly, any action or proceeding of any kind against the other
based on or arising out of, or in any manner related to, the breach of a
representation or warranty contained, herein if this Agreement is terminated,
pursuant to Section 7.1.
ANNEX A
39
170
ARTICLE VIII
MISCELLANEOUS
8.1 NONSURVIVAL OF REPRESENTATIONS, WARRANTIES, COVENANTS AND
AGREEMENTS. None of the representations, warranties, covenants or agreements
contained in this Agreement or in any instrument delivered pursuant to this
Agreement, and no agreements or obligations arising under the Confidentiality
Agreement, shall survive the consummation of the Merger (except for the
Agreements contained in Article II, Section 5.10 and in this Article VIII).
8.2 AMENDMENT. This Agreement may be amended by the parties hereto at any
time before or after approval of the DLB Proposal by the stockholders of DLB;
provided, however, that after any such approval, no amendment shall be made that
by law requires further approval by such stockholders without such further
approval. This Agreement may not be amended except by a written instrument
signed on behalf of each of the parties hereto.
8.3 NOTICES. Any notice or other communication required or permitted
hereunder shall be in writing and either delivered personally, by facsimile
transmission or by registered or certified mail (postage prepaid and return
receipt requested) and shall be deemed given when received (or, if mailed, five
business days after the date of mailing) at the following addresses or facsimile
transmission numbers (or at such other address or facsimile transmission number
for a party as shall be specified by like notice):
(a) If to CHK or Merger Sub: Chesapeake Energy Corporation, 6100 North
Western Avenue, Oklahoma City, Oklahoma 73118, Attention: Chief Executive
Officer (facsimile transmission number: (405) 848-8588), with a copy (which
shall not constitute notice) to G. Michael O'Leary, Andrews & Kurth L.L.P., 4200
Texas Commerce Tower, Houston, Texas 77002 (facsimile transmission number: (713)
220-4285).
(b) If to DLB: DLB Oil & Gas, Inc., 1601 Northwest Expressway, Suite 700,
Oklahoma City, Oklahoma 73118-1401, Attention: President (facsimile transmission
number (405) 848-9449).
8.4 COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which shall be an original but all of which together shall
constitute one and the same instruments.
8.5 SEVERABILITY. Any term or provision of this Agreement that is invalid
or unenforceable in any jurisdiction shall, as to such jurisdiction, be
ineffective to the extent of such invalidity or unenforceability without
rendering invalid or unenforceable the remaining terms and provisions of this
Agreement or affecting the validity or enforceability of any of the terms or
provisions of this Agreement in any other jurisdiction. If any provision of this
Agreement is so broad as to be unenforceable, such provision shall be
interpreted to be only so broad as is enforceable.
8.6 ENTIRE AGREEMENT; NO THIRD PARTY BENEFICIARIES. This Agreement
(together with the Confidentiality Agreement and the documents and instruments
delivered by the parties in connection with this Agreement) (a) constitutes the
entire agreement and supersedes all other prior agreements and understandings,
both written and oral, among the parties with respect to the subject matter
hereof, and (b) except as provided in Article II or Section 5.12 or Section
5.13, is solely for the benefit of the parties hereto and their respective
successors, legal representatives and assigns and does not confer on any other
person any rights or remedies hereunder.
8.7 APPLICABLE LAW. This Agreement shall be governed in all respects,
including validity, interpretation and effect, by the laws of the State of
Oklahoma regardless of the laws that might otherwise govern under applicable
principles of conflicts of laws thereof.
8.8 NO REMEDY IN CERTAIN CIRCUMSTANCES. Each party agrees that, should any
court or other competent authority hold any provision of this Agreement or part
hereof to be null, void or unenforceable, or order any party to take any action
inconsistent herewith or not to take an action consistent herewith or required
hereby, the validity, legality and enforceability of the remaining provisions
and obligations contained or set forth herein
ANNEX A
40
171
shall not in any way be affected or impaired thereby, unless the foregoing
inconsistent action or the failure to take an action constitutes a material
breach of this Agreement or makes this Agreement impossible to perform, in which
case this Agreement shall terminate pursuant to Article VII.
8.9 ENFORCEMENT OF AGREEMENT. The parties hereto agree that irreparable
damage would occur in the event that any of the provisions of this Agreement was
not performed in accordance with the terms hereof or was otherwise breached.
Accordingly, the parties hereto hereby agree that each party hereto shall be
entitled to an injunction to prevent a breach of this Agreement and shall be
entitled to specific performance of the terms and provisions hereof in addition
to any other remedy at law or in equity.
8.10 ASSIGNMENT. Neither this Agreement nor any of the rights, interests
or obligations hereunder shall be assigned by any of the parties hereto (whether
by operation of law or otherwise) without the prior written consent of the other
parties. Subject to the preceding sentence, this Agreement will be binding upon,
inure to the benefit of and be enforceable by the parties and their respective
successors and permitted assigns.
8.11 WAIVERS. At any time prior to the Effective Time, the parties hereto
may, to the extent legally allowed, (a) extend the time for the performance of
any of the obligations or other acts of the other parties hereto, (b) waive any
inaccuracies in the representations and warranties contained herein or in any
document delivered pursuant hereto, and (c) waive performance of any of the
covenants or agreements, or satisfaction of any of the conditions, contained
herein. Any agreement on the part of a party hereto to any such extension or
waiver shall be valid only if set forth in a written instrument signed on behalf
of such party. Except as provided in this Agreement, no action taken pursuant to
this Agreement, including any investigation by or on behalf of any party, shall
be deemed to constitute a waiver by the party taking such action of compliance
with any representations, warranties, covenants or agreements contained in this
Agreement. The waiver by any party hereto of a breach of any provision hereof
shall not operate or be construed as a waiver of any prior or subsequent breach
of the same or any other provisions hereof.
8.12 CONFIDENTIALITY AGREEMENT. CHK agrees to be bound by the terms of the
Confidentiality Agreement as if it were a party thereto. The Confidentiality
Agreement shall remain in full force and effect following the execution of this
Agreement until terminated as described in Section 7.1 or Section 8.1 , is
hereby incorporated herein by reference and shall constitute a part of this
Agreement for all purposes. Any and all information received by CHK pursuant to
the terms and provisions of this Agreement shall be governed by the applicable
terms and provisions of the Confidentiality Agreement.
8.13 INCORPORATION. The Disclosure Schedules referred to herein are
incorporated herein for all purposes.
ANNEX A
41
172
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed
by their duly authorized representatives as of the date first above written.
"DLB" "CHK"
DLB OIL & GAS, INC. CHESAPEAKE ENERGY CORPORATION
By: /s/ MIKE LIDDELL By: /s/ AUBREY K. MCCLENDON
---------------------------------------- ----------------------------------------
Mike Liddell Aubrey K. McClendon
Chief Executive Officer Chairman of the Board and Chief
Executive Officer
"Merger Sub"
CHESAPEAKE MERGER CORP.
By: /s/ AUBREY K. MCCLENDON
----------------------------------------
Aubrey K. McClendon
President
ANNEX A
42
173
ANNEX A
TO AGREEMENT AND PLAN OF MERGER
AGREEMENT AND LIMITED IRREVOCABLE PROXY
This Agreement and Irrevocable Proxy, dated as of October 22, 1997 (the
"Agreement"), is by and between Chesapeake Energy Corporation, an Oklahoma
corporation ("CHK"), and the party identified as the "Stockholder" on the
signature page hereof (the "Stockholder").
RECITALS:
WHEREAS, Chesapeake Merger Corp., an indirect wholly owned subsidiary of
CHK ("Merger Sub") and DLB Oil & Gas, Inc., an Oklahoma corporation ( "DLB")
propose to enter into an Agreement and Plan of Merger, dated as of the date
hereof (the "Merger Agreement"), providing, among other things, for the merger
of Merger Sub with and into DLB in accordance with the terms and provisions of,
and subject to the conditions set forth in, the Merger Agreement (the "Merger");
and
WHEREAS, the Stockholder is the owner, beneficially and of record, of the
number of shares of DLB Common Stock (the "Shares") identified on the signature
page of this Agreement; and
WHEREAS, the Stockholder has agreed to vote the Shares in favor of the
Merger Agreement and the consummation of the Merger at the DLB Special Meeting;
NOW, THEREFORE, to induce CHK and Merger Sub to enter into the Merger
Agreement and in consideration of the aforesaid and the representations,
warranties, covenants and agreements set forth herein and in the Merger
Agreement, including the benefits that the parties hereto expect to derive from
the Merger, the receipt and sufficiency of all of which are hereby acknowledged
by the parties, the parties hereto agree as follows:
1. Revocation of Prior Proxies. The Stockholder hereby revokes all previous
proxies granted with respect to any of the Shares owned by the Stockholder that
would conflict with the terms of the Proxy granted hereby.
2. Grant of Limited Irrevocable Proxy. The Stockholder hereby irrevocably
constitutes and appoints CHK and Aubrey K. McClendon, Chairman of the Board and
Chief Executive Officer of CHK, Tom L Ward, President and Chief Operating
Officer of CHK and Marcus C. Rowland, Vice President -- Finance and Chief
Financial Officer of CHK, in their respective capacities as officers of CHK, and
any individual, who shall hereafter succeed to the office of Chairman of the
Board and Chief Executive Officer, President or Chief Financial Officer,
respectively, of CHK, and each of them individually, as its true and lawful
proxy and attorney-in-fact, with full power of substitution, for and in the
name, place and stead of the Stockholder, to call and attend any and all
meetings of DLB's stockholders, including the DLB Special Meeting, at which the
Merger Agreement or the Merger are to be considered and voted upon by DLB's
stockholders, and any adjournments thereof, to execute any and all written
consents of stockholders of DLB and to vote all of the Shares and any and all
shares of any other class of capital stock of DLB presently or at any future
time owned beneficially or of record by the Stockholder , including any and all
securities having voting rights issued or issuable in respect thereof, which the
Stockholder is entitled to vote other than as set forth on Exhibit A hereto (all
of the foregoing being collectively referred to as the "Subject Stock"), and to
represent and otherwise act as the Stockholder could act, in the same manner and
with the same effect as if the Stockholder were personally present, at any such
annual, special or other meeting of the stockholders of DLB (including the DLB
Special Meeting), and at any adjournment thereof (a "Meeting"), or pursuant to
any written consent in lieu of meeting or otherwise; provided, however, that any
such vote or consent in lieu thereof or any other action so taken shall be
solely for the purposes of voting in favor of the Merger and the Merger
Agreement and any transactions contemplated thereby. Such attorneys and proxies
are hereby authorized to vote the Subject Stock in accordance with the terms of
the Proxy contemplated hereby.
ANNEX A
174
3. Vote in Favor of Merger and Merger Agreement. If CHK is unable or
declines to exercise the power and authority granted by the Proxy for any
reason, the Stockholder covenants and agrees to vote all the Subject Stock in
favor of approval of the Merger and the Merger Agreement at any Meeting at which
such matters are considered and voted upon and, upon request of CHK, to provide
the Stockholder's written consent thereto.
4. No Action Without CHK's Consent. The Stockholder hereby covenants and
agrees that it will not vote or take any action by written consent of
stockholders in lieu of meeting on any matter that is subject to the Proxy
without CHK's prior written consent.
5. Negative Covenants of the Stockholder. Except to the extent contemplated
herein or in the Merger Agreement, the Stockholder hereby covenants and agrees
that the Stockholder will not, and will not agree to, directly or indirectly,
(a) sell, transfer, assign, cause to be redeemed or otherwise dispose of any of
the Subject Stock or enter into any contract, option or other agreement or
understanding with respect to the sale, transfer, assignment, redemption or
other disposition of any Subject Stock; or (b) grant any proxy,
power-of-attorney or other authorization or interest in or with respect to such
Subject Stock pertaining or relating to the Merger Agreement, the Merger or any
of the transactions contemplated thereby; or (c) deposit such Subject Stock into
a voting trust or enter into a voting agreement or arrangement with respect to
such Subject Stock, unless and until, in the case of (a), (b) or (c) above, the
Stockholder shall have taken all actions (including, without limitation, the
endorsement of a legend on the certificates evidencing such Subject Stock)
reasonably necessary to ensure that such Subject Stock shall at all times be
subject to all the rights, powers and privileges granted or conferred, and
subject to all the restrictions, covenants and limitations imposed, by this
Agreement and shall have caused any transferee of any of the Subject Stock to
execute and deliver to CHK, an Agreement and Irrevocable Proxy, in substantially
the form of this Agreement with respect to the Subject Stock. Nothing contained
herein shall be construed in any way as affecting the right of the Stockholder
to grant a security interest, by way of pledge, by hypothecation or otherwise,
in the Subject Stock in connection with bona fide credit arrangements or as
requiring the lender in such bona fide credit arrangement to be bound by the
terms of this Agreement, provided that the Stockholder shall promptly notify CHK
of any such grant.
6. Stockholder's Representations and Warranties. The Stockholder represents
and warrants to CHK that (a) the Stockholder has duly authorized, executed and
delivered this Agreement and this Agreement constitutes a valid and binding
agreement, enforceable in accordance with its terms and neither the execution
and delivery of this Agreement nor the consummation by the Stockholder of the
transactions contemplated hereby will constitute a violation of, a default
under, or conflict with any contract, commitment, agreement, understanding,
arrangement or restriction of any kind to which the Stockholder is a party or by
which the Stockholder is bound; or (b) consummation by the Stockholder of the
transactions contemplated hereby will not violate, or require any consent,
approval, or notice under, any provision of law other than filing on Form 13D
that may be required under the Securities Exchange Act of 1934, as amended; (c)
except to the extent contemplated herein and except as described in the final
sentence of this Section 6, the Subject Stock and the certificates representing
same are now and at all times during the term of this Agreement will be held by
the Stockholder, or by a nominee or custodian for the benefit of the
Stockholder, free and clear of all liens, claims, security interests, proxies,
voting trusts or agreement or any other encumbrances whatsoever ("Encumbrances")
with respect to the ownership or voting of the Subject Stock or otherwise, other
than Encumbrances created by or arising pursuant to this Agreement and other
than as set forth on Exhibit A; and there are no outstanding options, warrants
or rights to purchase or acquire, or proxies, powers-of-attorney, voting
agreements, trust agreements or other agreements relating to, the Subject Stock
other than this Agreement; (d) except as set forth on Exhibit A, such Subject
Stock constitutes all of the securities of DLB owned beneficially or of record
by the Stockholder on the date hereof; and (e) the Stockholder has the present
power and right to vote all of the Subject Stock as contemplated herein. The
Stockholder hereby advises CHK that the only agreements or arrangements pursuant
to which the Shares are pledged as security are described on Exhibit A, and that
no default, event of default, or event of acceleration has occurred under any of
such agreements or arrangements.
ANNEX A
2
175
7. Certain Defined Terms. Unless otherwise expressly provided herein, all
capitalized terms used herein without definition shall have the meanings
assigned to them in the Merger Agreement.
8. Choice of Law. The terms and provisions of this Agreement shall be
governed by and construed in accordance with the laws of the State of Oklahoma
without giving effect to the provisions thereof relating to conflicts of law.
9. Binding Effect; Assignability. The terms and provisions of this
Agreement shall be binding upon, inure to the benefit of, and be enforceable by
the successors and permitted assigns of the parties hereto. This Agreement and
the rights hereunder may not be assigned or transferred by CHK, except with the
prior written consent of the Stockholder.
10. Term. This Agreement shall terminate at the earlier of (i) the
Effective Time, (ii) the termination of the Merger Agreement in accordance with
its terms or (iii) upon written notice of termination of this Agreement given by
CHK to the Stockholder expressly referring to this paragraph.
11. Irrevocable Proxy Coupled with an Interest. The Stockholder
acknowledges that CHK will enter into the Merger Agreement in reliance upon this
Agreement, including the Proxy, and that the Proxy is granted in consideration
for the execution and delivery of the Merger Agreement by CHK. THE STOCKHOLDER
AGREES THAT THE PROXY AND ALL OTHER POWER AND AUTHORITY INTENDED TO BE CONFERRED
HEREBY IS COUPLED WITH AN INTEREST SUFFICIENT IN LAW TO SUPPORT AN IRREVOCABLE
POWER AND, EXCEPT AS PROVIDED IN SECTION 10 ABOVE, SHALL NOT BE TERMINATED BY
ANY ACT OF THE STOCKHOLDER BY LACK OF APPROPRIATE POWER OR AUTHORITY OR BY THE
OCCURRENCE OF ANY OTHER EVENT OR EVENTS.
12. Specific Performance. The parties acknowledge and agree that
performance of their respective obligations hereunder will confer a unique
benefit on the other and that a failure of performance will result in
irreparable harm to the other and will not be compensable by money damages. The
parties therefore agree that this Agreement, including the Proxy, shall be
specifically enforceable and that specific enforcement and injunctive relief
shall be a remedy properly available to CHK and the Stockholder for any breach
of any agreement, covenant or representation of the other hereunder.
13. Further Assurance. The Stockholder will, upon request, execute and
deliver any additional documents and take such further actions as may reasonably
be deemed by CHK or its counsel to be necessary or desirable to carry out the
provisions hereof.
14. Severability. If any term, provision, covenant or restriction of this
Agreement, or the application thereof to any circumstance shall, to any extent,
be held by a court of competent jurisdiction to be invalid, void or
unenforceable, the remainder of the terms, provisions, covenants and
restrictions of this Agreement or the application thereof to any other
circumstance, shall remain in full force and effect, shall not in any way be
affected, impaired or invalidated and shall be enforced to the fullest extent
permitted by law.
15. Counterparts. This Agreement may be executed in counterparts, each of
which shall be deemed to be an original but all of which together shall
constitute one and the same document.
16. Notice. All notices, requests, claims, demands and other communications
under this Agreement shall be in writing and shall be deemed given if delivered
personally or sent by overnight courier (providing proof of delivery) to the
parties at the following addresses (or such other address for a party as shall
be specified by like notice): (i) if to CHK, to the address set forth in Section
8.3 of the Merger Agreement; and (ii) if to a Stockholder, to the address set
forth on the signature page hereof, or such other address as may be specified in
writing by such Stockholder.
ANNEX A
3
176
IN WITNESS WHEREOF, CHK and the Stockholder have duly executed this
Agreement or caused this Agreement to be duly executed as of the date first set
forth above.
STOCKHOLDER
[NAME]
----------------------------------------
Shares Owned:
shares of DLB Common Stock
------
Address:
----------------------------------------
----------------------------------------
----------------------------------------
CHK
CHESAPEAKE ENERGY CORPORATION
By:
------------------------------------
Aubrey K. McClendon
Chairman of the Board and Chief
Executive Officer
ANNEX A
4
177
ANNEX B
TO THE AGREEMENT AND PLAN OF MERGER
GOODWILL PROTECTION AGREEMENT
This GOODWILL PROTECTION AGREEMENT, dated as of , 1997 (this
"Agreement"), is entered into among CHESAPEAKE ENERGY CORPORATION, an Oklahoma
corporation, and CHESAPEAKE MERGER CORP., an Oklahoma corporation (jointly and
severally, "Chesapeake"), and CHARLES E. DAVIDSON, MIKE LIDDELL and MARK LIDDELL
(jointly and severally, the "Restricted Parties"). Chesapeake and each of the
Restricted Parties are sometimes referred to herein individually as a "Party,"
and collectively as the "Parties."
RECITALS:
WHEREAS, Chesapeake Energy Corporation, Chesapeake Merger Corp., and DLB
Oil & Gas, Inc., an Oklahoma corporation, have entered into that certain
Agreement and Plan of Merger dated as of October , 1997 (the "Merger
Agreement");
WHEREAS, Chesapeake's obligations to close the transactions contemplated
under the Merger Agreement are expressly conditioned upon the execution and
delivery of this Agreement by the Restricted Parties; and
WHEREAS, to induce Chesapeake to perform the Merger Agreement and to
protect the goodwill purchased by Chesapeake under the Merger Agreement, the
Restricted Parties have agreed to execute, deliver and perform this Goodwill
Protection Agreement.
NOW, THEREFORE, for and in consideration of the premises, and for other
good and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, and as an inducement to consummate the transactions contemplated
by the Merger Agreement, each of the Parties hereto agree as follows:
ARTICLE 1
DEFINITIONS
Section 1.1 Terms Defined Herein. The following definitions shall be for
all purposes, unless otherwise clearly indicated to the contrary, applied to the
terms used in this Agreement.
"Affiliate" means, with respect to any Person, any other Person that
directly or indirectly through one or more intermediaries controls, is
controlled by or is under common control with, the Person in question. As used
herein, the term "control" means the possession, direct or indirect, of the
power to direct or cause the direction of the management and policies of a
Person, whether through ownership of voting securities, by contract or
otherwise. Notwithstanding the foregoing, "Affiliate" includes WRT Energy
Corporation, a Delaware corporation, but does not include any other Person that
is subject to the reporting requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, as amended and of which the Parties do not own,
beneficially or of record, at least 40% of the outstanding voting securities of
such Person.
"Agreement" means this Goodwill Protection Agreement, as it may be amended,
supplemented or restated from time to time.
"DLB Companies" shall have the meaning specified in the Merger Agreement.
"Effective Date" means 11:59 p.m. on the Closing Date (as such term is
defined in the Merger Agreement).
ANNEX A
178
"Lands" means any and all lands lying within Dewey, Major, Woods and
Woodward Counties, Oklahoma.
"Merger Agreement" is defined in the Recitals hereof.
"Oil and Gas Business" means owning, managing, operating, controlling,
financing, developing Oil and Gas Interests or engaging in or being connected
with as a partner, limited liability company member, investor, stockholder,
creditor, guarantor, advisor, employee, independent contractor or consultant,
the foregoing activities or the oil and gas exploration and production business.
"Oil and Gas Interests" means the interests owned by any of the DLB
Companies, Chesapeake or any Affiliate of Chesapeake as of the Effective Date in
and to: (a) all oil and gas leases, mineral interests, oil, gas and mineral
leasehold interests, fee interests, royalty interests (including, without
limitation, landowner royalty interests, nonparticipating royalty interests and
overriding royalty interests), production payments, net profits interests,
subleases, mineral servitudes, licenses, easements, pooling orders and other
interests in oil, gas and other hydrocarbons; (b) all contract rights, joint
operating agreements, pooling agreements, seismic agreements, cost sharing
arrangements, and other agreements relating to the interests under the foregoing
clause (a) or the oil and gas exploration and production business; (c) all
wells, equipment, personal property, pipelines, fixtures and other assets
related to the foregoing; and (d) all other businesses, operations, rights,
titles, and interests relating directly or indirectly to the drilling,
exploration, development, operation, marketing, sale or other disposal of the
foregoing assets and interests.
"Person" means an individual or a corporation, limited liability company,
partnership, joint venture, trust, unincorporated organization, association,
government agency or political subdivision thereof, or other entity.
"Restricted Party" is one of the Parties so defined in the Preamble above.
ARTICLE 2
COVENANT NOT TO COMPETE
Section 2.1 Restriction on Outside Activities. (a) During the period
commencing on the Effective Date and ending on the second anniversary of the
Effective Date, the Restricted Parties and their relatives, heirs, successors
and Affiliates shall not, directly or indirectly: (1) own, acquire or solicit
the acquisition of (or assist any third Person to own, acquire or solicit the
acquisition of) any Oil and Gas Interests pertaining to or covering, in whole or
in part, the Lands or any option or other right to acquire any such interest; or
(2) conduct (or assist any third Person to conduct) any Oil and Gas Business on
or with respect to the Lands. Notwithstanding the foregoing, the acquisition,
solicitation of acquisitions and/or assisting other Persons with an acquisition
of Oil and Gas Interests pertaining to or covering, in part, the Lands and the
subsequent ownership thereof and conducting Oil and Gas Business thereon shall
not constitute a breach or violation of this Agreement provided that not more
than 15% (by value) of the Oil and Gas Interests included in such acquisition
pertains to or is included with the Lands.
(b) Except as specifically provided in Section 2.1(a), it is understood
that there is no restriction imposed upon any of the Restricted Parties under
this Agreement with respect to engaging in any oil and gas activities or other
activities conducted by Chesapeake, even if in direct competition with
Chesapeake.
(c) The Parties agree that the purchase price allocated to this Agreement
and the restrictions contained herein is $10.00, and no further amount will be
allocated or claimed with respect thereto by any Party hereto. The Parties to
this Agreement acknowledge and agree to the tax consequences of this allocation
and agree to report the tax consequences arising therefrom in accordance with
the allocation of only $10.00 to this Agreement and the restrictions contained
herein.
ANNEX A
2
179
ARTICLE 3
MISCELLANEOUS
Section 3.1 Headings; References; Interpretation. All Article or Section
headings in this Agreement are for convenience only and shall not be deemed to
control or affect the meaning or construction of the provisions hereof. The
definitions in this Agreement shall apply equally to both the singular and
plural forms of the terms defined. All personal pronouns used in this Agreement,
whether used in the masculine, feminine or neuter gender, shall include all
other genders, and the singular shall include the plural and vice versa. The use
herein of the word "including" following any general statement, term or matter
shall not be construed to limit such statement, term or matter to the specific
items or matters set forth immediately following such word or to similar items
or matters, whether or not nonlimiting language (such as "without limitation,"
"but not limited to," or words of similar import) is used with reference
thereto, but rather shall be deemed to refer to all other items or matters that
could reasonably fall within the broadest possible scope of such general
statement, term or matter.
Section 3.2 Integration. This Agreement supersedes all previous
understandings or agreements between the parties, whether oral or written, with
respect to its subject matter. This document is an integrated agreement which
contains the entire understanding of the Parties. No understanding,
representation, promise or agreement, whether oral or written, is intended to be
or shall be included in or form a part of this Agreement unless it is contained
in a written amendment hereto executed by the Parties hereto after the date of
this Agreement.
Section 3.3 Counterparts. This Agreement may be executed in any number of
counterparts, all of which together shall constitute one agreement binding on
the Parties hereto.
Section 3.4 Applicable Law. This Agreement shall be governed by and
construed and enforced in accordance with the laws of the State of Oklahoma, to
the extent permitted by law, without regard to the principles of conflicts of
law.
Section 3.5 Amendments and Waivers. The parties hereto, by mutual
agreement in writing, may amend, modify or supplement this Agreement. Waiver of
performance of any obligation or term contained in this Agreement by any Party,
or waiver by one Party of the other's default hereunder will not operate as a
waiver of performance of any other obligation or term of this Agreement or a
future waiver of the same obligation or a waiver of any future default.
Section 3.6 Enforcement. If any Restricted Party fails to perform any
obligation contained in this Agreement, Chesapeake will serve written notice to
the Restricted Parties specifying the nature of such default and demanding
performance. If such default has not been cured within five (5) business days
after receipt of such default notice, Chesapeake will be entitled to demand
specific performance. Given the nature of the Oil and Gas Business, the Parties
acknowledge and agree that the goodwill sold by the Restricted Parties and other
shareholders of the DLB Companies and purchased by Chesapeake cannot be
protected if the provisions of this Agreement are not strictly enforced.
Accordingly, the Parties acknowledge and agree that if there is a breach by the
Restricted Parties of the provisions of this Agreement, money damages alone will
not be adequate, Chesapeake will be irreparably harmed and Chesapeake will be
entitled to an injunction restraining the Restricted Parties from violating the
provisions of this Agreement. The remedies provided by this Agreement are
cumulative and will not exclude any other remedy to which a Party might be
entitled under this Agreement. In the event a Party elects to selectively and
successively enforce such Party's rights under this Agreement, such action will
not be deemed a waiver or discharge of any other remedy.
Section 3.7 Severability. Subject to Section 3.8 below, in the event that
any provision contained in this Agreement shall, for any reason, be judicially
declared to be invalid, illegal, unenforceable or void in any respect, such
declaration shall not have the effect of invalidating or voiding the remainder
of this Agreement and the Parties hereto agree that the part or parts of this
Agreement so declared to be invalid, illegal,
ANNEX A
3
180
unenforceable or void in any respect will be deemed to have been stricken from
this Agreement and the remainder will have the same force and effectiveness as
if such part had never been included herein.
Section 3.8 Compliance with Law. It is the intent of the Parties hereto to
comply fully with applicable law. If the provisions of this Agreement are
determined by any court of competent jurisdiction to be unenforceable by reason
of: (i) extending for too great a period of time; (ii) covering too great a
geographical area; or (iii) in any other respect, this Agreement shall be
interpreted to extend only to such time periods, geographical area or such other
respect as to which it may be enforceable, as the case may be, all as determined
by such court in such action.
Section 3.9 Notices. Any notice, request, demand, waiver, consent,
approval or other communication which is required or permitted hereunder shall
be in writing and shall be deemed given only if delivered personally or sent by
facsimile transmission or by registered or certified mail, postage prepaid,
return receipt requested, as follows:
If to Chesapeake:
Chesapeake Energy Corporation
6100 North Western
Oklahoma City, Oklahoma 73118
Attention: Mr. Aubrey K. McClendon
Fax No.: (405) 848-8588
If to the Restricted Parties:
Fax No.: ( ) -
or to such other address as the addressee may have specified in a notice duly
given to the sender as provided herein. Such notice, request, demand, waiver,
consent, approval or other communication will be deemed to have been given as of
the date so delivered or electronically transmitted or sent after mailing
thereof.
Section 3.10 Attorneys' Fees. If any Party institutes an action or
proceeding against any other party relating to the provisions of this Agreement,
the party to such action or proceeding which does not prevail will reimburse the
prevailing party therein for the reasonable expenses of attorneys' fees and
disbursements incurred by the prevailing party.
ANNEX A
4
181
IN WITNESS WHEREOF, this Agreement has been duly executed by the parties
hereto as of the date first above written, to be effective as of the Effective
Date.
CHESAPEAKE ENERGY CORPORATION
By:
----------------------------------
Aubrey K. McClendon
CHIEF EXECUTIVE OFFICER
CHESAPEAKE MERGER CORP.
By:
----------------------------------
Aubrey K. McClendon
President
By:
----------------------------------
Charles E. Davidson
By:
----------------------------------
Mike Liddell
By:
----------------------------------
Mark Liddell
ANNEX A
5
182
ANNEX C
TO THE AGREEMENT AND PLAN OF MERGER
FORM OF AFFILIATE LETTER FOR
AFFILIATES OF THE COMPANY
[DATE]
CHESAPEAKE ENERGY CORPORATION
6100 North Western Avenue
Oklahoma City, OK 73118
Ladies and Gentlemen:
I have been advised that as of the date of this letter I may be deemed to
be an "affiliate" of DLB Oil & Gas, Inc., an Oklahoma corporation (the
"Company"), as the term "Affiliate" is defined for purposes of paragraphs (c)
and (d) of Rule 145 of the rules and regulations (the "Rules And Regulations")
of the Securities and Exchange Commission (the "Commission") under the
Securities Act of 1933, as amended (the "Act"). Pursuant to the terms of the
Agreement and Plan of Merger dated as of October , 1997 (the "Merger
Agreement") among Chesapeake Energy Corporation, an Oklahoma corporation
("Chesapeake"), Chesapeake Merger Corp., an Oklahoma corporation ("Merger Sub"),
and the Company, Merger Sub will be merged with and into the Company (the
"Merger"). Capitalized terms used in this letter without definition shall have
the meanings assigned to them in the Merger Agreement.
As a result of the Merger, I may receive shares of common stock, no par
value, of Chesapeake ("Chesapeake Common Stock"). I would receive such
Chesapeake Common Stock (the "Shares") in exchange for shares (or upon exercise
of options for shares) owned by me of common stock, par value $.001 per share,
of the Company ("Company Common Stock").
1. I represent, warrant and covenant to Chesapeake that in the event I
receive any Shares as a result of the Merger:
A. I shall not make any sale, transfer or other disposition of the
Shares in violation of the Act or the Rules and Regulations.
B. I have carefully read this letter and the Merger Agreement and
discussed the requirements of such documents and other applicable limitations
upon my ability to sell, transfer or otherwise dispose of the Shares, to the
extent I felt necessary, with my counsel or counsel for the Company.
C. I have been advised that the issuance of the Shares to me pursuant to
the Merger has been registered with the Commission under the Act on a
Registration Statement on Form S-4. However, I have also been advised that,
because at the time the Merger is submitted for a vote of the stockholders of
the Company, (a) I may be deemed to be an affiliate of the Company and (b)
distribution by me of the Chesapeake Common Stock has not been registered under
the Act, I may not sell, transfer or otherwise dispose of the Chesapeake Common
Stock issued to me in the Merger unless (i) such sale, transfer or other
disposition is made in conformity with the volume and other limitations of Rule
145 promulgated by the Commission under the Act, (ii) such sale, transfer or
other disposition has been registered under the Act, the Company shall include
the Shares in the Registration Statement and to maintain the effectiveness of
the Registration statement for a period of 100 days after the effective date
hereof or (iii) in the opinion of counsel reasonably acceptable to Chesapeake,
such sale, transfer or other disposition is otherwise exempt from registration
under the Act.
D. Except as provided in paragraph C, I understand that Chesapeake is
under no obligation to register the sale, transfer or other disposition of the
Shares by me or on my behalf under the Act or, except as
ANNEX A
183
provided in paragraph 2(A) below, to take any other action necessary in order to
make compliance with an exemption from such registration available.
E. I understand that there will be placed on the certificates for the
Shares issued to me, or any substitutions therefor, a legend stating in
substance:
"THE SHARES REPRESENTED BY THIS CERTIFICATE WERE ISSUED IN A
TRANSACTION TO WHICH RULE 145 PROMULGATED UNDER THE SECURITIES ACT OF
1933 APPLIES. THE SHARES REPRESENTED BY THIS CERTIFICATE MAY ONLY BE
TRANSFERRED IN ACCORDANCE WITH THE TERMS OF AN AGREEMENT DATED
, 1997 BETWEEN THE REGISTERED HOLDER HEREOF AND CHESAPEAKE
ENERGY CORPORATION, A COPY OF WHICH AGREEMENT IS ON FILE AT THE
PRINCIPAL OFFICES OF CHESAPEAKE ENERGY CORPORATION."
F. I understand that unless a sale or transfer is made in conformity
with the provisions of Rule 145, or pursuant to a registration statement,
Chesapeake reserves the right to put the following legend on the certificates
issued to my transferee:
"THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933 AND WERE ACQUIRED FROM A PERSON WHO
RECEIVED SUCH SHARES IN A TRANSACTION TO WHICH RULE 145 PROMULGATED
UNDER THE SECURITIES ACT OF 1933 APPLIES. THE SHARES HAVE BEEN
ACQUIRED BY THE HOLDER NOT WITH A VIEW TO, OR FOR RESALE IN CONNECTION
WITH, ANY DISTRIBUTION THEREOF WITHIN THE MEANING OF THE SECURITIES
ACT OF 1933 AND MAY NOT BE SOLD, PLEDGED OR OTHERWISE TRANSFERRED
EXCEPT IN ACCORDANCE WITH AN EXEMPTION FROM THE REGISTRATION
REQUIREMENTS OF THE SECURITIES ACT OF 1933."
G. Execution of this letter should not be considered an admission on my
part that I am an "affiliate" of the Company as described in the first paragraph
of this letter, nor as a waiver of any rights I may have to object to any claim
that I am such an affiliate on or after the date of this letter.
2. By Chesapeake's acceptance of this letter, Chesapeake hereby agrees with
me as follows:
A. For so long as and to the extent necessary to permit me to sell the
Shares pursuant to Rule 145 and, to the extent applicable, Rule 144 under the
Act, Chesapeake shall (a) use its reasonable efforts to (i) file, on a timely
basis, all reports and data required to be filed with the Commission by it
pursuant to Section 13 of the Securities Exchange Act of 1934, as amended (the
"1934 Act"), and (ii) furnish to me upon request a written statement as to
whether Chesapeake has complied with such reporting requirements during the 12
months preceding any proposed sale of the Chesapeake Common Stock by me under
Rule 145, and ( b) otherwise use its reasonable efforts to permit such sales
pursuant to Rule 145 and Rule 144. Chesapeake hereby represents to me that it
has filed all reports required to be filed with the Commission under Section 13
of the 1934 Act during the preceding 12 months.
ANNEX A
2
184
B. It is understood and agreed that certificates with the legends set
forth in paragraphs E and F above will be substituted by delivery of
certificates without such legend if (i) one year shall have elapsed from the
date the undersigned acquired the Chesapeake Common Stock received in the Merger
and the provisions of Rule 145(d)(2) are then available to the undersigned, (ii)
two years shall have elapsed from the date the undersigned acquired the
Chesapeake Common Stock received in the Merger and the provisions of Rule
145(d)(3) are then applicable to the undersigned, or (iii) Chesapeake has
received either an opinion of counsel, which opinion and counsel shall be
reasonably satisfactory to Chesapeake, or a "no action" letter obtained by the
undersigned from the staff of the Commission, to the effect that the
restrictions imposed by Rule 145 under the Act no longer apply to the
undersigned.
Very truly yours,
------------------------------------
Name:
Agreed and accepted this day of
[ ], 1997, by
CHESAPEAKE ENERGY CORPORATION
By:
-----------------------------------------------------
Name:
Title:
ANNEX A
3
185
ANNEX D
TO AGREEMENT AND PLAN OF MERGER
REGISTRATION RIGHTS AGREEMENT
This REGISTRATION RIGHTS AGREEMENT (this "AGREEMENT"), dated as of October
22, 1997 (the "Effective Date"), is by and among CHESAPEAKE ENERGY CORPORATION,
an Oklahoma corporation (the "COMPANY"), and CHARLES E. DAVIDSON (the
"SHAREHOLDER").
RECITALS:
WHEREAS, the Company, Chesapeake Merger Corp. and DLB Oil & Gas, Inc.
("DLB") are parties to that certain Agreement and Plan of Merger, dated October
22, 1997 (the "MERGER AGREEMENT");
WHEREAS, pursuant to the Merger Agreement, the Shareholder (as well as
certain other persons) will execute and deliver to the Company an Affiliate
Letter substantially in the Form of Annex C to the Merger Agreement pursuant to
which he will acknowledge that the shares of Common Stock, par value $.01 per
share, of the Company (the "COMMON STOCK") he receives in the merger (the
"MERGER") to be effected pursuant to the Merger Agreement will be subject to
certain transfer restrictions; and
WHEREAS, under the provisions of the Securities Act of 1933, as amended
(the "SECURITIES ACT"), and the General Rules and Regulations promulgated by the
Securities and Exchange Commission ("SEC") thereunder, such transfer
restrictions will include limitations on the manner in which the Shareholder may
sell the Shares he receives in connection with the Merger, absent registration
under the Securities Act of the sale of such shares of Common Stock or the
availability of an exemption from the registration requirements of the
Securities Act; and
WHEREAS, the Company has agreed, on the terms and subject to the conditions
set forth herein, to grant the Shareholder certain rights to register his Shares
for sale under the Securities Act;
NOW, THEREFORE, the parties hereby agree as follows:
1. DEFINITIONS. The following terms, as used herein, have the following
meanings (all terms defined herein in the singular to have the correlative
meanings when used in the plural and vice versa):
"COMMERCIALLY REASONABLE EFFORTS", when used with respect to any obligation
to be performed or term or provision to be observed hereunder, means such
efforts as a prudent Person seeking the benefits of such performance or action
would make, use, apply or exercise to preserve, protect or advance its rights or
interests, provided, that such efforts do not require such Person to incur a
material financial cost or a substantial risk of material liability unless such
cost or liability (i) would customarily be incurred in the course of performance
or observance of the relevant obligation, term or provision, (ii) is caused by
or results from the wrongful act or negligence of the Person whose performance
or observance is required hereunder or (iii) is not excessive or unreasonable in
view of the rights or interests to be preserved, protected or advanced. Such
efforts may include, without limitation, the expenditure of such funds and
retention by such Person of such accountants, attorneys or other experts or
advisors as may be necessary or appropriate to effect the relevant action; the
undertaking of any special audit or internal investigation that may be necessary
or appropriate to effect the relevant action; and the commencement, termination
or settlement of any action, suit or proceeding involving such Person to the
extent necessary or appropriate to effect the relevant action.
"CLOSING DATE" has the meaning ascribed to such term in the Merger
Agreement.
"DEMAND REGISTRATION" means any registration of Shares under the Securities
Act effected in accordance with Section 2.1.
"EFFECTIVE TIME" has the meaning ascribed to such term in the Merger
Agreement.
ANNEX A
186
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended from
time to time, or any successor statute, and the rules and regulations
promulgated thereunder.
"INDEMNIFIED PARTY" has the meaning ascribed to it in Section 2.6(a).
"LOSS" has the meaning ascribed to it in Section 2.6(a).
"NOTICE OF DEMAND" means a request by the Shareholder pursuant to Section
2.1 that the Company effect the registration under the Securities Act of not
less than 200,000 of the Shares.
"PERSON" means a natural person, a corporation, a partnership, a trust, a
joint venture, or any other entity or organization.
"PIGGYBACK REGISTRATION" means any registration of Shares under the
Securities Act effected in accordance with Section 2.2.
"PIGGYBACK REGISTRATION NOTICE" has the meaning ascribed to it in Section
2.2(a).
"REGISTRATION EXPENSES" means all expenses incident to the Company's
performance of or compliance with this Agreement, including, without limitation,
(a) all registration, filing, securities exchange listing and National
Association of Securities Dealers fees, (b) all registration, filing,
qualification and other fees and expenses of complying with securities or blue
sky laws of all jurisdictions in which the securities are to be registered and
any legal fees and expenses incurred in connection with the blue sky
qualifications of the Shares and the determination of their eligibility for
investment under the laws of all such jurisdictions, (c) all word processing,
duplicating, printing, messenger and delivery expenses, (d) the fees and
disbursements of counsel for the Company and of its independent public
accountants, including, without limitation, the expenses of any special audits
or "cold comfort" letters required by or incident to such performance and
compliance, (e) the reasonable fees and disbursements incurred by the
Shareholder (including, without limitation, the reasonable fees and
disbursements for one counsel or firm of counsel selected by the Shareholder),
(f) any fees and disbursements of underwriters customarily paid by issuers or
sellers of securities (excluding underwriting discounts commissions and transfer
taxes, if any, relating to the Shares being registered) and (g) fees and
expenses of other Persons retained or employed by the Company. Registration
Expenses, to the extent payable by the Company, shall not include underwriting
discounts, commissions or transfer taxes payable in respect of the sale of
Shares by the Shareholder.
"SHARES" means the shares of Common Stock received by the Shareholder
pursuant to the Merger Agreement and any shares of Common Stock received in
respect thereof pursuant to dividends, distributions or stock splits.
"SUCCESSOR" means, with respect to any Person, a successor to such Person
by merger, consolidation, liquidation or other similar transaction.
"SUSPENSION NOTICE" has the meaning ascribed to it in Section 2.3(g).
"SUSPENSION PERIOD" has the meaning ascribed to it in Section 2.3(g).
2. REGISTRATION UNDER THE SECURITIES ACT.
2.1 DEMAND REGISTRATION.
(a) REGISTRATION ON REQUEST. Except as provided in subsection (b) below, at
any time during the period that commences 60 days prior to the scheduled
Effective Time and continues until 5:00 p.m. Oklahoma City time on the day
immediately preceding the Closing Date the Shareholder may provide the Company
with a Notice of Demand, provided that such Notice of Demand shall request
registration for sale of not less than 200,000 Shares. Upon receipt of a Notice
of Demand, the Company shall, subject to the provisions of Section 2.1(b), use
Commercially Reasonable Efforts to (i) effect at the earliest practicable date
(but not prior to the Effective Time) the registration under the Securities Act
of the Shares that the Company has been so requested to register pursuant to the
Notice of Demand and (ii) cause such registration to be declared
ANNEX A
2
187
effective promptly after the Effective Time. The Shareholder acknowledges that
if Notice of Demand is given less than 35 days prior to the scheduled Closing
Date, the registration of the Shares in respect of which the Notice of Demand is
given may not be effective prior to or promptly after the Effective Time.
(b) LIMITATIONS ON DEMAND REGISTRATION. The Company shall not be obligated
to take any action to effect any registration pursuant to this Section 2.1 after
the Company has, in accordance with the provisions of Section 2.3(c), effected
one (1) registration of Shares with respect to a registration requested pursuant
to Section 2.1.
(c) COMPANY UNDERTAKING REGARDING DEMAND REGISTRATION. The Company will use
its Commercially Reasonable Efforts to promptly prepare and file with the SEC a
shelf registration statement for The Shares in respect of which The Notice of
Demand is given, as provided in this Section 2.1. Such shelf registration
statement shall relate to the offer and sale of the Shares in respect of which
the Notice of Demand is given in accordance with the methods of distribution to
be set forth in such registration statement as directed by the Shareholder. The
Company further agrees to use its Commercially Reasonable Efforts to take all
steps necessary or appropriate so that such registration statement can be
declared effective promptly after the Effective Time and, subject to the terms
of Section 2.3, to keep it continuously effective in order to permit the
prospectus forming a part thereof to be used by the Shareholder until the first
to occur of (i) 5:00 p.m. Oklahoma City time on the 45th day after such
registration statement is declared effective and (ii) the date that the
Shareholder sells or transfers all of the Shares subject to such registration
statement.
2.2 PIGGYBACK REGISTRATION.
(a) RIGHT TO INCLUDE SHARES. If the Company at any time after the Effective
Time proposes to register any of its equity securities under the Securities Act
(other than by a registration on Form S-4 or Form S-8 or any successor or
similar form then in effect and other than pursuant to Section 2.1) on a form
and in a manner that would permit registration of the Shares, whether or not for
sale for its own account, it will give prompt (but in no event less than 15 days
prior to the proposed date of filing the registration statement relating to such
registration) notice to the Shareholder of the Company's intention to do so and
of the rights of such Shareholder under this Section 2.2; provided, however,
that no such notice need be given to the Shareholder, and the Shareholder shall
have no rights under this Section 2.2, if the Shareholder has therefore disposed
of the Shares. Upon the request of the Shareholder made within 15 days after his
receipt of any such notice (which request shall specify the Shares intended to
be disposed of by the Shareholder and the intended method or methods of
disposition thereof) (the "PIGGYBACK REGISTRATION NOTICE"), the Company will use
Commercially Reasonable Efforts to effect the registration under the Securities
Act of all Shares which the Company has been so requested to register by the
Shareholder, to the extent required to permit the disposition (in accordance
with the intended method or methods thereof as aforesaid) of the Shares so to be
registered, provided that if, at any time after giving notice of its intention
to register any equity securities and prior to the effective date of the
registration statement filed in connection with such registration, the Company
shall determine for any reason not to register or to delay registration of such
equity securities, the Company may, at its election, give notice of such
determination to the Shareholder and, thereupon, (i) in the case of a
determination not to register, shall be relieved of its obligation to register
any Shares in connection with such registration (but not from its obligation to
pay all Registration Expenses in connection therewith as provided in Section
2.3(b)), and (ii) in the case of a determination to delay registering such other
equity securities, shall be permitted to delay registering any Shares for the
same period as the delay in registering such other equity securities.
(b) PRIORITY IN PRIMARY PIGGYBACK REGISTRATIONS. If (i) a registration
pursuant to this Section 2.2 involves an underwritten offering of the securities
being registered for sale for the account of the Company to be distributed (on a
firm commitment basis) by or through one or more underwriters of recognized
standing under underwriting terms appropriate for such a transaction and (ii)
the managing underwriter of such underwritten offering shall inform the Company
and the Shareholder of its belief that the amount of securities requested to be
included in such registration exceeds the amount which can be sold in (or during
the time of) such offering within a price range acceptable to the Company, then
the Company will include in such
ANNEX A
3
188
registration such amount of securities which the Company is so advised can be
sold in (or during the time of) such offering as follows: all securities
proposed by the Company to be sold for its own account; and such Shares
requested to be included in such registration by the Shareholder and any other
shareholder(s) of the Company then exercising piggyback registration rights pro
rata on the basis of the amount of such securities so proposed to be sold and so
requested to be included by such parties.
2.3 REGISTRATION TERMS AND PROCEDURES.
(a) REGISTRATION STATEMENT FORM. Registrations under Section 2.1 shall be
on such appropriate registration forms of the SEC (i) as shall be acceptable to
the Company and (ii) as shall permit the disposition of such Shares in
accordance with the intended method or methods of disposition. The Company
agrees to include in any such registration statement all information that the
Shareholder shall reasonably request (to the extent such information relates to
the Shareholder).
(b) REGISTRATION EXPENSES. Subject to Section 2.3(e), the Company will pay
all Registration Expenses incurred in connection with a registration to be
effected (whether or not effected or deemed effected pursuant to subsection (c)
below) pursuant to Section 2.1 or 2.2.
(c) EFFECTIVENESS OF DEMAND REGISTRATION. A registration will not be deemed
to have been effected under Section 2.1 unless the registration statement with
respect thereto has been declared effective by the SEC and, subject to Section
2.3(f)(vii) hereof, remains effective for the earlier of 45 days or the
distribution of the securities covered by such registration statement; provided,
however, that if (i) after such registration statement has been declared
effective, the marketing of Shares offered pursuant to such registration
statement is materially disrupted or adversely affected as a result of any stop
order, injunction or other order or requirement of the SEC or any other
governmental agency or court (for reasons other than a misrepresentation or
omission by any Shareholder) or (ii) the conditions to closing specified in the
purchase agreement or underwriting agreement entered into in connection with
such registration have not been satisfied (for reasons other than a wrongful or
bad faith act, omission or misrepresentation by the Shareholder), such
registration statement will be deemed not to have become effective. If a
registration pursuant to Section 2.1 is deemed not to have been effected
hereunder, then the Company shall continue to be obligated to effect a
registration pursuant to such Section.
(d) SELECTION OF UNDERWRITER. The offering of Shares pursuant to Section
2.1 shall be in such form (which may include an underwritten offering) as the
Shareholder may elect, and if the Company so elects an offering pursuant to
Section 2.2 shall be in the form of an underwritten offering. In connection with
an underwritten offering of Shares pursuant to this Agreement, the Company shall
have the exclusive right to select one or more nationally recognized firms of
investment bankers to act as the book-running managing underwriter or
co-managing underwriters in connection with such offering.
(e) WITHDRAWAL. The Shareholder shall be permitted to withdraw all or part
of the Shares from such registration at any time prior to the effective date of
the registration statement covering such securities; provided that, in the event
of a withdrawal from a registration effected pursuant to Section 2.1, such
registration shall be deemed to have been effected for purposes of Section
2.3(c), unless the Shareholder shall have paid or reimbursed the Company for the
reasonable out-of-pocket costs and expenses paid by the Company in respect of
such registration.
(f) REGISTRATION PROCEDURES. In connection with the Company's obligations
to register Shares pursuant to this Agreement, the Company will use Commercially
Reasonable Efforts to effect such registration so as to permit the sale of any
Shares included in such registration in accordance with the intended method or
methods of distribution thereof, and pursuant thereto the Company will as
expeditiously as possible:
(i) prepare and (as soon thereafter as practicable) file with the SEC
the requisite registration statement containing all information required
thereby to effect such registration and thereafter use Commercially
Reasonable Efforts to cause such registration statement to become and
remain effective in accordance with the terms of this Agreement, provided,
that as far in advance as practicable before filing
ANNEX A
4
189
such registration statement or any amendment, supplement or exhibit thereto
(but, with respect to the filing of such registration statement, in no
event later than three business days prior to such filing), the Company
will furnish to the Shareholder or its counsel copies of reasonably
complete drafts of all such documents proposed to be filed (excluding
exhibits, which shall be made available upon request by the Shareholder),
and the Shareholder shall have the opportunity to object to any information
contained therein and the Company will make the corrections reasonably
requested by the Shareholder with respect to information relating to the
Shareholder or the plan of distribution of the Shares prior to filing any
such registration statement, amendment, supplement or exhibit;
(ii) prepare and file with the SEC such amendments and supplements to
such registration statement and the prospectus used in connection therewith
(A) as reasonably requested by the Shareholder to which such registration
statement relates (but only to the extent such request relates to
information with respect to such Shareholder) and (B) as may be necessary
to keep such registration statement effective for a period of 45 days after
the Effective Time (or such shorter period as shall be necessary to
complete the distribution of the securities covered thereby, but not before
the expiration of the applicable period referred to in Section 4(3) of the
Securities Act and Rule 174 thereunder), and comply with the provisions of
the Securities Act with respect to the sale or other disposition of all
securities covered by such registration statement during such period in
accordance with the intended method or methods of disposition by the seller
or sellers thereof set forth in such registration statements;
(iii) furnish to the Shareholder covered by, and each underwriter or
agent participating in the disposition of securities under, such
registration statement such number of conformed copies of such registration
statement and of each such amendment and supplement thereto (in each case
excluding all exhibits and documents incorporated by reference, which
exhibits and documents shall be furnished to any such Person upon request),
such number of copies of the prospectus contained in such registration
statement (including each preliminary prospectus and any summary
prospectus) and any other prospectus filed under Rule 424 under the
Securities Act relating to the Shares, in conformity with the requirements
of the Securities Act, and such other documents as the Shareholder,
underwriter or agent may reasonably request to facilitate the disposition
of such Shares;
(iv) use Commercially Reasonable Efforts to register or qualify all
Shares and other securities covered by such registration statement under
all applicable blue sky and other securities laws, and to keep such
registration or qualification in effect for so long as such registration
statement remains in effect, and take any other action which may be
reasonably necessary or advisable to enable the Shareholder to consummate
the disposition of the securities owned by the Shareholder, except that the
Company shall not for any such purpose be required to (a) qualify generally
to do business as a foreign corporation in any jurisdiction wherein it
would not but for the requirements of this clause (iv) be obligated to be
so qualified, (b) subject itself to taxation in any such jurisdiction or
(c) consent to general service of process in any jurisdiction;
(v) use Commercially Reasonable Efforts to cause all Shares covered by
such registration statement to be registered with or approved by such other
governmental agencies or authorities applicable to the Company as may be
reasonably necessary to enable the seller or sellers thereof (or
underwriter or agent, if any) to consummate the disposition of such Shares
in accordance with the plan of distribution set forth in such registration
statement;
(vi) furnish to the Shareholder a signed counterpart, addressed to the
Shareholder (and underwriter or agent, if any) of:
(A) an opinion of counsel to the Company, dated the effective date
of such registration statement (and, if such registration includes an
underwritten public offering, dated the date of the closing under the
underwriting agreement), and
(B) unless otherwise precluded under applicable accounting rules, a
"comfort" letter, dated the effective date of such registration
statement (and, if such registration includes an underwritten
ANNEX A
5
190
public offering, dated the date of the closing under the underwriting
agreement), signed by the independent public accountants who have
certified the Company's financial statements included in such
registration statement,
in each case, reasonably satisfactory in form and substance to such
Shareholder (and underwriter or agent and their respective counsel) and
covering substantially the same matters with respect to such registration
statement (and the prospectus included therein) and, in the case of the
accountants' letter, with respect to events subsequent to the date of such
financial statements, as are customarily covered in opinions of issuer's
counsel and in accountants' letters delivered to the underwriter or agent
in underwritten public offerings of securities;
(vii) promptly notify the Shareholder and any underwriter or agent
participating in the disposition of Shares covered by such registration
statement, at any time when a prospectus relating thereto is required to be
delivered under the Securities Act, upon discovery that, or upon the
happening of any event known to the Company as a result of which, the
prospectus included in such registration statement, as then in effect,
includes 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 in light of the circumstances under which
they were made, and promptly prepare and furnish to such Shareholder (or
underwriter or agent, if any) a reasonable number of copies of a supplement
to or an amendment of such prospectus as may be necessary so that, as
thereafter delivered to the purchasers of such securities, such prospectus
shall not include an untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the
statements therein not misleading in light of the circumstances under which
they were made;
(viii) otherwise use Commercially Reasonable Efforts to comply with
all applicable rules and regulations of the SEC, and make available to its
securityholders, as soon as reasonably practicable (but not more than 15
months) after the effective date of the registration statement, an earnings
statement satisfying the provisions of Section 11(a) of the Securities Act
and Rule 158 promulgated thereunder, and furnish to each Shareholder
covered by such registration statement or any participating underwriter or
agent at least five (5) business days prior to the filing a copy of any
amendment or supplement to such registration statement or prospectus;
(ix) provide and cause to be maintained a transfer agent and registrar
for all Shares covered by such registration statement from and after a date
not later than the effective date of such registration statement;
(x) use Commercially Reasonable Efforts to list, on or prior to the
effective date of such registration statement, all Shares covered by such
registration statement on any securities exchange on which any of the
outstanding shares of Common Stock are then listed for trading;
(xi) cooperate with each seller of Shares and each underwriter or
agent participating in the disposition of such Shares and their respective
counsel in connection with any filings required to be made with the
National Association of Securities Dealers;
(xii) use Commercially Reasonable Efforts to prevent the issuance by
the SEC or any other governmental agency or court of a stop order,
injunction or other order suspending the effectiveness of such registration
statement and, if such an order is issued, use Commercially Reasonable
Efforts to cause such order to be lifted as promptly as practicable;
(xiii) take such other actions as the Shareholder shall reasonably
request in order to expedite or facilitate the disposition of such Shares;
ANNEX A
6
191
(xiv) promptly notify the Shareholder and the underwriter or agent, if
any:
(A) when such registration statement or any prospectus used in
connection therewith, or any amendment or supplement thereto, has been
filed and, with respect to such registration statement or any
post-effective amendment thereto, when the same has become effective;
(B) of any written comments from the SEC with respect to any filing
referred to in clause (A) and of any written request by the SEC for
amendments or supplements to such registration statement or prospectus;
(C) of the notification to the Company by the SEC of its initiation
of any proceeding with respect to, or of the issuance by the SEC of, any
stop order suspending the effectiveness of such registration statement;
and
(D) of the receipt by the Company of any notification with respect
to the suspension of the qualification of any Shares for sale under the
applicable securities or blue sky laws of any jurisdiction;
(xv) cooperate with the Shareholder and each underwriter or agent
participating in the distribution of such Shares to facilitate the timely
preparation and delivery of certificates (which shall not bear any
restrictive legends, other than as required by applicable law) representing
securities sold under a registration statement hereunder, and enable such
securities to be in such denominations and registered in such names as such
seller, underwriter or agent may request and keep available and make
available to the Company's transfer agent, prior to the effectiveness of
such registration statement, an adequate supply of such certificates;
(xvi) not later than the effective date of such registration
statement, provide a CUSIP number for all Shares covered by a registration
statement hereunder;
(xvii) incorporate in the registration statement or any amendment,
supplement or post-effective amendment thereto such information as the
Shareholder, the underwriter or agent (if any) or their respective counsel
may reasonably request to be included therein with respect to any Shares
being sold by the Shareholder to such underwriter or agent, the purchase
price being paid therefor by such underwriter or agent and any other terms
of the offering of such Shares; and
(xviii) during any period when a prospectus is required to be
delivered under the Securities Act, make periodic filings with the SEC
pursuant to and containing the information required by the Exchange Act
(whether or not the Company is required to make such filings pursuant to
such Act).
(g) AGREEMENTS OF CERTAIN SHAREHOLDERS. (i) In connection with the
registration of any of the Shares, the Shareholder shall furnish to the Company
such information regarding the Shareholder, the Shares held by the Shareholder
and the intended plan of distribution of such securities as the Company may from
time to time reasonably request in writing in connection with such registration.
(ii) In connection with the registration of any of the Shares, the
Shareholder agrees that upon receipt of any notice (a "SUSPENSION NOTICE") from
the Company of the happening of any event of the kind described in clause (vii)
of Section 2.3(f), the Shareholder will forthwith discontinue the Shareholder's
disposition of Shares pursuant to the registration statement relating to such
Shares until the Shareholder's receipt of the copies of the supplemented or
amended prospectus contemplated by clause (vii) of Section 2.3(f) (the period
from the date on which the Shareholder receives a suspension Notice to the date
on which the Shareholder receives copies of the supplemented or amended
prospectus being herein called the "SUSPENSION PERIOD"). The Company shall take
such actions as are necessary to end the Suspension Period as promptly as
practicable. In the event the Company shall give any such notice, the periods
referred to in Section 2.1(c), Section 2.3(c) and clause (ii) of Section 2.3(f)
shall be extended by a number of days equal to the number of days of the
Suspension Period.
ANNEX A
7
192
2.4 UNDERWRITTEN OFFERINGS. If the Company at any time proposes to
register any of its equity securities under the Securities Act as contemplated
by Section 2.2 and such securities are to be distributed by or through one or
more underwriters, the Company will, if requested by the Shareholder and subject
to Sections 2.2(b), arrange for such underwriters to include all of the Shares
to be offered and sold by the Shareholder among the securities to be distributed
by such underwriters. The Shareholder shall be a party to the underwriting
agreement between the Company and such underwriters, provided that such
agreement is reasonably satisfactory in substance and form to the Company and
the Shareholder.
2.5 PREPARATION; REASONABLE INVESTIGATION. In connection with the
preparation and filing of each registration statement under the Securities Act
pursuant to this Agreement, the Company will give the Shareholder of Shares to
be registered under such registration statement, and their respective counsel
and accountants reasonable access to its books and records and such
opportunities to discuss the business of the Company with its officers and the
independent public accountants who have certified its financial statements as
shall be necessary, in the opinion of such Shareholder or its counsel, to
conduct a reasonable investigation within the meaning of the Securities Act.
2.6 INDEMNIFICATION.
(a) INDEMNIFICATION BY THE COMPANY. The Company agrees to indemnify and
hold harmless, to the full extent permitted by law, the Shareholder, its
directors, officers, shareholders, employees, investment advisers and agents,
either direct or indirect, and each other Person, if any, who controls such
Persons within the meaning of the Securities Act (each such Person, an
"INDEMNIFIED PARTY"), from and against any losses, claims, damages, liabilities
or expenses, joint or several (each a "LOSS" and collectively, "LOSSES"), to
which such Indemnified Party may become subject under the Securities Act or
otherwise, to the extent that such Losses (or actions or proceedings, whether
commenced or threatened, in respect thereof) arise out of or are based upon any
untrue statement or alleged untrue statement of any material fact contained in
any registration statement under which any of the Shares were registered under
the Securities Act in accordance with this Agreement (including all documents
incorporated therein by reference), and preliminary prospectus, final prospectus
or summary prospectus contained therein, or any amendment or supplement thereto,
or 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,
and the Company will reimburse such Indemnified Party for any legal or any other
expenses reasonably incurred by it in connection with investigating or defending
against any such Loss, action or proceeding; provided that in any such case the
Company shall not be liable to any particular Indemnified Party to the extent
that such Loss (or action or proceeding in respect thereof) arises out of or is
based upon an untrue statement or alleged untrue statement or omission or
alleged omission made in such registration statement, any such preliminary
prospectus, final prospectus, summary prospectus amendment or supplement in
reliance upon and in conformity with written information furnished to the
Company by such Indemnified Party specifically for inclusion therein; and
provided, further, that the Company shall not be liable in any such case to the
extent it is finally determined by a court of competent jurisdiction that any
such Loss (or action or proceeding in respect thereof) arises out of or is based
upon an untrue statement or alleged untrue statement or omission or alleged
omission made
(i) in any such preliminary prospectus, if (A) it was the
responsibility of such Indemnified Party to provide the Person asserting
such Loss with a current copy of the prospectus and such Indemnified Party
failed to deliver or cause to be delivered a copy of the prospectus to such
Person after the Company had furnished such Indemnified Party with a
sufficient number of copies of the same prior to the sale of Shares to the
Person asserting such Loss and (B) the prospectus corrected such untrue
statement or omission; or
(ii) in such prospectus, if such untrue statement or omission is
corrected in an amendment or supplement to such prospectus and such
amendment or supplement has been delivered to the Indemnified Party prior
to the sale of Shares to the Person asserting such Loss and the Indemnified
Party thereafter fails to deliver the prospectus as so amended or
supplemented prior to or concurrently with such sale after the Company had
furnished such Indemnified Party (in accordance with the notice
ANNEX A
8
193
provisions contained in Section 8 for Persons who are parties to this
Agreement) with a sufficient number of copies of the same for delivery to
purchasers of securities.
Such indemnity shall remain in full force and effect regardless of any
investigation made by or on behalf of such Indemnified Party and shall survive
the transfer of such securities by such Indemnified Party. The Company shall
also indemnify each other Person who participates (including as an underwriter)
in the offering or sale of Shares hereunder, their officers and directors and
each other Person, if any, who controls any such participating Person within the
meaning of the Securities Act to the same extent as provided above with respect
to Indemnified Parties.
(b) INDEMNIFICATION BY THE SHAREHOLDER. The Company may require, as a
condition to including any Shares in any registration statement filed pursuant
to Section 2.1 or 2.2 and as a condition to indemnifying such sellers pursuant
to this Section 2.6, that the Company shall have received an undertaking
reasonably satisfactory to it from each prospective seller of such Shares to
indemnify and hold harmless and reimburse (in the same manner and to the same
extent as set forth in paragraph (a) of this Section 2.6) the Company, each
director, officer, employee and agent of the Company, and each other Person, if
any, who controls the Company within the meaning of the Securities Act, from and
against any Losses (or actions or proceedings, whether commenced or threatened,
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
under which such securities were registered under the Securities Act (including
all documents incorporated therein by reference), any preliminary prospectus,
final prospectus or summary prospectus contained therein, or any amendment or
supplement thereto, or any omission or alleged omission from such registration
statement, preliminary prospectus, final prospectus or summary prospectus, or
any amendment or supplement thereto required to be stated therein or necessary
to make the statements therein not misleading, if (but only if) such untrue
statement or alleged untrue statement or omission or alleged omission was made
in reliance upon and in conformity with written information furnished to the
Company by such prospective seller specifically for inclusion therein; provided,
however, that such prospective seller shall not be obligated to provide such
indemnity to the extent that such Losses result, directly or indirectly, from
the failure of the Company to promptly amend or take action to correct or
supplement any such registration statement, prospectus, amendment or supplement
based on corrected or supplemental information provided in writing by such
prospective seller to the Company expressly for such purpose; and provided,
further, that the obligation to provide indemnification pursuant to this Section
2.6(b) shall be several, and not joint and several, among such indemnifying
parties. Notwithstanding anything in this Section 2.6(b) to the contrary, in no
event shall the liability of any prospective seller under such indemnity be
greater in amount than the amount of the proceeds received by such seller upon
the sale of its Shares in the offering to which the Losses relate. Such
indemnity shall remain in full force and effect, regardless of any investigation
made by or on behalf of the Company or any such director, officer, employee,
agent or participating or controlling Person and shall survive the transfer of
such securities by such prospective seller.
(c) NOTICES OF CLAIMS, ETC. Promptly after receipt by an indemnified party
of notice of the commencement of any action or proceeding involving a claim
referred to in paragraph (a) or (b) of this Section 2.6, such indemnified party
will, if a claim in respect thereof is to be made against an indemnifying party,
give prompt written notice to the latter of the commencement of such action,
provided that the failure of any indemnified party to give notice as provided
herein shall not relieve the indemnifying party of its obligations under this
Section 2.6, except to the extent that the indemnifying party is actually and
materially prejudiced by such failure to give notice. In case any such action is
brought against an indemnified party, the indemnifying party shall be entitled
to participate in and to assume the defense thereof (such assumption to
constitute its acknowledgment of its agreement to indemnify the indemnified
party with respect to such matters), jointly with any other indemnifying party
similarly notified to the extent that it may wish, with counsel reasonably
satisfactory to such indemnified party, and after notice from the indemnifying
party to such indemnified party of its election so to assume the defense
thereof, the indemnifying party shall not be liable to such indemnified party
for any legal fees or other expenses subsequently incurred by the latter in
connection with the defense
ANNEX A
9
194
thereof other than reasonable costs of investigation; provided, however, that
if, in such indemnified party's reasonable judgment, a conflict of interest
between such indemnified and indemnifying parties may exist in respect of such
claim, such indemnified party shall be entitled to separate counsel for such
claim at the expense of the indemnifying party; and provided, further, that,
unless there exists a conflict of interest among indemnified parties, all
indemnified parties in respect of such claim shall be entitled to only one
counsel or firm of counsel for all such indemnified parties. In the event an
indemnifying party shall not be entitled, or elects not, to assume the defense
of a claim, such indemnifying party shall not be obligated to pay the fees and
expenses of more than one counsel or firm of counsel for all parties indemnified
by such indemnifying party in respect of such claim, unless in the reasonable
judgment of any such indemnified party a conflict of interest exists between
such indemnified party and any other of such indemnified parties in respect of
such claim, in which event the indemnifying party shall be obligated to pay the
fees and expenses of one additional counsel or firm of counsel for such
indemnified parties. No indemnifying party shall, without the consent of the
indemnified party, consent to entry of any judgment or enter into any settlement
that (i) does not include as an unconditional term thereof the giving by the
claimant or plaintiff to such indemnified party of a release from all Losses in
respect of such claim or litigation or (ii) would impose injunctive relief on
such indemnified party. No indemnifying party shall be subject to any Losses for
any settlement made without its consent, which consent shall not be unreasonably
withheld.
(d) OTHER INDEMNIFICATION. The provisions of this Section 2.6 shall be in
addition to any other rights to indemnification or contribution which an
indemnified party may have pursuant to law, equity, contract or otherwise.
(e) INDEMNIFICATION PAYMENTS. The indemnification required by this Section
2.6 shall be made by periodic payments of the amount thereof during the course
of the investigation or defense, promptly as and when bills are received or
Losses are incurred.
(f) CONTRIBUTION. If for any reason the foregoing indemnity and
reimbursement is unavailable or is insufficient to hold harmless an indemnified
party under paragraph (a) or (b) of this Section 2.6, then each indemnifying
party shall contribute to the amount paid or payable by such indemnified party
as a result of any Loss (or actions or proceedings, whether commenced or
threatened, in respect thereof), including, without limitation, any legal or
other expenses reasonably incurred by them in connection with investigating or
defending any such Loss, action or proceeding, in such proportion as is
appropriate to reflect the relative fault of the indemnifying party on the one
hand and the indemnified party on the other. The relative fault shall be
determined by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact or the omission or alleged omission to state
a material fact relates to information supplied by the indemnifying party or the
indemnified party and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such untrue statement or
omission. Notwithstanding anything in this Section 2.6(f) to the contrary, no
indemnifying party (other than the Company) shall be required pursuant to this
Section 2.6(f) to contribute any amount in excess of the amount by which the net
proceeds received by such indemnifying party from the sale of Shares in the
offering to which the Losses of the indemnified parties relate exceeds the
amount of any damages which such indemnifying party has otherwise been required
to pay by reason of such untrue statement or omission. No person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the
Securities Act) shall be entitled to contribution from any Person who was not
guilty of such fraudulent misrepresentation.
3. TERM. This Agreement shall be effective on the date hereof and, subject
to Section 13 hereof, shall continue in full force and effect until the first
anniversary of the Effective Date.
4. AMENDMENTS AND WAIVERS. This Agreement may be amended, supplemented or
modified at any time; provided that the Company has provided its written consent
to such amendment, supplement or modification. Any term or condition of this
Agreement may be waived at any time by the party that is entitled to the benefit
thereof, but no such waiver shall be effective unless set forth in a written
instrument duly executed by or on behalf of the party waiving such term or
condition. No waiver by any party of any term or
ANNEX A
10
195
condition of this Agreement, in any one or more instances, shall be deemed to be
or construed as a waiver of the same term or condition of this Agreement on any
future occasion.
5. ENTIRE AGREEMENT. This Agreement supersedes all prior discussions and
agreements between the parties with respect to the subject matter hereof and
contains the sole and entire agreement between the parties hereto with respect
to the subject matter hereof.
6. NO THIRD-PARTY BENEFICIARY. The terms and provisions of this Agreement
are intended solely for the benefit of each party and their respective
Successors and it is not the intention of the parties to confer third-party
beneficiary rights upon any other Person other than (i) any Shareholder entitled
to notice of the registration of securities under this Agreement and (ii) any
Shareholder entitled to indemnity under Section 2.6.
7. INVALID PROVISIONS. If any provision of this Agreement is held to be
illegal, invalid or unenforceable under any present or future law, (i) such
provision will be fully severable, (ii) this Agreement will be construed and
enforced as if such illegal, invalid or unenforceable provision had never
comprised a part hereof, (iii) the remaining provisions of this Agreement will
remain in full force and effect and will not be affected by the illegal, invalid
or unenforceable provision or by its severance here from and (iv) in lieu of
such illegal, invalid or unenforceable provision, there will be added
automatically as a part of this Agreement a legal, valid and enforceable
provision as similar in terms to such illegal, invalid or unenforceable
provision as may be possible.
8. NOTICES. All notices, requests and other communications hereunder must
be in writing and will be deemed to have been duly given only (i) if delivered
personally (ii) by facsimile transmission, (iii) by Federal Express or other
nationally recognized courier service or (iv) mailed (first class postage
prepaid) to the parties at the following addresses or facsimile numbers:
If to the Company, to:
Chesapeake Energy Corporation
6100 North Western Avenue
Oklahoma City, OK 73118
Attention: Aubrey K. McClendon
Fax No.: (405) 848-8588
With respect to the Shareholder, any notice, request or other communication
hereunder shall be sent to the addresses and facsimile numbers appearing beneath
such Shareholder's signature on the signature page hereof or to the addresses
and facsimile numbers provided to the Company and the other parties hereto by
notice as herein provided and referencing this Agreement. All such notices,
requests and other communications will (i) if delivered personally to the
address as provided in this Section 8, be deemed given upon delivery, (ii) if
delivered by facsimile transmission to the facsimile number as provided in this
Section 8, be deemed given upon receipt, and (iii) if delivered by courier
service or mail in the manner described above to the address as provided in this
Section 8, be deemed given upon receipt (in each case regardless of whether such
notice, request or other communication is received by any other Person to whom a
copy of such notice is to be delivered pursuant to this Section 8). Any Person
from time to time may change its address, facsimile number or other information
for the purpose of notices to that Person by giving notice in accordance with
this Section 8 specifying such change to each of the other parties executing
this Agreement.
9. ASSIGNMENT. This Agreement shall be binding upon and inure to the
benefit of and be enforceable by the parties hereto and their respective
Successors and permitted assigns.
10. DESCRIPTIVE HEADINGS. The descriptive headings of the several sections
and paragraphs of this Agreement are inserted for convenience of reference only
and do not define or limit the provisions hereof or otherwise affect the meaning
hereof.
ANNEX A
11
196
11. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF OKLAHOMA WITHOUT REFERENCE TO THE
CONFLICTS OF LAW PRINCIPLES THEREOF.
12. REGISTRATION RIGHTS TO OTHERS. As of the date hereof, the Company has
not granted to any other holder of its securities rights with respect to the
registration of securities of the Company under the Securities Act.
13. TERMINATION OF CERTAIN RIGHTS AND OBLIGATIONS. The provisions of
Section 2.6., the rights of any party hereto with respect to the breach of any
provision hereof and any obligation accrued as of the date of termination shall
survive the termination of this Agreement.
14. NO INCONSISTENT AGREEMENTS. The Company will not hereafter enter into,
modify, amend or waive any agreement with respect to its securities if such
agreement, modification or waiver would conflict with the rights granted
pursuant to this Agreement to the Shareholders of Shares.
15. SPECIFIC PERFORMANCE. The parties agree that, to the extent permitted
by law, (i) the obligations imposed on them in this Agreement are special,
unique and of an extraordinary character, and that in the event of a breach by
any such party damages would not be an adequate remedy and (ii) each of the
other parties shall be entitled to specific performance and injunctive and other
equitable relief in addition to any other remedy to which it may be entitled at
law or in equity.
16. COUNTERPARTS. This Agreement may be executed simultaneously in any
number of counterparts, each of which shall be deemed an original, but all of
which shall together constitute one and the same instrument.
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed
and delivered by their respective officers thereunto duly authorized as of the
date first above written.
CHESAPEAKE ENERGY CORPORATION
By: /s/ AUBREY K. MCCLENDON
----------------------------------
Aubrey K. McClendon
Chairman of the Board and Chief
Executive Officer
SHAREHOLDER:
/s/ CHARLES E. DAVIDSON
------------------------------------
Charles E. Davidson
Address: 411 West Putnam Avenue
Greenwich, Connecticut 06830
Fax:
----------------------------------
ANNEX A
12
197
AMENDMENT NO. 1
TO
AGREEMENT AND PLAN OF MERGER
This Amendment No. 1 to the Agreement and Plan of Merger ("AMENDMENT NO.
1") is made and entered this 22nd day of December, 1997 by and among Chesapeake
Energy Corporation, an Oklahoma corporation ("CHK"), Chesapeake Merger Corp., an
Oklahoma corporation and indirect wholly owned subsidiary of CHK ("MERGER SUB"),
and DLB Oil & Gas, Inc., an Oklahoma corporation ("DLB").
RECITALS:
WHEREAS, on October 22, 1997, the parties entered into an Agreement and
Plan of Merger (the "MERGER AGREEMENT") providing for the merger of Merger Sub
with and into DLB (the "MERGER"); and
WHEREAS, on November 12, 1997, CHK, Chesapeake Acquisition Corp., a Kansas
corporation and an indirect wholly owned subsidiary of CHK ("CHK ACQUISITION,")
and Hugoton Energy Corporation, a Kansas corporation ("HUGOTON,")entered into an
Agreement and Plan of Merger (the "HUGOTON MERGER AGREEMENT") providing for,
among other things, the merger of CHK Acquisition with and into Hugoton (the
"HUGOTON MERGER") and in connection therewith, the issuance of 1.3 shares of
common stock, par value $.01 per share, of CHK ("CHK COMMON STOCK") for each
share of issued and outstanding common stock of Hugoton; and
WHEREAS, DLB desires to spin off the shares of WRT Common Stock it owns
effective immediately prior to the Merger (the "WRT SPIN OFF") and, subject to
the terms and conditions set forth herein, CHK has agreed to permit WRT to
proceed with the WRT Spin Off; and
WHEREAS, the Shareholders of DLB are not required to approve the WRT
Spin-Off; and
WHEREAS, DLB and CHK have agreed that, if so requested by DLB provided such
request is made in connection with the WRT Spin-Off, at any time during the term
of the Merger Agreement and prior to the Effective Time, CHK shall, not later
than 15 days after such request, repay Lehman Commercial Paper, Inc. ("LEHMAN")
all amounts owed by DLB to Lehman under that certain Credit Agreement dated as
of July 11, 1997, between Bonray Drilling Corporation and Lehman Commercial
Paper Inc. as administrative agent and arranger, as amended, supplemented or
modified from time to time and the related Assumption Agreement dated October
16, 1997 by and between Bonray Holding L.L.C., Bonray Drilling Corporation,
Lehman Commercial Paper, Inc. and DLB (the "BONRAY FACILITY") and in
consideration therefor DLB shall become the debtor under the Bonray Facility and
such Bonray Facility shall be amended or restated on the same terms as the
current Bonray Facility to reflect the substitution of CHK as creditor
thereunder and to reflect that the collateral securing DLB's repayment
obligations to CHK therefor shall be the shares of Bayard Common Stock and WRT
Common Stock, subject to the release of the WRT Common Stock to permit the WRT
Spin-Off; and
WHEREAS, CHK has further agreed to amend that certain Registration Rights
Agreement dated October 22, 1997 among CHK and Charles E. Davidson (the
"REGISTRATION RIGHTS AGREEMENT") to provide that CHK will keep effective the
registration statement to be filed upon Mr. Davidson's request pursuant to the
Registration Rights Agreement for a period to end (i) 90 days after the Merger
or (ii) 30 days after the Hugoton Merger, whichever is a longer period of time;
and
WHEREAS, the DLB Specified Stockholders (as defined in the Merger
Agreement) have each agreed to consent to this Amendment No. 1 and to execute an
amendment to the respective Agreements and Limited Irrevocable Proxies delivered
by them in connection with the execution of the Merger Agreement which amendment
shall allow the execution of a written consent in lieu of a vote at the DLB
Special Meeting (as defined in the Merger Agreement); and
ANNEX A
198
WHEREAS, pursuant to Section 8.2 of the Merger Agreement the parties now
mutually desire to amend the Merger Agreement as set forth below;
NOW, THEREFORE, in consideration of the premises and the representations,
warranties, covenants and agreements contained herein and in the Merger
Agreement, the parties hereto, intending to be legally bound, agree as follows:
1. The following definitions in Article I shall be amended as follows:
A. The definition of "CREDIT FACILITIES" is hereby amended to add the
following phrase at the end of the last line of such definition: "(the
"BONRAY FACILITY") or as amended or replaced by CHK at the request of
DLB on the same terms as the Bonray Facility whereby, prior to the
Effective Time, CHK repays Lehman in full and retains the collateral
thereunder or security for repayment by DLB subject to the release of
the WRT Common Stock to permit the WRT Spin-Off (the "CHK FACILITY")."
B. The definition of "CLOSING PRICE" is hereby amended in its entirety to
read as follows: "CLOSING PRICE" means the average of the closing prices
of CHK Common Stock, rounded to three decimal places, as reported by The
Wall Street Journal -- Composite Transactions, for each of the first 20
consecutive trading days in the period commencing 25 days prior to the
earliest date on which the corporate action approved at the DLB Special
Meeting (defined below) may be effected.
C. The definition of "DLB MATERIAL AGREEMENT(S)" is hereby amended to add
the word "and" after "Credit Facilities," and before "(c)" in line 4
thereof and to delete the phrase "and (d) the WRT Registration
Agreement" in line 5 thereof.
D. The definition of "WRT REGISTRATION AGREEMENT" shall be deleted in its
entirety.
E. The definition of "WRT SPIN-OFF" shall be added, which shall read in its
entirety as follows: "WRT SPIN-OFF" has the meaning specified in Section
6.2(j).
2. SECTION 2.4(a) of the Merger Agreement shall be amended in its entirety
to read as follows:
(a) (i) DLB COMMON STOCK. At the Effective Time, by virtue of the Merger
and without any action on the part of any holder thereof (but subject
to the provisions of Section 2.5(e)), each share of DLB Common Stock
that is issued and outstanding immediately prior to the Effective Time
(other than shares of DLB Common Stock held by Dissenting Stockholders
and other than shares of DLB Common Stock to be canceled pursuant to
Section 2.4(b) hereof) shall be converted into the right to receive:
(w) a fractional interest in a share of CHK Common Stock equal to the
CHK Common Stock Consideration divided by the Closing Price (the
"EXCHANGE RATIO"); provided, however, that if the Closing Price is less
than $7.50, DLB, Merger Sub or CHK may terminate this Agreement by
written notice to the other parties to this Agreement (which notice
shall be effective if delivered to such other parties not later than
5:00 p.m. Oklahoma City time on the Trading Day next preceding the date
that the corporate action approved at the DLB Special Meeting is first
permitted to be effected); and (x) that number of shares of Bayard
Common Stock owned by DLB immediately prior to the Effective Time
divided by the number of shares of DLB Common Stock issued and
outstanding immediately prior to the Effective Time (collectively, the
"MERGER CONSIDERATION"); provided that the number of shares of Bayard
Common Stock that any holder of DLB Common Stock would otherwise be
entitled to receive shall be rounded to the nearest whole number of
shares of Bayard Common Stock and in no event shall the number of
shares of Bayard Common Stock subject to issuance as Merger
Consideration exceed the number of shares of Bayard Common Stock owned
by DLB immediately prior to the Effective Time. Each share of DLB
Common Stock, when so converted, shall automatically be canceled and
retired, shall cease to exist and shall no longer be outstanding; and
the holder of any certificate representing any such shares shall cease
to have any rights with respect thereto.
ANNEX A
2
199
(ii) The Merger Consideration shall be subject to equitable adjustment
in the event of any stock split, stock dividend, reverse stock split or
other change in the number of shares of CHK Common Stock (unless the
election to pay cash is made in accordance with Section 2.4(f)), DLB
Common Stock or Bayard Common Stock outstanding prior to Closing.
3. SECTION 2.4(f) of the Merger Agreement shall be amended in its entirety
to read as follows:
(f) SUBSTITUTION OF CASH FOR CHK COMMON STOCK. At any time prior to 6:00
p.m. Oklahoma City time on the fifth Trading Day prior to the date that the
corporate action approved at the DLB Special Meeting is first permitted to be
effected, CHK and Merger Sub may elect, by delivering written notice to DLB by
facsimile transmission in accordance with Section 8.3(b) hereof, to pay as
Merger Consideration cash in lieu of CHK Common Stock. If CHK shall complete an
underwritten public offering of CHK Common Stock for its own account after the
date of this Agreement and on or before the fifth Trading Day prior to the date
that the corporate action approved at the DLB Special Meeting is first permitted
to be effected and receives not less than $65 million in net cash proceeds from
such offering, CHK shall be deemed to have made an election to pay as Merger
Consideration cash in lieu of CHK Common Stock. If such an election is made,
such election shall be irrevocable and, effective upon such election, the first
sentence of Section 2.4(a)(i) shall be deemed modified and amended to read in
its entirety as follows:
At the Effective Time, by virtue of the Merger and without any
action on the part of any holder thereof (but subject to the
provisions of Section 2.5(e)), each share of DLB Common Stock
that is issued and outstanding immediately prior to the
Effective Time (other than shares of DLB Common Stock held by
Dissenting Stockholders and other than shares of DLB Common
Stock to be canceled pursuant to Section 2.4(b) hereof) shall be
converted into the right to receive (w) an amount in cash equal
to the CHK Common Stock Consideration (the "Cash Exchange
Ratio"); and (x) that number of shares of Bayard Common Stock
owned by DLB immediately prior to the Effective Time divided by
the number of shares of DLB Common Stock issued and outstanding
immediately prior to the Effective Time; provided that the
number of shares of Bayard Common Stock that any holder of DLB
Common Stock would otherwise be entitled to receive shall be
rounded to the nearest whole number of shares of Bayard Common
Stock and in no event shall the number of shares of Bayard
Common Stock subject to issuance as Merger Consideration exceed
the number of shares of Bayard Common Stock owned by DLB
immediately prior to the Effective Time.
The Parties hereto agree that if the election is made by CHK and Merger Sub
in accordance with this Section 2.4(f), the term Merger Consideration as
used in this Agreement shall thereafter be defined as, and shall consist
of, the consideration described in clauses (w) and (x) of this Section
2.4(f).
4. SECTIONS 2.5(a), (b)(ii), (c), (e) and (f) of the Merger Agreement shall
be amended in their entirety to delete any references to WRT Common Stock or to
the WRT Claims Interest and to read as follows:
(a) EXCHANGE FUND. Prior to the Effective Time, Merger Sub shall, and CHK
shall cause Merger Sub to, deposit with the Exchange Agent, for the benefit of
the holders of shares of DLB Common Stock and for exchange in accordance with
this Agreement, certificates representing the shares of CHK Common Stock to be
issued in exchange for shares of DLB Common Stock pursuant to Section 2.4(a)
(or, if the cash election is made in accordance with Section 2.4(f) hereof, cash
equal to the total amount of cash to be paid as Merger Consideration pursuant to
clause (w) of Section 2.4(f)), and DLB shall deposit with the Exchange Agent,
for the benefit of the holders of shares of DLB Common Stock and for delivery in
accordance with this Agreement, certificates representing the shares of Bayard
Common Stock to be delivered as part of the Merger Consideration pursuant to
Section 2.4(a) (or if the cash election is made, pursuant to Section 2.4(f)) and
at the Effective Time all such shares so deposited with the Exchange Agent shall
be free and clear of any Lien arising under CHK, Merger Sub or any of the DLB
Companies. Such shares of CHK Common Stock
ANNEX A
3
200
(or cash, if the cash election is made in accordance with Section 2.4(f) hereof)
and Bayard Common Stock together with any dividends or distributions with
respect thereto (as provided in Section 2.5(c)) are referred to herein as the
"EXCHANGE FUND." The Exchange Agent, pursuant to irrevocable instructions
consistent with the terms of this Agreement, shall deliver the CHK Common Stock
(or cash, if the cash election is made in accordance with Section 2.4(f) hereof)
and Bayard Common Stock (and cash in lieu of fractional shares and any unpaid
dividends and distributions) to be delivered pursuant to Section 2.4(a) or
Section 2.4(f), as the case may be, out of the Exchange Fund, and the Exchange
Fund shall not be used for any other purpose whatsoever. Subject to Section
2.5(b)(v) hereof, the Exchange Agent shall not be entitled to vote or exercise
any rights of ownership with respect to the CHK Common Stock and Bayard Common
Stock held by it from time to time hereunder, except that it shall receive and
hold all dividends or other distributions paid or distributed with respect
thereto for the account of Persons entitled thereto.
(b) EXCHANGE PROCEDURES.
(ii) Upon surrender to the Exchange Agent of a DLB Certificate for
cancellation, together with a duly completed and executed letter of transmittal
and any other required documents (including, in the case of any Person
constituting an "affiliate" of DLB for purposes of Rule 145(c) and (d) under the
Securities Act, a written agreement from such Person as described in Section
5.11 if not theretofore delivered to CHK), (A) the holder of such DLB
Certificate shall be entitled to receive in exchange therefor stock certificates
representing the number of whole shares of CHK Common Stock (or cash in
accordance with clause (w) in Section 2.4(f) if the cash election is made in
accordance with Section 2.4(f) hereof) and whole shares of Bayard Common Stock
that such holder has the right to receive pursuant to Section 2.4(a) or Section
2.4(f), as the case may be, any cash in lieu of fractional shares of CHK Common
Stock as provided in Section 2.5(e) (unless the cash election is made in
accordance with Section 2.4(f) hereof), and any unpaid dividends and
distributions that such holder has the right to receive pursuant to Section
2.5(c) (after giving effect to any required withholding of taxes); provided,
however, that no certificates representing shares of Bayard Common Stock
(including, without limitation, any dividends or distributions on the shares of
Bayard Common Stock payable in shares of Bayard Common Stock) shall be
distributed by the Exchange Agent until the Bayard Distribution Date and (B) the
DLB Certificate so surrendered shall forthwith be canceled. No interest shall be
paid or accrued on the Merger Consideration, cash in lieu of fractional shares
or unpaid dividends and distributions, if any, payable to holders of DLB
Certificates. The Exchange Agent shall accept such certificates upon compliance
with such reasonable terms and conditions as the Exchange Agent may impose to
effect an orderly exchange thereof in accordance with normal exchange practices.
Until surrendered as contemplated by this Section 2.5(b), each certificate for
shares of DLB Common Stock shall be deemed at any time after the Effective Time
to represent only the right to receive upon such surrender the Merger
Consideration as contemplated by Section 2.4(a) or Section 2.4(f), as the case
may be.
(c) DISTRIBUTIONS WITH RESPECT TO UNEXCHANGED SHARES. No dividends or other
distributions with respect to CHK Common Stock and Bayard Common Stock declared
or made after the Effective Time with a record date after the Effective Time
shall be paid to the holder of any unsurrendered DLB Certificate. Subject to the
effect of applicable laws, (i) at the time of the surrender of a DLB Certificate
for exchange in accordance with the provisions of this Section 2.5, there shall
be paid to the surrendering holder, without interest, the amount of dividends or
other distributions (having a record date after the Effective Time but on or
prior to surrender and a payment date on or prior to surrender) theretofore paid
with respect to the number of whole shares of CHK Common Stock (unless the cash
election is made in accordance with Section 2.4(f) hereof, in which case such
dividends or other distributions on CHK Common Stock shall not be paid to the
surrendering holder) and Bayard Common Stock that such holder is entitled to
receive (less the amount of any withholding taxes that may be required with
respect thereto); and (ii) at the appropriate payment date, there shall be paid
to the surrendering holder, without interest, the amount of dividends or other
distributions (having a record date after the Effective Time but on or prior to
surrender and a payment date subsequent to surrender) payable with respect to
the number of whole shares of CHK Common Stock (unless the cash election is made
in accordance with Section 2.4(f) hereof) and Bayard Common Stock that such
holder receives or, with respect to Bayard Common Stock held by the Exchange
Agent prior to the Bayard
ANNEX A
4
201
Distribution Date that such holder is entitled to receive (less the amount of
any withholding taxes that may be required with respect thereto).
(e) TREATMENT OF FRACTIONAL SHARES. No certificates or scrip representing
fractional shares of CHK Common Stock or Bayard Common Stock shall be issued in
the Merger and, except as provided in this Section 2.5(e), no dividend or other
distribution, stock split or interest shall relate to any such fractional share,
and such fractional share shall not entitle the owner thereof to vote or to any
other rights of a stockholder of CHK. In lieu of any fractional share of CHK
Common Stock to which a holder of DLB Common Stock would otherwise be entitled,
such holder, upon surrender of a DLB Certificate as described in this Article
II, shall be paid an amount in cash (without interest) determined by multiplying
(i) the Closing Price by (ii) the fractional share of CHK Common Stock to which
such holder would otherwise be entitled, in which case the Surviving Corporation
shall make available to the Exchange Agent, without regard to any other cash
being provided to the Exchange Agent, the amount of cash necessary to make such
payments. The Surviving Corporation shall retain all fractional shares of Bayard
Common Stock and no DLB stockholder shall be entitled to any such fractional
shares.
(f) TERMINATION OF EXCHANGE FUND. Any portion of the Exchange Fund and cash
held by the Exchange Agent in accordance with the terms of this Section 2.5 that
remains unclaimed by the former stockholders of DLB for a period of one year
following the Effective Time shall be delivered to the Surviving Corporation,
upon demand. Thereafter, any former stockholders of DLB who have not theretofore
complied with the provisions of this Section 2.5 shall look only to the
Surviving Corporation for payment of their claim for the Merger Consideration,
any cash in lieu of fractional share of CHK Common Stock and any dividends or
distributions with respect to CHK Common Stock and Bayard Common Stock (all
without interest).
5. The definition of "PROXY STATEMENT/PROSPECTUS" contained in Section 3.26
of the Merger Agreement is hereby amended to add the phrase "or information
statement" after "proxy statement" and before "relating to the DLB Special
Meeting" in line 3 thereof.
6. SECTION 4.4 of the Merger Agreement shall be amended to delete (i) the
phrase "and the WRT Common Stock" in line 13 after "Bayard Common Stock" and
before "to be delivered," (ii) the word "or WRT" in line 25 and (iii) the words
"or WRT Registration Statement, respectively," in lines 25 and 26.
7. SECTION 5.1(a) of the Merger Agreement shall be amended to add the
phrase "other than in connection with the WRT Spin-Off" at the end of clause
(iii) thereof.
8. SECTION 5.5 of the Merger Agreement shall be amended to read in its
entirety as follows:
5.5 MEETING OF DLB'S STOCKHOLDERS. DLB shall, as promptly as reasonably
practicable after the date hereof, (a) take all steps reasonably necessary to
call, give notice of, convene and hold a special meeting of its stockholders or,
in lieu thereof, obtain an effective and binding written consent from the
holders of a majority of DLB Common Stock to the terms of the Merger (either
action being referred to as the "DLB SPECIAL MEETING") for the purpose of
securing the DLB Stockholders' Approval, (b) distribute to its stockholders the
Proxy Statement/Prospectus (or, if applicable, an information
statement/prospectus) in accordance with applicable Federal and state law and
with its certificate of incorporation and by-laws, which Proxy
Statement/Prospectus (or, if applicable, information statement/prospectus) shall
contain the recommendation of the Board of Directors of DLB that its
stockholders approve the Merger, this Agreement and the transactions
contemplated hereby, (c) use all reasonable efforts to solicit from its
stockholders proxies, if required, in favor of the approval and adoption of the
Merger, this Agreement and the transactions contemplated hereby and to secure
the DLB Stockholders' Approval, and (d) cooperate and consult with CHK with
respect to each of the foregoing matters; provided, that nothing contained in
this Section 5.5 shall prohibit DLB's Board of Directors from failing to make or
from withdrawing or modifying its recommendation to DLB's stockholders hereunder
if the Board of Directors of DLB, after consultation with and based upon advice
of counsel, determines in good faith that such action is necessary for such
Board of Directors to comply with its fiduciary duties to its stockholders under
applicable law.
ANNEX A
5
202
7. SECTION 5.18 of the Merger Agreement shall be amended so that all
references to WRT Common Stock and the WRT Registration Agreement are deleted
and shall read in its entirety as follows:
5.18 BAYARD COMMON STOCK REGISTRATION STATEMENT. As promptly as
practicable after the execution of this Agreement, DLB shall take all steps
necessary to exercise its registration rights under the Bayard Registration
Agreement with respect to the Bayard Common Stock to be delivered as Merger
Consideration upon consummation of the Merger, and shall use all reasonable
efforts to cause such registration statement to become effective prior to the
date that the corporate action approved by the DLB Special Meeting is first
permitted to be effected. DLB shall advise CHK promptly after it receives notice
thereof, of the time when such registration statement shall become effective or
any supplement or amendment has been filed, the issuance of any stop order, the
suspension of the qualification of the Bayard Common Stock for offering or sale
in any jurisdiction, or any request by the SEC for amendment of such
registration statement or comments thereon and responses thereto or requests by
the SEC for additional information.
8. A new SECTION 5.20 shall be added, which shall read in its entirety:
5.20 If during the term of this Agreement and prior to the Effective Time
DLB submits a written request to CHK pursuant to this Section 5.20, CHK shall
(subject to the completion of documentation therefor in a form reasonably
acceptable to CHK) repay Lehman Commercial Paper, Inc. all amounts owed by DLB
to Lehman under the Bonray Facility provided such request is made in connection
with the WRT Spin-Off. In consideration for such payment by CHK, DLB shall
cancel the promissory note held by Lehman and issue to CHK as payee a new
promissory note on similar terms, become the debtor under the Bonray Facility
and amend or restate Bonray Facility on substantially similar terms as the
current Bonray Facility to reflect the substitution of CHK as creditor
thereunder and to reflect that the collateral to CHK of the aforementioned
promissory note shall be the shares of Bayard Common Stock and WRT Common Stock,
subject to the release of the WRT Common Stock to the extent necessary to permit
the WRT Spin-Off.
9. SECTION 6.1(f) of the Merger Agreement entitled "WRT COMMON STOCK" which
currently lists as a condition to the Merger the filing of a registration
statement covering the WRT Common Stock shall be deleted in its entirety to read
as follows:
(f) [reserved]
10. A new SECTION 6.2 (j) shall be added, which shall read in its entirety
as follows:
(j) The shares of WRT Common Stock that DLB owns immediately prior to the
Merger shall have been spun off to the stockholders of DLB effective immediately
prior to the Merger but after the determination of the Closing Price after all
other conditions to the Merger are satisfied or have been waived ("WRT
SPIN-OFF").
ANNEX A
6
203
IN WITNESS WHEREOF, the parties hereto have caused this Amendment No. 1 to
be signed by their duly authorized representatives as of the day and year first
above written.
DLB OIL & GAS, INC. CHESAPEAKE ENERGY CORPORATION
By: /s/ MIKE LIDDELL By: /s/ AUBREY K. MCCLENDON
------------------------------------------------- -------------------------------------------------
Mike Liddell Aubrey K. McClendon
Chief Executive Officer Chairman and Chief Executive Officer
CHESAPEAKE MERGER CORP.
By: /s/ AUBREY K. MCCLENDON
----------------------------------------------
Aubrey K. McClendon
President
ANNEX A
7
204
AMENDMENT NO. 2
TO
AGREEMENT AND PLAN OF MERGER
This Amendment No. 2 to the Agreement and Plan of Merger ("AMENDMENT NO.
2") is made and entered this 11th day of February, 1998 by and among Chesapeake
Energy Corporation, an Oklahoma corporation ("CHK"), Chesapeake Merger Corp., an
Oklahoma corporation and indirect wholly owned subsidiary of CHK ("MERGER SUB"),
and DLB Oil & Gas, Inc., an Oklahoma corporation ("DLB").
RECITALS:
WHEREAS, on October 22, 1997, the parties entered into an Agreement and
Plan of Merger, as amended by Amendment No. 1 thereto, dated as of December 22,
1997 (as amended, the "MERGER AGREEMENT") providing for the merger of Merger Sub
with and into DLB (the "MERGER"); and
WHEREAS, the parties hereto have agreed to change the consideration to be
paid by CHK to the stockholders of DLB to $17.5 million in cash and 5,000,000
shares of common stock, par value $0.01 per share, of CHK in exchange for the
oil and gas assets of DLB, but excluding DLB's Barbados properties and WRT
Energy Corporation, and, in connection with such change in consideration, to
amend the Merger Agreement to eliminate the parties' mutual right to terminate
the Merger Agreement if the Closing Price (as defined in the Merger Agreement)
of CHK common stock is below $7.50 per share for a specified period of time
prior to the Effective Time (as defined in the Merger Agreement) of the Merger;
and
WHEREAS, the Board of Directors of each of the parties has duly authorized
and approved the execution and delivery of this Amendment No. 2; and
WHEREAS, pursuant to Section 8.2 of the Merger Agreement the parties now
mutually desire to amend the Merger Agreement as set forth below.
NOW, THEREFORE, in consideration of the premises and the representations,
warranties, covenants and agreements contained herein and in the Merger
Agreement, the parties hereto, intending to be legally bound, agree as follows:
1. Article I of the Merger Agreement shall be amended as follows:
A. The following definition of "CASH CONSIDERATION" shall be added to
Article I:
"CASH CONSIDERATION" means $17.5 million divided by the number of
fully diluted shares of DLB Common Stock issued and outstanding at the
Effective Time.
B. The definition of "CHK COMMON STOCK CONSIDERATION" included in
Article I is hereby amended to read in its entirety as follows:
"CHK COMMON STOCK CONSIDERATION" means 5,000,000 shares of CHK
Common Stock divided by the number of fully diluted shares of DLB Common
Stock issued and outstanding at the Effective Time.
C. The definition of "DLB COMPANIES" included in Article I is hereby
amended to read in its entirety as follows:
"DLB COMPANIES" means DLB and each of its Subsidiaries (excluding
WRT and DLB International, Inc.).
D. The definition of "EXCHANGE RATIO" included in Article I shall be
deleted in its entirety.
E. The definition of "MERGER CONSIDERATION" is hereby amended to read
in its entirety as follows:
"MERGER CONSIDERATION" has the meaning specified in Section 2.4(a).
ANNEX A
205
F. The definition of "TRANSACTION CONSIDERATION" is hereby added to
Article I read in its entirety as follows:
"TRANSACTION CONSIDERATION" has the meaning specified in Section
2.4(a).
2. SECTION 2.4(a) of the Merger Agreement shall be amended to read in its
entirety as follows:
(a) (i) DLB COMMON STOCK. At the Effective Time, by virtue of the Merger
and without any action on the part of any holder thereof (but subject to the
provisions of Section 2.5(e)), each share of DLB Common Stock that is issued and
outstanding immediately prior to the Effective Time (other than shares of DLB
Common Stock held by Dissenting Stockholders and other than shares of DLB Common
Stock canceled pursuant to Section 2.4(b) hereof) shall be converted into the
right to receive: (w) a fractional interest in a share of CHK Common Stock equal
to the CHK Common Stock Consideration; (x) the Cash Consideration (together with
the CHK Common Stock Consideration, the "TRANSACTION CONSIDERATION"); and (y)
that number of shares of Bayard Common Stock owned by DLB immediately prior to
the Effective Time divided by the number of shares of DLB Common Stock issued
and outstanding immediately prior to the Effective Time (collectively, the
"MERGER CONSIDERATION"); provided that the number of shares of Bayard Common
Stock that any holder of DLB Common Stock would otherwise be entitled to receive
shall be rounded to the nearest whole number of shares of Bayard Common Stock
and in no event shall the number of shares of Bayard Common Stock subject to
issuance as Merger Consideration exceed the number of shares of Bayard Common
Stock owned by DLB immediately prior to the Effective Time. Each share of DLB
Common Stock, when so converted, shall automatically be canceled and retired,
shall cease to exist and shall no longer be outstanding; and the holder of any
certificate representing any such shares shall cease to have any rights with
respect thereto.
(ii) The Merger Consideration shall be subject to equitable adjustment in
the event of any stock split, stock dividend, reverse stock split or other
change in the number of shares of CHK Common Stock, DLB Common Stock or Bayard
Common Stock outstanding prior to Closing.
3. SECTION 2.4(f) of the Merger Agreement shall be deleted in its entirety.
4. SECTIONS 2.5(a), (b)(ii), (b)(iv) and (c) of the Merger Agreement shall
be amended in their entirety to delete any references to Section 2.4(f) and to
read as follows:
(a) EXCHANGE FUND. Prior to the Effective Time, Merger Sub shall, and CHK
shall cause Merger Sub to, deposit with the Exchange Agent, for the benefit of
the holders of shares of DLB Common Stock and for exchange in accordance with
this Agreement, cash equal to the aggregate amount of the Cash Consideration and
certificates representing the shares of CHK Common Stock to be issued in
exchange for shares of DLB Common Stock pursuant to Section 2.4(a), and DLB
shall deposit with the Exchange Agent, for the benefit of the holders of shares
of DLB Common Stock and for delivery in accordance with this Agreement,
certificates representing the shares of Bayard Common Stock to be delivered as
part of the Merger Consideration pursuant to Section 2.4(a) and at the Effective
Time all such shares so deposited with the Exchange Agent shall be free and
clear of any Lien arising under CHK, Merger Sub or any of the DLB Companies.
Such cash and shares of CHK Common Stock and Bayard Common Stock together with
any dividends or distributions with respect thereto (as provided in Section
2.5(c)) are referred to herein as the "EXCHANGE FUND." The Exchange Agent,
pursuant to irrevocable instructions consistent with the terms of this
Agreement, shall deliver the Cash Consideration, CHK Common Stock and Bayard
Common Stock (and cash in lieu of fractional shares and any unpaid dividends and
distributions) to be delivered pursuant to Section 2.4(a), out of the Exchange
Fund, and the Exchange Fund shall not be used for any other purpose whatsoever.
Subject to Section 2.5(b)(v) hereof, the Exchange Agent shall not be entitled to
vote or exercise any rights of ownership with respect to the CHK Common Stock
and Bayard Common Stock held by it from time to time hereunder, except that it
shall receive and hold all dividends or other distributions paid or distributed
with respect thereto for the account of Persons entitled thereto.
(b) EXCHANGE PROCEDURES.
ANNEX A
2
206
(ii) Upon surrender to the Exchange Agent of a DLB Certificate for
cancellation, together with a duly completed and executed letter of transmittal
and any other required documents (including, in the case of any Person
constituting an "affiliate" of DLB for purposes of Rule 145(c) and (d) under the
Securities Act, a written agreement from such Person as described in Section
5.11 if not theretofore delivered to CHK), (A) the holder of such DLB
Certificate shall be entitled to receive in exchange therefor cash in accordance
with Section 2.4(a), stock certificates representing the number of whole shares
of CHK Common Stock and whole shares of Bayard Common Stock that such holder has
the right to receive pursuant to Section 2.4(a), any cash in lieu of fractional
shares of CHK Common Stock as provided in Section 2.5(e), and any unpaid
dividends and distributions that such holder has the right to receive pursuant
to Section 2.5(c) (after giving effect to any required withholding of taxes);
provided, however, that no certificates representing shares of Bayard Common
Stock (including, without limitation, any dividends or distributions on the
shares of Bayard Common Stock payable in shares of Bayard Common Stock) shall be
distributed by the Exchange Agent until the Bayard Distribution Date and (B) the
DLB Certificate so surrendered shall forthwith be canceled. No interest shall be
paid or accrued on the Merger Consideration, cash in lieu of fractional shares
or unpaid dividends and distributions, if any, payable to holders of DLB
Certificates. The Exchange Agent shall accept such certificates upon compliance
with such reasonable terms and conditions as the Exchange Agent may impose to
effect an orderly exchange thereof in accordance with normal exchange practices.
Until surrendered as contemplated by this Section 2.5(b), each certificate for
shares of DLB Common Stock shall be deemed at any time after the Effective Time
to represent only the right to receive upon such surrender the Merger
Consideration as contemplated by Section 2.4(a).
(iv) Until surrendered as contemplated by this Section 2.5(b), each DLB
Certificate shall be deemed at any time after the Effective Time to represent
only the right to receive upon such surrender cash and stock certificates
representing the Merger Consideration as provided in Section 2.4(a) in
accordance with the provisions of this Section 2.5 (along with any cash in lieu
of fractional shares and any unpaid dividends and distributions).
(c) DISTRIBUTIONS WITH RESPECT TO UNEXCHANGED SHARES. No dividends or other
distributions with respect to CHK Common Stock and Bayard Common Stock declared
or made after the Effective Time with a record date after the Effective Time
shall be paid to the holder of any unsurrendered DLB Certificate. Subject to the
effect of applicable laws, (i) at the time of the surrender of a DLB Certificate
for exchange in accordance with the provisions of this Section 2.5, there shall
be paid to the surrendering holder, without interest, the amount of dividends or
other distributions (having a record date after the Effective Time but on or
prior to surrender and a payment date on or prior to surrender) theretofore paid
with respect to the number of whole shares of CHK Common Stock, in which case
such dividends or other distributions on CHK Common Stock shall not be paid to
the surrendering holder, and Bayard Common Stock that such holder is entitled to
receive (less the amount of any withholding taxes that may be required with
respect thereto); and (ii) at the appropriate payment date, there shall be paid
to the surrendering holder, without interest, the amount of dividends or other
distributions (having a record date after the Effective Time but on or prior to
surrender and a payment date subsequent to surrender) payable with respect to
the number of whole shares of CHK Common Stock and Bayard Common Stock that such
holder receives or, with respect to Bayard Common Stock held by the Exchange
Agent prior to the Bayard Distribution Date that such holder is entitled to
receive (less the amount of any withholding taxes that may be required with
respect thereto).
5. SECTION 3.3(a) of the Merger Agreement shall be amended in its entirety
to delete any references to "Cash Exchange Ratio" and shall read as follows:
3.3 BOARD ACTION, AUTHORITY AND ENFORCEABILITY. (a) The Board of Directors
of DLB (at a meeting duly called and held) has (i) determined that the Merger is
fair to and is in the best interests of the DLB stockholders and (ii) resolved
to approve the Merger and recommend the approval and adoption of this Agreement
by the DLB stockholders. Pursuant to its Amended and Restated Certificate of
Incorporation, DLB elected that it would not be governed by the Control Share
Acquisition Act, Sections 1145 through 1155 of Title 18 of the Oklahoma
Statutes, and Section 1090.3 of the Oklahoma General Corporation Act. Lehman
ANNEX A
3
207
Brothers Inc., DLB's financial advisor, has delivered a written opinion to the
Board of Directors of DLB that, as of the date thereof and on the basis of and
subject to the matters set forth therein, the Transaction Consideration to be
received by the stockholders of DLB in exchange for the sale of DLB's
Mid-Continent Operations was fair from a financial point of view to such
holders.
6. SECTION 5.1(b) of the Merger Agreement shall be amended to add the
phrase "; provided, further, however, that DLB may contribute the capital stock
of DLB International, Inc. to WRT" at the end of clause (iii) thereof.
7. SECTION 5.7 of the Merger Agreement shall be amended in its entirety to
delete any references to Section 2.4(f) and shall read as follows:
5.7 STOCK LISTING. CHK shall use commercially reasonable efforts to cause
the CHK Common Stock to be issued in the Merger to be approved for listing on
the New York Stock Exchange prior to the Effective Time, subject to official
notice of issuance.
8. SECTION 7.1(b) of the Merger Agreement shall be amended to read in its
entirety as follows:
"(b) By either DLB or CHK if (i) the Merger has not been consummated
by May 31, 1998 (provided, however, that the right to terminate this
Agreement pursuant to this clause (i) shall not be available to any party
whose breach of any representation or warranty or failure to perform any
covenant or agreement under this Agreement has been the cause of or
resulted in the failure of the Merger to occur on or before such date);
(ii) any Governmental Authority shall have issued an order, decree or
ruling or taken any other action permanently restraining, enjoining or
otherwise prohibiting the Merger and such order, decree, ruling or other
action shall have become final and nonappealable (provided, however, that
the right to terminate this Agreement pursuant to this clause (ii) shall
not be available to any party until such party has used all commercially
reasonable efforts to remove such injunction, order or decree); or (iii)
the stockholder approvals referred to in Section 5.5 shall not have been
obtained by reason of the failure to obtain the requisite vote upon a vote
at a duly held meeting of DLB stockholders or at any adjournment or
postponement thereof;"
9. Section 7.1(f) of the Merger Agreement shall be deleted in its entirety.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment No. 2 to
be signed by their duly authorized representatives as of the day and year first
above written.
DLB OIL & GAS, INC. CHESAPEAKE ENERGY CORPORATION
By: /s/ MIKE LIDDELL By: /s/ MARCUS C. ROWLAND
- -------------------------------------------- -------------------------------------------------
Mike Liddell Marcus C. Rowland
Chief Executive Officer Senior Vice President -- Finance and
Chief Financial Officer
CHESAPEAKE MERGER CORP.
/s/ MARCUS C. ROWLAND
-------------------------------------------------
Marcus C. Rowland
Vice President
ANNEX A
4
208
AMENDMENT NO. 3
TO
AGREEMENT AND PLAN OF MERGER
This Amendment No. 3 to the Agreement and Plan of Merger ("AMENDMENT NO.
3") is made and entered as of March 24, 1998 by and among Chesapeake Energy
Corporation, an Oklahoma corporation ("CHK"), Chesapeake Merger Corp., an
Oklahoma corporation and indirect wholly owned subsidiary of CHK ("MERGER SUB"),
and DLB Oil & Gas, Inc., an Oklahoma corporation ("DLB").
RECITALS:
WHEREAS, on October 22, 1997, the parties hereto entered into an Agreement
and Plan of Merger, as amended by Amendment No. 1 thereto, dated as of December
22, 1997, and Amendment No. 2 thereto, dated as of February 11, 1998 (as
amended, the "MERGER AGREEMENT") providing for the merger of Merger Sub with and
into DLB (the "MERGER"); and
WHEREAS, on March 24, 1998, DLB International, Inc., an Oklahoma
corporation and a wholly owned subsidiary of DLB ("DLB INTERNATIONAL"), and
Waggoner (Barbados), Ltd., a Barbados corporation ("WAGGONER"), entered into an
Agreement for Sale and Purchase of Preferred Stock and Promissory Note of
Waggoner (Barbados), Ltd. (the "WAGGONER AGREEMENT") providing for, among other
things, the purchase of the assets of DLB International subject to the terms and
conditions set forth therein; and DLB International desires to transfer to DLB
prior to the Effective Time (as defined in the Merger Agreement) DLB
International's right to receive the net proceeds from the sale of such assets
pursuant to the Waggoner Agreement; and
WHEREAS, DLB is the holder of Beneficial Interests of WRT Creditors
Liquidating Trust, a liquidating trust created pursuant to the WRT Plan of
Reorganization (as defined in the Merger Agreement), and DLB desires to assign
such Beneficial Interests to an escrow agent for the benefit of the DLB
stockholders immediately prior to the Effective Time; and
WHEREAS, the parties hereto have agreed to modify the Merger Consideration
to be received by the stockholders of DLB to include (i) the contingent right to
receive the net proceeds from the sale of the assets of DLB International
pursuant to the Waggoner Agreement and (ii) the contingent right to receive any
net distributions made in respect of the Beneficial Interests; and
WHEREAS, pursuant to Section 8.2 of the Merger Agreement the parties now
mutually desire to amend the Merger Agreement as set forth below.
NOW, THEREFORE, in consideration of the premises and the representations,
warranties, covenants and agreements contained herein and in the Merger
Agreement, the parties hereto, intending to be legally bound, agree as follows:
1. The following definitions shall be added to Article I of the Merger
Agreement:
A. "BARBADOS CONTINGENT PAYMENT RIGHT" means the right to receive a
pro rata share of the net cash proceeds from the sale of the assets of DLB
International pursuant to the Waggoner Agreement.
B. "LIQUIDATING TRUST CONTINGENT PAYMENT RIGHT" means the right to
receive a pro rata share of any net distributions made in respect of the
WRT Beneficial Interests owned by DLB immediately prior to the Effective
Time.
C. "WAGGONER AGREEMENT" means the Agreement for Sale and Purchase of
Preferred Stock and Promissory Note of Waggoner (Barbados), Ltd., dated as
of March 24, 1998, by and between DLB International and Waggoner
(Barbados), Ltd.
D. "WRT BENEFICIAL INTERESTS" means the Beneficial Interests of WRT
Creditors Liquidating Trust.
ANNEX A
209
E. "WRT CREDITORS LIQUIDATING TRUST" means the trust formed pursuant
to that certain Liquidating Trust Agreement, dated as of July 10, 1997, by
and among WRT Energy Corporation and Goldin Associates, L.L.C., as Trustee.
2. SECTION 2.4(a)(i) of the Merger Agreement shall be amended to read in
its entirety as follows:
(a) (i) DLB COMMON STOCK. At the Effective Time, by virtue of the
Merger and without any action on the part of any holder thereof (but
subject to the provisions of Section 2.5(e)), each share of DLB Common
Stock that is issued and outstanding immediately prior to the Effective
Time (other than shares of DLB Common Stock held by Dissenting Stockholders
and other than share of DLB Common Stock canceled pursuant to Section
2.4(b) hereof) shall be converted into the right to receive: (A) a
fractional interest in a share of CHK Common Stock equal to the CHK Common
Stock Consideration; (B) the Cash Consideration (together with the CHK
Common Stock Consideration, the "Transaction Consideration"); (C) that
number of shares of Bayard Common Stock owned by DLB immediately prior to
the Effective Time divided by the number of shares of DLB Common Stock
issued and outstanding immediately prior to the Effective Time; (D) one
Liquidating Trust Contingent Payment Right; and (E) one Barbados Contingent
Payment Right (collectively, the "Merger Consideration"); provided that the
number of shares of Bayard Common Stock that any holder of DLB Common Stock
would otherwise be entitled to receive shall be rounded to the nearest
whole number of shares of Bayard Common Stock and in no event shall the
number of shares of Bayard Common Stock subject to issuance as Merger
Consideration exceed the number of shares of Bayard Common Stock owned by
DLB immediately prior to the Effective Time. Each share of DLB Common
Stock, when so converted, shall automatically be canceled and retired,
shall cease to exist and shall no longer be outstanding; and the holder of
any certificate representing any such shares shall cease to have any rights
with respect thereto.
3. SECTION 5.1(b) of the Merger Agreement shall be amended by amending the
last clause thereto in its entirety to read as follows:
"provided that, notwithstanding anything in this Section 5.1 to the
contrary, DLB may sell, contribute or assign to WRT or any other Person,
for consideration or without consideration, the WRT Claims Interest,
including the WRT Beneficial Interests."
IN WITNESS WHEREOF, the parties hereto have caused this Amendment No. 3 to
be signed by their duly authorized representatives as of the day and year first
above written.
DLB OIL & GAS, INC. CHESAPEAKE ENERGY CORPORATION
By: /s/ MIKE LIDDELL By: /s/ MARCUS C. ROWLAND
-------------------------------------- -------------------------------------------------
Mike Liddell Marcus C. Rowland
Chief Executive Officer Senior Vice President -- Finance and
Chief Financial Officer
CHESAPEAKE MERGER CORP.
By: /s/ MARCUS C. ROWLAND
-------------------------------------------------
Marcus C. Rowland
Vice President
ANNEX A
210
ANNEX B
OPINION OF LEHMAN BROTHERS
211
February 11, 1998
Board of Directors
DLB Oil & Gas, Inc.
1601 N.W. Expressway
Oklahoma City, OK 73118-1401
Members of the Board,
We understand that DLB Oil & Gas, Inc. ("DLB") proposes to amend its
Agreement and Plan of Merger dated October 22, 1997 (as amended, the "Merger
Agreement") with Chesapeake Energy Corporation ("Chesapeake") and Chesapeake
Merger Corp., a wholly owned subsidiary of Chesapeake ("Merger Corp."), pursuant
to which Merger Corp. will be merged with and into DLB (the "Merger") and upon
the effectiveness of the Merger (the "Effective Time"), each share of the common
stock, par value $.001 per share, of DLB (the "DLB Common Stock") will be
converted into the right to receive (1) a fractional interest in a share of
common stock, par value $0.10 per share (the "CHK Common Stock"), of Chesapeake
equal to 5,000,000 shares of CHK Common Stock divided by the number of fully
diluted shares of DLB Common Stock issued and outstanding at the Effective Time
(the "Exchange Ratio"); (2) an amount of cash equal to $17.5 million divided by
the number of fully diluted shares of DLB Common Stock issued and outstanding at
the Effective Time (together with the Exchange Ratio, the "Transaction
Consideration"); and (3) such number of shares of the common stock, par value
$.01 per share (the "Bayard Common Stock"), of Bayard Drilling Technologies,
Inc. ("Bayard") as determined in accordance with the Merger Agreement. We
further understand that prior to the Merger, DLB's direct or indirect interest
in Waggoner (Barbados) Ltd. ("Waggoner") will be transferred to WRT Energy
Corporation ("WRT") and that thereafter, the shares of WRT Common Stock (as
defined in the Merger Agreement) that DLB owns immediately prior to the Merger
will be spun off to the stockholders of DLB effective immediately prior to the
Merger. The terms and conditions of the transactions described in this paragraph
(collectively, the "Proposed Transaction") are described in more detail in the
Merger Agreement. As a result of the Proposed Transaction DLB will transfer its
Mid-Continent operations (the "Operations" or the "Mid-Continent Operations") to
Chesapeake for a purchase price equal to the Transaction Consideration
multiplied by the number of fully diluted shares of DLB Common Stock issued and
outstanding at the Effective Time and the assumption by Chesapeake of at least
$85 million of indebtedness (the "Asset Transfer").
We have been requested by the Board of Directors of DLB to render our
opinion with respect to the fairness, from a financial point of view, to DLB's
stockholders of the Transaction Consideration to be received by such
stockholders in exchange for the sale of the Mid-Continent Operations to
Chesapeake. We have not been requested to opine as to, and our opinion does not
in any manner address, (1) the value, or the fairness, from a financial point of
view, to DLB's stockholders of, the Bayard Common Stock or the WRT Common Stock
to be received by such stockholders in the Proposed Transaction, (2) the
fairness, from a financial point of view, to DLB's stockholders of the transfer
of DLB's interest in Waggoner to WRT or the spin off of the WRT Common Stock or
(3) DLB's underlying business decision to proceed with or effect the Asset
Transfer or the Proposed Transaction.
In arriving at our opinion, we reviewed and analyzed: (1) the Merger
Agreement, Amendment No. 1 thereto and a draft dated February 10, 1998 of
Amendment No. 2 thereto and the specific terms of the Proposed Transaction, (2)
publicly available information concerning DLB, the Mid-Continent Operations and
Chesapeake that we believe to be relevant to our analysis, (3) financial and
operating information with respect to the business, operations and prospects of
the Mid-Continent Operations and Chesapeake furnished to us by DLB and
Chesapeake, respectively, including reserve estimates prepared by DLB, DeGolyer
and MacNaughton and H.J. Gruy and Associates, Inc. (collectively, "DLB's
Petroleum Engineers") for the Operations and reserve estimates prepared by
Chesapeake and Williamson Petroleum Consultants, Inc. (together with DLB's
B-1
212
Petroleum Engineers, the "Petroleum Engineers") for Chesapeake (collectively,
the "Reserve Reports"), (4) a trading history of the DLB Common Stock from
February 9, 1996 to the present, (5) a trading history of the Chesapeake Common
Stock from February 9, 1996 to the present and a comparison of that trading
history with those of other companies that we deemed relevant, (6) a comparison
of the historical financial results and present financial condition of the
Mid-Continent Operations and Chesapeake with those of other businesses and
companies that we deemed relevant, (7) a comparison of the financial terms of
the Asset Transfer with the financial terms of certain other transactions that
we deemed relevant, and (8) the results of our efforts to solicit indications of
interest from third parties with respect to a purchase of all or a portion of
DLB's business. In addition, we have had discussions with the managements of DLB
and Chesapeake concerning their respective business, operations, assets,
financial condition and prospects and have undertaken such other studies,
analyses and investigations as we deemed appropriate.
In arriving at our opinion, we have assumed and relied upon the accuracy
and completeness of the financial and other information used by us without
assuming any responsibility for independent verification of such information and
have further relied upon the assurances of the managements of DLB and Chesapeake
that they are not aware of any facts or circumstances that would make such
information inaccurate or misleading. With respect to the operating projections
of the Operations and Chesapeake, upon advice of DLB and Chesapeake, we have
assumed that such projections have been reasonably prepared on bases reflecting
the best currently available estimates and judgments of the managements of DLB
and Chesapeake, as the case may be, as to the future performance of the
Operations and Chesapeake, respectively, and that the Operations and Chesapeake
will perform substantially in accordance with such projections. We also have
assumed that the Reserve Reports have been reasonably prepared and reflect the
best currently available estimates and judgments of DLB and Chesapeake and their
respective Petroleum Engineers as to the respective reserves of the Operations
and Chesapeake, their future hydrocarbon production and associated costs. In
arriving at our opinion, we have not conducted a physical inspection of the
properties and facilities of DLB or Chesapeake and have not made or obtained any
evaluations or appraisals of the assets or liabilities of DLB or Chesapeake
(other than the Reserve Reports). Our opinion necessarily is based upon market,
economic and other conditions as they exist on, and can be evaluated as of, the
date of this letter.
Based upon and subject to the foregoing, we are of the opinion as of the
date hereof that, from a financial point of view, the Transaction Consideration
to be received by the stockholders of DLB in exchange for the sale of the
Mid-Continent Operations to Chesapeake is fair to such stockholders.
We have acted as financial advisor to DLB in connection with the Merger and
will receive a fee for our services which is contingent upon the consummation of
the Merger. In addition, DLB has agreed to indemnify us for certain liabilities
that may arise out of our engagement as financial advisor to DLB. We also have
performed in the past and continue to perform various investment banking
services for DLB and have in the past performed various investment banking
services for Chesapeake and have received customary fees for such services. In
addition, Lehman Brothers or its affiliates have made a loan to DLB with a
current outstanding principal amount of $23 million and such loan is due in full
upon closing of the Proposed Transaction. In the ordinary course of our
business, we actively trade in the debt and equity securities of DLB and
Chesapeake for our own account and for the accounts of our customers and,
accordingly, may at any time hold a long or short position in such securities.
This opinion is for the use and benefit of the Board of Directors of DLB
and is rendered to the Board of Directors in connection with its consideration
of the Asset Transfer and the Proposed Transaction. This opinion is not intended
to be and does not constitute a recommendation to any stockholder of DLB as to
how such stockholder should vote with respect to the Proposed Transaction.
Very truly yours,
LEHMAN BROTHERS
B-2
213
ANNEX C
APPRAISAL RIGHTS
214
ANNEX C
OKLAHOMA GENERAL CORPORATION ACT
SECTION 1091: APPRAISAL RIGHTS
A. Any shareholder of a corporation of this state who holds shares of stock
on the date of the making of a demand pursuant to the provisions of subsection D
of this section with respect to such shares, who continuously holds such shares
through the effective date of the merger or consolidation, who has otherwise
complied with the provisions of subsection D of this section and who has neither
voted in favor of the merger or consolidation nor consented thereto in writing
pursuant to the provisions of Section 1073 of this title shall be entitled to an
appraisal by the district court of the fair value of his shares of stock under
the circumstances described in subsections B and C of this section. As used in
this section, the word "shareholder" means a holder of record of stock in a
stock corporation and also a member of record of a nonstock corporation; the
words "stock" and "share" mean and include what is ordinarily meant by those
words and also membership or membership interest of a member of a nonstock
corporation. The provisions of this subsection shall be effective only with
respect to mergers or consolidations consummated pursuant to an agreement of
merger or consolidation entered into after November 1, 1988.
B. 1. Except as otherwise provided for in this subsection, appraisal rights
shall be available for the shares of any class or series of stock of a
constituent corporation in a merger or consolidation or of the acquired
corporation in a share acquisition, to be effected pursuant to the provisions of
Sections 1081, 1082, 1086, 1087, or 1091.1 of this title or Section 12 of this
act.
2. a. No appraisal rights under this section shall be available for
the shares of any class or series of stock which, at the record date fixed
to determine the shareholders entitled to receive notice of and to vote at
the meeting of shareholders to act upon the agreement of merger or
consolidation, were either:
(1) listed on a national securities exchange; or
(2) held of record by more than two thousand shareholders.
b. In addition, no appraisal rights shall be available for any
shares of stock of the constituent corporation surviving a merger if the
merger did not require for its approval the vote of the shareholders of
the surviving corporation as provided for in subsection F of Section
1081 of this title.
3. Notwithstanding the provisions of paragraph 2 of this subsection,
appraisal rights provided for in this section shall be available for the
shares of any class or series of stock of a constituent corporation if the
holders thereof are required by the terms of an agreement of merger or
consolidation pursuant to the provisions of Sections 1081, 1082, 1086 or
1087 of this title to accept for such stock anything except:
a. shares of stock of the corporation surviving or resulting from
such merger or consolidation; or
b. shares of stock of any other corporation which at the effective
date of the merger or consolidation will be either listed on a national
securities exchange or held of record by more than two thousand
shareholders; or
c. cash in lieu of fractional shares of the corporations described
in subparagraphs a and b of this paragraph; or
d. any combination of the shares of stock and cash in lieu of the
fractional shares described in subparagraphs a, b and c of this
paragraph.
4. In the event all of the stock of a subsidiary Oklahoma corporation
party to a merger effected pursuant to the provisions of Section 1083 of
this title is not owned by the parent corporation immediately prior to the
merger, appraisal rights shall be available for the shares of the
subsidiary Oklahoma corporation.
C. Any corporation may provide in its certificate of incorporation that
appraisal rights under this section shall be available for the shares of any
class or series of its stock as a result of an amendment to its certificate
C-1
215
of incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially all of the assets of
the corporation. If the certificate of incorporation contains such a provision,
the procedures of this section, including those set forth in subsections D and E
of this section, shall apply as nearly as is practicable.
D. Appraisal rights shall be perfected as follows:
1. If a proposed merger or consolidation for which appraisal rights
are provided under this section is to be submitted for approval at a
meeting of shareholders, the corporation, not less than twenty (20) days
prior to the meeting, shall notify each of its shareholders entitled to
such appraisal rights that appraisal rights are available for any or all of
the shares of the constituent corporations, and shall include in such
notice a copy of this section. Each shareholder electing to demand the
appraisal of the shares of the shareholder shall deliver to the
corporation, before the taking of the vote on the merger or consolidation,
a written demand for appraisal of the shares of the shareholder. Such
demand will be sufficient if it reasonably informs the corporation of the
identity of the shareholder and that the shareholder intends thereby to
demand the appraisal of the shares of the shareholder. A proxy or vote
against the merger or consolidation shall not constitute such a demand. A
shareholder electing to take such action must do so by a separate written
demand as herein provided. Within ten (10) days after the effective date of
such merger or consolidation, the surviving or resulting corporation shall
notify each shareholder of each constituent corporation who has complied
with the provisions of this subsection and has not voted in favor of or
consented to the merger or consolidation as of the date that the merger or
consolidation has become effective; or
2. If the merger or consolidation was approved pursuant to the
provisions of Section 1073 or 1083 of this title, the surviving or
resulting corporation, either before the effective date of the merger or
consolidation or within ten (10) days thereafter, shall notify each of the
shareholders entitled to appraisal rights of the effective date of the
merger or consolidation and that appraisal rights are available for any or
all of the shares of the constituent corporation, and shall include in such
notice a copy of this section. The notice shall be sent by certified or
registered mail, return receipt requested, addressed to the shareholder at
the address of the shareholder as it appears on the records of the
corporation. Any shareholder entitled to appraisal rights may, within
twenty (20) days after the date of mailing of the notice, demand in writing
from the surviving or resulting corporation the appraisal of the shares of
the shareholder. Such demand will be sufficient if it reasonably informs
the corporation of the identity of the shareholder and that the shareholder
intends to demand the appraisal of the shares of the shareholder.
E. Within one hundred twenty (120) days after the effective date of the
merger or consolidation, the surviving or resulting corporation or any
shareholder who has complied with the provisions of subsections A and D of this
section and who is otherwise entitled to appraisal rights, may file a petition
in district court demanding a determination of the value of the stock of all
such shareholders. Provided, however, at any time within sixty (60) days after
the effective date of the merger or consolidation, any shareholder shall have
the right to withdraw the demand of the shareholder for appraisal and to accept
the terms offered upon the merger or consolidation. Within one hundred twenty
(120) days after the effective date of the merger or consolidation, any
shareholder who has complied with the requirements of subsections A and D of
this section, upon written request, shall be entitled to receive from the
corporation surviving the merger or resulting from the consolidation a statement
setting forth the aggregate number of shares not voted in favor of the merger or
consolidation and with respect to which demands for appraisal have been received
and the aggregate number of holders of such shares. Such written statement shall
be mailed to the shareholder within ten (10) days after the shareholder's
written request for such a statement is received by the surviving or resulting
corporation or within ten (10) days after expiration of the period for delivery
of demands for appraisal pursuant to the provisions of subsection D of this
section, whichever is later.
F. Upon the filing of any such petition by a shareholder, service of a copy
thereof shall be made upon the surviving or resulting corporation, which, within
twenty (20) days after such service, shall file in the office of the court clerk
of the district court in which the petition was filed a duly verified list
containing the names and addresses of all shareholders who have demanded payment
for their shares and with whom agreements as to
C-2
216
the value of their shares have not been reached by the surviving or resulting
corporation. If the petition shall be filed by the surviving or resulting
corporation, the petition shall be accompanied by such a duly verified list. The
court clerk, if so ordered by the court, shall give notice of the time and place
fixed for the hearing of such petition by registered or certified mail to the
surviving or resulting corporation and to the shareholders shown on the list at
the addresses therein stated. Such notice shall also be given by one or more
publications at least one (1) week before the day of the hearing, in a newspaper
of general circulation published in the City of Oklahoma City, Oklahoma, or such
publication as the court deems advisable. The forms of the notices by mail and
by publication shall be approved by the court, and the costs thereof shall be
borne by the surviving or resulting corporation.
G. At the hearing on such petition, the court shall determine the
shareholders who have complied with the provisions of this section and who have
become entitled to appraisal rights. The court may require the shareholders who
have demanded an appraisal for their shares and who hold stock represented by
certificates to submit their certificates of stock to the court clerk for
notation thereon of the pendency of the appraisal proceedings; and if any
shareholder fails to comply with such direction, the court may dismiss the
proceedings as to such shareholder.
H. After determining the shareholders entitled to an appraisal, the court
shall appraise the shares, determining their fair value exclusive of any element
of value arising from the accomplishment or expectation of the merger or
consolidation, together with a fair rate of interest, if any, to be paid upon
the amount determined to be the fair value. In determining such fair value, the
court shall take into account all relevant factors. In determining the fair rate
of interest, the court may consider all relevant factors, including the rate of
interest which the surviving or resulting corporation would have to pay to
borrow money during the pendency of the proceeding. Upon application by the
surviving or resulting corporation or by any shareholder entitled to participate
in the appraisal proceeding, the court may, in its discretion, permit discovery
or other pretrial proceedings and may proceed to trial upon the appraisal prior
to the final determination of the shareholder entitled to an appraisal. Any
shareholder whose name appears on the list filed by the surviving or resulting
corporation pursuant to the provisions of subsection F of this section and who
has submitted the certificates of stock of the shareholder to the court clerk,
if such is required, may participate fully in all proceedings until it is
finally determined that the shareholder is not entitled to appraisal rights
pursuant to the provisions of this section.
I. The court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting corporation to the
shareholders entitled thereto. Interest may be simple or compound, as the court
may direct. Payment shall be so made to each such shareholder, in the case of
holders of uncertificated stock immediately, and in the case of holders of
shares represented by certificates upon the surrender to the corporation of the
certificates representing such stock. The court's decree may be enforced as
other decrees in the district court may be enforced, whether such surviving or
resulting corporation be a corporation of this state or of any other state.
J. The costs of the proceeding may be determined by the court and taxed
upon the parties as the court deems equitable in the circumstances. Upon
application of a shareholder, the court may order all or a portion of the
expenses incurred by any shareholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorney's fees and the
fees and expenses of experts, to be charged pro rata against the value of all of
the shares entitled to an appraisal.
K. From and after the effective date of the merger or consolidation, no
shareholder who has demanded the appraisal rights of the shareholder as provided
for in subsection D of this section shall be entitled to vote such stock for any
purpose or to receive payment of dividends or other distributions on the stock,
except dividends or other distributions payable to shareholders of record at a
date which is prior to the effective date of the merger or consolidation;
provided, however, that if no petition for an appraisal shall be filed within
the time provided for in subsection E of this section, or if such shareholder
shall deliver to the surviving or resulting corporation a written withdrawal of
the shareholder's demand for an appraisal and an acceptance of the merger or
consolidation, either within sixty (60) days after the effective date of the
merger or consolidation as provided for in subsection E of this section or
thereafter with the written approval of the
C-3
217
corporation, then the right of such shareholder to an appraisal shall cease.
Provided, however, no appraisal proceeding in the district court shall be
dismissed as to any shareholder without the approval of the court, and such
approval may be conditioned upon such terms as the court deems just.
L. The shares of the surviving or resulting corporation into which the
shares of such objecting shareholders would have been converted had they
assented to the merger or consolidation shall have the status of authorized and
unissued shares of the surviving or resulting corporation. (Last amended by Ch.
328, L. '90, eff. 9-1-90.)
C-4
218
ANNEX D
PROSPECTUS OF BAYARD DRILLING TECHNOLOGIES, INC.
219
PROSPECTUS ANNEX D
MARCH 30, 1998
2,955,000 SHARES
BAYARD DRILLING TECHNOLOGIES, INC.
COMMON STOCK
----------
This Prospectus relates to the contemplated distribution (the "Merger
Share Distribution") of 2,955,000 shares (the "Shares") of Common Stock, par
value $0.01 per share ("Common Stock"), of Bayard Drilling Technologies, Inc.,
a Delaware corporation ("Bayard" or the "Company"), currently held by DLB Oil &
Gas, Inc., an Oklahoma corporation ("DLB"), on a pro rata basis to the holders
of record of shares of common stock, par value $.001 per share ("DLB Stock"),
of DLB in connection with the proposed merger (the "Merger") of Chesapeake
Merger Corp., an Oklahoma corporation ("Merger Sub") and indirect wholly owned
subsidiary of Chesapeake Energy Corporation, an Oklahoma corporation
("Chesapeake"), with and into DLB to be effected pursuant to the Agreement and
Plan of Merger, dated as of October 22, 1997, as amended (the "Merger
Agreement"), among Chesapeake, Merger Sub and DLB. As a result of the Merger
Share Distribution, the holders of DLB Stock will receive in respect of each
share of DLB Stock that number of shares of Common Stock obtained by dividing
2,955,000 by the number of shares of DLB Stock issued and outstanding
immediately prior to the Effective Time. Based on the assumption that there
will be 12,970,000 shares of DLB Stock outstanding immediately prior to the
effective time ("Effective Time") of the Merger, a holder of DLB Stock would
receive 0.2277 Shares for each share of DLB Stock held. See "Prospectus
Summary -- The Merger Share Distribution." In addition to shares of Common
Stock, as a result of the Merger and a related distribution (the "WRT
Spin-Off") of all of DLB's equity interest in WRT Energy Corporation, a
Delaware corporation ("WRT"), holders of DLB Stock will receive (i) shares of
common stock, par value $0.01 per share ("Chesapeake Stock"), of Chesapeake,
(ii) shares of common stock, par value $.01 per share ("WRT Stock"), of WRT,
(iii) cash and (iv) certain contingent payment rights. The Company will not
receive any proceeds from the Merger Share Distribution. The Merger Share
Distribution will be treated as a taxable transaction for federal income tax
purposes to the holders of DLB Stock. See "Federal Income Tax Considerations."
The Merger Agreement and the Merger have each been approved by the
Board of Directors of DLB. Under Oklahoma law, the affirmative vote of the
holders of a majority of the outstanding shares of DLB Stock is required to
approve the Merger. Holders of a majority of the DLB Stock entitled to vote on
the Merger entered into irrevocable proxy agreements with Chesapeake whereby
such stockholders agreed to vote (or to execute a written consent in lieu of a
vote with respect to) all shares of DLB Stock owned by them in favor of the
proposal to approve the Merger Agreement and the Merger and granted Chesapeake
a proxy to vote (or to execute a written consent in lieu of a vote with respect
to) such shares in favor of the Merger. On March 25, 1998, Chesapeake, as
attorney-in-fact, executed a written consent in lieu of a vote with respect to
a majority of the shares of DLB Stock approving the Merger. As a result, the
approval of the Merger is assured. It is expected that the Merger will be
consummated as soon as practicable following the twentieth business day after
the mailing of the Information Statement/Prospectus of DLB and Chesapeake (the
"Information Statement/Prospectus"), of which this Prospectus is included as
Annex D.
The Common Stock is traded on the American Stock Exchange ("AMEX")
under the symbol "BDI." On March 27, 1998, the last sale price of the Common
Stock, as reported by the AMEX, was $16 1/4 per share. See "Price Range of
Common Stock and Dividends."
DLB STOCKHOLDERS WHO WILL RECEIVE SHARES OF COMMON STOCK IN THE MERGER
SHARE DISTRIBUTION SHOULD CAREFULLY CONSIDER THE MATTERS SET FORTH UNDER THE
CAPTION "RISK FACTORS" BEGINNING ON PAGE 9 OF THIS PROSPECTUS.
----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
ALL INFORMATION CONTAINED IN THIS PROSPECTUS REGARDING DLB,
CHESAPEAKE, THE MERGER AND THE OTHER TRANSACTIONS CONTEMPLATED BY THE MERGER
AGREEMENT (INCLUDING THE MERGER SHARE DISTRIBUTION) HAS BEEN PROVIDED TO THE
COMPANY BY DLB. THE COMPANY HAS NOT VERIFIED THE ACCURACY OR COMPLETENESS OF
SUCH INFORMATION.
This Prospectus is being furnished to the Stockholders of DLB as Annex
D to the Information Statement/Prospectus, which more fully describes the
Merger and the other transactions contemplated by the Merger Agreement.
Stockholders of DLB with inquiries related to DLB, Chesapeake, the
Merger or the other transactions contemplated by the Merger Agreement should
contact DLB's Stockholders Relations Department, 1601 NW Expressway, Suite 700,
Oklahoma City, Oklahoma 73118. After the Effective Time, stockholders of the
Company with inquiries related to the Company or its Common Stock should
contact the Company or its transfer agent.
----------
The date of this Prospectus is March 30, 1998.
220
AVAILABLE INFORMATION
In connection with an initial public offering of 11,040,000 shares of
Common Stock consummated in November 1997 (the "Initial Public Offering"), the
Company became subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information filed by the Company with the Commission can
be inspected, and copies may be obtained at prescribed rates from the public
reference facilities maintained by the Commission at its principal offices
located at Judiciary Plaza, 450 Fifth Street N.W., Washington D.C. 20549, as
well as at the Commission's regional offices located at Seven World Trade
Center, New York, New York 10048, and Northwestern Atrium Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661-2511. Such reports, proxy
statements and other information may also be obtained from the web site that
the Commission maintains at http://www.sec.gov. Reports, proxy statements and
other information concerning the Company can also be inspected at the offices
of the American Stock Exchange, 86 Trinity Place, New York 10016, where the
Common Stock is listed.
The Company has filed with the Commission a Registration Statement on
Form S-1 (as amended and including exhibits, the "Registration Statement")
under the Securities Act of 1933, as amended (the "Securities Act"), with
respect to the Shares that are the subject of the Merger Share Distribution
described in this Prospectus. This Prospectus constitutes a part of the
Registration Statement and does not contain all of the information set forth in
the Registration Statement, certain parts of which are omitted from this
Prospectus as permitted by the rules and regulations of the Commission.
Statements contained herein concerning any document filed as an exhibit to the
Registration Statement are not necessarily complete and, in each instance,
reference is made to the copy of such document filed as an exhibit to the
Registration Statement. Each such statement is qualified in its entirety by
such reference. For further information pertaining to the Company and the
Common Stock, reference is hereby made to the Registration Statement. Such
information can be inspected at and obtained from the Commission and the AMEX
in the manner set forth above.
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This Prospectus contains forward-looking statements and information
that are based on the beliefs of the Company's management as well as
assumptions made by and information currently available to management. All
statements other than statements of historical fact included in this Prospectus
are forward-looking statements, including but not limited to statements
identified by the words "anticipate," "believe," "estimate," "intend" and
"expect" and similar expressions. Such statements reflect the Company's
current views with respect to future events, based on what it believes are
reasonable assumptions; however, such statements are subject to certain risks,
uncertainties and assumptions, including but not limited to the risk factors
described in this Prospectus. See "Risk Factors." Should one or more of these
risks or uncertainties materialize, or should underlying assumptions prove
incorrect, actual results may vary materially from those in the forward-looking
statements. The Company does not intend to update these forward-looking
statements and information. All forward-looking statements included in this
Prospectus are expressly qualified in their entirety by the cautionary
statements in this paragraph.
2
221
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more
detailed information and financial statements and related notes appearing
elsewhere in this Prospectus. Unless otherwise indicated, all information
contained in this Prospectus (i) reflects a two-for-one stock split effected by
means of a stock dividend to stockholders of record on August 22, 1997 and (ii)
for the purposes of operating data, fleet statistics, shares outstanding and,
where specified, operating results, gives pro forma effect to the October 16,
1997 acquisition (the "Bonray Acquisition") of Bonray Drilling Corporation
("Bonray"), as described below. Unless the context otherwise requires, the
terms "Bayard" and the "Company" include Bayard Drilling Technologies, Inc. and
its predecessors and subsidiaries.
This Prospectus relates to the distribution of 2,955,000 shares of
Common Stock currently held by DLB to the holders of record of shares of DLB
Stock, on a pro rata basis, in connection with the Merger described in the
materials accompanying this Prospectus. All of the information contained in
this Prospectus should be read in conjunction with the Information
Statement/Prospectus to which this Prospectus is attached as Annex D.
THE COMPANY
The Company is a leading provider of contract land drilling services
to major and independent oil and gas companies. As of September 30, 1997, the
Company's rig fleet consisted of 54 rigs (including 13 rigs acquired in the
Bonray Acquisition), of which 48 were being marketed and six were to be
refurbished and expected to be placed in operation within the next 12 months.
The Company's fleet consists primarily of rigs capable of deep
drilling applications (well depths of 15,000 feet or greater). The Company
believes that deep drilling targets are more attractive to oil and gas
companies due to new technologies, including (i) three-dimensional seismic
techniques, (ii) increasingly accurate down hole measurement devices and (iii)
improved guidance systems and directional drilling motors for horizontal and
directional wells. Examples of currently active deep drilling areas include
the Tuscaloosa trend in Louisiana, the Pinnacle Reef trend in East Texas, the
Anadarko and Arkoma basins in Oklahoma and the Austin Chalk in Texas and
Louisiana.
As of September 30, 1997, the Company's fleet included 38 rigs capable
of drilling to depths of 15,000 feet or greater, 25 of which are capable of
drilling to depths of 20,000 feet or greater. Of these 38 rigs, 21 are diesel
electric silicon controlled rectifier ("SCR") rigs which offer operators
superior control and efficiency, particularly in deep, directional or
horizontal applications.
The Company's fleet is concentrated in its two core operating regions
- -- the Mid-Continent region (which includes principally Oklahoma, North Texas
and the Texas Panhandle) and the Gulf Coast region of Texas, Louisiana,
Mississippi and Alabama. At September 30, 1997, the Company had 35 rigs
marketed in Oklahoma (including 11 of the rigs acquired in the Bonray
Acquisition) and was the most active land drilling contractor in the state.
The Company's rigs operating in the Mid-Continent region are generally capable
of drilling to depths of 10,000 feet or greater and are marketed by the Company
to meet the specific well depth and mobility needs of producers in that region.
At September 30, 1997, the Company had 13 rigs marketed in the Gulf Coast
region, including 11 diesel electric SCR rigs.
The Company's principal executive offices are located at 4005
Northwest Expressway, Suite 550E, Oklahoma City, Oklahoma 73116, and its
telephone number at such offices is (405) 840-9550.
FORMATION AND OTHER TRANSACTIONS
The Company was formed in December 1996 through a series of affiliated
entity transactions in which the Company became the successor to Anadarko
Drilling Company ("Anadarko"), the contract drilling subsidiary of privately
held AnSon Partners Limited Partnership (together with its affiliates, "APLP").
In connection with the formation of the Company (i) APLP contributed ten
drilling rigs, including two rigs requiring refurbishment, for shares of Common
Stock, (ii) Roy T. Oliver and related entities exchanged six additional
drilling rigs for shares of Common Stock, (iii) Energy Spectrum Partners LP
("Energy Spectrum") contributed cash for shares of Common Stock and (iv)
Chesapeake entered into drilling contracts with two-year terms for six of the
Company's rigs in consideration for an option to purchase shares of Common
Stock (together, the "Formation Transactions"). See "Business -- Formation
3
222
and Other Transactions." Since the Formation Transactions, the Company has
enhanced its original fleet through acquisitions and refurbishment of rigs as
described below.
o Trend Acquisition. In May 1997, the Company completed the
acquisition of Trend Drilling Co. and its 14 rigs ("Trend") for $18 million in
cash and 250,000 shares of Common Stock (the "Trend Acquisition").
o Ward Acquisition. Also in May 1997, the Company acquired the assets
of Ward Drilling Company, Inc. including six drilling rigs ("Ward") for $8
million in cash, 400,000 shares of Common Stock and warrants to purchase an
additional 200,000 shares of Common Stock (the "Ward Acquisition").
o Bonray Acquisition. In October 1997, the Company acquired Bonray
from DLB for 3,015,000 shares of Common Stock. Bonray has operated a land
drilling business in the Mid-Continent region since 1980 and prior to its
acquisition by the Company was a wholly owned subsidiary of DLB. In the Bonray
Acquisition, the Company acquired 13 rigs, including seven rigs with depth
capacities of 15,000 feet or greater and two diesel electric SCR rigs. As of
September 30, 1997, 12 of Bonray's rigs were operating and under contract and
one was awaiting refurbishment.
o Individual Rig Acquisitions. In addition to the Trend, Ward and
Bonray Acquisitions, prior to the Initial Public Offering, the Company invested
$5.5 million to acquire six rigs in five transactions involving purchases of
individual rigs or rig components (the "Individual Rig Acquisitions" and,
together with the Formation Transactions, the Trend Acquisition, the Ward
Acquisition and the Bonray Acquisition, the "Consolidation Transactions"). In
August 1997, the Company sold one rig.
o Initial Public Offering. In November 1997, the Company completed
the Initial Public Offering of 11,040,000 shares of Common Stock. Of the total
shares sold in the Initial Public Offering, the Company sold 4,229,050 shares
of Common Stock and certain shareholders sold 6,810,950 shares of Common Stock.
o Refurbishment. The Consolidation Transactions included a number of
rigs in need of refurbishment. From January 1, 1997 through September 30,
1997, the Company completed refurbishment of 12 rigs at an average cost of
approximately $2.6 million per rig (including drill pipe). These rigs were
placed in service at various dates between January and September 30, 1997. At
September 30, 1997, the Company had six additional rigs in various stages of
refurbishment. The Company completed refurbishment and placed one of such rigs
in service during the fourth quarter of 1997, two more rigs in the first
quarter of 1998 and anticipates placing the remaining three rigs in the
remainder of 1998. The Company expects the cost to refurbish these six rigs to
average approximately $3.5 million per rig (including drill pipe).
o Recent Acquisitions. On January 9, 1998, the Company purchased six
additional rigs from R.T. Oliver Drilling, Inc. for approximately $14 million
in cash (the "Oliver Acquisition"). The Company expects to refurbish and
purchase complementary equipment, including drill pipe, for these rigs at a
cost of approximately $28.6 million. Additionally, since the Initial Public
Offering, the Company has decided to refurbish three additional rigs, one of
which was purchased for approximately $54,000 and two of which were assembled
rigs from inventoried components, bringing the Company's rig fleet total to 63
rigs, of which 51 are being marketed.
THE MERGER
Chesapeake, Merger Sub and DLB have entered into the Merger Agreement,
which provides that, upon the terms and subject to the conditions set forth
therein, Merger Sub will merge with and into DLB, with DLB continuing as the
surviving corporation.
Pursuant to the Merger Agreement, at the Effective Time, each share of
DLB Stock issued and outstanding immediately prior thereto (other than shares
of DLB Stock held by dissenting stockholders and other shares to be canceled
pursuant to the Merger Agreement) will be converted into the right to receive
(i) a fractional interest in a share of Chesapeake Stock equal to the quotient
obtained by dividing 5,000,000 by the number of shares of DLB Stock issued and
outstanding immediately prior to the Effective Time (the "DLB Stock Number"),
(ii) an amount in cash determined by dividing $17,500,000 by the DLB Stock
Number, (iii) a number of Shares determined by dividing 2,955,000 (representing
the total number of Shares owned by DLB immediately prior to the Effective
Time) by the DLB Stock Number, (iv) a contingent right to receive a pro rata
share of the net cash proceeds from the sale of assets of an affiliate
4
223
of DLB and (v) a contingent right to receive a pro rata share of certain net
distributions related to the liquidation of WRT (the consideration referred to
in clauses (i), (ii), (iii), (iv) and (v) being collectively referred to as the
"Merger Consideration"). Based on the assumption that there will be 12,970,000
shares of DLB Stock outstanding immediately prior to the Effective Time, a
holder of DLB Stock would receive 0.2277 Shares for each share of DLB Stock
held. See "-- The Merger Share Distribution." Additionally, immediately prior
to the Merger, DLB will distribute to holders of DLB Stock, on a pro rata
basis, an aggregate of 10,792,220 shares of WRT Stock resulting in the
distribution of approximately 0.8318 shares of WRT Stock per share of DLB Stock
held.
The Merger has been approved by the Board of Directors of DLB. Under
Oklahoma law, the affirmative vote of the holders of a majority of the
outstanding shares of DLB Stock is required to approve the Merger. Holders of
a majority of the DLB Stock entitled to vote on the Merger have entered into
irrevocable proxy agreements with Chesapeake whereby such stockholders have
agreed to vote (or to execute a written consent in lieu of a vote with respect
to) all shares of DLB Stock owned by them in favor of the proposal to approve
the Merger Agreement and the Merger and have each granted Chesapeake a proxy to
vote (or to execute a written consent in lieu of a vote with respect to) such
shares in favor of the Merger. On March 25, 1998, Chesapeake, as
attorney-in-fact, executed a written consent in lieu of a vote with respect to
a majority of the shares of DLB Stock approving the Merger. As a result, the
approval of the Merger is assured. It is expected that the Merger will be
consummated as soon as practicable following the twentieth business day after
the mailing of the Information Statement/Prospectus to which this Prospectus is
attached as Annex D. Holders of DLB Stock who do not execute written consents
approving the Merger will be entitled to pursue dissenters' rights of appraisal
under Section 1091 of the Oklahoma General Corporation Act.
DLB is furnishing to the holders of DLB Stock a package of information
regarding the Merger that includes the Information Statement/Prospectus, the
Merger Agreement, this Prospectus information regarding the value of the Merger
Consideration and information on dissenters' rights of appraisal. For a more
complete description of the terms of the Merger Agreement and the values
attributed by DLB to the Merger Consideration, see the Information
Statement/Prospectus to which this Prospectus is attached as Annex D. With
respect to the terms of the Merger and the related appraisal rights, reference
is made to the sections of the Information Statement/Prospectus entitled
"Description of Merger," "Merger Agreement" and "Shareholders' Rights of
Appraisal." With respect to the terms of the WRT Spin-Off, reference is made
to the section of the Information Statement/Prospectus entitled "Description of
WRT Spin-Off."
THE MERGER SHARE DISTRIBUTION
Shares to be Distributed . . . . . . . . . 2,955,000 shares of Common Stock
owned by DLB immediately prior to
the Effective Time.
Outstanding Common Stock . . . . . . . . . 18,183,945 shares(1)
- ----------
(1) Does not include (i) 806,600 shares of Common Stock subject to issuance
pursuant to outstanding options awarded under the Company's 1997 Stock
Option and Stock Award Plan (the "Employee Stock Plan"), (ii) 75,000 shares
of Common Stock subject to issuance pursuant to options awarded under the
Company's 1997 Non-Employee Directors' Stock Option Plan (the "Director
Stock Plan") or (iii) 397,000 shares of Common Stock subject to issuance
pursuant to other outstanding warrants issued by the Company. See
"Management 1997 Stock Option and Stock Award Plan" and "Certain
Relationships and Related Transactions." Further, this number does not
include shares of Common Stock that may be issued, solely at the option of
the Company, to redeem outstanding Subordinated Notes (as defined in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations"). See "Certain Relationships and Related Transactions Certain
Financing Arrangements Common Stock and Subordinated Notes."
5
224
Merger Share Distribution Ratio . . . . . . For each share of DLB Stock held
immediately prior to the Effective
Time, each holder of DLB Stock
will receive a number of Shares
determined by dividing 2,955,000
(the total number of Shares owned
by DLB immediately prior to the
Effective Time) by the DLB Stock
Number (such quotient being
defined as the "Merger Share
Distribution Ratio"). No
fractional shares of Common Stock
will be distributed in the Merger
Share Distribution. The number of
shares of Common Stock that any
holder of DLB Stock would
otherwise be entitled to receive
will be rounded to the nearest
whole number of such shares. Based
on the assumption that there will
be 12,970,000 shares of DLB Stock
outstanding immediately prior to
the Effective Time, a DLB
stockholder would receive 0.2277
Shares for each share of DLB Stock
held. To the extent outstanding
options to acquire up to 1,713,750
shares of DLB Stock are exercised
prior to the Effective Time, the
number of Shares distributed per
share of DLB Stock will be
proportionately reduced. Assuming
that all such options for DLB
Stock are exercised prior to the
Effective Time, the Merger Share
Distribution Ratio would be equal
to 0.2012 Shares for each share of
DLB Stock held. All calculations
and percentages set forth in this
Prospectus regarding ownership of
shares of Common Stock upon
consummation of the Merger Share
Distribution assume a Merger Share
Distribution Ratio of 0.2277.
Assuming a value of $16 1/4 per
share (the last reported trading
price on the AMEX of a Share on
March 27, 1998), the market value
of 0.2277 Shares would be $3.70.
Common Stock Listing . . . . . . . . . . . The Common Stock is traded on the
AMEX under the symbol "BDI."
Effective Time . . . . . . . . . . . . . . It is expected that the Effective
Time will occur promptly following
the twentieth business day after
the mailing of the Information
Statement/Prospectus to which this
Prospectus is attached as Annex D.
Exchange Agent . . . . . . . . . . . . . . UMB Bank, N.A.
Merger Share Distribution Date . . . . . . As soon as reasonably practicable
after the Effective Time,
Chesapeake will mail to the
stockholders of DLB a letter of
transmittal to be used to effect
the exchange of certificates
evidencing shares of DLB Stock for
the Shares and other Merger
Consideration. In order to receive
Shares and other Merger
Consideration, holders of the DLB
Stock will be required to
surrender to the Exchange Agent
stock certificates evidencing
shares of DLB Stock together with
a duly completed and executed
letter of transmittal and any
other required documents.
Certificates for the Shares to
which holders of DLB Stock are
entitled will not be distributed
until May 3, 1998, the date of the
expiration of the lock-up period
(180 days) of the Initial Public
Offering (the "Lock-up Period").
Until such date, the Exchange
Agent will hold the Shares in
escrow.
Federal Income Tax Considerations . . . . . The Merger Share Distribution,
together with the Merger, will be
treated as a taxable transaction
to each holder of DLB Stock
resulting in a capital gain or
loss in an amount equal to the
difference between (i) the amount
of cash and the fair market value
of all of the shares of the
Company, WRT and Chesapeake and
any contingent consideration
received in respect of such
holder's shares of DLB Stock and
(ii) such holder's adjusted tax
basis in the shares of DLB Stock
redeemed.
6
225
SUMMARY HISTORICAL AND PRO FORMA
CONSOLIDATED FINANCIAL AND OPERATING DATA
The following table sets forth summary historical financial and
operating data for the Company for each of the years in the three year period
ended December 31, 1996, for the nine months ended September 30, 1996 and 1997,
and as of December 31, 1996 and September 30, 1997. The financial results for
the period ended and as of September 30, 1997 include the results of the
Company's consolidated subsidiary, Trend, beginning May 1, 1997. The Company's
historical results reflect the operations of its predecessor, Anadarko. The
consolidated financial data for the nine months ended September 30, 1996 and
1997 is derived from the unaudited financial statements of the Company. In the
opinion of management, the financial data for the nine months ended September
30, 1996 and 1997 reflects all adjustments (consisting only of normal recurring
adjustments) necessary for a fair presentation of such data.
The pro forma consolidated financial and operating data for the year
ended December 31, 1996 and the nine months ended September 30, 1997 shown
below give effect to (i) the Consolidation Transactions (to the extent not
already reflected in the historical financial statements), (ii) the Chesapeake
Transactions (as described in "Certain Relationships and Related Transactions
- -- Chesapeake Transactions"), (iii) the exercise by The CIT Group/Equipment
Financing, Inc. ("CIT") of a warrant for 150,000 shares of Common Stock (the
"CIT Exercise"), and (iv) the Initial Public Offering and the application of
the net proceeds to the Company therefrom (as set forth in footnote 1 to the
Capitalization Table) as if they occurred on January 1, 1996 for purposes of
operations data and September 30, 1997 for purposes of balance sheet data. The
following information should be read together with Management's Discussion and
Analysis of Financial Condition and Results of Operations, the historical
financial statements of Bayard, Trend, Ward and Bonray, including the notes
thereto, and the Pro Forma Consolidated Financial Data, including the notes
thereto, included elsewhere in this Prospectus.
Year Ended December 31, Nine Months Ended September 30,
-------------------------------------------- -------------------------------
1994 1995 1996 1996 1996 1997 1997
Historical Pro Forma Historical Pro Forma
(unaudited)
(In thousands, except per share, rig and day rate data)
Statement of Operations Data:
Total revenues ......................... $ 9,910 $ 7,708 $ 9,853 $ 47,952 $ 6,787 $ 33,214 $ 58,840
-------- -------- -------- -------- -------- -------- --------
Operating expenses:
Drilling and other .................... 8,572 6,122 7,699 38,073 5,244 24,246 43,245
Depreciation and amortization ......... 1,557 791 1,126 7,730 727 4,918 8,551
General and administrative ............ 786 880 658 3,636 473 1,181 2,753
-------- -------- -------- -------- -------- -------- --------
Total operating expenses ........... 10,915 7,793 9,483 49,439 6,444 30,345 54,549
-------- -------- -------- -------- -------- -------- --------
Operating income (loss) ................ (1,005) (85) 370 (1,487) 343 2,869 4,291
Interest expense and financing
cost .................................. (18) (3) (11) (821) -- (2,172) (1,274)
Other income (expense) ................. 366 (134) 71 601 17 376 745
-------- -------- -------- -------- -------- -------- --------
Income (loss) before income taxes ...... (657) (222) 430 (1,707) 360 1,073 3,762
Income tax expense(1) .................. -- -- 163 -- 137 410 1,430
-------- -------- -------- -------- -------- -------- --------
Net income (loss) ...................... $ (657) $ (222) $ 267 $ (1,707) $ 223 $ 663 $ 2,332
======== ======== ======== ======== ======== ======== ========
Earnings per share (primary and
fully diluted) ........................ $ .02 $ (.11) $ .02 $ .06 $ .15
======== ======== ======== ======== ========
Weighted average shares outstanding
(fully diluted)(2) .................... 11,317 15,901 11,317 11,317 15,901
======== ======== ======== ======== ========
Cash Flows:
Operating activities .................. $ 445 $ 310 $ (462) $ 589 $ 7,212
Investing activities .................. (454) (1,710) (10,441) (6,363) (75,059)
Financing activities .................. 9 1,400 15,866 5,774 62,966
(continued on following page)
7
226
December 31,
1996 September 30, 1997
------------ ---------------------------
Historical Historical Pro Forma
(unaudited)
In thousands)
Balance Sheet Data:
Cash and investments .......................................... $ 4,963 $ 812 $ 55,799
Working capital (deficit), excluding current portion of
long-term debt............................................... 4,974 (2,659) 54,019
Property, plant and equipment, net............................. 26,973 104,674 138,631
Total assets................................................... 34,673 128,064 227,177
Long-term debt, including current portion...................... 7,000 54,948 19,567
Total stockholders' equity(3).................................. 26,251 48,496 174,512
Year Ended December 31, Nine Months Ended September 30,
------------------------------------- -------------------------------
1994 1995 1996 1996 1996 1997 1997
Historical Pro Forma Historical Pro Forma
(unaudited)
(In thousands, except per share, rig and day rate data)
Other Financial Data:
EBITDA(4) ........................ $ 552 $ 706 $ 1,496 $ 6,243 $ 1,070 $ 7,787 $12,842
Capital expenditures ............. 1,183 2,088 10,578 6,499 83,101
Drilling Rig Activity Data:
Total rigs at end of period ...... 7 8 17 54 8 41 54
Marketed rigs at end of period ... 7 8 8 34 8 34 46
Average utilization rate of
drilling rigs available
for service(5) ................. 84% 86% 88% 87% 94%
Average dayrate(6) ............... $ 4,148 $ 4,298 $ 4,731 $ 4,678 $ 5,740
- ----------
(1) Income tax expense is presented on a pro forma basis (assuming a 38%
statutory rate) for the year ended December 31, 1996 and for the nine
months ended September 30, 1996.
(2) Historical weighted average shares outstanding is calculated using the
fully diluted shares outstanding through September 30, 1997 for the
year ended December 31, 1996 and the nine months ended September 30,
1996 and 1997. The pro forma shares outstanding reflect the sale of a
sufficient number of shares in the Initial Public Offering to retire
certain indebtedness of the Company. See footnote (g) to "Notes to
Unaudited Pro Forma Consolidated Financial Data."
(3) No dividends were declared through September 30, 1997. See "Price
Range of Common Stock and Dividends -- Dividend Policy."
(4) EBITDA represents operating income (loss) before depreciation and
amortization. EBITDA is frequently used by securities analysts and is
presented herein to provide additional information about the Company's
operations. EBITDA is not a measurement presented in accordance with
generally accepted accounting principles. EBITDA should not be
considered in isolation or as a substitute for net income or cash flow
data prepared in accordance with generally accepted accounting
principles or as a measure of a company's profitability or liquidity.
(5) Rig utilization rates are calculated on a weighted average basis
assuming 365 days availability for all rigs available for service.
Rigs acquired have been treated as added to the rig fleet as of the
date of acquisition. Rigs under contract that generate revenues
during moves between locations or during mobilization/ demobilization
are also considered to be utilized. Rigs that are owned but not being
marketed, including rigs being refurbished, are not considered in
determining the utilization rate.
(6) Represents total contract drilling revenues (excluding mobilization,
cost reimbursements and fuel), divided by the total number of days the
Company's drilling rig fleet operated during the period, divided by
the average number of rigs in operation.
8
227
RISK FACTORS
An investment in the Common Stock offered hereby involves a high
degree of risk. DLB Stockholders who will receive shares of Common Stock in
the Merger Share Distribution should carefully consider and evaluate the
following factors -- together with the information and financial data set forth
elsewhere in this Prospectus -- prior to making an investment decision
regarding the Common Stock.
DEPENDENCE ON OIL AND GAS INDUSTRY
The Company's revenues, cash flows and earnings are substantially
dependent upon, and affected by, the level of domestic oil and gas exploration
and development activity. Such activity and the resulting level of demand for
contract land drilling and related services are directly influenced by many
factors over which the Company has no control. Such factors include, among
others, the market prices of oil and gas, market expectations about future
prices, the volatility of such prices, the cost of producing and delivering oil
and gas, government regulations and trade restrictions, local and international
political and economic conditions, levels of production by, and other
activities of, the Organization of Petroleum Exporting Countries and other oil
and gas producers, the development of alternate energy sources and the
long-term effects of worldwide energy conservation measures. Substantial
uncertainty exists as to the future level of oil and gas exploration and
development activity. There can be no assurance that the current level of oil
and gas exploration and development activity will be maintained or that demand
for the Company's contract drilling services will reflect the level of such
activity.
CYCLICAL CONDITIONS
Historically, the contract drilling industry has been cyclical, with
significant volatility in profitability and rig values. This industry
cyclicality has been due to changes in the level of domestic oil and gas
exploration and development activity and the available supply of drilling rigs.
The market for contract land drilling services has generally been depressed
since 1982, when oil and gas prices began to weaken following a period of
significant increase in new drilling rig capacity. Since that time and except
during occasional upturns, there have been substantially more drilling rigs
available than necessary to meet demand in most operating and geographic
segments of the domestic drilling industry, including the geographic areas in
which the Company operates.
Although the Company believes that improved technologies and stable
oil and gas prices have contributed to increased activity in the exploration
and production sector during 1997, there has been a general decline in oil and
gas prices in recent months and there can be no assurance that such decline
will not continue. The recent decline in oil prices has caused the Company's
rig utilization rates to decrease in recent periods. In addition, ongoing
movement or reactivation of land drilling rigs (including the movement of rigs
from outside the United States into domestic markets) or new construction of
drilling rigs could increase rig supply and adversely affect contract drilling
rates and utilization levels. The Company cannot predict the future level of
demand for its contract drilling services and resulting rig utilization rates,
future conditions in the contract drilling industry or future contract drilling
rates.
LIMITED HISTORY OF A PUBLIC MARKET FOR AND VOLATILITY OF THE PRICE OF THE
COMMON STOCK
Although the Common Stock is listed for trading on the AMEX, no public
market for the Common Stock existed prior to the Initial Public Offering on
November 4, 1997. The Common Stock was initially offered to the public at a
price of $23 per share and since that time has traded at per share prices
varying from a low of $11 1/8 to a high of $28 1/4. On March 27, 1998, the
last sale price of the Common Stock as reported on the AMEX was $16 1/4 per
share. Due to the limited amount of time that the Common Stock has been traded
on a public market and the volatility of the price per share of the Common
Stock, there can be no assurance that an active public market for the Common
Stock will be sustained, that the price volatility will not continue or that
the price at which the Common Stock will trade after the Merger Share
Distribution will not be lower than recent trading prices. Market prices for
the Common Stock following the Merger Share Distribution will be influenced by
a number of factors, including the depth and liquidity of the market for the
Common Stock, investor perceptions of the Company and general economic and
other conditions.
LIMITED OPERATING HISTORY
The Company was founded in December 1996 as the successor to Anadarko,
which had operated as a contract land drilling rig service company since 1982
in Oklahoma. Although Anadarko was owned by and provided drilling
9
228
services to APLP prior to December 1996, Anadarko had also provided drilling
services to 23 different third party customers between 1982 and December 1996.
Prior to December 1996, however, the Company had not operated as an independent
entity. Although the President and Chief Executive Officer of the Company had
been employed by Anadarko for 14 years and several other key employees of the
Company had been with Anadarko for extended periods, much of the Company's
management group has been assembled recently. Despite the extensive experience
and qualifications of many of the recently added individual managers, there can
be no assurance that the management group will be able to manage the
stand-alone entity as a cohesive team or to implement effectively the Company's
business strategy. The pro forma financial results presented herein include
the operating results of drilling rigs which were not under the Company's
control and may not be indicative of the Company's future operating results.
MANAGEMENT OF GROWTH; RISKS OF ACQUISITION STRATEGY
The Company has experienced rapid and substantial growth since its
formation as a result of acquisitions. The Company anticipates the further
expansion of the Company's drilling fleet through additional acquisitions.
Certain risks are inherent in an acquisition strategy, such as increasing
leverage and debt service requirements and combining disparate company
cultures, which could adversely affect the Company's operating results.
Continued growth and the process of integrating such acquired businesses may
involve unforeseen difficulties and may require a disproportionate amount of
management's attention and the Company's financial and other resources. No
assurance can be given that the Company will be able to continue to identify
suitable acquisition opportunities, negotiate acceptable terms, obtain
financing for acquisitions on satisfactory terms or successfully acquire
identified targets. There can be no assurance that the Company will be able to
successfully manage and integrate the acquired businesses and assets into its
existing operations or that it will be able to successfully maintain the market
share attributable to operable drilling rigs acquired by the Company. If the
Company is unable to manage its growth and successfully integrate the acquired
businesses into the Company's existing operations, or if the Company encounters
unexpected costs or liabilities in the acquired businesses, the Company's
results of operations or financial condition could be materially adversely
affected. See "Business -- Business Strategy."
Competition in the market for drilling rigs has caused substantial
increases in the acquisition prices paid for rigs in recent months. Such
competition could adversely affect the Company's growth strategy if it is
unable to purchase additional drilling rigs or related equipment on favorable
terms. There can be no assurance that the Company will be able to compete
successfully in the future for acquisitions of available drilling rigs or
related equipment, or that such competition will not have a material adverse
effect on the Company's business, financial condition and results of
operations.
SHORTAGE OF QUALIFIED AND EXPERIENCED LABOR
Increases in both onshore and offshore domestic oil and gas
exploration and production since 1995 and resultant increases in contract
drilling activity have created a shortage of qualified drilling rig personnel
in the industry. If the Company is unable to attract and retain sufficient
qualified operating personnel, its ability to market and operate its drilling
rigs will be restricted. In addition, labor shortages could result in wage
increases, which could reduce the Company's operating margins and have a
material adverse effect on the Company's financial condition and results of
operations.
COMPETITION
The contract drilling industry is a highly competitive and fragmented
business characterized by high capital and maintenance costs. As a result,
even though the Company has the fifth largest active land drilling rig fleet in
the United States, the Company believes such fleet represents a market share of
approximately 6% of the domestic land drilling industry. Drilling contracts
are usually awarded through a competitive bid process and, while the Company
believes that operators consider factors such as quality of service, type and
location of equipment, or the ability to provide ancillary services, price and
rig availability are the primary factors in determining which contractor is
awarded a job. Certain of the Company's competitors have greater financial and
human resources than the Company, which may enable them to better withstand
periods of low rig utilization, to compete more effectively on the basis of
price and technology, to build new rigs or acquire existing rigs and to provide
rigs more quickly than the Company in periods of high rig utilization.
10
229
CONCENTRATION OF CUSTOMER BASE
During the nine months ended September 30, 1997 (pro forma for the
Consolidation Transactions), the three largest customers for the Company's
contract drilling services were Chesapeake, Union Pacific Resources Corporation
and Marathon Oil Company, which accounted for approximately 22%, 7% and 7% of
total revenues, respectively. Chesapeake recently announced that it was
reducing its drilling program in the Gulf Coast region, an area in which it
utilizes a number of the Company's rigs. In late 1997, Chesapeake released two
rigs under contract with the Company and has subsequently released three
additional rigs it was using in the Gulf Coast region. As of the date of this
Prospectus, Chesapeake continued to utilize five of the Company's rigs;
however, there can be no assurance that Chesapeake or any of the Company's
other principal customers will continue to employ the Company's services or
that the loss of any of such customers or adverse developments affecting any of
such customers would not have a material adverse effect on the Company's
financial condition and results of operations.
OPERATING HAZARDS AND UNINSURED RISKS
The Company's operations are subject to many hazards inherent in the
land drilling business, including, for example, blowouts, cratering, fires,
explosions, loss of well control, loss of hole, damaged or lost drill strings
and damage or loss from inclement weather. These hazards could cause personal
injury or death, serious damage to or destruction of property and equipment,
suspension of drilling operations, or substantial damage to the environment,
including damage to producing formations and surrounding areas. Generally,
drilling contracts provide for the division of responsibilities between a
drilling company and its customer, and the Company seeks to obtain
indemnification from its customers by contract for certain of these risks. To
the extent not transferred to customers by contract, the Company seeks
protection against certain of these risks through insurance. Although the
Company believes that it is adequately insured for public liability and
property damage to others and injury or death to persons in accordance with
industry standards with respect to its operations, no assurance can be given
that such insurance will be sufficient to protect the Company against liability
for all consequences of well disasters, personal injury, extensive fire damage
or damage to the environment. No assurance can be given that the Company will
be able to maintain adequate insurance in the future at rates it considers
reasonable or that any particular types of coverage will be available. The
occurrence of events, including any of the above-mentioned risks and hazards,
that are not fully insured or the failure of a customer to meet its
indemnification obligations could subject the Company to significant liability
and could have a material adverse effect on the Company's financial condition
and results of operations. See "Business -- Operating Hazards and Insurance."
SHORTAGE OF DRILLING EQUIPMENT AND SUPPLIES
There is a general shortage of certain drilling equipment and supplies
used in the Company's business and the Company believes these shortages may
intensify. Because, until recent years, the land drilling industry was
characterized by an oversupply of land rigs, rig manufacturers have generally
focused on the production of more expensive offshore rigs and rig equipment.
As a result, most rig manufacturers are not currently building new land rigs
and those manufacturers that are building new land rigs and components charge
premium prices (approximately $13 million for a new 2,000 horsepower rig) and
require that orders be placed at least 120 days in advance of requested
delivery. The limited availability of new rigs and equipment has caused land
rig owners and operators, including the Company, to maintain and enhance their
fleets primarily through acquisitions and refurbishments using previously
manufactured rig components and equipment. As the land drilling industry
continues to refurbish rigs using existing components and equipment, the
available supply of such components and equipment continues to deplete. There
can be no assurance that a continued shortage of such equipment and supplies
will not result in a material increase in the costs incurred by the Company to
refurbish and maintain its rigs.
The Company requires a substantial amount of drill pipe in order to
achieve the drilling depths required by its customers. A shortage of drill
pipe exists in the contract drilling industry in the United States. This
shortage has caused the price of drill pipe to increase by more than 54% over
the past 24 months and has required orders for new drill pipe to be placed at
least one year in advance of expected use. The price increase and the delay in
delivery has caused the Company to increase capital expenditures for drill pipe
in recent months by 110% of its original budget. While the Company believes it
currently has sufficient drill pipe for its existing rigs (including those rigs
in refurbishment), in the event the shortage continues, the Company may be
unable to obtain the drill pipe required to expand its contract drilling
operations.
11
230
CAPITAL REQUIREMENTS AND LIQUIDITY
The oil and gas contract drilling industry is capital intensive. The
Company's cash flow from operations and the continued availability of credit
are subject to a number of variables, including the Company's utilization rate,
operating margins and ability to maintain costs and obtain contracts in a
competitive industry. There can be no assurance that the Company's cash flow
from operations, proceeds from the Initial Public Offering and present
borrowing capacity will be sufficient to fund its anticipated capital
expenditures and working capital requirements. The Company may from time to
time seek additional financing, either in the form of bank borrowings, sales of
the Company's debt or equity securities or otherwise. Except for the Company's
loan agreements with its lenders, the Company has no agreements for any such
financing and there can be no assurance as to the availability or terms of any
such financing. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Financial Condition and Liquidity." To
the extent the Company's capital resources and cash flow from operations are at
any time insufficient to fund its activities or repay its indebtedness as due,
the Company will need to raise additional funds through public or private
financings or additional borrowings. No assurance can be given as to the
Company's ability to obtain any such capital resources. If the Company is at
any time not able to obtain the necessary capital resources, its financial
condition and results of operations could be materially adversely affected. In
the event that additional funds are raised through the issuance of equity
securities, the percentage ownership of the Company's stockholders at that time
would be diluted and, in addition, such equity securities may have rights,
preferences or privileges senior to those of the Common Stock.
RELIANCE ON KEY PERSONNEL
The success of the Company's business is highly dependent upon the
services, efforts and abilities of James E. Brown, the Company's President and
Chief Executive Officer and certain other officers and key employees,
particularly Edward S. Jacob, III, the Company's Executive Vice President --
Operations & Marketing, David E. Grose, the Company's Vice President and Chief
Financial Officer, and Ron Tyson, the Company's Construction Manager. The
business of the Company could be materially and adversely affected by the loss
of any of these individuals. The Company does not maintain key man life
insurance on the lives of any of its executive officers or key employees. The
Company has employment agreements with Messrs. Brown, Jacob and Grose. See
"Management -- Executive Salaries and Employment Agreements."
CLASS ACTION LITIGATION
On January 14, 1998, February 2, 1998 and February 3, 1998, three
purported class action lawsuits were filed against the Company, certain
directors and officers of the Company, the managing underwriters of the Initial
Public Offering, and certain current and former stockholders of the Company,
alleging violations of federal and state securities laws in connection with the
Initial Public Offering. The lawsuits allege, among other things, that the
registration statement and prospectus for the Initial Public Offering contained
materially false and misleading information and omitted to disclose material
facts. The Company believes the allegations in the lawsuits are without merit
and is defending vigorously the claims brought against it. The Company is
required under certain circumstances to indemnify the named directors,
officers, underwriters and selling stockholders against losses incurred as a
result of such lawsuits and to advance to such parties ongoing legal expenses
incurred in connection with the defense. The Company expects to continue to
incur legal expenses on its behalf and on behalf of such officers, directors,
underwriters and selling stockholders in connection with this litigation. In
addition, defending this litigation has and will likely continue to result in
the diversion of management's attention from the day-to-day operations of the
Company's business. The Company is unable to predict the outcome of these
lawsuits or the costs to be incurred in connection with their defense and there
can be no assurance that this litigation will be resolved in the Company's
favor. An adverse result or prolonged litigation could have a material adverse
effect on the Company's financial position or results of operation. See
"Business--Legal Proceedings."
CONTROL BY EXISTING MANAGEMENT AND STOCKHOLDERS; VOTING AGREEMENT AMONG CERTAIN
STOCKHOLDERS
The Company's directors, executive officers and holders of more than
5% of the Common Stock beneficially own approximately 31.9% (26.8% after giving
effect to the Merger Share Distribution) of the outstanding shares of Common
Stock. In addition, holders of approximately 28.9% of the outstanding shares
of Common Stock (25.4% after giving effect to the Merger Share Distribution)
are parties to a stockholders and voting agreement (the "Stockholders and
Voting Agreement") with the Company that provides for, among other things, the
nomination of certain individuals
12
231
for election to the Board of Directors of the Company (the "Board"). Pursuant
to the Stockholders and Voting Agreement, each of APLP, Energy Spectrum and DLB
(or certain significant stockholders of DLB) are entitled to nominate one
person for election to the Board, subject to maintaining certain ownership
thresholds. Each of APLP, Energy Spectrum, DLB (or, alternatively, certain
significant stockholders of DLB), and Carl B. Anderson, III are (or in the case
of certain significant stockholders of DLB, will be) obligated to vote all of
their shares of Common Stock for the election of such nominees. After the
Merger Share Distribution, (i) DLB will no longer be a party to the
Stockholders and Voting Agreement, (ii) the three significant stockholders of
DLB, Mike Liddell, Mark Liddell and Charles E. Davidson (the "DLB Group"), will
be obligated to execute supplemental agreements to the Stockholders and Voting
Agreement and (iii) the DLB Group, rather than DLB, will have the right to
nominate one person to the Board and will be obligated to vote all of its
shares of Common Stock for the election of such nominee and the other nominees
named pursuant to the Stockholders and Voting Agreement. Accordingly, if all
stockholders who are currently party to the Stockholders and Voting Agreement
(other than DLB) and the DLB Group were to act in concert after the
consummation of the Merger Share Distribution, they would be able to nominate
up to three members of the Board and exercise significant influence over the
Company's affairs. The Stockholders and Voting Agreement also requires that
any transferee of stock from a party thereto (other than pursuant to the Merger
Share Distribution and sales into the public market) be bound by the terms
thereof as a condition precedent to such transfer. See "Principal and Selling
Stockholders" and "Certain Relationships and Related Transactions --
Stockholders and Voting Agreement."
GOVERNMENTAL REGULATION AND ENVIRONMENTAL MATTERS
The domestic oil and gas industry is affected from time to time in
varying degrees by political developments and federal, state and local laws and
regulations. In particular, oil and gas production, operations and economics
are or have been affected by price controls, taxes and other laws relating to
the oil and gas industry, by changes in such laws and by changes in
administrative regulations. Except for the handling of solid wastes directly
generated from the operation and maintenance of the Company's drilling rigs,
such as waste oils and wash water, it is the Company's practice to require its
customers to contractually assume responsibility for compliance with
environmental regulations. However, the Company's operations are vulnerable to
certain risks arising from the numerous environmental health and safety laws
and regulations. These laws and regulations may restrict the types, quantities
and concentration of various substances that can be released into the
environment in connection with drilling activities, require reporting of the
storage, use or release of certain chemicals and hazardous substances, require
removal or cleanup of contamination under certain circumstances, and impose
substantial civil liabilities or criminal penalties. Environmental laws and
regulations may impose strict liability, rendering a person liable for
environmental damage without regard to negligence or fault, and could expose
the Company to liability for the conduct of, or conditions caused by, others,
or for acts of the Company that were in compliance with all applicable laws at
the time such acts were performed. Moreover, there has been a trend in recent
years toward stricter standards in environmental, health and safety legislation
and regulation which is likely to continue.
The Company has made and will continue to make expenditures to comply
with governmental regulations, including environmental, health and safety
requirements. As part of the Bonray Acquisition, the Company acquired an
equipment yard which may require certain expenditures or remedial actions for
the removal or cleanup of contamination. In exchange for a $1 million cash
payment to the Company at closing, the Company did not require DLB to indemnify
the Company with respect to such expenditures or remedial actions. While the
Company has not determined whether and to what extent such expenditures or
remedial actions may be necessary or advisable, based on the presently
available information, the Company does not believe that such expenditures will
exceed $1 million. There can be no assurance, however, that the Company will
not incur material liability with respect to this property or any of the
Company's other properties or operations. The Company cannot predict how
existing laws and regulations may be interpreted by enforcement agencies or
court rulings, whether additional laws and regulations will be adopted, or the
effect such changes may have on the Company's business, financial condition or
results of operations. Because the requirements imposed by such laws and
regulations are subject to change, the Company is unable to forecast the
ultimate cost of compliance with such requirements. The modification of
existing laws and regulations or the adoption of new laws or regulations
curtailing exploratory or development drilling for oil and gas for economic,
political, environmental or other reasons could have a material adverse effect
on the Company by limiting drilling opportunities. See "Business -- Government
Regulation and Environmental Matters."
13
232
RISKS ASSOCIATED WITH FOOTAGE AND TURNKEY DRILLING
The Company in the past has performed drilling services under footage
and turnkey contracts and may enter into such arrangements in the future.
Revenues from footage contracts accounted for approximately 2% of total
revenues during the nine months ended September 30, 1997 and the Company had no
turnkey contracts during such period. Under footage contracts, the Company is
paid a fixed amount for each foot drilled, regardless of the time required or
the problems encountered in drilling the well. Under turnkey drilling
contracts, the Company contracts to drill a well to an agreed depth under
specified conditions for a fixed price, regardless of the time required or the
problems encountered in drilling the well. In addition, the Company provides
technical expertise and engineering services, as well as most of the equipment
required for the well, and is compensated only when the contract terms have
been satisfied. On a turnkey well, the Company often subcontracts for related
services and manages the drilling process. The risks to the Company under
footage and turnkey contracts are substantially greater than under daywork
contracts because the Company assumes most of the risks associated with
drilling operations that in a daywork contract are generally assumed by the
operator, including risk of blowout, loss of hole, stuck drill pipe, machinery
breakdowns, abnormal drilling conditions and risks associated with
subcontractors' services, supplies, cost escalation and personnel. While the
Company's current strategy is to operate primarily under daywork contracts,
management continually analyzes market conditions, customer requirements, rig
demand and the experience of its personnel to determine how to most profitably
contract its fleet. If the Company were to encounter less favorable conditions
within its industry, competitive pressures and customer demands might require
it to consider entering into a larger number of footage and turnkey drilling
contracts. Accordingly, there can be no assurance that the Company will not
suffer a loss that is not insured as a result of entering into such contracts,
and any such uninsured loss could have a material adverse effect on the
Company's financial position and results of operations. See "Business --
Contract Drilling Operations."
SHARES ELIGIBLE FOR FUTURE SALE
Future sales of shares of Common Stock by the Company or its existing
stockholders could adversely affect the market price of the Common Stock. As
of January 31, 1998, the Company had 18,183,945 shares of Common Stock
outstanding. Additionally, as of such date, (i) options for the purchase of
806,600 shares of Common Stock had been granted to certain employees of the
Company pursuant to the Employee Stock Plan, (ii) options for the purchase of
75,000 shares of Common Stock had been granted to certain non-employee
directors of the Company pursuant to the Director Stock Plan and (iii) 397,000
shares of Common Stock were subject to outstanding warrants issued by the
Company. The exercise prices of some of these options and warrants are lower
than the recent trading prices of the Common Stock. In addition, certain
outstanding Subordinated Notes are convertible, solely at the Company's option,
into shares of Common Stock. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources" and "Certain Relationships and Related Transactions -- Certain
Financing Arrangements -- Common Stock and Subordinated Notes."
The Company may in the future issue significant amounts of Common
Stock or options or warrants to acquire Common Stock under stock option plans
or to finance capital projects, including acquisitions of rigs and related
equipment. Of the outstanding shares, the 11,040,000 shares sold in the
Initial Public Offering and the 2,955,000 shares that are the subject of the
Merger Share Distribution will be freely tradeable without restrictions or
further registration under the Securities Act, except for shares purchased by
or distributed to an "affiliate" (as defined in the Securities Act) of the
Company. Following the consummation of the Merger Share Distribution and the
expiration of the lock-up agreements with the underwriters executed in
connection with the Initial Public Offering, each of the Company's directors
and executive officers and each of its existing stockholders who hold
restricted shares, who hold (as a group) an aggregate of approximately 23% of
the outstanding shares of Common Stock, may sell such shares subject to the
requirements of Rule 144 under the Securities Act or pursuant to the terms of a
registration rights agreement. See "Certain Relationships and Related
Transactions" and "Shares Eligible for Future Sale." The Company is also a
party to certain registration rights agreements pursuant to which it has
granted demand and piggyback registration rights which, as of December 31, 1997
covered an aggregate of up to 8,139,125 shares of Common Stock and Common Stock
Equivalents. The beneficiaries of these agreements include DLB, Energy
Spectrum, APLP, the Oliver Companies (as defined in "Management's Discussion
and Analysis of Financial Condition and Results of Operations") and certain of
their affiliates, Ward and certain of its transferees, Donaldson, Lufkin &
Jenrette Securities Corporation ("DLJ"), Carl B. Anderson, III, James E.
Brown, Edward S. Jacob, III, David E. Grose and certain other parties. The
terms of these agreements prohibit the exercise of such registration rights for
a period of 180 days following the date of the Initial Public Offering, subject
to certain exceptions. Additionally, the Company intends to file registration
statements on Form S-8 covering the issuance of shares of Common Stock pursuant
to the Employee Stock Plan and the Director Stock Plan
14
233
(collectively, the "Company Stock Plans") within 180 days after completion of
the Initial Public Offering. Accordingly, shares of Common Stock registered
pursuant to the Company's registration rights agreements or issued pursuant to
the Company Stock Plans will be available for sale in the public market without
restriction or limitation under the Securities Act, except for any shares held
by an "affiliate" of the Company. No prediction can be made as to the effect,
if any, that future sales of shares, the issuance or exercise of options,
warrants or other securities convertible into Common Stock, or the availability
of shares for sale will have on the market price for Common Stock prevailing
from time to time. Sales of a substantial amount of Common Stock, or a
perception that such sales could occur, could adversely affect the prevailing
market price of the Common Stock and could impair the Company's ability to
raise additional capital through the sale of equity securities.
SUPERIOR RIGHTS OF PREFERRED STOCK
The Company is authorized to issue preferred stock. The Board,
without stockholder approval, may issue shares of the preferred stock with
rights and preferences adverse to the voting power or other rights of the
holders of the Common Stock. No preferred stock has been issued. See
"Description of Capital Stock -- Preferred Stock."
EFFECTS OF CERTAIN ANTI-TAKEOVER PROVISIONS
The Restated Certificate of Incorporation of the Company (the
"Certificate") (i) contains a "fair price" provision, (ii) does not permit
stockholders to act by written consent, (iii) does not permit stockholders to
call special meetings of stockholders, (iv) requires certain procedures to be
followed and time periods to be met for any stockholder to propose matters to
be considered at annual meetings of stockholders, including nominating
directors for election at those meetings, (v) limits the ability of
stockholders to interfere with the power of the Board in other specified ways,
(vi) requires supermajority votes to amend any of the preceding provisions and
(vii) authorizes the Board to issue up to 20,000,000 shares of preferred stock
without stockholder approval and to set the rights, preferences, and other
designations, including voting rights, of those shares as the Board may
determine. See "Description of Capital Stock -- Certain Provisions of the
Certificate and Bylaws." These provisions, alone or in combination with each
other, may discourage, hinder, delay or prevent transactions involving actual
or potential changes of control of the Company, including transactions that
otherwise could involve payment of a premium over prevailing market prices to
holders of Common Stock. The Company is also subject to provisions of the
Delaware General Corporation Law (the "DGCL") that may make some business
combinations more difficult. See "Description of Capital Stock -- Delaware
Anti-Takeover Statute."
15
234
PLAN OF DISTRIBUTION
BACKGROUND
Chesapeake, Merger Sub and DLB have entered into the Merger Agreement
which provides that, upon the terms and subject to the conditions set forth
therein, Merger Sub will merge with and into DLB, with DLB continuing as the
surviving corporation. The registration of the Shares is being effected to
comply with DLB's obligations under the Merger Agreement.
Pursuant to the Merger Agreement, at the Effective Time, each
outstanding share of DLB Stock (other than shares held by dissenting
shareholders and other shares to be canceled pursuant to the Merger Agreement)
will be converted into the right to receive approximately (i) $1.35 in cash,
(ii) 0.3854 share of Chesapeake Stock, (iii) 0.2277 share of Common Stock owned
by DLB immediately prior to the Effective Time, (iv) a contingent right to
receive a pro rata share of the net cash proceeds from the sale of assets of an
affiliate of DLB and (v) a contingent right to receive a pro rata share of
certain net distributions related to the liquidation of WRT. The foregoing per
share amounts are based on the assumption that there will be 12,975,000 shares
of DLB Common Stock outstanding immediately prior to the Effective Time. To
the extent outstanding options to acquire up to 1,713,750 shares of DLB Stock
are exercised prior to the Effective Time, the Merger Consideration will be
proportionately reduced. If all such options were exercised by the payment of
the exercise price in cash, the non-contingent portion of the consideration
received per share of DLB Stock would be (i) $1.19 in cash, (ii) 0.3404 share
of Chesapeake Stock and (iii) 0.2012 share of Common Stock. In addition, the
number of shares of Common Stock that any holder of DLB Stock would otherwise
be entitled to receive will be rounded to the nearest whole number of shares of
Common Stock, and in no event will the number of shares of Common Stock subject
to issuance as Merger Consideration exceed the number of shares of Common Stock
owned by DLB immediately prior to the Effective Time. For a more complete
description of the terms of the Merger Agreement and the values attributed by
DLB to the Merger Consideration, as well as the terms of the WRT Spin-Off, see
the Information Statement/Prospectus which is delivered to each DLB Stockholder
and to which this Prospectus is attached as Annex D.
MANNER OF EFFECTING MERGER SHARE DISTRIBUTION
Pursuant to the Merger Agreement, the Shares will be transferred to
the DLB stockholders of record as of immediately prior to the Effective Time.
The Shares represent a portion of the Merger Consideration that will be paid in
the Merger. As a result of the Merger, each DLB stockholder will receive for
each share of DLB Stock held, that number of Shares represented by the Merger
Share Distribution Ratio. No fractional shares of Common Stock will be
distributed in the Merger Share Distribution. The number of shares of Common
Stock that any holder of DLB Stock would otherwise be entitled to receive will
be rounded to the nearest whole number of such shares. All calculations and
percentages set forth in this Prospectus regarding ownership of shares of
Common Stock upon consummation of the Merger Share Distribution assume a Merger
Share Distribution Ratio of 0.2277. See "-- Background." Prior to the
Effective Time, DLB shall deposit with the Exchange Agent certificates
representing the Shares, which Shares will be held in escrow by the Exchange
Agent until the expiration of the Lock-up Period. All of the Shares to be
transferred in the Merger Share Distribution will be fully paid, nonassessable
and free of preemptive rights.
After the Effective Time, the Exchange Agent will mail to each holder
of record of DLB Stock, as of immediately prior to the Effective Time, a letter
of transmittal to be used to effect the Merger Share Distribution, together
with instructions for completing such letter of transmittal. The letter of
transmittal, together with the instructions thereto, will specify the manner of
delivery to the Exchange Agent of stock certificates representing shares of DLB
Stock.
Upon surrender to the Exchange Agent for cancellation of a stock
certificate which prior thereto represented DLB Stock, properly endorsed, with
signature guaranteed or otherwise in proper form for transfer, accompanied by a
duly completed and executed letter of transmittal and any other required
documents as specified in the letter of transmittal, together with the
instructions thereto, a holder of DLB Stock will be entitled to a certificate
representing that number of shares of Common Stock determined in accordance
with the Merger Share Distribution Ratio, rounded to the nearest whole number.
Certificates for the Common Stock will not be distributed by the Exchange Agent
until May 3, 1998, the date of the expiration of the Lock-up Period. No holder
will be required to pay any cash or other consideration for the shares of
Common Stock received in the Merger Share Distribution nor will any action be
required to be taken by any holder in order to receive shares of Common Stock,
except as described above.
16
235
LISTING AND TRADING OF COMMON STOCK
The Common Stock is listed for trading on the AMEX under the symbol
"BDI." The transfer agent and registrar for the Common Stock is Norwest Bank
Minnesota, N.A.
The Common Stock has been publicly traded since November 4, 1997. The
extent of the trading market for the Common Stock and the prices at which the
Common Stock may trade prior to or after the Merger Share Distribution cannot
be predicted. See "Risk Factors -- Limited History of a Public Market for and
Volatility of the Price of the Common Stock."
The Shares transferred in the Merger Share Distribution will be freely
transferable, except for Shares received by persons who may be deemed to be
"affiliates" of the Company under the Securities Act. Persons who may be
deemed to be affiliates of the Company after the Merger Share Distribution
generally include individuals or entities that control, are controlled by or
are under common control with the Company and may include certain officers and
directors of the Company as well as principal stockholders of the Company.
REASON FOR FURNISHING THIS PROSPECTUS
This Prospectus is being furnished in order to provide information for
holders of DLB Stock, each of whom will receive shares of Common Stock in the
Merger Share Distribution. The registration of the Merger Share Distribution
pursuant to the Securities Act is being effected at the request of DLB, in
accordance with a registration rights agreement which, among other things,
obligates the Company to register a transaction resulting in the transfer of
the Shares to the shareholders of DLB. The Company estimates that the total
costs and expenses of the Merger Share Distribution will be approximately
$65,000 all of which will be borne by the Company. Neither the Registration
Statement nor this Prospectus is to be construed as an inducement or
encouragement to buy or sell any securities of the Company, DLB, Chesapeake or
any other corporation. The information contained herein is provided as of the
date of this Prospectus unless otherwise indicated. For more information
regarding the Merger, the Merger Agreement and the Merger Share Distribution,
see the Information Statement/Prospectus.
17
236
PRICE RANGE OF COMMON STOCK AND DIVIDENDS
PRICE RANGE OF COMMON STOCK
The initial price to the public for the Common Stock was $23 per
share. The range of the reported per share sale prices on the AMEX for the
Common Stock for the period between November 4, 1997 (the first trading day
following the Initial Public Offering) and March 27, 1998 was a high of $28 1/4
and a low of $11 1/8. During such period there have been no dividends paid on
the Common Stock. As of March 27, 1998, there were approximately 50 holders of
record of the Common Stock and 18,183,945 shares of Common Stock outstanding.
The last reported sale price of the Common Stock on March 27, 1998, as reported
on the AMEX, was $16 1/4.
DIVIDEND POLICY
The Company currently intends to retain all available earnings
generated by its operations for the development and growth of its business and
does not anticipate paying any cash dividends on its Common Stock in the
foreseeable future. Future dividend policy will be made by the Board and will
depend on a number of factors, including the Company's earnings, capital
requirements, financial condition and business prospects and such other factors
as the Board may deem relevant. The payment of cash dividends on Common Stock
is restricted under the terms of the Term Loan and the Revolving Loan. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
18
237
CAPITALIZATION
The following table sets forth the capitalization of the Company at
September 30, 1997 (i) on an historical basis and (ii) on an as adjusted basis
after giving effect to the issuance of shares pursuant to the Bonray
Acquisition, the Chesapeake Transactions and the CIT Exercise and the Initial
Public Offering and the application of the net proceeds therefrom. The table
should be read in conjunction with "Pro Forma Consolidated Financial Data,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements of the Company and
related notes included elsewhere in this Prospectus.
SEPTEMBER 30, 1997
-----------------------
HISTORICAL AS ADJUSTED
(IN THOUSANDS)
Cash and investments ........................................ $ 812 $ 55,799
========= =========
Current portion of long-term debt ........................... $ 14,589 $ 1,373
--------- ---------
Long-term debt:
Term Loan ................................................. 23,583 15,499(1)
Subordinated Notes ........................................ 16,776 2,060(1)
Notes payable ............................................. -- 635
--------- ---------
Total long-term debt .............................. 40,359 18,194
--------- ---------
Stockholders' equity:
Preferred Stock, par value $0.01 per
share; no shares outstanding ........................... -- --
Common Stock, par value $0.01 per
share; 7,588,000 shares outstanding, historical; and
18,176,050 shares outstanding as adjusted(2) ........... 76 180
Additional paid-in capital ................................ 47,791 179,059
Retained earnings (accumulated deficit) ................... 629 (4,727)
--------- ---------
Total stockholders' equity ........................ 48,496 174,512
--------- ---------
Total capitalization .............................. $ 103,444 $ 194,079
========= =========
- ----------
(1) The Company used a portion of the net proceeds from the Initial Public
Offering (completed in November 1997) to repay $6 million outstanding
under the Revolving Loan and the portion of the Subordinated Notes
held by Chesapeake. Although the Company intended to repay 50% of the
amount outstanding under the Term Loan, the Company and its lenders
have recently agreed to certain changes to their existing credit
arrangements. In particular, CIT has agreed to terminate a pending
sale and lease back arrangement pursuant to which the Company would
have been required to finance, over a period of up to 7 years, the
cost of two rigs aggregating approximately $7.5 million. In exchange,
the Company has agreed that it will prepay only 25% of the borrowings
outstanding under the Term Loan (resulting in a decrease of
approximately $6 million in the amount to be prepaid). The Company
believes that the foregoing changes to its credit arrangements with
CIT are beneficial because, among other things, they reduce the term
for which its financial commitments to CIT will continue in place,
without materially increasing the total amount of financing provided
to the Company by CIT. As of February 28, 1998, no borrowings were
outstanding under the Revolving Loan, and approximately $26 million
was outstanding under the Term Loan. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity
and Capital Resources" and "Certain Relationships and Related
Transactions -- Chesapeake Transactions."
(2) Does not include (i) 806,600 shares of Common Stock subject to
issuance pursuant to outstanding options awarded under the Employee
Stock Plan, (ii) 75,000 shares of Common Stock subject to issuance
pursuant to options awarded under the Director Stock Plan or (iii)
412,000 shares of Common Stock subject to issuance pursuant to
outstanding warrants issued by the Company (of which 7,895 shares of
Common Stock have been issued after September 30, 1997 as a result of
the exercise (on a net exercise basis) of warrants for the purchase of
15,000 shares of Common Stock). See Management -- 1997 Stock Option
and Stock Award Plan," "-- 1997 Non-Employee Directors' Stock Option
Plan" and "Certain Relationships and Related Transactions."
19
238
PRO FORMA CONSOLIDATED FINANCIAL DATA
The following unaudited pro forma financial statements are derived
from the historical financial statements of Bayard, Trend, Ward and Bonray
included elsewhere in this Prospectus. The Pro Forma Combined Statements of
Operations for the nine months ended September 30, 1997 and for the year ended
December 31, 1996 reflect (a) in the column entitled "combined," (i) the Trend
Acquisition (acquired on May 1, 1997 and accounted for as a purchase), (ii) the
Ward Acquisition (acquired on May 30, 1997 and accounted for as a purchase),
(iii) the Bonray Acquisition (acquired on October 16, 1997 and accounted for as
a purchase) and (iv) the May Financing (as defined in "Management's Discussion
and Analysis of Financial Condition and Results of Operations") related to the
Trend and Ward acquisitions and (b) in the column entitled "as adjusted," the
consummation of, and application of proceeds from, the Initial Public Offering
as if all such transactions occurred on January 1, 1996. The Pro Forma Balance
Sheet at September 30, 1997 reflects the consummation of, and application of
proceeds from, the Chesapeake Transactions, the CIT Exercise, the Bonray
Acquisition and the Initial Public Offering as if they had occurred on
September 30, 1997. The unaudited pro forma combined financial information
should be read in conjunction with the notes thereto and the historical
financial statements of Bayard, Trend, Ward and Bonray, including the notes
thereto, which are included elsewhere in this Prospectus.
The unaudited pro forma combined financial statements do not purport
to be indicative of the results of operations that would actually have occurred
if the transactions described had occurred as presented in such statements or
that may occur in the future. In addition, future results may vary
significantly from the results reflected in such statements due to general
economic conditions, oil and gas commodity prices, the demand and prices for
contract drilling services, changes in the number of rigs available for
service, the Company's ability to successfully integrate the operations of
Trend, Ward and Bonray with its current business and several other factors,
many of which are beyond the Company's control. See "Risk Factors."
20
239
BAYARD DRILLING TECHNOLOGIES, INC.
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
HISTORICAL PRO FORMA
-------------------------------------------- -------------------------------------------------
INITIAL
PUBLIC
ACQUISITION OFFERING AS
BAYARD TREND(a) WARD(a) BONRAY(a) ADJUSTMENTS COMBINED ADJUSTMENTS ADJUSTED
REVENUES ..................... $ 9,853 $ 15,692 $ 11,385 $ 11,022 $ -- $ 47,952 $ -- $ 47,952
-------- -------- -------- -------- -------- -------- -------- --------
COSTS AND EXPENSES:
Drilling costs ............. 7,653 11,752 9,891 8,731 -- 38,027 -- 38,027
Depreciation and
amortization ............ 1,126 1,603 966 1,229 1,806(b) 7,730 -- 7,730
1,000(c)
General and
administrative .......... 658 1,647 485 846 -- 3,636 -- 3,636
Other operating ............ 46 -- -- -- -- 46 -- 46
-------- -------- -------- -------- -------- -------- -------- --------
Total costs and
expenses ......... 9,483 15,002 11,342 10,806 2,806 49,439 -- 49,439
-------- -------- -------- -------- -------- -------- -------- --------
Operating
income ........... 370 690 43 216 (2,806) (1,487) -- (1,487)
-------- -------- -------- -------- -------- -------- -------- --------
OTHER INCOME
(EXPENSE):
Interest income ............ -- 8 34 72 -- 114 -- 114
Interest expense and
financing costs ......... (11) (261) (72) (128) (2,928)(d) (3,400) 2,579(h (821)
Gain (loss) on sale of
assets .................. 54 2,055 8 (29) (1,738)(e) 350 -- 350
Other ...................... 17 53 67 -- -- 137 -- 137
-------- -------- -------- -------- -------- -------- -------- --------
Total other
income
(expense) ........ 60 1,855 37 (85) (4,666) (2,799) 2,579 (220)
-------- -------- -------- -------- -------- -------- -------- --------
Income (loss) before
taxes ...................... 430 2,545 80 131 (7,472) (4,286) 2,579 (1,707)
Income tax expense
(benefit) .................. 17 981 -- 10 (1,008)(f) -- -- --
-------- -------- -------- -------- -------- -------- -------- --------
Net income (loss) ............ $ 413 $ 1,564 $ 80 $ 121 $ (6,464) $ (4,286) $ 2,579 $ (1,707)
======== ======== ======== ======== ======== ======== ======== ========
Earnings per share,
primary and fully
diluted .................... $ .04 $ (.30) $ (.11)
======== ======== ========
Weighted average shares
outstanding, primary and
fully diluted(g) ........... 11,317 14,332 15,901
======== ======== ========
The accompanying notes are an integral part of these pro forma financial
statements.
21
240
BAYARD DRILLING TECHNOLOGIES, INC.
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
HISTORICAL PRO FORMA
------------------------------------------------ ------------------------------------------------
BAYARD TREND(a) WARD(a) BONRAY(a)
NINE MONTHS FOUR MONTHS FIVE MONTHS NINE MONTHS INITIAL
ENDED ENDED ENDED ENDED PUBLIC
SEPTEMBER 30, APRIL 30, MAY 31, SEPTEMBER 30, ACQUISITION OFFERING AS
1997 1997 1997 1997 ADJUSTMENTS COMBINED ADJUSTMENTS ADJUSTED
REVENUES ................... $ 33,214 $ 6,390 $ 4,957 14,279 $ -- $ 58,840 $ -- $ 58,840
COSTS AND EXPENSES:
Drilling costs ........... 24,246 4,845 3,914 10,240 -- 43,245 -- 43,245
Depreciation and
amortization ........... 4,918 627 413 1,707 386(b) 8,551 -- 8,551
500(c)
General and
administrative ......... 1,181 515 197 860 -- 2,753 -- 2,753
-------- -------- -------- -------- -------- -------- -------- --------
Total costs and
expenses .......... 30,345 5,987 4,524 12,807 886 54,549 -- 54,549
-------- -------- -------- -------- -------- -------- -------- --------
Operating income ..... 2,869 403 433 1,472 (886) 4,291 -- 4,291
-------- -------- -------- -------- -------- -------- -------- --------
OTHER INCOME
(EXPENSE):
Interest income .......... 68 -- 16 420 -- 504 -- 504
Interest expense and
financing costs ........ (2,172) (47) (27) (471) (1,464)(d) (4,181) 2,907(h)
(1,274)
Gain (loss) on sale of
assets ................. 303 -- -- (57) -- 246 -- 246
Other .................... 5 -- 31 (41)) -- (5) --
-------- -------- -------- -------- -------- -------- -------- --------
(5)
--------
Total other income
(expense) ......... (1,796) (47) 20 (149) (1,464) (3,436) 2,907
-------- -------- -------- -------- -------- -------- -------- --------
(529)
--------
Income (loss) before
taxes .................... 1,073 356 453 1,323 (2,350) 855 2,907 3,762
-------- -------- -------- -------- -------- -------- -------- --------
Income tax expense
(benefit) ................ 410 135 -- 563 (1,108)(f) -- 1,430(i) 1,430
-------- -------- -------- -------- -------- -------- -------- --------
Net income (loss) .......... $ 663 $ 221 $ 453 $ 760 $ (1,242) $ 855 $ 1,477 $ 2,332
======== ======== ======== ======== ======== ======== ======== ========
Earning per share,
primary and fully
diluted .................. $ .06 $ .06 $ .15
======== ======== ========
Weighted average shares
outstanding, primary
and fully diluted(g) ..... 11,317 14,332 15,901
======== ======== ========
The accompanying notes are an integral part of these pro forma financial
statements.
22
241
BAYARD DRILLING TECHNOLOGIES, INC.
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
AS OF SEPTEMBER 30, 1997
(IN THOUSANDS)
ASSETS
HISTORICAL PRO FORMA
-------------------- ---------------------------
BAYARD(l) BONRAY ADJUSTMENTS AS ADJUSTED
CURRENT ASSETS:
Cash and investments ..................................................... $ 812 $ 817 $ 54,170(j) $ 55,799
Accounts receivable ...................................................... 13,610 4,186 -- 17,796
Other .................................................................... 452 299 -- 751
--------- --------- --------- ---------
Total current assets ............................................. 14,874 5,302 54,170 74,346
Property & Equipment, net .................................................. 104,674 18,610 15,347(k) 138,631
Notes receivable - parent .................................................. -- 21,820 (21,820)(m) --
Goodwill, net .............................................................. 6,285 -- 5,684(k) 11,969
Other ...................................................................... 2,231 545 (545)(m) 2,231
--------- --------- --------- ---------
Total assets ..................................................... $ 128,064 $ 46,277 $ 52,836 $ 227,177
========= ========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable ......................................................... $ 13,716 $ 1,529 $ -- $ 15,245
Accrued liabilities ...................................................... 3,817 1,265 -- 5,082
Current portion of long-term debt ........................................ 14,589 -- (13,216)(j) 1,373
--------- --------- --------- ---------
Total current liabilities ........................................ 32,122 2,794 (13,216) 21,700
--------- --------- --------- ---------
Long-term debt ............................................................. 23,583 70 (8,154)(j) 15,499
--------- --------- --------- ---------
Subordinated Notes ......................................................... 16,776 -- (14,716)(j) 2,060
--------- --------- --------- ---------
Notes payable .............................................................. -- 23,000 (22,365)(m) 635
--------- --------- --------- ---------
Deferred income tax liabilities ............................................ 7,087 2,030 3,654(k) 12,771
--------- --------- --------- ---------
STOCKHOLDERS' EQUITY:
Common stock ............................................................. 76 424 74(j) 180
(394)(k)
Additional paid-in capital ............................................... 47,791 17,146 95,538(j) 179,059
18,584(k)
Retained earnings (accumulated deficit) .................................. 629 813 (5,356)(j) (4,727)
(813)(k)
--------- --------- --------- ---------
Total stockholders' equity ....................................... 48,496 18,383 107,633 174,512
--------- --------- --------- ---------
Total liabilities and stockholders'
equity ......................................................... $ 128,064 $ 46,277 $ 52,836 $ 227,177
========= ========= ========= =========
The accompanying notes are an integral part of these pro forma financial
statements.
23
242
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA
(TABLES IN THOUSANDS)
(a) Represents the results of operations for Trend, Ward and Bonray prior
to their acquisition by Bayard. Operations subsequent to the date of
purchase of each of Trend and Ward, May 1 and May 30, 1997,
respectively, are included in the Bayard historical results.
(b) To adjust depreciation expense on assets acquired in the Trend, Ward
and Bonray Acquisitions using allocated purchase prices and based on
estimated useful lives of 15 years calculated on a straight-line
basis.
(c) To record amortization of goodwill attributable to the Trend and
Bonray Acquisitions over 15 years on a straight-line basis.
(d) To reflect the addition of interest expense on an aggregate principal
amount of $20.5 million of Subordinated Notes issued in the May
Financing with an original issue discount of $4 million.
(e) To eliminate the gain recognized by Trend on a rig sold to Bayard in
December 1996, prior to the Trend Acquisition in May 1997.
(f) To eliminate income tax expense recognized by Bayard, Trend and Bonray
to conform to the Company's pro forma income tax position.
(g) Calculations of weighted average shares outstanding are based upon the
following:
Shares outstanding at September 30, 1997 . . . . . . . . . . . . . . . . . . . 7,588
Chesapeake Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,194
CIT Exercise . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 150
Bonray Acquisition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,015
-------
Shares outstanding immediately prior to Initial Public Offering . . . . . . . . 13,947
Common Stock Equivalents (treasury stock method) . . . . . . . . . . . . . . . 385
-------
Historical and combined fully diluted shares outstanding . . . . . . . . . . . 14,332
Shares issued in the Initial Public Offering to the extent necessary to
repay the Subordinated Notes, the Term Loan and the
Revolving Loan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,569
-------
Pro forma shares outstanding . . . . . . . . . . . . . . . . . . . . . . . . . 15,901
=======
(h) To eliminate pro forma and historical interest expense based on the
assumed repayment of debt as set forth in Note (j) as follows:
DECEMBER 31, 1996 SEPTEMBER 30, 1997
--------------------------------- ---------------------------------
PERCENTAGE PERCENTAGE
INCURRED REPAID* PRO FORMA INCURRED REPAID* PRO FORMA
Revolving Loan (historical) $ 0 100.0% $ 0 $ 280 100.0% $ 280
Term Loan (historical)...... 22 50.0% 11 1,400 50.0% 700
Subordinated Notes (pro
forma).................... 2,928 87.7% 2,568 2,197 87.7% 1,927
------ ------ ------ ------
$2,950 $2,579 $3,877 $2,907
====== ====== ====== ======
* Represents the percentage of debt to be repaid from proceeds of the
Initial Public Offering.
(i) To record a provision for federal and state income tax at the statutory
rate of 38%.
(j) To adjust for the Chesapeake Transactions and the CIT Exercise
(collectively, the "Stockholder Exercises"), the Initial Public Offering
and the application of the net proceeds therefrom:
Net proceeds from the Initial Public Offering . . . . . . . . . . $ 84,590
Stockholder Exercises . . . . . . . . . . . . . . . . . . . . . . 11,023
---------
95,613
---------
24
243
BALANCE AT
SEPTEMBER 30, PERCENTAGE
1997 REPAID
Less debt retired --
Term Loan . . . . . . . . . . . . . . . . . . . $ 28,547 50.0% 14,274
Revolving Loan . . . . . . . . . . . . . . . . 7,097 100.0% 7,096
Subordinated Notes . . . . . . . . . . . . . . 16,776 87.7%(1) 14,716
---------- -------
$ 52,420 36,086
Extraordinary loss on early extinguishment of debt . . . . . . . . . . . . . . . . 5,357
-------
41,443
-------
Net adjustment to cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $54,170
=======
- ----------
(1) Represents repayment of Chesapeake's portion of the Subordinated Notes
($18 million of $20.52 million) as described under the caption
"Chesapeake Transactions."
(k) To reflect (i) the acquisition of Bonray and the issuance of 3,015,000
shares of Common Stock at $11.86 per share based on the appraisals of
the fair market value of the property and equipment acquired of $35
million, (ii) the allocation of the purchase price as shown below and
(iii) deferred income taxes related to the book/tax differences in the
basis of property and equipment:
Current assets . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,591
Property and equipment . . . . . . . . . . . . . . . . . . . . . 34,976
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,261
Current liabilities . . . . . . . . . . . . . . . . . . . . . . . (3,733)
Long-term liabilities . . . . . . . . . . . . . . . . . . . . . . (74)
Deferred income tax . . . . . . . . . . . . . . . . . . . . . . . (6,261)
-------
Purchase price . . . . . . . . . . . . . . . . . . . . . . . . . $35,760
=======
(l) On May 1, 1997, the Company completed the Trend Acquisition for $18
million in cash and 250,000 shares of Common Stock, which equates to
$10.64 per share based on the appraisals of the fair market value of
the property and equipment acquired of $21.5 million. The Company
incurred costs of approximately $307,000 in connection with this
acquisition.
The Trend Acquisition was accounted for as a purchase. The following
is an analysis of the allocation of the purchase price:
(IN THOUSANDS)
Current assets . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,734
Property and equipment . . . . . . . . . . . . . . . . . . . . . 21,532
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,330
Current liabilities . . . . . . . . . . . . . . . . . . . . . . . (2,265)
Long-term liabilities . . . . . . . . . . . . . . . . . . . . . . (1,340)
Deferred income tax liability . . . . . . . . . . . . . . . . . . (6,330)
-------
Purchase price . . . . . . . . . . . . . . . . . . . . . . . . . $20,661
=======
On May 30, 1997, pursuant to the Ward Acquisition, the Company
acquired six drilling rigs for approximately $8 million in cash and
400,000 shares of Common Stock which equates to $8.95 per share based
on the appraisal of the fair market value of the assets acquired of
$11.9 million. The Company also issued warrants to purchase 200,000
shares of Common Stock at $10.00 per share. The warrants had an
estimated fair market value of $294,000 at the closing date of the
Ward Acquisition and was recorded as an increase in property and
equipment and additional paid in capital.
(m) To eliminate (i) notes receivable, (ii) notes payable and (iii) loan
origination fees related to a certain Credit Agreement, by and between
Lehman Commercial Paper, Inc. and Bonray, which was retained by DLB in
connection with the Company's acquisition of Bonray.
25
244
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
The historical financial data presented in the table below for and at
the end of each of the years in the five- year period ended December 31, 1996
are derived from the financial statements of the Company and relate to the
operations of Anadarko, the predecessor of the Company, and include, generally,
the financial results of the operation of eight rigs.
The financial statements for the years ended December 31, 1994, 1995
and 1996 have been audited by Grant Thornton LLP, independent certified public
accountants. The historical financial data presented in the table below for
and at the end of the nine month periods ended September 30, 1997 and 1996 are
derived from the unaudited consolidated financial statements of the Company.
In the opinion of management of the Company, such unaudited consolidated
condensed financial statements include all adjustments (consisting of normal
recurring adjustments) necessary for a fair presentation of the financial data
for such periods. The results for the nine months ended September 30, 1997 are
not necessarily indicative of the results to be achieved for the full year.
The data presented below should be read in conjunction with the
Company's consolidated financial statements and the notes thereto included
elsewhere in this Prospectus and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
----------------------------------------------------- ----------------------
1992 1993 1994 1995 1996 1996 1997
(UNAUDITED) (UNAUDITED)
STATEMENT OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA)
DATA:
Revenues:
Contract drilling ................... $9,368 $ 8,349 $ 9,910 $ 7,405 $ 9,793 $ 6,728 $ 33,214
Other................................ -- -- -- 303 60 59 --
------ ------- ------- ------- -------- ---------- --------
Total revenues................... 9,368 8,349 9,910 7,708 9,853 6,787 33,214
------ ------- ------- ------- -------- ---------- --------
Operating expense:
Drilling............................. 7,835 7,690 8,572 6,075 7,653 5,244 24,246
Depreciation, depletion and
amortization....................... 988 1,374 1,557 791 1,126 727 4,918
General and administrative........... 651 819 786 880 658 473 1,181
Other................................ -- -- -- 47 46 -- --
------ ------- ------- ------- -------- ---------- --------
Total operating costs............ 9,474 9,883 10,915 7,793 9,483 6,444 30,345
------ ------- ------- ------- -------- ---------- --------
Operating income (loss)................ (106) (1,534) (1,005) (85) 370 343 2,869
------ ------- ------- ------- -------- ---------- --------
Other income and (expense):
Interest expense and financing cost (8) (30) (18) (3) (11) -- (2,172)
Interest income...................... -- -- -- -- -- -- 68
Gain (loss) on sale of assets........ -- -- 366 (131) 54 -- 303
Other income (expense)............... 90 24 -- (3) 17 17 5
------ ------- ------- ------- -------- ----------- --------
Income (loss) before income taxes...... (24) (1,540) (657) (222) 430 360 1,073
Income tax expense(1).................. -- -- -- -- 163 137 410
------ ------- ------- ------- -------- ---------- --------
Net income (loss)...................... $ (24) $(1,540) $ (657) $ (222) $ 267 $ 223 $ 663
====== ======= ======= ======= ======== ========= ========
Earnings (loss) per common share:
primary and fully diluted.............. $ .02 $ .02 $ .06
======== ========= ========
Weighted average shares
outstanding(2): fully diluted.......... 11,317 11,317 11,317
CASH FLOWS:
Operating activities................... $ (786) $ (51) $ 445 $ 310 $ (462) $ 589 $ 7,212
Investing activities................... (1,352) (1,671) (454) (1,710) (10,441) (6,363) (75,059)
Financing activities................... 2,138 1,722 9 1,400 15,866 5,774 62,966
BALANCE SHEET DATA:
Total assets........................... $6,858 $ 6,791 $ 6,149 $ 8,054 $ 34,673 $14,339 $128,064
Working capital (deficit), excluding
current portion of long-term debt.... 826 711 802 12 4,974 828 (2,659)
Total long-term debt, including
current portion...................... 408 365 -- -- 7,000 -- 54,948
BALANCE SHEET DATA:
Total stockholders' equity(3).......... (6,875) (913) (54) (276) 26,251 402 48,496
OTHER FINANCIAL DATA:
EBITDA(4).............................. $ 882 $ (160) $ 552 $ 706 $ 1,496 $ 1,070 $ 7,787
Capital expenditures................... 1,352 1,671 1,183 2,088 10,578 6,499 83,101
26
245
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------------------------- ------------------
1992 1993 1994 1995 1996 1996 1997
(UNAUDITED) (UNAUDITED)
(IN THOUSANDS, EXCEPT RIG AND DAY RATE DATA)
DRILLING RIG ACTIVITY DATA
(UNAUDITED):
Total rigs at end of period.... 7 8 7 8 17 8 41
Marketed rigs at end of
period....................... 7 8 7 8 8 8 34
Average utilization rate of
drilling rigs available for
service(5)................... 77% 71% 84% 86% 88% 87% 94%
Average revenues per day(6).... 4,020 $ 4,332 $4,148 4,298 $ 4,731 $ 4,678 $ 5,740
- ----------
(1) Income tax expense is presented on a pro forma basis (assuming a 38%
statutory rate) for the year ended December 31, 1996 and for the nine
months ended September 30, 1996.
(2) Historical weighted average shares outstanding is calculated using the
fully diluted shares outstanding through September 30, 1997 for the
year ended December 31, 1996 and nine months ended September 30, 1996
and 1997.
(3) No dividends were declared through September 30, 1997. See "Dividend
Policy."
(4) EBITDA represents operating income (loss) before depreciation and
amortization. EBITDA is frequently used by securities analysts and is
presented herein to provide additional information about the Company's
operations. EBITDA is not a measurement presented in accordance with
generally accepted accounting principles. EBITDA should not be
considered in isolation or as a substitute for net income or cash flow
data prepared in accordance with generally accepted accounting
principles or as a measure of a company's profitability or liquidity.
(5) Rig utilization rates are calculated on a weighted average basis
assuming 365 days availability for all rigs available for service.
Rigs acquired have been treated as added to the rig fleet as of the
date of acquisition. Rigs under contract that generate revenues
during moves between locations or during mobilization/ demobilization
are also considered to be utilized. Rigs that are owned but not being
marketed, including rigs being refurbished, are not considered in
determining the utilization rate.
(6) Represents total contract drilling revenues (excluding mobilization,
cost reimbursements and fuel), divided by the total number of days the
Company's drilling rig fleet operated during the period, divided by
the average number of rigs in operation.
27
246
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
Consolidated Financial Statements of the Company and notes thereto included
elsewhere in this Prospectus.
GENERAL
The Company's operations have been and will be significantly affected
by the Consolidation Transactions which have transformed the Company from a
regional competitor with ten rigs in late 1996 to its current position of
operating the fifth largest land drilling fleet in the United States, with a
total of 54 rigs. The historical financial results presented herein include
the effects of the Formation Transactions (16 rigs), the Trend Acquisition (14
rigs), the Ward Acquisition (six rigs) and the Individual Rig Acquisitions (six
rigs), only for the periods after such transactions. The Bonray Acquisition
(13 rigs) was completed after September 30, 1997, and therefore the historical
financial results presented herein do not reflect the effects of such
transaction. In addition, the historical financial results include periods in
which a number of rigs were being refurbished and did not contribute to
revenues. Accordingly, the Company does not believe that the historical
statements of operations presented herein are necessarily indicative of the
Company's future operating results, particularly in light of the magnitude of
its recent acquisitions and rig refurbishment projects and the increased demand
and contract rates for drilling rigs in its core Mid-Continent and Gulf Coast
regions. See "Business -- Formation and Other Transactions."
DOMESTIC LAND DRILLING INDUSTRY OVERVIEW
Demand for the Company's contract land drilling services is
substantially dependent upon, and affected by, the level of domestic oil and
gas exploration and development activity. Industry sources estimate that from
its peak in 1982, the supply of domestic rigs has fallen as a result of normal
attrition, cannibalization of components to refurbish rigs, the inability of
smaller competitors to raise capital needed to upgrade and modernize rigs and
the export of rigs to international markets. As a result of these factors, the
contract land drilling industry has been cyclical with significant volatility
in profitability and rig values.
The Company's operating margins are influenced by contract drilling
rates, operating costs and drilling rig utilization. The land drilling
industry is experiencing higher utilization, increased day rates and improved
financial performance as a result of the long term decline in the supply of
rigs and increased demand for rigs attributable to improved oil and gas
industry fundamentals. In addition, the industry is experiencing a period of
rapid consolidation as larger, better-capitalized drilling companies have
acquired smaller operators. The convergence of land drilling rig supply and
demand in its core domestic markets, along with the acquisition and
refurbishment of rigs, has contributed to higher utilization, increased day
rates and improved financial results for the Company in recent periods.
Although the Company believes that improved technologies and stable
oil and gas prices have contributed to increased activity in the exploration
and production sector during 1997, there has been a general decline in oil and
gas prices in recent months and there can be no assurance that such decline
will not continue. The recent decline in oil prices has caused the Company's
rig utilization rates to decrease in recent periods. In addition, ongoing
movement or reactivation of land drilling rigs (including the movement of rigs
from outside the United States into domestic markets) or new construction of
drilling rigs could increase rig supply and adversely affect contract drilling
rates and utilization levels. The Company cannot predict the future level of
demand for its contract drilling services, future conditions in the contract
drilling industry or future contract drilling rates.
FINANCIAL CONDITION AND LIQUIDITY
Since December 1996, the Company has completed the Formation
Transactions, the Trend Acquisition, the Ward Acquisition, the Bonray
Acquisition, the Individual Rig Acquisitions and the Oliver Acquisition. The
Formation Transactions involved the issuance of an aggregate of 5,600,000
shares of Common Stock in consideration for the contribution to the Company of
16 rigs and $10 million in cash. At the time of the Formation Transactions,
the Company entered into a $24 million term loan facility with CIT, principally
for the refurbishment of certain of the Company's rigs. In May 1997,
contemporaneously with the Trend Acquisition and in anticipation of the Ward
Acquisition, the Company completed a financing transaction in which it (i)
issued to Chesapeake and Energy Spectrum additional shares of Common Stock, and
two series of warrants together with subordinated notes due May 1, 2003 (the
28
247
"Subordinated Notes") for $28.5 million in cash and (ii) increased the
availability under its debt facilities from $24 million to $40.5 million
(collectively, the "May Financing"). In addition, the Company obtained the
right, exercisable solely at the Company's option at any time on or prior to
April 30, 1998, to require Chesapeake to provide an additional $3 million in
cash in exchange for the issuance to Chesapeake of additional shares of Common
Stock, Subordinated Notes and warrants to purchase Common Stock. The Company
later waived this right in connection with the Chesapeake Transactions. See
"Certain Relationships and Related Transactions -- Chesapeake Transactions."
The Company is currently negotiating with a commercial bank to
establish a new revolving credit facility of approximately $50 million. A
commitment letter and term sheet are being reviewed by the Company with due
diligence in progress. This commitment is subject to the signing of a
definitive credit agreement and amendment of certain provisions of the existing
credit agreements governing the Term Loan.
The Company's principal requirements for capital, in addition to the
funding of ongoing contract drilling operations, have been capital
expenditures, including the refurbishment of existing rigs and acquisitions.
From December 1996 through September 30, 1997, the Company spent $20.7 million
on the Trend Acquisition, $11.9 million on the Ward Acquisition, $5.5 million
on the Individual Rig Acquisitions and approximately $45.5 million on
refurbishments and other related equipment purchases, including drill pipe. As
a result, the Company's net property and equipment increased from $27 million
at December 31, 1996 to $105 million at September 30, 1997. The Company's
principal sources of liquidity have been the issuance of Common Stock, warrants
to purchase Common Stock, the Subordinated Notes and borrowings under a $30.5
million term loan facility (the "Term Loan") between the Company, CIT and Fleet
Capital Corporation ("Fleet") and a $10 million revolving loan facility (the
"Revolving Loan") between Fleet and the Company (collectively, the "Loan
Agreements").
The most significant change in the Company's balance sheet from
December 31, 1996 to September 30, 1997 was a $77.7 million increase in net
property and equipment. During this same period, long-term debt, net of
current maturities, increased by $34.3 million and stockholders' equity
increased by $22.2 million. These changes are a direct result of the
acquisition and financing transactions described herein.
From December 31, 1996 to September 30, 1997, the Company's working
capital position declined by $21.3 million to a deficit of $17.2 million. This
decline was primarily the result of a $13.6 million increase in current
maturities of long-term debt and a $4.9 million decrease in cash, as the
Company continued to invest in rig acquisitions and the refurbishment of rigs.
Operating Activities
During the year ended December 31, 1996, the Company required $462,000
of cash to fund operating activities. This was the result of $1.5 million of
cash provided by operations, partially offset by changes in working capital
items that required $2 million of cash. Cash required for changes in working
capital items included (i) increase in accounts receivable of $2.1 million,
(ii) increase in other assets totaling $185,000 and (iii) decrease of $383,000
in accounts payable, which were partially offset by an increase of $663,000 of
other current liabilities.
During the nine months ended September 30, 1997, net cash provided
from operating activities totaled $8.6 million. The Company generated cash
from operations of $5.7 million and working capital changes provided $2.9
million.
Investing Activities
During 1996, the Company invested $21.7 million in fixed assets, net
of asset sales. The major components of these expenditures were $10.4 million
of cash expenditures to acquire and refurbish five diesel electric SCR rigs and
$9.8 million of Common Stock issued to acquire rigs in the Formation
Transactions.
During the nine months ended September 30, 1997, the Company invested
$83.1 million in fixed assets, including the Trend Acquisition, the Ward
Acquisition and the Individual Rig Acquisitions. Rig refurbishments consisted
of $28.7 million, and $16.8 million was invested in drill pipe and other
drilling related equipment. The acquisitions of Trend and Ward were partially
funded through the issuance of Common Stock valued at $6.6 million.
29
248
Financing Activities
During 1996, the Company raised $15.9 million from financing
activities. The Company borrowed $7 million during the year under the Term
Loan as described below. The Company also issued 3,600,000 shares of Common
Stock for assets and cash and made debt payments totaling $900,000 during the
year.
During the nine months ended September 30, 1997, the Company obtained
$63 million from financing activities, including net borrowings under the Loan
Agreements totaling $31.3 million, $11.2 million from the issuance of Common
Stock and $20.5 million from the issuance of the Subordinated Notes and the
associated warrants. The proceeds from these transactions were used to fund
the Company's working capital requirements and capital expenditures as
discussed above.
Following is a summary of certain material terms of the Formation
Transactions, the Loan Agreements and the May Financing.
Formation Transactions. The Company was formed in December 1996
through a series of affiliated entity transactions in which the Company became
successor to Anadarko, the contract drilling subsidiary of privately held APLP.
In connection with the Formation Transactions (i) APLP contributed ten drilling
rigs in consideration for 2,000,000 shares of Common Stock, (ii) R.T. Oliver
Drilling, Inc. and Mike Mullen Energy Equipment Resource, Inc. and certain of
their affiliated companies (collectively, the "Oliver Companies") exchanged six
drilling rigs for 1,600,000 shares of Common Stock, (iii) Energy Spectrum
contributed $10 million in consideration for 2,000,000 shares of Common Stock
and (iv) Chesapeake entered into drilling contracts with two-year terms for six
of the Company's rigs in consideration for the grant by the Company of the an
option to purchase 2,000,000 shares of Common Stock (the "Chesapeake Option").
See "Business -- Formation and Other Transactions."
Loan Agreements. On December 10, 1996, the Company also entered into
the Term Loan. Subsequent to that date and in connection with the May
Financing, the Company increased the Term Loan from $24 million to $30.5
million. The Term Loan provides the Company up to approximately $30.5 million
of borrowing capacity for the purchase of additional land drilling rigs, the
refurbishment of such rigs and equipment and for working capital purposes. The
Company also entered into a Revolving Loan with Fleet in May 1997. The
Revolving Loan provides for revolving credit loans of up to $10 million, and is
being used for general corporate purposes. Amounts outstanding under the
Revolving Loan ($7.9 million at September 30, 1997) bear interest based on
Fleet's prime rate plus 1.5% (10.0% at September 30, 1997) and mature in April
2000. Amounts outstanding under the Term Loan ($28.5 million at September 30,
1997) bear interest, at the election of the Company, at floating rates equal to
Chase Manhattan Bank's prime rate plus 2.0% or the London Interbank Offered
Rate plus 4.25% (10% at September 30, 1997) and mature in March 2002. To date,
loans under the Revolving Loan and the Term Loan have been used for capital
expenditures and working capital requirements. The Loan Agreements are secured
by substantially all of the assets of the Company, including drilling rigs,
equipment and drilling contracts, and contain customary restrictive covenants
(including covenants restricting the ability of the Company to pay dividends
and encumber assets) and affirmative covenants to maintain specified financial
ratios.
May Financing. In order to fund the Trend Acquisition and the Ward
Acquisition, on May 1, 1997, the Company completed the May Financing in which
the Company issued shares of Common Stock, the Subordinated Notes and warrants
to purchase Common Stock to Chesapeake and Energy Spectrum in exchange for an
aggregate of $28.5 million in cash, as described below. In addition, the
Company modified the Term Loan and entered into the Revolving Loan as described
above.
In the May Financing, the Company issued 1,000,000 shares of Common
Stock to Chesapeake in consideration for $7 million in cash and 140,000 shares
of Common Stock to Energy Spectrum in consideration for $980,000 in cash.
Additionally, the Company issued the Subordinated Notes due May 1, 2003 in the
original principal amounts of $18 million and $2.52 million to Chesapeake and
Energy Spectrum, respectively. The Subordinated Notes bear interest at the
Company's option at either (i) 11% per annum, payable in cash, or (ii) 12.875%
per annum, payable in the form of additional Subordinated Notes, which interest
is payable quarterly in arrears. The Subordinated Notes are general unsecured
subordinated obligations of the Company that are subordinated in right of
payment to all existing and future senior indebtedness of the Company, pari
passu with all existing and future subordinated indebtedness of the Company and
senior in right of payment to all future junior subordinated indebtedness of
the Company. Upon consummation of the Initial Public Offering, the Company
redeemed in full the $18 million principal amount of Subordinated Notes issued
30
249
to Chesapeake in consideration for the payment by the Company to Chesapeake of
$18.2 million in cash. See "Certain Relationships and Related Transactions --
Chesapeake Transactions."
In connection with the issuance of the Subordinated Notes, the Company
issued two series of detachable warrants (the "Warrants") for the purchase of
shares of Common Stock, designated as "Series A Warrants" and "Series B
Warrants." The Warrants are exercisable on or prior to May 1, 2003 at a price
of $0.01 per share in the case of the Series A Warrants and $7.50 per share in
the case of the Series B Warrants. In the May Financing, Chesapeake was issued
Series A Warrants and Series B Warrants representing the right to purchase
700,000 shares and 800,000 shares of Common Stock, respectively, and Energy
Spectrum was issued Series A Warrants and Series B Warrants representing the
right to purchase 98,000 shares and 112,000 shares of Common Stock,
respectively. On July 31, 1997, Energy Spectrum exercised in full its Series A
Warrants, but continues to hold all of the Series B Warrants issued to it. In
August 1997, Chesapeake agreed to the relinquishment and cancellation in full
of its Series A Warrants and Series B Warrants in connection with the
Chesapeake Transactions. See "Certain Relationships and Related Transactions
- -- Chesapeake Transactions."
Additional Chesapeake Financing. Additionally, in connection with the
May Financing, the Company obtained the right to require Chesapeake, on or
before April 30, 1998, to provide the Company with an additional $3 million in
capital through the purchase of (i) 120,000 shares of Common Stock for a
purchase price of $7.00 per share, (ii) additional Subordinated Notes in the
aggregate principal amount of $2.16 million, (iii) additional Series A Warrants
exercisable for 84,000 shares of Common Stock and (iv) additional Series B
Warrants exercisable for 96,000 shares of Common Stock. In August 1997, the
Company agreed to waive this right in connection with the Chesapeake
Transactions. See "Certain Relationships and Related Transactions --
Chesapeake Transactions."
The foregoing summaries of the material provisions of the Company's
principal financing agreements do not purport to be complete and are subject
to, and qualified in their entirety by reference to, all of the provisions of
the related agreements, copies or forms of which have been filed as exhibits to
the Registration Statement of which this Prospectus is a part.
Recent Events and Future Activities
In October 1997, the Company consummated the Chesapeake Transactions,
resulting in the cancellation of the Chesapeake Option, the payment to the
Company of $9 million in cash by Chesapeake, the redemption of the $18 million
principal amount of Subordinated Notes held by Chesapeake for an aggregate cash
payment by the Company of $18.2 million and the issuance of 3,194,000 shares of
Common Stock to Chesapeake.
Also in October 1997, the Company consummated the Bonray Acquisition,
pursuant to which Bonray became a wholly owned subsidiary of the Company. In
the Bonray Acquisition, the Company issued to DLB and DLJ 2,955,000 and 60,000
shares of Common Stock, respectively. See "Business--Formation and Other
Transactions--The Bonray Acquisition."
In November 1997, the Company and certain of its stockholders
consummated the Initial Public Offering, pursuant to which the Company
registered the sale of an aggregate of 11,040,000 shares of Common Stock. In
the Initial Public Offering, the Company issued and sold 4,229,050 shares of
Common Stock and certain stockholders of the Company sold 6,810,950 shares of
Common Stock. The Company received net proceeds of $89.5 million for the
shares sold by it in the Initial Public Offering. Through February 28, 1998
these net proceeds have been used as follows: (i) $34.1 million to purchase
machinery and equipment, (ii) $25.6 million to repay indebtedness, (iii)
$817,125 to pay CIT in connection with the CIT Exercise and (iv) $29 million to
place in temporary investments.
On November 24, 1997, the Board of Directors of the Company approved
the acquisition and refurbishment of nine additional drilling rigs as part of
an $87 million capital expenditure budget. This budget includes (i) $14.4
million for the refurbishment of four rigs in inventory, (ii) $14 million for
the acquisition of the six rigs acquired in the Oliver Acquisition, (iii) $28.6
million for the refurbishment of, and purchase of complementary equipment,
including drill pipe, for, the six rigs acquired in the Oliver Acquisition,
(iv) $11.2 million for the acquisition of components and refurbishment to
complete three additional rigs, (v) $10 million for maintenance capital
expenditures, including drill pipe, and (vi) $8.8 million for spare equipment.
The schedule for rig refurbishment is expected to extend through the first
quarter of 1999; however, the Company may accelerate or delay this schedule at
any time and from time to time based on market conditions and other factors.
31
250
The Company believes that the balance of the proceeds from the Initial
Public Offering, cash flow from operations and, to the extent required,
borrowings under the Loan Agreements will be sufficient to fund the Company's
1997 rig refurbishment program and to meet its other anticipated capital
requirements for 1997. As of February 28, 1998, the Company had approximately
$26 million of borrowings outstanding under the Term Loan, no borrowings
outstanding under the Revolving Loan and $2.5 million of borrowings outstanding
under the Subordinated Notes, with $10 million of unused borrowing capacity
under the Revolving Loan and cash or cash equivalents of approximately $29
million.
On January 9, 1998, the Company completed the Oliver Acquisition,
pursuant to which it acquired six rigs from R.T. Oliver Drilling, Inc. for
approximately $14 million in cash. The Company expects to refurbish and
purchase complementary equipment, including drill pipe, for these rigs at an
aggregate cost of approximately $28.6 million.
The Company continues to actively review possible acquisition
opportunities. The Company currently has no agreements to acquire additional
businesses or equipment; however, suitable opportunities may arise in the
future. The timing or success of any acquisition effort and the size of the
associated potential capital commitments cannot be predicted at this time. In
addition, there can be no assurance that adequate funding will be available on
terms satisfactory to the Company.
RESULTS OF OPERATIONS
Comparison of Three Months Ended September 30, 1997 and 1996
THREE MONTHS ENDED SEPTEMBER 30,
--------------------------------
1996 1997
Rig days worked(1) ............................... 502 3,006
Average revenues per day(2) ...................... $ 4,952 $ 6,024
Drilling revenues ................................ $ 2,486,000 18,107,000
Drilling costs(3) ................................ 1,976,000 13,349,000
----------- -----------
Operating Margin ................................. $ 510,000 $ 4,758,000
=========== ===========
- -----------------
(1) Rig days worked represents the number of rigs being marketed by the
Company multiplied by the number of days during which such rigs are
being operated, mobilized, assembled or dismantled while under
contract. Rig days are a common measurement of both utilization rates
and fleet size.
(2) Represents total contract drilling revenues (including mobilization
revenues and reimbursement for fuel and other costs) divided by the
total number of rig days worked by the Company's drilling rig fleet
marketed during the period.
(3) Drilling costs exclude depreciation and amortization and general and
administrative expenses.
Drilling revenues increased approximately $15.6 million, or 628% to
$18.1 million for the three months ended September 30, 1997, from $2.5 million
for the three months ended September 30, 1996. Drilling revenues increased due
to a 2,504 day, or 499%, increase in rig days worked, and a $1,072, or 22%,
increase in the average revenue per day. The increase in days worked was a
result of an increase in the average number of rigs owned and available for
service. As of September 30, 1997, the Company had 36 rigs available for
service. The increase in rigs available for service was principally the result
of the Consolidation Transactions. Rig days worked consisted of 1,096 days
worked in the Gulf Coast region and 1,910 days worked in the Mid-Continent
region. Increases in revenues per day were a result of the overall increase in
demand for land drilling rigs as reflected in the utilization rate increase
from 87% to 94%.
Drilling costs increased by approximately $11.3 million, or 576%, to
$13.3 million for the three months ended September 30, 1997, as compared to $2
million for the three months ended September 30, 1996. The increase in
drilling operating expenses was a direct result of the increase in the number
of rigs owned and available for service and the corresponding 2,504 day
increase in the days worked.
Depreciation and amortization expense increased by $2 million, or
629%, to $2.3 million for the three months ended September 30, 1997, as
compared to $312,000 for the three months ended September 30, 1996. The
increase was primarily due to additional depreciation associated with the
Consolidation Transactions.
32
251
General and administrative expense increased by $297,000, or 198%, to
$447,000 for the three months ended September 30, 1997, from $150,000 for the
same period of 1996 due primarily to increased payroll costs associated with
new management and increased corporate staff and increased legal fees due to
the Company's acquisition activities.
Interest expense was $1.2 million for the three months ended September
30, 1997. The Company had no outstanding debt for the three months ended
September 30, 1996.
Other income increased for the three months ended September 30, 1997
as compared to the three months ended September 30, 1996, primarily due to
gains on the sale of assets.
Comparison of Nine Months Ended September 30, 1997 and 1996
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
1996 1997
Rig days worked(1) .............................. 1,438 5,786
Average revenues per day(2) ..................... $ 4,678 $ 5,740
Drilling revenues ............................... $ 6,728,000 $33,214,000
Drilling costs(3) ............................... 5,244,000 24,246,000
----------- -----------
Operating Margin ................................ $ 1,484,000 $ 8,968,000
=========== ===========
- ----------
(1) Rig days worked represents the number of rigs being marketed by the
Company multiplied by the number of days during which such rigs are
being operated, mobilized, assembled or dismantled while under
contract. Rig days are a common measurement of both utilization rates
and fleet size.
(2) Represents total contract drilling revenues (including mobilization
revenues and reimbursement for fuel and other costs) divided by the
total number of rig days worked by the Company's drilling rig fleet
marketed during the period.
(3) Drilling costs exclude depreciation and amortization and general and
administrative expenses.
Drilling revenues increased approximately $26.5 million, or 394%, to
$33.2 million for the nine months ended September 30, 1997, from $6.7 million
for the nine months ended September 30, 1996. Drilling revenues increased due
to a 4,348 day, or 302%, increase in rig days worked, and a $1,062, or 23%,
increase in the average revenue per day. The increase in days worked was a
result of an increase in the average number of rigs owned and available for
service. As of September 30, 1997, the Company had 36 rigs available for
service. The increase in rigs available for service was principally the result
of the Consolidation Transactions. Rig days worked consisted of 2,533 days
worked in the Gulf Coast region and 3,253 days worked in the Mid-Continent
region. Increases in revenues per day were a result of the overall increase in
demand for land drilling rigs as reflected in the utilization rate increase
from 87% to 94%.
Drilling costs increased by approximately $19 million, or 362%, to
$24.2 million for the nine months ended September 30, 1997, as compared to $5.2
million for the nine months ended September 30, 1996. The increase in drilling
operating expenses was a direct result of the increase in the number of rigs
owned and available for service and the corresponding 4,348 day increase in rig
days worked.
Depreciation and amortization expense increased by $4.2 million, or
576%, to $4.9 million for the nine months ended September 30, 1997, as compared
to $727,000 for the nine months ended September 30, 1996. The increase was
primarily due to additional depreciation associated with the Consolidation
Transactions.
General and administrative expense increased by $708,000, or 149%, to
$1.2 million for the nine months ended September 30, 1997, from $473,000 for
the same period of 1996, due primarily to increased payroll costs associated
with new management and increased corporate staff and increased legal fees due
to the Company's acquisition activities.
Interest expense was $2.2 million for the nine months ended September
30, 1997. The Company had no outstanding debt for the nine months ended
September 30, 1996.
Other income increased for the nine months ended September 30, 1997 as
compared to the nine months ended June 30, 1996, primarily due to gains on the
sale of assets.
33
252
For the nine months ended September 30, 1997, the income tax provision
was $410,000. For the first nine months of 1996 the Company was not a taxable
entity.
Comparison of Six Months Ended June 30, 1997 and 1996
SIX MONTHS ENDED JUNE 30,
-------------------------
1996 1997
Rig days worked(1) . . . . . . . . . . . . . . . . 936 2,470
Average revenues per day(2) . . . . . . . . . . . . $ 4,532 $ 6,116
Drilling revenues . . . . . . . . . . . . . . . . . $4,242,000 $15,107,000
Drilling costs(3) . . . . . . . . . . . . . . . . . 3,268,000 10,897,000
---------- -----------
Operating Margin . . . . . . . . . . . . . . . . . $ 974,000 $ 4,210,000
========== ===========
- ----------
(1) Rig days worked represents the number of rigs being marketed by the
Company multiplied by the number of days during which such rigs are
being operated, mobilized, assembled or dismantled while under
contract. Rig days are a common measurement of both utilization rates
and fleet size.
(2) Represents total contract drilling revenues (including mobilization
revenues and reimbursement for fuel and other costs) divided by the
total number of rig days worked by the Company's drilling rig fleet
marketed during the period.
(3) Drilling costs exclude depreciation and amortization and general and
administrative expenses.
Drilling revenues increased approximately $10.9 million, or 256% to
$15.1 million for the six months ended June 30, 1997, from $4.2 million for the
six months ended June 30, 1996. Drilling revenues increased due to a 1,534
day, or 164%, increase in rig days worked, and a $1,584, or 34.9%, increase in
the average revenue per day. The increase in days worked was a result of an
increase in the average number of rigs owned and available for service. As of
June 30, 1997, the Company had 34 rigs available for service. The increase in
rigs available for service was principally the result of the Consolidation
Transactions. Rig days worked consisted of 1,305 days worked in the Gulf Coast
region and 1,165 days worked in the Mid-Continent region. Increases in
revenues per day were a result of the overall increase in demand for land
drilling rigs as reflected in the utilization rate increasing from 87% to 97%.
Drilling costs increased by approximately $7.6 million, or 233%, to
$10.9 million for the six months ended June 30, 1997, as compared to $3.3
million for the six months ended June 30, 1996. The increase in drilling
operating expenses was a direct result of the increase in the number of rigs
owned and available for service and the corresponding 1,534 day increase in the
days worked.
Depreciation and amortization expense increased by $2.2 million, or
537%, to $2.6 million for the six months ended June 30, 1997 as compared to
$415,000 for the six months ended June 30, 1996. The increase was primarily
due to additional depreciation associated with the Consolidation Transactions.
General and administrative expense increased by $411,000, or 127%, to
$734,000 for the six months ended June 30, 1997, from $323,000 for the same
period of 1996 due primarily to increased payroll costs associated with new
management and increased corporate staff and increased legal fees due to the
Company's acquisition activities.
Interest expense was $982,000 for the six months ended June 30, 1997.
The Company had no outstanding debt for the six months ended June 30, 1996.
Other income decreased for the six months ended June 30, 1997 as
compared to the six months ended June 30, 1996.
For the six months ended June 30, 1997, the income tax benefit was
$12,000. For the first six months of 1996 the Company was not a taxable
entity.
34
253
Comparison of Years Ended December 31, 1996 and 1995
YEAR ENDED DECEMBER 31,
-----------------------
1995 1996
Rig days worked(1) ............................... 1,489 2,029
Average revenues per day(2) ...................... $ 4,973 $ 4,826
Drilling revenues ................................ $7,405,000 $9,793,000
Drilling costs(3) ................................ 6,075,000 7,653,000
---------- ----------
Operating Margin ................................. $1,330,000 $2,140,000
========== ==========
- ----------
(1) Rig days worked represents the number of rigs being marketed by the
Company multiplied by the number of days during which such rigs are
being operated, mobilized, assembled or dismantled while under
contract. Rig days are a common measurement of both utilization rates
and fleet size.
(2) Represents total contract drilling revenues (including mobilization
revenues and reimbursement for fuel and other costs) divided by the
total number of rig days worked by the Company's drilling rig fleet
marketed during the period.
(3) Drilling costs exclude depreciation and amortization and general and
administrative expenses.
Drilling revenues increased approximately $2.4 million, or 32%, to
$9.8 million for the year ended December 31, 1996 from $7.4 million for the
year ended December 31, 1995. This improvement was due to an increase in the
number of rig days worked offset by a decrease in the average revenue per day.
Rig utilization also improved from 86% to 88% in 1996, due to an overall
improvement in the contract drilling market.
Drilling costs increased by $1.6 million, or 26%, to $7.7 million for
the year ended December 31, 1996, from $6.1 million for the year ended December
31, 1995. This increase was primarily due to increased utilization and, to a
lesser extent, increased direct labor costs.
Depreciation and amortization expenses increased by $335,000, or 42%,
to $1.1 million for the year ended December 31, 1996 from $791,000 for the year
ended December 31, 1995. The increase in depreciation expense was primarily
attributable to acquisition and refurbishment costs.
General and administrative expenses decreased by $222,000 to $658,000
for the year ended December 31, 1996, from $880,000 for the year ended December
31, 1995, due to the discontinued allocation of expenses associated with the
predecessor company.
Interest expense remained fairly constant for the year end December
31, 1996 primarily as a result of the outstanding debt level remaining fairly
constant. Interest rates during these periods remained relatively unchanged.
Other income increased $197,000 from 1995 to 1996, primarily as a
result of a loss recorded in 1995 in connection with the sale of certain
assets.
The Company's income tax expense of $163,000 in 1996 was attributable
to the Company's profitable operations.
The Company had net income of $267,000 in 1996 as compared to a net
loss of $222,000 in 1995. The Company's net loss in 1995 includes net losses
from the sale of assets, for which there was no similar transaction in 1996.
35
254
Comparison of Years Ended December 31, 1995 and 1994
YEAR ENDED DECEMBER 31,
-----------------------
1994 1995
Rig days worked(1) ................................ 2,047 1,489
Average revenues per day(2) ....................... $ 4,841 $ 4,973
Drilling revenues ................................. $9,910,000 $7,405,000
Drilling costs(3) ................................. 8,572,000 6,075,000
---------- ----------
Operating Margin .................................. $1,338,000 $1,330,000
========== ==========
- ----------
(1) Rig days worked represents the number of rigs being marketed by the
Company multiplied by the number of days during which such rigs are
being operated, mobilized, assembled or dismantled while under
contract. Rig days are a common measurement of both utilization rates
and fleet size.
(2) Represents total contract drilling revenues (including mobilization
revenues and reimbursement for fuel and other costs) divided by the
total number of rig days worked by the Company's drilling rig fleet
marketed during the period.
(3) Drilling costs exclude depreciation and amortization and general and
administrative expenses.
Drilling revenues decreased $2.5 million, or 25%, to $7.4 million for
the fiscal year ended December 31, 1995 from $9.9 million for the twelve months
ended December 31, 1994. This decrease was primarily due to a decrease in the
number of rig days worked, offset by an increase in rig utilization from 84%
for the year ended December 31, 1994 to 86% for the year ended December 31,
1995 and an increase in average revenues per day from $4,841 during 1994 to
$4,973 during 1995.
Drilling costs decreased $2.5 million, or 29%, to $6.1 million for the
year ended December 31, 1995, from $8.6 million for the twelve months ended
December 31, 1994. This decrease in costs was due to a decrease in the
Company's rig days worked.
Depreciation and amortization expenses decreased $766,000, or 49%, to
$791,000 for the year ended December 31, 1995 from $1.6 million for the twelve
months ended December 31, 1994. This decrease was primarily due to a change in
the estimated remaining lives of the Company's drilling rigs and other related
drilling equipment. These changes were made to more closely approximate the
remaining useful lives of such assets.
General and administrative expenses increased approximately $94,000 to
$880,000 for the year ended December 31, 1995 from $786,000 for the twelve
months ended December 31, 1994 primarily due to increased personnel costs.
Interest expense remained fairly constant for the year ended December
31, 1995. Interest rates and borrowings outstanding during these periods
remained relatively unchanged.
Other income decreased $500,000 from $366,000 in 1994 to a loss of
$134,000 in 1995, primarily due to a loss on sale of assets for the year ended
December 31, 1995 compared to a gain on sale of assets for the prior year.
The Company had a net loss of $222,000 in 1995 as compared to a loss
of $657,000 for the year ended December 31, 1994.
INFLATION AND CHANGING PRICES
Contract drilling revenues do not necessarily track the changes in
general inflation as they tend to respond to the level of activity on the part
of the oil and gas industry in combination with the supply of equipment and the
number of competing companies. Capital and operating costs are influenced to a
larger extent by specific price changes in the oil and gas industry and to a
lesser extent by changes in general inflation.
36
255
RECENT ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings per Share"
("SFAS No. 128"). SFAS No. 128, which is effective for periods ending after
December 15, 1997, including interim periods, simplifies the standards for
computing earnings per share and replaces the presentation of primary earnings
per share with a presentation of basic earnings per share. Initial adoption of
this standard is not expected to have a material impact on the Company's
financial position or results of operations. Early adoption is not permitted.
37
256
BUSINESS
GENERAL
The Company is a leading provider of contract land drilling services
to major and independent oil and gas companies. As of September 30, 1997, the
Company's rig fleet consisted of 54 rigs (including 13 rigs acquired in the
Bonray Acquisition), of which 48 were being marketed and six were to be
refurbished and are expected to be placed in operation within the next 9
months.
The Company's fleet consists primarily of rigs capable of deep
drilling applications (well depths of 15,000 feet or greater). The Company
believes that deep drilling targets are more attractive to oil and gas
companies due to new technologies, including (i) three-dimensional seismic
techniques, (ii) increasingly accurate down hole measurement devices and (iii)
improved guidance systems and directional drilling motors for horizontal and
directional wells. Examples of currently active deep drilling areas include
the Tuscaloosa trend in Louisiana, the Pinnacle Reef trend in East Texas, the
Anadarko and Arkoma basins in Oklahoma and the Austin Chalk in Texas and
Louisiana.
As of September 30, 1997, the Company's fleet included 38 rigs capable
of drilling to depths of 15,000 feet or greater, 25 of which are capable of
drilling to depths of 20,000 feet or greater. Of these 38 rigs, 21 are diesel
electric SCR rigs which offer operators superior control and efficiency,
particularly in deep, directional or horizontal applications. Of the five
largest domestic land drillers, the Company ranked first in average measured
depth per well drilled for the nine month period ended September 30, 1997.
The Company's fleet is concentrated in its two core operating regions
- -- the Mid-Continent region (which includes principally Oklahoma, North Texas
and the Texas Panhandle) and the Gulf Coast region of Texas, Louisiana,
Mississippi and Alabama. At September 30, 1997, the Company had 35 rigs
marketed in Oklahoma (including 11 of the rigs acquired in the Bonray
Acquisition) and was the most active land drilling contractor in the state. In
1996, 1,835 onshore wells were drilled in Oklahoma, making it the third most
active state for domestic onshore drilling. The Company's rigs operating in
the Mid-Continent region are generally capable of drilling to depths of 10,000
feet or greater and are marketed by the Company to meet the specific well depth
and mobility needs of producers in that region. See "-- Drilling Equipment and
Supplies." At September 30, 1997, the Company had 13 rigs marketed in the Gulf
Coast region, including 11 diesel electric SCR rigs. This region is
characterized by significant drilling activity in deep, technically challenging
formations for which the Company's rigs are particularly well suited. The
Company believes that its high quality equipment, including diesel electric SCR
rigs, powerful mud pumps and high horsepower drawworks, gives the Company a
competitive advantage in attracting premium jobs with customers engaged in
multi-well horizontal drilling programs. In May 1997, one of the Company's
rigs drilled a horizontal well in the Gulf Coast region to a vertical depth of
18,700 feet before initiating a horizontal lateral of 3,239 feet. The Company
believes this to be the deepest vertical depth at which a horizontal lateral
had ever been initiated.
The Company was formed in December 1996 as the successor to Anadarko,
which owned ten rigs, including two rigs requiring refurbishment. At the time
of its formation, the Company also purchased six rigs requiring refurbishment.
See "-- Formation and Other Transactions." Since that time, the Company has
aggressively pursued acquisitions of additional rigs and components and has
acquired 47 additional rigs (net of sales), 32 of which were acquired in
connection with the purchases of Trend, Ward and Bonray, nine of which were
acquired pursuant to individual rig purchases and six of which were acquired in
the Oliver Acquisition. Some of these acquired rigs required refurbishment
before the Company placed such rigs in service. Many of the acquired and
refurbished rigs were put into service in May and June 1997, and therefore
contributed to operating results for less than half of the nine month period
ended September 30, 1997. The Company expects these rigs to be operational and
to contribute to its profitability throughout the second half of 1997.
BUSINESS STRATEGY
The Company believes that growth in earnings and cash flow can be
achieved by pursuing the following business strategy:
Operating a Technologically Advanced Rig Fleet. The Company has
assembled its existing rig fleet, and will pursue further acquisitions, with
the goal of operating one of the most technologically sophisticated land
drilling fleets in the United States. Many of the Company's rigs include
engines, pumps and drilling mud systems that represent the
38
257
best drilling technology available and that the Company believes offer greater
efficiencies for customers than many of the rigs available from its
competitors. For example, by deploying its diesel electric SCR rigs with two
or three high horsepower pumps and top drive drilling systems in challenging
deep and horizontal drilling situations, the Company believes that it can
reduce its customers' overall drilling costs, thus securing and enhancing its
relationships with some of the most active operators in the domestic market.
The Company is committed to making the capital investments required to maintain
the technological sophistication and operational efficiencies of its fleet.
Developing Deep Drilling Capabilities. The Company believes demand
has been particularly strong for rigs capable of drilling deeper, more complex
wells, including 1,500 horsepower and larger rigs, and has focused, and will
continue to focus, on acquiring rigs with these capabilities. Management
believes that demand and utilization rates for these types of rigs,
particularly SCR rigs, will remain higher than for rigs with lesser depth
capacities due to their greater operational flexibility and efficiency. At
September 30, 1997, 70% of the Company's rig fleet (38 rigs) had deep drilling
capability (15,000 feet or greater).
Focusing on Core Markets. The Company believes that its strong asset
position and operating expertise in the Mid-Continent and Gulf Coast regions
enable it to achieve operating efficiencies and to provide premium service to
its customers in these markets. The Company is the second largest provider of
drilling rigs in Oklahoma and is among the largest operators of deep rigs in
the onshore Gulf Coast region.
Developing and Maintaining Relationships with Operators. In order to
maximize the utilization rate of its rig fleet and to minimize exposure to
market downturns, the Company seeks to maintain and build relationships with
operators committed to active domestic drilling programs. The Company's
largest current customers include Apache Corporation, Chesapeake, Enron Oil and
Gas Company, Marathon Oil Company, Sonat Exploration Company, Union Pacific
Resources Corporation and Unocal. Each of these companies was among the most
active onshore operators in the United States during the last three years.
During the nine months ended September 30, 1997 (pro forma for the
Consolidation Transactions), the three largest customers for the Company's
contract drilling services were Chesapeake, Union Pacific Resources Corporation
and Marathon Oil Company which accounted for approximately 22%, 7% and 7% of
total revenues, respectively. See "Risk Factors -- Concentration of Customer
Base."
Acquiring and Refurbishing Additional Rigs and Related Equipment. The
Company intends to continue acquiring additional rigs and related equipment,
including top drive drilling systems. Additionally, the Company has experience
in the acquisition of component parts from which rigs can be assembled or
refurbished and intends to continue to seek opportunities for the expansion and
enhancement of its rig fleet by such means. Since its formation, the Company
has acquired 47 land rigs (net of sales) in ten transactions.
DOMESTIC LAND DRILLING INDUSTRY OVERVIEW
The land drilling industry is experiencing higher utilization,
increased day rates and improved financial performance as a result of a
long-term decline in the supply of rigs and increased demand for rigs
attributable to improved oil and gas industry fundamentals. Industry sources
estimate that from its peak in 1982, the supply of domestic land rigs had
fallen by 72% through October 1997 as a result of normal attrition,
cannibalization of components to refurbish rigs, the inability of smaller
competitors to raise capital needed to upgrade and modernize rigs and the
export of rigs to international markets. Greater demand in the industry is
evidenced by the increase in the active domestic land rig count to 1,032 in
September 1997 from 790 in September 1996, according to data published by Baker
Hughes Incorporated. The Company believes that as of September 30, 1997 the
domestic land drilling industry was experiencing utilization rates of
approximately 86% for actively marketed rigs. While the Company's rig
utilization rates have historically been above 90% for the fiscal year ended
1997, the recent decline in oil prices has caused the Company's utilization
levels to decrease.
Beyond the diminished size of the rig fleet, the domestic land
drilling industry is also benefitting from improved fundamentals among domestic
oil and gas exploration and production companies. In particular, new
technologies and improved operating efficiencies have increased drilling
success rates, lowered finding costs and enhanced the industry's profitability
recently as compared to the late 1980's and early 1990's. In addition, the
financial positions of many domestic oil and gas companies, and their access to
additional capital, have improved in recent years, affording these companies
the ability to fund aggressive drilling programs. From 1992 to 1996, the total
equity market capitalization of 35 of the largest domestic exploration and
production companies grew from approximately $255 billion to approximately $465
billion and their aggregate annual capital expenditures increased from $10.5
billion to $16.5
39
258
billion. The Company believes that these improved industry fundamentals have
allowed oil and gas companies to maintain more consistently active drilling
programs, even in periods of lower commodity prices. However, the Company
believes that the recent decline in oil prices has led to a decrease in
drilling activities.
Much of the new technology being employed in the oil and gas industry
has increased demand for rigs capable of drilling deeper wells efficiently and
accurately. For example, more sophisticated and, longer life drilling motors
and measurement-while-drilling devices have made deep horizontal drilling less
expensive and more precise. Three dimensional seismic techniques have also
increased the demand for deep rigs. This technology permits geoscientists to
develop a more complete understanding of deep, complex geology prior to
drilling a well. As shallower fields continue to deplete, oil and gas
companies are likely to continue to pursue deep drilling prospects to maintain
or increase their production levels. While demand for land rigs capable of
drilling greater than 15,000 feet has grown significantly, the supply of such
rigs is limited, contributing to rapid increases in day rates for rigs with
these capabilities.
Driven by expectations of improved economic returns and the
fundamentals discussed above, the domestic land drilling industry has
experienced a period of significant consolidation. In 1996, approximately 33%
of the footage drilled in the United States was drilled by only five
contractors, down from 25 in 1993. This consolidation is ongoing, and the
Company believes that approximately 26 transactions involving the acquisition
of approximately 404 domestic land rigs have been announced from September 1996
through September 1997, including acquisitions by the Company.
FORMATION AND OTHER TRANSACTIONS
Formation Transactions. The Company was formed in December 1996
through a series of affiliated entity transactions in which the Company became
the successor to Anadarko, the contract drilling subsidiary of privately held
APLP. In connection with the Formation Transactions (i) APLP contributed ten
drilling rigs, including two rigs requiring refurbishment, for 2,000,000 shares
of Common Stock, (ii) the Oliver Companies exchanged six drilling rigs
requiring refurbishment for 1,600,000 shares of Common Stock and (iii) Energy
Spectrum acquired 2,000,000 shares of Common Stock for cash. Additionally,
Chesapeake entered into drilling contracts with two-year terms for six of the
Company's rigs in consideration for the Chesapeake Option.
Since the Formation Transactions, the Company has enhanced its
original fleet through acquisitions and refurbishment of rigs as described
below.
Trend Acquisition. In May 1997, the Company completed the acquisition
of Trend for $18 million in cash and 250,000 shares of Common Stock. Trend has
operated a land drilling business in the Mid-Continent region since 1976.
Trend owned 14 rigs, including three diesel electric SCR rigs and six rigs with
depth capacities of 15,000 feet or greater. The Company retained substantially
all of Trend's operating personnel.
Ward Acquisition. Also in May 1997, the Company acquired the assets
of Ward for $8 million in cash, 400,000 shares of Common Stock and warrants to
purchase an additional 200,000 shares of Common Stock. Ward has operated a
land drilling business in the Mid-Continent region since 1981. In the Ward
Acquisition, the Company acquired six drilling rigs, including three rigs with
depth capacities of 15,000 feet or greater, further enhancing its presence in
the Mid- Continent region. The Company retained substantially all of Ward's
operating personnel.
Bonray Acquisition. In October 1997, the Company acquired Bonray for
3,015,000 shares of Common Stock. Bonray has operated a land drilling business
in the Mid-Continent region since 1980 and prior to its acquisition by the
Company was a wholly owned subsidiary of DLB. In the Bonray Acquisition, the
Company acquired 13 rigs, including seven rigs with depth capacities of 15,000
feet or greater and two diesel electric SCR rigs. As of September 30, 1997, 12
of Bonray's rigs were operating and under contract and one was awaiting
refurbishment. The Bonray Acquisition further strengthens the Company's
presence in the Mid-Continent region, making it the leading competitor in the
Oklahoma market. The Company retained substantially all of Bonray's operating
personnel.
Individual Rig Acquisitions. In addition to the Trend, Ward and
Bonray Acquisitions, prior to the Initial Public Offering, the Company invested
$5.5 million to acquire six rigs in five transactions involving purchases of
individual rigs or rig components. In August 1997, the Company sold one rig.
40
259
Initial Public Offering. In November 1997, the Company completed the
Initial Public Offering of 11,040,000 shares of Common Stock. Of the total
shares sold in the Initial Public Offering, the Company sold 4,229,050 shares
of Common Stock and certain shareholders sold 6,810,950 shares of Common Stock.
Refurbishment. The Consolidation Transactions included a number of
rigs in need of refurbishment. From January 1, 1997 through September 30,
1997, the Company completed refurbishment of 12 rigs at an average cost of
approximately $2.6 million per rig (including drill pipe). These rigs were
placed in service at various dates between January and September 30, 1997. At
September 30, 1997, the Company had six additional rigs in various stages of
refurbishment. The Company completed refurbishment and placed one of such rigs
in service during the fourth quarter of 1997, two more rigs in the first
quarter of 1998 and anticipates placing the remaining three rigs in the
remainder of 1998. The Company expects the cost to refurbish these six rigs to
average approximately $3.5 million per rig (including drill pipe).
Recent Acquisitions. On January 9, 1998, the Company purchased six
additional rigs from R.T. Oliver Drilling, Inc. for approximately $14 million
in cash. The Company expects to refurbish and purchase complementary
equipment, including drill pipe, for these rigs at a cost of approximately
$28.6 million. Additionally, since the Initial Public Offering, the Company
has decided to refurbish three additional rigs, one of which was purchased for
approximately $54,000 and two of which were assembled from inventoried
components, bringing the Company's rig fleet total to 63 rigs, of which 51 are
being marketed.
DRILLING EQUIPMENT AND SUPPLIES
A land drilling rig consists of various components, including engines,
drawworks, a derrick or mast, substructure, pumps to circulate drilling fluid,
blowout preventers, drill pipe and related equipment. The actual drilling
capacity of a rig may be more or less than its rated drilling capacity due to
numerous factors, including the length of its drill pipe and the drilling
conditions of any particular well. The intended well depth and the drill site
conditions determine the rig, drill pipe length and other equipment needed to
complete a well. The Company's rigs can be relocated to areas where demand,
well specifications and day rates allow for maximization of gross operating
margins and utilization. Generally, land rigs operate with crews of five to
six persons.
As of September 30, 1997, including the rigs acquired in the Bonray
Acquisition, the Company's fleet included 21 rigs that are diesel electric SCR
rigs and 33 that are mechanical rigs. Mechanical rigs utilize diesel engines
to produce power that is transferred to drilling equipment, such as drawworks
and pumps, by way of a compound consisting of a series of chains, sprockets and
pneumatic clutches. SCR rigs employ diesel engines that generate alternating
current electricity which is converted and transferred into amps as alternating
current or direct current electricity, which in turn drives electric motors
powering the drilling equipment. The Company believes that SCR rigs offer a
number of advantages over mechanical rigs. SCR rigs enable flexible power
distribution to selected individual drilling equipment components, providing
for more precise drilling control and efficient operation. SCR rigs are also
quieter and safer because the diesel engines are typically located away from
the rig floor and well bore, allowing for better communication among rig crews.
SCR rigs are also more easily adapted to the use of top drive drilling systems
which are typically electrically powered. The Company has developed a fleet
that uses the advanced drilling technology of diesel electric SCR rigs to
provide greater efficiencies to its customers, especially in deep drilling,
horizontal and directional applications, and uses mechanical rigs primarily in
areas such as the Mid-Continent region where operators target shallower well
depths and require more frequent mobility.
In addition to its SCR rigs, the Company has focused its acquisitions
on rigs with efficient and flexible drilling mud systems as well as high
horsepower drawworks and mud pumps, features which give the Company a
competitive advantage in attracting premium jobs with customers engaged in
multi-well horizontal drilling programs. The majority of the Company's rigs
employ diesel engines manufactured by Caterpillar, Inc. as the rigs' main power
sources. The Company believes that such engines are lighter and more fuel
efficient than other available engines, thus saving the Company and its
customers money in terms of lower trucking costs and reduced fuel consumption.
Finally, the Company has begun equipping certain of its deep drilling
rigs with top drive drilling systems. Top drives provide the Company's
customers with greater control in transferring horsepower to the bit, precise
orientation of drilling tools while drilling complex directional wells, and
reduced incidence of stuck drill pipe in high risk areas. Moreover, top drives
enable the contractor to drill in 90 foot sections (as opposed to conventional
45 foot sections), a capability which reduces connection time, and are safer
for rig employees and equipment during tubular handling
41
260
operations and in well control situations. Currently, the Company has four
rigs equipped with top drives and anticipates using a portion of the proceeds
of the Initial Public Offering for the purchase of additional top drives.
42
261
RIGFLEET
The following table identifies certain information as of September 30,
1997 regarding the rigs owned and operated by the Company (including 13 rigs
acquired in the Bonray Acquisition).
HORSEPOWER
RIG DEPTH RIG ----------------------------- CURRENT CURRENT
NO. CAPACITY (FT.) DRAWWORKS TYPE(1) DRAWWORKS(2) TOTAL(3) OPERATOR STATUS(4)
- --------------------------------------------------------------------------------------------------------------------------------
GULF COAST REGION
21 30,000 Continental Emsco C-3 SCR 3,000 4,400 UPR Working
24 25,000 National 1320-UE SCR 2,000 3,960 Refurbishing
11 25,000 Mid Continent U-1220-EB SCR 2,500 3,600 Chesapeake Working
12 25,000 Mid Continent U-1220-EB SCR 2,500 3,600 Chesapeake Working
14 25,000 Mid Continent U-1220-EB SCR 2,500 3,600 Chesapeake Working
15 25,000 Mid Continent U-1220-EB SCR 2,500 3,600 Chesapeake Working
16 25,000 Mid Continent U-1220- SCR 2,500 3,600 Chesapeake Working
EB(5)
17 25,000 Mid Continent U-1220-EB SCR 2,500 3,600 UPR Working
18 25,000 Mid Continent U-1220-EB SCR 2,500 3,600 Chesapeake Working
23 25,000 Gardner Denver 1500-E SCR 2,000 3,600 Refurbishing
22 25,000 National 1320-UE (5) SCR 2,000 3,300 Chesapeake Working
40 25,000 National 1320-UE SCR 2,000 3,300 UPR Working
20 20,000 Oilwell 840-E SCR 1,500 2,700 UPR Working
7 20,000 Mid Continent U-914-C Mechanical 1,500 2,700 Oryx Working
4 18,000 Mid Continent U-712-A Mechanical 1,200 2,700 Chesapeake Working
39 16,000 Ideco E-900 SCR 900 2,350 Refurbishing
MID-CONTINENT REGION
10 25,000 Mid Continent U-1220-EB SCR 2,500 3,600 Apache Working
63 25,000 Gardner Denver 1500-E SCR 2,000 3,300 Pioneer Working
46 25,000 BDW 1350 Mechanical 2,000 2,900 Marathon Working
60 25,000 National 1320-M Mechanical 2,000 2,700 SMR Working
52 25,000 National 1320-M Mechanical 2,000 2,700 Toklan Working
35 20,000 National 110-UE SCR 1,500 3,300 Vastar Working
59 20,000 Oilwell 860 Mechanical 1,500 2,700 St. Mary Operating Working
19 20,000 Continental EMSCO C-1 SCR 1,500 2,700 Burlington Working
62 20,000 Mid Continent U914 SCR 1,500 2,700 Unit Petroleum Working
36 20,000 National 110-M Mechanical 1,500 2,700 Sonat Working
61 20,000 National 110-M Mechanical 1,500 2,700 Sanguine Working
5 16,000 Gardner Denver 800 Mechanical 1,000 2,900 Anadarko Working
31 16,000 Gardner Denver 800-E SCR 1,000 2,200 Anadarko Working
27 16,000 National 80-B Mechanical 1,000 1,650 Refurbishing
8 16,000 National 80-B Mechanical 1,000 1,650 Chesapeake Working
51 16,000 Oilwell 760 Mechanical 1,000 1,650 Brigham Working
47 16,000 Ideco H-900 Mechanical 900 1,650 Refurbishing
33 15,000 Brewster N-46 Mechanical 1,000 2,000 Sonat Working
34 15,000 Ideco E-900 SCR 900 1,800 Sonat Working
32 15,000 BDW 800 MI Mechanical 1,000 1,650 Sonat Working
42 15,000 Gardner Denver 700 Mechanical 800 1,650 Seagull Working
44 15,000 Gardner Denver 700 Mechanical 800 1,650 Enron Working
26 14,000 National 610 Mechanical 750 1,650 ONEOK Working
41 14,000 Mid Continent U-36A Mechanical 600 1,650 Enron Working
38 13,000 Mid Continent U-36A Mechanical 600 1,650 Texaco Working
29 13,000 Continental Emsco D-2 Mechanical 750 1,450 National Energy Working
9 12,000 Gardner Denver 500 Mechanical 650 2,250 Universal Resources Working
57 12,000 National 55 Mechanical 550 2,000 St. Mary Operating Working
53 12,000 Unit U-40 Mechanical 850 1,650 Avalon Working
58 12,000 Ideco 750 Mechanical 750 1,650 Oryx Working
43 12,000 Superior 700 Mechanical 650 1,450 Available
45 12,000 Gardner Denver 500 Mechanical 650 1,450 Anadarko Working
37 11,000 Gardner Denver 500 Mechanical 650 1,900 Available
28 11,000 BDW 650 Mechanical 650 1,350 National Energy Working
56 10,000 Cooper LTD 750 Mechanical 750 1,550 Kilpatrick Working
30 10,000 Brewster N-42 Mechanical 550 1,725 Cross Timbers Working
54 10,000 National 50-A Mechanical 450 900 Refurbishing
55 7,500 Cooper LTD 550 Mechanical 550 1,400 Keener Oil Working
- ----------
(1) "SCR" denotes a diesel electric silicon controlled rectifier rig.
"Mechanical" denotes a mechanical rig powered by diesel engines.
43
262
(2) Drawworks horsepower represents the amount of input power required to
achieve the maximum hoisting capability of the drawworks.
(3) Total horsepower represents the maximum horsepower produced by a rig's
diesel engines for consumption by the drilling equipment.
(4) Due to a recent decline in oil prices, the utilization of the
Company's rigs has decreased to some extent from the level at
September 30, 1997 that is indicated by this chart.
(4) Rigs 16 and 22 in the Gulf Coast region are each equipped with
National PS350/500 top drives.
Drilling rigs and related equipment deteriorate over time unless they
are operated and maintained properly. The Company strives to keep its drilling
rigs well maintained and technologically competitive. An active maintenance
program during the life of a drilling rig permits the maintenance, replacement
and upgrading of its components on an individual basis. Over the life of a
typical drilling rig, major components, such as engines, pumps, drawworks and
drill pipe, are replaced or rebuilt on a periodic basis as required while other
components, such as the mast and substructure, can be utilized for extended
periods of time with proper maintenance.
There is a general shortage of certain drilling equipment and supplies
used in the Company's business and the Company believes these shortages may
intensify. Because, until recent years, the land drilling industry was
characterized by an oversupply of land rigs, rig manufacturers have generally
focused on the production of more expensive offshore rigs and rig equipment.
As a result, most rig manufacturers are not currently building new land rigs
and those manufacturers that are building new land rigs and components charge
premium prices (approximately $13 million for a new 2,000 horsepower rig) and
require that orders be placed at least 120 days in advance of requested
delivery. The limited availability of new rigs and equipment has caused land
rig owners and operators, including the Company, to maintain and enhance their
fleets primarily through acquisitions and refurbishments using previously
manufactured rig components and equipment. As the land drilling industry
continues to refurbish rigs using existing components and equipment, the
available supply of such components and equipment continues to deplete.
Additionally, a shortage of drill pipe in the contract drilling industry has
caused the price of drill pipe to increase by more than 54% over the past 24
months and has required orders for new drill pipe to be placed at least one
year in advance of expected use. The Company has established arrangements to
meet its current needs for certain necessary drilling equipment and supplies,
including drill pipe, on satisfactory terms, but there can be no assurance that
it will continue to be able to do so. Accordingly, there can be no assurance
that the Company will not experience shortages of, or material price increases
in, drilling equipment and supplies, including drill pipe, in the future. Any
such shortages could delay and adversely affect the Company's ability to
refurbish its inventory rigs and obtain contracts for its marketed rigs.
CONTRACT DRILLING OPERATIONS
The Company's drilling rigs are employed under individual contracts
which extend either over a stated period of time or the time required to drill
a well or a number of wells. Drilling contracts are obtained through either a
competitive bidding process or as a result of direct negotiations with
customers. Terms of the Company's drilling contracts vary based on factors
such as the complexity and risk of operations, on-site drilling conditions,
type of equipment used and the anticipated duration of the work to be
performed. Contracts are typically entered into on a single well basis and
obligate the Company to pay certain operating expenses, including wages of
drilling personnel, maintenance expenses and costs for incidental rig supplies,
equipment and local office facilities. Contracts generally are subject to
termination by the customer on short notice, but are sometimes written on a
firm basis for a specified number of wells or years. The Company has ongoing
relationships with a number of customers that often engage a specific rig for
the drilling of consecutive wells.
At September 30, 1997, all of the Company's marketed rigs were
operating under daywork contracts and one rig to be acquired in the Bonray
Acquisition was operating under a footage contract. The Company and its
predecessors in the past have performed drilling services under footage and
turnkey contracts and the Company may do so again in the future. Revenues from
daywork contracts accounted for approximately 98% of total drilling revenues
(excluding mobilization revenues) during the nine months ended September 30,
1997, with the remainder from footage contracts.
44
263
Daywork Contracts. Under daywork contracts, the Company provides a
drilling rig with required personnel to the operator, who supervises the
drilling of the well. The Company is paid based on a negotiated fixed rate per
day while the rig is utilized. The rates for the Company's services depend on
market and competitive conditions, the nature of the operations to be
performed, the duration of the work, the equipment and services to be provided,
the geographic area involved and other variables. Lower rates may be paid when
the rig is in transit, or when drilling operations are interrupted or
restricted by equipment breakdowns, actions of the customer or adverse weather
conditions or other conditions beyond the control of the Company. In addition,
daywork contracts typically provide for a lump sum fee for the mobilization and
demobilization of the drilling rig. Daywork drilling contracts generally
specify the type of equipment to be used, the size of the hole and the depth of
the well. Under a daywork drilling contract, the customer bears a large
portion of out-of-pocket costs of drilling and the Company generally bears no
part of the usual capital risks associated with oil and gas exploration (such
as time delays for various reasons, including stuck drill pipe and blowouts).
Footage and Turnkey Contracts. Under footage contracts, the Company
is paid a fixed amount for each foot drilled, regardless of the time required
or the problems encountered in drilling the well. The Company pays more of the
out-of-pocket costs associated with footage contracts compared to daywork
contracts. Under turnkey contracts, the Company contracts to drill a well to
an agreed depth under specified conditions for a fixed price, regardless of the
time required or the problems encountered in drilling the well. The Company
provides technical expertise and engineering services, as well as most of the
equipment required for the well, and is compensated when the contract terms
have been satisfied. Turnkey contracts afford an opportunity to earn a higher
return than would normally be available on daywork or footage contracts if the
contract can be completed successfully without complications.
The risks to the Company under footage and turnkey contracts are
substantially greater than under daywork contracts because the Company assumes
most of the risks associated with drilling operations generally assumed by the
operator in a daywork contract, including risk of blowout, loss of hole, lost
or damaged drill pipe, machinery breakdowns, abnormal drilling conditions and
risks associated with subcontractors' services, supplies, cost escalation and
personnel. See "Risk Factors -- Risks Associated with Footage and Turnkey
Drilling."
CUSTOMERS AND MARKETING
The Company's customers include major oil companies and independent
oil and gas producers. During the nine months ended September 30, 1997 (pro
forma for the Consolidation Transactions), the three largest customers for the
Company's contract drilling services were Chesapeake, Union Pacific Resources
Corporation and Marathon Oil Company, which accounted for approximately 22%, 7%
and 7% of total revenues, respectively.
The Company enters into informal, nonbinding commitments with many of
its customers to provide drilling rigs for future periods at agreed upon rates
plus fuel and mobilization charges, if applicable, and escalation provisions.
This practice is customary in the land drilling business during times of
tightening rig supply. Although neither the Company nor the customer is
legally required to honor these commitments, the Company strives to satisfy
such commitments in order to maintain good customer relations.
The Company's sales force consists of industry professionals with
significant land drilling sales experience who utilize industry contacts and
available public data to determine how to most appropriately market available
rigs.
COMPETITION
The contract drilling industry is a highly competitive and fragmented
business characterized by high capital and maintenance costs. As a result,
even though the Company has the fifth largest active land drilling rig fleet in
the United States, the Company believes that such fleet represents a market
share of approximately 6% of the domestic land drilling industry. Drilling
contracts are usually awarded through a competitive bid process and, while the
Company believes that operators consider factors such as quality of service,
type and location of equipment, or the ability to provide ancillary services,
price and rig availability are the primary factors in determining which
contractor is awarded a job. Certain of the Company's competitors have greater
financial and human resources than the Company, which may enable them to better
withstand periods of low rig utilization, to compete more effectively on the
basis of price and technology, to build new rigs or acquire existing rigs and
to provide rigs more quickly than the Company in periods of high rig
utilization.
45
264
Competition in the market for drilling rigs has caused substantial
increases in the acquisition prices paid for rigs in recent months. Such
competition could adversely affect the Company's growth strategy if it is
unable to purchase additional drilling rigs or related equipment on favorable
terms. See "Risk Factors -- Competition" and "-- Management of Growth; Risks
of Acquisition Strategy."
OPERATING HAZARDS AND INSURANCE
The Company's operations are subject to many hazards inherent in the
land drilling business, including, for example, blowouts, cratering, fires,
explosions, loss of well control, loss of hole, damaged or lost drill strings
and damage or loss from inclement weather. These hazards could cause personal
injury or death, serious damage to or destruction of property and equipment,
suspension of drilling operations, or substantial damage to the environment,
including damage to producing formations and surrounding areas. Generally, the
Company seeks to obtain indemnification from its customers by contract for
certain of these risks. To the extent not transferred to customers by
contract, the Company seeks protection against certain of these risks through
insurance, including property casualty insurance on its rigs and drilling
equipment, commercial general liability and commercial contract indemnity,
commercial umbrella and workers' compensation insurance.
The Company's insurance coverage for property damage to its rigs and
drilling equipment is based on the Company's estimate of the cost of comparable
used equipment to replace the insured property. There is a deductible per
occurrence on rigs and equipment of $500,000.
The Company's third party liability insurance coverage under the
general policy is $1 million per occurrence, with a self insured retention of
$100,000 per occurrence. The commercial umbrella policy has a self insured
retention of $10,000 per occurrence with coverage of $5 million per occurrence.
The Company believes that it is adequately insured for public liability and
property damage to others with respect to its operations. However, such
insurance may not be sufficient to protect the Company against liability for
all consequences of well disasters, extensive fire damage or damage to the
environment. See "Risk Factors -- Operating Hazards and Uninsured Risks."
GOVERNMENT REGULATION AND ENVIRONMENTAL MATTERS
General
The Company's operations are affected from time to time in varying
degrees by political developments and federal, state and local laws and
regulations. In particular, oil and gas production, operations and economics
are or have been affected by price controls, taxes and other laws relating to
the oil and gas industry, by changes in such laws and by changes in
administrative regulations. Although significant capital expenditures may be
required to comply with such laws and regulations, to date, such compliance
costs have not had a material adverse effect on the earnings or competitive
position of the Company. In addition, the Company's operations are vulnerable
to risks arising from the numerous laws and regulations governing the discharge
of materials into the environment or otherwise relating to environmental
protection.
Environmental Regulation
The Company's activities are subject to existing federal, state and
local laws and regulations governing environmental quality, pollution control
and the preservation of natural resources. Such laws and regulations concern,
among other things, air emissions, the containment, disposal and recycling of
waste materials, and reporting of the storage, use or release of certain
chemicals or hazardous substances. Numerous federal and state environmental
laws regulate drilling activities and impose liability for discharges of waste
or spills, including those in coastal areas. The Company has conducted
drilling activities in or near ecologically sensitive areas, such as wetlands
and coastal environments, which are subject to additional regulatory
requirements. State and federal legislation also provide special protections
to animal and marine life that could be affected by the Company's activities.
In general, under various applicable environmental programs, the Company may
potentially be subject to regulatory enforcement action in the form of
injunctions, cease and desist orders and administrative, civil and criminal
penalties for violations of environmental laws. The Company may also be
subject to liability for natural resource damages and other civil claims
arising out of a pollution event.
46
265
Except for the handling of solid wastes directly generated from the
operation and maintenance of the Company's drilling rigs, such as waste oils
and wash water, it is the Company's practice to require its customers to
contractually assume responsibility for compliance with environmental
regulations. Laws and regulations protecting the environment have become more
stringent in recent years, and may, in certain circumstances, impose strict
liability, rendering a person liable for environmental damage without regard to
negligence or fault on the part of such person. Such laws and regulations may
expose the Company to liability for the conduct of or conditions caused by
others, or for acts of the Company which were in compliance with all applicable
laws at the time such acts were performed. The application of these
requirements or adoption of new requirements could have a material adverse
effect on the Company.
Environmental regulations that affect the Company's customers also
have an indirect impact on the Company. Increasingly stringent environmental
regulation of the oil and gas industry has led to higher drilling costs and a
more difficult and lengthy well permitting process.
The primary environmental statutory and regulatory programs that
affect the Company's operations include the following:
Oil Pollution Act and Clean Water Act. The Oil Pollution Act of 1990
("OPA") amends certain provisions of the federal Water Pollution Control Act of
1972, commonly referred to as the Clean Water Act ("CWA"), and other statutes
as they pertain to the prevention of and response to spills or discharges of
hazardous substances or oil into navigable waters. Under OPA, a person owning
or operating a facility or equipment (including land drilling equipment) from
which there is a discharge or threat of a discharge of oil into or upon
navigable waters and adjoining shorelines is liable, regardless of fault, as a
"responsible party" for removal costs and damages. Federal law imposes strict,
joint and several liability on facility owners for containment and clean-up
costs and certain other damages, including natural resource damages, arising
from a spill.
The United States Environmental Protection Agency ("EPA") is also
authorized to seek preliminary and permanent injunctive relief and, in certain
cases, criminal penalties and fines. State laws governing the control of water
pollution also provide varying civil and criminal penalties and liabilities in
the case of releases of petroleum or its derivatives into surface waters or
into the ground. In the event that a discharge occurs at a well site at which
the Company is conducting drilling or pressure pumping operations, the Company
may be exposed to claims that it is liable under the CWA or similar state laws.
Certain of the Company's operations are also subject to EPA
regulations, including regulations that require the preparation and
implementation of spill prevention control and countermeasure ("SPCC") plans to
address the possible discharge of oil into navigable waters. Where so
required, the Company has SPCC plans in place.
Superfund. The Comprehensive Environmental, Response, Compensation,
and Liability Act, as amended ("CERCLA"), also known as the "Superfund" Law,
imposes liability, without regard to fault or the legality of the original
conduct, on certain classes of persons with respect to the release of a
"hazardous substance" into the environment. These persons include (i) the
current owner and operator of a facility from which hazardous substances are
released, (ii) owners and operators of a facility at the time any hazardous
substances were disposed, (iii) generators of hazardous substances who arranged
for the disposal or treatment at or transportation to such facility of
hazardous substances and (iv) transporters of hazardous substances to disposal
or treatment facilities selected by them. The Company may be responsible under
CERCLA for all or part of the costs to clean up sites at which hazardous
substances have been released. To date, however, the Company has not been
named a potentially responsible party under CERCLA or any similar state
Superfund laws.
Hazardous Waste Disposal. The Company's operations involve the
generation or handling of materials that may be classified as hazardous waste
and subject to the federal Resource Conservation and Recovery Act and
comparable state statutes. The EPA and various state agencies have limited the
disposal options for certain hazardous and nonhazardous wastes and is
considering the adoption of stricter handling and disposal standards for
nonhazardous wastes.
As part of the Bonray Acquisition, the Company acquired an equipment
yard which may require certain expenditures or remedial actions for the removal
or cleanup of contamination. In exchange for a $1 million cash payment to the
Company at closing, the Company did not require DLB to indemnify the Company
with respect to such expenditures or remedial actions. While the Company has
not determined whether and to what extent such expenditures
47
266
or remedial actions may be necessary or advisable, based on the presently
available information, the Company does not believe that such expenditures will
exceed $1 million. Management believes that the Company and its operations are
in material compliance with applicable environmental laws and regulations.
Health and Safety Matters
The Company's facilities and operations are also governed by laws and
regulations, including the federal Occupational Safety and Health Act ("OSHA"),
relating to worker health and workplace safety. As an example, the
Occupational Safety and Health Administration has issued the Hazard
Communication Standard ("HCS") requiring employers to identify the chemical
hazards at their facilities and to educate employees about these hazards. HCS
applies to all private-sector employers, including the oil and gas exploration
and producing industry. HCS requires that employers assess their chemical
hazards, obtain and maintain certain written descriptions of these hazards,
develop a hazard communication program and train employees to work safely with
the chemicals on site. Failure to comply with the requirements of the standard
may result in administrative, civil and criminal penalties. The Company
believes that appropriate precautions are taken to protect employees and others
from harmful exposure to materials handled and managed at its facilities and
that it operates in substantial compliance with all OSHA regulations. While it
is not anticipated that the Company will be required in the near future to
expend material amounts by reason of such health and safety laws and
regulations, the Company is unable to predict the ultimate cost of compliance
with these changing regulations.
FACILITIES AND OTHER PROPERTY
The Company leases approximately 7,500 square feet of office space for
its principal executive offices in Oklahoma City, Oklahoma at a cost of
approximately $7,000 per month. In addition, the Company owns approximately
ten acres of land in El Reno, Oklahoma and five acres of land in Weatherford,
Oklahoma that it uses for rig storage and maintenance. The Company has
negotiated the lease of a facility in Houston, Texas that includes
approximately 5,000 square feet of warehouse space and 1,300 square feet of
office space. As part of the Bonray Acquisition, the Company acquired
approximately 40 acres of land in Oklahoma City with facilities including 3,600
square feet of office space, an 8,000 square foot repair shop and three
warehouses. The Company considers all of its facilities to be in good
operating condition and adequate for their present uses.
EMPLOYEES
As of January 31, 1998, the Company had approximately 935 employees,
of which approximately 120 were salaried and approximately 815 were employed on
an hourly basis. None of the Company's employees is represented by any
collective bargaining unit. Management believes that the Company's
relationship with its employees is good.
LEGAL PROCEEDINGS
Three purported class action lawsuits have been filed against the
Company, certain directors and officers of the Company, the managing
underwriters of the Initial Public Offering, and certain current and former
stockholders of the Company, alleging violations of federal and state
securities laws in connection with the Initial Public Offering. The first two
suits , Khan v. Bayard Drilling Technologies, Inc., et al. ("Khan") and Burkett
v. Bayard Drilling Technologies, Inc., et al. ("Burkett"), were filed in the
District Court in and for Oklahoma County, State of Oklahoma on January 14,
1998 and February 2, 1998, respectively. The third suit, Yuan v. Bayard
Drilling Technologies, Inc., et al. ("Yuan"), was filed on February 3, 1998 in
the United States District Court for the Western District of Oklahoma. The
principal plaintiff in Khan is Michael W. Khan. The principal plaintiffs in
Burkett are Diane Burkett, Julian Swadel and Robert T. Greenberg. The
principal plaintiff in Yuan is Tom Yuan. The defendants in each of the cases
include the Company, Chesapeake, Energy Spectrum LLC, James E. Brown, David E.
Grose, Carl B. Anderson, III, Merrill A. Miller, Jr., Sidney L. Tassin, Lew O.
Ward, Mike Mullen, Roy T. Oliver, Donaldson, Lufkin & Jenrette Securities
Corporation, Lehman Brothers Inc., Prudential Securities, Inc., Rauscher Pierce
Refsnes, Inc. and Raymond James & Associates, Inc.
The plaintiffs in these lawsuits purport to sue on their own behalf
and on behalf of all persons who purchased shares of Common Stock on or
traceable to the Initial Public Offering. In each of the lawsuits, plaintiffs
allege claims against all defendants under the Securities Act. The two state
court actions also assert claims against all defendants under an Oklahoma state
securities law.
48
267
All of the suits contain substantially the same allegations. The
plaintiffs allege that the registration statement and prospectus for the
Initial Public Offering contained materially false and misleading information
and omitted to disclose material facts. In particular, the plaintiffs allege
that such registration statement and prospectus failed to disclose financial
difficulties of Chesapeake, the Company's largest customer, and the effects of
such difficulties on Chesapeake's ability to continue to provide the Company
with substantial drilling contracts. The petitions further allege that the
Company failed to disclose pre-offering negotiations with R.T. Oliver
Drilling, Inc., whom the plaintiffs allege was a related party, for the
purchase of drilling rigs. In addition, the petitions allege that the Company
failed to disclose that its growth strategy required costly refurbishment of
older drilling rigs that would dramatically increase the Company's costs, which
could not be sustained by internally generated cash flow. In each of these
lawsuits, the plaintiffs are seeking rescission and damages.
The Company believes the allegations in the lawsuits are without merit
and is defending vigorously the claims brought against it. The Company is
unable, however, to predict the outcome of these lawsuits or the costs to be
incurred in connection with their defense and there can be no assurance that
this litigation will be resolved in the Company's favor. An adverse result or
prolonged litigation could have a material adverse effect on the Company's
financial position or results of operations.
49
268
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information regarding the
Company's directors and executive officers, including their respective ages.
NAME AGE POSITION
James E. Brown . . . . . . . . . . . . . . . . . . . . . . . . . 45 Chairman of the Board, President and Chief
Executive Officer
Edward S. Jacob, III . . . . . . . . . . . . . . . . . . . . . . 45 Executive Vice President -- Operations & Marketing
David E. Grose . . . . . . . . . . . . . . . . . . . . . . . . . 45 Vice President and Chief Financial Officer
Carl B. Anderson, III . . . . . . . . . . . . . . . . . . . . . . 42 Director
Mark Liddell . . . . . . . . . . . . . . . . . . . . . . . . . . 43 Director
Merrill A. Miller, Jr . . . . . . . . . . . . . . . . . . . . . . 47 Director
Sidney L. Tassin . . . . . . . . . . . . . . . . . . . . . . . . 41 Director
Lew O. Ward . . . . . . . . . . . . . . . . . . . . . . . . . . . 67 Director
James E. Brown is Chairman of the Board and has served as President
and Chief Executive Officer and as a director of the Company since its
formation in 1996. From 1992 until joining the Company in 1996, Mr. Brown
served as President of Anadarko Drilling Company, an Oklahoma general
partnership and the predecessor of the Company. From 1982 through 1992, Mr.
Brown served as Chief Financial Officer of AnSon Gas Corporation and its
predecessor entities. From 1979 through 1982, Mr. Brown served as Vice
President, Treasurer and Controller of Blocker Energy Corporation. Prior
thereto, Mr. Brown served as an accountant in various positions with Arthur
Andersen & Co.
Edward S. Jacob, III has served as Executive Vice President --
Operations & Marketing since April 1997 and prior thereto served as Vice
President of Operations and Marketing for the Company since its formation.
From 1983 until joining the Company, Mr. Jacob was employed by Helmerich &
Payne International Drilling Co., serving as U.S. Marketing Manager from 1990
through 1996. Mr. Jacob is a Director of the International Association of
Drilling Contractors ("IADC"), serving on its Contracts and Marketing
Committee, and is a former IADC Chapter Chairman.
David E. Grose has served as Vice President and Chief Financial
Officer of the Company since July 1997. Prior to joining the Company, Mr.
Grose was affiliated with Alexander Energy Corporation from its inception in
March 1980, serving from 1987 through 1996 as a director and Vice President,
Treasurer and Chief Financial Officer. In August 1996, National Energy Group
acquired Alexander Energy Corporation and Mr. Grose served as Vice President --
Finance and Treasurer through February 1997.
Carl B. Anderson, III has served as a director of the Company since
its formation in December 1996. Since 1994, Mr. Anderson has served as
Managing General Partner and Chief Executive Officer of APLP, a diversified
energy company and parent of Anadarko, the Company's predecessor. From 1978
through 1994, Mr. Anderson served in various capacities for APLP.
Mark Liddell has served as a director of the Company since November
1997. Since 1991, Mr. Liddell has served in various capacities for DLB,
including President since October 1994 and Vice President from 1991 to 1994.
Mr. Liddell is a Director of DLB and Davidson Oil & Gas, Inc. From 1991 to May
1995, Mr. Liddell served as a Director of TGX Corporation, a publicly traded
oil and gas company, and from 1989 to 1990, Mr. Liddell served as a Director of
Kaneb Services, Inc., a publicly traded industrial services and pipeline
transportation company.
Merrill A. Miller, Jr. has served as a director of the Company since
October 1997. Since February 1996, Mr. Miller has served in various
capacities for National-Oilwell, Inc., a publicly traded oilfield services
company, including President of its Products & Technology Group since May 1997,
Vice President and General Manager of Drilling Systems since July 1996 and Vice
President of Marketing, Drilling Systems from February 1996 through July 1996.
Prior thereto, Mr. Miller served in various capacities for Anadarko, the
Company's predecessor, from January 1995 through February 1996. From May 1980
through January 1995, Mr. Miller served in various capacities with Helmerich &
Payne International Drilling Co., including Vice President of U.S. Operations.
Sidney L. Tassin has served as a director of the Company since its
formation in 1996. Since March 1996, Mr. Tassin has been the President of
Energy Spectrum Capital LP, the general partner of Energy Spectrum, an equity
fund
50
269
that invests in the energy industry. From 1980 to 1994, Mr. Tassin was
associated with MESA Inc., serving in various financial executive capacities,
including Vice President -- Finance from 1986 to 1988 and President of BTC
Partners Inc., a financial and strategic consultant to MESA Inc., from 1988 to
1994.
Lew O. Ward has served as a director of the Company since May 1997.
Since 1981, Mr. Ward has served as Chairman and Chief Executive Officer of Ward
Petroleum Corporation, an independent oil and gas company founded by Mr. Ward.
Mr. Ward is a former Director and Area Vice President of the Independent
Petroleum Association of America ("IPAA") and currently serves as Chairman of
the IPAA.
BOARD OF DIRECTORS
Board Composition. The Board is currently composed of six directors.
Directors are elected for one-year terms at each annual meeting of
stockholders. Three of the Company's current directors were elected pursuant
to the terms of the Stockholders and Voting Agreement. See "Certain
Relationships and Related Transactions -- Stockholders and Voting Agreement."
Board Committees. The Company has established two standing committees
of the Board: a Compensation Committee and an Audit Committee. The current
members of the Compensation Committee are Carl B. Anderson, III and Sidney L.
Tassin. The Compensation Committee recommends to the Board the base salaries
and incentive bonuses for the officers of the Company and is charged with
administering the Company Stock Plans. The current members of the Audit
Committee are Merrill A. Miller, Jr., Sidney L. Tassin and Lew O. Ward. The
Audit Committee reviews the functions of the Company's management and
independent auditors pertaining to the Company's financial statements and
performs such other related duties and functions as are deemed appropriate by
the Audit Committee or the Board. The Board does not have a standing
nominating committee or other committee performing similar functions.
Director Compensation. Directors who are also employees of the
Company are not compensated for service on the Board or on any committee of the
Board. Non-employee directors of the Company receive an annual retainer of
$10,000. Additionally, all directors of the Company are entitled to
reimbursement for their reasonable out-of-pocket expenses in connection with
their travel to and attendance at meetings of the Board or committees thereof.
In October 1997, the Company adopted the Director Stock Plan pursuant to which
each non-employee director is entitled to receive (i) upon such director's
initial election to the Board, an option to purchase 15,000 shares of Common
Stock and (ii) immediately following each annual meeting at which such director
is reelected to the Board, an option to purchase 5,000 shares of Common Stock.
Such non-employee directors are also entitled under the Director Stock Plan to
elect to receive options to purchase Common Stock in lieu of their annual cash
retainer and to receive certain other stock option awards. Directors who are
also employees of the Company are not eligible to receive awards under the
Director Stock Plan. See "-- 1997 Non-Employee Directors' Stock Option Plan."
EXECUTIVE COMPENSATION
Because the Company was formed in December 1996, total compensation
awarded to or earned by James E. Brown, the Chairman of the Board, President
and Chief Executive Officer of the Company, for the Company's fiscal year ended
December 31, 1996 included only $9,167 in salary, an option to purchase 200,000
shares of Common Stock and $900 in other compensation. No options to purchase
Common Stock were exercised by Mr. Brown at any time during the fiscal year
ended December 31, 1996. No executive officer of the Company received salary
and bonus in excess of $100,000 for services rendered in all capacities during
such fiscal year. For anticipated executive compensation levels in 1997 and
beyond, see "-- Executive Salaries and Employment Agreements."
On December 10, 1996, the Company granted Mr. Brown an option (the
"1996 Brown Option") to purchase 200,000 shares of Common Stock at an exercise
price of $5 per share, becoming exercisable with respect to 20% of the
underlying shares each anniversary of the grant date. The option terminates as
to any unexercised portion on December 10, 2002. The potential realizable
values of the 1996 Brown Option, assuming that the market price of the Common
Stock appreciates in value from $5 per share (the estimated market price of the
Common Stock based upon the cash price paid for shares of Common Stock by an
independent third party in a separate transaction consummated on the date of
grant) through the end of the option term at annualized rates of 5% and 10%,
would be $340,096 and $771,561, respectively. If the 1996 Brown Option was
fully exercisable and exercised on December 31, 1997, on which the closing
price of a share of Common Stock on the AMEX was $16 1/4, the realized value of
the option would have been $2.3 million. The Company did not grant any options
to purchase Common Stock to any other executive officer or other
51
270
employee of the Company during the fiscal year ended December 31, 1996. The
Company has not granted any stock appreciation rights.
The Company adopted the Employee Stock Plan in April 1997 and made the
terms thereof applicable to the 1996 Brown Option. Including the 1996 Brown
Option, the Company has granted to James E. Brown, Edward S. Jacob, III, and
David E. Grose options to purchase 200,000, 50,000 and 50,000 shares of Common
Stock, respectively, at exercise prices of $5, $5 and $10 per share,
respectively. Additionally, the Company has granted to Messrs. Brown, Jacob
and Grose, options to purchase 200,000, 100,000 and 10,000 shares of Common
Stock, respectively, at an exercise price of $23 per share (the Initial Public
Offering price). Effective March 10, 1998, the Company granted Mr. Jacob an
option to purchase an additional 40,000 shares of Common Stock at an exercise
price of $14 per share. None of such options has been exercised, and all of
such options remain outstanding, as of the date of this Prospectus. Each of
the option agreements relating to stock options granted under the Employee
Stock Plan provides for the vesting of 20% of the shares subject to the option
each year beginning on the first anniversary of the date of grant. The option
ceases to be exercisable on the earliest of (i) the sixth anniversary of the
date of grant, (ii) the date of the employee's voluntary termination of
employment with the Company or the Company's termination of the employee's
employment for Due Cause (as defined in the employee's employment agreement) or
(iii) the date that is 90 days after termination of the employee's employment
by means of retirement, disability or death. In the event of a Change of
Control (as defined in the Employee Stock Plan), the committee that is charged
with administering the Employee Stock Plan (the "Committee") may accelerate the
exercisability of the options or take certain other actions provided in the
Employee Stock Plan. See "-- 1997 Stock Option and Stock Award Plan." The
options are exercisable for cash, or in the Committee's discretion, in an
acceptable equivalent, by the assignment of shares of Common Stock owned by the
option holder or the surrender of another Incentive Award (as hereinafter
defined).
The Company and James E. Brown are parties to a restricted stock award
agreement (the "Restricted Stock Award Agreement") pursuant to which Mr. Brown
purchased 100,000 shares (the "Restricted Shares") of Common Stock at a price
of $2.50 per share in February 1997. The Restricted Stock Award Agreement
provides for vesting of the Restricted Shares at a rate of 20% per year
beginning on December 10, 1997. Mr. Brown is required to remain continuously
employed by the Company through each vesting date for the applicable portion of
the Restricted Shares to vest and, prior to vesting, the Restricted Shares are
not transferable. In the event of termination of Mr. Brown's employment due to
a Change of Control (as defined in the Employee Stock Plan), all Restricted
Shares will vest immediately and all restrictions on transfer will terminate.
If Mr. Brown's employment with the Company terminates for any other reason, all
unvested Restricted Shares (the "Unvested Shares") will no longer be eligible
for vesting but, under certain circumstances, will be eligible for purchase by
the Company or Mr. Brown, as applicable. If Mr. Brown resigns or is terminated
by the Company for Due Cause (as defined in the Restricted Stock Award
Agreement), the Company may purchase the Unvested Shares from Mr. Brown for
$2.50 per share. If the Company elects not to purchase the Unvested Shares
from Mr. Brown, Mr. Brown will forfeit such Unvested Shares to the Company
without any payment therefor. If the Company terminates Mr. Brown's employment
for any reason other than Due Cause or if Mr. Brown's employment with the
Company terminates due to the death or disability of Mr. Brown, Mr. Brown may
keep the Unvested Shares by paying the Company an additional $5.00 per share.
If Mr. Brown elects not to make such additional payment, the Company may
purchase the Unvested Shares from Mr. Brown for $2.50 per share or allow Mr.
Brown to keep the Unvested Shares. EXECUTIVE SALARIES AND EMPLOYMENT
AGREEMENTS
The Company has entered into employment agreements with James E.
Brown, Edward S. Jacob, III and David E. Grose. The aggregate of the annual
base salaries for all three executive officers (taken as a group) is $375,000.
Pursuant to an employment agreement dated December 10, 1996 (the
"Brown Agreement"), James E. Brown is employed as President of the Company and,
if elected by the Board, the Chairman of the Board. The Brown Agreement
provides that Mr. Brown will receive an annual salary of not less than
$120,000, subject to annual adjustment in the sole discretion of the Board
based upon the performance and accomplishments of Mr. Brown. Currently, Mr.
Brown's annual salary is $140,000. If the Company's earnings before deducting
interest, taxes and depreciation during any full quarterly period equal or
exceed the greater of (i) $1.5 million or (ii) 5% of the sum of the Company's
stockholders' equity and long- term debt (averaged on a daily basis throughout
such quarterly period), then Mr. Brown will be eligible to receive a quarterly
bonus of $12,500. The Brown Agreement also provides for the grant of
non-transferrable options to purchase 200,000 shares of Common Stock at an
exercise price of $5 per share, which options are subject to vesting and other
restrictions provided in an option agreement. Pursuant to the Brown Agreement,
52
271
Mr. Brown purchased 100,000 shares of restricted Common Stock which are subject
to vesting in equal amounts annually over a five year period and other
restrictions provided in the agreement, including Mr. Brown's continued
employment with the Company and Mr. Brown's right, under certain circumstances,
to purchase unvested shares for $2.50 per share. See "-- Executive
Compensation." Mr. Brown is also entitled to reimbursement of reasonable
business expenses incurred by him in the performance of his duties, as well as
certain fringe benefits. The initial term of the Brown Agreement expires on
November 30, 1998 and is subject to extension for additional one-year periods
by mutual consent of Mr. Brown and the Company. In the event Mr. Brown's
employment is terminated by Mr. Brown voluntarily or by the Company for due
cause, Mr. Brown has agreed, for a period of two years thereafter, not to take
certain actions in competition with the Company in the states of Oklahoma,
Texas, New Mexico, Louisiana or any other state in which the Company then owns,
leases or operates its assets. If, in the event of a Change of Control (as
defined in the Brown Agreement), Mr. Brown is terminated without due cause or
Mr. Brown voluntarily elects to terminate his employment for any reason, then
Mr. Brown will be entitled to continue to receive his base salary and other
employee benefits through the remaining term of the Brown Agreement and to
receive a cash payment in an amount equal to any earned but unpaid quarterly
bonus for the previous quarter.
The Company has entered into employment agreements dated as of January
1, 1997 with Edward S. Jacob, III (the "Jacob Agreement") and July 16, 1997
with David E. Grose (the "Grose Agreement" and collectively with the Jacob
Agreement, the "Executive Agreements"). Pursuant to the Executive Agreements,
Mr. Jacob is employed as Executive Vice President -- Operations & Marketing and
Mr. Grose is employed as Vice President and Chief Financial Officer. The Jacob
Agreement provides that Mr. Jacob will receive an annual salary of not less
than $105,000 in 1997 and $115,000 in 1998, subject to annual adjustment in the
sole discretion of the Board based upon performance and accomplishments of Mr.
Jacob. Currently, Mr. Jacob's annual salary is $130,000. The Grose Agreement
provides that Mr. Grose will receive an annual salary of not less than
$105,000, subject to annual adjustment in the sole discretion of the Board
based upon performance and accomplishments of Mr. Grose. If the Company's
earnings before deducting interest, taxes and depreciation during any full
quarterly period equal or exceed the greater of (i) $1.5 million or (ii) 5% of
the sum of the Company's stockholders' equity and long-term debt (averaged on a
daily basis throughout such quarterly period), then each of Messrs. Jacob and
Grose will be eligible to receive a quarterly bonus of $5,000. The Executive
Agreements also provide for the grant of non-transferrable options to purchase
50,000 shares of Common Stock to each of Messrs. Jacob and Grose at an exercise
price of $5 per share, for Mr. Jacob, and $10 per share, for Mr. Grose. Such
options were granted to Mr. Jacob on January 1, 1997 and to Mr. Grose on July
16, 1997 and are subject to vesting and other restrictions. Such options
generally become exercisable in equal annual amounts over five years. Each of
Messrs. Jacob and Grose are entitled to reimbursement of reasonable business
expenses incurred by him in the performance of his duties, as well as certain
fringe benefits. The Jacob Agreement also provided for payment to Mr. Jacob of
a relocation allowance of $50,000, which was paid by the Company in January
1997. The initial terms of the Jacob Agreement and the Grose Agreement expire
on December 31, 1998 and June 30, 1999, respectively, and are subject to
extension for additional one-year periods by mutual consent. Each of the
Executive Agreements provides that if the applicable executive officer's
employment is terminated by the executive voluntarily or by the Company for due
cause, for a period of two years thereafter, the executive will not take
certain actions in competition with the Company in the states of Oklahoma,
Texas, New Mexico, Louisiana or any other state in which the Company then owns,
leases or operates its assets. If, in the event of a Change of Control (as
defined in the Executive Agreement), the executive is terminated without due
cause or the executive voluntarily elects to terminate his employment for any
reason, then the executive will be entitled to continue to receive his base
salary and other employee benefits through the remaining term of his Executive
Agreement and to receive a cash payment in an amount equal to any earned but
unpaid quarterly bonus for the previous quarter.
1997 STOCK OPTION AND STOCK AWARD PLAN
The description set forth below represents a summary of the principal
terms and conditions of the Employee Stock Plan and does not purport to be
complete. Such description is qualified in its entirety by reference to the
Employee Stock Plan, a copy of which has been filed as an exhibit to the
Registration Statement of which this Prospectus is a part.
General
Purpose. The Company adopted the Employee Stock Plan for the purposes
of strengthening the ability of the Company and its subsidiaries to attract,
motivate and retain employees of superior capability and encouraging valued
employees to have a proprietary interest in the Company. To accomplish these
purposes, the Employee Stock Plan
53
272
provides terms upon which certain eligible employees of the Company and its
subsidiaries may be granted stock options ("Options"), stock appreciation
rights ("SARs"), restricted stock, performance units, performance shares or
phantom stock rights (collectively, "Incentive Awards").
Administration. The Employee Stock Plan is administered by a
committee (the "Committee") consisting of two or more non-employee members of
the Board elected to the Committee by a majority of the Board. Presently, the
members of the Committee are Carl B. Anderson, III and Sidney L. Tassin.
Subject to the terms of the Employee Stock Plan, the Committee has the ability
to (i) determine, among other things, which full-time employees (by individual
or by class) are eligible to receive Incentive Awards and the time or times at
which Incentive Awards are granted, (ii) determine the number of shares of
Common Stock, Options, SARs, restricted stock awards, performance units or
shares or phantom stock rights that will be subject to each Incentive Award and
the terms and provisions of each Incentive Award, (iii) interpret the Employee
Stock Plan and agreements thereunder, (iv) prescribe, amend and rescind any
rules relating to the Employee Stock Plan and (v) make all other determinations
necessary for Employee Stock Plan administration.
Shares Subject to Employee Stock Plan. Initially, an aggregate of
1,600,000 shares of Common Stock (subject to certain adjustments) may be
issued, transferred or exercised pursuant to Incentive Awards under the
Employee Stock Plan. If the total number of issued and outstanding shares of
Common Stock increases, (other than any increase due to issuances of Common
Stock in connection with Incentive Awards under the Employee Stock Plan), then
the number of shares reserved under the Employee Stock Plan will be increased
one time per year, each January 1 during the existence of the plan, commencing
January 1, 1998, such that the number of shares reserved and available for
issuance under the Employee Stock Plan will equal 10% of the total number of
shares of issued and outstanding Common Stock. As a result, on January 1,
1998, the number of shares received under the Employee Stock Plan increased to
1,818,394 shares. Notwithstanding the foregoing, only a total of 400,000 of
the original 1,600,000 shares of Common Stock reserved under the Employee Stock
Plan may be issued, transferred or exercised pursuant to incentive stock
options ("ISOs") that comply with the requirements of Section 422 of the
Internal Revenue Code of 1986 (the "Code") under the Employee Stock Plan, and
the number of shares eligible for such treatment as ISOs shall not be subject
to annual adjustment. At the discretion of the Board or the Committee, the
shares of Common Stock delivered under the Employee Stock Plan may be made
available from (i) authorized but unissued shares, (ii) treasury shares or
(iii) previously issued but reacquired shares (or through a combination
thereof).
Eligibility and Participation. The Employee Stock Plan authorizes the
Committee to designate, by individual or class, those persons who are eligible
to receive Incentive Awards under the Plan ("Participants"). Participants must
be employed on a full-time basis by the Company or its subsidiaries. Members
of the Board who are not officers or employees of the Company may not be
Participants.
Incentive Awards
Except to the extent that the Committee in a written agreement
evidencing an Incentive Award (an "Incentive Award Agreement") or the Employee
Stock Plan provides otherwise, Incentive Awards vest and become exercisable in
equal amounts on the first, second, third, fourth and fifth anniversaries of
their grant. For purposes of all Incentive Awards under the Employee Stock
Plan, the term "Fair Market Value" means the closing price per share of such
Common Stock on the principal stock exchange or quotation system on which the
Common Stock is traded or listed on the date of grant or other specified
measuring date, or, if there shall have been no such price so reported or
listed on that date, on the last preceding date on which a price was so
reported or listed. If Common Stock is not publicly traded, then "Fair Market
Value" shall mean the value of a share of Common Stock, as determined by the
Committee, in the Committee's sole and absolute discretion, at least annually.
The Committee may utilize the services of an independent third party in
determining the Fair Market Value of the Common Stock for this purpose. The
types of Incentive Awards that may be made under the Employee Stock Plan are as
follows:
Options. Options are rights to purchase a specified number of shares
of Common Stock at a specified price. An Option granted pursuant to the
Employee Stock Plan may consist of either an ISO or a non-qualified stock
option ("NQSO") that does not comply with the requirements of section 422 of
the Code. ISOs may not be granted to any employee who owns or would own
immediately after the grant of such ISO, directly or indirectly, stock
possessing more than 10% of the total combined voting power of all classes of
stock of the Company (unless at the time of such grant, the incentive stock
option price is at least 110% of fair market value and such Option is not
exercisable after the expiration of five years from the date of grant). The
exercise price for an ISO must be at least equal to fair market value
54
273
of the Common Stock on the date of grant and the term of such option cannot be
greater than 10 years. The exercise price for a NQSO must be equal to at least
the greater of (i) the par value of the Common Stock or (ii) 50% of the fair
market value of the Common Stock on the date of grant. The exercise price of
an Option is payable in cash or an equivalent acceptable to the Committee. At
the discretion of the Committee, the exercise price for an Option may be paid
in Common Stock valued at fair market value on the exercise date, another
Incentive Award valued at fair market value, or a combination thereof equal in
value to the exercise price. Subject to the foregoing, the exercise price and
other terms and conditions relating to each Option are determined by the
Committee at the time of grant.
Stock Appreciation Rights. SARs are rights to receive a payment, in
cash or Common Stock, equal to the excess of the fair market value of a
specified number of shares of Common Stock on the date of exercise over a
specified strike price. The Committee may grant SARs in connection with an
Option (either at the time of grant or at any time during the term of the
Option) or without relation to an Option. For SARs related to Options, the
applicable strike price is the exercise price of the related Stock Option and
for SARs granted without relationship to an Option, the applicable strike price
is the fair market value of a share of Common Stock on the date of grant of the
SAR. Options related to SARs cease to be exercisable when the SAR is
exercised. Subject to certain exceptions, an SAR granted in connection with an
Option is exercisable at such time or times and only to the extent that the
related Option is exercisable, and may not be disposed by the holder except to
the extent that such related Option may be disposed. The Committee may provide
at the date of grant of an SAR for a limit on the amount payable upon exercise
of the SAR. Any such limitation must be noted in the agreement evidencing the
holder's SAR.
Restricted Stock Awards. The Committee may grant shares of restricted
stock pursuant to the Employee Stock Plan. Shares of restricted stock may not
be disposed of until the restrictions are removed or expire, and the Committee
may impose other conditions on such shares as it may deem advisable. The
restrictions upon restricted stock awards lapse as determined by the Committee,
subject to certain other lapse provisions. Shares of restricted stock may
remain subject to certain restrictions as set forth in the restricted stock
agreement. Each restricted stock award may have a different restriction
period, in the discretion of the Committee. The Committee may, in its
discretion, prospectively change the restriction period applicable to a
particular restricted stock award. Subject to certain provisions, the
Committee may, in its discretion, determine what rights, if any, a grantee of a
restricted stock award will have with respect to such stock, including the
right to vote the shares and receive all dividends and other distributions paid
or made with respect thereto.
Performance Awards. Performance units or performance shares
(collectively, "Performance Awards") may be granted under the Employee Stock
Plan subject to the attainment of one or more performance goals. Performance
goals may relate to any financial, production, sales or cost performance
objectives determined by the Committee at the beginning of a designated period.
If minimum performance is achieved or exceeded, the value of a Performance
Award will be based on the degree to which actual performance exceeds the
preestablished minimum performance standards. The Committee may, at any time,
modify the performance measures previously established for a Performance Award
as it considers appropriate and equitable. Payments with respect to
Performance Awards are made in cash or Common Stock valued at fair market value
as of the close of the applicable performance period (or a combination of both)
in the discretion of the Committee following the close of the applicable
performance period.
Phantom Stock Rights. Phantom stock rights entitle a holder, upon
conversion, to receive payment of cash or in shares of Common Stock valued at
fair market value on the date of conversion of the phantom stock right (or
both) in the discretion of the Committee. Upon conversion of a phantom stock
right, the Participant shall be entitled to receive payment of an amount
determined by multiplying (i) the fair market value of a share of Common Stock
on the date of conversion, by (ii) the number of shares of Common Stock as to
which such phantom stock right has been converted. Any payment of shares of
Common Stock upon conversion of a phantom stock right may be made in shares of
restricted stock.
Additional Provisions of the Employee Stock Plan
Expiration of Incentive Awards and Effects of Employment Separation.
Except to the extent that the Committee provides otherwise in an Incentive
Award Agreement, Incentive Awards (whether or not vested) expire immediately or
are forfeited by the recipient upon termination of such recipient's employment
with the Company or any subsidiary employing such recipient for any reason
other than death, disability or retirement. Most, if not all, of the Incentive
Award Agreements provide that vested Incentive Awards are not forfeited if the
recipient is terminated for reasons other than Due Cause (as defined in the
Incentive Award Agreement). Upon death, retirement, or disability resulting in
the
55
274
cessation of an employee's employment with the Company or its subsidiaries, any
unexercised Options or SARs or outstanding phantom stock rights terminate on
the date that is 90 days following the date of death, retirement or disability
(unless it expires by its terms on an earlier date). In the event of death,
disability or retirement, or other reasons that the Committee deems
appropriate, the Performance Awards will continue after the date of the
applicable event for such period of time as determined by the Committee,
subject to the terms of the Incentive Award Agreement or any other applicable
agreement, but only to the extent exercisable on the date of the applicable
event.
If a holder of a restricted stock award ceases to be an employee
because of retirement, death, permanent and total disability, or because of
other reasons as the Committee deems appropriate, the Committee may determine
that restrictions on all or some portion of the restricted stock award subject
to restrictions at the time of such employment termination will be deemed to
have lapsed. If an eligible employee who has purchased restricted stock under
the Employee Stock Plan terminates employment with the Company for any reason,
then all shares of restricted stock that have not previously vested will be
repurchased by the Company at the cost paid by such employee. In addition,
upon an eligible employee's termination of employment with the Company and all
of its subsidiaries for any reason (including by reason of death or
disability), the Company has the right to purchase from such employee all
shares of Common Stock awarded under the Employee Stock Plan on the terms and
conditions set forth in the applicable Incentive Award.
Adjustment Provisions. The Employee Stock Plan provides that upon the
dissolution or liquidation of the Company, certain types of reorganizations,
mergers or consolidations, the sale of all or substantially all of the assets
of the Company, or a "change of control" (as defined in the Employee Stock
Plan), the Committee may determine (without stockholder approval), subject to
the terms of any applicable agreement evidencing an Incentive Award, that (i)
all or some Incentive Awards then outstanding under the Employee Stock Plan
will be fully vested and exercisable or convertible, as applicable, (ii) some
or all restrictions on restricted stock lapse immediately, or (iii) there will
be a substitution of new Incentive Awards by such successor employer
corporation or a parent or subsidiary company therefor, with appropriate
adjustments as to the number and kind of shares or units subject to such awards
and prices. In addition, in the event of a "change of control," the Committee
may take certain actions, without stockholder approval, including but not
limited to (i) acceleration of the exercise dates of any outstanding SARs or
Options or immediate vesting, (ii) acceleration of the restriction (lapse of
forfeiture provision) period of any restricted stock award, (iii) grants of
SARs to holders of outstanding Options, (iv) payment of cash to holders of
Options in exchange for the cancellation of their outstanding Options, (v)
payment for outstanding Performance Awards, (vi) acceleration of the conversion
dates of outstanding phantom stock rights, (vii) grants of new Incentive Awards
or (viii) other adjustments or amendments to outstanding Incentive Awards.
Transfer of Incentive Awards. No Incentive Award and no right under
the Employee Stock Plan, contingent or otherwise, may be assigned, transferred
or otherwise disposed by a recipient other than pursuant to a court order, by
will or beneficiary designation, or pursuant to the laws of descent and
distribution. Pursuant to the Employee Stock Plan, so long as the Common Stock
has not been publicly traded for at least 90 days, any Common Stock obtained
pursuant to an Incentive Award will be subject to the Company's right of first
purchase for the price and upon the other terms provided in the Incentive Award
agreement if the holder of such shares intends to transfer them. In addition,
upon an employee's death, the Company has the right to purchase all or some of
the Common Stock that such employee obtained pursuant to an Incentive Award at
its fair market value within nine months of the employee's death.
Amendment and Termination of the Employee Stock Plan. Subject to
stockholder approval where expressly required by law, the Board may amend,
suspend or terminate the Employee Stock Plan at any time. No amendment, unless
approved by the holders of a majority of the outstanding shares of voting stock
of the Company may (i) change the class of persons eligible to receive
Incentive Awards, (ii) materially increase the benefits accruing to
Participants, (iii) increase by more than 10% the number of shares of Common
Stock subject to the Employee Stock Plan (except for certain adjustments
required by the Employee Stock Plan) or (iv) transfer the administration of the
Employee Stock Plan to any person who is not a nonemployee director. Except as
otherwise provided in the Employee Stock Plan, the Committee may not, without
the applicable Participant's consent, modify the terms and conditions of such
Participant's Incentive Award. No amendment, suspension, or termination of the
Employee Stock Plan may, without the applicable Participant's consent, alter,
terminate or impair any right or obligation under any Incentive Award
previously granted under the Employee Stock Plan. Unless previously
terminated, the Employee Stock Plan will terminate and no more Incentive Awards
may be granted after the tenth anniversary of the adoption of the Employee
Stock Plan by the Board. The Employee Stock Plan will continue in effect with
respect to Incentive Awards granted before termination of the Employee Stock
Plan and until such Incentive Awards have been settled, terminated or
forfeited.
56
275
1997 NON-EMPLOYEE DIRECTORS' STOCK OPTION PLAN
The description set forth below represents a summary of the principal
terms and conditions of the Director Stock Plan and does not purport to be
complete. Such description is qualified in its entirety by reference to the
Director Stock Plan, a copy of which has been filed as an exhibit to the
Registration Statement of which this Prospectus is a part.
General
Purpose. The Company adopted the Director Stock Plan for the purposes
of strengthening the ability of the Company to attract and retain experienced
and knowledgeable independent individuals to act as non-employee directors of
the Company and encouraging such directors to have a proprietary interest in
the Company. To accomplish these purposes, the Director Stock Plan provides
terms upon which members of the Board who are not employees of the Company or
any of its subsidiaries ("non-employee directors") will be granted
non-qualified Options.
Administration. The Director Stock Plan is administered by a
committee (the "Director Plan Committee") consisting of two or more
non-employee directors elected to the Director Plan Committee by a majority of
the Board. Currently, the members of the Director Plan Committee are Carl B.
Anderson, III and Sidney L. Tassin. Subject to the terms of the Director Stock
Plan, the Director Plan Committee has the ability to (i) determine the terms
and provisions of the agreements under which Options are granted under the
Director Stock Plan, (ii) to interpret the Director Stock Plan and the
agreements thereunder, (iii) to prescribe, amend and rescind any rules relating
to the Director Stock Plan and (iv) to make all other determinations necessary
for the administration of the Director Stock Plan. The Director Plan Committee
does not have discretion or authority to disregard or change any of the terms
and conditions under which Options are granted to non-employee directors.
Shares Subject to Director Stock Plan. Initially, an aggregate of
200,000 shares of Common Stock may be issued, transferred or exercised pursuant
to Options under the Director Stock Plan (the "Authorized Shares"). If the
total number of issued and outstanding shares of Common Stock increases after
the consummation of the Initial Public Offering (other than any increase due to
issuances of Common Stock in connection with awards of Options under the
Director Stock Plan), then the number of Authorized Shares automatically
increases one time per year, commencing January 1, 1998 and occurring each
January 1 thereafter during the existence of the Director Stock Plan, by a
sufficient number of shares of Common Stock such that the number of Authorized
Shares reserved and available for issuance under the Plan shall equal 1.2% of
the total number of shares of issued and outstanding Common Stock. As a
result, on January 1, 1998, the number of Authorized Shares increased to
218,207 shares. At the discretion of the Board or the Director Plan Committee,
the shares of Common Stock delivered under the Director Stock Plan may be made
available from (i) authorized but unissued shares, (ii) treasury shares or
(iii) previously issued but reacquired shares (or through a combination
thereof).
Eligibility and Participation. Each non-employee director is
automatically eligible to participate in the Director Stock Plan unless he does
not retain the annual retainer to which he is entitled for service on the
Board. No non-employee director may be issued an Option to acquire more than
15,000 shares of Common Stock in any plan year.
Options
Automatic Initial and Annual Awards of Options. Upon the consummation
of the Initial Public Offering, each person who was then a non-employee
director received, and thereafter on the date at which a person first becomes a
non- employee director, such non-employee director will receive, a one-time
grant of an Option to acquire 15,000 shares of Common Stock (an "Initial
Award"), which shall be exercisable on or after November 4, 1998. In each year
succeeding the year in which a non-employee director receives an Initial Award,
the non-employee director, if reelected to the Board, will be granted an
additional Option to acquire 5,000 shares of Common Stock (an "Annual Award").
Annual Awards will be made as of the date of the Company's regular annual
meeting of stockholders and will be immediately exercisable. No Option granted
as an Initial Award or Annual Award will be exercisable after the tenth
anniversary of the date of grant.
Retainer Options. Under the Director Stock Plan, a non-employee
director may elect to receive, in lieu of any or all of the annual cash
retainer he would otherwise receive in cash during the succeeding plan year
(currently $10,000 annually), Options for the purchase of a number of shares
equal to the amount of the annual retainer so forgone divided by the fair
market value of the Common Stock on the date of grant.
57
276
Exercise Price. Each Option granted pursuant to the Director Stock
Plan will be exercisable at a per share price equal to the fair market value of
a share of Common Stock as of the date of grant. Such price may be paid in
cash or, in the discretion of the Director Plan Committee, by assigning to the
Company shares equal in value to the exercise price.
Termination. Except to the extent the Director Plan Committee
provides otherwise in the agreement evidencing an Option under the Director
Stock Plan, all Options granted under the Director Stock Plan that are held by
a non- employee director will expire and be forfeited upon the date of
resignation or removal from the Board of such non- employee director, unless
such resignation or removal results from the death or permanent and total
disability of the director, or resignation upon the attainment of 65 years.
Upon such death, disability or resignation at age 65, such Options will remain
exercisable and effective for six months following the date of the event
causing the non-employee director to cease membership on the Board.
Effect of Corporate Changes. In the event of certain significant
corporate changes, including (i) dissolution or liquidation of the Company,
(ii) a reorganization, merger or consolidation (other than for purposes of
reincorporation in a different state) in which the Company is not the survivor,
(iii) the sale of all or substantially all of the assets of the Company, or
(iv) a Change of Control (as defined in the Director Stock Plan), subject to
the terms of any applicable agreement, the Director Plan Committee may, in its
discretion, without obtaining stockholder approval, take any one or more of the
following actions: (a) determine that all or some Options then outstanding will
be fully vested and exercisable, (b) substitute new Options by a successor
employer with appropriate adjustments as to the number and kind of shares
subject to such awards and prices or (c) cancel such Options and pay the
non-employee directors or their beneficiaries the difference between the
exercise price and the fair market value of the shares subject to the Options
as of the date of such corporate change.
STOCK OWNERSHIP OF DIRECTORS AND EXECUTIVE OFFICERS
Certain of the directors and executive officers of the Company are
beneficial owners of shares of Common Stock. See "Principal and Selling
Stockholders."
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During the fiscal year ended December 31, 1996, the Company had no
compensation committee or other committee of the Board performing similar
functions and no executive officer of the Company participated in deliberations
of the Board concerning executive officer compensation. Decisions concerning
compensation of executive officers during 1996 were made by, and the Company's
Compensation Committee currently consists of, Carl B. Anderson, III and Sidney
L. Tassin, both of whom are nonemployee directors. See "-- Board of Directors
- -- Board Committees." Mr. Anderson and Mr. Tassin each had direct or indirect
interests in certain transactions described in "Certain Relationships and
Related Transactions."
INDEMNIFICATION AGREEMENTS
The Company has entered into Indemnification Agreements (the
"Indemnification Agreements") with its directors and certain of its officers
(the "Indemnitees"), a form of which has been filed as an exhibit to the
Registration Statement of which this Prospectus is a part. Under the terms of
the Indemnification Agreements, the Company is required to indemnify the
Indemnitees against certain liabilities arising out of their services for the
Company. The Indemnification Agreements require the Company to indemnify each
Indemnitee to the fullest extent permitted by law and to advance certain
expenses incurred by an Indemnitee. The Indemnification Agreements provide
limitations on the Indemnitees' rights to indemnification in certain
circumstances. To the extent that indemnification provisions contained in the
Indemnification Agreements purport to include indemnification for liabilities
arising under the Securities Act, the Company has been informed that in the
opinion of the Commission, such indemnification is contrary to public policy
and is therefore unenforceable.
58
277
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the
beneficial ownership of the Common Stock as of January 31, 1998 both prior to
and after giving effect to the Merger Share Distribution by (i) each person
known by the Company to own more than 5% of the outstanding shares of Common
Stock, (ii) each of the Company's directors, (iii) each named executive
officer, (iv) all executive officers and directors as a group and (v) DLB. All
persons listed have an address in care of the Company's principal executive
offices and have sole voting and investment power with respect to their shares
unless otherwise indicated.
SHARES OWNED SHARES OWNED
BEFORE THE MERGER SHARE AFTER THE MERGER SHARE
DISTRIBUTION(1) DISTRIBUTION(1)
------------------------------------- --------------------------
NAME AND ADDRESS
OF BENEFICIAL OWNER NUMBER PERCENTAGE(2) (SHARES TO BE NUMBER PERCENTAGE(2)
DISTRIBUTED
Charles E. Davidson
411 West Putnam Avenue
Greenwich, Connecticut 06830 ............ -- -- -- 1,707,887(15) 9.4%
DLB Oil & Gas, Inc.
1601 Northwest Expressway, Suite 700
Oklahoma City, Oklahoma 73118 ........... 2,955,000(3) 16.3% 2,955,000 -- --
Energy Spectrum LLC
5956 Sherry Lane, Suite 600
Dallas, Texas 75225 ..................... 1,100,000(4) 6.0 -- 1,100,000 6.0
Carl B. Anderson, III
c/o AnSon Partners Limited Partnership
4005 Northwest Expressway, Suite 400E
Oklahoma City, Oklahoma 73116 ........... 1,288,000(5)(6) 7.1 -- 1,288,000 7.1
James E. Brown ............................ 313,000(7) 1.7 -- 313,000 1.7
Edward S. Jacob, III ...................... 10,000(8) * -- 10,000 *
David E. Grose ............................ --(9) -- -- -- --
Mark Liddell
c/o DLB Oil & Gas, Inc.
1601 Northwest Expressway, Suite 700
Oklahoma City, Oklahoma 73118 2,955,000(6)(10) 16.3 -- 291,456(15) 1.6
Merrill A. Miller, Jr .....................
c/o National-Oilwell, Inc.
5555 San Felipe
Houston, Texas 77056 .................... --(6) -- -- -- --
Sidney L. Tassin
c/o Energy Spectrum Partners LP
5956 Sherry Lane, Suite 600
Dallas, Texas 75225 ..................... 1,100,000(6)(11) 6.0 -- 1,100,000 6.0
Lew O. Ward
c/o Ward Petroleum Corporation
502 South Fillmore Road
Enid, Oklahoma 73703 .................... 423,125(6)(12) 2.3 -- 423,125 2.3
All parties to the Stockholders and
Voting Agreement as a group (13) ........ 5,343,000 29.4 -- 4,682,647 25.8
All directors and executive officers
as a group (8 persons) .................. 6,089,125(14) 33.4% -- 3,422,581 18.8%
- ------------------
* Less than one percent.
(1) The information contained in this table with respect to beneficial
ownership reflects "beneficial ownership" as defined in Rule 13d-3
under the Exchange Act. In computing the number of shares
beneficially owned by a person and the percentage ownership of that
person, shares of Common Stock subject to options or warrants held by
that person that are exercisable on January 31, 1998 or become
exercisable within 60 days following January 31, 1998 are deemed
outstanding. However, such shares are not deemed outstanding for the
purpose of computing the percentage ownership of any other person.
All information with respect to the beneficial ownership of any
stockholder has been furnished by such stockholder and, unless
otherwise indicated, each
59
278
stockholder has sole voting and investment power with respect to the
shares listed as beneficially owned by such stockholder, subject to
community property laws where applicable.
(2) Percentage of ownership is based on 18,183,945 shares of Common Stock
outstanding.
(3) Represents shares of Common Stock issued to DLB in connection with the
Bonray Acquisition, less 60,000 shares issued to DLJ at the direction
of DLB. Charles E. Davidson, Chairman of the Board of DLB, is the
beneficial owner of a majority of the outstanding common stock of DLB
and may be deemed to have beneficial ownership of the shares of Common
Stock held by DLB. Mark Liddell and Mike Liddell, as executive
officers and significant stockholders of DLB, may also be deemed to
have beneficial ownership of these shares.
(4) Represents shares of Common Stock (including 112,000 shares of Common
Stock that may be acquired within the next 60 days upon exercise of
outstanding Series B Warrants) held of record by Energy Spectrum
Partners LP, of which Energy Spectrum Capital LP is the sole general
partner. Energy Spectrum LLC is the sole general partner of Energy
Spectrum Capital LP and possesses sole voting and investment power
with respect to such shares. Sidney L. Tassin, as President and a
member of Energy Spectrum LLC, may be deemed to have beneficial
ownership of these shares. Mr. Tassin disclaims beneficial ownership
of such shares.
(5) Includes (i) 1,018,000 shares held of record by APLP, of which Mr.
Anderson is managing general partner, (ii) 170,000 shares held of
record by James E. Brown that are subject to voting rights retained by
Mr. Anderson pursuant to an irrevocable proxy and (iii) 100,000 shares
held of record and beneficially by Mr. Anderson.
(6) Excludes 15,000 shares of Common Stock that may be acquired upon
exercise of options granted in connection with the Initial Public
Offering pursuant to the Director Stock Plan. None of such options
are exercisable within the next 60 days.
(7) Includes (i) 100,000 shares of Common Stock held by Mr. Brown which
vest pro rata over five years starting on December 10, 1997 and are
subject to certain restrictions on resale and provisions for the
repurchase by the Company at a specified price and upon certain
conditions, including termination of employment with the Company, (ii)
170,000 shares for which an irrevocable voting proxy has been granted
to Carl B. Anderson, III and (iii) 40,000 shares subject to options
granted pursuant to the Employee Stock Plan that are exercisable
within the next 60 days. Excludes options to purchase an aggregate of
360,000 shares held by Mr. Brown which were granted pursuant to the
Employee Stock Plan, subject to vesting and other conditions contained
in stock option agreements, none of which options are exercisable
within the next 60 days.
(8) Includes 10,000 shares subject to options granted pursuant to the
Employee Stock Plan that are exercisable within the next 60 days.
Excludes options to purchase an aggregate of 180,000 shares held by
Mr. Jacob which were granted pursuant to the Employee Stock Plan,
subject to vesting and other conditions contained in stock option
agreements, none of which options are exercisable within the next 60
days.
(9) Excludes options to purchase an aggregate of 60,000 shares held by Mr.
Grose which were granted pursuant to the Employee Stock Plan, subject
to vesting and other conditions contained in stock option agreements,
none of which options are exercisable within the next 60 days.
(10) Represents shares held of record and beneficially by DLB. Mr.
Liddell, a director of the Company, is President and a significant
stockholder of DLB. Mr. Liddell disclaims beneficial ownership of
such shares.
(11) Represents shares held of record by Energy Spectrum Partners LP and
beneficially by Energy Spectrum LLC. Mr. Tassin, a director of the
Company, is the President of Energy Spectrum LLC, which is the
ultimate general partner of Energy Spectrum Partners LP. Mr. Tassin
disclaims beneficial ownership of such shares. See note (4) above.
(12) Includes (i) 253,725 shares held of record by Wil-Cas Investments,
L.P., a family limited partnership controlled by Lew O. Ward and a
family trust for the benefit of Mr. Ward's children, William C. Ward
and Casidy Ward, of which Bank of Oklahoma, N.A. is trustee, and (ii)
169,400 shares that may be acquired within the next 60 days upon the
exercise of outstanding warrants held by Wil-Cas Investments, L.P.
60
279
(13) Currently, DLB is a party to the Stockholders and Voting Agreement.
Upon consummation of the Merger Share Distribution, DLB will cease to
be such a party and the stockholders of the Company party to the
Stockholders and Voting Agreement will be Energy Spectrum, APLP and
Carl B. Anderson, III. At the time of the Merger Share Distribution,
each of Mike Liddell, Mark Liddell and Charles E. Davidson will be
required to execute a supplemental agreement, agreeing to become
parties to and to be bound by the Stockholders and Voting Agreement,
at which time, assuming a Merger Share Distribution Ratio of 0.2277,
an aggregate of 4,682,647 shares (25.4%) of Common Stock will be
beneficially owned by the parties to the Stockholders and Voting
Agreement. See "Certain Relationships and Related Transactions --
Stockholders and Voting Agreement."
(14) Includes (i) 112,000 shares that may be acquired by Energy Spectrum
Partners LP within the next 60 days upon the exercise of outstanding
Series B Warrants, (ii) 170,000 shares subject to voting rights
retained by Mr. Anderson, (iii) 100,000 shares of restricted stock
held by Mr. Brown, (iv) 40,000 shares subject to options granted to
Mr. Brown pursuant to the Employee Stock Plan that vest within the
next 60 days, (v) 10,000 shares subject to options granted to Mr.
Jacob pursuant to the Employee Stock Plan that are exercisable within
the next 60 days and (vi) 169,400 shares that may be acquired by
Wil-Cas Investments, L.P. within the next 60 days upon the exercise of
outstanding warrants.
(15) Based on a Merger Share Distribution Ratio of 0.2277.
61
280
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The following discussion identifies certain of the Company's
relationships and related transactions in which any founder, director or
executive officer of the Company, any person known to the Company to own of
record or beneficially over 5% of the Common Stock, or any member of the
immediate family of any such persons had, or has, a direct or indirect material
interest. Transactions involving any former director of the Company that have
occurred since the formation of the Company in December 1996 are also included.
DLB, Energy Spectrum and APLP are each record or beneficial owners of over 5%
of the Common Stock. Prior to the Initial Public Offering, Chesapeake and the
Oliver Companies were record or beneficial owners of over 5% of the Common
Stock. APLP, Energy Spectrum, the Oliver Companies and Chesapeake participated
in the Formation Transactions as founders of the Company. Three of the
Company's former directors, Aubrey K. McClendon, Tom L. Ward and Marcus C.
Rowland, are stockholders, executive officers and/or directors of Chesapeake.
One of the Company's directors, Sidney L. Tassin, and one of the Company's
former directors, James W. Spann, are executive officers and partners of the
ultimate general partner of Energy Spectrum. Roy T. Oliver, a former director
of the Company, is a director, executive officer and significant stockholder of
certain of the Oliver Companies. Mike Mullen is a director, executive officer
and significant stockholder of certain of the Oliver Companies. Prior to the
Ward Acquisition, Lew O. Ward, a director of the Company, was a director,
executive officer and significant stockholder of Ward. Carl B. Anderson, III,
a director of the Company, and Robert E. Bell, a former director of the
Company, are directors, executive officers and holders of substantial ownership
interests in APLP (of which Anadarko is a subsidiary). James E. Brown is a
director and executive officer of the Company and, prior to the formation of
the Company, was a director and executive officer of Anadarko. Edward S.
Jacob, III and David E. Grose are each executive officers of the Company. Each
of such persons and entities has or had a direct or indirect material interest
in one or more of the arrangements and transactions described below.
REGISTRATION RIGHTS AGREEMENTS
The Company and certain of its investors, including certain directors,
officers and significant stockholders, are party to a Registration Rights
Agreement (the "Registration Rights Agreement") covering shares of Common
Stock, including the shares of Common Stock issuable upon the exercise of
options, warrants and other Company securities (collectively, "Common Stock
Equivalents"), owned by such investors (the "Registrable Securities"). The
Registration Rights Agreement applies to Registrable Securities owned by Energy
Spectrum, APLP, the Oliver Companies and certain of their affiliates, Ward and
certain of its transferees, Carl B. Anderson, III, James E. Brown, Edward S.
Jacob, III, David E. Grose and certain other persons. As of December 31, 1997,
4,062,725 outstanding shares of Common Stock and 1,061,400 Common Stock
Equivalents (640,000 of which remain subject to further vesting pursuant to the
Employee Stock Plan) were subject to the Registration Rights Agreement.
Additionally, any shares issued by the Company upon conversion of the
Subordinated Notes will be subject to the Registration Rights Agreement.
The Registration Rights Agreement provides, among other things, that,
at any time after 180 days following the Initial Public Offering (subject to
customary "black-out" periods) certain holders of Registrable Securities with a
minimum aggregate share value of at least $20 million may require the Company
to effect the registration under the Securities Act of the Registrable
Securities owned by such holders, subject to certain limitations. The
Registration Rights Agreement also provides certain "piggyback" registration
rights to the holders of Registrable Securities whenever the Company proposes
to register an offering of any of its capital stock under the Securities Act,
subject to certain exceptions, including pro rata reduction if, in the
reasonable opinion of the managing underwriter of the offering, such a
reduction is necessary to prevent an adverse effect on the marketability or
offering price of all the securities proposed to be offered in such offering.
The Registration Rights Agreement contains customary provisions
regarding the payment of expenses by the Company and regarding mutual
indemnification agreements between the Company and the holders of Registrable
Securities for certain securities law violations.
In connection with the Bonray Acquisition, the Company entered into a
registration rights agreement (the "DLB Registration Rights Agreement") for the
benefit of DLB and its financial advisor with respect to such transaction. The
DLB Registration Rights Agreement covers 3,015,000 shares of Common Stock
issued in the Bonray Acquisition. The DLB Registration Rights Agreement
provides, among other things, that, at any time (subject to customary
"black-out" periods following 120 days after the Initial Public Offering) DLB
may request the Company to register the Merger Share Distribution. All of the
Shares the subject of the Merger Share Distribution are being registered
pursuant to the terms of the DLB Registration Rights Agreement.
62
281
The DLB Registration Rights Agreement requires the Company to pay
expenses associated with the Merger Share Distribution. In addition, the DLB
Registration Statement contains customary provisions regarding mutual
indemnification agreements between the Company and the holders of registrable
securities for certain securities law violations.
The foregoing summary of the principal provisions of the Company's
registration rights agreements does not purport to be complete and is subject
to, and qualified in its entirety by reference to, all of the provisions of the
Registration Rights Agreement and the DLB Registration Rights Agreement, copies
of which have been filed as exhibits to the Registration Statement of which
this Prospectus is a part.
STOCKHOLDERS AND VOTING AGREEMENT
The Company is party to the Stockholders and Voting Agreement among
DLB, Energy Spectrum, APLP and Carl B. Anderson, III that provides for certain
agreements regarding the corporate governance of the Company, transfer
restrictions on shares of Common Stock and Common Stock Equivalents, and other
customary terms and conditions. Immediately following the Merger Share
Distribution, DLB will no longer be a party to the Stockholders and Voting
Agreement, the DLB Group will become parties to the Stockholders and Voting
Agreement and the remaining original parties thereto, together with the DLB
Group, will beneficially own approximately 4,682,647 shares of Common Stock,
representing 25.8% of the outstanding shares of Common Stock. The Stockholders
and Voting Agreement will terminate on November 4, 2007.
Board Representation. The Stockholders and Voting Agreement provides
that the Board shall not consist of more than ten members. In addition, the
Stockholders and Voting Agreement provides that, certain stockholders who are
party thereto have the right to designate a specified number of persons to be
nominated for election as directors. Each of Energy Spectrum, Anadarko and the
DLB Group (to the extent the DLB Group elects to be bound thereby) have the
right to designate one nominee for director as follows: (i) Energy Spectrum has
the right to designate one nominee for director as long as it owns at least (a)
5% of the outstanding Common Stock of the Company, (b) 50% in principal amount
of the Subordinated Notes purchased by it in the May Financing or (c) 600,000
shares of Common Stock, (ii) Anadarko has the right to designate one nominee
for director as long as it owns at least (a) 5% of the outstanding Common Stock
of the Company or (b) 600,000 shares of Common Stock, and (iii) the DLB Group
has the right to designate one nominee for director as long as the DLB Group
owns at least 5% of the outstanding Common Stock of the Company. The parties
to the Stockholders and Voting Agreement (the "Bound Stockholders") are
obligated to vote all of their voting securities (including certain Common
Stock Equivalents) of the Company for these designees.
Certain Transfer Restrictions. In accordance with the Stockholders
and Voting Agreement and in connection with the Initial Public Offering, the
Bound Stockholders agreed to a "lock-up" period of up to 180 days, during which
such stockholders will not transfer (other than pursuant to the Merger Share
Distribution) any Common Stock or Common Stock Equivalents without the prior
written consent of the Board, with any members of the Board designated by such
Bound Stockholder abstaining. The Bound Stockholders have agreed that any such
Bound Stockholder holding 5% or more of the Common Stock (on a fully diluted
basis) shall not, subject to certain exceptions, transfer 5% or more of the
Common Stock (on a fully diluted basis) unless such Bound Stockholder has
received the prior written consent of the Board, with any member of the Board
designated by such Bound Stockholder abstaining.
The foregoing summary of the material provisions of the Stockholders
and Voting Agreement does not purport to be complete and is subject to, and
qualified in its entirety by reference to, all of the provisions of such
agreement, a copy of which has been filed as an exhibit to the Registration
Statement of which this Prospectus is a part.
CERTAIN ARRANGEMENTS RELATED TO THE CONSOLIDATION TRANSACTIONS
The Formation Transactions
The Company was formed in December 1996 through a series of affiliated
entity transactions in which the Company became the successor to Anadarko, the
contract drilling subsidiary of privately held APLP. In connection with the
Formation Transactions (i) APLP contributed ten drilling rigs, including two
rigs requiring refurbishment, for 2,000,000 shares of Common Stock, (ii) the
Oliver Companies exchanged six drilling rigs requiring refurbishment for
1,600,000 shares of Common Stock and (iii) Energy Spectrum acquired 2,000,000
shares of Common Stock for $10 million. Additionally, Chesapeake entered into
drilling contracts with two-year terms for six of the Company's rigs in
consideration
63
282
for the Chesapeake Option. See "Business -- Formation and Other Transactions."
In connection with the Formation Transactions, the ten rigs acquired from APLP
were valued at an aggregate of $10.8 million, the six rigs acquired from the
Oliver Companies were valued at an aggregate of $9.5 million and the six
Chesapeake Drilling Agreements were valued at an aggregate of $1.1 million.
The valuations of the rigs acquired in the Formation Transactions from APLP and
the Oliver Companies, the values placed upon the Chesapeake Drilling Agreements
and the consideration to be received by each such founder were determined and
established through negotiations among representatives of APLP and Anadarko
(including Carl B. Anderson, III), Energy Spectrum (including Sidney L.
Tassin), the Oliver Companies (including Roy T. Oliver and Mike Mullen) and
Chesapeake (including Aubrey McClendon), taking into account the then existing
market values of available rigs, the anticipated costs to complete the
necessary refurbishment of the contributed rigs and the expected values of
revenues to be received by the Company from the Chesapeake Drilling Agreements.
Three of the rigs acquired by the Company from APLP were acquired by
APLP within the two years prior to their contribution to the Company. APLP
acquired one rig in each of August, September and October 1996 for $1.3
million, $922,000 and $450,000, respectively. At the time of their
contribution to the Company, such rigs were valued on the books of the Company
at $2.7 million. Four of the rigs acquired by the Company from the Oliver
Companies were acquired by the contributing founder within the two years prior
to their contribution to the Company at an aggregate cost of $2.6 million. At
the time of their contribution to the Company, such rigs were valued on the
books of the Company at $4.4 million.
Chesapeake Option. Upon issuance by the Company, the Chesapeake
Option provided Chesapeake with the right to purchase up to 2,000,000 shares of
Common Stock from the Company at an exercise price of $6 per share. The
Chesapeake Option would have expired (i) as to 668,000 shares, on December 5,
2000 and (ii) as to 1,332,000 shares, on December 5, 1998, subject to extension
to December 5, 2000 if Chesapeake extended four of the Chesapeake Drilling
Agreements for additional two-year terms. In August 1997, Chesapeake
relinquished the Chesapeake Option in connection with the Chesapeake
Transactions. See "-- Chesapeake Transactions."
Chesapeake Drilling Agreements. In December 1996 in connection with
the Formation Transactions, Chesapeake and its operating subsidiary
(collectively referred to in this discussion as "Chesapeake") entered into
drilling contracts (the "Chesapeake Drilling Agreements") with the Company
pursuant to which Chesapeake agreed to engage six of the Company's rigs for
two-year terms. Through September 30, 1997, the Company had recognized
aggregate revenues of $7.5 million from the Chesapeake Drilling Agreements.
Under the terms of the Chesapeake Drilling Agreements, the standard
day rates were subject to upward, but not downward, adjustment annually in
November to the average then-current market rates for the areas of operation,
less $100 per day. The Company and Chesapeake were required to consider such
adjustment each November during the term of the applicable Chesapeake Drilling
Agreement and if no agreement could be timely reached as to the appropriate
rate adjustment, the Company had the option to terminate the contract for such
rig at the conclusion of operations at the well then being drilled. In
December 1997, the Company and Chesapeake were unable to agree on an
appropriate rate adjustment, so the Company exercised its option to terminate
the Chesapeake Drilling Agreements. At March 27, 1998, three of the Company's
six rigs formerly covered by the Chesapeake Drilling Agreements remained under
contract with Chesapeake on a well-to-well basis.
In addition to the Chesapeake Drilling Agreements, between December
1996 and September 30, 1997, Chesapeake engaged five of the Company's rigs
under short term drilling contracts on standard daywork terms. The Company
recognized aggregate revenues of $4.4 million from such contracts over that
period. The Company recognized aggregate revenues of $11.9 million over that
period from all drilling contracts with Chesapeake.
Oliver Companies' Put Rights. Also in connection with the Formation
Transactions, the Company granted the Oliver Companies a right, exercisable at
any time between June 2, 1998 and July 2, 1998 if the Company had not
previously completed an IPO (as defined in the Master Agreement providing for
such right), to require the Company to either (at the Company's option) (i)
repurchase all 1,600,000 of the shares of Common Stock held by the Oliver
Companies for an aggregate purchase price of $12 million ($7.50 per share) in
cash or (ii) issue to the Oliver Companies an aggregate of 400,000 additional
shares of Common Stock. This right terminated upon consummation of the Initial
Public Offering.
64
283
Fees Paid to Energy Spectrum. In January 1997, the Company paid
Energy Spectrum Capital LP ("ESC"), the general partner of Energy Spectrum, a
fee in the amount of $300,000 in consideration for assistance provided by
Energy Spectrum in the structuring of the Formation Transactions and
arrangement and negotiation of external financing. The Company also reimbursed
ESC for expenses incurred in connection with the rendering of such services.
The Ward Acquisition
On May 31, 1997, the Company completed the Ward Acquisition involving
the acquisition by the Company of all of the issued and outstanding common
units of a subsidiary of Ward that held six drilling rigs in consideration for
$8 million in cash, 400,000 shares of Common Stock and a warrant (the "Ward
Warrant") to purchase up to 200,000 shares of Common Stock at an exercise price
of $10 per share. The Ward Warrant is exercisable at any time on or before the
later of (i) May 30, 2000 or (ii) one year after the completion of an initial
public offering of the Common Stock (which was satisfied by the Initial Public
Offering), but no later than June 1, 2003.
In connection with the Ward Acquisition, the Company entered into an
agreement (the "Ward Transportation Agreement") with Geronimo Trucking Company
("Geronimo"), a company owned and controlled by Lew O. Ward, a director of the
Company. The Ward Transportation Agreement provides that the Company will have
a preferential right to engage Geronimo's trucking services for covered
transportation needs and that Geronimo will make its trucking services
available to the Company at rates that are competitive in the area. The Ward
Transportation Agreement also provides Geronimo with the preferential right to
perform trucking services contracted for by the Company for the movement of the
rigs acquired by the Company in the Ward Acquisition. The Company is obligated
to allow Geronimo to bid on any covered rig movement required by the Company
and to allow Geronimo the opportunity to match or better any bid received from
a third party. Unless earlier terminated by the parties, the Ward
Transportation Agreement is effective through May 2000. Through September 30,
1997, the Company paid an aggregate of $135,000 under the Ward Transportation
Agreement.
The Bonray Acquisition
In October 1997, the Company acquired all of the issued and
outstanding capital stock of Bonray from DLB in consideration for the issuance
of 3,015,000 shares of Common Stock. In connection with the Bonray
Acquisition, DLB obtained certain rights to require the Company to effect the
registration under the Securities Act of the shares of Common Stock acquired by
DLB in the Bonray Acquisition. See "-- Registration Rights Agreements."
Additionally, DLB is a party to the Stockholders and Voting Agreement and is
entitled to designate one Board nominee as long as DLB owns at least 5% of the
Common Stock of the Company. Upon the consummation of the Merger Share
Distribution, DLB will no longer be a party to the Stockholders and Voting
Agreement, the members of the DLB Group will become parties to the Stockholders
and Voting Agreement and such members of the DLB Group, rather than DLB, will
be entitled to designate one Board nominee as long as the DLB Group owns at
least 5% of the Common Stock of the Company. See "-- Stockholders and Voting
Agreement."
Individual Rig Acquisitions
In May 1997, the Company purchased from R.T. Oliver Drilling, Inc. two
drilling rigs for an aggregate purchase price consisting of $3.3 million in
cash and warrants (the "Oliver Warrants") for the purchase of an aggregate of
100,000 shares of Common Stock at an exercise price of $8 per share. One of
the Oliver Warrants was issued to RR&T, Inc., an affiliate of Roy T. Oliver,
and the other was issued to Mike Mullen. Each of the Oliver Warrants expires
on May 1, 2000 and is separately exercisable for 50,000 shares of Common Stock.
CERTAIN FINANCING ARRANGEMENTS
On May 1, 1997, the Company completed a financing transaction (the
"May Financing") in which the Company issued shares of Common Stock,
subordinated notes and warrants to purchase Common Stock to certain significant
stockholders in exchange for an aggregate of $28.5 million in cash, as
described below. The following summary of terms of the May Financing does not
purport to be complete and is qualified in its entirety by reference to the
Securities Purchase Agreement, dated as of April 30, 1997 (the "May Securities
Purchase Agreement"), the Subordinated Notes, Series A Warrants and Series B
Warrants, copies or forms of which are filed as exhibits to the Registration
Statement of which this Prospectus is a part.
65
284
Common Stock and Subordinated Notes. In the May Financing, the
Company issued 1,000,000 shares of Common Stock to Chesapeake in consideration
for $7 million in cash and 140,000 shares of Common Stock to Energy Spectrum in
consideration for $980,000 in cash. Additionally, the Company issued the
Subordinated Notes due May 1, 2003 in the original principal amounts of $18
million and $2.52 million to Chesapeake and Energy Spectrum, respectively. The
Subordinated Notes bear interest at the Company's option at either (i) 11% per
annum, payable in cash, or (ii) 12.875% per annum, payable in the form of
additional Subordinated Notes, which interest is payable quarterly in arrears.
On each quarterly interest payment date, the Company may make an election as to
the interest rate to be applied for the previous quarter. The Subordinated
Notes are redeemable, solely at the option of the Company, in whole or in part,
at any time at varying redemption prices. The Company must offer to redeem the
Subordinated Notes upon the occurrence of certain events constituting a "Change
of Control" (as defined in the Subordinated Notes) at a redemption price equal
to 100% of the principal amount thereof, together with accrued and unpaid
interest, if any, to the date of redemption. The Subordinated Notes are
convertible into Common Stock at the option of the Company, in whole or in
part, in conjunction with a "Convertible Event" (as defined in the Subordinated
Notes), which includes certain underwritten public offerings (including the
Initial Public Offering), mergers, consolidations and other business
combination transactions. The Subordinated Notes are general unsecured
subordinated obligations of the Company that are subordinated in right of
payment to all existing and future senior indebtedness of the Company, pari
passu with all existing and future subordinated indebtedness of the Company and
senior in right of payment to all future junior subordinated indebtedness of
the Company. Upon consummation of the Initial Public Offering, the Company
redeemed in full the $18 million principal amount of Subordinated Notes issued
to Chesapeake in consideration for the payment by the Company to Chesapeake of
$18.2 million in cash, based on the price to public in the Initial Public
Offering. See "-- Chesapeake Transactions." In May 1997, the Company paid
Chesapeake a commitment fee of $250,000 in connection with the funding of the
Common Stock and Subordinated Notes in the May Financing.
Warrants. In the May Financing, the Company also issued the Series A
Warrants and the Series B Warrants. The Warrants are exercisable on or prior to
May 1, 2003 at a price of $0.01 per share in the case of the Series A Warrants
and $7.50 per share in the case of the Series B Warrants. In the May
Financing, Chesapeake was issued Series A Warrants and Series B Warrants
representing the right to purchase 700,000 shares and 800,000 shares of Common
Stock, respectively, and Energy Spectrum was issued Series A Warrants and
Series B Warrants representing the right to purchase 98,000 shares and 112,000
shares of Common Stock, respectively. The Warrants expire on May 1, 2003 and
are exercisable (i) at any time with a cash payment or (ii) pursuant to a
cashless exercise at any time after the completion of a "Qualified IPO" (as
defined in the Warrants), which includes certain underwritten public offerings
(including the Initial Public Offering), mergers, consolidations and other
business combination transactions. The exercise prices, as well as the number
and kind of shares issuable under the Warrants, are subject to adjustment upon
the happening of certain events described in the Warrants, including, the
payment of in-kind dividends or distributions and the subdivision,
reclassification or recapitalization of the Common Stock, whether in connection
with a consolidation or merger or otherwise. On July 31, 1997, Energy Spectrum
exercised in full its Series A Warrants. On the date hereof, Energy Spectrum
holds all of the Series B Warrants issued to it in the May Financing. In
August 1997, Chesapeake relinquished its Series A Warrants and Series B
Warrants as part of the Chesapeake Transactions. See "-- Chesapeake
Transactions."
CHESAPEAKE TRANSACTIONS
In August 1997, Chesapeake and the Company agreed to complete a series
of transactions (the "Chesapeake Transactions") pursuant to which the Company
has issued 3,194,000 shares of Common Stock to Chesapeake in consideration for
(i) $9 million in cash, (ii) the relinquishment and cancellation of the
Chesapeake Option and the Warrants issued to Chesapeake in connection with the
May Financing and (iii) the redemption in full of the $18 million principal
amount of Subordinated Notes held by Chesapeake at a cash redemption price of
$18.2 million which was paid from the proceeds of the Initial Public Offering.
Also in connection with the Chesapeake Transactions, the Company waived its
right under the May Securities Purchase Agreement to require Chesapeake to
purchase additional Common Stock, Warrants and Subordinated Notes for $3
million.
OTHER RELATED PARTY TRANSACTIONS AND ARRANGEMENTS
Weatherford Storage Yard. In connection with the Formation
Transactions, Anadarko granted the Company a transferrable option, exercisable
at any time prior to June 30, 1998, to either purchase from Anadarko a storage
yard located in Weatherford, Oklahoma (the "Weatherford Storage Yard") for a
price of $1,000 in cash or lease from Anadarko, for any period specified by the
Company through a date not later than December 31, 1999, the Weatherford
66
285
Storage Yard for a lease price of $100 per year. In August 1997, the Company
acquired from Anadarko approximately five acres of land also in Weatherford,
Oklahoma, in consideration for the relinquishment of the Company's option to
acquire or lease the Weatherford Storage Yard.
Fees Paid to Energy Spectrum. In May 1997, the Company paid ESC a fee
in the amount of $220,000 for financial advisory and other services rendered to
the Company in connection with the valuation, negotiation and closing of the
Trend Acquisition, for assistance in the arrangement of alternative financing
sources, and for structuring, negotiating and closing the amended financing
arrangements with CIT and Fleet. The Company also reimbursed ESC for expenses
incurred in connection with the rendering of such services.
Fees Paid to Energy Spectrum Advisors. The Company has engaged Energy
Spectrum Advisors Inc. ("ESA") to provide financial advisory and investment
banking services to the Company in connection with a possible restructuring or
refinancing of the Company's existing funded debt. As compensation for such
services, the Company has agreed to pay ESA an initial fee of $50,000 and an
additional fee of $25,000 per month through the term of the engagement. The
engagement letter expires on May 31, 1998 and may be terminated at the
Company's option at any time after March 1, 1998. To date the Company has paid
$75,000 in fees to ESA in connection with this arrangement. ESA is an
affiliate of Energy Spectrum, which is the beneficial owner of approximately 6%
of the Common Stock. Sidney L. Tassin, a director of the Company designated to
serve on the Board by Energy Spectrum pursuant to the Stockholders and Voting
Agreement, has a right under certain circumstances to acquire, and as a result
may be deemed to beneficially own, a minority equity interest in ESA.
Transactions with Affiliates of Roy T. Oliver. The Company has in the
past purchased drilling rig equipment from U.S. Rig & Equipment, Inc., an
affiliate of Roy T. Oliver, a former director of the Company and control person
of certain of the Oliver Companies. From December 1996 through September 30,
1997, the Company paid U.S. Rig & Equipment, Inc. an aggregate of $5 million in
connection with such purchases. Additionally, in August 1997, the Company sold
to an affiliate of Mr. Oliver one rig acquired in the Trend Acquisition that
did not meet the Company's operational and technical standards. The Company
believes that the $500,000 price received by the Company in that sale is
equivalent to the price that would have been received from an unaffiliated
third party. Additionally, in the Oliver Acquisition, which was completed in
January 1998, the Company acquired six rigs and related drilling equipment from
R.T. Oliver Drilling, Inc. for $14 million. Such rigs will require additional
refurbishment prior to placement into service.
APLP Trucking Services. The Company has engaged affiliates of APLP
for the provision of trucking services related to the movement of the Company's
rigs on numerous occasions. From December 1996 through September 30, 1997, the
Company paid such affiliates of APLP an aggregate of $630,000 in consideration
for such trucking services.
APLP Administrative Services. Since December 13, 1996, APLP has made
available to the Company certain of APLP's employees, office space and
administrative equipment, such as computer and telephone systems. In
consideration for such assistance, through September 30, 1997, the Company had
reimbursed APLP an aggregate of $179,000. APLP continues to provide certain
computer services to the Company.
67
286
DESCRIPTION OF CAPITAL STOCK
AUTHORIZED AND OUTSTANDING CAPITAL STOCK
The authorized capital stock of the Company consists of 100,000,000
shares of common stock, par value $0.01 per share, and 20,000,000 shares of
preferred stock, par value $0.01 per share ("Preferred Stock"). As of March
27, 1998, 18,183,945 shares of Common Stock and no shares of Preferred Stock
were outstanding. The following summary is qualified in its entirety by
reference to the Certificate and Bylaws, copies of which are filed as exhibits
to the Registration Statement of which this Prospectus is a part.
COMMON STOCK
All shares of Common Stock transferred in the Merger Share
Distribution are fully paid and nonassessable. As of March 27, 1998, there
were 18,183,945 shares of Common Stock outstanding held of record by 50
stockholders. The holders of Common Stock are entitled to one vote for each
share held on all matters submitted to a vote of common stockholders of the
Company. The Common Stock does not have cumulative voting rights in the
election of directors. Shares of Common Stock have no preemptive rights,
conversion rights, redemption rights or sinking fund provisions. The Common
Stock is not subject to redemption by the Company.
Subject to the rights of the holders of any class of capital stock of
the Company having any preference or priority over the Common Stock, the
holders of Common Stock are entitled to dividends in such amounts as may be
declared by the Board from time to time out of funds legally available for such
payments and, in the event of liquidation, to share ratably in any assets of
the Company remaining after payment in full of all creditors and provision for
any liquidation preferences on any outstanding preferred stock ranking prior to
the Common Stock.
PREFERRED STOCK
The Certificate authorizes the Board, subject to limitations
prescribed by law, to provide for the issuance of up to 20,000,000 shares of
Preferred Stock in one or more series. The Board is authorized to establish
the number of shares to be included in any such series and to fix the
designations, powers, preferences and rights of the shares of each such series,
and any qualifications, limitations or restrictions thereof.
The Company believes that the ability of the Board to issue one or
more series of Preferred Stock will provide the Company with flexibility in
structuring possible future financings and acquisitions, and in meeting other
corporate needs which might arise from time to time. The authorized shares of
Preferred Stock, as well as shares of Common Stock, will be available for
issuance without further action by the Company's stockholders, unless such
action is required by applicable law or the rules of any stock exchange or
automated quotation system on which the Company's securities may be listed or
traded. If the approval of the Company's stockholders is not required for the
issuance of shares of Preferred Stock or Common Stock, the Board may determine
not to seek stockholder approval.
Although the Board has no intention at the present time of doing so,
it could issue a series of Preferred Stock that may, depending on the terms of
such series, hinder, delay or prevent the completion of a merger, tender offer
or other takeover attempt. Among other things, the Board could issue a series
of Preferred Stock having terms that could discourage an acquisition attempt
through which an acquiror may be able to change the composition of the Board,
including a tender offer or other transaction that some, or a majority, of the
Company's stockholders might believe to be in their best interests or in which
stockholders might receive a premium for their stock over the then current
market price of such stock.
CERTAIN PROVISIONS OF THE CERTIFICATE OF INCORPORATION AND BYLAWS
The Board consists of directors who are elected for one-year terms at
each annual meeting of stockholders. Stockholders may remove a director only
for cause. In general, the Board, not the stockholders, has the right to
appoint persons to fill vacancies on the Board.
The Certificate contains a "fair price" provision that requires the
affirmative vote of the holders of at least 80% of the Company's voting stock
and the affirmative vote of at least 66 2/3% of the Company's voting stock not
owned, directly or indirectly, by a Company Related Person (hereinafter
defined) to approve any merger, consolidation, sale
68
287
or lease of all or substantially all of the Company's assets, or certain other
transactions involving a Company Related Person. For purposes of this fair
price provision, a "Company Related Person" is any person beneficially owning
10% or more of the voting power of the outstanding capital stock of the Company
who is a party to the transaction at issue. The voting requirement is not
applicable to certain transactions, including those that are approved by the
Company's Continuing Directors (as defined in the Certificate) or that meet
certain "fair price" criteria contained in the Certificate.
The Certificate further provides that stockholders may act only at
annual or special meetings of stockholders and not by written consent, that
special meetings of stockholders may be called only by the Board, and that only
business proposed by the Board may be considered at special meetings of
stockholders.
The Certificate also provides that the only business (including
election of directors) that may be considered at an annual meeting of
stockholders, in addition to business proposed (or persons nominated to be
directors) by the directors of the Company, is business proposed (or persons
nominated to be directors) by stockholders who comply with the notice and
disclosure requirements set forth in the Certificate. In general, the
Certificate requires that a stockholder give the Company notice of proposed
business or nominations no later than 60 days before the annual meeting of
stockholders (meaning the date on which the meeting is first scheduled and not
postponements or adjournments thereof) or (if later) ten days after the first
public notice of the annual meeting is sent to common stockholders. In
general, the notice must also contain information about the stockholder
proposing the business or nomination, his interest in the business, and (with
respect to nominations for director) information about the nominee of the
nature ordinarily required to be disclosed in public proxy solicitations. The
stockholder also must submit a notarized letter from each of his nominees
stating the nominee's acceptance of the nominations and indicating the
nominee's intention to serve as director if elected.
The Certificate also restricts the ability of stockholders to
interfere with the powers of the Board in certain specified ways, including the
constitution and composition of committees and the election and removal of
officers.
The Certificate provides that approval by the holders of at least 66
2/3% of the outstanding voting stock of the Company is required to amend the
provisions of the Certificate discussed above and certain other provisions,
except that (i) approval by the holders of at least 80% of the outstanding
voting stock of the Company, together with approval by the holders of at least
66 2/3% of the outstanding voting stock not owned, directly or indirectly, by
the Company Related Person, is required to amend the fair price provisions and
(ii) approval of the holders of at least 80% of the outstanding voting stock is
required to amend the provisions prohibiting stockholders from acting by
written consent.
DELAWARE ANTI-TAKEOVER STATUTE
The Company is a Delaware corporation and is subject to Section 203 of
the DGCL. In general, Section 203 prevents an "interested stockholder"
(defined generally as a person owning 15% or more of the outstanding voting
stock of the Company) from engaging in a "business combination" (as defined in
Section 203) with the Company for three years following the date that person
becomes an interested stockholder unless (i) before that person became an
interested stockholder, the Board approved the transaction in which the
interested stockholder became an interested stockholder or approved the
business combination, (ii) upon completion of the transaction that resulted in
the interested stockholder's becoming an interested stockholder, the interested
stockholder owns at least 85% of the Company's voting stock outstanding at the
time the transaction commenced (excluding stock held by directors who are also
officers of the Company and by employee stock plans that do not provide
employees with the right to determine confidentially whether shares held
subject to the plan will be tendered in a tender or exchange offer), or (iii)
following the transaction in which that person became an interested
stockholder, the business combination is approved by the Board and authorized
at a meeting of stockholders by the affirmative vote of the holders of at least
two-thirds of the outstanding voting stock of the Company not owned by the
interested stockholder.
Under Section 203, these restrictions also do not apply to certain
business combinations proposed by an interested stockholder following the
announcement or notification of one of certain extraordinary transactions
involving the Company and a person who was not an interested stockholder during
the previous three years or who became an interested stockholder with the
approval of a majority of the Company's directors, if that extraordinary
transaction is approved or not opposed by a majority of the directors who were
directors before any person became an interested stockholder in the previous
three years or who were recommended for election or elected to succeed such
directors by a majority of such directors then in office.
69
288
LIABILITY OF DIRECTORS; INDEMNIFICATION
The Certificate provides, as authorized by Section 102(b)(7) of the
DGCL, that a director of the Company will not be personally liable to the
Company or any of its stockholders for monetary damages for breach of fiduciary
duty as a director involving any act or omission of any such director, except
that such provisions do not eliminate or limit the liability of a director (i)
for any breach of the director's duty of loyalty to the Company or its
stockholders, (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) under Section 174
of the DGCL, as it now exists or hereafter may be amended, or (iv) for any
transaction from which the director derived an improper personal benefit. The
Certificate also provides that if the DGCL is amended after the date of filing
of the Certificate to authorize corporate action further limiting or
eliminating the personal liability of directors, then the liability of a
director of the Company, in addition to the limitation on personal liability
provided for already, shall be limited to the fullest extent permitted by the
DGCL as so amended. Any repeal or modification of such provision in the
Certificate by the stockholders of the Company will be effective prospective
only, and will not adversely affect any limitation on the personal liability of
a director of the Company existing at the time of such repeal or modification.
The Certificate also provides for indemnification of directors to the
fullest extent permitted by the DGCL. Such indemnification may be available
for liabilities arising in connection with the Merger Share Distribution.
Insofar as indemnification for liabilities under the Securities Act may be
permitted to directors, officers or persons controlling the Company pursuant to
the foregoing provisions, the Company has been informed that, in the opinion of
the Commission, such indemnification is against public policy as expressed in
the Securities Act and is therefore unenforceable. Pursuant to its
Certificate, the Company may indemnify its officers, employees, agents and
other persons to the fullest extent permitted by the DGCL. The Company's
Bylaws obligate the Company, under certain circumstances, to advance expenses
to its directors and officers in defending an action, suit or proceeding for
which indemnification may be sought. The Company has entered into
Indemnification Agreements with certain of its directors and officers. See
"Management -- Indemnification Agreements."
The Company's Bylaws also provide that the Company shall have the
power to purchase and maintain insurance on behalf of any person who is or was
a director, officer, employee or agent of the Company, or who, while a
director, officer, employee or agent, is or was serving as a director, officer,
trustee, general partner, employee or agent of one of the Company's
subsidiaries or, at the request of the Company, of any other organization,
against any liability asserted against such person or incurred by such person
in any such capacity, where the Company would have the power to indemnify such
person against such liability under the DGCL.
70
289
SHARES ELIGIBLE FOR FUTURE SALE
As of March 27, 1998, the Company had 18,183,945 shares of Common
Stock outstanding. Additionally, as of such date, (i) options for the purchase
of 806,600 shares of Common Stock had been granted to certain employees of the
Company pursuant to the Employee Stock Plan, (ii) options for the purchase of
75,000 shares of Common Stock had been granted to certain non-employee
directors of the Company pursuant to the Director Stock Plan and (iii) 397,000
shares of Common Stock were subject to outstanding warrants issued by the
Company. The exercise prices of some of these options and warrants are lower
than the recent trading prices of the Common Stock. In addition, the
Subordinated Notes are convertible, solely at the Company's option, into shares
of Common Stock. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources" and
"Certain Relationship and Related Transactions -- Certain Financing
Arrangements -- Common Stock and Subordinated Notes."
Of the outstanding shares, the 11,040,000 shares sold in the Initial
Public Offering and the 2,955,000 shares the subject of the Merger Share
Distribution will be freely tradeable in the public market without restriction
or limitation under the Securities Act, except for any shares purchased by or
distributed to an "affiliate" (as defined in the Securities Act) of the
Company. The shares of Common Stock that were not registered in connection
with the Initial Public Offering or the Merger Share Distribution will
constitute "restricted shares" for purposes of Rule 144 under the Securities
Act, and may not be sold by the holders of such shares other than in compliance
with the registration requirements of the Securities Act or pursuant to an
available exemption therefrom. The Company, its officers, directors and the
selling stockholders in the Initial Public Offering have agreed that they will
not offer or sell any shares of Common Stock for a period of 180 days after
November 4, 1997 without the prior written consent of the representatives of
the underwriters of the Initial Public Offering. Following the consummation of
the Merger Share Distribution and the expiration of the lock-up agreements with
the underwriters executed in connection with the Initial Public Offering, each
of the Company's directors and executive officers and each of its existing
stockholders who hold restricted shares, who hold (as a group) an aggregate of
approximately 23% of the outstanding shares of Common Stock, may sell such
shares subject to the requirements of Rule 144 under the Securities Act or
pursuant to the terms of a registration rights agreement. See "Certain
Relationships and Related Transactions -- Registration Rights Agreements." The
Company is also a party to certain registration rights agreements pursuant to
which it has granted demand and piggyback registration rights which, as of
December 31, 1997, covered an aggregate of 8,139,125 shares of Common Stock and
Common Stock Equivalents. The beneficiaries of the registration rights
agreements include DLB, Energy Spectrum, APLP, the Oliver Companies and certain
of their affiliates, Ward and certain of its transferees, DLJ, Carl B.
Anderson, III, James E. Brown, Edward S. Jacob, III, David E. Grose and certain
other parties. The terms of these agreements prohibit the exercise of such
registration rights for a period of 180 days following the date of the Initial
Public Offering, subject to certain exceptions. In addition, the Company
intends to file registration statements on Form S-8 covering the issuance of
shares of Common Stock registered pursuant to the Company Stock Plans within
180 days of the Initial Public Offering. Accordingly, shares of Common Stock
issued pursuant to the Company Stock Plans will be available for sale in the
public market without restriction or limitation under the Securities Act,
except for any shares held by an "affiliate" of the Company.
In general, under Rule 144 as currently in effect, an "affiliate" of
the Company may sell within any three- month period a number of shares that
does not exceed the greater of (i) 1% of the then outstanding shares of such
class or (ii) the average weekly trading volume on the AMEX during the four
calendar weeks preceding the date on which a notice of sale is filed with the
Commission with respect to the proposed sale. Sales under Rule 144 are subject
to certain restrictions relating to the manner of sale, notice and the
availability of current public information about the issuer. A person who has
not been an affiliate of the Company at any time during the 90 days preceding a
sale, and who has beneficially owned shares for at least two years (including
the holding period of any prior owner other than an affiliate), would be
entitled to sell such shares without regard to the volume limitations, manner
of sale provisions, notice or other requirements of Rule 144.
71
290
FEDERAL INCOME TAX CONSIDERATIONS
The following discussion summarizes the principal federal income tax
consequences associated with the Merger Share Distribution of the Shares to the
DLB Stockholders. The following discussion applies only to a DLB Stockholder
who is a citizen or resident of the United States, a corporation, partnership
or other entity created or organized in or under the laws of the United States
and who holds shares of DLB as a capital asset. The following discussion does
not address the potential tax consequences applicable to DLB Stockholders (i)
who have received such shares in connection with the performance of services,
(ii) who are dealers in securities or (iii) who are subject to special
treatment under the Code (such as insurance companies, tax-exempt
organizations, nonresident alien individuals or foreign entities). Moreover,
the discussion does not discuss every aspect of federal income taxation that
may be relevant to a particular taxpayer under special circumstances or to
persons who are otherwise subject to a special tax treatment.
The following summary is based on the Code, applicable Treasury
Regulations, judicial authority and administrative rulings and practice, all as
of the date hereof. There can be no assurance that future legislative,
judicial or administrative changes or interpretations will not materially alter
the statements and conclusions set forth herein. Any such changes or
interpretations could be applied retroactively and could affect the tax
consequences of the Merger Share Distribution to the DLB Stockholders. No
ruling has been requested from the IRS with respect to any of the matters
discussed herein and, thus, no assurance can be provided that statements set
forth herein (which do not bind the courts or the IRS) will not be challenged
by the IRS or would be sustained by a court if so challenged. Furthermore, the
following discussion addresses only certain United States federal income tax
matters and does not consider any state, local or foreign tax consequences of
the Merger Share Distribution.
In connection with the Merger Share Distribution, the DLB Stockholders
will also be exchanging their DLB shares for shares of the common stock of
Chesapeake, WRT and the Company, cash and certain other contingent
consideration. The sale of DLB shares to Chesapeake together with the
redemption of the DLB Stockholders' remaining shares in exchange for shares of
Chesapeake, WRT and the Company, cash and certain other contingent
consideration should be treated for federal income tax purposes as a redemption
in complete termination of the DLB Stockholders' interests in the DLB shares
resulting in capital gain or loss to the DLB Stockholders. Accordingly, each
DLB Stockholder will recognize gain or loss on the above described sale and
redemption equal to the difference between (i) the amount of cash and the fair
market value of all of the shares of the Company, WRT and Chesapeake and any
contingent consideration received by such Stockholder and (ii) such
Stockholder's adjusted tax basis in his or her DLB shares exchanged therefor.
In accordance with recent changes in the capital gains tax rate,
capital gains of each noncorporate DLB Stockholder relating to the Merger Share
Distribution generally will be subject to tax at a rate of (i) 28% if such
Stockholder's DLB shares have been held for more than 12 months but not more
than 18 months or (ii) 20% if such Stockholder's DLB shares have been held for
more than 18 months. If a DLB Stockholder has held its shares for 12 months or
less, any such capital gain recognized on the sale and redemption will be
subject to tax at ordinary income tax rates (of which the maximum rate is
39.6%). The DLB Stockholders will be considered to have a new holding period
with respect to each of the shares of the Company and Chesapeake received and
will have an adjusted tax basis in each such share equal to the fair market
value thereof.
LEGAL MATTERS
The validity of the issuance of the shares of Common Stock offered by
this Prospectus will be passed upon for the Company by Baker & Botts, L.L.P.,
Dallas, Texas.
INDEPENDENT PUBLIC ACCOUNTANTS
The financial statements of the Company as of December 31, 1994, 1995
and 1996 and for the fiscal years then ended included in this Prospectus and
elsewhere in the Registration Statement have been audited by Grant Thornton
LLP, independent public accountants, as stated in their reports thereon
appearing elsewhere herein, and are so included in reliance on such reports
given upon the authority of that firm as experts in auditing and accounting.
The financial statements of the Company as of June 30, 1997 and for the six
months then ended, the financial statements of Trend as of December 31, 1995
and 1996 and for the three fiscal years ended December 31, 1996, 1995 and 1994,
and the financial statements of Ward as of December 31, 1996 and for the fiscal
year then ended, included in this Prospectus and elsewhere in the Registration
Statement have been included herein in reliance on the report of Coopers &
Lybrand
72
291
L.L.P., independent public accountants, given upon the authority of that firm
as experts in auditing and accounting. The financial statements of Bonray as
of December 31, 1996 and June 30, 1996 and for the six-month period ended
December 31, 1996 and years ended June 30, 1996 and 1995 included in this
Prospectus and Registration Statement have been audited by Ernst & Young LLP,
independent auditors, as set forth in their report thereon appearing elsewhere
herein, and are included in reliance on such report given upon the authority of
such firm as experts in accounting and auditing.
In preparation for its initial public offering, the Board appointed
Coopers & Lybrand L.L.P. as auditors for the Company's financial statements for
the six months ended June 30, 1997, and for the year ending December 31, 1997.
During the period Grant Thornton LLP was engaged by the Company and up to and
including March 7, 1997, the date of the Coopers & Lybrand engagement, there
were no disagreements with Grant Thornton LLP on any matter of accounting
principles or practices, financial statement disclosure or auditing scope or
procedure and there were no "reportable events" as the term is defined under
the Securities Act. The audit reports previously issued by Grant Thornton LLP
with respect to the Company's financial statements did not contain an adverse
opinion or a disclaimer of opinion, nor were such reports qualified or modified
as to uncertainty, audit scope or accounting principles.
73
292
INDEX TO FINANCIAL STATEMENTS
PAGE
CONSOLIDATED FINANCIAL STATEMENTS OF BAYARD DRILLING
TECHNOLOGIES, INC.
Report of Independent Certified Public Accountants.................................................. F-2
Report of Independent Accountants................................................................... F-3
Balance Sheets as of December 31, 1995 and 1996, June 30,
1997 and September 30, 1997...................................................................... F-4
Statements of Operations for the years ended December 31, 1994,
1995 and 1996, six months ended June 30, 1997 and nine
months ended September 30, 1996 and 1997......................................................... F-5
Statements of Equity (Deficit) for the years ended
December 31, 1994, 1995 and 1996 and nine months ended
September 30, 1997............................................................................... F-6
Statements of Cash Flows for the years ended December 31, 1994,
1995 and 1996, six months ended June 30, 1997 and nine
months ended September 30, 1996 and 1997......................................................... F-7
Notes to Financial Statements....................................................................... F-9
FINANCIAL STATEMENTS OF TREND DRILLING COMPANY
Report of Independent Accountants................................................................... F-19
Balance Sheets as of December 31, 1995 and 1996 and as of
April 30, 1997................................................................................... F-20
Statements of Operations for the years ended December 31,
1994, 1995 and 1996 and four months ended April 30,
1997 (unaudited)................................................................................. F-21
Statements of Stockholders' Equity for the years ended
December 31, 1994, 1995 and 1996................................................................. F-22
Statements of Cash Flows for the years ended December 31,
1994, 1995 and 1996 and four months ended April 30,
1997 (unaudited)................................................................................. F-23
Notes to the Financial Statements................................................................... F-24
FINANCIAL STATEMENTS OF WARD DRILLING COMPANY, INC.
Report of Independent Accountants................................................................... F-28
Balance Sheet as of December 31, 1996 and May 31, 1997.............................................. F-29
Statements of Operations and Retained Earnings for the year ended December 31,
1996 and five months ended May
31, 1997 (unaudited)............................................................................. F-30
Statements of Cash Flows for the year ended December 31,
1996 and five months ended May 31, 1997 (unaudited).............................................. F-31
Notes to Financial Statements....................................................................... F-32
FINANCIAL STATEMENTS OF BONRAY DRILLING CORPORATION
Report of Independent Auditors...................................................................... F-35
Balance Sheets as of September 30, 1997 (unaudited) and
December 31, 1996 and June 30, 1996.............................................................. F-36
Statements of Operations and Accumulated Deficit for the
nine-month period ended September 30, 1997 (unaudited)
and for the six-month period ended December 31, 1996
and years ended June 30, 1996 and 1995........................................................... F-37
Statements of Cash Flows for the nine-month period ended
September 30, 1997 (unaudited) and for the six-month period ended December
31, 1996 and years ended
June 30, 1996 and 1995........................................................................... F-38
Notes to Financial Statements....................................................................... F-39
F-1
293
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Bayard Drilling Technologies, Inc.
We have audited the accompanying balance sheets of Bayard Drilling
Technologies, Inc. (Note A), as of December 31, 1996 and 1995, and the related
statements of operations, equity (deficit), and cash flows for each of the three
years in the period ended December 31, 1996. 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 financial statements referred to above present
fairly, in all material respects, the financial position of Bayard Drilling
Technologies, Inc., as of December 31, 1996 and 1995, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1996 in conformity with generally accepted accounting principles.
GRANT THORNTON LLP
Oklahoma City, Oklahoma
January 20, 1997
F-2
294
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors
Bayard Drilling Technologies, Inc.
We have audited the accompanying balance sheet of Bayard Drilling
Technologies, Inc., as of June 30, 1997, and the related statements of
operations, equity (deficit), and cash flows for the six months ended June 30,
1997. 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 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 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 audit provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Bayard Drilling
Technologies, Inc., as of June 30, 1997 and the results of its operations and
its cash flows for the six months ended June 30, 1997 in conformity with
generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Oklahoma City, Oklahoma
October 3, 1997
F-3
295
BAYARD DRILLING TECHNOLOGIES, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
ASSETS
DECEMBER 31,
-------------------------- JUNE 30, SEPTEMBER 30,
1995 1996 1997 1997
(UNAUDITED)
CURRENT ASSETS:
Cash .......................................................... $ -- $ 4,963 $ 240 $ 82
Restricted investments ........................................ -- -- 730 730
Accounts receivable ........................................... 1,692 286 5,993 10,462
Accounts receivable -- affiliate .............................. -- 798 4,524 3,148
Other current assets .......................................... 19 1 559 452
---------- ---------- ---------- ----------
Total current assets .................................. 1,711 6,048 12,046 14,874
Property, plant and equipment, net .............................. 6,343 26,973 92,658 104,674
Goodwill, net of accumulated amortization of $216 ............... -- -- 6,402 6,285
Other assets .................................................... -- 1,652 2,066 2,231
---------- ---------- ---------- ----------
Total assets .......................................... $ 8,054 $ 34,673 $ 113,172 $ 128,064
========== ========== ========== ==========
LIABILITIES AND EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable .............................................. $ 1,219 $ 409 $ 8,794 $ 12,529
Accounts payable -- affiliate ................................. -- -- 838 1,187
Payable to affiliate .......................................... 433 412 -- --
Accrued liabilities ........................................... 47 253 3,691 3,817
Current portion of long-term debt ............................. -- 947 12,869 14,589
---------- ---------- ---------- ----------
Total current liabilities ............................. 1,699 2,021 26,192 32,122
---------- ---------- ---------- ----------
Payable to affiliate ............................................ 6,631 -- -- --
---------- ---------- ---------- ----------
Deferred income tax liabilities ................................. -- 348 6,665 7,087
---------- ---------- ---------- ----------
Long-term debt, less current maturities ......................... -- 6,053 18,894 23,583
---------- ---------- ---------- ----------
Subordinated notes .............................................. -- -- 16,608 16,776
---------- ---------- ---------- ----------
Commitments and Contingencies
EQUITY (DEFICIT):
Partners' deficit ............................................. (276) -- -- --
Stockholders' equity
Preferred stock, $0.01 par value, 20,000,000 shares
authorized; none issued or outstanding ................... -- -- -- --
Common stock, $0.01 par value, 100,000,000 shares
authorized; 5,600,000 shares issued and outstanding
at December 31, 1996; 7,490,000 at June 30, 1997;
7,588,000 at September 30, 1997 .......................... -- 56 75 76
Additional paid-in capital (net of deferred compensation ...... -- 26,229 44,792 47,791
of $292 at September 30, 1997)
Retained earnings (accumulated deficit) ....................... -- (34) (54) 629
---------- ---------- ---------- ----------
Total equity (deficit) ................................ (276) 26,251 44,813 48,496
---------- ---------- ---------- ----------
Total liabilities and equity (deficit) ................ $ 8,054 $ 34,673 $ 113,172 $ 128,064
========== ========== ========== ==========
The accompanying notes are an integral part of these financial statements.
F-4
296
BAYARD DRILLING TECHNOLOGIES, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
SIX MONTHS
ENDED NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30, SEPTEMBER 30,
-------------------------------------- ----------- ------------------------
1994 1995 1996 1997 1996 1997
(UNAUDITED)
REVENUES:
Drilling .................................... $ 7,842 $ 5,491 $ 8,995 $ 7,029 $ 6,728 $ 20,711
Drilling -- affiliate ....................... 2,068 1,914 798 8,078 -- 12,503
Other ....................................... -- 303 60 -- 59 --
---------- ---------- ---------- ---------- ---------- ----------
Total revenues ........................... 9,910 7,708 9,853 15,107 6,787 33,214
---------- ---------- ---------- ---------- ---------- ----------
COSTS AND EXPENSES:
Drilling .................................... 8,572 6,075 7,653 10,897 5,244 24,246
General and administrative .................. 786 880 658 734 473 1,181
Depreciation and amortization ............... 1,557 791 1,126 2,645 727 4,918
Other ....................................... -- 47 46 -- -- --
---------- ---------- ---------- ---------- ---------- ----------
Total costs and expenses ................. 10,915 7,793 9,483 14,276 6,444 30,345
---------- ---------- ---------- ---------- ---------- ----------
Operating income (loss) .................. (1,005) (85) 370 831 343 2,869
---------- ---------- ---------- ---------- ---------- ----------
OTHER INCOME (EXPENSE):
Interest expense ............................ (18) (3) (11) (982) -- (2,172)
Interest income ............................. -- -- -- 51 -- 68
Gain (loss) on sale of assets ............... 366 (131) 54 60 -- 303
Other ....................................... -- (3) 17 8 17 5
---------- ---------- ---------- ---------- ---------- ----------
Total other income (expense) ............. 348 (137) 60 (863) 17 (1,796)
---------- ---------- ---------- ---------- ---------- ----------
Earnings (loss) before income taxes ........... (657) (222) 430 (32) 360 1,073
Income tax provision (benefit) -- deferred .... -- -- 17 (12) -- 410
---------- ---------- ---------- ---------- ---------- ----------
---------- ----------
Net earnings (loss) ........................... $ (657) $ (222) $ 413 $ (20) $ 360 $ 663
========== ========== ========== ========== ========== ==========
Net earnings (loss) per share ................. $ .00 $ .03 $ .06
========== ========== ==========
PRO FORMA INFORMATION:
Additional income tax expense ............... -- -- 146 137
---------- ---------- ---------- ----------
Pro forma net earnings (loss) ............... $ (657) $ (222) $ 267 $ 223
---------- ---------- ---------- ----------
Pro forma earnings per share ................ $ (.06) $ (.02) $ .02 $ .02
========== ========== ========== ==========
Weighted average common shares outstanding .... 11,317 11,317 11,317 11,317 11,317 11,317
========== ========== ========== ========== ========== ==========
The accompanying notes are an integral part of these financial statements.
F-5
297
BAYARD DRILLING TECHNOLOGIES, INC.
STATEMENTS OF EQUITY (DEFICIT)
(IN THOUSANDS)
STOCKHOLDERS' EQUITY
---------------------------------------------------------
PARTNERS ADDITIONAL
CAPITAL COMMON PAID-IN DEFERRED RETAINED
(DEFICIT) STOCK CAPITAL COST EARNINGS TOTAL
--------- -------- ---------- -------- -------- ---------
Balance at January 1, 1994 ....................... $ (912) $ -- $ -- $ -- $ -- $ --
Net loss ....................................... (657) -- -- -- -- --
Capital contribution ........................... 1,515 -- -- -- -- --
--------- -------- ---------- -------- -------- ---------
Balance at December 31, 1994 ..................... (54) -- -- -- -- --
Net loss ....................................... (222) -- -- -- -- --
--------- -------- ---------- -------- -------- ---------
Balance at December 31, 1995 ..................... (276) -- -- -- -- --
Net earnings through date of corporate
capitalization .............................. 447 -- -- -- -- --
Net increase in equity arising from
affiliate transactions ...................... 5,285 -- -- -- -- --
Issuance of stock in corporate
capitalization .............................. (5,456) 20 5,436 -- -- 5,456
Sale of stock .................................. -- 20 9,980 -- -- 10,000
Issuance of stock options and warrants
for drilling agreements and debt ............ -- -- 1,319 -- -- 1,319
Issuance of stock and options for
property and equipment ...................... -- 16 9,494 -- -- 9,510
Net loss from date of corporate
capitalization to December 31, 1996 ......... -- -- -- -- (34) (34)
--------- -------- ---------- -------- -------- ---------
Balance at December 31, 1996 ..................... -- 56 26,229 -- (34) 26,251
Net earnings ................................... -- -- -- -- 663 663
Issuance of stock options to
employees ................................... -- -- 60 (59) -- 1
Sale of stock .................................. -- 13 11,217 -- -- 11,230
Issuance of stock options and
warrants .................................... -- -- 4,023 -- -- 4,023
Executive compensation agreements .............. -- -- 250 (233) -- 17
Issuance of stock for acquisitions ............. -- 7 6,304 -- -- 6,311
--------- -------- ---------- -------- -------- ---------
Balance at September 30, 1997 (unaudited) ........ $ -- $ 76 $ 48,083 $ (292) $ 629 $ 48,496
========= ======== ========== ======== ======== =========
The accompanying notes are an integral part of these financial statements.
F-6
298
BAYARD DRILLING TECHNOLOGIES, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
SIX MONTHS
ENDED NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30, SEPTEMBER 30,
-------------------------------- --------- --------------------
1994 1995 1996 1997 1996 1997
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss) ...................................... $ (657) $ (222) $ 413 $ (20) $ 360 $ 663
Adjustments to reconcile net earnings (loss) to net
cash (used in) provided by operating
activities --
Depreciation and amortization .......................... 1,557 791 1,126 2,645 727 4,918
(Gain) loss on sale of assets .......................... (366) 131 (54) (60) -- (303)
Compensation expense ................................... -- -- -- 18 -- 21
Deferred income taxes .................................. -- -- 17 (12) -- 410
Change in assets and liabilities, net of effects of
affiliate transactions --
Decrease (increase) in accounts receivable ........... (96) 242 (2,059) (5,707) (525) (10,176)
(Increase) in accounts receivable from
affiliate ......................................... -- -- -- (3,726) -- (2,350)
Decrease (increase) in other assets .................. 2 (6) (185) (1,608) (124) (1,030)
Increase (decrease) in accrued liabilities ........... (101) (237) 251 3,438 (315) 3,564
Increase (decrease) in accounts payable .............. 106 (389) (383) 5,635 459 10,720
Increase in accounts payable to affiliate ............ -- -- -- 838 -- 1,187
Increase (decrease) in payable to affiliate .......... -- -- 412 (412) 7 (412)
-------- -------- -------- -------- -------- --------
Net cash (used in) provided by operating
activities ...................................... 445 310 (462) 1,029 589 7,212
-------- -------- -------- -------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment .................... (1,183) (2,088) (10,578) (32,539) (6,499) (49,054)
Acquisition of businesses ................................ -- -- -- (26,056) -- (26,056)
Proceeds from sale of assets ............................. 729 378 137 60 136 781
Purchase of investments .................................. -- -- -- (730) -- (730)
-------- -------- -------- -------- -------- --------
Net cash used in investing activities ............. (454) (1,710) (10,441) (59,265) (6,363) (75,059)
-------- -------- -------- -------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments made to affiliates .............................. (16,608) (8,828) (19,719) -- (9,015) --
Advances received from affiliates ........................ 16,982 10,228 18,791 -- 14,789 --
Retirement of notes payable .............................. (365) -- -- -- -- --
Proceeds from borrowings ................................. -- -- 7,000 41,044 -- 47,944
Proceeds from issuance of stock .......................... -- -- 10,000 8,230 -- 11,230
Debt issuance costs ...................................... -- -- (206) -- -- --
Payments on long-term debt ............................... -- -- -- (2,572) -- (4,114)
Borrowings under line of credit .......................... -- -- -- 6,811 -- 7,906
-------- -------- -------- -------- -------- --------
Net cash provided by financing activities ......... 9 1,400 15,866 53,513 5,774 62,966
-------- -------- -------- -------- -------- --------
Net change in cash ......................................... -- -- 4,963 (4,723) -- (4,881)
Cash at beginning of period ................................ -- -- -- 4,963 -- 4,963
-------- -------- -------- -------- -------- --------
Cash at end of period ...................................... $ -- $ -- $ 4,963 $ 240 $ -- $ 82
======== ======== ======== ======== ======== ========
Cash paid during the period for interest ................... $ 20 $ -- $ -- $ 653 $ -- $ 2,275
Cash paid during the period for income taxes ............... $ -- $ -- $ -- $ -- $ -- $ --
======== ======== ======== ======== ======== ========
Continued
F-7
299
BAYARD DRILLING TECHNOLOGIES, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
Continued
Supplemental noncash activity:
During 1994 certain affiliate payables were extinguished resulting in a
$1,515 capital contribution to the Company.
During 1995 an affiliate transferred drilling equipment to the Company
at the affiliate's basis totaling $173, net of accumulated depreciation of
$1,306, which has been reflected as an increase in payable to affiliate.
Additionally, the Company acquired property and equipment through trade payables
totaling $1,180.
During 1996 the Company acquired property and equipment totaling $9,841
through the issuance of stock and options and assumed a net deferred income tax
liability of $331. The Company acquired property and equipment through trade
payables and payables to affiliates totaling $1,390. The Company transferred
property and equipment totaling $29, net of accumulated depreciation of $1,254
to an affiliate which has been reflected as a decrease in payables to
affiliates. The Company issued stock options and warrants in exchange for
certain drilling agreements and debt. The stock options were valued at $1,100
and the warrants associated with the debt were valued at $219.
Additionally in 1996, the Company transferred the following assets and
liabilities to affiliates which resulted in a net increase in equity at the time
of corporate capitalization, effective December 1, 1996.
Accounts receivable.......................................... $ 2,667
Other assets................................................. 17
Cash......................................................... 9,252
Accounts payable and accrued liabilities..................... (1,799)
Payable to affiliates........................................ (15,422)
---------
$ (5,285)
=========
During 1997 the Company acquired property and equipment through the
issuance of stock and options for $6,591 and through the issuance of trade
payables of $1,400.
The accompanying notes are an integral part of these financial statements.
F-8
300
BAYARD DRILLING TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
INFORMATION FOR THE PERIODS ENDED SEPTEMBER 30, 1997 AND 1996 IS UNAUDITED
NOTE A -- NATURE OF OPERATIONS
Bayard Drilling Technologies, Inc. together with its predecessor, (the
"Company"), a Delaware corporation, is the successor to the drilling operations
of Anadarko Drilling Company ("Anadarko"), which began drilling operations in
1980. The Company provides land-based contract drilling services primarily to
independent oil and gas companies in the Mid-Continent and Gulf Coast regions of
the United States whose level of drilling activity is related to oil and gas
prices, among other factors.
Beginning in October 1996, AnSon Partners Limited Partnership ("APLP")
initiated a series of transactions among its wholly owned affiliates, Anadarko,
a partnership, and Bayard Drilling Company ("BDC"), a corporation, and the
Company. These series of transactions resulted in the corporate capitalization
of the Company in December 1996 with net assets, primarily drilling rigs,
previously owned by Anadarko. Such transactions were accounted for as a
reorganization of entities under common control.
NOTE B -- SUMMARY OF ACCOUNTING POLICIES
The summary of significant accounting policies applied in the
preparation of the accompanying financial statements follows.
1. Basis of Presentation and Consolidation
The financial statements and information for periods prior to December
1, 1996 represent those of the predecessor. The consolidated financial
statements for periods after December 31, 1996 include the accounts of the
Company and its wholly-owned subsidiaries, Trend Drilling Company ("Trend") and
WD Equipment, L.L.C. All significant intercompany accounts and transactions have
been eliminated.
2. Cash
The Company considers all cash and investments with an original
maturity of 90 days or less to be cash equivalents. The Company maintains its
cash in a bank deposit account which, at times, may exceed federally insured
limits. The Company has not experienced any losses in such accounts and believes
it is not exposed to any significant credit risk on cash.
3. Restricted Investments
Restricted Investments consist of certificates of deposits pledged to
state insurance departments and insurance companies to support payment of
workers compensation claims.
4. Concentration of Credit Risk
The primary market for the Company's services are independent oil and
gas companies whose level of activities are related to, among other things, oil
and gas prices. The Company performs ongoing credit evaluations of its customers
and provides for potential credit losses when necessary. No allowance was
required at December 31, 1996 and 1995 or September 30, and June 30, 1997. At
September 30, and June 30, 1997, approximately 71% of the Company's trade
receivables and at September 30, 1997 over 75% of total revenues were derived
from seven customers and approximately 71% was derived from five customers at
June 30, 1997.
5. Property and Equipment
Property and equipment are stated at cost, reduced by provisions to
recognize economic impairment in value when management determines that such
impairment has occurred. Drilling equipment is depreciated using the declining
balance
F-9
301
method over the estimated useful lives from five to fifteen years. Other
property and equipment are depreciated on a declining balance basis over
estimated useful lives from three to ten years. Refurbishments and betterments
on drilling equipment are capitalized if such expenditures are significant and
extend the lives of the equipment. Maintenance and repairs are expensed as
incurred. When assets are sold, retired or disposed of, the cost and related
accumulated depreciation are eliminated from the accounts and the gain or loss
is recognized.
6. Revenue Recognition
Revenues generated from the Company's dayrate drilling contracts are
recognized as services are performed and revenues generated from the Company's
footage drilling contracts are recognized as a percentage of completion. For all
drilling contracts under which the Company bears the risk of completion (such as
turnkey contracts) revenues and expenses are recognized using the completed
contracts method. When estimates of projected revenues and expenses indicate a
loss, the total estimated loss is accrued.
7. Net Earnings (Loss) Per Share
Earnings per common and equivalent shares is computed based on the
weighted average number of common and equivalent shares outstanding during the
period. Pro forma net earnings (loss) per share are presented to reflect the
provision for income taxes for periods Anadarko was a partnership. Pro forma net
earnings (loss) per share is computed by dividing the pro forma net earnings
(loss) by the weighted average number of shares of common stock and equivalent
shares outstanding during the period.
Under guidelines issued by the Securities and Exchange Commission,
common shares, options and warrants issued prior to a public offering at prices
below the initial offering price are treated as outstanding for all periods
presented (using the Treasury stock method) in computing net earnings (loss) per
share.
8. Income Taxes
Income taxes were not provided in the financial statements for earnings
attributable to Anadarko since the partners would pay income taxes or receive as
a deduction their distributive share of Anadarko's taxable income or loss. Pro
forma adjustments are reflected on the statement of operations to provide for
income taxes in accordance with Statement of Financial Accounting Standards No.
109 at an effective rate of 38%.
The Company uses the liability method of accounting for deferred income
taxes under SFAS No. 109, whereby deferred tax assets and liabilities are
recognized based upon differences between the financial statement and tax bases
of assets and liabilities using presently enacted tax rates. If it is more
likely that not some portion or all of a deferred tax asset will not be
realized, a valuation allowance is recognized.
9. Goodwill and Other Assets
Goodwill related to the acquisition of Trend is being amortized over
fifteen years. Amortization expense of $216,030 and $97,527 has been recognized
as of September 30, and June 30, 1997, respectively.
Other assets consist of (i) organizational costs incurred for the
organization of Bayard, (ii) debt issuance costs incurred on the term loan
disclosed in Note G, and (iii) deferred contract costs related to options
granted to a related party. Amortization expense for such other assets is
recognized over one to five years on a straight-line basis. $1,196,630 of
amortization expense has been recognized for the nine months ended September 30,
and $667,626 for the six months ended June 30, 1997 for these costs.
On an ongoing basis, management reviews the valuation and amortization
of goodwill and other intangibles to determine possible impairment. The
recoverability of these assets is assessed by determining whether the
amortization can be recovered from undiscounted future cash flows.
10. Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect certain reported amounts of assets and liabilities and
disclosure
F-10
302
of contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period;
accordingly actual results could differ from those estimates.
11. Fair Value of Financial Instruments
The Company's financial instruments consist of cash and investments
which approximate fair value because of the short maturity of those instruments,
a payable to an affiliate which approximates fair value due to the demand nature
of this obligation and a floating rate term loan which approximates fair value
because the interest rate adjusts to the market rate, and notes payable which
approximate fair value because the interest rates on these notes reflects the
borrowing terms currently available to the Company.
12. Interim Financial Statements and Disclosures
In the opinion of management, the unaudited interim financial
statements for September 30, 1997 and 1996 and unaudited interim financial
statement disclosures subsequent to December 31, 1996 include all adjustments,
consisting of normal recurring accruals, necessary to present fairly the
Company's financial position as of September 30, 1997 and results of operations
and cash flows for the nine months ended September 30, 1997 and 1996. Results
for the period ended September 30, 1997 are not necessarily indicative of the
results to be expected for the entire fiscal year.
13. Stock Based Compensation
The Company applies APB Opinion 25 in accounting for its stock option
plans. Under this standard, compensation expense is only recognized for grants
of options which include an exercise price less than the market price of the
stock on the date of grant. Accordingly, based on the Company's grants for 1996
and for the nine months ended September 30, 1997, the Company recognized $0 and
approximately $292,000 of deferred compensation and $0 and approximately $21,000
of compensation expense, respectively. For grants of options which include an
exercise price equal to or greater than the market price of the stock on the
date of grant, the Company has disclosed the pro forma effects of recording
compensation based on fair value in Note N to the financial statements as
allowed by Financial Accounting Standard No.
123 "Accounting for Stock-Based Compensation."
NOTE C -- ACQUISITIONS
On May 1, 1997, the Company completed the acquisition of the common
stock of Trend ("Trend Acquisition") for $18 million in cash and 250,000 shares
of common stock which equates to $10.64 per share based on the appraisals of the
fair market value of the property and equipment acquired of $21,532,000. The
Company incurred costs of approximately $307,000 in connection with this
acquisition.
The Trend Acquisition was accounted for as a purchase. The following is
an analysis of the allocation of the purchase price:
(IN THOUSANDS)
Current assets............................................. $2,734
Property and equipment..................................... 21,532
Goodwill................................................... 6,330
Current liabilities........................................ (2,265)
Long-term liabilities...................................... (1,340)
Deferred income tax liability.............................. (6,330)
------
Purchase price............................................. $20,661
=======
On May 30, 1997, the Company acquired WD Equipment, L.L.C. (which owned
six drilling rigs, but had no operations) from Ward Drilling Company, Inc.
("Ward Acquisition") for approximately $8 million in cash and 400,000 shares of
common stock which equates to $8.95 per share based on the appraisal of the fair
market value of the assets acquired of $11,931,000. The Company also issued
warrants to purchase 200,000 shares of common stock at $10.00 per share. The
warrant had an estimated fair market value of $294,000 at the agreement closing
date and was recorded as an increase in property and equipment and additional
paid in capital.
The following is the unaudited pro forma results of operations as if
Trend and Ward had been acquired January 1, 1996 (in thousands):
F-11
303
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, 1996 SEPTEMBER 30, 1997
----------------- ------------------
Revenues ..................................... $ 36,930 $ 44,561
================= ==================
Net income (loss) ............................ $ (2,347) $ 471
================= ==================
Net income (loss) per common share ........... $ (.16) $ .03
================= ==================
NOTE D -- PROPERTY AND EQUIPMENT
Major classes of property and equipment consist of the following:
NINE MONTHS
DECEMBER 31, ENDED
----------------------------- SEPTEMBER 30,
1995 1996 1997
(IN THOUSANDS)
Drilling rigs and components ..................... $ 21,152 $ 42,303 $ 122,012
Automobiles, trucks, and trailers ................ 1,546 431 1,443
Buildings and property ........................... -- -- 277
Furniture, fixtures, and other ................... 69 7 289
------------ ------------ ------------
22,767 42,741 124,021
Less accumulated depreciation .................. 16,424 15,768 19,347
------------ ------------ ------------
$ 6,343 $ 26,973 $ 104,674
============ ============ ============
NOTE E -- CHANGE IN ESTIMATED LIVES
Effective January 1, 1995, the Company changed the estimated remaining
lives of its drilling rigs and other related drilling equipment to 84 months
from remaining lives which ranged from 31 months to 113 months. The Company also
changed the estimated remaining life of drill collars from 20 months to 36
months. These changes were made to more closely approximate the remaining useful
lives of such assets. The effect of this change was to decrease the historical
net loss by approximately $539,000 and to reduce the pro forma net loss by
approximately $539,000 or $.05 per share (Note B(7)) for the year ended December
31, 1995.
Effective January 1, 1996, the Company changed the estimated remaining
lives of certain drilling component equipment from 84 months to 120 months and
changed the estimated remaining life of drill collars and pipe from 36 months to
60 months. After review and study by the Company, the useful lives of drilling
rigs acquired after January 1, 1996 were changed from 84 months to 144 months.
These changes were made to more closely approximate the remaining useful lives
of such assets. The effect of these changes was to increase the historical net
earnings by approximately $405,000 and to increase pro forma net earnings by
approximately $251,000, net of pro forma income taxes of $154,000, or $.02 per
share (Note B(7)) for the year ended December 31, 1996.
Effective July 1, 1997, the Company changed the estimated remaining
lives of its drilling rigs and other related drilling equipment to 180 months
from remaining lives of 144 months. These changes were made to more closely
approximate the remaining useful lives of such assets. The effect of these
changes was to increase net earnings for the third quarter ended September 30,
1997 by approximately $229,000, net of income taxes of $141,000, or $.02 per
share.
NOTE F -- INCOME TAXES
On October 28, 1996, Anadarko conveyed its operating assets to its
wholly-owned subsidiary, BDC, which caused a change in tax status of the
drilling operations from a partnership to a taxable corporation. A deferred tax
asset was recognized for the temporary differences which existed at the date of
conveyance together with a related valuation allowance. At December 31, 1996,
the Company has net operating loss carry forwards of approximately $418,000
which will expire in 2011 if unused.
F-12
304
Components of net deferred income tax liabilities are as follows:
OCTOBER 28, DECEMBER 31,
1996 1996
(IN THOUSANDS)
Deferred tax assets (liabilities)
Operating loss carryforwards ............. $ -- $ 167
Property and equipment ................... 1,818 (515)
Total valuation allowance ................ (1,818) --
------------ ------------
Net deferred tax liabilities .......... $ -- $ (348)
============ ============
The Company's effective income tax rate differed from the federal
statutory rate of 34% as follows for the years ended December 31: (in thousands)
1995 1996
Income tax expense (benefit) at federal statutory rate ..... $ (75) $ 146
Income tax (expense) benefit attributable to individual
partners ................................................. 75 (129)
------ ------
$ -- $ 17
====== ======
The Company's valuation allowance on tax assets was established October
28, 1996 due to a change in taxable status and decreased $1,818,000 during the
period from October 28, 1996 to December 31, 1996. The Company was not a taxable
entity in 1995 and had no valuation allowance. Effective December 1, 1996, the
Company acquired assets with deferred tax liabilities of approximately $2
million in which the purchase price allocation resulted in the reduction of the
Company's tax asset valuation allowance of approximately $1,724,000.
NOTE G -- LONG-TERM DEBT AND SUBORDINATED NOTES
Long-term debt at December 31, 1996 consisted of borrowings under loan
agreements (the "Loan Agreements") which provide for a term loan (the "Term
Loan") and a revolving loan (the "Revolving Loan"). The Term Loan of $7,000,000
bears interest at the Company's choice of LIBOR plus 4.25% (9.65% at December
31, 1996) or the prime rate of Chase Manhattan Bank, N.A. and requires monthly
payments of principal and interest in amounts sufficient to repay borrowings at
maturity on March 31, 2002. The Loan Agreements permit borrowings to a maximum
of $20 million under the Term Loan if defined collateral provisions are met. The
loan is collateralized by drilling equipment.
The Loan Agreements also permit borrowings up to $4 million under the
Revolving Loan through December 31, 1998 subject to a $2 million limitation if
the borrowings under the Term Loan exceed $17 million. Amounts advanced under
the Revolving Loan, if any, will be converted to a term loan on December 31,
1998 and will be repaid in monthly installments until maturity on January 31,
2002.
Starting in 1997, the Loan Agreements require the maintenance of
defined collateral values, cash flow and liquidity ratios, financial reporting
requirements, and the maintenance of total liabilities to tangible net worth not
greater than 1.25 and imposes certain limitations on capital expenditures and
incurrence of additional debt.
At December 31, 1996, the aggregate yearly maturities on long-term
obligations are as follows:
YEAR ENDING DECEMBER 31
1997....................................................... $ 947,000
1998....................................................... 1,240,000
1999....................................................... 1,365,000
2000....................................................... 1,503,000
2001....................................................... 1,654,000
Thereafter................................................. 291,000
-----------
$ 7,000,000
In May 1997, the Company amended and increased the availability under
the Loan Agreements. The Term Loan provides the Company up to $30.5 million for
the purchase of additional land drilling rigs, the refurbishment of such rigs
and equipment and for working capital purposes. The Revolving Loan provides the
revolving credit loans of up to $10 million, $2 million of which is available
for the issuance of letters of credit, and which is being used for general
corporate purposes. Amounts outstanding under the Revolving Loan bear interest
based on Fleet National Bank's prime rate plus 1.5% (10% at September 30, and
June 30, 1997) and mature in April 2000. Amounts outstanding under the Term Loan
bear
F-13
305
interest, at the election of the Company, at floating rates equal to Chase
Manhattan Bank's prime rate plus 2.0% or LIBOR plus 4.25% (10% at September 30,
and 9.94% at June 30, 1997) and mature in March 2002. The Loan Agreements are
collateralized by substantially all of the assets of the Company, including
drilling rigs, equipment and drilling contracts, and contain customary
restrictive covenants (including covenants restricting the ability of the
Company to pay dividends or encumber assets) and an affirmative covenant to
maintain Total Available Liquidity (as defined in the Loan Agreements) of at
least $4.5 million through December 31, 1997 and $3 million through December 31,
1998. Pursuant to the Loan Agreements, the Company must maintain certain
financial ratios, including a Cash Flow Coverage ratio (as defined in the Loan
Agreements) of at least 1.25 to 1 until December 1997, 1.5 to 1 in 1998 and 1.75
to 1 thereafter and a ratio of Total Liabilities (as defined in the Loan
Agreements) to Tangible Net Worth no greater than 1.25 to 1 in 1997 and 1 to 1
in 1998. Under the Loan Agreements the Company is obligated to pay certain fees,
including an annual commitment fee in an amount equal to 0.5% of the unused
portion of the commitment.
Additionally, the Company issued Subordinated Notes due May 1, 2003 in
the original principal amounts of $18 million and $2.52 million (the
"Subordinated Notes") to Chesapeake Energy Corporation ("Chesapeake") and Energy
Spectrum Partners LP ("Energy Spectrum"), respectively. The Subordinated Notes
bear interest at either (i) 11% per annum, payable in cash or (ii) 12.875% per
annum, payable in the form of additional Subordinated Notes, which interest is
payable quarterly in arrears. On each quarterly interest payment date, the
Company may make an election as to the interest rate to be applied for the
previous quarter. The Subordinated Notes are redeemable, solely at the option of
the Company, in whole or in part, at any time after May 31, 1998 at varying
redemption prices. The Company must offer to redeem the Subordinated Notes upon
the occurrence of certain events constituting a "Change of Control" (as defined
in the Subordinated Notes) at a redemption price equal to 100% of the principal
amount thereof, together with accrued and unpaid interest, if any, to the date
of redemption. The Subordinated Notes are convertible into Common Stock at the
option of the Company, in whole or in part, in conjunction with a "Convertible
Event" (as defined in the Subordinated Notes), which includes certain
underwritten public offerings (including the Initial Public Offering), mergers,
consolidations and other business combination transactions. The Subordinated
Notes are general unsecured subordinated obligations of the Company that are
subordinated in rights of payment to all existing and future senior indebtedness
of the Company, pari passu with all existing and future subordinated
indebtedness of the Company and senior in right of payment to all future junior
subordinated indebtedness of the Company.
NOTE H -- RELATED PARTY TRANSACTIONS
Before the corporate capitalization, AnSon Gas Corporation served as
the managing general partner responsible for all management and operational
functions of the Company and charged the Company for such expenses. The Company
expensed approximately $198,000, $390,000 and $435,000 for such services
received in 1996, 1995 and 1994, respectively.
Prior to December 31, 1996, the Company and its affiliates made
advances to each other from time to time which generally had no specific
repayment terms. The Company's payable to affiliate at December 31, 1995 was in
the form of a noninterest-bearing payable to APLP.
The Company purchased drilling equipment and supplies from an affiliate
totaling $2,862,000, $779,000 and $904,000 in 1996, 1995 and 1994, respectively.
The Company also transferred drilling equipment to an affiliate at the Company's
basis totaling $29,000, net of accumulated depreciation, which resulted in a
decrease in payable to affiliate.
An affiliate transferred drilling equipment to Anadarko at the
affiliates basis totaling $173,000, net of accumulated depreciation, during 1995
which has been reflected as an increase in payable to affiliate.
In December 1996, Anadarko granted the Company a transferrable option,
exercisable at any time prior to June 30, 1998, to either purchase from Anadarko
a storage yard located in Weatherford, Oklahoma (the "Weatherford Storage Yard")
for a price of $1,000 in cash or lease from Anadarko, for any period specified
by the Company through a date not later than December 31, 1999, the Weatherford
Storage Yard for a lease price of $100 per year. In August 1997, the Company
acquired from Anadarko approximately 5 acres of land also in Weatherford,
Oklahoma, in consideration for the relinquishment by the Company of the option
to acquire or lease the Weatherford Storage Yard.
In May 1997, the Company paid Energy Spectrum a fee in the amount of
$220,000 for financial advisory and other services rendered to the Company in
connection with the completion of the Trend Acquisition, including the valuation
and negotiation of the Trend Acquisition and for assistance in the arrangement
of alternative financing sources and structuring,
F-14
306
negotiating and closing the amended financing arrangements with CIT and Fleet.
The Company also reimbursed Energy Spectrum for expenses incurred in connection
with the rendering of such services.
The Company has in the past purchased rigs and related equipment from
U.S. Rig & Equipment, Inc., an affiliate of Roy T. Oliver, a director of the
Company. From January 1997 through September 30, 1997, the Company paid U.S. Rig
& Equipment, Inc. an aggregate of $5.0 million in connection with such
purchases. Additionally, in August 1997, the Company sold one of its rigs to an
affiliate of Mr. Oliver for $500,000. The Company believes that this sale price
is equivalent to the price that would have been received from an unaffiliated
third party. Additionally, in November 1997, the Company agreed to acquire six
rigs and related drilling equipment for $14 million and such rigs will require
additional refurbishment prior to placement into service. In connection
therewith, the Company made a cash down payment of $3.5 million and anticipates
closing the transaction in January 1998.
The Company has engaged affiliates of APLP for the provision of
trucking services related to the movement of the Company's rigs on numerous
occasions. From January 1997 through September 30, 1997, the Company paid such
affiliates of APLP an aggregate of $630,000 in consideration for such trucking
services.
Since December 13, 1996, APLP has made available to the Company certain
of APLP's employees, office space and administrative equipment, such as computer
and telephone systems. In consideration for such assistance, the Company had
reimbursed APLP an aggregate of $179,000 as of September 30, 1997 and APLP
continues to provide certain computer services to the Company.
Accounts receivable at September 30, 1997 included $3.1 million of
receivables from affiliates. Accounts payable at September 30, 1997 included
$1,187,000 owed to affiliates. Interest expense at September 30, 1997 included
$495,000 to affiliates.
NOTE I -- SIGNIFICANT CUSTOMERS
During the first nine months of 1997, 38% of revenues were generated
from affiliated customers and for the six months ended June 30, 1997, 51% of
revenues was generated from an affiliated customer and 10% of revenues was
generated from an unaffiliated customer. During 1996, sales to two customers
were, respectively, 75% (inclusive of $798,000 attributable to Chesapeake, which
became an affiliate in December 1996) and 18% of drilling revenues. During 1995,
sales to one customer totaled 36% of drilling revenue. During 1994, sales to two
customers totaled 34% and 11% of total drilling revenues.
NOTE J -- STOCKHOLDER'S EQUITY AND OPTIONS
In December 1996, the Company issued 2,000,000 shares of Common Stock
to Anadarko for the operating assets of BDC, Anadarko's subsidiary. Further, the
Company issued 2,000,000 shares of Common Stock to Energy Spectrum for $10
million cash. The Company also acquired six drilling rigs and related equipment
by the issuance of 1,600,000 shares of Common Stock and put options on the
Company's common stock. The drilling rigs were recorded in accordance with
appraisals of the estimated fair value of the assets acquired ($9,500) and the
net deferred income tax liability assumed. If the Company does not complete an
initial public stock offering prior to June 2, 1998, the holder of the options
has a thirty-day period in which to request that the Company purchase the
1,600,000 shares of Common Stock at $7.50 per share. The Company, at its option,
can either purchase the shares or issue 400,000 additional shares of Common
Stock to the holder. The estimated fair value of the put options are recorded as
additional contributed capital to the Company.
The Company executed in December 1996 certain drilling agreements to
supply six drilling rigs to Chesapeake at rates equal to defined comparable
market rates but not less than $5,000 per day per rig. The Company granted the
operator an option to purchase 2,000,000 shares of Common Stock at $6 per share,
subject to performance of the operator under the drilling agreement. The
estimated fair value of the options of $1,100,000 was recorded as additional
paid-in capital and a deferred charge to be amortized over a twelve month period
consistent with the annual negotiations of contract terms.
In February 1997, the Company sold 100,000 shares of Common Stock at
$2.50 per share to the President of the Company, which are subject to the terms
of a Restricted Stock Award Agreement. Deferred compensation in the amount of
$250,000 was recorded related to this stock grant as the purchase price was
below the fair market value of the Company's Common Stock at the date of grant.
See Note N.
F-15
307
On December 10, 1996, the Company granted the issuer of the Term Loan
(Note G) warrants to immediately purchase up to 290,000 shares of the Company's
Common Stock at $8 per share or up to 300,000 shares at $8 per share when total
outstanding Common Stock exceeds 6,000,000 shares. The warrants expire at the
earlier of December 13, 2001 or eighteen months after completion of the initial
public stock offering by the Company. The warrant holder can also elect to
receive in stock the excess of the stock market value over the warrant exercise
price. These warrants have an estimated fair value of $219,000, which has been
recorded as debt issue costs and is being amortized over the term of the loan.
The Company purchased during May 1997, two drilling rigs from U.S. Rig
& Equipment, Inc. for cash and granted options to purchase 100,000 shares of
Common Stock at $8 per share.
In connection with the issuance of Subordinated Notes executed in May
1997, the Company issued 1,140,000 shares of Common Stock at $7 per share.
Additionally, the Company issued two series of detachable Warrants, designated
as Series A Warrants and Series B Warrants. The Series A Warrants are
exercisable at a price of $.01 per share and the Series B Warrants are
exercisable at $7.50 per share. Both Warrants expire 72 months from issuance.
The Company issued Series A Warrants and Series B Warrants representing the
right to purchase 798,000 shares and 912,000 shares of Common Stock,
respectively. The fair market value of these warrants at the agreement closing
date was $6 million, $4,024,000 of which was attributable to the Subordinated
Notes. The warrant value applicable to the Subordinated Notes was allocated
between the Subordinated Notes and warrants and recorded as a discount to the
Subordinated Notes and additional paid in capital.
In October, 1995 SFAS No. 123 "Accounting for Stock Based Compensation"
was issued. The statement required the computation of compensation expense for
stock, stock options and other equity instruments issued to employees based on
the fair value of the instrument at the date the instrument was granted. The
compensation is to be recorded as an expense in the financial statements or
alternatively, disclosed. The Company has elected to disclose such information.
In June 1997, the Company granted options to employees to purchase
59,600 shares of Common Stock at $8 per share. Deferred compensation in the
amount of $59,600 was recorded related to these stock options as the exercise
price was below the fair market value of the Company's Common Stock at the date
of grant. See Note N. In November 1997, the Company granted options to employees
to purchase 197,500 shares of Common Stock at $23 per share. During 1996 and
1997, the Company issued stock options to three executive officers pursuant to
the 1997 Stock Option and Stock Award Plan to purchase 200,000, 50,000 and
50,000 shares of Common Stock, respectively, at an exercise price of $5, $5 and
$10 per share, respectively. None of such options has been exercised, and all of
such options remain outstanding.
NOTE K -- COMMITMENTS AND CONTINGENCIES
In December 1996, the Company entered into a drilling agreement whereby
Chesapeake agreed to engage six of the Company's rigs for two-year terms,
subject to annual negotiations. The Company has the option to extend the
agreement with respect to any two of the rigs for two additional years on the
same terms. Chesapeake has the option to extend each of the other four
individual drilling rigs for two additional years on the same terms. The
agreement provides standard day rates, subject to upward, but not downward,
adjustment annually to approximately $100 per day less than the average
then-current market rates for the areas of operation. This adjustment is
determined each November during the term of the agreement and becomes effective
for any wells spudded after December 1, while such agreement remains in effect.
The contract has been negotiated whereby the dayrate for each rig engaged by
Chesapeake will be determined on a well to well basis, based on the prevailing
market conditions at such time. Three of the six rigs have been released by
Chesapeake which allowed the Company to provide one rig to another customer at a
higher day rate, due to the current market conditions, than would have been
received if Chesapeake had retained the rig.
The Company has entered into two year employment agreements with three
executive officers, which provide for the payment of the remaining term of each
agreement upon a change of control. As of September 30, 1997, benefits under
such agreements, assuming a change of control, would aggregate approximately
$465,000.
As of September 30, 1997, the Company had construction commitments
totaling approximately $3.5 million for five rigs in various stages of
refurbishment.
A shortage of drill pipe exists in the contract drilling industry in
the United States. This shortage has caused the price of drill pipe to increase
significantly over the past 24 months and has required orders for new drill pipe
to be placed at least one year in advance of expected use. The price increase
and the delay in delivery has caused the Company to
F-16
308
substantially increase capital expenditures for drill pipe in recent months. In
the event the shortage continues, the Company may be unable to obtain the drill
pipe required to expand its contract drilling operations.
NOTE L -- SUBSEQUENT EVENTS
In August 1997, the Company issued 3,149,000 shares of Common Stock to
Chesapeake for $9 million in cash and the relinquishment by Chesapeake of its
right to exercise the Chesapeake Option and the warrants issued to it in
connection with the May Financing (the "Chesapeake Transactions"). In connection
with the Chesapeake Transactions and upon consummation of the Initial Public
Offering, the Company redeemed in full the $18 million principal amount of
Subordinated Notes held by Chesapeake at a cash redemption price of $18.2
million. The Company estimates a $5.3 million extraordinary loss from early
extinguishment of debt on the Subordinated Notes, subject to adjustment. Also in
connection with the Chesapeake Transactions, the Company waived its right under
the May Securities Purchase Agreement to require Chesapeake to purchase
additional Common Stock, Warrants and Subordinated Notes for $3 million.
At the August 19, 1997 Board of Directors meeting, the number of
authorized shares of Common Stock was increased from 10,000,000 to 100,000,000
and the number of authorized shares of preferred stock was increased from
2,000,000 to 20,000,000. Additionally, a two-for-one stock split effected as a
stock dividend on an August 22, 1997 record date was approved. All stock option
data, per share earnings and references to common stock have been restated to
give effect to the stock split.
On July 31, 1997, Energy Spectrum exercised in full its Series A
Warrants, at a price of $0.01 per share, for 98,000 shares of Common Stock.
SUBSEQUENT EVENTS -- UNAUDITED
On October 16, 1997, the Company acquired Bonray Drilling Corporation
("Bonray") for 3,015,000 shares of Common Stock, subject to certain working
capital adjustments. The acquisition will be accounted for as a purchase.
NOTE M -- EMPLOYEE BENEFIT PLAN
The Company has a profit sharing plan for certain eligible employees
who have attained the age of 21 and completed at least one year of service.
Participants may contribute up to 15% (20% prior to October 1997) of
compensation for any plan year. The Company's discretionary contribution is
based on the participants total years of service. The Company has made
contributions of approximately $60,900 through September 30, 1997.
NOTE N -- BENEFIT AND COMPENSATION PLAN
In April 1997, the Board of Directors approved the adoption of an
Employee Stock Plan ("the Plan") whereby 1,600,000 shares of Common Stock are
authorized for issuance under the Plan to officers and employees. The Plan
permits the issuance of qualified or nonqualified stock options, as well as
granting of certain other awards, including shares of restricted stock. Options
granted become vested at the rate of 20% per year one year after being granted,
with the options expiring six years from the original grant date. The exercise
price for options granted through September 30, 1997 was based on the Company's
estimate of the fair market value on the date of the grant. Through September
30, 1997, 309,600 options and 100,000 shares of restricted stock (denoted below)
were issued under the Plan, none of which were exercisable at September 30,
1997.
Activity pertaining to the Plan is as follows:
WEIGHTED
NUMBER OF AVERAGE
SHARES EXERCISE PRICE
--------- ---------------
Outstanding at
December 10, 1996 ............................... -- $ --
Granted ...................................... 200,000 5.00
Exercised .................................... -- --
-------
Outstanding at
January 1, 1997 ................................. 200,000 5.00
Granted ...................................... 209,600 4.66
Exercised .................................... -- --
-------
September 30, 1997 .............................. 409,600 $ 4.83
=======
F-17
309
WEIGHTED AVERAGE FAIR MARKET
WEIGHTED AVERAGE FAIR VALUE OF VALUE OF DEFERRED
EXERCISE NUMBER OF REMAINING WEIGHTED AVERAGE STOCK OPTIONS ON COMMON STOCK COMPENSATION
PRICE RANGE SHARES CONTRACTUAL LIFE EXERCISE PRICE DATE OF GRANT AT DATE OF GRANT COST
- ----------- --------- ---------------- ---------------- ---------------- ---------------- ------------
$ 2.50 100,000 0 $ 2.50 $ -- $ 5.00 $ 233,000
5.00 250,000(1) 5.46 5.00 2.09 5.00 --
8.00 59,600 5.96 8.00 4.18 9.00 59,000
- ----------
(1) Unvested restricted stock.
The Company applies APB Opinion 25 in accounting for the Plan. Had
compensation been determined on the basis of fair value pursuant to FASB
Statement No. 123, net income and earnings per share would have been reduced as
follows:
DECEMBER 31, JUNE 30,
1996 1997
------------ ------------
Net income (in thousands):
As reported ................................................... 413 (20)
Pro forma (net of effective tax of 38%) ....................... 407 (90)
Primary earnings per share, primary and fully diluted:
As reported ................................................... .04 (.00)
Pro forma ..................................................... .04 (.01)
The fair value of each option granted is estimated using the
Black-Scholes model. This model includes, among others, a variable of stock
volatility. As the Company is not yet public, the volatility used in the model
was .40 based on volatilities of a similar entity that is currently publicly
traded. Dividend yield was estimated to remain at zero with risk free interest
rates ranging between 5.72 and 6.31 percent. As there is no prior experience
available to use in estimating an expected life for the options, an average of
the time between the vesting and expiration dates of the options was used in
determining the expected lives of the options ranging from 3.5 to 5.5 years.
Fair value of options granted during 1997 and 1996 under the Plan were $415,990
and $354,590, respectively.
F-18
310
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
Bayard Drilling Technologies, Inc.
We have audited the accompanying balance sheets of Trend Drilling
Company as of December 31, 1996 and 1995, and the related statements of
operations, stockholder's equity, and cash flows for each of the three years in
the period ended December 31, 1996. 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 audits 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 financial statements referred to above present
fairly, in all material respect, the financial position of Trend Drilling
Company as of December 31, 1996 and 1995, and the results of its operations and
its cash flows for each of the three years in the period ended December 31,
1996, in conformity with generally accepted accounting principles.
COOPERS & LYBRAND, L.L.P.
Oklahoma City, Oklahoma
April 28, 1997
F-19
311
TREND DRILLING COMPANY
BALANCE SHEETS
ASSETS
AS OF DECEMBER 31,
----------------------------
AS OF
1995 1996 APRIL 30, 1997
CURRENT ASSETS:
Cash and cash equivalents . . . . . . . . . . . . . . $ 448,857 $ 570,873 $ 149,352
Accounts receivable . . . . . . . . . . . . . . . . . 2,398,231 3,474,043 2,544,526
Other current assets . . . . . . . . . . . . . . . . 34,899 40,661 40,661
Deferred tax asset . . . . . . . . . . . . . . . . . 175,593 -- --
----------- ----------- -----------
Total current assets . . . . . . . . . . . . 3,057,580 4,085,577 2,734,539
Property, plant and equipment, net . . . . . . . . . . 4,781,019 4,176,964 4,133,639
Goodwill, net of accumulated amortization of $60,000,
$84,000 and $92,000, respectively . . . . . . . . . . 60,000 36,000 28,000
Deferred tax asset . . . . . . . . . . . . . . . . . . 186,688 379,850 379,850
----------- ----------- -----------
Total assets . . . . . . . . . . . . . . . . $ 8,085,287 $ 8,678,391 $ 7,276,028
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable . . . . . . . . . . . . . . . . . . $ 2,358,575 $ 1,424,415 $ 583,405
Accrued liabilities . . . . . . . . . . . . . . . . . 626,883 1,049,338 280,049
Income taxes payable . . . . . . . . . . . . . . . . -- 986,834 1,157,103
Current portion of long-term debt . . . . . . . . . . 1,457,976 415,445 232,394
Deferred tax liability . . . . . . . . . . . . . . . -- 11,939 11,939
----------- ----------- -----------
Total current liabilities . . . . . . . . . . 4,443,434 3,887,971 2,264,890
----------- ----------- -----------
Long-term debt . . . . . . . . . . . . . . . . . . . . 1,755,437 1,339,992 1,339,992
----------- ----------- -----------
Commitments and contingencies
STOCKHOLDERS' EQUITY:
Common stock, $1 par value, 25,000 shares
authorized; 500 shares issued and outstanding . . 500 500 500
Additional paid-in capital . . . . . . . . . . . . . 2,483,880 2,483,880 2,483,880
Retained earnings (accumulated deficit) . . . . . . . (597,964) 966,048 1,186,766
----------- ----------- -----------
Stockholders' equity . . . . . . . . . . . . 1,886,416 3,450,428 3,671,146
----------- ----------- -----------
Total liabilities and stockholders'
equity . . . . . . . . . . . . . . . . . . $ 8,085,287 $ 8,678,391 $ 7,276,028
=========== =========== ===========
The accompanying notes are an integral part of the financial statements.
F-20
312
TREND DRILLING COMPANY
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31,
FOUR MONTHS
------------------------------------------------ ENDED
1994 1995 1996 APRIL 30, 1997
(UNAUDITED)
REVENUES:
Drilling contracts . . . . . . . $ 12,563,991 $ 12,283,649 $ 15,692,056 $ 6,389,703
------------ ------------ ------------ ------------
OPERATING EXPENSES:
Drilling . . . . . . . . . . . . 10,070,842 9,218,081 11,752,135 4,844,669
General and administrative . . . 1,415,842 1,878,347 1,647,330 514,937
Depreciation and amortization . . 1,077,292 1,344,835 1,602,832 627,350
------------ ------------ ------------ ------------
Total operating
expenses . . . . . . . 12,563,976 12,441,263 15,002,297 5,986,956
------------ ------------ ------------ ------------
Operating income (loss) . . . . . . 15 (157,614) 689,759 402,747
------------ ------------ ------------ ------------
OTHER INCOME (EXPENSE):
Interest expense . . . . . . . . (183,768) (280,741) (261,331) (46,750)
Interest income . . . . . . . . . 5,880 17,380 8,035 --
Other . . . . . . . . . . . . . . 140,021 43,673 53,523 --
Gain on disposition of
equipment . . . . . . . . . . 71,366 42,573 2,055,230 --
------------ ------------ ------------ ------------
Total other income
(expense) . . . . . . . 33,499 (177,115) 1,855,457 (46,750)
------------ ------------ ------------ ------------
Income (loss) before income
taxes . . . . . . . . . . . . . . 33,514 (334,729) 2,545,216 355,997
Income tax benefit (expense) . . . (17,177) 112,906 (981,204) (135,279)
------------ ------------ ------------ ------------
Net Income (loss) . . . . . . . . . $ 16,337 $ (221,823) $ 1,564,012 $ 220,718
============ ============ ============ ============
The accompanying notes are an integral part of the financial statements.
F-21
313
TREND DRILLING COMPANY
STATEMENTS OF STOCKHOLDERS' EQUITY
RETAINED
CAPITAL IN EARNINGS
COMMON EXCESS OF (ACCUMULATED
STOCK PAR VALUE DEFICIT) TOTAL
Balance, December 31, 1993 ............................ $ 500 $ 2,483,880 $ (392,478) $ 2,091,902
Net income .......................................... -- -- 16,337 16,337
----------- ----------- ----------- -----------
Balance, December 31, 1994 ............................ 500 2,483,880 (376,141) 2,108,239
Net loss ............................................ -- -- (221,823) (221,823)
----------- ----------- ----------- -----------
Balance, December 31, 1995 ............................ 500 2,483,880 (597,964) 1,886,416
Net income .......................................... -- -- 1,564,012 1,564,012
----------- ----------- ----------- -----------
Balance, December 31, 1996 ............................ $ 500 $ 2,483,880 $ 966,048 $ 3,450,428
=========== =========== =========== ===========
The accompanying notes are an integral part of the financial statements.
F-22
314
TREND DRILLING COMPANY
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31,
------------------------------------------------
FOUR MONTHS
ENDED
1994 1995 1996 APRIL 30, 1997
(UNAUDITED)
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income (loss) ................................... $ 16,337 $ (221,823) $ 1,564,012 $ 220,718
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Depreciation and amortization .................... 1,077,292 1,344,836 1,602,832 627,350
Gain on disposition of property,
plant and equipment ............................ (71,366) (42,573) (2,055,230) --
Deferred tax expense (benefit) ................... 17,177 (112,906) (5,630) --
Change in assets and liabilities:
Accounts receivable ............................ (1,436,642) (120,759) (1,075,812) 929,517
Prepaid expenses ............................... 2,867 (19,349) (5,762) --
Accounts payable and accrued
liabilities ................................. 903,866 929,719 (511,705) (1,610,299)
Income taxes payable ........................... -- -- 986,834 170,269
Deferred revenue ............................... (172,250) -- -- --
------------ ------------ ------------ ------------
Net cash provided by operating
activities ................................ 337,281 1,757,145 499,539 337,555
------------ ------------ ------------ ------------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Proceeds from the sale of equipment ................. 264,219 42,573 2,872,647 --
Capital expenditures ................................ (3,645,969) (1,552,257) (1,792,194) (576,027)
------------ ------------ ------------ ------------
Net cash provided by (used in)
investing activities ...................... (3,381,750) (1,509,684) 1,080,453 (576,027)
------------ ------------ ------------ ------------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Proceeds from issuance of debt ...................... 3,000,000 850,000 775,000 --
Principal payments under debt
obligations ...................................... (299,809) (658,104) (2,232,976) (183,049)
------------ ------------ ------------ ------------
Net cash provided by (used in)
financing activities ...................... 2,700,191 191,896 (1,457,976) (183,049)
------------ ------------ ------------ ------------
Net increase (decrease) in cash and cash
equivalents ......................................... (344,278) 439,357 122,016 (421,521)
Cash and cash equivalents, beginning of
period .............................................. 353,778 9,500 448,857 570,873
------------ ------------ ------------ ------------
Cash and cash equivalents, end of
period .............................................. $ 9,500 $ 448,857 $ 570,873 $ 149,352
============ ============ ============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the period for:
Interest ......................................... $ 136,857 $ 232,553 $ 254,110 $ 46,750
============ ============ ============ ============
Income taxes ..................................... $ -- $ -- $ -- $ 275,000
============ ============ ============ ============
The accompanying notes are an integral part of the financial statements.
F-23
315
TREND DRILLING COMPANY
NOTES TO THE FINANCIAL STATEMENTS
INFORMATION RELATING TO THE FOUR MONTHS ENDED APRIL 30, 1997 IS UNAUDITED
(A) NATURE OF OPERATIONS
Trend Drilling Company (the "Company"), an Oklahoma corporation, began
operations in 1981. The Company provides contract drilling services in the
Mid-Continent region of the United States. The Company's customers are
primarily independent oil and gas companies.
On February 13, 1997, the owner of the Company and sole stockholder,
entered into a stock purchase agreement (the "Agreement"), with Bayard Drilling
Technologies, Inc. ("Bayard") for the sale of the Company (the "Bayard
Acquisition"). The executed agreement states a purchase price of $18 million
plus shares of Bayard stock, adjusted for changes in working capital as of the
closing date compared to December 31, 1996.
(B) SUMMARY OF SIGNIFICANT ACCOUNT POLICIES
REVENUE RECOGNITION
The Company recognizes revenue and expenses on dayrate contracts as
the drilling progresses (percentage-of- completion method). For footage and
turnkey contracts, the Company recognizes the revenue and expenses upon
completion of the well (completed-contract method).
Revenue earned of $279,390, but not billed, is included in accounts
receivable at December 31, 1996.
CASH AND CASH EQUIVALENTS
For purposes of the balance sheet, the Company considers cash
equivalents to be all instruments that had a remaining maturity of three months
or less at the date of purchase.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is recorded at cost. Depreciation of
property, plant and equipment is determined primarily on the straight-line
method over the estimated useful lives of the assets at the following rates:
YEARS
Buildings . . . . . . . . . . . . . . . . . . . . . . . . . 15-39
Drilling rigs and related equipment . . . . . . . . . . . . 5-14
Vehicles . . . . . . . . . . . . . . . . . . . . . . . . . 5
Furniture and office equipment . . . . . . . . . . . . . . 5-10
Upon retirement or disposal, the related cost and accumulated
depreciation are removed from the accounts and any gain or loss is included in
operations. Repairs and maintenance, which extend the useful life of property,
plant and equipment, are capitalized.
GOODWILL
The excess of the purchase price over the fair value of assets
acquired is amortized on the straight-line method over five years.
Amortization expense was $24,000 for the years-ended December 31, 1996, 1995
and 1994.
F-24
316
INCOME TAXES
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS
No. 109"). Accordingly, deferred taxes are determined based on the difference
between the financial statement and tax bases of assets and liabilities using
the enacted tax rate in effect in the years in which the differences are
expected to reverse. Deferred tax expense represents the change in the
deferred tax liability balance.
CONCENTRATIONS OF CREDIT RISK
Financial instruments which potentially subject the Company to
concentrations of credit risk consist primarily of trade receivables with oil
and natural gas companies. For the years ended December 31, 1996 and 1995 over
ninety- five percent of the Company's trade receivables were from ten or less
customers. These customers also represented 63%, 51% and 54% of total revenues
for 1996, 1995 and 1994, respectively.
At December 31, 1996 and 1995, the Company had deposits in domestic
banks in excess of federally insured limits of approximately $467,000 and
$348,000, respectively.
ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts for certain revenues and expenses during
the reporting period. Actual results could differ from those estimates.
INTERIM FINANCIAL STATEMENTS AND DISCLOSURES
In the opinion of management, the unaudited interim financial
statements for the period ended April 30, 1997 and unaudited interim financial
statement disclosures subsequent to December 31, 1996 include all adjustments,
consisting of normal recurring accruals, necessary to present fairly the
Company's results of operations for the four months ended April 30, 1997.
(C) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following at December 31,
1995 1996
Building ......................................... $ 295,946 $ 295,946
Drilling rigs and related equipment .............. 12,323,939 12,887,107
Vehicles ......................................... 233,018 227,018
Furniture and office equipment ................... 153,984 141,131
Leasehold costs .................................. -- 9,290
----------- -----------
13,006,887 13,560,492
Less accumulated depreciation .................... 8,225,868 9,383,528
----------- -----------
$ 4,781,019 $ 4,176,964
=========== ===========
(D) LONG-TERM DEBT
Long-term debt consisted of the following at December 31,
1995 1996
Notes payable to banks ........................... 3,213,413 1,755,437
Less current portion ............................. 1,457,976 415,445
---------- ----------
Total long-term debt ................... $1,755,437 $1,339,922
========== ==========
On March 26, 1996, the Company entered into a term loan (the "Note")
of $3,098,058, which consolidated all of the Company's bank borrowings into one
term loan. At December 31, 1996, long-term debt consisted of borrowings under
this note of $1,755,437 which bears an interest rate at the prime rate,
adjusted quarterly (8.25% at December 31, 1996). The Note contains a
subjective acceleration clause which allows the lender to demand payment of the
Note when the lender,
F-25
317
at its sole discretion, determines that the Note is impaired. However, the
Note has been classified based on the scheduled maturities in the accompanying
balance sheet as management does not believe such impairment has occurred. The
Note requires the maintenance of financial reporting requirements and annual
personal financial statements from the owner of the Company.
The Note requires monthly payments of principal and interest in
amounts sufficient to repay borrowings at maturity on March 26, 2001. The Note
is collateralized by Accounts Receivable and Property, Plant and Equipment and
is personally guaranteed by the owner of the Company.
At December 31, 1995, long-term debt consisted of borrowings under
four bank notes with an aggregate amount of $3,213,413 which bore interest at a
rate of 1% over prime (which was 8.75% on December 31, 1995).
At December 31, 1996, the aggregate scheduled yearly maturities on
long-term obligations are as follows:
YEAR ENDING DECEMBER 31,
1997............................................. $ 415,445
1998............................................. 373,762
1999............................................. 406,799
2000............................................. 442,757
2001............................................. 116,674
----------
$1,755,437
==========
(E) INCOME TAXES
Income tax expense (benefit) for the years ended December 31, 1994,
1995 and 1996 is summarized as follows:
1994 1995 1996
Current:
Federal ............................................................... $ -- $ -- $ 882,957
State ................................................................. -- -- 103,877
Deferred:
Federal ............................................................... 15,369 (101,021) (5,037)
State ................................................................. 1,808 (11,885) (593)
--------- --------- ---------
$ 17,177 $(112,906) $ 981,204
========= ========= =========
Total income tax expense (benefit) differs from the amount computed by
multiplying income (loss) before income taxes by the U.S. federal income tax
statutory rate. The reasons for this difference are as follows:
1994 1995 1996
Computed expected tax expense (benefit) ................................. $ 11,394 $(113,807) $ 865,373
State income taxes ...................................................... 1,340 (13,389) 101,808
Non-deductible business meals and entertainment
expense ............................................................... 4,443 14,290 14,023
--------- --------- ---------
$ 17,177 $(112,906) $ 981,204
========= ========= =========
F-26
318
The components of the deferred tax assets and (liabilities) consisted
of the following at December 31:
1995 1996
Deferred tax assets:
Net operating loss and tax credit carry-forwards .................................. $ 38,549 $ --
Excess of book basis over tax basis of current
liabilities .................................................................... 112,054 --
Excess of tax basis over book basis of current assets ............................. 24,990 --
Depreciation of property, plant and equipment ..................................... 190,488 383,650
Deferred tax liabilities:
Excess of tax basis over book basis of current
liabilities .................................................................... -- (11,939)
Amortization of goodwill .......................................................... (3,800) (3,800)
--------- ---------
Net deferred tax asset .............................................................. $ 362,281 $ 367,911
========= =========
(F) RELATED PARTIES
The Company has several affiliates in the oil and gas industry with
which the Company does business throughout the year. The type of transactions
with these related parties varies from the Company drilling wells for
affiliates to affiliates moving rigs from one well site to another, as well as
receiving certain administrative support for which the Company was not billed
(i.e., computer support).
As of December 31, 1996 and 1995, the Company had trade receivables
with related parties in the amount of $375,016 and $32,633, respectively, and
trade payables with related parties of $168,169 and $505,426, respectively.
For the period ended December 31, 1996, 1995 and 1994 the Company had
revenues of $462,535, $917,743 and $1,422,658, respectively and expenses of
$2,121,975, $2,003,356 and $1,660,169, respectively, with related parties.
The Company leases office space from an affiliate. For the years
ended December 31, 1996, 1995 and 1994, the Company paid rent of approximately
$10,000.
The Company has an agreement for 1997 to continue renting this office
space for approximately $1,000 per month.
(G) EMPLOYEE BENEFIT PLAN
The Company has a profit sharing plan ("the Plan") for certain
eligible employees who have attained the age of 21 and completed at least six
months of service. Participants may contribute up to 15% of compensation for
any Plan year. The Company's discretionary contribution is allocated to each
participant's account in the proportion which that participant's compensation
bears to the total compensation of all eligible participants. The Company made
contributions of approximately $130,000, $35,000 and $20,000 to the Plan in
1996, 1995 and 1994, respectively.
F-27
319
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
Bayard Drilling Technologies, Inc.
We have audited the accompanying balance sheet of Ward Drilling
Company, Inc. as of December 31, 1996, and the related statement of operations
and retained earnings, and cash flows for the year ended December 31, 1996.
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 audits 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 financial statements referred to above present
fairly, in all material respects, the financial position of Ward Drilling
Company as of December 31, 1996, and the results of its operations and its cash
flows for the year ended December 31, 1996, in conformity with generally
accepted accounting principles.
COOPERS & LYBRAND, L.L.P.
Oklahoma City, Oklahoma
August 22, 1997
F-28
320
WARD DRILLING COMPANY, INC.
BALANCE SHEET
ASSETS
DECEMBER 31, MAY 31,
1996 1997
CURRENT ASSETS:
Cash ...................................................................... $ 7,038 $--
Accounts receivable ....................................................... 1,733,647 1,287,069
Prepaids and other assets ................................................. 781,470 520,204
----------- -----------
Total current assets .............................................. 2,522,155 1,807,273
----------- -----------
EQUIPMENT:
Drilling equipment ........................................................ 14,701,019 14,843,582
Other equipment ........................................................... 444,606 448,918
Other ..................................................................... 373,263 376,882
----------- -----------
15,518,888 15,669,382
Less accumulated depreciation ............................................. 8,569,372 8,509,445
----------- -----------
Net equipment .......................................................... 6,949,516 7,159,937
----------- -----------
Total assets ................................................. $ 9,471,671 $ 8,967,210
=========== ===========
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Book overdraft ............................................................ $ 118,765 $ 5,295
Accounts payable .......................................................... 1,246,022 383,329
Accrued expenses .......................................................... 590,161 474,582
Advances from affiliate and stockholder ................................... 3,265,480 3,899,629
----------- -----------
Total current liabilities ......................................... 5,220,428 4,762,835
----------- -----------
Note payable to bank ........................................................ 500,000 --
----------- -----------
Commitments and contingencies
STOCKHOLDER'S EQUITY:
Common stock of $1 par value. Authorized 25,000 shares;
issued and outstanding 1,000 shares .................................... 1,000 1,000
Additional paid-in capital ................................................ 99,014 99,014
Retained earnings ......................................................... 3,651,229 4,104,361
----------- -----------
Total stockholder's equity ........................................ 3,751,243 4,204,375
----------- -----------
Total liabilities and stockholder's equity ................... $ 9,471,671 $ 8,967,210
=========== ===========
See accompanying notes to financial statements.
F-29
321
WARD DRILLING COMPANY, INC.
STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
DECEMBER 31, FIVE MONTHS ENDED
1996 MAY 31, 1997
(UNAUDITED)
DRILLING REVENUES ................................................. $ 11,384,944 $ 4,956,971
------------ ------------
OPERATING EXPENSES:
Drilling ........................................................ 9,890,597 3,914,240
Depreciation .................................................... 966,328 413,249
General and administrative ...................................... 484,748 196,747
------------ ------------
Total operating expenses ................................ 11,341,673 4,524,236
------------ ------------
Operating income ........................................ 43,271 432,735
------------ ------------
OTHER INCOME (EXPENSE):
Interest income ................................................. 34,536 16,810
Interest expense ................................................ (72,056) (27,224)
Gain on sale of assets .......................................... 7,895 --
Miscellaneous income ............................................ 66,678 30,810
------------ ------------
Total other income ...................................... 37,053 20,396
------------ ------------
Net income (loss) ....................................... $ 80,324 $ 453,131
============ ============
Retained earnings at beginning of year ............................ $ 3,570,905
============
Retained earnings at end of year .................................. $ 3,651,229
============
See accompanying notes to financial statements.
F-30
322
WARD DRILLING COMPANY, INC.
STATEMENTS OF CASH FLOWS
DECEMBER 31, FIVE MONTHS ENDED
1996 MAY 31, 1997
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ................................................... $ 80,324 $ 453,131
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation ..................................................... 966,328 413,249
Gain on sale of assets ........................................... (7,895) --
Change in assets and liabilities:
(Increase) decrease in accounts receivable ..................... (485,735) 446,578
(Increase) decrease in prepaids and other assets ............... (330,577) 261,266
Decrease in cost incurred or contracts in progress ............. 463,588 --
Decrease in accounts payable ................................... (75,797) (862,693)
Increase (decrease) in accrued expenses ........................ 250,400 (115,579)
----------- -----------
Net cash provided by operating activities ........................ 860,636 595,952
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment, including major
repairs and betterments .......................................... (1,564,162) (623,669)
Proceeds from sale of assets ........................................ 21,034 --
----------- -----------
Net cash used in investing activities ............................ (1,543,128) (623,669)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds on revolving line of credit ................................ 50,000
Payments on revolving line of credit ................................ -- (500,000)
Advances from affiliate and stockholder ............................. 1,301,282 634,149
Payments to affiliates .............................................. (616,136) --
Decrease in book overdraft .......................................... (52,671) (113,470)
----------- -----------
Net cash provided by financing activities ........................ 682,475 20,679
----------- -----------
Net decrease in cash .................................................. (17) (7,038)
Cash at beginning of year ............................................. 7,055 7,038
----------- -----------
Cash at end of year ................................................... $ 7,038 $ --
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest .............................................. $ 57,244 $ 20,000
=========== ===========
See accompanying notes to financial statements.
F-31
323
WARD DRILLING COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
INFORMATION RELATING TO THE FIVE MONTHS ENDED MAY 31, 1997 IS UNAUDITED
(A) NATURE OF OPERATIONS
Ward Drilling Company (the "Company"), an Oklahoma corporation, began
operations in 1981. The Company provides contract drilling services in the
Mid-Continent region of the United States for independent oil and gas
companies.
In May 1997, the Company's parent, L.O. Ward Revocable Trust
transferred all the fixed assets of the Company into WD Equipment L.L.C. in
anticipation of the sale of these assets to Bayard Drilling Technologies, Inc.
("Bayard"), which was consummated on May 31, 1997 (the "Bayard Acquisition").
The Company and Bayard agreed to a purchase price of approximately $8 million
plus 400,000 shares of Bayard stock plus warrants to purchase up to 200,000
shares of Bayard stock in exchange for the purchase of WD Equipment L.L.C.
(B) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REVENUE RECOGNITION
The Company recognizes revenue and expenses on dayrate contracts as
the drilling progresses (percentage-of- completion method). For turnkey and
footage contracts, the Company recognizes the revenue and expenses upon
completion of the well (completed-contract method).
CASH AND CASH EQUIVALENTS
The Company considers cash equivalents to be all instruments that had
a remaining maturity of three months or less at the date of purchase.
EQUIPMENT
Equipment is recorded at cost. Depreciation on drilling equipment is
determined using the units-of-production method based upon management's
estimates of remaining drilling days by rig. Depreciation on all other
equipment is determined using the straight-line method over the estimated
useful lives of the assets ranging from three to seven years. Upon retirement
or disposal, the related cost and accumulated depreciation are removed from the
accounts and any gain or loss is included in operations.
The costs of major repairs and overhauls which extend the useful life
of drilling equipment are capitalized by charges to the allowance for
accumulated depreciation. Other additions and improvements are charged to the
applicable equipment account.
INCOME TAXES
The Company is an electing S corporation for federal and state income
tax purposes. The Company's taxable income or loss will be included in its
stockholder's income tax return. Accordingly, no provision for income taxes
has been included in these financial statements.
F-32
324
CONCENTRATIONS OF CREDIT RISK
Financial instruments which potentially subject the Company to
concentrations of credit risk consist primarily of trade receivables with oil
and natural gas companies. At December 31, 1996 over ninety-eight percent of
the Company's trade receivables were from four customers. For the year ended
December 31, 1996 the ten largest customers account for over 96% of total
revenues.
At December 31, 1996 the Company had deposits in domestic banks in
excess of federally insured limits of approximately $156,000.
ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts for certain revenues and expenses during
the reporting period. Actual results could differ from those estimates.
(C) NOTE PAYABLE TO BANK
The Company has available a line of credit with a bank for $500,000
which expires in March 1998. The line of credit is collateralized by
inventory, accounts receivable, and other miscellaneous assets. Interest is at
the bank's base rate plus one percent (9.25% and 9.5% at December 31, 1996 and
1995, respectively.) Upon consummation of the sale of the Company on May 31,
1997, this line of credit was extinguished.
(D) RELATED PARTIES
The Company conducts drilling activities for companies owned or
controlled by L.O. Ward, one of the trustees of the L.O. Ward Revocable Trust
(the Related Parties); however no drilling activities were conducted for the
Related Parties in 1996.
General and administrative expense in the accompanying statement of
operations is net of management fee income received from one of the Related
Parties aggregating $10,320 in 1996.
The Company allocates office space and administrative expenses
directly to Related Parties. Amounts allocated under this arrangement
aggregated approximately $25,000 for 1996.
The Company paid approximately $75,000 in 1996 to one of the Related
Parties for services which includes finding drilling contracts for the Company
and certain other administrative services. Certain expenses incurred by the
Related Parties and attributable to the Company's operations are not billed to
the Company.
Accounts receivable at December 31, 1996 included $8,446 of
receivables from affiliated entities. Accounts payable at December 31, 1996
included $241,233 owed to affiliated entities.
(E) EMPLOYMENT AGREEMENTS
The Company has issued stock appreciation rights to certain employees
which may entitle them to receive bonuses. These bonuses are based on net
income and the ratio of stock appreciation rights owned by the employees to
total outstanding shares of common stock at year end. Ninety-nine stock
appreciation rights were outstanding at December 31, 1996. A bonus payment of
approximately $37,500 was payable to employees at December 31, 1996.
(F) SAVINGS PLAN
The Company participates in a salary deferral retirement plan which is
available to substantially all employees. Participants in the plan may make
contributions to the plan, with the Company matching up to 25% of the
employee's basic contribution. The basic contribution cannot exceed 5% of the
employee's base salary. Total contributions by the Company were approximately
$10,000 in 1996.
F-33
325
(G) CONTINGENCIES
The Company maintains a self insurance plan for workers' compensation
and is liable for claims up to $400,000 per-occurrence. The Company is
involved in legal actions arising out of workers' compensation claims. In the
opinion of management, the ultimate disposition of these matters will not have
a material adverse effect on the Company's financial position. Total expense
for workers' compensation was approximately $335,000 in 1996, and accrued
liabilities included a reserve for unpaid and incurred but not reported claims
of $310,000 at December 31, 1996.
F-34
326
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Bonray Drilling Corporation
We have audited the accompanying balance sheets of Bonray Drilling
Corporation as of December 31, 1996 and June 30, 1996, and the related
statements of operations and accumulated deficit and cash flows for the
six-month period ended December 31, 1996 and the years ended June 30, 1996 and
1995. 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 financial statements referred to above present
fairly, in all material respects, the financial position of Bonray Drilling
Corporation at December 31, 1996 and June 30, 1996, and the results of its
operations and its cash flows for the six-month period ended December 31, 1996
and the years ended June 30, 1996 and 1995, in conformity with generally
accepted accounting principles.
Ernst & Young LLP
Oklahoma City, Oklahoma
April 17, 1997
F-35
327
THE ACQUISITION OF BONRAY DRILLING CORPORATION BY DLB WAS ACCOUNTED FOR USING
THE PURCHASE METHOD OF ACCOUNTING. ACCORDINGLY, THE PURCHASE PRICE WAS
"PUSHED-DOWN" AND RECORDED IN THE ACCOMPANYING FINANCIAL STATEMENTS WHICH
AFFECTS THE COMPARABILITY OF THE SEPTEMBER 30, 1997 FINANCIAL POSITION, RESULTS
OF OPERATIONS AND CASH FLOWS.
BONRAY DRILLING CORPORATION
BALANCE SHEETS
ASSETS
June 30, December 31, September 30,
1996 1996 1997
(Unaudited)
(Dollars in Thousands)
Current assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . $ 187 $ 58 $ 667
Temporary Investments . . . . . . . . . . . . . . . . . . -- -- 150
Accounts receivable (Note 5) . . . . . . . . . . . . . . 2,172 2,100 4,131
Accounts receivable - parent . . . . . . . . . . . . . . -- -- (55)
Drilling contracts in progress . . . . . . . . . . . . . 20 -- 115
Prepaid expenses . . . . . . . . . . . . . . . . . . . . 89 166 184
--------- --------- ---------
Total current assets . . . . . . . . . . . . . . 2,468 2,324 5,302
Properties and equipment:
Drilling equipment (Notes 1 and 3) . . . . . . . . . . . 20,411 20,927 19,400
Land . . . . . . . . . . . . . . . . . . . . . . . . . . 110 110 110
Buildings . . . . . . . . . . . . . . . . . . . . . . . . 356 356 73
Other equipment . . . . . . . . . . . . . . . . . . . . . 1,145 1,006 546
--------- --------- ---------
22,022 22,399 20,129
Less accumulated depreciation (Note 1) . . . . . . . . . 14,179 14,210 1,519
--------- --------- ---------
Net properties and equipment . . . . . . . . . . . . . . . 7,843 8,189 18,610
--------- --------- ---------
Note receivable - parent (Note 3) . . . . . . . . . . . . . -- -- 21,820
--------- --------- ---------
Loan origination fees . . . . . . . . . . . . . . . . . . . -- -- 545
--------- --------- ---------
Total assets . . . . . . . . . . . . . . . . . . $ 10,311 $ 10,513 $ 46,277
========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable . . . . . . . . . . . . . . . . . . . . $ 689 $ 871 $ 1,529
Notes payable (Note 3):
Short-term line of credit . . . . . . . . . . . . . . 555 -- --
Other . . . . . . . . . . . . . . . . . . . . . . . . 189 343 --
Accrued liabilities:
Salaries and wages . . . . . . . . . . . . . . . . . . 246 268 271
Payroll and other taxes . . . . . . . . . . . . . . . 57 17 62
Workers' compensation insurance (Note 4) . . . . . . . 446 768 879
Income taxes payable . . . . . . . . . . . . . . . . . -- 4 19
Other . . . . . . . . . . . . . . . . . . . . . . . . 120 120 34
--------- --------- ---------
Total current liabilities . . . . . . . . . . . . 2,302 2,391 2,794
Obligations due after one year:
Note payable (Note 3) . . . . . . . . . . . . . . . . . . -- -- 23,000
Workers' compensation insurance (Note 4) . . . . . . . . 75 75 70
Other . . . . . . . . . . . . . . . . . . . . . . . . . . 28 14 --
Deferred income taxes . . . . . . . . . . . . . . . . . . -- -- 2,030
Stockholders' equity:
Common stock, $1.00 par value; 800,000 shares
authorized; 432,740 shares issued at December 31,
1996 and June 30, 1996; 423,540 shares issued
at September 30, 1997 . . . . . . . . . . . . . . . . 433 433 424
Capital in excess of par value . . . . . . . . . . . . . 12,497 12,497 17,146
Retained earnings (accumulated deficit) (Note 1) . . . . (4,932) (4,805) 813
--------- --------- ---------
7,998 8,125 18,383
Less 9,200 shares of treasury stock, at cost . . . . . . 92 92 --
--------- --------- ---------
Total stockholders' equity . . . . . . . . . . . 7,906 8,033 18,383
--------- --------- ---------
Total liabilities and stockholders' equity . . . $ 10,311 $ 10,513 $ 46,277
========= ========= =========
See accompanying notes.
F-36
328
THE ACQUISITION OF BONRAY DRILLING CORPORATION BY DLB WAS ACCOUNTED FOR USING
THE PURCHASE METHOD OF ACCOUNTING. ACCORDINGLY, THE PURCHASE PRICE WAS
"PUSHED-DOWN" AND RECORDED IN THE ACCOMPANYING FINANCIAL STATEMENTS WHICH
AFFECTS THE COMPARABILITY OF THE SEPTEMBER 30, 1997 FINANCIAL POSITION, RESULTS
OF OPERATIONS AND CASH FLOWS.
BONRAY DRILLING CORPORATION
STATEMENTS OF OPERATIONS AND ACCUMULATED DEFICIT
YEAR ENDED SIX-MONTH NINE-MONTH
------------------------- PERIOD ENDED PERIOD ENDED
JUNE 30, JUNE 30, DECEMBER 31, SEPTEMBER 30,
1995 1996 1996 1997
(DOLLARS IN THOUSANDS, (UNAUDITED)
EXCEPT PER SHARE AMOUNTS)
Revenues:
Contract drilling operations (Note 5) . . . . . . $ 8,486 $ 10,257 $ 6,004 $ 14,279
Gain (loss) on sales of assets . . . . . . . . . 1,029 (66) 27 (57)
Interest and other income . . . . . . . . . . . . 172 89 27 456
-------- -------- -------- --------
Total revenues . . . . . . . . . . . . . 9,687 10,280 6,058 14,678
Costs and expenses (Note 4):
Contract drilling operations . . . . . . . . . . 6,865 8,189 4,836 10,240
General and administrative . . . . . . . . . . . 752 864 473 860
Interest and other expense . . . . . . . . . . . 39 85 43 548
Depreciation . . . . . . . . . . . . . . . . . . 1,130 1,284 569 1,707
-------- -------- -------- --------
8,786 10,422 5,921 13,355
-------- -------- -------- --------
Income (loss) before provision for income
taxes . . . . . . . . . . . . . . . . . . . . . . 901 (142) 137 1,323
Provision for income taxes (Note 2) . . . . . . . . 35 -- 10 563
-------- -------- -------- --------
Net income (loss) . . . . . . . . . . . . . . . . . 866 (142) 127 760
Accumulated deficit at beginning of period . . . . (5,656) (4,790) (4,932) (4,805)
Elimination of accumulated deficit from purchase
adjustment (Note 1) . . . . . . . . . . . . . . . -- -- -- 4,858
-------- -------- -------- --------
Retained earnings (accumulated deficit) at end of
period . . . . . . . . . . . . . . . . . . . . . $ (4,790) $ (4,932) $ (4,805) $ 813
======== ======== ======== ========
Net income (loss) per share . . . . . . . . . . . . $ 2.05 $ (0.34) $ 0.30 $ 1.79
======== ======== ======== ========
Weighted average shares outstanding . . . . . . . . 423,540 423,540 423,540 423,540
======== ======== ======== ========
See accompanying notes.
F-37
329
THE ACQUISITION OF BONRAY DRILLING CORPORATION BY DLB WAS ACCOUNTED FOR USING
THE PURCHASE METHOD OF ACCOUNTING. ACCORDINGLY, THE PURCHASE PRICE WAS
"PUSHED-DOWN" AND RECORDED IN THE ACCOMPANYING FINANCIAL STATEMENTS WHICH
AFFECTS THE COMPARABILITY OF THE SEPTEMBER 30, 1997 FINANCIAL POSITION, RESULTS
OF OPERATIONS AND CASH FLOWS.
BONRAY DRILLING CORPORATION
STATEMENTS OF CASH FLOWS
YEAR ENDED SIX-MONTH NINE-MONTH
------------------------ PERIOD ENDED PERIOD ENDED
JUNE 30, JUNE 30, DECEMBER 31, SEPTEMBER 30,
1995 1996 1996 1997
(DOLLARS IN THOUSANDS)
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES
Cash received from customers . . . . . . . . . . . . $ 10,910 $10,628 $ 6,457 $13,123
Cash paid to suppliers and employees . . . . . . . . (10,178) (9,662) (5,325) (12,233)
Interest received . . . . . . . . . . . . . . . . . . 36 5 -- 408
Interest paid . . . . . . . . . . . . . . . . . . . . (27) (66) (27) (436)
Income taxes paid . . . . . . . . . . . . . . . . . . (30) (5) (6) --
Other cash receipts . . . . . . . . . . . . . . . . . 152 85 61 35
-------- ------- ------- -------
Net cash provided by operating activities . . . . . . 863 985 1,160 897
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales of assets . . . . . . . . . . . . 1,659 27 43 --
Capital expenditures . . . . . . . . . . . . . . . . (2,120) (987) (931) (6,051)
-------- ------- ------- -------
Net cash used by investing activities . . . . . . . . (461) (960) (888) (6,051)
CASH FLOWS FROM FINANCING ACTIVITIES
Contributed capital . . . . . . . . . . . . . . . . . -- -- -- 4,582
Borrowings on notes payable . . . . . . . . . . . . . -- -- 395 23,000
Note receivable - parent . . . . . . . . . . . . . . -- -- -- (21,820)
Short term investment . . . . . . . . . . . . . . . . -- -- -- (150)
Payments on notes payable . . . . . . . . . . . . . . (86) (553) (241) (171)
Net increase (decrease) in borrowings on short-term
line of credit . . . . . . . . . . . . . . . . . . (165) 555 (555) 322
-------- ------- ------- -------
Net cash provided (used) by financing activities . . (251) 2 (401) 5,763
-------- ------- ------- -------
Net increase (decrease) in cash and cash
equivalents . . . . . . . . . . . . . . . . . . . . 151 27 (129) 609
Cash and cash equivalents at beginning of period . . 9 160 187 58
-------- ------- ------- -------
Cash and cash equivalents at end of period . . . . . $ 160 $ 187 $ 58 $ 667
======== ======= ======= =======
RECONCILIATION OF NET INCOME (LOSS) TO NET CASH
PROVIDED BY OPERATING ACTIVITIES
Net income (loss) . . . . . . . . . . . . . . . . . . $ 866 $ (142) $ 127 $ 760
Adjustments to reconcile net income (loss) to net
cash
provided by operating activities:
Depreciation . . . . . . . . . . . . . . . . . . . 1,130 1,284 569 1,707
(Gain) loss on sales of assets . . . . . . . . . . (1,029) 66 (27) (57)
Deferred income taxes . . . . . . . . . . . . . . . -- -- -- 563
Change in assets and liabilities:
Decrease (increase) in current assets:
Accounts receivable . . . . . . . . . . . . . . (434) (33) 72 (2,086)
Drilling contracts in progress . . . . . . . . 13 1 20 (115)
Prepaid expenses . . . . . . . . . . . . . . . 9 5 (77) (18)
Loan origination fees . . . . . . . . . . . . . -- -- -- (545)
Increase (decrease) in current liabilities:
Accounts payable . . . . . . . . . . . . . . . . 68 (276) 182 658
Accrued liabilities . . . . . . . . . . . . . . . (48) 479 308 49
Accrued workers' compensation insurance and other
due after one year . . . . . . . . . . . . . . 288 (399) (14) (19)
-------- ------- ------- -------
Total adjustments . . . . . . . . . . . . . (3) 1,127 1,033 137
-------- ------- ------- -------
Net cash provided by operating activities. . $ 863 $ 985 $ 1,160 $ 897
======== ======= ======= =======
DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITY
During the year ended June 30, 1995, the Company acquired property,
plant and equipment by issuing a note payable of $828,050.
See accompanying notes.
F-38
330
THE ACQUISITION OF BONRAY DRILLING CORPORATION BY DLB WAS ACCOUNTED FOR USING
THE PURCHASE METHOD OF ACCOUNTING. ACCORDINGLY, THE PURCHASE PRICE WAS
"PUSHED-DOWN" AND RECORDED IN THE ACCOMPANYING FINANCIAL STATEMENTS WHICH
AFFECTS THE COMPARABILITY OF THE SEPTEMBER 30, 1997 FINANCIAL POSITION, RESULTS
OF OPERATIONS AND CASH FLOWS.
BONRAY DRILLING CORPORATION
NOTES TO FINANCIAL STATEMENTS
NINE-MONTH PERIOD ENDED SEPTEMBER 30, 1997 AND SIX-MONTH PERIOD ENDED
DECEMBER 31, 1996 AND YEARS ENDED JUNE 30, 1996 AND 1995
INFORMATION RELATING TO THE NINE-MONTH PERIOD ENDED
SEPTEMBER 30, 1997 IS UNAUDITED
1. BASIS OF FINANCIAL STATEMENTS AND SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
Bonray Drilling Corporation (the "Company") is engaged in domestic
onshore contract drilling of oil and gas wells. The Company currently owns and
has available for operation fifteen drilling rigs located in Oklahoma, having
depth capabilities ranging from 7,000 to 25,000 feet.
On February 10, 1997, substantially all of the Company's shares of
outstanding common stock were purchased by DLB Oil & Gas, Inc. ("DLB") for $30
per share or approximately $12,700,000. As a result of the completed
transaction, the Company became a subsidiary of DLB. Effective on the date of
the acquisition, the Company changed its fiscal year end from June 30 to
December 31 to correspond with the year end of DLB.
The transaction was accounted for as a purchase using push down
accounting treatment. This resulted in a step up in the basis of the acquired
assets of approximately $6.3 million, the establishment of approximately $1.5
million of deferred income taxes and the elimination of the previously recorded
balance of accumulated depreciation and amortization. Additionally, the
accumulated deficit of $4,858,000 was eliminated as a result of a new basis
established for the acquired assets and liabilities.
Cash and Cash Equivalents
Cash and cash equivalents include cash deposits in banks and
short-term investments with original maturities of three months or less from
the date of purchase by the Company.
Contract Drilling Operations
Revenue earned from footage and turnkey contracts is recognized by the
completed contract method, while revenue earned from daywork contracts is
recognized by the percentage-of-completion method. Provision is made for the
entire amount of expected losses on contracts, if any, in the period in which
such losses are first determined.
Valuation of Properties and Equipment
Drilling equipment is stated at amounts representing historical cost
prior to the February 10, 1997 acquisition by DLB (pushed-down cost thereafter)
adjusted by prior year write-downs based on the expected future economic value
of such equipment. This value was determined by projecting the estimated
future undiscounted cash flows generated by drilling equipment based on the
Company's historical utilization rates and profit margins as well as
consideration of the economic conditions of the industry. The Company
continues to review these assets for possible impairment based on expected
future cash flows and other available information and has determined that no
impairment in the value of the assets exists at September 30, 1997, December
31, 1996 or June 30, 1996 or 1995. However, due to the uncertainty of such
factors it is
F-39
331
THE ACQUISITION OF BONRAY DRILLING CORPORATION BY DLB WAS ACCOUNTED FOR USING
THE PURCHASE METHOD OF ACCOUNTING. ACCORDINGLY, THE PURCHASE PRICE WAS
"PUSHED-DOWN" AND RECORDED IN THE ACCOMPANYING FINANCIAL STATEMENTS WHICH
AFFECTS THE COMPARABILITY OF THE SEPTEMBER 30, 1997 FINANCIAL POSITION, RESULTS
OF OPERATIONS AND CASH FLOWS.
reasonably possible that the estimated future cash flows may change. Additions
to drilling equipment, land, buildings and other equipment are reported at
cost.
Depreciation
Depreciation of drilling equipment is computed on an operating day
basis (net of estimated salvage value), except for drilling rigs and related
equipment which are "mothballed" or otherwise not expected to be used for an
extended period of time. During the year ended June 30, 1996, there was a
decrease in the estimated salvage value of these inactive drilling rigs and
equipment. As a result, depreciation on this equipment was increased during
the year ended June 30, 1996 to reduce the net book value of these assets to
their estimated salvage value. Depreciation recorded on these inactive rigs
and equipment was $269,000 and $36,000 for the years ended June 30, 1996 and
1995, respectively (none for the six-month period ended December 31, 1996).
The net book value of such drilling equipment is $457,000, which approximates
the estimated salvage value of the equipment at December 31, 1996.
Depreciation of buildings and other equipment is computed by the
straight-line method over the estimated useful lives of the assets.
Income (Loss) Per Share
Income (loss) per share is computed on the basis of weighted average
number of shares of common stock and dilutive common stock equivalents
outstanding.
Credit Risk
The Company operates its rigs in the state of Oklahoma and grants
credit, which is generally unsecured, to its customers (Note 5). At December
31, 1996, approximately 90% of the Company's accounts receivable were from five
customers. The Company has not experienced any significant credit losses in
the six-month period ended December 31, 1996 or the nine-month period ended
September 30, 1997, or the years ended June 30, 1996 or 1995 and is not aware
of any significant uncollectible accounts at December 31, 1996.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Fair Value of Financial Instruments
The following methods and assumptions were used by the Company in
estimating their fair values of financial instruments: Cash and cash
equivalents are estimated to have a fair value approximating the carrying
amount due to the short maturity of those instruments. Notes payable have
variable interest rates with carrying values approximating fair values.
Interim Financial Statements and Disclosures
In the opinion of management, the unaudited interim financial
statements as of and for the nine-month period ended September 30, 1997 and
unaudited interim financial statement disclosures subsequent to December 31,
1996 include all adjustments, consisting of normal recurring accruals and
push-down adjustments, necessary to present fairly the Company's financial
position as of September 30, 1997 and results of operations and cash flows for
the nine-month period ended September 30, 1997. Results for the period ended
September 30, 1997 are not necessarily indicative of the results to be expected
for the entire year.
F-40
332
THE ACQUISITION OF BONRAY DRILLING CORPORATION BY DLB WAS ACCOUNTED FOR USING
THE PURCHASE METHOD OF ACCOUNTING. ACCORDINGLY, THE PURCHASE PRICE WAS
"PUSHED-DOWN" AND RECORDED IN THE ACCOMPANYING FINANCIAL STATEMENTS WHICH
AFFECTS THE COMPARABILITY OF THE SEPTEMBER 30, 1997 FINANCIAL POSITION, RESULTS
OF OPERATIONS AND CASH FLOWS.
F-41
333
THE ACQUISITION OF BONRAY DRILLING CORPORATION BY DLB WAS ACCOUNTED FOR USING
THE PURCHASE METHOD OF ACCOUNTING. ACCORDINGLY, THE PURCHASE PRICE WAS
"PUSHED-DOWN" AND RECORDED IN THE ACCOMPANYING FINANCIAL STATEMENTS WHICH
AFFECTS THE COMPARABILITY OF THE SEPTEMBER 30, 1997 FINANCIAL POSITION, RESULTS
OF OPERATIONS AND CASH FLOWS.
2. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes.
Significant components of the Company's deferred tax liabilities and assets as
of December 31, 1996 and June 30, 1996 are as follows (dollars in thousands):
JUNE 30, DECEMBER 31,
1996 1996
Deferred tax liability --
Tax depreciation over book depreciation and
write-downs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 658 $ 629
====== ======
Deferred tax assets:
Net revenues and expenses recognized for tax purposes
which are deferred for financial purposes . . . . . . . . . . . . . . . . . . . $ 25 $ 25
Net operating loss carryforwards . . . . . . . . . . . . . . . . . . . . . . . . . 2,073 1,999
------ ------
Total deferred tax assets before valuation allowance . . . . . . . . . . . . . . . . 2,098 2,024
Less valuation allowance recognized . . . . . . . . . . . . . . . . . . . . . . . . 1,440 1,395
------ ------
Net deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 658 $ 629
====== ======
The deferred tax assets and liability are offset and, therefore, no
deferred tax asset or liability is reflected in the Company's balance sheets at
December 31, 1996 and June 30, 1996.
The difference between the amount of the provision for income taxes
and the amount which would result from the application of the statutory rate to
income (loss) before provision for income taxes is analyzed as follows (dollars
in thousands):
YEAR ENDED SIX-MONTH
JUNE 30, PERIOD ENDED
------------------- DECEMBER 31,
1995 1996 1996
Provision (credit) for income taxes at a statutory
rate . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 306 $(48) $ 47
Difference resulting from:
Increase (decrease) in valuation allowance for net
deferred tax assets . . . . . . . . . . . . . . . . . . (330) 24 (45)
Alternative minimum tax . . . . . . . . . . . . . . . . . . 35 -- --
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 24 8
----- ---- ----
Provision for income taxes . . . . . . . . . . . . . . . . . $ 35 $ -- $ 10
===== ==== ====
At December 31, 1996, the Company has net operating loss carryforwards
for federal tax purposes of approximately $4,600,000 which will expire
beginning in the year 2001 if not used. At December 31, 1996, the net
operating loss carryforwards for state tax purposes amounted to approximately
$12,100,000.
3. NOTES PAYABLE
In July 1997, the Company entered into a $23 million credit agreement
in connection with which substantially all of the Company's assets were pledged
as collateral. Additionally, the company's parent, DLB, pledged as collateral
all of the outstanding common stock of the Company. Upon consummation of the
acquisition of the Company by Bayard, the shares of common stock of the Company
were released by the lender and the shares of common stock of Bayard acquired
by DLB in the acquisition were pledged in lieu thereof. In connection with the
acquisition, the note payable to Lehman Commercial Paper, Inc. was transferred
to DLB, thereby eliminating the note receivable from DLB.
F-42
334
THE ACQUISITION OF BONRAY DRILLING CORPORATION BY DLB WAS ACCOUNTED FOR USING
THE PURCHASE METHOD OF ACCOUNTING. ACCORDINGLY, THE PURCHASE PRICE WAS
"PUSHED-DOWN" AND RECORDED IN THE ACCOMPANYING FINANCIAL STATEMENTS WHICH
AFFECTS THE COMPARABILITY OF THE SEPTEMBER 30, 1997 FINANCIAL POSITION, RESULTS
OF OPERATIONS AND CASH FLOWS.
During the six-month period ended December 31, 1996, the Company
acquired drilling equipment with the proceeds from two notes with a bank in the
amounts of $245,000 and $150,000, respectively. The notes are payable in
monthly installments of principal and interest in the amounts of $21,415 and
$13,102, respectively, until paid in full with interest at a rate of 1/2%
above the national prime lending rate (aggregate rate of 8.75% at December 31,
1996) and are secured by the equipment purchased as well as other specific
drilling equipment owned by the Company. The balances of the two notes at
December 31, 1996 are $205,000 and $138,000, respectively, all of which is due
within one year. During 1997, all of these outstanding note balances were
retired by DLB.
The Company has a revolving line of credit agreement (the "credit
agreement") with a bank. Credit availability is subject to a monthly borrowing
base determination calculated as 75% of the Company's accounts receivable less
than 90 days old, not to exceed $750,000. At December 31, 1996, no borrowings
were outstanding under the revolving line of credit ($555,000 outstanding at
June 30, 1996). The credit agreement, which expired November 3, 1997, provided
for monthly interest payments, which accrued at a rate of 1/2 of 1% over the
lender's national prime rate (aggregate rate of 8.75% at December 31, 1996).
Outstanding advances and accrued interest are due in full upon expiration of
the credit agreement. The credit agreement is secured by the Company's
accounts receivable.
During the year ended June 30, 1995, the Company acquired drilling and
other equipment by issuing a note payable to the seller of the equipment. The
$189,000 balance on the note at June 30, 1996 was paid by the Company during
the six-month period ended December 31, 1996.
4. WORKERS' COMPENSATION
The Company is covered by a workers' compensation insurance plan for
its employees under which the Company is responsible for claims up to $100,000
per incident.
At December 31, 1996 and June 30, 1996, the Company has an estimated
net liability for accrued workers' compensation costs totaling $843,000 and
$521,000 respectively. Under the plan, the Company is to reimburse the
administrator for costs as the administrator pays those costs, normally over a
five-year period. Accordingly, at both December 31, 1996 and June 30, 1996,
$75,000 is classified as due after one year, in the accompanying balance
sheets.
Total workers' compensation costs incurred by the Company were
$538,000 for the six-month period ended December 31, 1996 and $597,000 and
$979,000 for the years ended June 30, 1996 and 1995, respectively, and were
based on actual and estimated claims incurred. For the six-month period ended
December 31, 1996 and the year ended June 30, 1996, workers' compensation
expense was reduced by $38,000 and $48,000 ($0.09 and $0.11 per share,
respectively) for changes in estimates of claims relating to prior fiscal
years. Workers' compensation expense for the year ended June 30, 1995 was
increased by $40,000 ($0.09 per share), for changes in the estimated costs of
claims that occurred in prior fiscal years.
The Company accrues losses for workers' compensation based on
management's estimate of the expected cost of claims incurred. The estimates
are based upon known information, historical experiences and consideration of
risk reduction techniques, when applicable, such as stop loss insurance on
individual claims. Due to uncertainties inherent in the estimation process, it
is reasonably possible that these estimates will be revised in the near-term;
however, management does not expect that such changes will be material to the
financial position or results of operations of the Company.
5. MAJOR CUSTOMERS
Contract drilling operations revenues include revenues from certain
customers, which individually account for 10% or more of contract drilling
operations revenues as follows (dollars in thousands):
F-43
335
THE ACQUISITION OF BONRAY DRILLING CORPORATION BY DLB WAS ACCOUNTED FOR USING
THE PURCHASE METHOD OF ACCOUNTING. ACCORDINGLY, THE PURCHASE PRICE WAS
"PUSHED-DOWN" AND RECORDED IN THE ACCOMPANYING FINANCIAL STATEMENTS WHICH
AFFECTS THE COMPARABILITY OF THE SEPTEMBER 30, 1997 FINANCIAL POSITION, RESULTS
OF OPERATIONS AND CASH FLOWS.
YEAR ENDED SIX-MONTH
---------- PERIOD ENDED
CUSTOMER JUNE 30, 1995 JUNE 30, 1996 DECEMBER 31, 1996
A . . . . . . . . . . . . . . . $ 879 $3,333 $1,301
B . . . . . . . . . . . . . . . 2,561 1,881 1,166
C . . . . . . . . . . . . . . . -- -- 728
D . . . . . . . . . . . . . . . 2,082 1,042 721
E . . . . . . . . . . . . . . . -- -- 695
------ ------ ------
$5,522 $6,256 $4,611
====== ====== ======
6. SUBSEQUENT EVENTS
On October 16, 1997, the Company was acquired by Bayard for 3,015,000
shares of common stock, par value $0.01 per share, of Bayard, subject to
certain working capital adjustments.
7. CONTINGENCIES
During the normal course of business, the Company enters into
agreements and executes transactions that may result in a contingent liability
to the Company. At September 30, 1997, management does not believe such
contingencies would be material to the financial statements.
F-44
336
================================================================================
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY THE SHARES BY
ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT
AUTHORIZED, OR IN WHICH THE PERSON MAKING THE OFFER OR SOLICITATION IS NOT
QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER
OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE
HEREOF.
_______________
TABLE OF CONTENTS
PAGE
Available Information . . . . . . . . . . . 2
Disclosure Regarding Forward-Looking
Statements . . . . . . . . . . . . . . . . 2
Prospectus Summary . . . . . . . . . . . . 3
Risk Factors . . . . . . . . . . . . . . . 9
Plan of Distribution . . . . . . . . . . . 16
Price Range of Common Stock and
Dividends . . . . . . . . . . . . . . . . . 18
Capitalization . . . . . . . . . . . . . . 19
Pro Forma Consolidated Financial Data . . . 20
Selected Consolidated Financial and
Operating Data . . . . . . . . . . . . . . 26
Management's Discussion and Analysis
of Financial Condition and Results of
Operations . . . . . . . . . . . . . . . . 28
Business . . . . . . . . . . . . . . . . . 38
Management . . . . . . . . . . . . . . . . 50
Principal Stockholders . . . . . . . . . . 59
Certain Relationships and Related
Transactions . . . . . . . . . . . . . . . 62
Description of Capital Stock . . . . . . . 68
Shares Eligible for Future Sale . . . . . . 71
Federal Income Tax Considerations . . . . . 72
Legal Matters . . . . . . . . . . . . . . . 72
Independent Public Accountants . . . . . . 72
Index to Financial Statements . . . . . . . F-1
================================================================================
================================================================================
2,955,000 SHARES
BAYARD DRILLING
TECHNOLOGIES, INC.
COMMON STOCK
_______________
PROSPECTUS
_______________
MARCH 30, 1998
================================================================================