1
Filed Pursuant to Rule 424(b)(2)
Registration No. 33-64303
PROSPECTUS
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LOMAK PETROLEUM, INC.
1,350,000 SHARES OF $2.03 CONVERTIBLE EXCHANGEABLE PREFERRED STOCK, SERIES C
87,400 SHARES OF 7 1/2 CUMULATIVE CONVERTIBLE EXCHANGEABLE PREFERRED STOCK,
SERIES A
112,600 SHARES OF 7 1/2 CUMULATIVE CONVERTIBLE EXCHANGEABLE PREFERRED STOCK,
SERIES B
$33,750,000 OF 8.125% CONVERTIBLE SUBORDINATED NOTES DUE 2005
AND
6,715,617 SHARES OF COMMON STOCK
This Prospectus relates to the following securities of Lomak Petroleum,
Inc., a Delaware corporation (the "Company"): (i) 1,350,000 shares of $2.03
Convertible Exchangeable Preferred Stock, Series C, $1 par value (the "$2.03
Preferred"); (ii) 87,400 shares of 7 1/2% Cumulative Convertible Exchangeable
Preferred Stock, Series A, $1 par value (the "Series A Preferred"); (iii)
112,600 shares of 7 1/2% Cumulative Convertible Exchangeable Preferred Stock,
$1 par value (the "Series B Preferred") (collectively, the Series A Preferred
and the Series B Preferred are referred to herein as the "7 1/2% Preferred");
(iv) $33,750,000 of 8.125% Convertible Subordinated Notes due 2005 (the "$2.03
Notes"); and (v) 6,715,617 shares of Common Stock, $.01 par value per share
(the "Common Stock"). The $2.03 Preferred and the 7 1/2% Preferred are
collectively referred to herein as the "Preferred Stock."
Of the foregoing securities, 200,000 shares of the $2.03 Preferred (the
"Preferred Shares") and 3,026,316 shares of the Common Stock (the "Common
Shares") (collectively the Preferred Shares and the Common Shares are referred
to herein as the "Securities") and $5,000,000 of the $2.03 Notes may be issued
by the Company from time to time. The Common Shares include the 526,315 shares
of the Common Stock issuable upon conversion of the 200,000 shares of the $2.03
Preferred which may be issued by the Company from time to time. The balance
consists of (i) 1,150,000 shares of the $2.03 Preferred, (ii) the $28,750,000
of the $2.03 Notes into which such 1,150,000 shares of the $2.03 Preferred are
exchangeable, (iii) the 3,026,316 shares of the Common Stock into which such
1,150,000 shares of the $2.03 Preferred or $28,750,000 of the $2.03 Notes, as
the case may be, are convertible, (iv) 86,040 shares of the Common Stock (v)
87,400 Shares of the Series A Preferred, (vi) 112,600 Shares of the Series B
Preferred and (vii) 576,945 shares of the Common Stock issuable upon conversion
of the 7 1/2 Preferred (collectively, the "Selling Securityholder Securities")
which may be offered for sale from time to time for the accounts of certain
stockholders and noteholders of the Company (the "Selling Securityholders").
See "Selling Securityholders." See "Risk Factors" for information which
should be considered by prospective investors.
To the extent required, the number of the Securities being sold by the
Company, the purchase price, the public offering price, the proceeds to the
Company and the other terms of the offering of the Securities by the Company
will be set forth in a Prospectus Supplement to be delivered at the time of any
such offering.
The Securities may be sold directly by the Company or through agents,
underwriters or dealers designated from time to time. If any agents of the
Company or any underwriters are involved in the sale of the Securities by the
Company in respect of which this Prospectus is being delivered, the names of
such agents or underwriters and any applicable discounts or commissions with
respect to such Securities will also be set forth in a Prospectus Supplement,
to the extent required. See "Plan of Distribution."
The Common Stock is traded in the over-the-counter market and quoted on
the Nasdaq National Market ("Nasdaq") under the symbol "LOMK". The closing
price of the Common Stock on November 13, 1995, was $8.125. The conversion and
exchange price, as the case may be, and other terms of the $2.03 Preferred, the
$2.03 Notes and the $7 1/2% Preferred were determined by negotiation between
the Company and the Company's underwriters and placement agents, as the case
may be, and do not necessarily bear any relationship to the Company's assets,
book value, results of operations, net worth or any other recognized criteria
of value.
The Selling Securityholder Securities offered by this Prospectus may be
sold from time to time by the Selling Securityholders, or by their transferees.
The distribution of these securities may be effected in one or more
transactions that may take place on the over-the-counter market, including
ordinary brokers' transactions, privately negotiated transactions or through
sales to one or more dealers for resale of such securities as principals, at
market prices prevailing at the time of sale, at prices related to such
prevailing market prices or at negotiated prices. Usual and customary or
specifically negotiated brokerage fees or commissions may be paid by the
Selling Securityholders.
The Selling Securityholders and intermediaries through whom such
securities are sold may be deemed "underwriters" within the meaning of the
Securities Act of 1933, as amended (the "Securities Act"), with respect to the
securities offered, and any profits realized or commissions received may be
deemed underwriting compensation. The Company has agreed to indemnify certain
of the Selling Securityholders against certain liabilities, including
liabilities under the Securities Act.
The Company will not receive any of the proceeds from the sale of shares
of the Selling Securityholder Securities by the Selling Securityholders.
However, the Company will receive the proceeds from the sale of the Securities.
See "Use of Proceeds."
All expenses of the registration of securities covered by this Prospectus,
estimated to be $110,000, are to be borne by the Company, provided, however,
that the Selling Securityholders will pay any applicable underwriters'
commissions and expenses, brokerage fees or transfer taxes, as well as the
fees and disbursements of their counsel, except that the Company shall pay
Transfuel Inc.'s counsel fees in connection with the registration of the Common
Stock owned by Transfuel Inc. being hereby registered.
SEE "RISK FACTORS" FOR A DESCRIPTION OF CERTAIN FACTORS THAT SHOULD BE
CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE SECURITIES HEREBY OFFERED.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
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The date of this Prospectus is November 27, 1995
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AVAILABLE INFORMATION
The Company is subject to the reporting requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files annual and quarterly reports, proxy statements and other
information with the Securities Exchange Commission (the "Commission"). Such
reports, proxy statements and other information may be inspected, and copies of
such material may be obtained at prescribed rates, at the Commission's Public
Reference Section, Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549,
as well as at the Commission's Regional Offices at 7 World Trade Center, 13th
Floor, New York, New York 10048, and Northwestern Atrium Center, 500 West
Madison Street, Room 1400, Chicago, Illinois 60661-2511. Copies of such
material may be obtained at prescribed rates from the office of the Commission
at 450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C. 20549. The Common
Stock of the Company is traded on the NASDAQ National Market System. Reports,
proxy statements and other information concerning the Company may be inspected
at the National Association of Securities Dealers, Inc. at 1735 K Street, N.W.,
Washington D.C. 20006.
This Prospectus constitutes a part of a Registration Statement filed by
the Company with the Commission under the Securities Act. This Prospectus omits
certain of the information contained in the Registration Statement, and
reference is hereby made to the Registration Statement and related exhibits for
further information with respect to the Company and the securities offered
hereby. Any statements contained herein concerning the provisions of any
document 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
or otherwise filed with the Commission. Each such statement is qualified in its
entirety by such reference.
DOCUMENTS INCORPORATED BY REFERENCE
The following documents filed with the Commission by the Company (File No.
0-9592) are hereby incorporated by reference into this Prospectus:
(1) The Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1994.
(2) The Company's Quarterly Reports on Form 10-Q for the first fiscal
quarters ended March 31, 1995, June 30 1995 and September 30, 1995.
(3) The Company's Current Report on Form 8-K dated July 13, 1995, as
amended on a Form 8-K/A dated September 8, 1995.
(4) The Company's Current Report on Form 8-K dated September 27, 1995,
as amended on Form 8-K/A dated November 8, 1995.
(5) Red Eagle Resources Corporation's Annual Report on Form 10-K for the
fiscal year ended December 31, 1993.
All documents filed by the Company with the Commission pursuant to
Section 13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the date of
this Prospectus and prior to the termination of the offerings registered hereby
shall be deemed to be incorporated by reference into this Prospectus and to be
a part hereof from the date of the filing of such document.
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 Prospectus to the extent that a statement contained herein
(or in any subsequently filed document that 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 Prospectus. All
information appearing in this Prospectus is qualified in its entirety by
information and financial statements (including notes thereto) appearing in the
documents incorporated by reference herein, except to the extent set forth in
the two immediately preceding sentences.
The Company will provide, without charge, to each person to whom a copy
of this Prospectus is delivered, including any beneficial owner, upon written
or oral request or such person, a copy of any or all of the documents
incorporated by reference herein (other than exhibits to such documents,unless
such exhibits are specifically incorporated by reference into the information
that the Prospectus incorporates). Requests should be directed to John H.
Pinkerton, President, Lomak Petroleum, Inc., 500 Throckmorton Street, Suite
2104, Fort Worth, Texas 76102, telephone (817) 870-2601.
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SUMMARY
The following summary is qualified in its entirety by the more detailed
information, Consolidated Financial Statements, Pro Forma Combined Financial
Statements and notes thereto, appearing elsewhere, or incorporated by
reference, in this Prospectus. Unless the context otherwise requires all
references herein to the "Company" include Lomak Petroleum, Inc. and its
consolidated subsidiaries. Certain terms relating to the oil and gas business
are defined in "Glossary."
Unless specifically indicated, all financial and quantitative information
provided in this Prospectus gives pro forma effect to the Company's significant
1994 and 1995 acquisitions and the application of the net proceeds from the
sale of 1,000,000 shares of the $2.03 Preferred as described in the notes to
the Pro Forma Combined Financial Statements.
THE COMPANY
Lomak is an independent oil and gas company with core areas of operation
in Texas, Oklahoma and Appalachia. The Company has grown through a combination
of acquisition, development and enhancement activities. Since January 1, 1990,
57 acquisitions have been consummated at a total cost of approximately $181
million and approximately $21 million has been expended on development
activities. As a result, proved reserves and production have each grown during
this period at a rate in excess of 60% per annum. At June 30, 1995, proved
reserves totaled 47.3 million BOE, having a pre-tax present value at constant
prices on that date of $213 million and a reserve life in excess of 13 years.
The Company as of September 30, 1995, operated properties which accounted for
more than 95% of its reserves and owned 1,900 miles of gas gathering systems in
proximity to its principal gas properties. In 1996, the Company expects to
allocate a limited portion of its budget to selected exploratory activities in
its core operating areas.
BUSINESS STRATEGY
The Company's objective is to increase its asset base, cash flow and
earnings through a balanced strategy of acquisition, development and
enhancement activities in each of its current core operating areas of Texas,
Oklahoma and Appalachia. In each core area, the Company establishes separate
acquisition, engineering, geological, operating and other technical expertise.
By implementing its strategy and focusing on each core area in this manner, the
Company does not depend solely on any one activity type or region to expand its
asset base, cash flow and earnings. To the extent purchases continue to be made
in core areas, operating, administrative, drilling and gas marketing
efficiencies should continue to be realized.
The Company focuses primarily on smaller properties, where consolidation
is likely, and those areas that it believes to be less competitive and to have
a lower risk profile and longer reserve life than many alternate opportunities.
Management believes smaller producing properties can be acquired at a lower
relative cost than larger properties and that its focus on these properties, in
part, has accounted for its ability to acquire 47 million BOE of proved
reserves since 1990 at an average cost of $3.69 per BOE, well below the
independent producer industry average of $4.13, as reported in Arthur Andersen
LLP's Oil and Gas Reserve Disclosure Survey.
ACCOMPLISHMENTS
Despite periods of low energy prices prevalent since 1990, the Company's
strategy and emphasis on cost control has resulted in significant growth in
assets and reserves, and increased per share cash flow and earnings.
Specifically, from January 1, 1990 through September 30, 1995, the Company has
grown its asset base from $7 million to $203 million, while annualized cash
flow per share has risen from $.41 to $1.91 and annualized earnings per share
increased from break-even to $.25. The Company has increased its financial and
organizational strength and has begun to benefit from cost reductions and
operating efficiencies. From 1990 through September 30, 1995, administrative
costs per BOE were reduced from $8.63 to $0.77 and operating costs per BOE were
lowered from $6.89 to $4.54.
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RECENT DEVELOPMENTS
During the third quarter of 1995, the Company completed two significant
acquisitions in Appalachia for total consideration of $41.2 million (the
"Recent Appalachian Acquisitions"). A majority of the Recent Appalachian
Acquisition properties are adjacent to the Company's existing properties and,
as a result, significant operating and overhead efficiencies are expected to be
realized. The acquired properties are estimated to contain proved reserves of
65.6 Bcf of gas and 470,000 barrels of oil and include 110 proved drilling
locations, 190,000 acres of undeveloped leases and 1,400 miles of gas gathering
lines.
On November 3, 1995, the Company sold 1,000,000 shares of the $2.03
Preferred in a private placement and received $24,156,250 in net proceeds. In
connection with such sale, the Company granted Forum Capital Markets L.P. and
Hanifen, Imhoff Inc. (the "Initial Purchasers") an option to acquire an
additional 150,000 shares of the $2.03 Preferred to cover over-allotments. If
such option is exercised, the total net proceeds received by the Company from
such sale would be $27,779,688.
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SUMMARY OF THE TERMS OF THE PREFERRED STOCK
$2.03 PREFERRED
Security . . . . . . . . . . . . . . . . . $2.03 Convertible Exchangeable Preferred Stock, Series C, $1 par value.
Ranking . . . . . . . . . . . . . . . . . . The $2.03 Preferred ranks senior in right of payment of dividends and upon
liquidation to the Common Stock. Subject to certain limitations, the $2.03
Preferred ranks pari passu in right of payment of dividends upon liquidation to
the 7 1/2% Preferred and any convertible preferred stock hereafter issued by the
Company and subordinate to any non-convertible preferred stock hereafter issued
by the Company. See "Description of the Preferred Stock--$2.03
Preferred--Ranking."
Dividends . . . . . . . . . . . . . . . . . Cumulative from the date of issuance, and payable quarterly in arrears at an
annual rate of $2.03 per share, in cash.
Liquidation Preference . . . . . . . . . . Upon liquidation, dissolution or winding up of the Company, holders of the $2.03
Preferred are entitled to receive liquidation distributions equal to $25 per
share, plus cumulative unpaid dividends.
Conversion . . . . . . . . . . . . . . . . Each share of $2.03 Preferred is convertible into Common Stock, at the holder's
option, at any time, unless previously redeemed, at a conversion rate equal to
the aggregate liquidation preference of such share of $2.03 Preferred divided by
the conversion price of $9.50 (the "Conversion Price"), subject to adjustment
under certain circumstances.
Special Conversion Rights . . . . . . . . . The Conversion Price will be reduced for a limited period in the event a Change
of Control (as defined) or a Fundamental Change (as defined) occurs at a time
that the market price of the Common Stock is less than the Conversion Price. Upon
such occurrence, the Conversion Price then in effect will be reduced for a period
of 45 days to the market price of the Common Stock immediately prior to such
occurrence (but to not less than $5.21). The special conversion right is subject
to important limitations and qualifications as described at "Description of the
Preferred Stock--$2.03 Preferred--Special Conversion Rights."
Optional Redemption . . . . . . . . . . . . The $2.03 Preferred is not redeemable prior to November 1, 1998. At any time on
or after November 1, 1998, the $2.03 Preferred will be redeemable by the Company,
in whole or in part, at prices declining from $26.25 to $25.00 per share, plus
cumulative unpaid dividends through the date of repurchase.
Voting Rights . . . . . . . . . . . . . . . The holders of the $2.03 Preferred, as a class, may vote on all matters adversely
affecting the $2.03 Preferred, including, without limitation, the creation and/or
issuance of any capital stock senior to the $2.03 Preferred; provided, however,
the authorization and/or issuance of non-convertible preferred stock shall be
permitted to the extent permitted by law without such vote. In all other matters,
except as otherwise required by law, the holders of the $2.03 Preferred will have
one vote per share and will vote together with the holders of the Common Stock.
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Non-payment of Dividends . . . . . . . . . . . In the event that the Company misses payments on six quarterly dividends payable
on the $2.03 Preferred, which dividend payments remain unpaid, or if any future
class of preferred stockholders is entitled to elect Directors based on actual
missed and unpaid dividends, the number of Directors of the Company shall be
increased to such number necessary to enable the holders of the $2.03 Preferred
and all such other future preferred stockholders (the "Preferred Class"), voting
as a single class, to elect one third of the Directors of the Company (but not
less than three); provided, however, that there shall be counted as Directors
elected by the Preferred Class up to two Directors elected by the holders of the
7 1/2% Preferred, subject to the terms of the 7 1/2% Preferred, so long as it
remains outstanding. Such rights will be subject to certain limitations. See
"Description of the Preferred Stock--$2.03 Preferred--Voting Rights."
Exchangeability . . . . . . . . . . . . . . . . The $2.03 Preferred is exchangeable in whole but not in part at the Company's
option on any dividend payment date on or after December 31, 1996 and on or
before December 31, 2004 for the $2.03 Notes at the rate of $25 principal amount
of the $2.03 Notes for each share of the $2.03 Preferred. Such right is subject
to certain limitations. See "Description of the Preferred Stock--$2.03
Preferred--Exchange."
Registration Rights . . . . . . . . . . . . . . Pursuant to a Registration Rights Agreement, the Company has agreed to file this
shelf registration statement (the "Shelf Registration Statement") relating to the
Selling Securityholder Securities. The Company will use its reasonable best
efforts to maintain the effectiveness of the Shelf Registration Statement until
the third anniversary of the issuance of the $2.03 Preferred, except that it
shall be permitted to suspend the use of the Shelf Registration Statement during
certain periods under certain circumstances. If the Company fails to meet certain
of its obligations under the Registration Rights Agreement, a supplemental
payment will be made to holders of the $2.03 Preferred, the $2.03 Notes and the
Common Stock affected thereby.
SUMMARY OF THE TERMS OF THE 7 1/2% PREFERRED
Security . . . . . . . . . . . . . . . . . . . 7 1/2% Cumulative Convertible Exchangeable Preferred Stock, Series A and Series
B par value $1.00 per share.
Ranking . . . . . . . . . . . . . . . . . . . . Prior to the payment of any dividends on the Common Stock, all cumulative
dividends on the 7 1/2% Preferred must be paid. The 7 1/2% Preferred will rank
senior to the Common Stock in liquidation. See "Description of the Preferred
Stock--7 1/2% Preferred--Ranking."
Liquidation Preference . . . . . . . . . . . . Upon liquidation, dissolution or winding up of the Company, holders of the 7
1/2% Preferred are entitled to receive liquidation distributions equal to $25
per share, plus cumulative unpaid dividends. See "Description of the Preferred
Stock--7 1/2% Preferred--Liquidation Rights."
Dividends . . . . . . . . . . . . . . . . . . . Cumulative from the date of issuance, payable quarterly in arrears at an annual
rate of 7 1/2% per share, in cash. See "Description of the Preferred Stock--7
1/2% Preferred--Dividends."
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Conversion Rights . . . . . . . . . . . . . Each share of the 7 1/2% Preferred is convertible at any time at the option of
the holder into Common Stock at a conversion rate of 2.9412 shares of the Common
Stock for the Series A Preferred and 2.8409 shares of the Common Stock for the
Series B Preferred, per share of the 7 1/2% Preferred (equal to a conversion
price of $8.50 and $8.80 per share, respectively, representing a 22% premium
over the average of the closing prices for the Common Stock as quoted on Nasdaq
for the three trading days immediately preceding the closing. The Conversion
Price will be subject to adjustment for reverse stock splits, stock dividends
and other capital adjustments. See "Description of the Preferred Stock--7 1/2%
Preferred--Conversion."
Beginning July 1, 1995, the Company had the right to cause the 7 1/2% Preferred
to be converted into the Common Stock based on the conversion price if, and only
if, the average of the closing prices for the Common Stock as quoted on Nasdaq
for twenty of the thirty trading days preceding such conversion exceeds the
Conversion Price by 35%. See "Description of the Preferred Stock--7 1/2%
Preferred--Conversion."
Optional Redemption . . . . . . . . . . . . The shares of the 7 1/2% Preferred may be redeemed, at the option of the
Company, at any time beginning July 1, 1996, in whole or in part, at prices
declining from $26.875 to $25.00 per share plus accrued and unpaid dividends. If
the Company calls for early redemption, the holders will have a minimum of ten
business days in which to elect to convert the 7 1/2% Preferred to the Common
Stock. See "Description of the Preferred Stock--7 1/2% Preferred--Company's
Right of Redemption."
The shares of the 7 1/2% Preferred are exchangeable, at the option of the
Company, in whole (but not in part), on any dividend payment date for the
Company's 7 1/2% Convertible Subordinated Notes due 2003 (the "7 1/2% Notes")
(the 7 1/2% Notes and the $2.03 Notes are collectively referred to herein as the
"Notes") in a principal amount equal to $25.00 per share. The 7 1/2% Notes will
be convertible into Common Stock at the conversion price for the shares of the 7
1/2% Preferred at the time of the exchange. The 7 1/2% Notes will bear interest
from the date of issuance, payable semi-annually in arrears on June 30 and
December 31 of each year, commencing on the first such interest payment date
following the date of exchange. At the Company's option, the 7 1/2% Notes will
be redeemable, in whole or in part, at the redemption prices set forth above
under "Optional Redemption" plus accrued and unpaid interest. The 7 1/2% Notes
are not subject to mandatory sinking fund payments. The 7 1/2% Notes will be
subordinate to all senior indebtedness of the Company. See "Description of the
Preferred Stock--7 1/2% Preferred--Exchange."
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Voting Rights . . . . . . . . . . . . . . . . The holders of the shares of the 7 1/2% Preferred vote as a class with the
Common Stock. Each share of the 7 1/2% Preferred has 2 votes, adjusted for any
stock split, stock dividend or other like capital adjustment. The shares of the
7 1/2% Preferred vote separately as a class on all matters affecting the shares
of the 7 1/2% Preferred. If dividends on the 7 1/2% Preferred are in arrears for
eight quarters, the holders of the shares of the 7 1/2% Preferred, voting
separately, will be entitled to elect two directors to the Company's Board of
Directors. See "Description of the Preferred Stock-7 1/2% Preferred--Voting
Rights."
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SUMMARY FINANCIAL, OPERATING AND RESERVE INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND OPERATING AND RESERVE DATA)
The following tables set forth certain historical and pro forma financial, operating and reserve information. The pro forma
financial, operating and reserve information includes the Recent Appalachian Acquisitions, certain other acquisitions and the $2.03
Preferred offering. See "Selected Historical and Pro Forma Financial Data" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations." The historical data should be read in conjunction with the historical Consolidated Financial
Statements included herein. The pro forma information should be read in conjunction with the Pro Forma Combined Financial Statements
included herein. Neither the historical nor the pro forma results are necessarily indicative of future results.
YEAR ENDED DECEMBER 31, NINE MONTHS ENDED SEPTEMBER 30,
------------------------------------------------ ----------------------------------
PRO FORMA PRO FORMA
1992 1993 1994 1994(1) 1994 1995 1995(1)
------- ------- ------- --------- ------- ------- ---------
INCOME STATEMENT DATA:
Oil and gas revenues . . . . . $ 7,703 $11,132 $24,461 $45,810 $17,810 $24,135 $34,439
Total revenues . . . . . . . . 13,895 19,075 34,794 64,465 26,041 34,628 44,931
Net income . . . . . . . . . . 686 1,391 2,619 7,848 1,888 2,718 4,140
Net income applicable to
common shares . . . . . . . . 392 1,062 2,244 5,598 1,607 2,437 2,339
Net income per share . . . . . 0.08 0.18 0.25 0.46 0.18 0.21 0.19
Weighted average common
shares outstanding . . . . . 4,682 5,853 9,051 12,083 9,039 11,588 12,410
CASH FLOW DATA:
Net income . . . . . . . . . . $ 686 $ 1,391 $ 2,619 $ 7,848 $ 1,888 $ 2,718 $ 4,140
Depletion, depreciation and
amortization . . . . . . . . 3,124 4,347 10,105 18,121 7,647 9,808 13,567
Deferred income taxes . . . . . - (150) 118 2,636 110 832 1,841
------- ------- ------- -------- ------- ------- -------
Subtotal . . . . . . . . . . 3,810 5,588 12,842 28,605 9,645 13,358 19,548
Other non-cash items ) . . . . (278) (321) (471) N/A (445) (740) N/A
Changes in working capital . . 1,636 (962) (1,130) N/A (395) (2,863) N/A
------- ------- ------- ------- -------
Net cash provided from
operating activities . . . . $ 5,168 $ 4,305 $11,241 N/A $ 8,805 $ 9,755 $ N/A
======= ======= ======= ======= =======
DECEMBER 31, SEPTEMBER 30,
---------------------------------- ------------------------------------
PROFORMA
1992 1993 1994 1994 1995 1995(1)
------- ------- -------- -------- -------- --------
BALANCE SHEET DATA:
Working capital . . . . . . . . . . . . . . $ 167 $ 1,350 $ 1,002 $ 4,421 $ 1,740 $ 1,740
Oil and gas properties . . . . . . . . . . 18,271 55,310 112,964 83,302 169,900 169,900
Total assets . . . . . . . . . . . . . . . 28,328 76,333 141,768 104,027 203,305 203,305
Long-term debt . . . . . . . . . . . . . . 12,679 30,689 61,885 52,670 112,839 88,828
Stockholders' equity . . . . . . . . . . . 9,504 32,263 43,248 39,077 60,554 84,565
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SUMMARY FINANCIAL, OPERATING AND RESERVE INFORMATION (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND OPERATING AND RESERVE DATA)
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------------------ ----------------------
PRO FORMA PRO FORMA
1992 1993 1994 1994 1995 1995(1)
------- ------- -------- --------- -------- ---------
OPERATING DATA:
Production
Oil (MBbls) . . . . . . . . . . . 199 318 640 789 649 709
Gas (MMcf) . . . . . . . . . . . . 1,796 2,590 6,996 15,982 7,825 12,659
MBOE . . . . . . . . . . . . . . 498 750 1,806 3,453 1,953 2,819
Average sales price
Oil (per Bbl) . . . . . . . . . . $ 18.40 $ 16.07 $ 15.23 $ 15.23 $ 16.58 $ 16.51
Gas (per Mcf) . . . . . . . . . . 2.25 2.32 2.10 2.11 1.71 1.80
BOE . . . . . . . . . . . . . . . 15.46 14.82 13.55 13.27 12.36 12.22
Average operating cost per BOE . . . $ 5.95 $ 5.87 $ 5.55 5.21 $ 5.09 $ 4.54
DECEMBER 31, PRO FORMA
---------------------------------------- JUNE 30,
1992 1993 1994 1995
------ ------- ------- --------
RESERVE DATA(2):
Proved reserves
Oil (MBbls) . . . . . . . . . . . . . . . . . . . .. 1,980 4,539 8,449 10,328
Gas (MMcf) . . . . . . . . . . . . . . . . . . . . .. 17,615 74,563 149,370 222,054
MBOE . . . . . . . . . . . . . . . . . . . . . . . .. 4,916 16,966 33,344 47,337
Percent gas reserves . . . . . . . . . . . . . . . . .. 60% 73% 75% 78%
Reserve life index (years)(3) . . . . . . . . . . . . .. 9.9 12.6 13.3 13.1
Estimated future net cash flow (thousands)(4) . . . . .. $48,016 $140,892 $270,974 $371,895
Pre-tax present value (thousands)(4) . . . . . . . . .. $26,035 $ 65,114 $150,536 $213,159
Producing wells
Gross . . . . . . . . . . . . . . . . . . . . . . .. 1,113 2,057 3,134 6,430
Net . . . . . . . . . . . . . . . . . . . . . . . .. 355 981 1,621 4,583
Average working interest . . . . . . . . . . . . . .. 32% 48% 52% 71%
Gross operated wells . . . . . . . . . . . . . . . . .. 1,011 1,872 2,565 5,865
- -------------
(1) See the Pro Forma Combined Financial Statements included herein for a discussion of the preparation of this data.
(2) For limitations on the accuracy and reliability of reserves and future net cash flow estimates, see "Risk Factors--
Uncertainty of Estimates of Reserves and Future Net Revenues."
(3) The reserve life index is calculated by dividing the proved reserves (on a BOE basis) by projected production volumes
for the next twelve months.
(4) See Glossary included herein for the definition of "Present Value of Proved Reserves."
G:\HLF\LOMAK\S-3\S-3.REG 10
11
RISK FACTORS
Prior to making an investment decision, prospective investors should
carefully consider, together with the other information contained in this
Prospectus, the following risk factors:
VOLATILITY OF OIL AND GAS PRICES
The Company's revenues and profitability are substantially dependent upon
prevailing prices of, and demand for, oil and gas and the costs of acquiring,
finding, developing and producing reserves. Historically, the markets for oil
and gas have been volatile and are likely to continue to be volatile in the
future. Prices for oil and gas are subject to wide fluctuations in response to:
(i) relatively minor changes in supply of, and demand for, oil and gas; (ii)
market uncertainty; and (iii) a variety of additional factors, all of which are
beyond the Company's control. These factors include political conditions in the
Middle East, the foreign supply of oil and gas, the price of imported oil, the
level of consumer and industrial demand, weather, domestic and foreign
government relations, the price and availability of alternative fuels and
overall economic conditions.
UNCERTAINTY OF ESTIMATES OF RESERVES AND FUTURE NET REVENUES
This Prospectus contains estimates of the Company's oil and gas reserves
and the future net revenues from those reserves which have been prepared by the
Company and certain independent petroleum consultants. There are numerous
uncertainties inherent in estimating quantities of proved oil and gas reserves,
including many factors beyond the Company's control. The estimates in this
Prospectus are based on various assumptions, including, for example, constant
oil and gas prices, operating expenses and capital expenditures, and,
therefore, are inherently imprecise indications of future net revenues. Actual
future production, revenues, taxes, operating expenses, development
expenditures and quantities of recoverable oil and gas reserves may vary
substantially from those assumed in the estimates. Any significant variance in
these assumptions could materially affect the estimated quantity and value of
reserves set forth in this Prospectus. In addition, the Company's reserves may
be subject to downward or upward revision based upon production history,
results of future development, prevailing oil and gas prices and other factors.
See "Business -- Reserves."
FINDING AND ACQUIRING ADDITIONAL RESERVES
The Company's future success depends upon its ability to find or acquire
additional oil and gas reserves that are economically recoverable. Except to
the extent the Company conducts successful exploration or development
activities or acquires properties containing proved reserves, the proved
reserves of the Company will generally decline as they are produced. There can
be no assurance that the Company's planned development projects and acquisition
activities will result in significant additional reserves or that the Company
will have success drilling productive wells at economic returns. If prevailing
oil and gas prices were to increase significantly, the Company's finding costs
to add new reserves could increase. The drilling of oil and gas wells involves
a high degrees of risk, especially the risk of dry holes or of wells that are
not sufficiently productive to provide an economic return on the capital
expended to drill the wells. The cost of drilling, completing and operating
wells is uncertain, and drilling or production may be curtailed or delayed as a
result of many factors.
ACQUISITION RISKS
The Company intends to continue acquiring oil and gas properties. It
generally is not feasible to review in detail every individual property
involved in an acquisition. Ordinarily, review efforts are focused on the
higher-valued properties. However, even a detailed review of all properties and
records may not reveal existing or potential problems nor will it permit the
Company to become sufficiently familiar with the properties to assess fully
their deficiencies and capabilities. Inspections are not always performed on
every well, and environmental problems, such as ground water contamination, are
not necessarily observable even when an inspection is undertaken. See
"Business--Acquisitions."
G:\HLF\LOMAK\S-3\S-3.REG 11
12
MARKETING RISKS
For the year ended December 31, 1994 and for the nine month period ended
September 30, 1995, gas revenues comprised over 55% of total oil and gas
revenue on a historical basis and over 65% on a pro forma basis. For the year
ended December 31, 1994, no purchaser accounted for more than 10% of total oil
and gas revenues. For the nine months ended September 30, 1995, one purchaser
accounted for 11% of total oil and gas revenues, however, the loss of such
purchaser would not have a material adverse effect on the Company. The types of
gas contracts under which production is sold vary, but generally can be grouped
into three categories: (i) life-of-well, (ii) long-term (one year or longer),
and (iii) short-term contracts. Short-term contracts are defined as contracts
which may have a primary term of less than one year, but which are cancelable
at either party's discretion in 30 to 120 days. Approximately 58% of the
Company's gas production is currently sold under market sensitive contracts
which do not contain floor price provisions. Nearly 70% of the Company's gas is
produced in Appalachia, which gas has historically sold at higher prices. No
assurance can be given that such price discrepancy will continue. See
"Business--Gas Transportation and Marketing."
The Company has currently hedged less than 5% of its production through
September 1996. These hedges involve fixed price arrangements and other price
arrangements at a variety of prices, floors and caps. Although these hedging
activities provide the Company some protection against falling prices, these
activities also reduce the benefits to the Company from price increases above
the levels of the hedges. In the future, the Company may increase the
percentage of its production covered by hedging arrangements, however it
currently anticipates that such percentage would not exceed 50%.
OPERATING HAZARDS AND UNINSURED RISKS; PRODUCTION CURTAILMENTS
The oil and gas business involves a variety of operating risks, including,
but not limited to, unexpected formations or pressures, uncontrollable flows of
oil, gas, brine or well fluids into the environment (including groundwater
contamination), blowouts, fires, explosions, pollution and other risks, any of
which could result in personal injuries, loss of life, damage to properties and
substantial losses. Although the Company carries insurance which it believes is
reasonable, it is not fully insured against all risks. Losses and liabilities
arising from uninsured or under-insured events could have a material adverse
effect on the financial condition and operations of the Company.
From time-to-time, due primarily to contract terms, pipeline interruptions
or weather conditions, the producing wells in which the Company owns an
interest have been subject to production curtailments. The curtailments range
from production being partially restricted to wells being completely shut-in.
The duration of curtailments vary from a few days to several months. In most
cases the Company is provided only limited notice as to when production will be
curtailed and the duration of such curtailments. Currently, a number of wells
located in Appalachia are curtailed under terms of certain gas contracts due in
part to seasonal demand. The Company has been informed that such wells should
be returned to production during the remainder of 1995.
LAWS AND REGULATIONS
The Company's operations are affected by extensive regulation pursuant to
various federal, state and local laws and regulations relating to the
exploration for and development, production, gathering and marketing of oil and
gas. These regulations, among other things, control the rate of oil and gas
production, establish the maximum price at which gas is sold and control the
amount of oil that may be imported. Operations of the Company are also subject
to numerous laws and regulations governing the discharge of materials into the
environment or otherwise relating to environmental protection. The discharge of
oil, gas or other pollutants into the air, soil or water may give rise to
liabilities to the government and third parties and may require the Company to
incur costs to remedy the discharge. Although the Company believes that its
properties and operations substantially comply with all such laws and
regulations, there can be no assurance that new laws or regulations or new
interpretations of existing laws and regulations will not increase
substantially the cost of compliance or otherwise adversely affect the
Company's oil and gas operations and financial condition. See "Business --
Regulation."
COMPETITION
The Company encounters substantial competition in acquiring properties,
marketing oil and gas, securing trained personnel and operating its properties.
Many competitors have financial and other resources which substantially exceed
those of the Company. The competitors in acquisitions, development, exploration
and production include major oil companies, numerous independents, individual
proprietors and others. Therefore, competitors may be able to pay more for
desirable
G:\HLF\LOMAK\S-3\S-3.REG 12
13
leases and to evaluate, bid for and purchase a greater number of properties or
prospects than the financial or personnel resources of the Company will permit.
DEPENDENCE ON KEY PERSONNEL
The Company depends, and will continue to depend in the foreseeable
future, on the services of its officers and key employees with extensive
experience and expertise in evaluating and analyzing producing oil and gas
properties and drilling prospects, maximizing production from oil and gas
properties and marketing oil and gas production. The ability of the Company to
retain its officers and key employees is important to the continued success and
growth of the Company. The loss of key personnel could have a material adverse
effect on the Company. The Company does not maintain key man life insurance on
any of its officers or key employees. See "Management."
CERTAIN BUSINESS INTERESTS OF CHAIRMAN
Thomas J. Edelman, Chairman of the Company, is also the President of
Snyder Oil Corporation ("SOCO"), a significantly larger independent oil and gas
company. The Company has existing business relationships with SOCO, and as a
result of Mr. Edelman's position in both companies, conflicts of interests may
arise between the Company and SOCO. The Company's acquisitions are typically
smaller than SOCO's and in different geographic regions. The Company has, and
it has been advised that SOCO also has, board policies that require Mr. Edelman
to give notification of any potential conflicts that may arise between the
Company and SOCO. There can be no assurance, however, that the Company and SOCO
will not compete for the same acquisition or encounter other conflicts of
interest. See "Management" and "Certain Transactions."
LACK OF PUBLIC MARKET FOR THE PREFERRED STOCK
There is no existing trading market for the Preferred Stock, and there can
be no assurance regarding the future development of a market for the Preferred
Stock or the ability of holders of the Preferred Stock to sell their Preferred
Stock or the price at which such holders may be able to sell their Preferred
Stock. If such a market were to develop, the Preferred Stock could trade at
prices that may be higher or lower than the initial offering price depending on
many factors, including prevailing interest rates, the Company's operating
results and the market for similar securities. The Initial Purchasers have
advised the Company that each of them currently intends to make a market in the
Preferred Stock. The Initial Purchasers are not obligated to do so, however,
and any market-making with respect to the Preferred Stock may be discontinued
at any time without notice. Therefore, there can be no assurance as to the
liquidity of any trading market for the Preferred Stock or that an active
public market for the Preferred Stock will develop. Similarly, if the Company
elects to exchange the Preferred Stock for the $2.03 Notes, there can be no
assurance regarding the development of a market for the $2.03 Notes. It is
expected that the Preferred Stock will be eligible for trading in the PORTAL
Market of the National Association of Securities Dealers, Inc.
CAPITAL AVAILABILITY
The Company's strategy of acquiring and developing oil and gas properties
is dependent upon its ability to obtain financing for such acquisitions and
development projects. The Company expects to utilize its revolving bank credit
agreement, as amended (the "Credit Agreement") among the Company and several
banks (the "Banks") to borrow a portion of the funds required for any given
transaction or project. Any future acquisition or development project by the
Company requiring bank financing in excess of the amount then available under
the Credit Agreement will depend upon the Banks' evaluation of the properties
proposed to be acquired or developed. If funds under the Credit Agreement are
not available to fund acquisition and development projects, the Company would
seek to obtain such financing from the sale of equity securities or other debt
financing. There can be no assurance that any such other financing would be
available on terms acceptable to the Company. Should sufficient capital not be
available, the Company may not be able to continue to implement its strategy.
The Credit Agreement limits the amounts the Company may borrow to amounts,
determined by the Banks, in their sole discretion, based upon a variety of
factors including the discounted present value of the Company's estimated
future net cash flow from oil and gas production (the "Borrowing Base"). At
November 3, 1995 the Borrowing Base was $105 million of which the Company had
borrowings of $87 million outstanding. The weighted average interest rate on
November 3, 1995 was 7.13% after giving effect to interest swap arrangements
covering $40 million of the indebtedness outstanding under the
G:\HLF\LOMAK\S-3\S-3.REG 13
14
Credit Agreement. The Credit Agreement expires on July 1, 2001. The Company
does not currently have any substantial unpledged properties, and does not
anticipate acquiring properties in the foreseeable future which will not be
pledged under the Credit Agreement. If oil or gas prices decline below their
current levels, the availability of funds and the ability to pay outstanding
amounts under the Credit Agreement could be materially adversely affected.
DEPENDENCE UPON REVENUES OF SUBSIDIARIES
The Preferred Stock is a direct obligation of the Company which derives
all of its revenues from the operations of its subsidiaries. The ability of the
Company to redeem the Preferred Stock and to pay dividends, if any, will be
primarily dependent upon the receipt of dividends or other distributions from
such subsidiaries. The payment of dividends from the subsidiaries to the
Company and the payment of any interest on or the repayment of any principal of
any loans or advances made by the Company to any of its subsidiaries may be
subject to statutory or contractual restrictions and are contingent upon the
earnings of such subsidiaries. Although the Company believes that distributions
and dividends from its subsidiaries will be sufficient to pay dividends on the
Preferred Stock as well as to meet the Company's other obligations, there can
be no assurance they will be sufficient.
Claims of the creditors of the Company's subsidiaries may have priority
with respect to the assets and earnings of such subsidiaries over the claims of
the creditors of the Company.
RATIO OF EARNINGS TO FIXED CHARGES
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------------------------------------- -------------------
PRO FORMA PRO FORMA
1990 1991 1992 1993 1994 1994 1995 1995
---- ---- ---- ---- ---- --------- ---- ---------
Ratio of earnings to fixed
charges 1.77 1.82 1.92 2.17 1.98 3.43 1.95 2.33
Ratio of earnings to fixed
charges and preferred
dividends 1.07 1.17 1.47 1.68 1.75 2.29 1.81 1.69
For purposes of determining the ratio of earnings to fixed charges, earnings are defined as income before income taxes plus
fixed charges. Fixed charges consist of interest expense on all indebtedness.
USE OF PROCEEDS
The Company anticipates that proceeds received upon the issuance of the
Securities will be utilized by the Company to pay down its debt under the
Credit Agreement, for acquisitions and/or for working capital. There are no
agreements or understandings regarding any such acquisitions and there can be
no assurance that any such acquisitions will occur.
The Company will not receive any proceeds upon the sale by the Selling
Securityholders of the Selling Securityholder Securities.
G:\HLF\LOMAK\S-3\S-3.REG 14
15
CAPITALIZATION
The following table sets forth at September 30, 1995 the actual capitalization of the Company and gives pro forma effect
to the Company's significant 1994 and 1995 acquisitions and the sale of 1,000,000 shares of the Preferred Stock and the
application of the net proceeds therefrom. This table should be read in conjunction with the Consolidated Financial Statements
and Pro Forma Combined Financial Statements included herein.
SEPTEMBER 30, 1995
--------------------------------
ACTUAL PRO FORMA
--------- ----------
(IN THOUSANDS)
Current portion of long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . $ 399 $ 399
======== ========
Long-term debt:
Revolving credit facility . . . . . . . . . . . . . . . . . . . . . . . . . . . . $112,839 $ 88,828
Stockholders' equity:
Preferred Stock, $1 par value, 2,000,000 shares authorized:
7 1/2% Convertible Exchangeable Preferred Stock, 200,000 shares
outstanding ($5 million liquidation preference) . . . . . . . . . . . . 200 200
$2.03 Convertible Exchangeable Preferred Stock; 1,000,000 shares
outstanding ($25 million liquidation preference) . . . . . . . . . . . -- 1,000
Common Stock, $.01 par value, 20,000,000 shares authorized: 12,039,968
outstanding(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 120 120
Capital in excess of par value . . . . . . . . . . . . . . . . . . . . . . . . . . 65,342 88,353
Retained earnings (deficit) . . . . . . . . . . . . . . . . . . . . . . . . . . . (5,108) (5,108)
-------- --------
Total stockholders' equity . . . . . . . . . . . . . . . . . . . . . 60,554 84,565
-------- --------
Total capitalization . . . . . . . . . . . . . . . . . . . . . . . $173,393 $173,393
======== ========
(1) The number of shares of Common Stock outstanding excludes 1,299,439 shares which are reserved for issuance upon the
exercise of outstanding options and warrants, of which 707,315 are exercisable. In addition, 576,945 shares are
issuable upon conversion of the 7 1/2% Preferred. See "Description of Capital Stock."
G:\HLF\LOMAK\S-3\S-3.REG 15
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BUSINESS
GENERAL
The Company is an independent oil and gas company with core areas of
operation in Texas, Oklahoma and Appalachia. The Company has grown through a
combination of acquisition, development and enhancement activities. Since
January 1, 1990, 57 acquisitions have been consummated at a total cost of
approximately $181 million and approximately $21 million has been expended on
development activities. As a result, proved reserves and production have each
grown during this period at a rate in excess of 60% per annum. At June 30,
1995, proved reserves totaled 47.3 million BOE, having a pre-tax present value
at constant prices on that date of $213 million and a reserve life in excess of
13 years. The Company as of June 30, 1995, operated properties which accounted
for 95% of its reserves and owned 1,900 miles of gas gathering systems in
proximity to its principal gas properties. In 1996, the Company expects to
allocate a limited portion of its budget to selected exploratory activities in
its core operating areas.
STRATEGY
The Company's objective is to implement a balanced strategy of increasing
its asset base, cash flow and earnings through acquisition, development and
enhancement activities in core operating areas. In each core area, the Company
establishes separate acquisition, engineering, operating, geological and other
technical expertise. The Company is presently engaged in acquisition,
development and enhancement activities in each of its current core operating
areas of Texas, Oklahoma and Appalachia. Through its strategy, the Company does
not depend solely on any one region or activity to grow its asset base. As a
result, despite low energy prices prevalent since 1990, the Company has
consistently reported favorable operating results. By operating in three core
areas, the Company has expanded its acquisition and development opportunities.
Acquisitions. Since January 1, 1990, 57 acquisitions have been completed
for a total consideration of $181 million. Over 46.9 million BOE of proved
reserves have been acquired at an average cost of $3.69 per BOE. The Company's
acquisition strategy is based on: (i) Size: targeting smaller, less competitive
transactions having a cost below $30 million; (ii) Locale: focusing in areas
containing many small oil and gas operators and where larger companies are no
longer active; (iii) Efficiency: targeting acquisitions in which operating and
cost efficiencies can be obtained; (iv) Reserve Potential: pursuing properties
with the potential for reserve increases through recompletions and development
drilling; (v) Incremental Purchases: seeking acquisitions where opportunities
for purchasing additional interests in the same or adjoining properties exist;
and (vi) Complexity: pursuing more complex but less competitive corporate or
partnership acquisitions.
Development. The Company's development activities include recompletions of
existing wells, infield and step-out drilling and installation of secondary
recovery projects. Development projects are generated within core operating
areas where the Company has significant operational and technical experience.
At September 30, 1995, over 600 proven development projects were in inventory.
These projects are located in eight different fields, vary between oil and gas,
and are balanced between low and medium risk. Approximately 80 of these
projects are expected to be initiated in 1995 at a total cost of approximately
$11 million. Based on the number of projects currently in inventory,
development expenditures are projected to be approximately $40 million for the
three year period 1995 through 1997.
Enhancements. The Company's enhancement activities include all activities
other than acquisitions or drilling which maximize the value of its asset base.
Enhancements include: reducing overhead, operating and development costs;
concentrating operations to increase efficiency; the rapid disposal of
non-strategic properties; expanding marketing options; and applying new
technology to exploit additional reserves. Enhancements create higher margins
and help maintain profitability during the downward phase of energy price
cycles. Despite low oil and gas prices in 1994 and the first half of 1995, the
Company posted increased cash flow and profits, partly due to enhancements.
G:\HLF\LOMAK\S-3\S-3.REG 16
17
ACQUISITIONS
ACQUISITION STRATEGY
Since 1990, the Company has completed 57 acquisitions for $181 million of
consideration. During the first nine months of 1995, $52.8 million of purchases
were completed. The Company's acquisition strategy is to concentrate on smaller
transactions that offer higher expected returns. The Company believes that it
can continue to implement its acquisition strategy based on the following:
SIZE: The Company believes that smaller transactions (less than $30 million in
cost) provide the opportunity for higher returns due to the limited number of
buyers that have the interest, financial capabilities and the operational
efficiencies necessary to consummate such transactions. Smaller companies
generally do not have sufficient capital or the requisite expertise to engage
in such transactions while the larger companies are focusing on other areas,
such as overseas operations, or larger transactions. Additionally, because of
the continuing restructuring of the domestic oil and gas industry, many small
oil and gas entities are for sale and many larger companies are selling their
smaller or non-strategic properties.
LOCALE: Focusing on areas containing many small, less capitalized operators.
These typically are areas in which many of the major and larger independent
companies are no longer active and where, in some cases, they are divesting
their remaining assets. The potential for reserve increases in these areas
exists through the application of new operating and technical advances.
EFFICIENCY: Targeting acquisitions in which operating and cost efficiencies can
be obtained. The Company concentrates on acquiring oil and gas assets in areas
in which it already operates and seeks to subsequently merge into its existing
infrastructure the overhead functions of companies, partnerships and direct
property interests it acquires. Not only does the increased efficiency result
in increased profitability, but it also enables the Company to be an aggressive
buyer while still generating an attractive return.
RESERVE POTENTIAL: Pursuing properties with the potential for reserve increases
through workovers, recompletions, drilling and secondary recovery operations.
INCREMENTAL PURCHASES: Seeking acquisitions where opportunities for purchasing
incremental interests in the same or adjoining properties exist. Properties in
which the Company currently owns an interest contain over $100 million of
estimated value attributable to interests held by third parties. The purchase
of incremental interests results in only minor increases in overhead cost.
COMPLEXITY: A number of companies and partnerships which own oil and gas assets
have been acquired at attractive prices. Due to the added complexity involved
in acquiring and integrating these entities and their assets, many buyers do
not have the expertise or desire to compete for such acquisitions.
ACQUISITION SUMMARY
The following table, which includes the Recent Appalachian Acquisitions, sets forth information pertaining to acquisitions
completed during the period January 1, 1990 through September 30, 1995.
NUMBER OF PURCHASE MBOE COST PER
PERIOD TRANSACTIONS PRICE (1) ACQUIRED BOE(2)
------------------------------------------------- ------------ --------- -------- ---------
(IN THOUSANDS)
1990 . . . . . . . . . . . . . . . . . . . . . . 6 $ 6,520 1,062 $5.60
1991 . . . . . . . . . . . . . . . . . . . . . . 9 11,189 2,433 4.51
1992 . . . . . . . . . . . . . . . . . . . . . . 7 6,884 2,085 2.47
1993 . . . . . . . . . . . . . . . . . . . . . . 12 40,527 10,759 3.54
1994 . . . . . . . . . . . . . . . . . . . . . . 17 63,354 15,476 3.99
1995 (through September 30) . . . . . . . . . . . 6 52,848 15,420 3.38
-- -------- ------ -----
Total . . . . . . . . . . . . . . . . . . . . . . 57 $181,322 47,235 $3.69
== ======== ====== =====
(footnotes on following page)
G:\HLF\LOMAK\S-3\S-3.REG 17
18
[FN]
- ------------
(1) Includes purchase price for proved reserves as well as other acquired
assets, including gas gathering lines, undeveloped leasehold and field
service assets.
(2) Includes purchase price for proved reserves only.
ACQUISITION HISTORY
1995 ACQUISITIONS
APPALACHIA
Transfuel, Inc. In September, the Company acquired proved oil and gas
reserves, 1,100 miles of gas gathering lines and 175,000 undeveloped acres in
Ohio, Pennsylvania and New York from Transfuel, Inc. for approximately $20.2
million in cash and $755,000 in the Company's Common Stock.
Parker & Parsley Petroleum Company. In August, the Company purchased
proved oil and gas reserves, 300 miles of gas gathering lines and 16,400
undeveloped acres in Pennsylvania and West Virginia from Parker & Parsley
Petroleum Company for $20.2 million.
OKLAHOMA
The Company purchased interests in 52 wells in the Caddo and Canadian
counties for $4.8 million. The Company assumed operation of half of these
wells.
Interests in Company operated properties were acquired for $3.4 million.
TEXAS
The Company purchased interests in 140 wells located primarily in the Big
Lake Area of west Texas and the Laura LaVelle Field of east Texas for $2.8
million.
1994 ACQUISITIONS
OKLAHOMA
Red Eagle Resources Corporation. In December 1994, the Company acquired
effective control of Red Eagle Resources Corporation ("Red Eagle") principally
through the purchase of two common stockholders' holdings. In February 1995,
the remaining stockholders of Red Eagle common stock voted to approve the
merger of Red Eagle with a wholly owned subsidiary of the Company in exchange
for approximately 2.2 million shares of the Company's Common Stock. The total
purchase price was approximately $31 million. Red Eagle's assets are reflected
in the Company's financial statements as of December 31, 1994. The additional
equity of Red Eagle acquired in February 1995 is reflected as a minority
interest on the Company's balance sheet at December 31, 1994. The Company's
statement of income does not reflect any of Red Eagle's operations during 1994.
Red Eagle's assets included interests in approximately 370 producing wells
located primarily in and around the Okeene Field of Oklahoma's Anadarko Basin.
Subsequently, the Company acquired additional interests in 70 Red Eagle wells
for $1.7 million. At December 31, 1994, Red Eagle operated 328 wells and
managed thirty-seven limited partnerships. See "Business--Legal Proceedings."
TEXAS
Grand Banks Energy Company. The Company acquired Grand Banks Energy
Company ("Grand Bank") for approximately $3.7 million. Grand Banks' assets
include interests in 182 producing wells located in west Texas, essentially all
of which are now operated by the Company. Grand Banks owned an average working
interest of 70% in the producing reserves, of which 60% was oil. Approximately
40% of Grand Banks' proved reserves are attributed to the Mills-Strain Unit
located in the Sharon Ridge Field of Mitchell County, Texas. The Mills-Strain
Unit is a waterflood unit producing from the Clearfork Formation at a depth of
approximately 2,000 feet. The Mills-Strain Unit has a remaining reserve life of
over 20 years.
Gillring Oil Company. The Company acquired Gillring Oil Company
("Gillring") for approximately $11.5 million. Gillring's assets include $5.2
million of working capital and interests in 106 producing oil and gas wells
located in south
G:\HLF\LOMAK\S-3\S-3.REG 18
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Texas. Gillring owned an average working interest of 80% in the producing
reserves, of which 80% were gas. The Gillring properties are located
principally in two fields producing from the Wilcox and Vicksburg formations
ranging in depths from 4,000 to 11,000 feet. Subsequent to the acquisition of
Gillring, the Company purchased, for approximately $2.1 million, the limited
partnership interests in a partnership for which Gillring acted as the general
partner.
The Company acquired from four parties interests in 118 producing wells in
the Big Lake Area of west Texas and the Laura LaVelle Field of east Texas for
$6.5 million.
APPALACHIA
The Company acquired, for $5.0 million, interests in 98 new wells and
additional interests in 436 wells which the Company already operated.
1993 ACQUISITIONS
APPALACHIA
Mark Resources Corporation. In December 1993, the Company acquired Mark
Resources Corporation ("Mark") for approximately $28.4 million. Mark's assets
are located primarily in northwestern Pennsylvania in the Appalachian Basin,
and to a lesser extent in West Virginia. Mark owned interests in 655 producing
wells, 230 miles of gas gathering lines and over 180 proved development
drilling locations. Mark operated nearly all of its properties and owned an
average working interest of 27% in the producing reserves and 88% in the
undeveloped reserves.
The Company acquired interests in 393 wells, 70 miles of gas gathering
systems and undeveloped leasehold for $5.4 million.
TEXAS
The Company acquired interests in 128 producing wells in the Big Lake Area
of west Texas and the Laura LaVelle Field of east Texas for $6.7 million.
DEVELOPMENT ACTIVITIES
Development activities include recompletions of existing wells, the
drilling of infield and step-out wells and secondary recovery projects. In
1993, approximately $3.7 million was expended on these activities, while $9.5
million was incurred during 1994. The Company estimates that it will spend
approximately $11 million on development activities in 1995. Based on over 600
proven development projects currently in inventory, capital expenditures are
estimated to be approximately $40 million for the three year period 1995
through 1997.
The Company's development strategy is to own as large an interest as
possible in more established, lower risk development projects. Conversely, in
development activities that are less established and therefore deemed to be of
higher risk, the Company generally seeks to participate for no more than a 50%
interest. As more confidence is gained in regard to the higher risk development
activities, the Company may increase its ownership percentage.
Texas. At June 30, 1995, Texas accounted for 130 proved development
projects. The majority of these projects include recompletions and infield
drilling locations in the Big Lake Area of west Texas and the Laura LaVelle
Field of east Texas. The Company has performed 21 recompletions and drilled 31
wells in these two fields. As a result of development and additional
acquisitions, gross production from the two fields has increased from 500 BOE
per day to over 1,900 BOE per day. In 1995, the Company expects to recomplete
12 wells and drill 18 new wells in the two fields for approximately $3 million.
Oklahoma. Essentially all of the 160 Oklahoma proven development projects
are in the Okeene Field located in the northwestern portion of the Anadarko
Basin. These projects include 122 recompletions and 34 drilling locations. The
Company's primary producing area is situated in a four township area that
straddles the Blaine-Major County line, with over 130 Company operated wells.
The majority of the reserves are gas and are produced from six geologic
horizons at depths ranging from 7,000 to 9,000 feet. The Company acquired its
interests in the field during the fourth quarter of 1994. Since then the
Company's engineers have applied state-of-the-art fracture technology to ten
recompletions doubling gross production to 7 MMcf per day. In 1995, the Company
estimates it will undertake 21 recompletions and drill two new wells for
G:\HLF\LOMAK\S-3\S-3.REG 19
20
approximately $2 million. An extensive geologic study of the area has been
initiated to further identify potential additional development opportunities.
Appalachia. In Ohio, Pennsylvania and West Virginia 390 proved development
projects have been identified in the shallow Clinton and Medina Sandstone
formations. These projects are located on 38,700 gross (35,400 net) acres under
lease and range in depth from 4,000 to 6,000 feet. The reserves are
characterized by initial flush production, followed by extremely gradual
decline rates resulting in a projected life of over twenty years. During 1995
the Company estimates that it will drill 23 new wells at a cost of
approximately $4 million. The Company currently has a sufficient inventory of
proved infield drilling locations to drill up to 60 wells per year for the next
five years.
In addition to the shallow formations discussed above, the Appalachian
Basin has less developed formations including the Rose Run-Beekmantown and
Trempealeau which range in depths from 4,000 to 8,000 feet. The geological
boundaries of these formations lie approximately 2,500 feet below the shallower
Clinton and Medina Sandstone formations. While the industry has drilled over
100,000 Clinton and Medina Sandstone wells, fewer than 1,700 wells have been
drilled to the Rose Run-Beekmantown and 5,000 to the Trempealeau. The results
were poor because the wells were based on only regional geology and no seismic
data was utilized. Since 1993, the Company has participated in eighteen deeper
wells with an average working interest of 13%, of which, seven were productive
and eleven were dry. Currently, the Company owns leases covering 211,000 gross
(181,000 net) acres in the deeper "Rose Run Trend." The Company's 1995 budget
allocates approximately $1 million to acquire acreage and seismic and to drill
wells.
ENHANCEMENT ACTIVITIES
The Company defines enhancements as those activities, other than
acquisitions or drilling, which maximize the value of its asset base.
Enhancements include: reducing overhead, operating and development costs on a
per BOE basis; concentrating operations to increase efficiency; disposing
non-strategic properties rapidly; expanding marketing options; and applying new
technology to exploit additional reserves. Enhancements create higher margins
and help maintain profitability during the downward phase of commodity price
cycles. Despite low oil and gas prices in 1994 and the first nine months of
1995, the Company posted increased cash flow and profits, partly due to
enhancements. Primarily as a result of its enhancement activities during the
past five years the Company has: (i) decreased overhead costs per BOE by 91%;
(ii) cut operating costs per BOE by 34%; (iii) reduced development costs per
BOE by 27%; (iv) now operates properties representing more than 95% of its
reserves; (v) sold over 1,000 non-strategic properties; (vi) expanded gas
marketing to 70 MMcf per day through 1,900 miles of Company-owned gas gathering
systems; and (vii) improved seismic and completion techniques by applying new
technology.
OIL AND GAS RESERVES
The following table sets forth estimated proved reserves for each year in
the five year period ended December 31, 1994 and pro forma as of June 30, 1995.
DECEMBER 31, PRO FORMA
----------------------------------------------------------- JUNE 30,
1990 1991 1992 1993 1994 1995(1)
------- ------- ------- ------- ------- -------
Crude oil (MBbl)
Developed . . . . . . . . . . . . . . . . 416 1,609 1,643 3,344 6,431 8,003
Undeveloped . . . . . . . . . . . . . . . 4 245 337 1,195 2,018 2,325
------- ------- ------- ------- ------- -------
Total . . . . . . . . . . . . . 420 1,854 1,980 4,539 8,449 10,328
======= ======= ======= ======= ======= =======
Natural gas (MMcf)
Developed . . . . . . . . . . . . . . . . 5,626 8,318 13,171 38,373 97,251 164,522
Undeveloped . . . . . . . . . . . . . . . -- 221 4,444 36,190 52,119 57,532
------- ------- ------- ------- ------- -------
Total . . . . . . . . . . . . . 5,626 8,539 17,615 74,563 149,370 222,054
======= ======= ======= ======= ======= =======
Total equivalent barrels (MBOE) . . . . . . . 1,357 3,277 4,916 16,967 33,344 47,337
======= ======= ======= ======= ======= =======
(1) See "Business--Pro Forma Reserve Information."
G:\HLF\LOMAK\S-3\S-3.REG 20
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Proved developed reserves are expected to be recovered from existing wells
with existing equipment and operating methods. Proved undeveloped reserves are
expected to be recovered from new wells drilled to known reservoirs on
undrilled acreage for which the existence and recoverability of such reserves
can be estimated with reasonable certainty. On a BOE basis, approximately 75%
of the Company's proved reserves were developed at June 30, 1995. At December
31, 1994, approximately 95% of the proved reserves set forth above were
evaluated by independent petroleum consultants, while the remainder was
evaluated by the Company's engineering staff. See "Pro Forma Reserve
Information" below regarding the evaluation of proved reserves at June 30,
1995.
The following table sets forth as of June 30, 1995 the estimated future
net cash flow from and the present value of the proved reserves. See "Pro
Forma Reserve Information." Future net cash flow represents future gross cash
flow from the production and sale of proved reserves, net of production costs
(including production taxes, ad valorem taxes and operating expenses) and
future development costs. Such calculations, which are prepared in accordance
with the Statement of Financial Accounting Standards No. 69 "Disclosures about
Oil and Gas Producing Activities" are based on constant cost and price factors.
Average product prices at December 31, 1994 were $16.14 per barrel of oil and
$2.07 per Mcf of gas and at June 30, 1995 were $16.35 per barrel of oil and
$2.15 per Mcf of gas. There can be no assurance that the proved reserves will
be developed within the periods indicated and it is likely that actual prices
received in the future will vary from those used in deriving this information.
There are numerous uncertainties inherent in estimating reserves and related
information and different reservoir engineers often arrive at different
estimates for the same properties.
DEVELOPED UNDEVELOPED TOTAL
--------- ----------- ---------
(IN THOUSANDS)
Estimated future net cash flow . . . . . . . . . .. . . $ 283,947 $ 87,948 $ 371,895
========= ========= =========
Present value of proved reserves
Pre-tax . . . . . . . . . . . . . . . . . . $ 173,806 40,353 $ 213,159
========= ========= =========
After-tax . . . . . . . . . . . . . .. . . $ 130,036 30,365 $ 160,401
========= ========= =========
PRO FORMA RESERVE INFORMATION
The following table sets forth summary pro forma information with respect
to the Company's estimated proved oil and gas reserves as of June 30, 1995,
giving effect to acquisitions completed from January 1, 1995 through June 30,
1995. The reserve information below is based on reserve evaluations for each
property group and in most cases each reserve evaluation had an effective date
varying from December 31, 1994 through July 1, 1995. These reserve evaluations
were adjusted by the Company's engineering staff to June 30, 1995 by adjusting
production to June 30, 1995 depending on the effective date of each respective
evaluation. Therefore, the reserve information below does not reflect
production revisions or changes in oil and gas prices, changes in expectations
or changes in estimates of recoverable reserves resulting from price changes.
Approximately 95% of December 31, 1994 reserve information was prepared by
independent petroleum consultants and 100% of the Recent Appalachian
Acquisitions reserve information was prepared by independent petroleum
consultants. The "Other 1995 Acquisitions" reserve information, as well as the
"Adjustments" information, were prepared by the Company's engineering staff.
All estimates of oil and gas reserves are subject to significant uncertainty.
See "Risk Factors--Uncertainty of Estimates of Reserves and Future
Net Revenues."
PRO FORMA RESERVE INFORMATION
----------------------------------------------------------------------------
HISTORICAL RECENT
DECEMBER 31, APPALACHIAN OTHER 1995 PRO FORMA
1994 ACQUISITIONS ACQUISITIONS ADJUSTMENTS JUNE 30, 1995
------------ -------------- -------------- ----------- --------------
Proved reserves . . . . . . . . . . . . . . .
Oil (MBbls) . . . . . . . . . . . . . . . 8,449 468 1,845 (434) 10,328
Gas (MMcf) . . . . . . . . . . . . . . . . 149,370 65,592 9,760 (2,66) 222,054
MBOE . . . . . . . . . . . . . . . . . . . 33,344 11,400 3,472 (879) 47,337
Estimated future net cash flow (thousands) . $270,974 $ 80,925 $ 25,191 (5,195) $371,895
Pre-tax present value (thousands) . . . . . . $150,536 $ 46,638 $ 16,459 (474) $213,159
Average product prices . . . . . . . . . . .
Oil (per Bbl) . . . . . . . . . . . . . . $ 16.13 $ 16.01 $ 17.45 N/A $ 16.35
Gas (per Mcf) . . . . . . . . . . . . . . $ 2.13 $ 2.27 $ 1.68 N/A $ 2.15
G:\HLF\LOMAK\S-3\S-3.REG 21
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SIGNIFICANT PROPERTIES
Until 1990, virtually all of the Company's properties were located in
Ohio. Since that time, properties have been acquired in Texas and Oklahoma and
other areas of Appalachia. At June 30, 1995, on a pre-tax present value basis,
49.8% of the reserves were located in Appalachia, 25.7% were in Oklahoma and
21.2% were in Texas. At September 30, 1995, the Company's properties included
working interests in 6,430 gross (4,583 net) productive oil and gas wells and
royalty interests in 450 additional wells. The properties contained, net to the
Company's interest, estimated proved reserves of 10.3 million barrels of oil
and 222 Bcf of gas or a total of 47.3 million BOE. The Company also held
interests in 311,250 gross (225,132 net) undeveloped acres at June 30, 1995.
The following table sets forth summary pro forma information with respect to
the Company's estimated proved oil and gas reserves as of June 30, 1995.
PRE-TAX PRESENT VALUE
------------------------ CRUDE NATURAL EQUIV.
AMOUNT OIL GAS BARRELS
(THOUSANDS) % (MBBL) (MMCF) (MBOE)
----------- ----- ------ ------- ------
Appalachia . . . . . . . . . . . . . . . 106,108 49.8% 1,025 154,255 26,734
Oklahoma . . . . . . . . . . . . . . . . 54,703 25.7 1,933 50,256 10,309
Texas . . . . . . . . . . . . . . . . . . 45,264 21.2 6,144 17,053 8,986
Other . . . . . . . . . . . . . . . . . . 7,084 3.3 1,226 490 1,308
-------- ----- ------ ------- ------
Total . . . . . . . . . . . . . . . . . . $213,159 100.0% 10,328 222,054 47,337
======== ===== ====== ======= ======
The largest concentration of reserves is in Appalachia with 49.8% of total
present value. On a BOE basis, gas accounts for approximately 96% of these
reserves. These reserves are ascribed to over 4,800 wells located in
Pennsylvania, Ohio, West Virginia and New York. The Company operates nearly all
of these wells. The reserves produce principally from the Medina, Clinton and
Rose Run formations at depths of 3,000 to 7,000 feet. After initial flush
production, these properties are characterized by extremely gradual decline
rates and have a projected life of more than twenty years. Gas production is
transported through Company-owned gas gathering systems and is sold primarily
to utilities and industrial end-users.
The second largest concentration of reserves is in Oklahoma, totalling
25.7% of present value. On a BOE basis, gas makes up 81% of these reserves. The
largest portion of these reserves is ascribed to over 190 operated wells in and
around the Okeene Field of the Anadarko Basin. These wells produce from
numerous formations ranging in depth from approximately 6,000 to 9,000 feet.
The properties have a projected remaining life of over fifteen years. Gas
production is sold primarily to Phillips Petroleum and Natural Gas
Clearinghouse on an index or percent of plant proceeds basis.
The third largest concentration of reserves is in Texas, totalling 21.2%
of present value. On a BOE basis, oil makes up 68% of the reserves. The largest
portion of these reserves is ascribed to 338 operated wells in the Big Lake
Area of west Texas. These wells produce from the San Andres/Grayburg formation
at a depth of approximately 2,500 feet. The properties have a projected
remaining life of over 25 years. Over 83% of these reserves are oil. Oil
production is sold to Scurlock Permian and gas to J.L. Davis Company. The
second largest portion of these reserves are ascribed to 64 operated wells in
the Laura LaVelle Field in east Texas. These wells produce from the shallow
Carrizo section of the Wilcox formation at a depth of approximately 1,600 feet.
These properties have a projected remaining life of twenty years. All of the
reserves are oil and production is sold to Texaco. The third largest portion is
in Hagist Ranch Field in south Texas. The Company operates 58 wells in this
field which produces primarily from the Wilcox at approximately 8,000 feet.
Arco purchases the gas production from the Hagist Ranch Field.
PRODUCTION
Production revenue is generated through the sale of oil and gas from
properties held directly and through partnerships and joint ventures.
Additional revenue is received from royalties. Oil and gas production is sold
to a limited number of purchasers. Through September 30, 1995, one purchaser
accounted for 11% of total oil and gas revenues, however the loss of such
purchaser would not have a material adverse effect on the Company's business.
Proximity to local markets, availability of competitive fuels and overall
supply and demand are factors affecting the ability to market production. There
has been a worldwide surplus of oil and gas for more than a decade which has
weakened oil prices and particularly recently, depressed the price of natural
gas. While the Company anticipates an upward trend in energy prices, factors
outside its control such as political developments in the Middle East, overall
energy supply, weather conditions and economic growth rates have had, and may
continue to have, an unpredictable or adverse effect on energy prices.
G:\HLF\LOMAK\S-3\S-3.REG 22
23
The following table sets forth historical revenue and expense information
for the periods indicated (in thousands, except sales price and operating cost
data). See the Pro Forma Combined Financial Statements included herein for a
discussion of the preparation of the pro forma data.
NINE MONTHS
YEAR ENDED DECEMBER 31, ENDED SEPTEMBER 30,
----------------------------------------------------------- ------------------------------
PRO FORMA PRO FORMA
1992 1993 1994 1994 1995 1995
------------- ------------ ---------------- ------------- --------------- -------------
Production
Oil (Bbl) . . . . . . . . . . . . . 199 318 640 789 649 709
Gas(Mcf) . . . . . . . . . . . . . . 1,796 2,590 6,996 15,982 7,825 12,659
BOE . . . . . . . . . . . . . . . . 498 750 1,806 3,453 1,953 2,819
Revenue
Oil . . . . . . . . . . . . . . . . $ 3,660 $ 5,118 $ 9,743 $ 12,019 $ 10,768 $ 11,711
Gas . . . . . . . . . . . . . . . . 4,043 6,014 14,718 33,791 13,367 22,728
------- -------- -------- -------- -------- --------
Total . . . . . . . . . . $ 7,703 $ 11,132 $ 24,461 $ 45,810 $ 24,135 $ 34,439
Average Sales Price
Oil (per Bbl) . . . . . . . . . . . $ 18.40 $ 16.07 $ 15.23 $ 15.23 $ 16.58 $ 16.52
Gas (per Mcf) . . . . . . . . . . . 2.25 2.32 $ 2.10 2.11 1.71 1.80
BOE . . . . . . . . . . . . . . . . 15.46 14.82 $ 13.55 13.27 12.36 12.22
Average Operating Cost
Per BOE . . . . . . . . . . . . . . $ 5.95 $ 5.87 $ 5.55 $ 5.21 $ 5.09 $ 4.54
For 1994 and the nine months ended September 30, 1995, natural gas
accounted for over 74% of total production on a BOE basis. Gas production was
sold primarily to utilities and directly to industrial users. Gas sales are
made pursuant to various arrangements ranging from month-to-month contracts,
one year contracts at fixed or variable prices and contracts at fixed prices
for the life of the well. All contracts other than the fixed price contracts
contain provisions for price adjustment, termination and other terms customary
in the industry. A number of the Appalachian gas contracts hold favorable sales
prices when compared to market spot prices. Oil is sold on a basis such that
the purchaser can be changed on 30 days notice. The price received is generally
equal to a posted price set by the major purchasers in the area. Oil
purchasers are selected on the basis of price and service.
PRODUCING WELLS
The following table sets forth certain information relating to productive
wells at September 30, 1995. The Company owns royalty interests in an
additional 450 wells. Wells are classified as oil or gas according to their
predominant production stream.
PRINCIPAL GROSS NET AVERAGE
PRODUCT STREAM WELLS WELLS WORKING INTEREST
------------------------------------------------- ------------ -------- -------------------
Crude oil . . . . . . . . . . . . . . . . . . . . 1,026 542 53%
Natural gas . . . . . . . . . . . . . . . . . . . 5,404 4,041 75%
----- -----
Total . . . . . . . . . . . . . . . . . . . . 6,430 4,583 71%
===== =====
ACREAGE
The following table sets forth the developed and undeveloped gross and net
acreage held at September 30, 1995.
G:\HLF\LOMAK\S-3\S-3.REG 23
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AVERAGE
GROSS NET WORKING INTEREST
----------------------- ----------------------- -----------------------
Developed . . . . . . . . . . . . . . . . . . . . . . 454,200 319,500 70%
Undeveloped . . . . . . . . . . . . . . . . . . . . . 311,200 225,100 72%
--------- ---------
Total . . . . . . . . . . . . . . . . . . . . . . 765,400 544,600 71%
========= =========
DRILLING RESULTS
The following table summarizes actual drilling activities for the three
years ended December 31, 1994 and the nine months ended September 30, 1995. The
drilling results below do not reflect acquisitions, on a pro forma basis, as
the drilling results on the acquired properties are not reflective of the
Company's drilling results.
NINE MONTHS
YEAR ENDED DECEMBER 31, ENDED
------------------------------------------------------------ SEPTEMBER 30,
1992 1993 1994 1995
------------------- ------------------- ------------------- --------------------
Drilling:
Development wells:
Gross . . . . . . . . . . . . . . . . . 8.0 24.0 62.0 21.0
Net . . . . . . . . . . . . . . . . . . 2.2 17.4 56.6 14.6
Exploratory wells:
Gross . . . . . . . . . . . . . . . . . 2.0 6.0 9.0 5.0
Net . . . . . . . . . . . . . . . . . . 0.2 1.0 1.6 0.5
Total:
Gross . . . . . . . . . . . . . . . . . 10.0 30.0 71.0 26.0
Net . . . . . . . . . . . . . . . . . . 2.4 18.4 58.2 15.1
Drilling Results:
Productive wells:
Gross . . . . . . . . . . . . . . . . . 8.0 25.0 64.0 24.0
Net . . . . . . . . . . . . . . . . . . 2.2 16.5 56.3 14.9
Dry holes:
Gross . . . . . . . . . . . . . . . . . 2.0 5.0 7.0 2.0
Net . . . . . . . . . . . . . . . . . . 0.2 1.9 1.8 0.2
FIELD SERVICES
The field services area is comprised of three components: well operations,
brine hauling and disposal and well servicing. As of September 30, 1995, the
Company acted as operator of, or provided pumping services for, over 5,600
wells. For its well operations, the Company receives a monthly fee plus
reimbursement of third party charges. In September 1994, the Company sold
substantially all of its brine disposal and well servicing assets located in
Ohio. Currently, the majority of the Company's brine disposal and well
servicing activities are carried out in Oklahoma.
GAS TRANSPORTATION AND MARKETING
The Company has built or acquired a number of gas gathering systems as a
means of marketing gas production in proximity to its principal natural gas
properties. This has resulted in the ownership of over 1,900 miles of gas
transportation and gathering lines. Having concentrated gas reserves tied to
Company-owned gathering systems affords considerable control and flexibility in
marketing a substantial portion of its gas production. To further exploit this
opportunity, the Company began to market its own gas production in 1993. Today,
the Company is marketing over 70 MMcf per day for its own account, as well as
for the account of others. In a number of situations, the Company has entered
into fixed price contracts which act as a hedge against volatile prices. See
"Risk Factors--Marketing Risks."
G:\HLF\LOMAK\S-3\S-3.REG
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After giving effect to the Recent Appalachian Acquisitions, approximately
70% of the Company's gas production is attributable to Appalachia. Gas
production in Appalachia has historically received a higher price, due to its
proximity to the northeastern gas markets. During six months ended June 30,
1995, the Company received, on average, $2.08 per Mcf for its Appalachia gas
production. During this same time period, the average settlement price for gas
on NYMEX was $1.58 per Mcf. Currently, on a Company-wide basis, approximately
11% of its gas production is sold under life-of well contracts averaging $2.49
per Mcf, 31% is sold under contracts with an initial term of no less than one
year that provide for a fixed price or a fixed floor price and 58% is sold
under variable price arrangements whereby the price received fluctuates
monthly.
Within the last year, the Company has begun to hedge its oil and gas
production by entering into price arrangements at a variety of prices, floors
and caps. At September 30, 1995, less than 5% of the Company's production was
hedged under such arrangements. As production increases, the Company expects
that it may hedge a larger percentage of its production, however it currently
anticipates that such percentage would not exceed 50%.
FACILITIES
The Company owns a 24,000 square foot facility located on approximately
seven acres near Hartville, Ohio. The facility houses certain operating and
administrative personnel. The Company leases approximately 16,000 square feet
in Fort Worth, Oklahoma City, and Pittsburgh under standard office lease
arrangements that expire at various times through May 1996. All facilities are
adequate to meet the Company's existing needs and can be expanded with minimal
expense.
The Company owns various rolling stock and other equipment which is used
in its field operations. Such equipment is believed to be in good repair and,
while such equipment is important to its operations, it can be readily replaced
as necessary.
COMPETITION
The Company encounters substantial competition in acquiring properties,
marketing oil and gas, securing personnel and operating its well services
business. Many competitors have financial and other resources which
substantially exceed those of the Company. The competitors in acquisitions,
exploration, development and production include the major oil companies in
addition to numerous independents, individual proprietors and others.
Therefore, competitors may be able to pay more for desirable leases and to
evaluate, bid for and purchase a greater number of properties or prospects than
the financial or personnel resources of the Company permit. The ability of the
Company to replace and expand its reserve base in the future will be dependent
upon its ability to select and acquire suitable producing properties and
prospects for future drilling.
The Company's acquisitions have been partially financed through issuances
of equity and debt securities. The competition for capital to finance oil and
gas acquisitions and development is intense. The ability of the Company to
obtain such financing is uncertain and can be affected by numerous factors
beyond its control. The inability of the Company to raise capital in the future
could have an adverse effect on certain areas of its business.
EMPLOYEES
As of November 8, 1995, the Company had 280 full-time employees, 189 of
whom were field personnel. None are covered by a collective bargaining
agreement and management believes that its relationship with its employees is
good.
REGULATION
The Company's oil and gas production and transportation operations are
subject to various types of regulation, including regulation by state and
federal agencies. Although such regulations have an impact on the Company and
others in the oil, gas and pipeline industry, the Company does not believe that
it is affected in a significantly different manner by these regulations than
others in the oil and gas industry.
Legislation affecting the oil and gas industry is under constant review
for amendment or expansion. Numerous departments and agencies, both federal and
state, are authorized by statute to issue, and have issued, rules and
regulations binding on the oil and gas industry and its individual members. The
failure to comply with such rules and regulations can result in substantial
penalties. Many states require permits for drilling operations, drilling bonds
and reports concerning operations. Many states also have statutes or
regulations addressing conservation matters, including provisions for the
G:\HLF\LOMAK\S-3\S-3.REG
25
26
unitization or pooling of oil and gas properties, the establishment of maximum
rates of production from oil and gas wells and the regulation of spacing,
plugging and abandonment of such wells. Some state statutes and regulations
limit the rate at which oil and gas can be produced from the Company's
properties. See "Risk Factors--Laws and Regulations."
In 1992, the Federal Energy Regulatory Commission ("FERC") issued Order
No. 636 pertaining to pipeline restructuring. This rule requires interstate
pipelines to unbundle transportation and sales services by separately stating
the price of each service and by providing customers only the particular
service desired, without regard to the source for purchase of the gas. The rule
also requires pipelines to (i) provide nondiscriminatory notice service
allowing firm commitment shippers to receive delivery of gas on demand up to
certain limits without penalties; (ii) establish a basis for release and
reallocation of capacity; and (iii) provide nondiscriminatory access to
capacity by firm transportation shippers on a downstream pipeline.
The Company's operations are subject to extensive federal, state and local
laws and regulations relating to the generation, storage, handling, emission,
transportation and discharge of materials into the environment. Permits are
required for the operation of various of the Company's facilities, and these
permits are subject to revocation, modification and renewal by issuing
authorities. Governmental authorities have the power to enforce compliance with
their regulations, and violations are subject to fines, injunctions or both. It
is possible that increasingly strict requirements will be imposed by
environmental laws and enforcement policies thereunder. It is not anticipated
that the Company will be required in the near future to expend amounts that are
material in relation to its total capital expenditures program by reason of
environmental laws and regulations, but inasmuch as such laws and regulations
are frequently changed, the Company is unable to predict the ultimate cost of
such compliance. See "Risk Factors--Laws and Regulations."
LEGAL PROCEEDINGS
In January 1995, prior to the consummation of the Red Eagle acquisition, a
lawsuit (the "Lawsuit") was filed in the Delaware Court of Chancery, against
Red Eagle, each of the members of the Board of Directors of Red Eagle and the
Company. The Plaintiff seeks to represent all holders (the "Class") of Red
Eagle common stock, excluding the Red Eagle Directors and the Company. The
lawsuit seeks other remedies, some of which are in the alternative,
certification of the lawsuit as a class action, designation of the Plaintiff as
representative of the Class and Plaintiff's counsel as counsel to the Class;
declaration that the Red Eagle Directors breached their fiduciary duties owed
to the Class; recision of the Red Eagle merger agreement; and award of
unspecified compensatory damages, prejudgment interest and costs and
disbursement of the Lawsuit including counsel fees.
A stipulation of settlement among all defendants and the putative
representative of the Class was executed on September 22, 1995, and was filed
in the Delaware Court of Chancery without the Company and the defendants
admitting any liability. Under the terms of the settlement, the Class would
receive, at the Company's option, either (i) $900,000 in cash or (ii) $250,000
in cash plus 74,286 shares of the Company's Common Stock. A hearing on the
proposed settlement is scheduled to be held by the Delaware Court of Chancery
in November, 1995. If the Court approves the settlement, the settlement
consideration will be paid to members of the Class. While there can be no
assurance of approval by the Delaware Court of Chancery. In any event, in the
opinion of management, such litigation and claims will be resolved without
material adverse effect on the Company's financial position.
The Company is involved in various other legal actions and claims arising
in the ordinary course of business. In the opinion of management, such
litigation and claims will be resolved without material adverse effect on the
Company's financial position.
G:\HLF\LOMAK\S-3\S-3.REG
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MANAGEMENT
The current executive officers and Directors of the Company are listed
below, together with a description of their experience and certain other
information. Each of the Directors was re-elected for a one-year term at the
Company's 1995 annual meeting of stockholders. Executive officers are appointed
by the Board of Directors.
HELD OFFICE
NAME AGE SINCE POSITION WITH COMPANY
----------------------------- --------------------------- --------------------- ---------------------------------------------
Thomas J. Edelman 44 1988 Chairman and Chairman of the Board
John H. Pinkerton 41 1988 President, Chief Executive Officer
and Director
C. Rand Michaels 58 1976 Vice Chairman and Director
Robert E. Aikman 63 1990 Director
Allen Finkelson 49 1994 Director
Anthony V. Dub 45 1995 Director
Ben A. Guill 44 1995 Director
Jeffery A. Bynum 40 1985 Vice President-Land
Steven L. Grose 47 1980 Vice President-Operations
Chad L. Stephens 40 1990 Vice President
Thomas W. Stoelk 40 1994 Vice President-Finance
John R. Frank 40 1990 Controller
THOMAS J. EDELMAN holds the office of Chairman and is Chairman of the
Board of Directors. Mr. Edelman joined the Company in 1988 and served as its
Chief Executive Officer until 1992. Since 1981, Mr. Edelman has been a Director
and President of SOCO. Prior to 1981, Mr. Edelman was a Vice President of The
First Boston Corporation. From 1975 through 1980, Mr. Edelman was with Lehman
Brothers Kuhn Loeb Incorporated. Mr. Edelman received his Bachelor of Arts
Degree from Princeton University and his Masters Degree in Finance from Harvard
University's Graduate School of Business Administration. Mr. Edelman is also a
Director of Petroleum Heat & Power Co., Inc., a Connecticut based fuel oil
distributor, Star Gas Corporation, a private company which distributes propane
gas, Amerac Energy Corporation, a public domestic exploration and production
company, and Command Petroleum Limited, an international exploration and
production company affiliated with SOCO.
JOHN H. PINKERTON, President, Chief Executive Officer and a Director,
joined the Company in 1988. He was appointed President in 1990 and Chief
Executive Officer in 1992. Previously, Mr. Pinkerton was Senior Vice
President-Acquisitions of SOCO. Prior to joining SOCO in 1980, Mr. Pinkerton
was with Arthur Andersen & Co. Mr. Pinkerton received his Bachelor of Arts
Degree in Business Administration from Texas Christian University and his
Master of Arts Degree in Business Administration from the University of Texas.
C. RAND MICHAELS, who holds the office of Vice Chairman and is a Director,
served as President and Chief Executive Officer of the Company from 1976
through 1988 and Chairman of the Board from 1984 through 1988, when he became
Vice Chairman. Mr. Michaels received his Bachelor of Science Degree from Auburn
University and his Master of Business Administration Degree from the University
of Denver. Mr. Michaels is also a Director of American Business Computers
Corporation of Akron, Ohio, a public company serving the beverage dispensing
and fast food industries.
ROBERT E. AIKMAN, a Director, joined the Company in 1990. Mr. Aikman has
more than 40 years experience in petroleum and natural gas exploration and
production throughout the United States and Canada. From 1984 to 1994 he was
Chairman of the Board of Energy Resources Corporation. From 1979 through 1984,
he was the President and principal shareholder of Aikman Petroleum, Inc. From
1971 to 1977, he was President of Dorchester Exploration Inc., and from 1971 to
1980, he was a Director and a Member of the Executive Committee of Dorchester
Gas Corporation. Mr. Aikman is also Chairman of Provident Trade Company,
President of EROG, Inc., and President of The Hawthorne Company, an entity
which organizes joint ventures and provides advisory services for the
acquisition of oil and gas properties, including the financial restructuring,
reorganization and sale of companies. He was President of Enertec Corporation
which was
G:\HLF\LOMAK\S-3\S-3.REG
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28
reorganized under Chapter 11 of the Bankruptcy Code in December 1994. In
addition, Mr. Aikman is a Director of the Panhandle Producers and Royalty
Owners Association and a member of the Independent Petroleum Association of
America, Texas Independent Producers and Royalty Owners Association and
American Association of Petroleum Landmen. Mr. Aikman graduated from the
University of Oklahoma in 1952.
ALLEN FINKELSON was appointed a Director in 1994. Mr. Finkelson has been a
partner at Cravath, Swaine & Moore since 1977, with the exception of the period
from September 1983 through August 1985, when he was a managing Director of
Lehman Brothers Kuhn Loeb Incorporated. Mr. Finkelson was first employed by
Cravath, Swaine & Moore as an associate in 1971. Mr. Finkelson received his
Bachelor of Arts Degree from St. Lawrence University and his Doctor of Laws
Degree from Columbia University School of Law.
ANTHONY V. DUB was elected to serve as a Director of the Company in 1995.
Mr. Dub is a Managing Director of CS First Boston, an international investment
banking firm with headquarters in New York City. Mr. Dub joined CS First Boston
in 1971 and was named a Managing Director in 1981. Mr. Dub is Chairman of the
Latin America Executive Committee which coordinates CS First Boston's
activities throughout that region. Mr. Dub received his Bachelor of Arts Degree
from Princeton University in 1971.
BEN A. GUILL was elected to serve as a Director of the Company in 1995.
Mr. Guill is a Partner and Managing Director of Simmons & Company
International, an investment banking firm located in Houston, Texas focused
exclusively on the oil service and equipment industry. Mr. Guill has been with
Simmons & Company since 1980 and currently is one of two Managing Directors in
the corporate finance group. Prior to joining Simmons & Company, Mr. Guill was
with Blyth Eastman Dillon & Company from 1978 to 1980. Mr. Guill received his
Bachelor of Arts Degree from Princeton University and his Masters Degree in
Finance from the Wharton Graduate School of Business at the University of
Pennsylvania.
JEFFERY A. BYNUM, Vice President-Land and Secretary, joined the Company in
1985. Previously, Mr. Bynum was employed by Crystal Oil Company and Kinnebrew
Energy Group of Shreveport, Louisiana. Mr. Bynum holds a Professional
Certification with American Association of Petroleum Landmen and attended
Louisiana State University in Baton Rouge, Louisiana and Centenary College in
Shreveport, Louisiana.
STEVEN L. GROSE, Vice President-Operations, joined the Company in 1980.
Previously, Mr. Grose was employed by Halliburton Services, Inc. as a Field
Engineer from 1971 until 1974. In 1974, he was promoted to District Engineer
and in 1978, was named Assistant District Superintendent based in Pennsylvania.
Mr. Grose is a member of the Society of Petroleum Engineers and a trustee of
The Ohio Oil and Gas Association. Mr. Grose received his Bachelor of Science
Degree in Petroleum Engineering from Marietta College.
CHAD L. STEPHENS, Vice President, joined the Company in 1990. Previously,
Mr. Stephens was a landman with Duer Wagner & Co., an independent oil and gas
producer, since 1988. Prior thereto, Mr. Stephens was an independent oil
operator in Midland, Texas for four years. From 1979 to 1984, Mr. Stephens was
a landman for Cities Service Company and HNG Oil Company. Mr. Stephens received
his Bachelor of Arts Degree in Finance and Land Management from the University
of Texas.
THOMAS W. STOELK, Vice President-Finance and Chief Financial Officer,
joined the Company in 1994. Mr. Stoelk is a Certified Public Accountant and was
a Senior Manager with Ernst & Young LLP. Prior to rejoining Ernst & Young LLP
in 1986 he was with Partners Petroleum, Inc. Mr. Stoelk received his Bachelor
of Science Degree in Industrial Administration from Iowa State University.
JOHN R. FRANK, Controller and Chief Accounting Officer, joined the Company
in 1990. From 1989 until he joined the Company in 1990, Mr. Frank was Vice
President Finance of Appalachian Exploration, Inc. Prior thereto, he held the
positions of Internal Auditor and Treasurer with Appalachian Exploration, Inc.
beginning in 1977. Mr. Frank received his Bachelor of Arts Degree in Accounting
and Management from Walsh College and attended graduate studies at the
University of Akron.
G:\HLF\LOMAK\S-3\S-3.REG
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29
PRINCIPAL STOCKHOLDERS
AND SHARE OWNERSHIP OF MANAGEMENT
SECURITY OWNERSHIP
The following table sets forth certain information as of November 6, 1995, regarding (i) the share ownership of the Company by
each person known to the Company to be the beneficial owner of more than 5% of the outstanding shares of the Common Stock and
the Preferred Stock of the Company, (ii) the share ownership of the Company by each Director and (iii) the share ownership by
all Directors and executive officers of the Company, as a group.
COMMON STOCK 7 1/2% PREFERRED $2.03 PREFERRED
---------------------------------- -------------------------- ---------------------------
NUMBER OF SHARES NUMBER OF SHARES NUMBER OF SHARES
BENEFICIALLY PERCENT BENEFICIALLY PERCENT BENEFICIALLY PERCENT
NAME AND ADDRESS OWNED OF CLASS OWNED OF CLASS OWNED OF CLASS
------------------------------- -------------------- -------- ---------------- -------- ---------------- --------
Thomas J. Edelman
595 Madison Avenue
New York, NY 10022 . . . . . . 852,160(1) 7.0% 4,000 2.0% 0 0.0%
John H. Pinkerton
500 Throckmorton Street
Fort Worth, TX 76102 . . . . . 457,701(2) 3.8% 0 0.0% 0 0.0%
C. Rand Michaels
125 State Route 43
Hartville, OH 44632 . . . . . . 196,491(3) 1.6% 0 0.0% 0 0.0%
Robert E. Aikman
3200 Hawthorne Drive
Amarillo, TX 79109 . . . . . . 62,766(4) 0.5% 0 0.0% 0 0.0%
David H. Smith, M.D.
599 Lexington Avenue
New York, NY 10022 . . . . . . 248,974(5) 2.1% 20,000 10.0% 0 0.0%
Orefund
1300 SW Fifth Avenue
Portland, OR 97201 . . . . . . 117,647(6) 1.0% 40,000 20.0% 0 0.0%
Pirvest, Inc.
5608 Malvey Avenue
Fort Worth, TX 76107 . . . . . 85,274(7) 0.7% 20,000 10.0% 0 0.0%
Spear Benzak Saloman & Ferrell
46 Rockefeller Plaza
New York, NY 10111 . . . . . . 58,823(8) 0.5% 20,000 10.0% 0 0.0%
Anthony V. Dub
55 East 52nd Street
New York, NY 10055 . . . . . . 36,764(9) 0.3% 4,000 2.0% 0 0.0%
H.E.C. Support Fund
One Prince Center
Holland, MI 49423 . . . . . . 35,294(10) 0.3% 12,000 6.0% 0 0.0%
G:\HLF\LOMAK\S-3\S-3.REG 29
30
COMMON STOCK 7 1/2% PREFERRED $2.03 PREFERRED
---------------------------------- -------------------------- ---------------------------
NUMBER OF SHARES NUMBER OF SHARES NUMBER OF SHARES
BENEFICIALLY PERCENT BENEFICIALLY PERCENT BENEFICIALLY PERCENT
NAME AND ADDRESS OWNED OF CLASS OWNED OF CLASS OWNED OF CLASS
------------------------------- -------------------- -------- ---------------- -------- ---------------- --------
Allen Finkelson
825 Eighth Avenue
New York, NY 10019 . . . . . . 26,847(11) 0.2% 0 0.0% 0 0.0%
Ben A. Guill
700 Louisiana Street
Houston, TX 77002 . . . . . . 25,000 0.2% 0 0.0% 0 0.0%
Guardian Life
201 Park Avenue South
New York, NY 10003 . . . . . . 503,423(13) 4.0% 0 0.0% 191,304 19.1%
Fidelity Management
82 Devonshire
Boston, MA 02110 . . . . . . . 366,132(14) 3.0% 0 0.0% 139,130 13.9%
Palisade Capital
One Bridge Plaza
Suite 695
Fort Lee, NJ 07024 . . . . . . 320,366(15) 2.6% 0 0.0% 121,739 12.2%
Merrill Lynch Asset Mgmt.
800 Scuddersmill Road
Plainsboro, NJ 08536 . . . . . 240,274(16) 2.0% 0 0.0% 91,304 9.1%
Pecks Management
1 Rockefeller Place
Suite 320
New York, NY 10020 . . . . . . 228,834(17) 1.9% 0 0.0% 86,957 8.7%
Putnam Investments
One Post Office Square
Boston, MA 02109 . . . . . . . 137,300(18) 1.1% 0 0.0% 52,174 5.2%
All Directors and executive
officers as a group (12 1,856,841(1)
persons) . . . . . . . . . . . (2)(3)(4)(9)(11)(12) 15.3% 8,000 4.0% 0 0.0%
- -------------
(1) Includes 11,764 shares issuable upon conversion of Mr. Edelman's 4,000 shares of 7 1/2% Preferred; 45,000 shares
which may be purchased under currently exercisable options; 253,071 shares held under IRA, KEOGH and pension plan accounts;
24,916 shares owned by Mr. Edelman's spouse and 71,200 shares owned by Mr. Edelman's minor children, to which Mr. Edelman
disclaims beneficial ownership.
(2) Includes 152,333 shares which may be purchased under currently exercisable stock options; 946 shares owned by Mr. Pinkerton's
minor children, to which Mr. Pinkerton disclaims beneficial ownership; and 1,369 shares owned by Mr. Pinkerton's spouse, to
which Mr. Pinkerton disclaims beneficial ownership.
(3) Includes 5,785 shares held under the IRA account; 29,508 shares owned by the spouse and children of Mr. Michaels, to which
Mr. Michaels disclaims beneficial ownership, 24,065 shares which may be purchased under currently exercisable stock options.
(4) Includes 10,800 shares which may be purchased under currently exercisable stock options.
(5) Includes 58,823 shares issuable upon conversion of 20,000 shares of 7 1/2% Preferred.
(6) Includes 117,647 shares issuable upon conversion of 40,000 shares of 7 1/2% Preferred.
(7) Includes 58,823 shares issuable upon conversion of 20,000 shares of 7 1/2% Preferred.
(8) Includes 58,823 shares issuable upon conversion of 20,000 shares of 7 1/2% Preferred.
(9) Includes 11,764 shares issuable upon conversion of 4,000 shares of 7 1/2% Preferred.
(10) Includes 35,294 shares issuable upon conversion of 12,000 shares of 7 1/2% Preferred.
G:\HLF\LOMAK\S-3\S-3.REG 30
31
(11) Includes 1,800 shares which may be purchased under currently exercisable
options.
(12) Includes 89,430 shares which may be purchased under currently exercisable
stock options.
(13) Includes 503,432 shares issuable upon conversion of 191,304 shares of
$2.03 Preferred.
(14) Includes 366,132 shares issuable upon conversion of 139,130 shares of
$2.03 Preferred.
(15) Includes 320,366 shares issuable upon conversion of 121,739 shares of
$2.03 Preferred.
(16) Includes 240,274 shares issuable upon conversion of 91,304 shares of $2.03
Preferred.
(17) Includes 228,834 shares issuable upon conversion of 86,957 shares of $2.03
Preferred.
(18) Includes 137,300 shares issuable upon conversion of 52,174 shares of $2.03
Preferred.
CERTAIN TRANSACTIONS
In 1990 the Company loaned Mr. Pinkerton $100,000 in connection with his
acquisition of 66,667 shares of Common Stock. The loan was secured, with
interest at 10% per annum and was repaid in early 1994.
In 1993, the Company purchased from SOCO interests in 43 gas wells located
principally in Pennsylvania. The consideration was approximately $180,000. The
price was determined based on arms-length negotiations and was minimally higher
than an independent third-party offer received by SOCO. The Company reimburses
SOCO $2,000 per month for Mr. Edelman's New York office. Mr. Edelman is
Chairman of the Company and also an officer and shareholder of SOCO. Therefore,
Mr. Edelman has an indirect interest in the foregoing relationships and
transactions between the Company and SOCO.
During 1994, the Company incurred costs of $369,000 and during in the
first nine months of 1995 the Company incurred costs of $145,000 with the
Hawthorne Company for advisory services paid in connection with the purchase of
oil and gas properties. Mr. Aikman, a Director of the Company, is an executive
officer and a principal owner of the Hawthorne Company. The amount incurred was
on a basis similar to that paid by the Company to third parties for similar
services.
In September 1995, the Company reached a verbal understanding with SOCO
whereby the Company would acquire SOCO's interest in 468 wells located in
Appalachia for $4 million. The Company currently operates 136 of the wells and
upon completion of the transaction will operate, in aggregate, 325 of the
wells. The price was determined based on arms-length negotiations through a
third-party broker retained by SOCO. Closing of the transaction is anticipated
to occur in November 1995. Assuming this transaction is consummated, the
Company and SOCO will no longer hold interests in any of the same properties.
SELLING SECURITYHOLDERS
The Selling Securityholders have advised the Company that sales of the
Selling Securityholder Securities may be effected from time to time in
transactions (which may include block transactions) in the over-the-counter
market, in negotiated transactions, through the writing of options on the
Selling Securityholder Securities or a combination of such methods of sale, at
fixed prices that may be changed, at market prices prevailing at the time of
sale, or at negotiated prices. The Selling Securityholders may effect such
transactions by selling the Selling Securityholder Securities directly to
purchasers or through broker-dealers that may act as agents or principals. Such
broker-dealers may receive compensation in the form of discounts, concessions
or commissions from the Selling Securityholders and/or the purchasers of
Selling Securityholder Securities for whom such broker-dealers may act as
agents or to whom they sell as principals, or both (which compensation as to a
particular broker-dealer might be in excess of customary commissions). The
Selling Securityholders have not entered into any agreement with respect to the
sale of the Selling Securityholder Securities.
The Selling Securityholders and any broker-dealers that act in connection
with the sale of the Selling Securityholder Securities as principals may be
deemed to be "underwriters" within the meaning of Section 2(11) of the Act and
any commission received by them and any profit on the resale of the Selling
Securityholder Securities and/or principals might be deemed to be underwriting
discounts and commissions under the Act. The Selling Securityholders may agree
to indemnify any agent, dealer or broker-dealer that participates in
transactions involving sales of the Selling Securityholder Securities against
certain liabilities, including liabilities arising under the Act. Sales of the
Selling Securityholder Securities by the Selling Securityholders, or even the
potential of such sales, could have an adverse effect on the market price of
the Common Stock.
G:\HLF\LOMAK\S-3\S-3.REG
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32
No arrangements have been made for the distribution or sale of the Selling
Securityholder Securities. There can be no assurance that Selling
Securityholders will be able to sell some or all of the Selling Securityholder
Securities listed for sale herein. There is no established public trading
market for the Preferred Stock as of the date of this Prospectus.
The following table sets forth certain information with respect to the
Selling Securityholders for whom the Company is registering the Selling
Securityholder Securities for resale to the public. The Company will not
receive any of the proceeds from the sale of the Selling Securityholder
Securities. There are no material relationships between any of the Selling
Securityholders and the Company except as otherwise indicated. Beneficial
ownership of the Selling Securityholder Securities by each Selling
Securityholder after the sale will depend on the number of Selling
Securityholder Securities sold by each Selling Securityholder. The shares
offered by the Selling Securityholder are not being underwritten. The Common
Stock issuable upon conversion of the Preferred Stock is being offered directly
by the Company pursuant to the terms of the Preferred Stock and is being hereby
registered.
COMMON STOCK PREFERRED STOCK
BENEFICIALLY BENEFICIALLY PERCENT OF CLASS PERCENT OF CLASS
OWNED PRIOR TO OWNED PRIOR TO OF COMMON OF PREFERRED
NAME OF SELLING SECURITY HOLDER OFFERING OFFERING STOCK STOCK
- -------------------------------------------------- ----------------- -------------------- ------------------- -----------------
SERIES A PREFERRED:
ARAS ASSOCIATES, INC. 11,765(1) 4,000 0.1% 2.0%
ROGER WILLIAM BRITTAIN 1,176(1) 400 0.0% 0.2%
PETER D. BRUNDAGE 5,882(1) 2,000 0.0% 1.0%
MARY L. DAVIS 1,176(1) 400 0.0% 0.2%
ANTHONY V. DUB(2) 11,765(1) 4,000 0.1% 2.0%
ALBERT I. EDELMAN 5,882(1) 2,000 0.0% 1.0%
ELEANOR W. EDELMAN 2,353(1) 800 0.0% 0.4%
THOMAS J. EDELMAN(2) 11,765(1) 4,000 0.1% 2.0%
DEAN R. FELLOWS 4,706(1) 1,600 0.0% 0.8%
JOHN F. FLOYD 5,882(1) 2,000 0.0% 1.0%
JOHN A. HILL 1,176(1) 400 0.0% 0.2%
MICHAEL LUTSCH 5,882(1) 2,000 0.0% 1.0%
MARWOOD PARTNERS 1,176(1) 400 0.0% 0.2%
ROBERT E. MILLER REVOCABLE TRUST UA DTD
11/3/89 2,941(1) 1,000 0.0% 0.5%
WILLIAM P. NICOLETTI 11,765(1) 4,000 0.1% 2.0%
PIRVEST, INC. 58,824(1) 20,000 0.4% 10.0%
PAINEWEBBER CDN FBO JAMES D. PURSLEY IRA #2
UA DTD 10/92 3,529(1) 1,200 0.0% 0.6%
PETER S. SEAMAN 5,882(1) 2,000 0.0% 1.0%
AUDREY L. SEVIN 2,941(1) 1,000 0.0% 0.5%
IRIK P. SEVIN 2,941(1) 1,000 0.0% 0.5%
HEATHER L. SHEPPARD TRUST UA DTD 6/19/79 5,882(1) 2,000 0.0% 1.0%
KATHRYN E. SHEPPARD TRUST UA DTD 6/19/79 5,882(1) 2,000 0.0% 1.0%
THOMAS H. SHEPPARD TRUST UA DTD 6/19/79 5,882(1) 2,000 0.0% 1.0%
DAVID H. SMITH 58,824(1) 20,000 0.4% 10.0%
ANN. P. STEPHENS 11,765(1) 4,000 0.1% 2.0%
ANN VINSON 2941(1) 1,000 0.0% 0.5%
JOAN B. VINSON 1,176(1) 400 0.0% 0.2%
ROBERT E. VINSON 2,941(1) 1,000 0.0% 0.5%
RODNEY L. WALLER 2,353(1) 800 0.0% 0.4%
SERIES B PREFERRED:
CURTIS F. AMUNDSON TRUST UA DTD 7/1/91 7,386(1) 2,600 0.0% 1.3%
JACK N. AYDIN & GAIL AYDIN JT TEN 2,841(1) 1,000 0.0% 0.5%
RDV CAPITOLA MANAGEMENT L.P. 22,727(1) 8,000 0.1% 4.0%
JACK DEWITT 11,364(1) 4,000 0.1% 2.0%
THE ARLYLE FAHNENSTIEL TRUST UA DTD 11/12/88 2,841(1) 1,000 0.0% 0.5%
H.E.C. SUPPORT FUND 34,091(1) 12,000 0.2% 6.0%
MARCIA HORROCKS 2,841(1) 1,000 0.0% 0.5%
JIM HOVINGA 5,682(1) 2,000 0.0% 1.0%
J.C. HUIZENGA 11,364(1) 4,000 0.1% 2.0%
LEE R. KUNDTZ TRUST UA DTD 4/4/90 1,420(1) 500 0.0% 0.3%
JOHN C. LABARGE TRUST UA DTD 1/28/92 5,682(1) 2,000 0.0% 1.0%
G:\HLF\LOMAK\S-3\S-3.REG
32
33
WILLIAM H. MARTINDILL TRUST UA DTD 1/7/87 1,420(1) 500 0.0% 0.3%
MCDONALD & COMPANY SECURITIES, INC. AGENT 24,148(1) 8,500 0.2% 4.3%
DANIEL A. MCDONALD REVOC. TRUST UA DTD
10/22/84 2,841(1) 1,000 0.0% 0.5%
OREFUND 113,636(1) 40,000 0.7% 20.0%
THOMAS W. RITCHEY & KATHERINE RITCHEY IRR.
LIVING TRUST DTD 10/2/94 5,682(1) 2,000 0.0% 1.0%
SBSF CONVERTIBLE SECURITIES FUND ATTN: MR.
JOHN HANASSAK 56,818(1) 20,000 0.4% 10.0%
GEORGE L. UNIS MD PC EMPLOYEE RETIREMENT
FUND 5,682(1) 2,000 0.0% 1.0%
GERALD WILLIAMS 1,420(1) 500 0.0% 0.3%
$2.03 PREFERRED:
PAUL BERKMAN 68,650(1) 26,087 0.4% 2.6%
CINCINNATI FINANCIAL 228,834(1) 86,957 1.5% 8.7%
CNA INSURANCE 91,534(1) 34,783 0.6% 3.5%
DEAN WITTER 91,534(1) 34,783 0.6% 3.5%
EAGLE ASSET MANAGEMENT 34,324(1) 13,043 0.2% 1.3%
EVERGREEN FUND 45,766(1) 17,391 0.3% 1.7%
FIDELITY MANAGEMENT 366,132(1) 139,130 2.3% 13.9%
FRANKLIN FUNDS 45,766(1) 17,391 0.3% 1.7%
GUARDIAN LIFE 503,432(1) 191,304 3.2% 19.1%
MERRILL LYNCH ASSET MANAGEMENT 240,274(1) 91,304 1.5% 9.1%
ORION CAPITAL 125,858(1) 47,826 0.8% 4.8%
PALISADE CAPITAL 320,366(1) 121,739 2.0% 12.2%
PALLADIN CAPITAL 34,324(1) 13,043 0.2% 1.3%
PECKS MGMT. 228,834(1) 86,957 1.5% 8.7%
PUTNUM INVESTMENTS 137,300(1) 52,174 0.9% 5.2%
TIEDMANN 22,884(1) 8,696 0.1% 0.9%
VALUE LINE 45,766(1) 17,391 0.3% 1.7%
TRANSFUEL, INC. 86,040 0 0.5% 0.0%
- ----------------------------
* Denotes less than 1%.
(1) Issuable upon conversion of the Preferred Stock.
(2) Director of the Company. See "Principal Stockholders and Share Ownership of Management" and "Management."
PLAN OF DISTRIBUTION
The distribution of the Selling Securityholder Securities by the Selling
Securityholder may be effected from time to time in one or more transactions on
Nasdaq, in the case of the Common Stock, in privately-negotiated transactions
or otherwise, at fixed prices that may be changed, at market prices prevailing
at the time of sale, at prices related to such prevailing market prices, or at
negotiated prices.
The Selling Securityholder and any underwriters, broker-dealers or agents
that act in connection with the sale of the Selling Securityholder Securities
may be deemed to be "underwriters" as that term is defined in the Act, and any
commissions received by them and profit on any resale of the shares as
principal might be deemed to be underwriting discounts and commissions under
the Act.
It is anticipated that broker-dealers participating in sales of the
Selling Securityholder Securities will receive ordinary and customary or
specifically negotiated brokerage fees or commissions. The Company has agreed
to indemnify certain of the Selling Securityholders against certain
liabilities, including liabilities under the Securities Act.
The Company may offer the Securities in any of three ways: (i) through
underwriters or dealers; (ii) directly to a limited number of purchasers or to
a single purchaser; or (iii) through agents. To the extent required, any
Prospectus Supplement with respect to the Securities will set forth the terms
of the offering and the proceeds to the Company from the sale thereof, any
underwriting discounts and other items of price, and any discounts or
concessions allowed or reallowed or paid to dealers. Any public offering price
and any discounts or concessions allowed or reallowed or paid to dealers may be
changed from time to time.
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If underwriters are utilized, the Securities being sold to them will be
acquired by the underwriters for their own account and may be resold from time
to time in one or more transactions, including negotiated transactions, at a
fixed public offering price or at varying prices determined at the time of
sale. The Securities may be offered to the public either through underwriting
syndicates represented by one or more managing underwriters or directly by one
or more firms acting as underwriters. To the extent required, the underwriter
or underwriters with respect to the Securities being offered by the Company
will be named in the Prospectus Supplement relating to such offering and, if an
underwriting syndicate is used, the managing underwriter or underwriters will
be set forth on the cover page of such Prospectus Supplement. Any underwriting
agreement will provide that the obligations of the underwriters are subject to
certain conditions precedent, and that the underwriters will be obligated to
purchase all of the Securities to which such underwriting agreement relates if
any if purchased. The Company will agree to indemnify any underwriters against
certain civil liabilities, including liabilities under the Securities Act.
The Securities may be sold directly by the Company or through agents
designated by the Company from time to time. To the extent required any agent
involved in the offer or sale of the Securities in respect of which this
Prospectus is delivered will be set forth in the Prospectus Statement. Unless
otherwise indicated in the Prospectus Statement, any such agent will be acting
on a best efforts basis for the period of its appointment.
The Company will pay all of the expenses of this offering.
The shares of Common Stock are listed on Nasdaq. The Common Stock offered
hereby by the Company and the Selling Securityholders when issued, will be
listed, subject to notice of issuance, on Nasdaq.
DESCRIPTION OF THE PREFERRED STOCK
The following is a summary of the terms of the $2.03 Preferred and the
7 1/2% Preferred. This summary is not intended to be complete and is subject to,
and qualified in its entirety by reference to, the Certificate of Incorporation
of the Company and the related Certificate of Designations for each of the
$2.03 Preferred and the Series A Preferred and Series B Preferred, each filed
with the Secretary of State of the State of Delaware setting forth the rights,
preferences and limitations of the $2.03 Preferred, the Series A Preferred and
the Series B Preferred (each a "Certificate of Designations"), forms of which
are available upon request from the Company.
Under its Certificate of Incorporation, the Company has authority to issue
2,000,000 shares of preferred stock, par value of $1 per share, and the Board
of Directors is authorized to establish and designate the classes, series,
voting powers, designations, preferences and relative, participating, optional
or other rights, and such qualifications, limitations and restrictions of the
preferred stock as the Board, in its sole discretion, may determine without
further vote or action by the stockholders. The rights, preferences, privileges
and restrictions or qualifications of different series of preferred stock may
differ with respect to dividend rates, amounts payable on liquidation, voting
rights, conversion rights, redemption provisions, sinking fund provisions and
other matters. As of November 6, 1995, 1,000,000 shares of the $2.03 Preferred
were outstanding and 200,000 shares of the Company's 7 1/2% Preferred were
outstanding in two series. The outstanding shares of $2.03 Preferred and the
7 1/2% Preferred are fully paid and non-assessable.
$2.03 PREFERRED
RANKING
The $2.03 Preferred ranks senior to the Common Stock in right of payment
of dividends and upon liquidation, dissolution or winding up of the Company,
ranks pari passu to the 7 1/2% Preferred and any convertible preferred stock
hereafter issued by the Company (except to the extent any such convertible
preferred stock may be designated as junior to the $2.03 Preferred with respect
to the payment of dividends or upon liquidation, dissolution or winding up of
the Company) and ranks junior to any non-convertible preferred stock hereafter
issued by the Company (except to the extent any such non-convertible preferred
stock may be designated as ranking junior or pari passu to the $2.03 Preferred
with respect to the payment of dividends or upon liquidation, dissolution or
winding up of the Company). The Company may not, without the consent of the
holders of at least a majority of the $2.03 Preferred, create, authorize or
issue, or reclassify any authorized stock of the Company into, or create,
authorize or issue any obligation or security convertible or exchangeable into
or evidencing a right to purchase, any shares of any class of capital stock of
the Company ranking senior to the $2.03 Preferred, except that to the extent
permitted by law the foregoing shall not apply to non-convertible preferred
stock, which may be
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authorized and issued without such consent. The Company may issue additional
series of preferred stock ranking on parity with the $2.03 Preferred with
respect to the payment of dividends or upon liquidation, dissolution and
winding up without the consent of the holders of the $2.03 Preferred.
DIVIDENDS
Holders of the $2.03 Preferred are entitled to receive if, when and as
declared by the Board of Directors out of funds legally available therefor,
cash dividends at the annual rate of $2.03 per share, payable quarterly in
arrears on March 31, June 30, September 30 and December 31 of each year,
commencing December 31, 1995. Dividends on the $2.03 Preferred will be
cumulative from the date of initial issuance, and will be payable to holders of
record as of such record dates as shall be fixed by the Board of Directors,
which record dates shall not be more than 60 nor less than 10 days preceding
the dividend payment date. Accrued but unpaid dividends will not bear interest.
No dividends or other cash distributions may be set aside or paid with
respect to any shares of capital stock ranking junior to the $2.03 Preferred
(including the Common Stock) nor may any such capital stock be redeemed,
repurchased or otherwise acquired for cash consideration by the Company unless
and until all accumulated and unpaid dividends on the $2.03 Preferred have been
paid.
Whenever all accrued dividends are not paid in full on the $2.03 Preferred
or any such parity dividend stock, all dividends declared on the $2.03
Preferred and such parity dividend stock will be declared and made pro rata so
that the amount of dividends declared per share on the $2.03 Preferred and such
parity dividend stock will bear the same ratio that accrued and unpaid
dividends per share on the $2.03 Preferred and such parity dividend stock bear
to each other.
CONVERSION RIGHTS
The $2.03 Preferred will be convertible into shares of the Common Stock at
the option of the holder, at any time, at a conversion rate equal to the
aggregate liquidation preference of the shares of $2.03 Preferred surrendered
for conversion, divided by the Conversion Price. Notwithstanding the
foregoing, if shares of the $2.03 Preferred are called for redemption, the
conversion right will terminate at the close of business on the date fixed for
redemption or exchanges.
The initial Conversion Price set forth on the cover page of this
Prospectus is subject to adjustment (under formulas set forth in the
Certificate of Designations) in certain events, including (i) the issuance of
Common Stock as a dividend or distribution on any class of capital stock of the
Company or any subsidiary which is not wholly-owned by the Company; (ii)
subdivisions, splits and combinations of the Common Stock; (iii) the issuance
or distribution of capital stock of the Company or any of any subsidiary which
is not wholly owned by the Company or of rights or warrants to acquire capital
stock of the Company or any such subsidiary at less than the current market
price (as defined in the Certificate of Designations) on the date of issuance
or distribution (the issuance of capital stock upon the exercise of warrants or
options will not cause an adjustment in the conversion price if no such
adjustment would have been required at the time such warrant or option was
issued); and (iv) the distribution to holders of any class of capital stock of
the Company generally and to holders of capital stock of any subsidiary which
is not wholly owned by the Company of evidences of indebtedness or assets
(including cash and securities, but excluding warrants and options for which
adjustment is made as described above).
Notwithstanding the foregoing, no adjustment in the Conversion Price shall
be made upon (i) the issuance of Common Stock of the Company pursuant to any
compensation or incentive plan for officers, Directors, employees or
consultants of the Company, which plan has been approved by the Compensation
Committee of the Board of Directors (or if there is no such committee then
serving, by the majority vote of the independent Directors) and, if required by
law, the requisite vote of the stockholders of the Company (unless the exercise
or conversion price is subsequently changed other than solely by operation of
the anti-dilution provisions thereof or by the Compensation Committee, if
applicable, the Board of Directors and, if required by law, the stockholders of
the Company as provided in this clause (i)), (ii) the issuance of Common Stock
upon the conversion or exercise of $2.03 Preferred or warrants of the Company
outstanding on the date hereof, unless the conversion or exercise price thereof
is changed after the date of the Indenture (other than solely by operation of
the anti-dilution provisions thereof), (iii) the declaration, setting aside or
payment of dividends on the $2.03 Preferred, the 7 1/2% Preferred or any other
preferred stock hereafter issued by the Company or (iv) after giving effect to
any dividend pursuant to the preceding clause (iii), the declaration, setting
aside or payment of dividends out of the Company's cumulative retained
earnings. Also, notwithstanding the provisions of the preceding paragraph, (a)
if the rights or warrants described in clause (iii) of the preceding paragraph
are exercisable only upon the occurrence of certain triggering events, then the
conversion
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price will not be adjusted until such triggering events occur and (b) if rights
or warrants expire unexercised, the conversion price shall be readjusted to
take into account only the actual number of such rights or warrants which were
exercised.
In case of any reclassification or change of outstanding shares of the
Common Stock (with certain exceptions) or the Company's consolidation with, or
merger with or into, any other entity that results in a reclassification,
change, conversion, exchange or cancellation of outstanding shares of the
Common Stock (with certain exceptions) or any sale or transfer of all or
substantially all the assets of the Company, the entity resulting from such
reclassification, change or merger, or formed by such consolidation, or which
acquires such assets, as the case may be, will be required to make a provision
in its articles or certificate of incorporation such that all holders of the
$2.03 Preferred after the reclassification, change, consolidation, merger, sale
or transfer will have the right to convert their shares of the $2.03 Preferred
into the kind and amount of securities, cash and other property which the
holders would have been entitled to receive upon the reclassification, change,
consolidation, merger, sale or transfer if the holders had held the Common
Stock issuable upon conversion of their shares of the $2.03 Preferred
immediately prior to the reclassification, change, consolidation, merger, sale
or transfer.
No adjustment in the Conversion Price will be required unless the
adjustment would require a change of at least one percent in the Conversion
Price then in effect; provided, however, that any adjustment that would
otherwise be required to be made will be carried forward and taken into account
in any subsequent adjustment. The Company reserves the right to make such
reduction in the Conversion Price, in addition to those required under the
provisions described above, as the Company in its discretion may determine to
be advisable in order that certain stock-related distributions which may be
made by the Company to its stockholders will not be taxable. Except as stated
above, the Conversion Price will not be adjusted for the issuance of the Common
Stock or any securities convertible into or exchangeable for the Common Stock,
or carrying the right to purchase any such securities.
No fractional share or securities representing fractional shares of Common
Stock will be issued upon conversion; instead, any fractional shares resulting
from conversion will be paid in cash based on the last sales price of the
Common Stock at the close of business on the last day on which the Common Stock
traded preceding the date of conversion.
The holder of record of a share of the $2.03 Preferred on a record date
with respect to the payment of a dividend on the $2.03 Preferred will be
entitled to receive the dividend on that share of the $2.03 Preferred on the
corresponding dividend payment date notwithstanding the conversion of the share
after the record date or any default by the Company in the payment of the
dividend payable on that dividend payment date. Except as described above, no
payment or adjustment is to be made on conversion for accrued and unpaid
dividends on the shares of the $2.03 Preferred or for dividends on the Common
Stock issued on conversion.
Adjustments to the conversion price of the $2.03 Preferred may be taxable
to the holders of the $2.03 Preferred as a dividend for federal income tax
purposes.
SPECIAL CONVERSION RIGHTS
The $2.03 Preferred has a special conversion right that becomes effective
upon the occurrence of certain types of significant transactions affecting
ownership or control of the Company or the market for the Common Stock or the
$2.03 Preferred. The purpose of the special conversion right is to provide
(subject to certain exceptions) partial loss protection upon the occurrence of
a Change of Control (as defined below) or a Fundamental Change (as defined
below) at a time when the market value of the Common Stock is less than the
then prevailing Conversion Price. In such situations, the special conversion
right would, for a 45-day period, reduce the then prevailing Conversion Price
to the market value (as defined below) of the Common Stock, except that the
Conversion Price will not be reduced below $5.21 per share of Common Stock
(which is 66 2/3% of the last reported sale price of the Common Stock on the
day preceding the date of this Prospectus), subject to certain adjustments
described below (the "Special Conversion Price"). Consequently, to the extent
that the market value of the Common Stock is less than the minimum Special
Conversion Price, a holder of the $2.03 Preferred will not be fully protected
from loss upon exercise of a special conversion right.
The special conversion right is intended to provide limited loss
protection to investors in certain circumstances while not giving holders a
veto power over significant transactions affecting ownership or control of the
Company. Although the special conversion right may render more costly or
otherwise inhibit certain proposed transactions, its primary purpose is not to
inhibit or discourage takeovers or other business combinations.
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Each holder of the $2.03 Preferred will be entitled to a special
conversion right if a Change of Control or Fundamental Change occurs. A Change
of Control will occur if a person or group acquires the right to cast more than
50% of the votes for the election of Directors generally or to elect a majority
of the Board of Directors of the Company, subject to certain important
qualifications. A Fundamental Change is, generally, a sale of all or
substantially all the Company's assets or a transaction in which at least a
majority of the Common Stock or the $2.03 Preferred is transferred for, or is
converted into, any other asset, subject to certain important qualifications.
The full definitions of the terms "Change of Control" and "Fundamental Change"
are set forth below.
Upon a Change of Control or Fundamental Change, the special conversion
right will permit each holder of the $2.03 Preferred, at the holder's option
during the 45-day period described below, to convert all, but not less than
all, of the holder's $2.03 Preferred at the Special Conversion Price. Upon such
conversion with respect to a Change of Control, the holder will receive Common
Stock, and upon such conversion with respect to a Fundamental Change, the
holder will receive the kind and amount of cash, securities or other assets
receivable upon such Fundamental Change by a holder of the number of shares of
Common Stock into which the $2.03 Preferred of the holder exercising the
special conversion right would have been convertible immediately prior to the
Fundamental Change at the Special Conversion Price. In either case, however,
the Company or its successor may, at its option, elect to provide the holder
with cash equal to the market value of the number of shares of Common Stock
into which the holder's $2.03 Preferred would have been convertible immediately
prior to such Change of Control or Fundamental Change at the Special Conversion
Price, but only if the Company, in its notice to holders that a Change of
Control or Fundamental Change has occurred, has notified such holder of the
election to provide cash in lieu of other consideration.
The Company will mail to each registered holder of the $2.03 Preferred a
notice setting forth details of any special conversion right occasioned by a
Change of Control or Fundamental Change, together with all information required
by applicable securities laws related thereto, within 30 days after the event
occurs. A special conversion right may be exercised only within the 45-day
period after the notice is mailed and will expire at the end of that period.
Exercise of a special conversion right is revocable by the holder at any time
prior to the conversion date by notice of withdrawal to the conversion agent,
and all the $2.03 Preferred tendered for conversion will be converted at the
end of the 45-day period mentioned in the preceding sentence. In the event that
a Change of Control or Fundamental Change occurs, the Company will comply with
all applicable provisions of the Exchange Act and the rules and regulations
issued thereunder including, without limitation, Sections 13(e) and 14(e) under
the Exchange Act and the rules thereunder including Rule 13e-4. The $2.03
Preferred that is not converted pursuant to a special conversion right will
continue to be convertible pursuant to the general conversion rights described
above at "Conversion Rights."
The special conversion right is not intended to, and does not, protect
holders of the $2.03 Preferred in all circumstances that might affect ownership
or control of the Company or the market for the Common Stock or the $2.03
Preferred, or otherwise adversely affect the value of an investment in the
$2.03 Preferred. The ability to control the Company may be obtained by a person
even if that person does not acquire the right to vote a majority of the
Company's voting stock or to elect a majority of the Board of Directors. In
addition, the Company and the market for the Common Stock or $2.03 Preferred
may be affected by various transactions that do not constitute a Fundamental
Change. In particular, transactions involving transfer or conversion of less
than a majority of the Common Stock or the $2.03 Preferred may have a
significant effect on the Company and the market for the Common Stock or the
$2.03 Preferred, as could other transactions which are exempted from the
definition of Fundamental Change, as described below. If the special conversion
right does arise as the result of a Fundamental Change, the special conversion
right will allow a holder exercising such right to receive the same type of
consideration received by holders of the Common Stock and, accordingly, the
degree of protection afforded by the special conversion right may be affected
by the type of consideration received.
As used herein, a "Change of Control" shall be deemed to occur if any
person (as the term "person" is used in Section 13(d) or Section 14(d) of the
Exchange Act) is or becomes the direct or indirect beneficial owner of shares
of the Company's capital stock representing greater than 50% of the total
voting power of all shares of capital stock of the Company entitled to vote in
the election of Directors under ordinary circumstances or to elect a majority
of the Board of Directors of the Company. Notwithstanding the foregoing, a
Change of Control will not include any transaction or series of related
transactions in which (a) 85% or more of the consideration received by the
holders of the $2.03 Preferred after giving effect to the conversion
immediately after such transaction consists of common stock that is listed on a
national securities exchange or approved for quotation on Nasdaq or (b)
immediately after the consummation of such transaction the value of (i) the
$2.03 Preferred or (ii) the sum of the value of any common stock that is listed
on a national securities exchange or approved for quotation on Nasdaq which is
receivable upon conversion of the $2.03 Preferred immediately after the
consummation of such
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transaction plus any cash receivable upon such conversion is equal to or in
excess of 105% of the liquidation preference thereof on each of the five
trading days immediately after the consummation of such transaction.
Notwithstanding the foregoing, a Change of Control will not be deemed to have
occurred with respect to any transaction that constitutes a Fundamental Change.
As used herein, a "Fundamental Change" means (i) the occurrence of any
transaction or series of related transactions in connection with which a
majority of the Common Stock or the $2.03 Preferred is exchanged for, converted
into or acquired for or converted solely into the right to receive cash,
securities, property or other assets (whether by means of an exchange offer,
liquidation, tender offer, consolidation, merger, combination,
reclassification, recapitalization or otherwise) or (ii) the conveyance, sale,
lease, assignment, transfer or other disposal of a majority of the Company's
business, property or assets; provided, however, a Fundamental Change will not
include any transaction or series of related transactions in which (a) 85% or
more of the consideration received by the holders of the $2.03 Preferred either
(i) directly for their shares or (ii) receivable upon conversion of their
shares immediately after such transaction or upon the conversion or exchange
immediately after such transaction of any convertible or exchangeable
securities received directly for their shares, consists of common stock that is
listed on a national securities exchange or approved for quotation on Nasdaq or
(b) immediately after the consummation of such transaction of (i) the value of
$2.03 Preferred, or (ii) the sum of the value immediately after the
consummation of the transaction of any securities into which such shares are
exchanged plus any cash received in connection with such exchange, or (iii) the
sum of the value immediately after the consummation of the transaction of any
securities into which such shares or securities identified in the preceding
clauses (i) and (ii) may be converted into or exchanged for plus any cash
received in connection with such conversion or exchange is equal to or in
excess of 105% of the liquidation preference of such shares of $2.03 Preferred
on each of the five consecutive trading days preceding such transaction.
The Special Conversion Price will be adjusted each time the Conversion
Price is adjusted, so that the ratio of such amount to the Conversion Price,
after giving effect to any such adjustment, shall always be the same as the
ratio of $5.21 to the initial Conversion Price, without giving effect to any
such adjustment.
As used herein, "market value" of the Common Stock or any other security
is the average of the last reported sale prices of the Common Stock or such
other security, as the case may be, for the five trading days ending on the
last business day preceding the date of the Fundamental Change or Change of
Control.
VOTING RIGHTS
Except as provided by law, holders of the $2.03 Preferred will vote as a
single class with the holders of the Common Stock at annual or special
meetings, and are entitled to one vote for each share of the $2.03 Preferred
owned by such holder. In addition to such general voting rights, without the
affirmative vote or consent of the holders of at least a majority of the number
of shares of the $2.03 Preferred then outstanding, the Company may not (i)
create or issue or increase the authorized number of shares of any class or
classes or series of stock ranking senior to the $2.03 Preferred either as to
dividends or upon liquidation, except for the authorization and/or issuance of
non- convertible $2.03 Preferred which shall be permitted without such vote, or
(ii) amend or alter or repeal any of the provisions of the Certificate of
Incorporation of the Company so as to affect adversely the preferences or
rights of the $2.03 Preferred. In addition, the $2.03 Preferred will be
entitled to vote on Fundamental Changes (as described below) under certain
circumstances.
In the event that the Company misses payments on six quarterly dividends
payable on the $2.03 Preferred, which dividend payments remain unpaid, or if
any future class of preferred stockholders is entitled to elect Directors based
on actual missed and unpaid dividends, the number of Directors of the Company
shall be increased to such number as may be necessary to enable holders of the
$2.03 Preferred, and all such other future preferred stockholders (the
"Preferred Class"), voting as a single class, to elect one third of the
Directors of the Company (but not less than three) provided, however, that
there shall be counted as Directors elected by the Preferred Class, up to two
Directors elected by the 7 1/2% Preferred, subject to the terms of the 7 1/2%
Preferred, so long as it remains outstanding. If, subsequent to an election of
Directors by the Preferred Class, there is an election of Directors by the 7
1/2% Preferred, one or more Directors elected by the Preferred Class shall
forthwith resign so that all Directors elected by the Preferred Class and the 7
1/2% Preferred, in the aggregate constitute no more than one third of the
Board. Upon any termination of such rights to vote for Directors, the term of
office of all Directors so elected shall terminate.
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COMPANY'S RIGHT OF REDEMPTION
The $2.03 Preferred is not subject to any mandatory redemption or sinking
fund provision. The $2.03 Preferred will not be redeemable by the Company prior
to November 1, 1998. On and after November 1, 1998, the $2.03 Preferred will be
redeemable at the option of the Company, in whole or in part, at any time at
the redemption prices set forth below, plus accumulated and unpaid dividends:
During the 12 month period
commencing November 1, Redemption Price
--------------------------- ----------------------
1998 $ 26.25
1999 $ 26.00
2000 $ 25.75
2001 $ 25.50
2002 $ 25.25
2003 and thereafter $ 25.00
If fewer than all of the shares of $2.03 Preferred are to be redeemed, the
shares to be redeemed shall be selected by lot or pro rata or in some other
equitable manner determined by the Company in its sole discretion. In the event
that the Company has failed to pay accrued and unpaid dividends on the $2.03
Preferred, it may not redeem any of the then outstanding shares of the $2.03
Preferred until all such accrued and unpaid dividends and the then current
quarterly dividends have been paid in full.
Notice of redemption must be mailed to each holder of the $2.03 Preferred
to be redeemed at his last address as it appears upon the Company's registry
books at least 30 days prior to the record date of such redemption. On and
after the redemption date, dividends will cease to accumulate on shares of the
$2.03 Preferred called for redemption.
On or after the redemption date, holders of shares of the $2.03 Preferred
which have been redeemed shall surrender their certificates representing such
shares to the Company at its principal place of business or as otherwise
specified and thereupon the redemption price of such shares shall be payable to
the order of the person whose name appears on such certificate or certificates
as the owner thereof; provided, however, that a holder of the $2.03 Preferred
may elect to convert such shares into Common Stock at any time prior to the
close of business on the date fixed for redemption.
From and after the redemption date, all rights of the holders of the $2.03
Preferred so redeemed shall cease with respect to such shares and such shares
shall not thereafter be transferred on the books of the Company or be deemed to
be outstanding for any purpose whatsoever.
EXCHANGE
The $2.03 Preferred is exchangeable in whole, but not in part, at the sole
option of the Company into the $2.03 Notes at an exchange rate of $25 principal
amount of the $2.03 Notes for each share of the $2.03 Preferred on any dividend
date beginning on December 31, 1996 and up to and including December 31, 2004.
See "Description of the $2.03 Notes." The Company may not exchange any share of
the $2.03 Preferred unless all accrued dividends through the date of exchange
have been paid and certain other conditions have been met. The Company shall
send to each holder of the $2.03 Preferred notice of such exchange not less
than 30 nor more than 90 days prior to the exchange date. The exchange shall
not relieve the Company from any obligation with respect to the payment of
accrued but unpaid dividends through the date of the exchange. Such exchange
will be a taxable transaction. See "Certain Federal Income Tax
Considerations--Redemption or Exchange for the $2.03 Notes."
From and after the date of the exchange of the $2.03 Preferred for the
$2.03 Notes, the $2.03 Preferred shall cease to accrue dividends, shall no
longer be deemed outstanding and shall represent only the right to receive the
$2.03 Notes.
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LIQUIDATION RIGHTS
In the event of any voluntary or involuntary liquidation, dissolution or
winding-up of the Company, the holders of the $2.03 Preferred will be entitled
to receive, out of the assets of the Company available for distribution to
stockholders, a liquidating distribution of $25 per share, plus any accumulated
and unpaid dividends (whether or not earned or declared) before any payment or
distribution of the assets of the Company (whether capital or surplus), or the
proceeds thereof, may be made or set apart for the holders of the Common Stock
or any other stock ranking junior to the $2.03 Preferred. If upon any voluntary
or involuntary liquidation, dissolution or winding up of the Company, the
assets of the Company are insufficient to pay in full the amount payable with
respect to the $2.03 Preferred and any other class of capital stock ranking on
a parity with the $2.03 Preferred upon liquidation, the holders of the $2.03
Preferred and such other shares of parity stock will share ratably in any such
distribution of the Company's assets in proportion to the full respective
distributable amounts to which they are entitled. After payment of the full
amount of the liquidation preference to which they are entitled, the holders of
shares of the $2.03 Preferred will not be entitled to any further participation
in any distribution of assets of the Company.
MISCELLANEOUS
The Company is not subject to any mandatory redemption or sinking fund
provisions with respect to the $2.03 Preferred. The holders of the $2.03
Preferred are not entitled to preemptive rights to subscribe for or to purchase
any shares or securities of any class which may at any time be issued, sold or
offered for sale by the Company. Shares of $2.03 Preferred redeemed or
otherwise reacquired by the Company shall be retired by the Company and shall
be unavailable for subsequent issuance. Keycorp Shareholder Services, Inc., or
such other transfer agent then employed by the Company, the transfer agent for
the $2.03 Preferred (the "Transfer Agent").
BOOK-ENTRY; DELIVERY AND FORM
Global Certificate. Except as set forth below, the $2.03 Preferred
initially issued in the form of one or more registered stock certificates in
global form (each a "Global Certificate"). Each Global Certificate was
deposited on the date of the closing of the sale of the $2.03 Preferred (the
"Closing Date") with, or on behalf of, the Depository Trust Company (the
"Depository") and registered in the name of Cede & Co., as nominee of the
Depository, and will remain in the custody of the Transfer Agent pursuant to
the FAST Balance Certificate Agreement between DTC and the Transfer Agent.
Interests in the Global Certificate will be available for purchase only by
"qualified institutional buyers," as defined in Rule 144A under the Securities
Act ("QIBs").
Certificates for $2.03 Preferred that were originally issued to or
transferred to institutional "accredited investors," as defined in Rule
501(a)(1), (2), (3) or (7) under the Securities Act (an "Institutional
Accredited Investor"), who are not QIBs or to any other persons who are not
QIBs will be issued in registered form (the "Certificated $2.03 Preferred").
Upon the transfer to a QIB of Certificated $2.03 Preferred, such Certificated
$2.03 Preferred will, unless the Global Certificate has previously been
exchanged for Certificated $2.03 Preferred, be exchanged for an interest in the
Global Certificate representing the principal amount of $2.03 Preferred being
transferred. For a description of the restrictions on the transfer of
Certificated $2.03 Preferred, see "Transfer Restrictions."
The Depository has advised the Company that it is (i) a limited purpose
trust company organized under the laws of the State of New York, (ii) a member
of the Federal Reserve System, (iii) a "clearing corporation" within the
meaning of the Uniform Commercial Code, as amended, and (iv) a "Clearing
Agency" registered pursuant to Section 17A of the Exchange Act. The Depository
was created to hold securities for its participants (collectively, the
"Participants") and facilitates the clearance and settlement of securities
transactions between Participants through electronic book-entry changes to the
accounts of its Participants, thereby eliminating the need for physical
transfer and delivery of certificates. The Depository's Participants include
securities brokers and dealers (including the Initial Purchasers), banks and
trust companies, clearing corporations and certain other organizations. Access
to the Depository's system is also available to other entities such as banks,
brokers, dealers and trust companies (collectively, the "Indirect
Participants") that clear through or maintain a custodial relationship with a
Participant, either directly or indirectly. QIBs may elect to hold $2.03
Preferred purchased by them through the Depository. QIBs who are not
Participants may beneficially own securities held by or on behalf of the
Depository only through Participants or Indirect Participants. Persons that
are not QIBs may not hold $2.03 Preferred through the Depository.
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The Company expects that pursuant to procedures established by the
Depository (i) upon deposit of the Global Certificates, the Depository will
credit the accounts of Participants designated by the Initial Purchasers with
an interest in the Global Certificate and (ii) ownership of the $2.03 Preferred
represented thereby will be shown on, and the transfer of ownership thereof
will be effected only through, records maintained by the Depository (with
respect to the interest of Participants), the Participants and the Indirect
Participants. The laws of some states require that certain persons take
physical delivery in definitive form of securities that they own and that
security interests in negotiable instruments can only be perfected by delivery
of certificates representing the instruments. Consequently, the ability to
transfer $2.03 Preferred or to pledge $2.03 Preferred as collateral will be
limited to such extent.
So long as the Depository or its nominee is the registered owner of the
Global Certificate, the Depository or such nominee, as the case may be, will be
considered the sole owner of the $2.03 Preferred represented by the Global
Certificate for all purposes. Except as provided below, owners of beneficial
interests in a Global Certificate will not be entitled to have $2.03 Preferred
represented by such Global Certificate registered in their names, will not
receive or be entitled to receive physical delivery of certificates for such
shares, and will not be considered the owners or holders thereof for any
purpose, including with respect to the voting thereof. As a result, the ability
of a person having a beneficial interest in $2.03 Preferred represented by a
Global Certificate to pledge such interest to persons or entities that do not
participate in the Depository's system or to otherwise take action with respect
to such interest, may be affected by the lack of a physical certificate
evidencing such interest.
Accordingly, each QIB owning a beneficial interest in a Global Certificate
must rely on the procedures of the Depository and, if such QIB is not a
Participant or an Indirect Participant, on the procedures of the Participant
through which such QIB owns its interest, to exercise any rights of an owner of
$2.03 Preferred. The Company understands that under existing industry practice,
in the event the Company requests any action of holders or a QIB that is an
owner of a beneficial interest in a Global Certificate desires to take any
action that the Depository, as the holder of such Global Certificate, is
entitled to take, the Depository would authorize the Participants to take such
action and the Participant would authorize QIBs owning through such
Participants to take such action or would otherwise act upon the instruction of
such QIBs. The Company will not have any responsibility or liability for any
aspect of the records relating to or payments made on account of $2.03
Preferred by the Depository, or for maintaining, supervising or reviewing any
records of the Depository relating to such $2.03 Preferred.
Payments with respect to dividends, liquidation or other amounts with
respect to $2.03 Preferred represented by a Global Certificate registered in
the name of the Depository or its nominee on the applicable record date will be
payable by the Company to or at the direction of the Depository or its nominee
in its capacity as the registered holder of the Global Certificate representing
such $2.03 Preferred. The Company may treat the persons in whose names the
$2.03 Preferred, including the Global Certificate, are registered as the owners
thereof for the purpose of receiving such payment and for any and all other
purposes whatsoever. Consequently, the Company will not have any responsibility
or liability for the payment of such amounts to beneficial owners of $2.03
Preferred, or to immediately credit the accounts of the relevant Participants
with such payment, in amounts proportionate to their respective holdings in
principal amount of beneficial interest in the Global Certificate as shown on
the records of the Depository. Payments by the Participants and the Indirect
Participants to the beneficial owners of $2.03 Preferred will be governed by
standing instructions and customary practice and will be the responsibility of
the Participants or the Indirect Participants.
Delivery of Certificates. If (i) the Depository notified the Company that
it is no longer willing or able to act as a depository and the Company is
unable to locate a qualified successor within 90 days or (ii) the Company, at
its option, elects to cause the issuance of $2.03 Preferred in definitive form,
then, upon surrender by the Depository of its Global Certificate, certificates
for $2.03 Preferred will be issued to each person that the Depository
identifies as the beneficial owner of the $2.03 Preferred represented by the
Global Certificate. In addition, subject to certain conditions, any person
having a beneficial interest in a Global Certificate may, upon request to the
Company and the transfer agent for the $2.03 Preferred, exchange such
beneficial interest for certificated shares. Upon any such issuance, the
Company and the transfer agent are required to register such certificates in
the name of such person or persons (or the nominee of any thereof), and cause
the same to be delivered thereto.
Neither the Company nor the transfer agent shall be liable for any delay
by the Depository or any Participant or Indirect Participant in identifying the
beneficial owners of the related $2.03 Preferred and each such person may
conclusively rely on, and shall be protected in relying on, instructions from
the Depository for all purposes (including with respect to the registration and
delivery, and the respective principal amounts, of the $2.03 Preferred to be
issued).
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7 1/2% PREFERRED
RANKING
The 7 1/2 Preferred ranks senior to the Common Stock in right of payment
of dividends and upon liquidation, dissolution or winding up of the Company and
ranks pari passu to the $2.03 Preferred. The Company may not issue any shares
of preferred stock which are convertible into shares of the Common Stock which
rank senior to shares of the 7 1/2% Preferred as to liquidation preference
without the consent of the holders of a majority of the shares of the 7 1/2%
Preferred.
DIVIDENDS
Holders of the 7 1/2 Preferred are entitled to receive if, when and as
declared by the Board of Directors out of funds legally available therefor,
cash dividends of $1.875 per share, payable quarterly, in arrears, on the last
day of each September, December, March, and June, respectively in each year. If
and so long as any dividends have not been paid in full on the 7 1/2%
Preferred, the Company agrees that it will not (i) redeem any shares of
preferred stock convertible into the Common Stock or any other shares of
capital stock of the Company which rank junior to shares of the 7 1/2%
Preferred as to dividends and liquidation preference or (ii) pay dividends on
shares of preferred stock convertible into the Common Stock or any other shares
of capital stock of the Company which rank junior to shares of the 7 1/2%
Preferred as to dividends and liquidation preference.
CONVERSION
Each share of the 7 1/2% Preferred may be converted at any time, at the
option of the holder thereof, into shares of the Common Stock on the terms and
conditions set forth below The Company may cause the 7 1/2% Preferred to be
converted at any time on or after July 1, 1995 on the terms and conditions set
forth below, subject to adjustment, if, but only if: (i) the Common Stock is
then listed on a national securities exchange or authorized for quotation on
Nasdaq; and (ii) the closing price of a share of the Common Stock on a national
securities exchange (including Nasdaq) has exceeded $8.80, subject to
adjustment, by 35% or more for at least twenty of the thirty preceding trading
days.
Subject to the provisions for adjustment hereinafter set forth, each share
of the 7 1/2% Preferred shall be convertible into 2.9412 fully paid and
nonassessable shares of the Common Stock and each share of Series B Preferred
shall be convertible in to 2.8409 fully paid and nonasseable shares of the
Common Stock, equal to a conversion price of $8.80 and $8.50 per share,
respectively. In lieu of issuing a partial share, the shares of the Common
Stock issuable shall be rounded up or down, as the case may be, to the nearest
whole share;
The number of shares of the Common Stock into which each share of the 7
1/2% Preferred is convertible shall be adjusted from time to time as follows:
(i) in case the Company shall at any time or from time to time declare or pay
any dividend on the Common Stock payable in the Common Stock or effect a
subdivision of the outstanding shares of the Common Stock (by reclassification,
split or otherwise than by payment of a dividend in the Common Stock), then,
and in each such case, the number of shares of the Common Stock into which each
share of the 7 1/2% Preferred is convertible shall be adjusted so that the
holder of each share thereof shall be entitled to receive, upon the conversion
thereof, the number of shares of the Common Stock determined by multiplying (a)
the number of shares of the Common Stock into which such share was convertible
immediately prior to the occurrence of such event by (b) a fraction, the
numerator of which is the sum of (I) the number of shares of the Common Stock
into which such share was convertible immediately prior to the occurrence of
such event plus (II) the number of shares of the Common Stock which such holder
would have been entitled to receive in connection with the occurrence of such
event had such share been converted immediately prior thereto, and the
denominator of which is the number of shares of the Common Stock determined in
accordance with clause (I) above (adjustments shall become effective (a) in the
case of any such dividend, immediately after the close of business on the
record date for the determination of holders of the Common Stock entitled to
receive such dividend, or (b) in the case of any such subdivision, at the close
of business on the day immediately prior to the day upon which such corporate
action became effective); (ii) in case the Company at any time or from time to
time shall combine or consolidate the outstanding shares of the Common Stock
into a lesser number of shares of the Common Stock, by reverse split,
reclassification or otherwise, then, and in each such case, the number of
shares of the Common Stock into which each share of the 7 1/2% Preferred is
convertible shall be adjusted so that the holder of each share thereof shall be
entitled to receive, upon the conversion thereof, the number of shares of the
Common Stock determined by multiplying (a) the number of shares of the Common
Stock into
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which such share was convertible immediately prior to the occurrence of such
event by (b) a fraction, the numerator of which is the number of shares which
the holder would have owned after giving effect to such event had such share
been converted immediately prior to the occurrence of such event and the
denominator of which is the number of shares of the Common Stock into which
such share was convertible immediately prior to the occurrence of such event
(adjustments shall become effective at the close of business on the day
immediately prior to the day upon which such corporate action becomes
effective); (iii) in case of any capital reorganization or reclassification of
the capital stock of the Company in case of the consolidation or merger of the
Company with another corporation or in the case of any sale or conveyance of
all or substantially all of the property of the Company, each share of the
7 1/2% Preferred shall thereafter be convertible into the number of shares of
stock or other securities or cash or other property receivable upon such
capital reorganization, reclassification of capital stock, consolidation,
merger, sale or conveyance, as the case may be, by a holder of the number of
shares of the Common Stock into which such share of 7 1/2% Preferred was
convertible immediately prior to such capital reorganization, reclassification
of capital stock, consolidation, merger, sale or conveyance.
VOTING RIGHTS
The holders of shares of the 7 1/2% Preferred shall be entitled to 2 votes
for each such share on all matters presented to the Company's stockholders'
and, except as otherwise provided herein or required by law, the holders of
shares of the 7 1/2% Preferred and the holders of shares of the Common Stock
and any other shares having voting rights shall vote together as one class on
all matters. On any matter requiring the holders of the 7 1/2% Preferred as a
class, said holders shall be treated as a single class.
If at any time or times dividends payable on the 7 1/2% Preferred shall be
in arrears and unpaid in an amount equal to eight (8) full quarterly dividends,
then the number of directors constituting the Board of Directors of the Company
shall be increased by two (2) and the holders of 7 1/2% Preferred shall have
the exclusive right, voting separately as a class, to elect the directors of
the Company to fill such newly created directorships, the remaining directors
to be elected by the other class or classes of stock entitled to vote
therefore, at each meeting of stockholders held for the purpose of electing
directors.
COMPANY'S RIGHT OF REDEMPTION
To the extent the Company shall have funds legally available for such
payment, the Company may redeem at its option the 7 1/2% Preferred, at any time
in whole or from time to time in part after July 1, 1996 at the redemption
prices set forth below plus an amount per share equal to all unpaid dividend
thereon, including accrued dividends to the redemption date.
Period Redemption Price
------------------------------------- ---------------------
July 1, 1996 - December 31,1996 $ 26.875
1997 $ 26.25
1998 $ 26.625
1999 and Thereafter $ 25.00
The Company will provide the holders of the 7 1/2% Preferred with a minimum
advance notice of 10 days prior to any redemption, within which period
conversion of the 7 1/2% Preferred can be effected.
If any proposed redemption of shares of the 7 1/2% Preferred shall be of
less than all the then outstanding shares of the 7 1/2% Preferred, the shares
of the 7 1/2% Preferred to be redeemed will be selected by lot or pro rata or
by any other method as may be determined by the Board of Directors of the
Company in its sole discretion to be equitable.
EXCHANGE
The 7 1/2% Preferred are exchangeable, at the option of the Company, in
whole (but not in part), on any dividend payment date for the 7 1/2% Notes in a
principal amount equal to $25.00 per share. The 7 1/2% Notes will be
convertible into the Common Stock on the same basis as if the exchange had not
occurred. The 7 1/2% Notes will bear interest from the date of issuance,
payable semi-annually in arrears on June 30, and December 31 of each year,
commencing on the first such interest payment date following the date of
exchange. At the Company's option, the 7 1/2% Notes will be redeemable, in
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44
whole or in part, at the redemption prices set forth above under "Company's
Right of Redemption" plus accrued and unpaid interest. The 7 1/2% Notes are not
subject to mandatory sinking fund payments. The 7 1/2% Notes will be
subordinated to all senior indebtedness of the Company.
LIQUIDATION RIGHTS
In the event of any voluntary or involuntary liquidation, dissolution or
winding up of the affairs of the Company, the holders of the 7 1/2% Preferred
will be entitled to receive $25.00 per share plus accrued and unpaid dividends
to the date of payment of the amount due pursuant to such liquidation,
dissolution or winding up of the affairs of the Company. Shares of the 7 1/2%
Preferred shall have preference over all shares of the Common Stock as to
distribution of assets in the event of any voluntary or involuntary
liquidation, dissolution or winding up of the affairs of the Company.
RIGHTS DISTRIBUTIONS
If the Company distributes to all holders of the Common Stock rights to
subscribe or purchase shares of the Common Stock and in the event that prior to
the record date for such distribution of such rights the holders of shares of
the 7 1/2% Preferred have not converted such shares into shares of Common
Stock, the Company agrees that it will also distribute such rights to holders
of shares of the 7 1/2% Preferred as if such holder had converted shares of the
7 1/2% Preferred for shares of the Common Stock.
DESCRIPTION OF THE $2.03 NOTES
If the Company elects to exchange the $2.03 Preferred for the $2.03 Notes,
the Company will issue the $2.03 Notes under an indenture (the "Indenture"),
between the Company and Keycorp Shareholder Services, Inc., or an equivalent
trustee selected by the Company, as trustee (the "Trustee"). The Indenture will
be in substantially the form agreed between the Initial Purchasers and the
Company, a copy of which is available upon request from the Company, with such
changes as may be required by law or usage. The statements under this caption
address the material terms of the $2.03 Notes but are summaries and do not
purport to be complete. The summaries make use of terms defined in the
Indenture and are qualified in their entirety by reference to the Indenture,
including the definitions therein of certain terms. Whenever reference is made
to defined terms of the Indenture and not otherwise defined herein, such
defined terms are incorporated herein by reference.
GENERAL
The $2.03 Notes will be unsecured, subordinated obligations of the
Company, will be limited to $33,750,000 aggregate principal amount and will
mature on December 31, 2005. The $2.03 Notes will bear interest at the dividend
rate of the $2.03 Preferred from the date of original issue, or from the most
recent Interest Payment Date (as defined below) to which interest has been paid
or duly provided for, and accrued but unpaid interest will be payable quarterly
on March 31, June 30, September 30 and December 31 of each year (each, an
"Interest Payment Date"). Interest will be paid to holders of the $2.03 Notes
of record ("Holders") at the close of business on March 15, June 15, September
15 and December 15, respectively, immediately preceding the relevant Interest
Payment Date (each, a "Regular Record Date"). Interest will be computed on the
basis of a 360-day year of twelve 30-day months. Principal (plus premium, if
any) and interest will be payable, and the $2.03 Notes may be presented for
conversion, exchange or registration of transfer, at the office or agency of
the Company maintained by the Company for those purposes, except that payment
of interest may at the option of the Company be made by check mailed to the
address of the person entitled thereto as it appears on the security register.
At any time from and after the execution and delivery of the Indenture,
the Company may deliver the $2.03 Notes to the Trustee for authentication and
the Trustee shall, in accordance with the instructions of the Company,
authenticate and deliver the $2.03 Notes as provided in the Indenture.
No service charge will be made for any transfer or exchange of the $2.03
Notes, but the Company may require payment of a sum sufficient to cover any tax
or other governmental charge payable in connection therewith.
All monies paid by the Company to the Trustee or any Paying Agent for the
payment of principal of and premium, if any, and interest on any $2.03 Note
which remains unclaimed for two years after such principal, premium or interest
became due and payable may be repaid to the Company. Thereafter the Holder of
such Note may, as an unsecured general creditor, look only to the Company for
payment thereof.
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45
CONVERSION RIGHTS
Holders will be entitled, at any time and from time to time prior to
maturity (subject to earlier redemption or repurchase, as described below), to
convert their Notes (or any portion thereof that is an integral multiple of
$1,000), at 100% of the principal amount thereof, into the Common Stock of the
Company at the conversion price set forth on the cover page hereof, subject to
adjustment under certain circumstances as described below. After a call for
redemption of the $2.03 Notes, through optional redemption or otherwise, the
$2.03 Notes or portion thereof called for redemption will be convertible if
duly surrendered on or before, but not after, the close of business on the date
fixed for redemption in respect thereof.
The provisions in the Indenture for adjustment of the conversion price
will be substantially the same as those applicable to the $2.03 Preferred
described at "Description of the Preferred Stock--$2.03 Preferred--Conversion
Rights."
Subject to any applicable right of the Holders to cause the Company to
purchase the $2.03 Notes upon a Change of Control (as described below), in case
of any consolidation or merger to which the Company is a party, other than a
transaction in which the Company is the continuing corporation, or in case of
any sale or conveyance to another corporation of the property of the Company as
an entirety or substantially as an entirety, or in the case of any statutory
exchange of securities with another corporation or other entity, there will be
no adjustment of the conversion price, but each Holder will have the right
thereafter to convert such Holder's $2.03 Notes into the kind and amount of
securities, cash or other property which the Holder would have owned or have
been entitled to receive immediately after such consolidation, merger,
statutory exchange, sale or conveyance had such Note been converted immediately
prior to the effective date of such consolidation, merger, statutory exchange,
sale or conveyance. In the case of a cash merger of the Company with another
corporation or other entity or any other cash transaction of the type mentioned
above, the effect of these provisions would be that the conversion features of
the $2.03 Notes would thereafter be limited to converting the $2.03 Notes at
the conversion price then in effect into the same amount of cash that such
Holder would have received had such Holder converted the $2.03 Notes into
Common Stock immediately prior to the effective date of such cash merger or
transaction. Depending upon the terms of such cash merger or transaction, the
aggregate amount of cash so received on conversion could be more or less than
the principal amount of the $2.03 Notes.
Fractional shares of Common Stock will not be issued upon conversion. A
person otherwise entitled to a fractional share of Common Stock upon conversion
shall be paid cash based on the last sales price of the Common Stock at the
close of business on the last day on which the Common Stock traded preceding
the date of conversion. The Company from time to time, to the extent permitted
by law, may reduce the conversion price by any amount for any period of at
least 15 days which it determines to be advisable. If at any time the Company
makes a distribution of property to its stockholders which would be taxable to
such stockholders as a dividend for federal income tax purposes (e.g.,
distribution of evidence of indebtedness or assets of the Company, but
generally not stock dividends or rights to subscribe for the Common Stock) and,
pursuant to the anti-dilution provisions of the Indenture, the conversion price
of the $2.03 Notes is reduced or the conversion price of the $2.03 Notes is
reduced other than in connection with certain anti-dilution adjustments, such a
reduction may be considered as resulting in the distribution of a dividend to
Holders for federal income tax purposes.
A Holder who surrenders a $2.03 Note (or portion thereof) for conversion
between the close of business on a Regular Record Date and the next Interest
Payment Date will receive interest on such Interest Payment Date with respect
to such $2.03 Note (or portion thereof) so converted for the period from the
last Interest Payment Date through the date of such conversion. Subject to such
payments in the event of conversion after the close of business on a Regular
Record Date, no payment or adjustment shall be made upon any conversion on
account of any interest accrued but unpaid on the $2.03 Notes surrendered for
conversion.
REDEMPTION
Optional Redemption by the Company. The $2.03 Notes are not redeemable
prior to November 1, 1998. On and after November 1, 1998, the $2.03 Notes will
be redeemable at the option of the Company, in whole or in part, at any time
prior to maturity, upon not less than 30 days' nor more than 60 days' prior
notice of the redemption date, mailed by first class mail to each Holder's last
address as it appears in the security register, at the Redemption Prices
established for the $2.03 Notes, together with accrued but unpaid interest, if
any, to the date fixed for redemption. The Redemption Prices for the $2.03
Notes (expressed as a percentage of the principal amount) shall be as follows:
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46
During the 12 month period
commencing November 1, Percentage
---------------------------------- -----------------------------
1998 105%
1999 104
2000 103
2001 102
2002 101
2003 and thereafter 100
Selection of Notes Redeemed. If less than all the $2.03 Notes are to be
redeemed, selection of the $2.03 Notes for redemption will be made by the
Trustee in compliance with the requirements of the principal national
securities exchange, if any, on which the $2.03 Notes are listed, or, if the
$2.03 Notes are not listed, on a pro rata basis by lot or by such method that
complies with applicable legal requirements and that the Trustee considers fair
and appropriate. The Trustee may select for redemption portions of the
principal of $2.03 Notes that have a denomination larger than $1,000, in
integral amounts of $1,000. The Trustee will make the selection from the $2.03
Notes outstanding and not previously called for redemption.
CHANGE OF CONTROL
If a Change of Control occurs, the Company shall offer to repurchase each
Holder's Notes pursuant to an offer as described below (the "Change of Control
Offer") at a purchase price equal to 100% of the principal amount of such
Holder's Notes, plus accrued but unpaid interest, if any, to the date of
purchase. The Change of Control purchase feature of the $2.03 Notes may in
certain circumstances make more difficult or discourage a takeover of the
Company.
Under the Indenture, a "Change of Control" means the occurrence of any of
the following events; (i) any person (as the term "person" is used in Section
13(d) or Section 14(d) of the Exchange Act) is or becomes the direct or
indirect beneficial owner of shares of the Company's capital stock representing
greater than 50% of the total voting power of all shares of capital stock of
the Company entitled to vote in the election of Directors under ordinary
circumstances or to elect a majority of the Board of Directors of the Company,
or (ii) the Company sells, transfers or otherwise disposes of all or
substantially all of the assets of the Company. Notwithstanding the foregoing,
a Change of Control will not include any transaction or series of related
transactions in which 85% or more of the consideration received by the Holders
upon conversion of their Notes immediately after the occurrence of such Change
of Control consists of common stock that is listed on a national securities
exchange or approved for quotation on Nasdaq or (ii) immediately after the
occurrence of such Change of Control (a) the value immediately after the
consummation of the $2.03 Notes or (b) the sum of the value immediately after
the consummation of any such common stock receivable upon conversion of the
$2.03 Notes immediately after such occurrence plus the cash receivable upon
such conversion has a value on each of the five trading days immediately after
the occurrence of such Change of Control equal to or in excess of 105% the
principal amount of such Notes.
Within 30 days after any Change of Control, unless the Company has
previously mailed a notice of optional redemption by the Company of all of the
$2.03 Notes, the Company shall mail a notice of the Change of Control Offer to
each Holder by first class mail at such Holder's last address as it appears on
the Note Register stating: (i) that a Change of Control has occurred and that
the Company is offering to repurchase all of such Holder's $2.03 Notes; (ii)
the circumstances and relevant facts regarding such Change of Control
(including, but not limited to, information with respect to pro forma income,
cash flow and capitalization of the Company after giving effect to such Change
of Control); (iii) the repurchase price; (iv) the expiration date of the Change
of Control Offer, which shall be no earlier than 30 days nor later than 60 days
from the date such notice is mailed; (v) the date such purchase shall be
effected, which shall be no later than 30 days after expiration date of the
Change of Control Offer; (vi) any other information required by applicable law
to be included therein; and (vii) the procedures determined by the Company,
consistent with the Indenture, that a Holder must follow in order to have such
Notes repurchased.
In the event that the Company is required to make a Change of Control
Offer, the Company will comply with any applicable securities laws and
regulations, including, to the extent applicable, Section 14(e), Rule 14e-1 and
any other tender offer rules under the Exchange Act which may then be
applicable in connection with any offer by the Company to purchase the $2.03
Notes at the option of the Holders thereof.
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47
The Company, could, in the future, enter into certain transactions,
including certain recapitalizations of the Company, that would not constitute a
Change in Control under the $2.03 Notes, but that would increase the amount of
Senior Indebtedness (or any other indebtedness) outstanding at such time. The
Company's ability to create any additional Senior Indebtedness or additional
Subordinated Indebtedness is limited as described in the $2.03 Notes and the
Indenture although, under certain circumstances, the incurrence of significant
amounts of additional indebtedness could have an adverse effect on the
Company's ability to service its indebtedness, including the $2.03 Notes. If a
Change in Control were to occur, there can be no assurance that the Company
would have sufficient funds at the time of such event to pay the Change in
Control purchase price for all $2.03 Notes tendered by the Holders. A default
by the Company on its obligation to pay the Change in Control purchase price
could, pursuant to cross-default provisions, result in acceleration of the
payment of other indebtedness of the Company outstanding at that time.
Certain of the Company's existing and future agreements relating to its
indebtedness could prohibit the purchase by the Company of the $2.03 Notes
pursuant to the exercise by a Holder of the foregoing option, depending on the
financial circumstances of the Company at the time any such purchase may occur,
because such purchase could cause a breach of certain covenants contained in
such agreements. Such a breach may constitute an event of default under such
indebtedness and thereby restrict the Company's ability to purchase the $2.03
Notes. See "Subordination."
CONSOLIDATION, MERGER AND SALE OF ASSETS
The Company, without the consent of the Holders of any of the $2.03 Notes,
may consolidate with or merge into any other entity or convey, transfer, sell
or lease its assets substantially as an entirety to any person or entity,
provided that: (i) either (a) the Company is the continuing corporation or (b)
the corporation or other entity formed by such consolidation or into which the
Company is merged or the person or entity to which such assets are conveyed,
transferred, sold or leased is organized under the laws of the United States or
any state thereof or the District of Columbia and expressly assumes all
obligations of the Company under the $2.03 Notes and the Indenture, (ii)
immediately after and giving effect to such merger, consolidation, conveyance,
transfer, sale or lease no Event of Default, and no event which, after notice
or lapse of time, would become an Event of Default, under the Indenture shall
have occurred and be continuing, (iii) immediately after and giving effect to
such merger, consolidation, conveyance, transfer, sale or lease the
consolidated stockholders' equity of the Company or such successor entity is
not less than the consolidated stockholders' equity of the Company immediately
prior to such transaction, (vi) upon consummation of such consolidation,
merger, conveyance, transfer, sale or lease, the $2.03 Notes and the Indenture
will be a valid and enforceable obligation of the Company or such successor and
(v) the Company has delivered to the Trustee an officer's certificate and an
opinion of counsel, each stating that such consolidation, merger, conveyance,
transfer, sale or lease complies with the provisions of the Indenture.
SUBORDINATION
The payment of principal of and premium, if any, and interest on the $2.03
Notes will be, to the extent set forth in the Indenture, subordinated in right
of payment to the prior payment in full of all Senior Indebtedness (as defined
below). By reason of such subordination, upon any payment or distribution of
assets to creditors upon any liquidation, dissolution, winding up,
reorganization, assignment for the benefit of creditors or marshalling of
assets, whether voluntary, involuntary or in receivership, bankruptcy,
insolvency or similar proceedings, the holders of all Senior Indebtedness will
be first entitled to receive payment in full of all amounts due or to become
due thereon before any payment is made on account of principal of and premium,
if any, and interest on the $2.03 Notes or on account of any other monetary
claims under or in respect of the $2.03 Notes, and before any distribution is
made to acquire any of the $2.03 Notes for any cash, property or securities. No
payments on account of principal of and premium, if any, and interest on the
$2.03 Notes shall be made if at the time thereof: (i) there is a default in the
payment of all or any portion of the obligations under any Senior Indebtedness
or (ii) there shall exist a default in any covenant with respect to the Senior
Indebtedness (other than as specified in clause (i) of this sentence), and, in
such event, such default shall not have been cured or waived or shall not have
ceased to exist, and such default would permit the maturity of such Senior
Indebtedness to be accelerated, provided that no such default will prevent any
payment on, or in respect of, the $2.03 Notes for more than 120 days unless the
maturity of such Senior Indebtedness has been accelerated.
The Holders will be subrogated to the rights of the holders of the Senior
Indebtedness to the extent of payments made on Senior Indebtedness upon any
distribution of assets in any such proceedings out of the distributive share of
the $2.03 Notes.
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48
"Senior Indebtedness" is defined to mean the principal of and premium, if
any, and interest on (i) indebtedness or other obligations under the Credit
Agreement, (ii) indebtedness for money borrowed (including purchase money
obligations) evidenced by notes or other written obligations, including letters
of credit and bankers acceptances, (iii) indebtedness evidenced by notes,
debentures, bonds or other securities issued under the provisions of an
indenture or similar instrument, (iv) obligations as lessee under capitalized
leases and under leases of property made as part of any sale and leaseback
transactions, (v) indebtedness of others of any of the kinds described in the
preceding clauses (i) through (iv) assumed or guaranteed and (vi) amendments,
renewals, extensions, modifications and refundings of any obligations or
indebtedness described in the foregoing clauses (i) through (v); provided,
however, that the following will not constitute Senior Indebtedness: (a) any
indebtedness or obligation as to which, in the instrument creating or
evidencing the same or pursuant to which the same is outstanding, it is
expressly provided that such indebtedness or obligation is subordinate in right
of payment to all other indebtedness, (b) any indebtedness or obligation which
refers explicitly to the $2.03 Notes and states that the indebtedness or
obligation shall not be senior in right of payment thereto, (c) any
indebtedness or obligation in respect of the $2.03 Notes, (d) any indebtedness
or obligation of the Company to any affiliates, and (e) obligations of the
Company for compensation to employees or for items purchased or services
rendered in the ordinary course of business.
There will be no restrictions on the creation of Senior Indebtedness in
the Indenture.
The $2.03 Notes are unsecured obligations of the Company, and,
accordingly, will rank pari passu with all trade debt and obligations of the
Company and its subsidiaries that arise by operation of law or are imposed by
any judicial or governmental authority, except that any such trade debt or
other obligation may be senior in right of payment to the $2.03 Notes to the
extent the same is entitled to any security interest arising by operation of
law.
CERTAIN COVENANTS OF THE COMPANY
The Indenture contains, among others, the covenants summarized below,
which will be applicable (unless waived or amended) so long as any of the $2.03
Notes are outstanding.
Limitation on Additional Debt After Default. The Company shall not, and
shall not permit any of its subsidiaries to, incur any additional indebtedness
(other than liabilities for accounts payable and accrued expenses incurred in
the ordinary course of business and intra-company payables or receivables
incurred in the ordinary course of business) or Senior Indebtedness following
the occurrence of an Event of Default (as defined below) unless such Event of
Default (and all other Events of Default then pending) is cured or waived
except that the Company shall be permitted to incur up to $5.0 million of
Senior Indebtedness after the occurrence of an Event of Default notwithstanding
that such Event of Default (or any other Default) is then outstanding.
Limitation on Dividend Restrictions Affecting Subsidiaries. The Company
may not, and may not permit any of its subsidiaries to, create or otherwise
cause or suffer to exist or become effective any encumbrance or restriction of
any kind on the ability of any subsidiary of the Company to (a) pay to the
Company dividends or make to the Company any other distribution on its capital
stock, (b) pay any debt owed to the Company or any of its subsidiaries, (c)
make loans or advances to the Company or any of it's subsidiaries or (d)
transfer any of its property or assets to the Company or any of its
subsidiaries, other than such encumbrances or restrictions existing or created
under or by reason of (i) applicable law, (ii) the Indenture, (iii) covenants
or restrictions contained in any instrument governing debt of the Company or
any of its subsidiaries existing on the date of the Indenture, (iv) customary
provisions restricting subletting, assignment and transfer of any lease
governing a leasehold interest of the Company or any of its subsidiaries or in
any license or other agreement entered into in the ordinary course of business,
(v) any agreement governing debt of a person acquired by the Company or any of
its subsidiaries in existence at the time of such acquisition (but not created
in contemplation thereof), which encumbrances or restrictions are not
applicable to any person, or the property or assets of any person, other than
the person, or the property or assets of the person so acquired or (vi) any
restriction with respect to a subsidiary imposed pursuant to an agreement
entered into in accordance with the terms of the Indenture for the sale or
disposition of capital stock or property or assets of such subsidiary, pending
the closing of such sale or disposition.
Limitation on Restricted Payments. The Company will not, and will not
permit any of its subsidiaries to, directly or indirectly, declare or pay any
distribution or dividend on or in respect of any class of its capital stock
(except dividends or distributions payable by wholly owned subsidiaries of the
Company or dividends or distributions payable in capital stock of the Company
which is not redeemable and is subordinated in right of payment to the $2.03
Notes ("Qualified Stock") or in options, warrants or other rights to purchase
Qualified Stock of the Company) (any such declaration, payment, distribution,
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49
purchase, repurchase, prepayment, redemption, defeasance or other acquisition
or retirement referred to above being hereinafter referred to as a "Restricted
Payment"); unless (a) at the time of and after giving effect to a proposed
Restricted Payment no Event of Default (and no event that, after notice or
lapse of time, or both, would become an Event of Default) shall have occurred
and be continuing and (b) such Restricted Payment is made in cash and in an
amount, that together with the sum of the aggregate of all other Restricted
Payments made by the Company and its subsidiaries after the date of the
Indenture plus the aggregate amount of all dividends paid with respect to the
Company's preferred stock outstanding after the date of the Indenture, does not
exceed the cumulative retained earnings of the Company arising after the date
of the Indenture. Notwithstanding the foregoing, the Company will be permitted
to pay dividends on preferred stock outstanding on the date of the Indenture in
an amount not greater than that specifically provided for in the Certificate of
Incorporation of the Company or the related Certificate of Designations.
Limitation on Stock Splits, Consolidations and Reclassifications. The
Company will not effect a stock split, consolidation or reclassification of any
class of its capital stock unless (a) an equivalent stock split, consolidation
or reclassification is simultaneously made with respect to each other class of
capital stock of the Company and all securities exchangeable or exercisable for
or convertible into any capital stock of the Company, and (b) after such stock
split, consolidation or reclassification all of the relative voting, dividend
and other rights and preferences of each class of capital stock of the Company
are identical to those in effect immediately preceding such stock split,
consolidation or reclassification.
EVENTS OF DEFAULT
The following will be Events of Default under the Indenture: (a) failure
to pay principal of or premium, if any, on any Note when due and payable at
maturity, upon redemption, upon a Change of Control Offer or otherwise, whether
or not such payment is prohibited by the subordination provisions of the
Indenture; (b) failure to pay any interest on any Note when due, which failure
continues for 30 days, whether or not such payment is prohibited by the
subordination provisions of the Indenture; (c) failure to perform the other
covenants of the Company to the holders of Senior Indebtedness, which failure
continues for 60 days after written notice; (d) failure to perform any
covenants of the Company to the holder of Senior Indebtedness as required by
the terms of such Senior Indebtedness unless waived by said holders; (e)
failure to pay when due principal of and/or acceleration of, any indebtedness
for money borrowed by the Company or any subsidiary in excess of $5 million,
individually or in the aggregate, if such indebtedness is not discharged, or
such acceleration is not annulled, within 10 days after written notice as
provided in the Indenture; and (f) certain events of bankruptcy, insolvency or
reorganization of the Company or any subsidiary. Subject to the provisions of
the Indenture relating to the duties of the Trustee in case an Event of Default
shall occur and be continuing, the Trustee will be under no obligation to
exercise any of its rights or powers under the Indenture at the request or
direction of any of the Holders, unless such Holders shall have offered to the
Trustee reasonable indemnity. Subject to such provisions for the
indemnification of the Trustee, the Holders of a majority in aggregate
principal amount of the outstanding Notes will have the right to direct the
time, method and place of conducting any proceeding for any remedy available to
the Trustee or exercising any trust or power conferred on the Trustee.
If an Event of Default shall occur and be continuing, either the Trustee
or the Holders of at least 25% in aggregate principal amount of the then
outstanding Notes may accelerate the maturity of all $2.03 Notes; provided,
however, that after such acceleration, but before a judgment or decree based on
acceleration, the Holders of a majority in aggregate principal amount of the
then outstanding $2.03 Notes may, under certain circumstances, rescind and
annul such acceleration if all Events of Default, other than the non-payment of
accelerated principal, have been cured or waived as provided in the Indenture.
For information as to waiver of defaults, see "Modification and Waivers."
No Holder of any $2.03 Note will have any right to institute any
proceeding with respect to the Indenture or for the appointment of a receiver
or trustee or for any other remedy thereunder unless (i) such Holder shall have
previously given to the Trustee written notice of a continuing Event of
Default, (ii) the Holders of at least 25% in aggregate principal amount of the
then outstanding $2.03 Notes shall have made written request, and offered
reasonable indemnity, to the Trustee to institute such proceeding as trustee,
(iii) the Trustee shall have failed to institute such proceeding within 60 days
after the receipt of such notice and (iv) no direction inconsistent with such
request shall have been given to the Trustee during such 60-day period by the
Holders of a majority in aggregate principal amount of the then outstanding
$2.03 Notes.
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50
MODIFICATIONS AND WAIVERS
Modifications and amendments of the Indenture may be made by the Company
and the Trustee with the consent of the Holders of not less than a majority in
aggregate principal amount of the then outstanding $2.03 Notes held by persons
other than affiliates of the Company; provided, however, that no such
modification or amendment may, without the consent of the Holder of each
outstanding Note affected thereby, (i) change the stated maturity of, or any
installment of interest on, any Note, (ii) reduce the principal amount of any
Note or reduce the rate or extend the time of payment of interest on any Note,
(iii) increase the conversion price (other than in connection with a reverse
stock split as provided in the Indenture), (iv) change the place or currency of
payment of principal of, or premium or repurchase price, if any, or interest
on, any $2.03 Note, (v) impair the right to institute suit for the enforcement
of any payment on or with respect to any Note, (vi) adversely affect the right
to exchange or convert the $2.03 Notes, (vii) reduce the percentage of the
aggregate principal amount of outstanding Notes, the consent of the Holders of
which is necessary to modify or amend the Indenture, (viii) reduce the
percentage of the aggregate principal amount of outstanding Notes, the consent
of the Holders of which is necessary for waiver of compliance with certain
provisions of the Indenture or for waiver of certain defaults, (ix) modify the
provisions of the Indenture with respect to the subordination of the $2.03
Notes in a manner adverse to the Holders, (x) modify the provisions of the
Indenture with respect to the right to require the Company to repurchase Notes
in a manner adverse to the Holders or (xi) modify the provisions of the
Indenture with respect to the vote necessary to amend this provision.
The Holders of a majority in aggregate principal amount of the outstanding
Notes held by persons other than affiliates of the Company may, on behalf of
all Holders, waive any past default under the Indenture or Event of Default,
except a default in the payment of principal, premium, if any, or interest on
any of the $2.03 Notes or in respect of a provision which under the Indenture
cannot be modified without the consent of the Holder of each outstanding $2.03
Note.
REPORTS TO HOLDERS
So long as the Company is subject to the periodic reporting requirements
of the Exchange Act it will continue to furnish the information required
thereby to the Commission. The Indenture provides that even if the Company is
entitled under the Exchange Act not to furnish such information to the
Commission or to the Holders, it will nonetheless continue to furnish
information under Section 13 of the Exchange Act to the Commission and the
Trustee as if it were subject to such periodic reporting requirements.
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of (i) 2,000,000
shares of serial preferred stock, $1.00 par value, and (ii) 20,000,000 shares
of Common Stock, $.01 par value. As of November 6, 1995, the Company had
outstanding 12,063,238 shares of Common Stock, 1,000,000 shares of the $2.03
Preferred, and 200,000 shares of the 7 1/2% Preferred. For a description of the
$2.03 Preferred and the 7 1/2% Preferred see "Description of the Preferred
Stock.
COMMON STOCK
Subject to any prior rights of the preferred stock, the holders of Common
Stock: (1) are entitled to such dividends as may be declared by the Board of
Directors from time to time out of funds legally available for such payments
(however the Credit Agreement limits the payment of dividends to $1 million in
any year); (2) are entitled to one vote per share; (3) have no preemptive or
conversion rights and are not subject to redemption; and (4) are entitled upon
liquidation to receive ratably the assets remaining after the payment of
corporate debts and the satisfaction of the liquidation preference of any
preferred stock. If there is any arrearage in the payment of dividends on any
preferred stock, the Company may not pay dividends upon, repurchase or redeem
shares of its Common Stock. Voting is noncumulative. The outstanding shares of
Common Stock are fully paid and nonassessable.
OPTIONS
The Company's stock option plan, which is administered by the Compensation
Committee, provides for the granting of options to purchase shares of Common
Stock to key employees and certain other persons who are not employees for
advice or other assistance or services to the Company. The plan permits the
granting of options to acquire up to 1,500,000
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51
shares of Common Stock subject to a limitation of 10% of the outstanding Common
Stock on a fully diluted basis. At September 30, 1995 a total of 933,149
options had been granted under the plan of which 370,994 shares were
exercisable at that date. The options outstanding at September 30, 1995 were
granted at an exercise price of $3.38 to $9.38 per share. The exercise price of
all such options was equal to the fair market value of the Common Stock on the
date of grant. All were options granted for a term of five years, with 30% of
the options becoming exercisable after one year, an additional 30% becoming
exercisable after two years and the remaining options becoming exercisable
after three years.
In 1994, the stockholders approved an Outside Directors Stock Option
Plan (the "Directors Plan"). The Directors Plan covers a maximum of 200,000
shares and only non-employee directors are eligible under it. At September 30,
1995, 44,000 options were outstanding under the Directors Plan and of which
3,600 were exercisable. The exercise price of the outstanding options under
the plan is $7.75 per share.
In 1994, the stockholders approved the 1994 Stock Purchase Plan (the
"1994 Plan") which authorizes the sale of up to 500,000 shares of common stock
to officers, directors, key employees and consultants. Under the Plan, the
right to purchase shares at prices ranging from 50% to 85% of market value may
be granted. The Company had a 1989 Stock Purchase Plan (the "1989 Plan") which
was identical to the 1994 Plan except that it covered fewer shares. Upon
adoption of the 1994 Plan, the 1989 Plan was terminated. The plan is
administered by the Compensation Committee of the Board. During the nine
months ended September 30, 1995, the Company sold 87,928 unregistered common
shares to officers and outside directors. Through September 30, 1995, a total
of 390,000 unregistered shares of common stock had been sold under the stock
purchase plans, for a total consideration of approximately $1.8 million at
prices equal to 75% of market value at the time of the sale.
WARRANTS
Warrants to acquire 40,000 shares of Common Stock at a price of $7.50 per
share were outstanding at November 8, 1995. These warrants expire in December
1996.
TRANSFER AGENT
The transfer agent and registrar for the Common Stock is Keycorp
Shareholder Services, Inc., or such other transfer agent then employed by the
Company.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following discussion is a summary of certain of the United States
federal income tax consequences of the purchase, ownership and disposition of
the Preferred Stock, the Notes and the Common Stock by investors who hold the
Preferred Stock, the Notes and the Common Stock as capital assets. This
discussion does not purport to be a complete analysis of the purchase,
ownership and disposition of the Preferred Stock, the Notes and the Common
Stock and does not address all of the tax considerations that may be relevant
to particular investors in light of their individual circumstances or to
holders subject to special treatment under United States federal income tax
laws, such as dealers in securities, insurance companies, foreign persons,
tax-exempt organizations and financial institutions. In addition, this
discussion does not address the application or effect of any state, local,
foreign or other tax laws. This discussion is based on the Internal Revenue
Code of 1986, as amended (the "Code"), Treasury regulations promulgated
thereunder, and Internal Revenue Service rulings and judicial decisions, all of
which are subject to change, possibly with retroactive effect. PROSPECTIVE
INVESTORS SHOULD CONSULT THEIR TAX ADVISORS CONCERNING THE UNITED STATES
FEDERAL INCOME TAX CONSEQUENCES OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF
THE PREFERRED STOCK.
DIVIDENDS ON THE PREFERRED STOCK OR THE COMMON STOCK
Dividends paid on the Preferred Stock or the Common Stock will be taxable
as ordinary income to the extent of current and accumulated "earnings and
profits" (as defined in the Code). Dividends paid to corporate holders of the
Preferred Stock or the Common Stock out of such earnings and profits generally
will qualify, subject to the limitations under Sections 246(c) and 246A of the
Code, for the 70% dividends received deduction allowable to corporations
(although the benefits of such deduction may be reduced or eliminated by the
corporate alternative minimum tax). Under Section 246(c) of the Code, to be
eligible for the dividends received deduction, a corporate holder must hold its
shares of the Preferred Stock or the Common Stock for at least 46 days (91 days
in the case of a dividend attributable to a period or periods aggregating more
than 366 days). A taxpayer's holding period for these purposes is suspended
during any period in which the taxpayer has an option to sell, is under a
contractual obligation to sell, has made (and not closed) a short sale of, or
has granted an option to buy, substantially identical stock or securities or
holds one or more other positions with respect to substantially similar or
related property that diminish the risk of loss from holding such stock. Under
Section 246A of the Code, the dividends received deduction may be reduced or
eliminated if a holder's shares of the Preferred Stock or the Common Stock are
debt financed.
Section 1059 of the Code requires a corporate stockholder to reduce its
basis (but not below zero) in the Preferred Stock or Common Stock by the
nontaxed portion (generally the portion eligible for the dividends received
deduction described above) of any "extraordinary dividend" if the Preferred
Stock or the Common Stock has not been held for more than two years before the
date of announcement or agreement with respect to such dividend. In addition, a
holder disposing of the Preferred Stock or the Common Stock would have to
recognize additional gain, if any, in an amount equal to nontaxed portions of
any extraordinary dividends that would have reduced such holder's basis but for
the limitation on reducing basis below zero. An "extraordinary dividend"
generally is a dividend that (a) equals or exceeds 5 percent in the case of
preferred
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52
stock, or 10 percent in the case of common stock, of the holder's basis in such
stock, treating all dividends having ex-dividend dates within an 85-day period
as one dividend or (b) exceeds 20 percent of the holder's basis in such stock,
treating all dividends having ex-dividend dates within a 365-day period as one
dividend, provided that in either case fair market value, if it can be
established by the holder, may be substituted for stock basis. In addition, an
amount treated as a dividend in the case of a redemption of the Preferred Stock
that is either non-pro rata as to all stockholders or in partial liquidation
would also constitute an "extraordinary dividend" without regard to the length
of time the Preferred Stock has been held. Application of the extraordinary
dividend rule is limited somewhat if the redemption proceeds that are treated
as dividends constitute "qualified preferred dividends." See "Redemption or
Exchange for the Notes." The length of time that a taxpayer is deemed to have
held stock for purposes of Section 1059 is determined under principles
comparable to those described in the preceding paragraph with respect to the
dividends received deduction.
To the extent, if any, that a distribution on the Preferred Stock or the
Common Stock which would otherwise constitute a dividend for federal income tax
purposes exceeds the current and accumulated earnings and profits of the
Company, such distribution will be treated as a tax-free return of capital,
reducing a holder's basis in the Preferred Stock or the Common Stock. The
reduction in basis will increase any gain, or reduce any loss, realized by the
holder on any subsequent sale, redemption or other disposition of the Preferred
Stock or the Common Stock. Any such distribution in excess of a holder's
adjusted basis in the Preferred Stock or the Common Stock will be treated as
short-term or long-term capital gain, depending on the period for which the
shares of the Preferred Stock or the Common Stock have been held. For a
corporate holder, treatment of a distribution as a capital gain rather than as
a dividend will result in an increase in the maximum effective federal income
tax rate on any amount so treated.
REDEMPTION OR EXCHANGE FOR THE NOTES
A redemption of the Preferred Stock for cash or in exchange for the Notes
will be a taxable event.
A redemption of the Preferred Stock for cash will be treated, under
Section 302 of the Code, as a distribution that is treated as a taxable
dividend, nontaxable recovery of basis or an amount received in exchange for
the Preferred Stock pursuant to the rules described under "Dividends on the
Preferred Stock or the Common Stock" above, unless the redemption (a) results
in a "complete termination" of the stockholder's stock interest in the Company
under Section 302(b)(3) of the Code; (b) is "substantially disproportionate"
with respect to the stockholder under Section 302(b)(2) of the Code; or (c) is
"not essentially equivalent to a dividend" under Section 302(b)(1) of the Code.
In determining whether any of these tests has been met, shares considered to be
owned by the stockholder by reason of certain constructive ownership rules in
Section 302(c) and 318 of the Code, as well as shares actually owned, must be
taken into account. If any of these tests were met, the redemption of the
Preferred Stock for cash would be treated as a sale or exchange for tax
purposes.
A redemption of the Preferred Stock by exchange for the Notes will be
subject to the same rules as a redemption for cash, but because under the
constructive ownership rules of Section 302(c) and 318 of the Code a holder of
the Notes would be treated as owning the Common Stock into which the Notes are
convertible, such a redemption could not satisfy the "complete termination" or
"substantially disproportionate" tests unless, as a result of other
transactions (such as contemporaneous sales of the Notes), the interest in the
Company of the holder of the Preferred Stock is sufficiently reduced. The
redemption would, therefore, be taxable as a dividend to the extent of the
current and accumulated earnings and profits of the Company unless it satisfied
the "not essentially equivalent to a dividend" test. A distribution will be
"not essentially equivalent to a dividend" as to a particular stockholder if it
results in a "meaningful reduction" in that stockholder's interest in the
Company. If, as a result of the redemption of the Preferred Stock, a
stockholder of the Company, whose relative stock interest in the Company is
minimal and who exercises no control over corporate affairs, suffers a
reduction in his proportionate interest in the Company (taking into account
shares owned by the stockholder under Sections 302(c) and 318 of the Code and,
in certain events, dispositions of the stock which occur contemporaneously with
the redemption) then, based upon published IRS rulings, that stockholder may be
regarded as having suffered a meaningful reduction in his interest in the
Company. Because the provisions of Section 302 of the Code are separately
applied to each stockholder based upon the particular facts and circumstances
at the time of the redemption (and the applicable law at such time which may be
different from that currently in effect), no assurance can be given that the
exchange of the Preferred Stock for the Notes pursuant to the terms of the
Preferred Stock will be treated as a sale or exchange rather than as a
distribution treated as a dividend. Each holder of the Preferred Stock is
advised to consult his tax advisors at the time of the exchange of the
Preferred Stock for the Notes to determine the consequences of such exchange.
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53
Recently introduced legislation would modify current law to provide that a
corporate stockholder would recognize gain immediately in any redemption
treated as a dividend to the extent that the non-taxed portion of the dividend
(the portion qualifying for the dividends received deduction) exceeds the basis
of the shares surrendered, if the redemption is treated as a dividend in whole
or in part due to options being counted as stock ownership as a result of
applying the rules of Sections 302 and 318 of the Code. Moreover, the proposal
would require immediate gain recognition whenever the basis of stock with
respect to which any extraordinary dividend was received is reduced below zero.
See "Dividends on the Preferred Stock or the Common Stock" above.
If, under the foregoing rules, a redemption of the Preferred Stock is
treated as a sale or exchange, rather than as a distribution, the holder would
have taxable gain or loss equal to the difference between the amount realized
and the holder's tax basis in the Preferred Stock. For these purposes, the
amount realized will be measured by the amount of cash and (i) the fair market
value of the Notes received in the exchange (in the case of a cash basis
taxpayer) or the face amount of the Notes received in the exchange (in the case
of an accrual basis taxpayer) or (ii) if the Notes are issued with original
issue discount, the "issue price" of the Notes, as defined below.
If a redemption of the Preferred Stock is treated as a distribution
taxable as a dividend, the amount of the distribution will be measured by the
amount of cash and (i) the fair market value of the Notes received in the
exchange (in the case of a cash basis taxpayer) or the face amount of the Notes
(in the case of an accrual basis taxpayer) or (ii) if the Notes are issued with
original issue discount, the "issue price" of the Notes, as defined below. In
any event, the amount of the distribution will not be reduced by the
stockholder's adjusted tax basis in the Preferred Stock. The stockholder's tax
basis in the redeemed Preferred Stock will be transferred to any remaining
stockholdings in the Company. If the stockholder does not retain any stock
ownership in the Company, such basis may be entirely lost.
A distribution to a corporate stockholder in redemption of the Preferred
Stock that is treated as a dividend may also be considered an "extraordinary
dividend" under Section 1059 of the Code. See "Dividends on the Preferred Stock
or Common Stock" above. Application of this rule is limited somewhat by a
special rule that provides that dividends on a share of stock which is not in
arrears as to dividends at the time the holder acquires such stock, that do not
exceed an actual rate of return of 15 percent of the lower of the holder's
adjusted basis or the liquidation preference (excluding dividend arrearages, if
any) of the Preferred Stock will be treated as extraordinary only if the holder
disposes of the Preferred Stock before it has held the stock for more than five
years and only to the extent that the actual rate of return to the holder
exceeds the stated rate of return on the Preferred Stock, as determined under
Section 1059(e)(3) of the Code.
If the Preferred Stock is redeemed by exchange for the Notes at a time
when the principal amount of such Notes exceeds the issue price of such Notes
by an amount equal to or greater than 1/4% of such principal amount times the
number of complete years to maturity, such excess will generally be includible
in gross income as "original issue discount" over the period during which such
Notes are held, even though the cash to which such income is attributable would
not be received until maturity or redemption of the Notes. If the Notes are
traded on an established securities market within 30 days of their issuance,
the issue price of the Notes for purposes of determining the amount, if any, or
original issue discount on the Notes will be the fair market value of the
Notes, determined as of the date of discount on the Notes will be the fair
market value of the Notes, determined as of the date of issuance. If the Notes
are not traded on an established securities market within 30 days of their
issuance, but the Preferred Stock is traded on such a market within 30 days
before or after the date of issuance, the issue price of the Notes will be the
fair market value of the Preferred Stock as of the exchange date. The amount of
any original issue discount included in income for each year would be
calculated under a constant yield to maturity basis that would result in the
allocation of less original issue discount to the early years of the term of
the Notes and more original issue discount to later years.
If the tax basis of a Note exceeds the amount payable at maturity, Section
171 of the Code provides for an election whereby such excess or premium, to the
extent not attributable to the conversion pledge of the Note, can be offset
against (and operate to reduce) interest received on the Note. The premium is
amortized, as an offset to interest received, over the remaining term of the
Note.
A holder's tax basis in a Note received in exchange for the Preferred
Stock will equal (i) the fair market value of the Note (in the case of a cash
basis taxpayer) or the face amount of the Note (in the case of an accrual basis
taxpayer) or (ii) if the Notes are issued with original issue discount, the
issue price of the Note, determined as described above, increased by the amount
of original issue discount (and market discount) previously included in the
income of the holder with respect to the Note, or reduced by any previously
amortized premium.
G:\HLF\LOMAK\S-3\S-3.REG 53
54
DISPOSITION OF THE NOTES
Generally any sale or redemption of Notes will result in taxable gain or
loss equal to the difference between the amount of cash received (except to the
extent of cash attributable to accrued interest, which will be taxable as
interest income) and the holder's tax basis in the Notes. Subject to the market
discount provisions of Sections 1276-1278 of the Code discussed in the
following paragraph, such gain or loss would be long-term gain or loss if the
holding period were to exceed one year.
The value of a Note may be adversely affected by the market discount
provisions of Section 1276-178 of the Code which require a person who purchases
a Note at a market discount to either (i) elect to accrue market discount into
income currently over the period during which the holder owns the Note or
(ii)(a) treat a portion of the gain recognized upon any disposition of the Note
as ordinary income (and not as capital gain) to the extent such market discount
accrued during the period such person owned the Note and (b) defer the
deduction of all or a portion of interest paid or accrued on indebtedness
incurred or continue to purchase or carry such Note until such Note is disposed
of in a taxable transaction.
If the Notes are issued in exchange for the Preferred Stock, the Company
believes that it will not be considered to have any intention to call the Notes
prior to maturity. Accordingly, Section 1271(a)(2) of the Code, which otherwise
might attach certain ordinary income consequences to gain from the disposition
of Notes, if the Notes were issued with original issue discount, is not
expected to apply.
REDEMPTION PREMIUM ON THE PREFERRED STOCK
Under Section 305 of the Code and applicable Treasury regulations, if the
redemption price of redeemable preferred stock exceeds its issue price and part
(or all) of such excess is considered an unreasonable redemption premium, the
entire amount of such excess may be treated as distributed over the period
during which the Preferred Stock cannot be redeemed. The amount treated as
distributed each year would be determined on a constant yield to maturity basis
that would result in the allocation of a lesser amount of distributions to the
early years and a greater amount to the later years of such period. Any such
constructive distribution would be classified as a dividend, non-taxable
recovery of basis or an amount received in exchange for the Preferred Stock
pursuant to the rules summarized under "Dividends on the Preferred Stock or the
Common Stock" above. A premium is considered to be reasonable if it is in the
nature of a penalty for a premature redemption and if such premium does not
exceed the amount which the issuer would be required to pay for such redemption
under market conditions existing at the time of issuance of the Preferred
Stock. The Company believes that the redemption premium on the Preferred Stock
is a reasonable redemption premium, although no assurance can be given that it
will be so considered by the IRS or a court.
CONVERSION OF THE PREFERRED STOCK OR THE NOTES INTO COMMON STOCK
In general, no gain or loss will be recognized for federal income tax
purposes on conversion of the Preferred Stock or the Notes solely into shares
of the Common Stock. (If dividends on the Preferred Stock were in arrears at
the time of conversion, however, a portion of the Common Stock received in
exchange for the Preferred Stock could be viewed under Section 305(c) of the
Code as a distribution with respect to the Preferred Stock, taxable as a
dividend). Gain realized (i.e.,the excess of the cash received over the portion
of basis allocable to the fractional shares) upon receipt of cash paid in lieu
of fractional shares of the Common Stock will be taxed immediately. In general,
the tax basis for the Common Stock received on conversion will be equal to the
tax basis of the Preferred Stock or the Notes converted, reduced by the portion
of basis allocable to any fractional share exchanged for cash. The holding
period of the shares of Common Stock will include the holding period of such
Preferred Stock or the Notes. Under the aforementioned market discount
provisions of the Code, any accrued market discount not previously included in
income as of the date of conversion of the Notes will carry over to the Common
Stock received on conversion and will be treated as ordinary income upon
subsequent disposition of such Common Stock.
ADJUSTMENT OF CONVERSION PRICE
Section 305 of the Code and the Treasury regulations thereunder treat
holders of convertible preferred stock and convertible debentures as having
received a constructive distribution, taxable as described in "Dividends on the
Preferred Stock or the Common Stock" above, due to certain adjustments in
conversion ratios. The conversion rates of the Preferred Stock and the Notes
are subject to adjustment under certain circumstances. Any adjustment
increasing the number of shares of Common Stock into which the Preferred Stock
or the Notes can be converted could cause the holders thereof to be viewed
G:\HLF\LOMAK\S-3\S-3.REG 54
55
under Section 305 of the Code as receiving a deemed distribution taxable as a
dividend, as described in "Dividends on the Preferred Stock or the Common
Stock," above, whether or not such holders exercise their conversion rights.
BACK-UP WITHHOLDING
Under Section 3406 of the Code and applicable Treasury regulations, a
holder of the Preferred Stock, the Notes or the Common Stock may be subject to
back-up withholding at the rate of 31 percent with respect to dividends or
interest paid, original issue discount accrued with respect to, or proceeds
received from a sale, exchange or redemption of, the Preferred Stock, the Notes
or the Common Stock, as the case may be. The payor will be required to deduct
and withhold a tax if (i) the payee fails to furnish a taxpayer identification
number ("TIN") to the payor or establish an exemption from backup withholding,
(ii) the IRS notifies the payor that the TIN furnished by the payee is
incorrect, (iii) there has been a notified payee underreporting with respect to
interest, dividends or original issue discount described in Section 3406(c) of
the Code or (iv) there has been a failure of the payee to certify under the
penalty of perjury that the payee is not subject to withholding under the Code.
As a result, if any one of the events discussed above occurs, the Company will
be required to withhold a tax equal to 31 percent from any dividend, interest
or redemption payment made with respect to the Preferred Stock, the Notes or
the Common Stock.
STATE AND LOCAL INCOME TAXES
Holders of the Preferred Stock, the Notes or the Common Stock may be
liable for state and local income taxes with respect to dividends or interest
paid, original issue discount accrued with respect to, or gain from the sale,
exchange or redemption of Depositary Shares, the Preferred Stock, the Notes or
the Common Stock, as the case may be. Many states and localities do not allow
corporations a deduction analogous to the federal dividends received deduction.
Prospective investors are advised to consult their own tax advisors as to the
state, local and other tax consequences of acquiring, holding and disposing of
the Preferred Stock, the Notes or the Common Stock.
LEGAL MATTERS
Certain legal matters related to the Securities and the Selling
Securityholder Securities, are being passed upon for the Company by Rubin Baum
Levin Constant & Friedman, New York, New York. Walter M. Epstein, Of Counsel to
Rubin Baum Levin Constant & Friedman, currently owns 7,681 shares of Common
Stock.
EXPERTS
The Consolidated Financial Statements of the Company, as of December 31,
1994 and for the year then ended, incorporated by reference in this Prospectus,
have been audited by Arthur Andersen LLP, independent public accountants, as
stated in their reports incorporated by reference. The Consolidated Financial
Statements of the Company as of December 31, 1993 and for each of the two years
in the period then ended, incorporated by reference in this Prospectus, have
been audited by Ernst & Young LLP, independent accountants, to the extent
indicated in their report thereon incorporated by reference herein. The
statement of assets (other than productive oil and gas properties) and
liabilities and the statements of revenues and direct operating expenses of the
Parker & Parsley Interests, as of December 31, 1994 and for the year then
ended, have been audited by Arthur Andersen LLP, independent public
accountants, as stated in their reports incorporated by reference. The
statements of assets (other than productive oil and gas properties) and
liabilities as of December 31, 1993 and 1994, and the statements of revenues
and direct operating expenses for each of the two years in the period ended
December 31, 1994 of the Transfuel Interests have been audited by Deloitte &
Touche LLP, independent public auditors, as stated in their report which is
incorporated herein by reference. The Consolidated Financial Statements of Red
Eagle Resources Corporation as of September 30, 1994 and for the nine months
then ended, included elsewhere in this Prospectus, have been audited by Coopers
& Lybrand LLP, independent public accountants, as stated in their reports
appearing elsewhere herein. The Consolidated Financial Statements of Red Eagle
Resources Corporation as of December 31, 1992 and 1993 and for the three years
in the period then ended, have been audited by Deloitte & Touche LLP,
independent public auditors, as stated in their report incorporated herein by
reference. Such financial statements have been included herein or incorporated
by reference in reliance upon such reports given upon the authority of such
firms as experts in accounting and auditing.
G:\HLF\LOMAK\S-3\S-3.REG 55
56
GLOSSARY
The terms defined in this glossary are used throughout this Offering
Memorandum.
Bbl. One stock tank barrel, or 42 U.S. gallons liquid volume, used herein in
reference to crude oil or other liquid hydrocarbons.
Bcf. One billion cubic feet.
BOE. Barrels of oil equivalent (converting six Mcf of natural gas to one Bbl of
oil).
Development well. A well drilled within the proved area of an oil or natural
gas reservoir to the depth of a stratigraphic horizon known to be productive.
Dry hole. A well found to be incapable of producing either oil or natural gas
in sufficient quantities to justify completion as an oil or gas well.
Exploratory well. A well drilled to find and produce oil or gas in an unproved
area, to find a new reservoir in a field previously found to be productive of
oil or gas in another reservoir, or to extend a known reservoir.
Gross acres or gross wells. The total acres or wells, as the case may be, in
which a working interest is owned.
Infill well. A well drilled between known producing wells to better exploit the
reservoir.
Mbbl. One thousand barrels of crude oil or other liquid hydrocarbons.
MBOE. One thousand barrels of oil equivalent.
Mcf. One thousand cubic feet.
MMBbl. One million barrels of crude oil or other liquid hydrocarbons.
MMBOE. One million barrels of oil equivalent.
MMcf. One million cubic feet.
Net acres or net wells. The sum of the fractional working interests owned in
gross acres or gross wells.
Net oil and gas sales. Oil and natural gas sales less oil and natural gas
production expenses.
Present Value of Proved Reserves. The present value of proved reserves is an
estimate of the discounted future net cash flows from each of the properties at
December 31, 1994, or as otherwise indicated. Net cash flow is defined as net
revenues less, after deducting production and ad valorem taxes, future capital
costs and operating expenses, but before deducting federal income taxes. The
future net cash flows have been discounted at an annual rate of 10% to
determine their "present value." The present value is shown to indicate the
effect of time on the value of the revenue stream and should not be construed
as being the fair market value of the properties. Estimates have been made
using constant oil and gas prices and operating costs, at December 31, 1994, or
as otherwise indicated.
Productive well. A well that is producing oil or gas or that is capable of
production.
Proved developed non-producing reserves. Reserves that consist of (i) proved
reserves from wells which have been completed and tested but are not producing
due to lack of market or minor completion problems which are expected to be
corrected and (ii) proved reserves currently behind the pipe in existing wells
and which are expected to be productive due to both the well log
characteristics and analogous production in the immediate vicinity of the
wells.
Proved developed producing reserves. Proved reserves that can be expected to be
recovered from currently producing zones under the continuation of present
operating methods.
Proved developed reserves. Proved reserves that can be expected to be recovered
through existing wells with existing equipment and operating methods.
G:\HLF\LOMAK\S-3\S-3.REG 56
57
Proved reserves. The estimated quantities of crude oil, natural gas and natural
gas liquids which geological and engineering data demonstrate with reasonable
certainty to be recoverable in future years from known reservoirs under
existing economic and operating conditions.
Proved undeveloped reserves. Proved reserves that are expected to be recovered
from new wells on undrilled acreage, or from existing wells where a relatively
major expenditure is required for recompletion.
Recompletion. The completion for production of an existing wellbore in another
formation from that in which the well has previously been completed.
Royalty interest. An interest in an oil and gas property entitling the owner to
a share of oil and natural gas production free of costs of production.
Working interest. The operating interest that gives the owner the right to
drill, produce and conduct operating activities on the property and a share of
production, subject to all royalties, overriding royalties and other burdens
and to all costs of exploration, development and operations and all risks in
connection therewith.
G:\HLF\LOMAK\S-3\S-3.REG 57
58
LOMAK PETROLEUM, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Number
------
PRO FORMA COMBINED FINANCIAL STATEMENTS (UNAUDITED):
Pro forma combined statement of income for the year ended December 31, 1994 . . . . . . . . . . . . . . . . . . . . F-3
Pro forma combined statement of income for the nine months ended September 30, 1995 . . . . . . . . . . . . . . . . F-4
Pro forma combined balance sheet at September 30, 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-5
Notes to pro forma combined financial statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-6
RED EAGLE RESOURCES CORPORATION:
Report of Independent Accountants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-8
Consolidated balance sheet at September 30, 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-9
Consolidated statement of operations for the nine months ended September 30, 1994 . . . . . . . . . . . . . . . . . F-11
Consolidated statement of stockholders' equity for the nine months ended September 30, 1994 . . . . . . . . . . . . F-12
Consolidated statement of cash flows for the nine months ended September 30, 1994 . . . . . . . . . . . . . . . . . F-13
Notes to consolidated financial statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-15
G:\HLF\LOMAK\S-3\S-3.REG F-1
59
PRO FORMA COMBINED FINANCIAL STATEMENTS
WITH RESPECT TO THE TRANSACTIONS
The accompanying unaudited pro forma combined statement of income gives effect
to (i) the purchase by the Company of 100% of the equity of Gillring Oil
Company ("Gillring"), accounted for as a purchase, (ii) the purchase by the
Company of 100% of the equity of Red Eagle Resources Corporation ("Red Eagle"),
accounted for as a purchase, (iii) the purchase by the Company of certain oil
and gas properties from a subsidiary of Parker & Parsley Petroleum Co. and (iv)
the purchase by the Company of certain oil and gas properties from Transfuel,
Inc. ("Transfuel"). The unaudited pro forma combined financial statements also
give effect to the private placement of Convertible Exchangeable Preferred
Stock ("the Offering") and the application of the estimated net proceeds
therefrom. The unaudited pro forma combined statement of income for the year
ended December 31, 1994 was prepared as if all transactions had occurred on
January 1, 1994. The unaudited pro forma combined statement of income for the
nine months ended September 30, 1995 was prepared as if all transactions had
occurred on January 1, 1995. The accompanying unaudited pro forma combined
balance sheet of the Company as of September 30, 1995 has been prepared as if
the Offering and the application of the net proceeds therefrom had occurred as
of that date. The historical information provided in the statements of income
for the year ended December 31, 1994 and for the nine months ended September
30, 1995, represents the following periods for the various acquisitions: (i)
Gillring represents the period from January 1, 1994 through January 31, 1994,
(ii) Red Eagle represents the period from January 1, 1994 through December 31,
1994, (iii) Parker & Parsley represents the periods from January 1, 1994
through December 31, 1994 and from January 1, 1995 through July 30, 1995 and
(iv) Transfuel represents the periods from January 1, 1994 through December 31,
1994 and from January 1, 1995 through September 30, 1995.
This information is not necessarily indicative of future combined operations
and it should be read in conjunction with the separate historical statements
and related notes of the respective entities appearing elsewhere in this filing
or incorporated by reference herein.
F-2
60
LOMAK PETROLEUM, INC.
PRO FORMA COMBINED STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1994
(UNAUDITED)
Parker &
Lomak Gillring Red Eagle Parsley Transfuel
------------- ----------- --------- ----------- --------- Pro Forma
Adjustments for the
Gillring acquisition,
Red Eagle merger,
Historical Historical Historical Historical Historical Parker & Parsley and
Year Ended Month Ended Year Ended Year Ended Year Ended Transfuel
December 31, January 31, December 31, December 31, December 31, acquisitions and Pro Forma
1994 1994 1994 1994 1994 Offering (Note 1) Combined
----------- ----------- ----------- ----------- ----------- ---------------- -----------
Revenues
Oil and gas production $24,460,945 $540,019 $4,236,396 $5,975,137 $10,597,532 $ - $45,810,029
Field services 7,667,135 - 6,634,668 - - - 14,301,803
Gas marketing and
transportation 2,194,892 - 993,902 - - - 3,188,794
Interest and other 470,562 28,484 693,624 - - (28,484) (e) 1,164,186
----------- ----------- ----------- ----------- ----------- ---------------- -----------
34,793,534 568,503 12,558,590 5,975,137 10,597,532 (28,484) 64,464,812
----------- ----------- ----------- ----------- ----------- ---------------- -----------
Expenses
Oil and gas production 10,018,941 222,198 2,481,906 2,928,350 3,821,024 (1,474,500) (c) 17,997,919
Field services 5,777,690 - 2,503,305 - - - 8,280,995
Gas marketing and
transportation 490,097 - - - - - 490,097
Exploration 359,315 8,975 473,916 - - - 842,206
General and administrative 2,477,680 67,780 3,786,925 - - (3,064,400) (c) 3,267,985
Interest 2,807,216 21,488 144,900 - - 1,529,976 (a) 4,503,580
Depletion, depreciation and
amortization 10,104,987 - 2,106,549 - - 5,909,294 (b)18,120,830
Lease impairments - - 1,097,000 - - (1,097,000) (g) -
Commodity trading losses - - 2,136,122 - - (2,136,122) (f) -
----------- ----------- ----------- ----------- ----------- ---------------- -----------
32,035,926 320,441 14,730,623 2,928,350 3,821,024 (332,752) 53,503,612
----------- ----------- ----------- ----------- ----------- ---------------- -----------
Income (loss) before income
taxes 2,757,608 248,062 (2,172,033) 3,046,787 6,776,508 304,268 10,961,200
Income taxes
Current (20,531) - (86,976) - - (369,493) (d) (477,000)
Deferred (118,523) - 475,180 - - (2,992,657) (d)(2,636,000)
----------- ----------- ----------- ----------- ----------- ---------------- -----------
Income (loss) from continuing
operations $2,618,554 $248,062 ($1,783,829) $3,046,787 $6,776,508 ($3,057,882) $7,848,200
=========== =========== =========== =========== =========== ================ ===========
Income from continuing
operations applicable to
common shares $2,243,554 $5,598,200
=========== ===========
Net income per common share $0.25 $0.46
=========== ===========
Weighted average shares
outstanding 9,050,558 3,032,920 12,083,478
=========== ===========
See notes to pro forma combined financial statements.
F-3
61
LOMAK PETROLEUM, INC.
PRO FORMA COMBINED STATEMENT OF INCOME
NINE MONTHS ENDED SEPTEMBER 30, 1995
(UNAUDITED)
Parker &
Lomak Parsley Transfuel
-------------- -------------- ---------- Pro Forma
Adjustments for
the Parker &
Parsley
Historical Nine Historical Nine Historical Nine and Transfuel
Months Ended Months Ended Months Ended acquisitions and the
September 30, September 30, September 30, Offering Pro Forma
1995 1995 1995 (Note 2) Combined
-------------- ------------ ------------ ------------------ -----------
Revenues
Oil and gas production $24,135,203 $3,377,129 $6,926,172 - $34,438,504
Field services 7,109,076 - - - 7,109,076
Gas marketing and
transportation 2,331,869 - - - 2,331,869
Interest and other 1,051,982 - - - 1,051,982
-------------- ------------ ------------ ------------------ -----------
34,628,130 3,377,129 6,926,172 - 44,931,431
-------------- ------------ ------------ ------------------ -----------
Expenses
Oil and gas production 9,934,497 1,481,325 2,696,825 (1,300,000)(k) 12,812,646
Field services 4,191,809 - - - 4,191,809
Gas marketing and
transportation 595,376 - - - 595,376
Exploration 472,931 - - - 472,931
General and administrative 2,187,395 - - (12,181)(j) 2,175,214
Interest 3,821,906 - - 947,146(h) 4,769,052
Depletion, depreciation and
amortization 9,808,364 - - 3,758,451(i) 13,566,815
-------------- ------------ ------------ ------------------ -----------
31,012,278 1,481,325 2,696,825 3,393,416 38,583,843
-------------- ------------ ------------ ------------------ -----------
Income (loss) before income taxes 3,615,852 1,895,804 4,229,348 (3,393,416) 6,347,588
Income taxes
Current (66,213) - - (300,787)(l) (367,000)
Deferred (831,828) - - (1,008,972)(l) (1,840,800)
-------------- ------------ ------------ ------------------ -----------
Income (loss) from continuing
operations $2,717,811 $1,895,804 $4,229,348 ($4,703,175) $4,139,788
============== ============ ============= ================== ===========
Income from continuing operations
applicable to common shares $2,436,561 $2,339,274
============== ===========
Net income per common share $0.21 $0.19
============== ===========
Weighted average shares
outstanding 11,588,111 821,575 12,409,686
============== ===========
See notes to pro forma combined financial statements.
F-4
62
LOMAK PETROLEUM, INC.
PRO FORMA COMBINED BALANCE SHEET
SEPTEMBER 30, 1995
(UNAUDITED)
Lomak
------------- Pro Forma
Historical as of Adjustments for
September 30, the Offering Pro Forma
1995 (Note 2) Combined
------------ ------------- ------------
ASSETS
Current assets
Cash and equivalents $2,400,646 $ - $2,400,646
Accounts receivable 10,559,082 - 10,559,082
Inventory and other 1,470,623 - 1,470,623
------------ ------------- ------------
Total current assets 14,430,351 - 14,430,351
------------ ------------- ------------
Oil and gas properties 199,024,164 - 199,024,164
Accumulated depletion and amortization (29,124,248) - (29,124,248)
------------ ------------- ------------
169,899,916 - 169,899,916
------------ ------------- ------------
Gas transportation and field service 22,652,604 - 22,652,604
assets Accumulated depreciation (3,677,673) - (3,677,673)
------------ ------------- ------------
18,974,931 - 18,974,931
------------ ------------- ------------
$203,305,198 $ - $203,305,198
============ ============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $7,197,593 $ - $7,197,593
Accrued liabilities 5,092,583 - 5,092,583
Current portion of debt 399,689 - 399,689
------------ ------------- ------------
Total current liabilities 12,689,865 - 12,689,865
------------ ------------- ------------
Long-term debt 112,839,335 (24,011,000) (m) 88,.828,335
Deferred income taxes 17,222,220 - 17,222,220
Stockholders' equity
Convertible preferred stock - 1,000,000 (m) 1,000,000
Preferred stock 200,000 - (m) 200,000
Common stock 120,400 - 120,400
Capital in excess of par value 65,341,465 23,011,000 (m) 88,352,465
Retained earnings (deficit) (5,108,087) - (5,108,087)
------------ ------------- ------------
Total stockholders' equity 60,553,778 24,011,000 84,564,778
------------ ------------- ------------
$203,305,198 $ - $203,305,198
============ ============= ============
See notes to pro forma combined financial statements.
F-5
63
LOMAK PETROLEUM, INC.
NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE (1) PRO FORMA ADJUSTMENTS FOR THE ACQUISITION OF GILLRING, THE
ACQUISITIONS OF PARKER & PARSLEY'S AND TRANSFUEL'S APPALACHIAN ASSETS, THE
MERGER WITH RED EAGLE AND THE OFFERING -- THE TWELVE MONTHS ENDED DECEMBER 31,
1994
In March 1994, the Company completed the acquisition of Gillring Oil
Company ("Gillring") for approximately $11.5 million. Gillring's assets
included approximately $5.4 million of working capital. As a result of the
acquisition, the Company acquired 100% of Gillring's assets including its oil
and natural gas producing properties and its 67% interest in a Texas limited
partnership, Gillring Oil L.P. The transaction was accounted for using the
purchase method of accounting.
In December 1994, Lomak acquired effective control of Red Eagle Resources
Corporation ("Red Eagle") principally through the purchase of two common
stockholders' holdings. On February 15, 1995, the remaining stockholders of
Red Eagle common stock voted to approve the merger of Red Eagle with a wholly
owned subsidiary of the Company. The consideration paid for the acquisition
totaled $11 million in cash and 2,862,000 shares of Lomak common stock.
In June 1995, the Company purchased properties in Pennsylvania and West
Virginia from a subsidiary of Parker & Parsley Petroleum Company for
approximately $20.2 million in cash.
In October 1995, the Company purchased properties in Pennsylvania, New York
and Ohio from Transfuel, Inc. for approximately $20.2 million in cash and
$755,000 of the Company's common stock.
The accompanying unaudited pro forma combined statement of income for the year
ended December 31, 1994 has been prepared as if the acquisitions had occurred
on January 1, 1994 and also gives effect as of January 1, 1994 to the Offering
and the application of the net proceeds therefrom. These transactions are
reflected as follows:
(a) To increase interest expense for the estimated amounts that would have
been incurred on the incremental borrowings to acquire Gillring, Red Eagle and
Parker & Parsley's and Transfuel's Appalachian assets and reduce interest
expense for the net proceeds from the sale of the convertible preferred stock.
(b) To record depletion expense for the Gillring, Parker & Parsley's and
Transfuel acquisitions at $4.37 and to adjust the historical depletion rate for
Lomak and Red Eagle from $4.41 and $3.08, respectively to $4.37.
(c) To adjust oil and gas production expense and general and administrative
expenses for the reduction in costs after the acquisitions of Gillring, Red
Eagle, Parker & Parsley's and Transfuel's assets.
(d) To adjust the provision for income taxes for the change in taxable income
resulting from the Gillring, Red Eagle, Parker & Parsley and Transfuel
acquisitions and the effect on deferred taxes recorded at January 1, 1994 had
the acquisitions taken place at that time.
(e) To reduce interest income on Gillring for cash balances used to reduce
incremental borrowings.
(f) To eliminate 1994 losses realized by Red Eagle on speculative commodity
trade. Lomak has never and does not anticipate in the future participating in
speculative commodity trading.
(g) To eliminate impairment losses on Red Eagle oil & gas properties.
F-6
64
NOTE (2) PRO FORMA ADJUSTMENTS FOR THE ACQUISITIONS OF PARKER & PARSLEY'S AND
TRANSFUEL'S APPALACHIAN ASSETS AND THE OFFERING -- AS OF AND FOR THE NINE
MONTHS ENDED SEPTEMBER 30, 1995
The accompanying unaudited pro forma combined balance sheet has been
prepared as if the Offering had occurred on September 30, 1995. The
accompanying unaudited pro forma combined statement of income for the nine
months ended September 30, 1995 has been prepared as if the acquisitions and
the Offering had occurred on January 1, 1995 and reflects the following
adjustments:
(h) To adjust interest expense for the estimated amounts that would have been
incurred on the incremental borrowings to acquire the Parker & Parsley and
Transfuel Appalachian assets.
(i) To record depletion expense for the Parker & Parsley and Transfuel asset
acquisitions at $4.37 and to adjust the historical depletion rate for Lomak
from $4.39 to $4.37.
(j) To remove minority interest from January 1995 Red Eagle income statement.
(k) To reduce oil and gas production and general and administrative expenses
for cost reductions.
(l) To adjust the provision for income taxes for the change in taxable income
resulting from the Gillring, Red Eagle and Parker & Parsley acquisitions and
the effect on deferred taxes recorded at January 1, 1994 had the acquisitions
taken place at that time.
(m) To record the private placement of $25 million of convertible preferred
stock, net of placement fees and offering costs.
F-7
65
REPORT OF INDEPENDENT ACCOUNTANTS
---------------------------------
To the Board of Directors and Stockholders
Red Eagle Resources Corporation
We have audited the accompanying consolidated balance sheet of Red Eagle
Resources Corporation (the "Company") and its subsidiaries as of September 30,
1994, and the related statements of operations, stockholders' equity and cash
flows for the nine months ended September 30, 1994. These financial statements
are is 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 provides 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 the Company and its
subsidiaries as of September 30, 1994, and the results of their operations and
their cash flows for the nine months then ended in conformity with generally
accepted accounting principles.
Oklahoma City, Oklahoma /s/ Coopers & Lybrand LLP
May 15, 1995
F-8
66
RED EAGLE RESOURCES CORPORATION
CONSOLIDATED BALANCE SREET
(In thousands of dollars)
SEPTEMBER 30, 1994
ASSETS
------
Current assets:
Cash and cash equivalents $2,702
Short-term investments 191
Accounts receivable:
Trade, net of allowance of $211 1,444
Affiliates 898
Current portion of notes receivable 238
Oil and gas properties held for resale 46
Inventory 375
Prepaid expenses 182
-------
Total current assets 6,076
-------
Property and equipment, at cost
(successful efforts method for oil and gas properties) 32,039
Less accumulated depreciation, depletion and
amortization (18,004)
-------
Net property and equipment 14,035
-------
Notes receivable 49
-------
Other assets 738
-------
Total assets $20,898
=======
Continued
The accompanying notes are an integral part of these financial statements.
F-9
67
RED EAGLE RESOURCES CORPORATION
CONSOLIDATED BALANCE SHEET, Continued
(In thousands of dollars)
SEPTEMBER 30, 1994
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable:
Trade $4,423
Affiliates 2,003
Accrued liabilities 351
Current portion of long-term debt 298
------
Total current liabilities 7,075
------
Long-term debt 2,413
------
Deferred income taxes 904
------
Commitments and contingencies (Note 6) -
Stockholders' equity:
Common stock, par value $.10;
10,000,000 shares authorized;
outstanding 4,926,200 493
Additional paid-in capital 6,728
Retained earnings 3,831
------
11,052
Less: Treasury stock, 107,775 shares, at cost (546)
------
Total stockholders' equity 10,506
------
Total liabilities and stockholders' equity $20,898
======
The accompanying notes are an integral part of these financial statements.
F-10
68
RED EAGLE RESOURCES CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
(In thousands of dollars, except per share amounts)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1994
Revenues:
Oil and gas sales $ 3,293
Program management fees, net and well
operator reimbursements 2,192
Gas gathering 752
Drilling and oilfield services 2,925
Sale of oil and gas properties 54
Other 79
-------
Total revenues 9,295
-------
Costs and expenses:
Oil and gas:
Production 1,872
Dry hole and abandonment 1,247
Drilling and oilfield services 1,804
Cost of oil and gas properties sold 30
Depreciation, depletion and amortization 1,608
General and administrative 2,730
-------
Total costs and expenses 9,291
-------
Income from operations 4
-------
Other income (expense):
Interest income 130
Interest expense (114)
Other, net (Note 6) (1,991)
-------
Other expense, net (1,975)
-------
Loss before income tax benefit (1,971)
Income tax benefit 358
-------
Net loss $(1,613)
=======
Net loss per share $ (0.33)
=======
Weighted average number of common and
common equivalent shares outstanding
(thousands) 4,819
=======
The accompanying notes are an integral part of these financial
statements.
F-11
69
RED EAGLE RESOURCES CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands of dollars)
Common Stock
---------------- Paid-In Retained Treasury
Shares Amount Capital Earnings Stock Total
------ ------ ------ -------- ----- -----
December 31, 1993 4,926,825 $493 $6,731 $ 5,444 $(546) $12,122
Retirement of
fractional
shares (625) - (3) - - (3)
Net loss - - - (1,613) - (1,613)
--------- ---- ------ ------- ----- -------
September 30, 1994 4,926,200 $493 $6,728 $ 3,831 $(546) $10,506
========= ==== ====== ======= ===== =======
The accompanying notes are an integral part of these financial statements.
F-12
70
RED EAGLE RESOURCES CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands of dollars)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1994
Operating activity:
Net loss $(1,613)
Adjustments to reconcile net loss
to net cash provided by operations:
Depreciation, depletion and amortization 1,608
Deferred income taxes (484)
Gain on sale of assets (134)
Short-term investment loss 2,136
Other 1,247
Change in assets and liabilities:
Accounts receivable 92
Inventory and prepaid expenses (19)
Accounts payable, accrued liabilities
and other (1,979)
-------
Net cash provided by operating
activity 854
-------
Investing activity:
Proceeds from sales of properties 1,085
Capital expenditures (2,078)
Reduction of notes receivable 621
Advances on notes receivable (168)
Cash paid for short-term investments (2,327)
Partnership offering costs:
Costs incurred (383)
-------
Net cash used by investing activity (3,250)
-------
Continued
The accompany notes are an integral part of these financial statements.
F-13
71
RED EAGLE RESOURCES CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS, CONTINUED
(In thousands of dollars)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1994
Financing activity:
Repayment of long-term debt and
notes payable $(1,130)
Purchase of stock (3)
-------
Net cash used by financing activity (1,133)
-------
Net decrease in cash and cash equivalents (3,529)
Cash and cash equivalents at
beginning of period 6,231
-------
Cash and cash equivalents at
end of period $ 2,702
=======
The accompanying notes are an integral part of these financial statements.
F-14
72
RED EAGLE RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The accompanying consolidated financial statements are the
representations of the management of Red Eagle Resources Corporation
and its subsidiaries (the "Company"). The Company's accounting policies
reflect industry practices and conform to generally accepted accounting
principles. The more significant of such policies are briefly described
below.
Nature of Business - The Company engages in oil and gas development and
production and oilfield services. The Company also develops domestic
oil and gas reserves through the formation and management of public
limited partnerships. The majority of the Company's activities are in
Oklahoma.
Principles of Consolidation - The consolidated financial statements
include the accounts of the Company and its subsidiaries and its
proportionate share of the assets, liabilities, revenues and expenses of
the partnerships in which it serves as general partner. All material
intercompany accounts and transactions have been eliminated.
Property and Equipment - The Company follows the successful
efforts method of accounting for oil and gas producing activities
whereby costs relating to development wells and successful exploratory
wells are capitalized. These costs are amortized to operations on a
unit-of-production basis using estimated recoverable reserves.
Geological and geophysical costs, lease rentals and costs associated
with unsuccessful exploratory wells are expensed as incurred. Unproved
properties include the carrying value of undeveloped oil and gas leases.
When properties are abandoned or their value becomes impaired, the
carrying value is written off or adjusted downward accordingly. Oil and
gas property costs are evaluated annually for net realizable value and
carried at the lower of cost less accumulated depreciation, depletion
and amortization or estimated future pre-tax net revenue discounted at
10 percent, based on unescalated year-end prices. Other property and
equipment is stated at cost and is depreciated using the straight-line
method over estimated useful lives of 3 to 15 years.
Oil and Gas Limited Partnerships - The Company is the general partner in
a number of limited partnerships (the "Partnerships"). These
Partnerships engage in activities associated with (a) exploring for,
developing and producing oil and gas reserves ("Drilling Partnerships"),
(b) acquiring producing property interests ("Production Income
Partnerships") and (c) acquiring producing property mineral rights
("Mineral Acquisition Partnerships").
F-15
73
RED EAGLE RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
Costs incurred by the Company during the formation and offering of the
Partnerships are deferred until the offering is completed. Direct costs
of successful offerings are amortized on a unit-of-production basis as
oil and gas reserves of the Partnerships are produced. Costs associated
with unsuccessful offerings are expensed. One-time fees received from
Partnerships upon formation are recorded as reductions in the Company's
basis in the Partnerships.
Oil and Gas properties Held for Resale - The Company acquires
non-producing leasehold interests which are sold to Partnerships or
nonaffiliates. These interests are contributed to the Partnerships or
sold to nonaffiliates.
Revenue Recognition - Net revenue from management of Partnership
drilling activities is recognized on the percentage of completions
method as costs are incurred. Oil and gas revenue is recognized at the
time hydrocarbons are produced. Oilfield service revenue is recognized
as the services are performed.
Sales of natural gas applicable to the Company's interest in producing
oil and gas leases are recorded as income when the gas is metered
and title transferred pursuant to the gas sales contracts covering the
Company's interest in natural gas reserves. During such times as the
Company's sales of gas exceed its pro rata ownership in a well, such
sales are recorded as income unless total sales from the well have
exceeded the Company's share of estimated total gas reserves underlying
the property at which time such excess is recorded as a liability.
The Company's policy is to expense its pro rata share of lease operating
costs from all wells as incurred. Such expenses relating to the
Company's balancing positions on wells are not material.
Inventory - Inventory consists primarily of tubular goods and oilfield
equipment which are stated at the lower of average cost or market.
Income Taxes - The Company uses the liability method in accounting for
income taxes. Under this method, deferred tax assets and liabilities
are determined based on differences between the financial reporting and
tax bases of assets and liabilities and are measured using the enacted
tax rates and laws that will be in effect when the differences are
expected to be realized or settled.
Earnings Per Share - Per share amounts have been computed based upon the
weighted average number of common and when dilutive, common equivalent
shares outstanding.
F-16
74
RED EAGLE RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
There was no difference between primary and fully diluted earnings per
share for the period presented.
Cash Flows - The Company considers all highly liquid debt instruments
with a maturity of three months or less when purchased to be cash
equivalents.
Presentation - Dollar amounts in the tabulations in the Notes to
Consolidated Financial Statements are in thousands.
2. PROPERTY AND EQUIPMENT:
Property and equipment consists of:
September 30,
1994
-------------
Capitalized costs:
Unproved properties $ 1,345
Proved oil and gas properties 18,328
Oilfield service equipment 7,114
Other 5,252
-------
32,039
-------
Accumulated depreciation, depletion
and amortization:
Proved oil and gas properties 10,740
Oilfield service equipment 5,233
Other 2,031
-------
18,004
-------
Net property and equipment $14,035
=======
The following is a summary of costs incurred (whether capitalized or
expensed) in connection with developed oil and gas producing activities
for the nine months ended September 30, 1994.
Property acquisitions $ 212
Exploration and development 1,139
F-17
75
RED EAGLE RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
3. CONSOLIDATED STATEMENTS OF CASH FLOWS:
The following items are supplemental disclosures of cash flow
information and significant noncash investment and financing activities
of the Company which are not reflected in the Consolidated Statements of
Cash Flows.
Interest paid during the nine months ended September 30, 1994, was
$114,000. During the nine months ended September 30, 1994, the Company
incurred $2,411,000 in debt for the purchase of property and $246,000 in
the settlement of a lawsuit. Income taxes paid for the nine months ended
September 30, 1994 were $191,000.
4. LONG-TERM DEBT:
September 30,
1994
-------------
Note payable to affiliate partnership
bearing interest at 8%, maturing
March 1995, collateralized by equipment $ 103
Note payable, bearing interest at 15%,
maturing June 1997, collateralized by
real estate 67
Note payable, bearing interest at prime
minus 2.4%, maturing February 1999,
collateralized by aircraft (Note 10) 2,368
Note payable, bearing interest at 6%
maturing July 1996 173
------
2,711
298
------
Less current portion $2,413
======
At September 30, 1994, the estimated aggregate maturities of long-term
debt for the next five years are:
1995 $ 298
1996 155
1997 92
1998 84
1999 2,031
The amount due in 1998 and 1999 is related to debt associated with
aircraft, and subsequent to September 30, 1994, the majority stockholder
purchased the aircraft and assumed the related debt.
F-18
76
RED EAGLE RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
5. INCOME TAXES:
The components of income tax benefit are as follows at September 30,1994:
Federal:
Current $ 95
Deferred (341)
State:
Current 31
Deferred (143)
-----
$(358)
=====
At September 30, 1994, the Company would normally have a larger income
tax benefit as a result of the net loss. However, because of a required
deferred tax asset valuation allowance adjustment, the ending net
deferred tax liability is larger than would be expected. The deferred
asset valuation is the result of expected expirations of losses
incurred, but not deducted for income tax purposes.
The tax basis of certain assets and liabilities are different from the
values reflected in the accompanying balance sheet. The related deferred
tax assets and liabilities created by these temporary differences are as
follows (in thousands) at September 30, 1994.
Deferred Tax Assets (Liabilities)
Allowance for doubtful accounts $ 49
Oil and gas properties (1,764)
Accrued workers compensation liability (66)
Deferred installment gain (22)
Other 84
Net operating loss carryforward 24
Capital loss carryforward 882
Partial write-down of undeveloped leases 377
Minimum tax credit carryforward 79
-------
(357)
Non-utilization of capital losses (547)
-------
Net deferred tax liability $ (904)
=======
The effective tax rate differs from the computed "expected" federal
income tax rate of 34% for the nine months ended September 30, 1994 on
income before income taxes for the following reasons:
F-19
77
RED EAGLE RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
5. INCOME TAXES, CONTINUED:
Tax benefit computed at statutory rate $ (670)
State income tax (75)
Statutory depletion (67)
Amortization of syndication costs 51
Non-utilization of capital losses, net of carryback 411
Other 50
Minimum tax credit (58)
------
$ (358)
======
At September 30, 1994 the Company has an alternative minimum tax credit
of approximately $79,000 which is available to reduce future regular
taxes indefinitely. The Company has a net operating loss carryforward
and capital loss carryforward of approximately $60,000 and $2.2 million,
respectively, to reduce future taxable income.
The net operating loss and capital loss carryforwards will expire in
1995 and 1999, respectively. The deferred asset valuation is the result
of expected expiration of capital losses incurred, but not deducted for
income tax purposes.
6. COMMITMENTS AND CONTINGENCIES:
The Company leases office space and equipment under operating leases
having initial or remaining noncancelable terms in excess of one year.
Lease expense for all operating leases was $289,000 for the nine months
ended September 30, 1994. The following is a schedule of future minimum
lease commitments as of September 30, 1994:
1995 $326
1996 149
The Company offers limited partnership interests in Drilling
Partnerships to be formed and as general partner is required to
contribute 1% of total capital to such partnerships plus all leasehold
and tangible equipment. As general partner the Company is also
contingently liable for a Partnership's liabilities. At September 30,
1994, the Partnerships had not incurred any debt to finance their
activities. Most of the Partnership agreements restrict such
borrowings. The Company is not obligated to repurchase limited
partnership interests under the terms of the Partnership agreements.
F-20
78
RED EAGLE RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
6. COMMITMENTS AND CONTINGENCIES, CONTINUED:
No drilling partnerships were closed for the nine months ended September
30, 1994. During October 1994, the company closed one Drilling
Partnership with total participant capital contributions of $2,270,000.
By December 31, 1995, the company is required to have paid cash and
capital expenditures to or on behalf of the Drilling Partnership in an
amount at least equal to 15% ($340,000) of the aggregate participant
capital contributions.
Through January 1993, the Company was self-insured for losses resulting
from workers' compensation claims of less than $500,000 per accident.
As of January 1993, the Company was no longer self-insured for losses
resulting from workers' compensation claims. Claims are handled by the
Oklahoma State Insurance Fund. The Company is self-insured for losses
resulting from employee health benefit claims of less than $35,000 per
participant.
The Company entered into futures contracts to hedge fluctuations in the
price of crude oil and natural gas. These contracts were treated as
speculative transactions and as such, all realized and unrealized gains
or losses on the contracts were included in current results of
operations. The Company recorded a loss for the nine months ended
September 30, 1994 of $2.1 million before income taxes related to these
contracts. The Company recorded a gain of $42,000 for the month of
October 1994. The Company did not have any similar activity subsequent
to October 1994 which significantly impacted the financial statements.
In January 1995, a lawsuit (the "Lawsuit") was filed in the Delaware
Court of Chancery, New Castle County, against the Company, each of the
members of the Company's Board of Directors and Lomak Petroleum, Inc
The Plaintiff seeks to represent all holders (the "Class") of the
Company's common stock, excluding the Company's Directors and Lomak. The
Lawsuit seeks, among other remedies, some of which are in the
alternative, certification of the Lawsuit as a class action, designation
of the Plaintiff as representative of the Class and Plaintiff's counsel
as counsel to the Class; declaration that the Company's Directors
breached their fiduciary duties owed to the Class; and award of
unspecified compensatory damages, prejudgment interest and costs and
disbursement of the Lawsuit including counsel fees. Management of the
Company does not believe that the Lawsuit will have a material effect on
their financial position or results of operations.
The Company is involved in various legal proceedings in the normal
course of its business. In the opinion of management, these matters
will not have a material adverse effect on the financial position or
results of operations of the Company.
F-21
79
RED EAGLE RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
7. RELATED PARTY TRANSACTIONS:
Approximately 37% of drilling and oilfield services revenues during the
nine months ended September 30, 1994, were derived from performing
services for affiliated Drilling Partnerships. In accordance with
industry practice, the Company charges working interest participants a
monthly fixed fee for each well that it operates to reimburse it for
administrative costs incurred. Amounts charged to the Partnerships
totaled approximately $617,000 for the period ended September 30, 1994.
In February 1991, the Company purchased certain oilfield equipment from
a related partnership for $458,000. As of September 30, 1994, $103,000
is outstanding and included in notes payable.
Accounts Receivable - Affiliates is comprised of the following at
September 30, 1994:
Partnerships $806
Other affiliates 92
-----
$ 898
=====
During the year ended December 31, 1992, the Company advanced the
majority stockholder $280,000 of which $20,000 was repaid in 1993 with
interest at 8%. During the year ended December 31, 1993, the Company
advanced the majority stockholder $145,000. In 1994, the Company
advanced the majority stockholder $75,000. All current and prior year
advances were repaid subsequent to September 30, 1994. The advances are
reflected in notes receivable on the accompanying consolidated balance
sheets.
8. BUSINESS SEGMENTS:
The Company's primary endeavor consists of oil and gas exploration and
production activities conducted in part through the formation and
management of limited partnerships and performing oilfield services.
All operations as of September 30, 1994 are in the United States.
Intersegment sales are made at prices prevailing in the industry at the
time of sale.
General corporate assets primarily consist of cash, furniture and
fixtures and leasehold improvements.
9. STOCKHOLDERS' EQUITY:
The Company reserved 200,000 shares of the Company's common stock for
issuance to key employees pursuant to a stock option plan adopted by the
Company. The plan provides for the granting of both incentive and
non-qualified stock options. The exercise price of the options is the
estimated fair market value ofthe stock on the date of grant.
F-22
80
RED EAGLE RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
9. STOCKHOLDERS' EQUITY, CONTINUED:
Options granted become exercisable over a four year period commencing
with the date of grant and expire in ten years. The following is a
summary of stock option transactions at September 30, 1994.
Shares available for grant at end of period 152,500
Shares under option at end of period -
Option price per share -
Shares exercisable at end of period -
Shares exercised during the period -
Shares canceled -
The Company has 5,000,000 authorized shares of preferred stock, $1.00
par value. The Company has no plans to issue this stock.
10. SUBSEQUENT EVENTS:
In December 1994, Lomak Petroleum, Inc. ("Lomak") acquired approximately
32% of the Company's outstanding common stock. On February 15, 1995, a
majority of the stockholders of the Company voted to approve the merger
of the Company with a wholly owned subsidiary of Lomak in exchange for
approximately 2.2 million shares of Lomak's common stock. In connection
therewith, one of the principal stockholders agreed to purchase the
Company's aircraft and to assume the associated indebtedness of
approximately $2.4 million. No gain or loss occurred on this sale.
11. CONCENTRATION OF CREDIT RISK:
Cash consists of balances held in various Oklahoma financial
institutions. Short-term investments represent deposits made on hedging
contracts. Accounts receivable are primarily due from other companies
within the oil and gas industry. The Company does not generally require
collateral related to these receivables; however, cash prepayments and
letters of credit are required for accounts with indicated credit risk.
F-23
81
==============================================================================
No dealer, salesperson or other person has been authorized to give any
information or to make any representations other than those contained in this
Prospectus, and, if given or made, such information or representations must not
be relied upon as having been authorized by the Company or any underwriter.
This Prospectus does not constitute an offer to sell, or a solicitation of an
offer to buy, any securities offered hereby by anyone in any jurisdiction in
which such offer or solicitation is not authorized or in which the person
making such offer or solicitation is not qualified to do so or to anyone to
whom it is unlawful to make such offer or solicitation.
TABLE OF CONTENTS
Page
----
Available Information . . . . . . . . . . . . . 2
Documents Incorporated by Reference . . . . . . 2
Summary . . . . . . . . . . . . . . . . . . . . 3
The Company . . . . . . . . . . . . . . . . . . 3
Business Strategy . . . . . . . . . . . . . . . 3
Accomplishments . . . . . . . . . . . . . . . . 3
Recent Developments . . . . . . . . . . . . . . 4
Summary of the Terms of the Preferred Stock . . 5
Summary Financial, Operating and
Reserve Information . . . . . . . . . . . . 9
Risk Factors. . . . . . . . . . . . . . . . . . 11
Ratio of Earnings to Fixed Charges . . . . . . 14
Use of Proceeds . . . . . . . . . . . . . . . . 14
Capitalization . . . . . . . . . . . . . . . . 15
Business . . . . . . . . . . . . . . . . . . . 16
Management . . . . . . . . . . . . . . . . . . 27
Principal Stockholder and Share Ownership of
Management . . . . . . . . . . . . . . . . . 29
Certain Transactions . . . . . . . . . . . . . 31
Selling Securityholders . . . . . . . . . . . . 31
Plan of Distribution . . . . . . . . . . . . . 33
Description of the Preferred Stock . . . . . . 34
Description of the $2.03 Notes . . . . . . . . 44
Description of Capital Stock . . . . . . . . . 50
Certain Federal Income Tax Considerations . . . 51
Legal Matters . . . . . . . . . . . . . . . . . 55
Experts . . . . . . . . . . . . . . . . . . . . 55
Glossary . . . . . . . . . . . . . . . . . . . 56
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LOMAK PETROLEUM, INC.
1,350,000 SHARES OF $2.03 CONVERTIBLE EXCHANGEABLE PREFERRED STOCK, SERIES C
87,400 SHARES OF 7 1/2 CUMULATIVE CONVERTIBLE EXCHANGEABLE PREFERRED STOCK,
SERIES A
112,600 SHARES OF 7 1/2 CUMULATIVE CONVERTIBLE EXCHANGEABLE PREFERRED STOCK,
SERIES B
$33,750,000 OF 8.125% CONVERTIBLE SUBORDINATED NOTES DUE 2005
AND
6,715,617 SHARES OF COMMON STOCK
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PROSPECTUS
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November 27, 1995
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