PROSPECTUS
COMSTOCK RESOURCES, INC.
52,798 Shares of Common Stock
The 52,798 shares of common stock, par value $.50 per share (the
"Common Stock"), of Comstock Resources, Inc. (together with its subsidiaries,
the "Company") covered by this Prospectus are being or will be offered by
certain selling security holders (the "Selling Security Holders"). See "Selling
Security Holders." The shares were issued in lieu of cash dividends on the
Company's Series 1995 Convertible Preferred Stock. See "Description of Capital
Stock - Preferred Stock." The Company will not receive any proceeds from the
sale of Common Stock offered hereby.
The Selling Security Holders may offer their shares of Common Stock
through broker transactions or directly to prospective purchasers. Such shares
will be offered at the market price or at prices that may be negotiated by the
Selling Security Holders. Brokers or dealers will receive commissions or
discounts from the Selling Security Holders in amounts to be negotiated
immediately prior to sale. See "Plan of Distribution."
The Company's Common Stock is quoted on the Nasdaq National Market
under the symbol CMRE. On June 28, 1996, the last sale price of the Common
Stock, as reported on the Nasdaq National Market, was $10.1875 per share. The
shares of Common Stock offered hereby include preferred stock purchase rights.
See "Description of Capital Stock - Stockholders' Rights Plan."
The Company has agreed to register the shares of Common Stock offered
and to pay the expenses of such registration. Such expenses, including legal and
accounting fees, are estimated to be $5,000. The Company intends to keep the
registration statement, of which this Prospectus is a part, effective for a
period of twenty-four months or, if earlier, until all the shares of Common
Stock offered hereby have been sold or the Company is no longer obligated to
maintain such effectiveness.
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PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED HEREBY
SHOULD CAREFULLY CONSIDER THE MATTERS SET FORTH UNDER "RISK FACTORS"
HEREIN.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
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July 1, 1996
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and, in
accordance therewith, files reports and other information with the Securities
and Exchange Commission (the "Commission"). Reports, proxy and/or information
statements and other information filed by the Company may be inspected and
copied at the public reference facilities maintained by the Commission in
Washington, D.C., and at certain of the regional offices of the Commission. The
addresses of the facilities are: Midwest Regional Office, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661; and New York Regional Office, 7
World Trade Center, New York, New York 10048. In addition, copies of such
material can be obtained from the Public Reference Section of the Commission,
450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates.
The Company shall provide without charge to each person to whom this
Prospectus is delivered, upon written or oral request by such person, a copy of
any and all of the information that is incorporated by reference in this
Prospectus (not including exhibits to the information that is incorporated by
reference unless such exhibits are specifically incorporated by reference into
the information that the Prospectus incorporates). These documents are available
upon request directed to: Comstock Resources, Inc., 5005 LBJ Freeway, Suite
1000, Dallas, Texas 75244; telephone number (214) 701-2000, Attention:
Secretary.
TABLE OF CONTENTS
PAGE
Prospectus Summary.............................................................3
Risk Factors...................................................................3
Description of Capital Stock...................................................7
Selling Security Holders......................................................14
Plan of Distribution..........................................................16
Incorporation of Certain Information By Reference.............................16
Legal Matters.................................................................16
Experts.......................................................................16
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the detailed
information appearing elsewhere or incorporated by reference in this Prospectus.
The Company
Comstock Resources, Inc. is primarily engaged in the acquisition,
development and production of oil and gas reserves in the United States. The
Company owns interests in oil and gas wells located primarily in Arkansas,
Louisiana (on and offshore), Nebraska, Oklahoma, and Texas.
The Company was originally organized as a Delaware corporation in 1919
under the name Comstock Tunnel and Drainage Company for the primary purpose of
conducting gold and silver mining operations in and around the Comstock Lode in
Nevada. In 1983, the Company was reincorporated under the laws of the State of
Nevada. In November 1987, the Company changed its name to Comstock Resources,
Inc.
The executive offices of the Company are located at 5005 LBJ Freeway,
Suite 1000, Dallas, Texas 75244 and its telephone number is (214) 701-2000.
The Offering
Common Stock Offered by the Selling Security Holders.........52,798 shares (1)
Common Stock Outstanding at July 1, 1996.................13,724,754 shares (2)
Nasdaq National Market Symbol.............................................CMRE
(1) Represents shares issued to the Selling Security Holders in lieu of
the payment of cash dividends on the Company's Series 1995 Convertible Preferred
Stock.
(2) At July 1, 1996, an additional 8,384,950 shares of Common Stock are
reserved for issuance upon exercise of outstanding stock options and warrants
and the conversion of the Series 1994 Convertible Preferred Stock, the 1994
Series B Convertible Preferred Stock and the Series 1995 Convertible Preferred
Stock.
RISK FACTORS
Prior to making an investment decision, prospective investors should
consider fully, together with the other information contained in or incorporated
into this Prospectus, the following factors:
Risk of Oil and Gas Operations
The Company must continually acquire or explore for and develop new oil
and gas reserves to replace those being depleted by production. Without
acquisitions or successful drilling, the Company's assets, properties and
revenues will decline over time. The Company's acquisition program assumes that
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major and independent oil companies and individuals will continue to divest many
of their domestic oil and natural gas properties. There can be no assurance that
such divestitures will continue or that the Company will be able to acquire such
properties on acceptable terms or have capital available to fund such
acquisitions. To the extent the Company engages in drilling activities, such
activities carry the risk that no commercially viable oil or gas production will
be obtained. The cost of drilling, completing and operating wells is often
uncertain. Moreover, drilling may be curtailed, delayed or canceled as a result
of many factors, including weather conditions and shortages of or delays in
delivery of equipment.
The availability of a ready market for the Company's oil and gas
production depends on numerous factors beyond its control, including the demand
for and supply of oil and gas, the proximity of the Company's gas reserves to
pipelines, the capacity of such pipelines, fluctuation in seasonal demand, the
effects of inclement weather and government regulations.
The oil and gas business is subject to numerous operating hazards such
as explosions, blowouts, oil spills and other disasters which could result in
substantial loss to the Company. Offshore oil and gas operations are subject to
the additional hazards of marine operations, such as capsizing, collision and
adverse weather and seas. Any of these could result in damage or destruction of
drilling rigs, oil and gas wells or producing facilities, suspension of
operations or damage or injury to property and persons. As is customary in the
industry, the Company maintains insurance against some, but not all, of these
risks.
Volatility of Oil and Natural Gas Prices
The Company's revenues, cash flow from operations and reserve valuations
are significantly affected by the prices received for its oil and gas
production. Historically, the markets for oil and natural gas have been volatile
and are likely to continue to be volatile in the future. Prices for oil and
natural gas are subject to wide fluctuation in response to market uncertainty,
changes in supply and demand and a variety of additional factors, all of which
are beyond the control of the Company. These factors include political
conditions in the Middle East, the foreign supply of oil and natural gas, the
price of foreign imports of oil, the level of consumer and industrial demand,
weather conditions, domestic and foreign government relations, the price and
availability of alternative fuels and overall economic conditions. The Company's
ability to acquire oil and gas properties at prices and upon terms acceptable to
the Company is significantly impacted by the recent volatility of prices for oil
and gas. Generally, during periods of depressed or falling prices, the Company
encounters resistance from potential sellers to sell oil and gas leases or
interests at then prevailing market prices. Conversely, during periods of
escalating prices, the Company encounters increased competition in its efforts
to acquire oil and gas properties having geologic merit and at reasonable
prices.
Derivative Financial Instruments
The Company has limited involvement with derivative financial
instruments and does not use them for trading purposes. The Company uses energy
price swap agreements to hedge anticipated sales of natural gas production and
in its gas marketing activities.
Conflicts of Interest
The Company and certain of its affiliates, including certain officers
and directors of the Company,
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have historically participated in various related party transactions. To the
extent that the Company and its affiliates continue to participate in such
related party transactions in the future, certain potential conflicts of
interest may arise. The Company's board of directors has adopted a policy
providing that any transactions between the Company and its officers, directors,
principal shareholders or affiliates will be on terms no less favorable to the
Company than could have been obtained from unaffiliated third parties on an
arms-length basis and such transactions, if any, will be approved by a majority
of the Company's disinterested directors.
Regulation
The Company's operations are regulated by certain federal and state
agencies. In particular, oil and natural gas production and operations are or
have been subject to price controls, taxes and other laws relating to the oil
and natural gas industry. The Company cannot predict how existing laws and
regulations may be interpreted by enforcement agencies or court rulings, whether
additional laws and regulations will be adopted, or the effect such changes may
have on its business or financial condition.
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 various of the Company's operations, 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. The Company does not anticipate that
it will be required in the near future to expend amounts that are material to
the Company's financial position or results of operations by reason of
environmental laws and regulations, but because such laws and regulations are
frequently changed, the Company is unable to predict the ultimate cost of such
compliance.
The Company believes that the oil and gas industry may experience
increasing liabilities and risks under the Comprehensive Environmental Response,
Compensation and Liability Act, as well as other federal, state and local
environmental laws, as a result of increased enforcement of environmental laws
by various regulatory agencies. As an "owner" or "operator" of property where
hazardous materials may exist or be present, the Company, like all others
engaged in the oil and gas industry, could be liable for the release of any
hazardous substances. Although the Company has not been subject to the
imposition of "clean-up" orders by the government, the potential for sudden and
unpredictable liability for environmental problems is a consideration of
increasing importance to the Company and the oil and gas industry as a whole.
Provisions Relating to Control of the Company
Although not intended to interfere with bona fide offers to acquire
control of the Company in transactions which would benefit all stockholders, the
Company has in place certain measures which affect the control of the Company.
These measures are summarized below.
Classified Board
At present, the Company's Board of Directors is divided into three
classes, with the term of office of one class expiring each year. The existence
of a classified board, which is designed to provide
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continuity and longer-term participation on the Board of Directors, has a
potentially discouraging effect on a takeover bid since it tends to impair a
bidder's ability to obtain control of the Board of Directors, and ultimately the
management, in a relatively short period of time. Because only one class of
directors, which consists of one-third of the total number of directors, stands
for election at each annual meeting, it would take two annual meetings, instead
of one, to change a majority of the directors. This would be true even if a
stockholder held more than a majority of the shares entitled to vote at an
annual meeting. Since the Company's Common Stock does not have cumulative voting
rights, the holders of a majority of shares voting for the election of directors
can elect all members of the class voted upon at each annual meeting. The
provisions of the Company's Bylaws creating the classified board may not be
amended without the approval of the holders of at least two-thirds of the Common
Stock outstanding and entitled to vote on any such change. See "Description of
Capital Stock - Preferred Stock" for rights of the holders of Series 1994
Convertible Preferred Stock, the 1994 Series B Convertible Preferred Stock and
the Series 1995 Convertible Preferred Stock to elect directors under limited
circumstances.
Stockholders' Rights Plan
The Board adopted a stockholders' rights plan (the "Rights Plan") on
December 4, 1990 in order to deter coercive or unfair takeover tactics and to
prevent a purchaser from gaining control of the Company without offering a fair
price to all stockholders. The Rights Plan was not adopted in response to any
specific effort to obtain control of the Company. Although intended to preserve
for the Company's stockholders the long-term value of the Company, the Rights
Plan may make it more difficult for the stockholders of the Company to benefit
from certain transactions which are opposed by the incumbent board. See
"Description of Capital Stock - Stockholders' Rights Plan."
Preferred Stock
In the event of any takeover attempt of the Company through tender
offer, merger, proxy contest or otherwise, the Board could issue shares of its
authorized preferred stock which could dilute the voting power of existing
stockholders. Moreover, since the Board may, without stockholder approval, fix
the voting powers, designations and preferences and other rights,
qualifications, limitations and restrictions on its authorized but unissued
shares of preferred stock, any preferred stock issued by the Board could be
structured so as to impede or prevent any proposed undesired takeover. For these
reasons, the ability of the Board of Directors of the Company to cause the
issuance of one or more series of preferred stock could discourage hostile
tender offers, mergers and other business combinations, proxy contests, and the
removal of incumbent management. The Board's rights to authorize the issuance of
any preferred stock are limited by the terms of the currently outstanding series
of preferred stock. See "Description of Capital Stock - Preferred Stock."
Severance Benefits
Effective July 1, 1996, the Company entered into employment agreements
with M. Jay Allison, the President and Chief Executive Officer of the Company,
and Roland O. Burns, Senior Vice President, Chief Financial Officer, Secretary
and Treasurer of the Company. Under the agreements, the Company agreed to employ
each of Messrs. Allison and Burns for a period of twelve months at a minimum
base rate of $245,000, and $132,500 per annum, respectively. Each of the
agreements provides for the payment of severance benefits in an amount equal to
three times the existing annual base salary of the employee upon a change in
control followed by the occurrence of certain specified events, including the
6
assignment of the employee to duties inconsistent with his position immediately
prior to the change in control, a reduction in the employee's salary, requiring
the employee to be relocated, failure of a purchaser to assume the obligations
of the Company under the agreement, failure of the Company to re-elect the
employee to the offices held by him immediately prior to a change in control and
a breach by the Company (or any successor) of any provisions of the agreement.
The severance benefit payments are payable in cash in equal payments (without
interest over a period not to exceed twelve months). As defined in the
agreements, a "change in control" is deemed to have taken place if (a) without
the approval or recommendation of a majority of the then existing Board of
Directors of the Company, a third person causes or brings about the removal or
resignation of the then existing members of the Board or if a third person
causes or brings about an increase in the size of the Board such that the then
existing members of the Board thereafter represent a minority of the total
number of persons comprising the entire Board; (b) a third person, including a
group, becomes the beneficial owner of shares of any class of the Company's
stock having 30 percent or more of the total number of votes that may be cast
for the election of directors of the Company; (c) any shares or any class of the
Company's stock are purchased pursuant to a tender or exchange offer (other than
an offer by the Company); or (d) the Company's stockholders approve a merger or
other business combination of the Company with or into another corporation
pursuant to which the Company will not survive or will survive only as a
subsidiary of another corporation, or the sale or other disposition of all or
substantially all of the assets of the Company, or any combination of the
foregoing.
As a result of the severance benefit payments that could become payable
to Messrs. Allison and Burns, and based on the base compensation currently in
effect, a total of $1,132,500 would presently be required to be paid to them
upon a change in control followed by one of the events triggering payment of the
severance benefits. Accordingly, the employment agreements would have the effect
of substantially increasing the cost of acquiring control of the Company,
thereby possibly discouraging any such attempted acquisition of control.
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 30,000,000
shares of Common Stock and 5,000,000 shares of preferred stock, $10.00 par value
(the "Preferred Stock"). At July 1, 1996, there were issued and outstanding
13,724,754 shares of Common Stock and 3,100,000 shares of Preferred Stock, of
which 600,000 shares are designated as the Series 1994 Convertible Preferred
Stock, 1,000,000 shares are designated as the 1994 Series B Convertible
Preferred Stock and 1,500,000 shares are designated as the Series 1995
Convertible Preferred Stock. Options and warrants to purchase 1,286,307 shares
of Common Stock were also outstanding and exercisable at that date. In the
aggregate, 8,384,950 shares of Common Stock have been reserved for issuance
pursuant to the exercise of stock options and warrants currently outstanding and
the conversion of the Series 1994 Convertible Preferred Stock, the 1994 Series B
Convertible Preferred Stock and the Series 1995 Convertible Preferred Stock.
Common Stock
Subject to the prior rights of the Series 1994 Convertible Preferred
Stock, the 1994 Series B Convertible Preferred Stock, the Series 1995
Convertible Preferred Stock and any other shares of Preferred Stock that may be
issued, and except as otherwise set forth below, the shares of Common Stock of
the Company (1) are entitled to such dividends as may be declared by the Board
of Directors, in its discretion, out of funds legally available therefor; (2)
are entitled to one vote per share on matters voted
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upon by the stockholders and have no cumulative voting rights; (3) have no
preemptive or conversion rights; (4) are not subject to, or entitled to the
benefits of, any redemption or sinking fund provision; and (5) are entitled,
upon liquidation, to receive the assets of the Company remaining after the
payment of corporate debts and the satisfaction of any liquidation preferences
of the Series 1994 Convertible Preferred Stock, the 1994 Series B Convertible
Preferred Stock, the Series 1995 Convertible Preferred Stock and any other
Preferred Stock, if issued. Although the Company's Articles of Incorporation do
not deny preemptive rights to stockholders, under Nevada law no stockholders
have preemptive rights with respect to shares that, upon issuance, are
registered under Section 12 of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"). The Common Stock is currently registered under the
Exchange Act.
The Common Stock presently issued and outstanding, including the shares
being offered by the Selling Security Holders, is validly issued, fully paid and
nonassessable.
Because the shares of Common Stock do not have cumulative voting rights,
the holders of a majority of the shares voting for the election of directors can
elect all members of the class of the Company's classified Board of Directors
that are to be elected at a meeting of the stockholders, subject to any rights
of the holders of Series 1994 Convertible Preferred Stock, the 1994 Series B
Convertible Preferred Stock and the Series 1995 Convertible Preferred Stock. See
"Description of Capital Stock Preferred Stock."
The Company's Common Stock is quoted on the Nasdaq National Market
System of the Nasdaq Stock Market. The Transfer Agent and Registrar for the
Common Stock of the Company is American Stock Transfer & Trust Company.
Stockholders' Rights Plan
General
As part of its long-term strategy to maximize, preserve and protect the
long-term value of the Company for the benefit of all stockholders, the Board of
Directors of the Company considered, and on December 4, 1990, adopted, a
stockholders' rights plan. The basic objective of the Rights Plan is to
encourage prospective purchasers to negotiate with the board, whose ability to
negotiate effectively with a potential purchaser, on behalf of all stockholders,
is significantly greater than that of the stockholders individually. In the
board's view, some attempted takeovers can pressure stockholders into disposing
of their equity investment in the Company at less than full value and can result
in the unfair treatment of minority stockholders, especially considering that
prospective purchasers typically are interested in acquiring targets as cheaply
as they can. The rights are designed to deter abusive takeover tactics, such as
(i) accumulations of the Company's stock by a prospective purchaser who through
open market or private purchases may achieve a position of substantial influence
or control without paying to selling or remaining stockholders a fair "control
premium", (ii) coercive two-tier, front-end loaded or partial offers which may
not offer fair value to all stockholders, (iii) accumulations of the Company's
stock by a prospective purchaser who lacks the financing to complete an offer
and is only interested in putting the Company "in play", without concern as to
how its activities may affect the business of the Company, and (iv) self-dealing
transactions by or with prospective purchasers who may seek to acquire the
Company at less than full value or upon terms that may be detrimental to
minority stockholders. Equally important, offers left open only a short time
might prevent management and the board from considering all
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alternatives to maximize the value of the Company - including, if appropriate, a
search for competing bidders. The board believes that the specific benefits
derived by the stockholders of the Company as a result of having the rights plan
in place include:
o providing disincentives to potential purchasers who are not willing
or able to make and complete a fully financed offer to all
stockholders at a fair price;
o providing the board and management the time to consider available
alternatives and act in the best interests of all stockholders in
the event of an offer;
o protecting against abusive takeover tactics; and
o increasing the bargaining power of the board.
The Rights Plan was not adopted by the board in response to any specific
effort to obtain control of the Company.
Description of Rights Plan
On December 4, 1990, the Company declared a dividend distribution of one
preferred share purchase right (a "Right") for each outstanding share of Common
Stock, payable on December 17, 1990 (the "Record Date") to stockholders of
record at that date. Each Right entitles the registered holder to purchase from
the Company one one-hundredth of a share of Series A Junior Participating
Preferred Stock, $10.00 par value per share, at an exercise price of $15.00 (the
"Purchase Price") per one one-hundredth of a share of Preferred Stock, subject
to adjustment. The description and terms of the Rights are set forth in a Rights
Agreement (the "Rights Agreement") between the Company and American Stock
Transfer & Trust Company, as successor Rights Agent.
The Rights are initially evidenced by the Common Stock certificates as
no separate Rights Certificates were distributed. The Rights separate from the
Common Stock and a "Distribution Date" will occur at the close of business on
the earliest of (i) the tenth business day following a public announcement that
a person or group of affiliated or associated persons (an "Acquiring Person")
has acquired, or obtained the right to acquire, beneficial ownership of 20% or
more of the outstanding shares of Common Stock (the "Stock Acquisition Date"),
(ii) the tenth business day (or such later date as may be determined by action
of the Board of Directors) following the commencement of a tender offer or
exchange offer that would result in a person or group beneficially owning 20% or
more of the outstanding shares of Common Stock or (iii) the tenth business day
after the Board of Directors of the Company determines that any individual,
firm, corporation, partnership or other entity (each a "Person"), alone or
together with its affiliates and associates, has become the beneficial owner of
an amount of Common Stock which a majority of the continuing directors who are
not officers of the Company determines to be substantial (which amount shall in
no event be less than 10% of the shares of Common Stock outstanding) and at
least a majority of the continuing directors who are not officers of the
Company, after reasonable inquiry and investigation, including consultation with
such Person as such directors shall deem appropriate, shall determine that (a)
such beneficial ownership by such Person is intended to cause the Company to
repurchase the Common Stock beneficially owned by such Person or to cause
pressure on the Company to take action or enter into a transaction or series of
transactions intended to provide such Person with short-term financial gain
under circumstances where such directors determine that the best
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long-term interests of the Company and its stockholders would not be served by
taking such action or entering into such transaction or series of transactions
at that time or (b) such beneficial ownership is causing or is reasonably likely
to cause a material impact (an "Adverse Person").
The Rights are not exercisable until the Distribution Date and will
expire at the close of business on December 17, 2000, unless earlier redeemed by
the Company.
If (i) a Person becomes the beneficial owner of 20% or more of the then
outstanding shares of Common Stock (except (a) pursuant to certain offers for
all outstanding shares of Common Stock approved by at least a majority of the
continuing directors who are not officers of the Company or (b) solely due to a
reduction in the number of shares of Common Stock outstanding as a result of the
repurchase of shares of Common Stock by the Company) or (ii) the Board of
Directors determines that a Person is an Adverse Person, each holder of a Right
will thereafter have the right to receive, upon exercise, Common Stock (or, in
certain circumstances, cash, property or other securities of the Company) having
a value equal to two times the exercise price of the Right. However, Rights are
not exercisable following the occurrence of either of the events set forth in
this paragraph until such time as the Rights are no longer redeemable by the
Company as set forth below. Notwithstanding any of the foregoing, following the
occurrence of either of the events set forth in this paragraph, all Rights that
are, or (under certain circumstances specified in the Rights Agreement) were
beneficially owned by any Acquiring Person or Adverse Person will be null and
void.
If at any time following the Stock Acquisition Date, (i) the Company is
acquired in a merger or other business combination transaction in which the
Company is not the surviving corporation, or in which the Company is the
surviving corporation, but its Common Stock is changed or exchanged (other than
a merger which follows an offer described in clause (i)(a) of the preceding
paragraph), or (ii) more than 50% of the Company's assets, cash flow or earning
power is sold or transferred, each holder of a Right (except Rights which
previously have been voided as set forth above) shall thereafter have the right
to receive upon exercise, Common Stock of the acquiring company having a value
equal to two times the exercise price of the Right.
At any time after the earlier to occur of (i) an Acquiring Person
becoming such or (ii) the date on which the Board of Directors of the Company
declares an Adverse Person to be such, the Board of Directors may cause the
Company to exchange the Rights (other than Rights owned by the Adverse Person or
Acquiring Person, as the case may be, which will have become null and void), in
whole or in part, at an exchange ratio of one share of Common Stock per Right
(subject to adjustment). Notwithstanding the foregoing, no such exchange may be
effected at any time after any Person becomes the beneficial owner of 50% or
more of the outstanding Common Stock.
The Purchase Price payable, and the number of shares of Preferred Stock
or other securities or property issuable, upon exercise of the Rights are
subject to adjustment from time to time to prevent dilution (i) in the event of
a stock dividend on, or a subdivision, combination or reclassification of, the
Preferred Stock, (ii) if holders of the Preferred Stock are granted certain
rights or warrants to subscribe for Preferred Stock or convertible securities at
less than the current market price of the Preferred Stock, or (iii) upon the
distribution to holders of the Preferred Stock of evidences of indebtedness or
assets (excluding regular quarterly cash dividends) or of subscription rights or
warrants (other than those referred to above).
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At any time until the close of business on the earlier of the tenth day
following the Stock Acquisition Date or the tenth business day following the
date on which the Board of Directors first declares a person to be an Adverse
Person, the Company may redeem the Rights in whole, but not in part, at a price
of $0.01 per Right. Under certain circumstances set forth in the Rights
Agreement, the decision to redeem shall require the concurrence of a majority of
the continuing directors (as defined in the Rights Agreement).
Until a Right is exercised, the holder thereof, as such, will have no
rights as a stockholder of the Company, including, without limitation, the right
to vote or to receive dividends.
The Rights Plan has certain anti-takeover effects including making it
prohibitively expensive for a raider to try to control or take over the Company
unilaterally and without negotiation with the Board. Although intended to
preserve for the stockholders the long term value of the Company, the Rights
Plan may make it more difficult for stockholders of the Company to benefit from
certain transactions which are opposed by the incumbent board. See "Risk Factors
- - Provisions Relating to Control of the Company."
Preferred Stock
The Board of Directors is empowered, without approval of the
stockholders, to cause shares of its authorized Preferred Stock to be issued in
one or more classes or series, from time to time, with the number of shares of
each class or series and the rights, preferences and limitations of each class
or series to be determined by it. Among the specific matters that may be
determined by the Board of Directors are the rate of dividends, redemption and
conversion prices, terms and amounts payable in the event of liquidation and
voting rights. Shares of Preferred Stock may, in the board's sole determination,
be issued with voting rights greater than one vote per share. Issuance of shares
of Preferred Stock could involve dilution of the equity of the holders of Common
Stock and further restrict the rights of such stockholders to receive dividends.
On January 6, 1994, the Board of Directors created a new series of
Preferred Stock consisting of 600,000 shares designated as the Series 1994
Convertible Preferred Stock (the "Series 1994 Preferred"). On January 7, 1994,
the Company issued and sold 600,000 shares of the Series 1994 Preferred in a
private placement for $6 million. The Series 1994 Preferred was purchased by
certain investors and investment funds represented or managed by Trust Company
of the West.
On July 21, 1994, the Board of Directors created a new series of
Preferred Stock consisting of 1,500,000 shares designated as the 1994 Series B
Convertible Preferred Stock (the "1994 Series B Preferred"). On July 22, 1994,
the Company exchanged 1,000,000 shares of the 1994 Series B Preferred and
$10,150,000 in cash to re-acquire certain production payments previously
conveyed by the Company to Enron Reserve Acquisition Corp. ("Enron").
On June 16, 1995, the Board of Directors created a new series of the
Company's preferred stock ($10.00 par value) consisting of 1,500,000 shares
designated as the Series 1995 Convertible Preferred Stock (the "Series 1995
Preferred"). On June 19, 1995, the Company sold 1,500,000 shares in a private
placement for $15 million to certain investors and investment funds represented
or managed by Trust Company of the West.
11
The Series 1994 Preferred and the Series 1995 Preferred pay quarterly
dividends at the rate of 22 1/2(cent) on each outstanding share and is payable
when, as and if declared on each March 31, June 30, September 30, and December
31. Dividends on the Series 1994 Preferred and the Series 1995 Preferred are
cumulative from the date of original issue. Unpaid dividends bear interest at a
rate of 9% per annum, compounded quarterly. The Company, at its option, can pay
the dividend in cash or in shares of Common Stock valued at 75%, in the case of
the Series 1994 Preferred, or 80% in the case of the Series 1995 Preferred, of
the lower of the Common Stock's 5 day or 30 day average closing price.
The 1994 Series B Preferred bears quarterly dividends at the rate of 15
5/8(cent) on each outstanding share and is payable when, as and if declared by
the Board of Directors on April 1, July 1, October 1 and January 1, of each
year. Dividends on the 1994 Series B Preferred are cumulative from the date of
issuance. The Company can elect to pay the dividends in cash or in shares of
stock. If the dividends are to be paid in shares of stock, the holder may elect
to receive either additional shares of the 1994 Series B Preferred (valued at
$10.00 per share) or Common Stock (valued at 85% of the 15 trading day average
closing price) or a combination thereof.
On January 1, 1999 and on each January 1 thereafter, so long as any
shares of the Series 1994 Preferred are outstanding, the Company is obligated to
redeem 120,000 shares of the Series 1994 Preferred at $10.00 per share plus
accrued and unpaid dividends thereon. On June 30, 2000 and on each June 30,
thereafter, so long as any shares of the Series 1995 Preferred are outstanding,
the Company is obligated to redeem 300,000 shares of the Series 1995 Preferred
at $10.00 per share plus accrued and unpaid dividends thereon. The mandatory
redemption price may be paid either in cash or in shares of Common Stock, at the
option of the Company. If the Company elects to pay the mandatory redemption
price in shares of Common Stock, the Common Stock will be valued at 75%, in the
case of the Series 1994 Preferred, or 80%, in the case of the Series 1995
Preferred, of the lower of the Common Stock's 5 day or 30 day average closing
price (immediately prior to the date of redemption). There is no mandatory
redemption required for the 1994 Series B Preferred.
The respective holders of the Series 1994 Preferred, the 1994 Series B
Preferred and the Series 1995 Preferred have the right, at their option and at
any time, to convert all or any part of such shares into shares of Common Stock.
The initial Common Stock conversion prices are $4.00 per share for the Series
1994 Preferred, $5.00 per share for the 1994 Series B Preferred and $5.25 per
share for the Series 1995 Preferred. If the holders of the Series 1994
Preferred, 1994 Series B Preferred and the Series 1995 Preferred elected to
convert all such shares into Common Stock at the initial conversion prices, the
holders would own approximately 7%, 10% and 14%, respectively, of the Company's
issued and outstanding shares of Common Stock as of July 1, 1996. The Company
has the option to redeem the shares of Series 1994 Preferred and the Series 1995
Preferred at a price that would provide the holder with a specified rate of
return on their original investment. The Company has the option to redeem the
shares of 1994 Series B Preferred at any time at the rate of $14.00 per share as
increased by 7 1/2% per annum compounded monthly from the date of issuance.
In the event of dissolution, liquidation or winding-up of the Company,
the holders of the Series 1994 Preferred, the 1994 Series B Preferred and the
Series 1995 Preferred, after payments of all amounts payable to the holders of
Preferred Stock senior to such series of Preferred Stock, to receive out of the
assets remaining $10.00 per share, together with all dividends thereon accrued
or in arrears, whether or not earned or declared, before any payment is made or
assets set apart for payment to the holders of the Common Stock.
12
The holders of the Series 1994 Preferred, the 1994 Series B Preferred
and the Series 1995 Preferred are each entitled to vote with the holders of
Common Stock on all matters submitted for a vote of the holders of shares of
Common Stock on an "as converted" basis. Upon the occurrence of an "event of
noncompliance" with the terms of the Series 1994 Preferred, the 1994 Series B
Preferred and/or the Series 1995 Preferred as set forth therein, the holders of
each such series of Preferred Stock have the right (for so long as such event of
noncompliance continues) to elect two additional directors to the Board of
Directors of the Company. Accordingly, up to six additional directors could be
elected pursuant to the terms of the Series 1994 Preferred, the 1994 Series B
Preferred and the Series 1995 Preferred. "Events of noncompliance" include (i)
the failure to pay in the aggregate four quarterly dividends on any such series,
(ii) the failure to redeem any such series in accordance with its terms, (iii) a
default by the Company on certain indebtedness, (iv) M. Jay Allison ceasing to
be the chief executive officer of the Company, or (v) a bankruptcy or similar
proceeding is commenced by or against the Company or any of its significant
subsidiaries.
The Company has the option to convert the Series 1995 Preferred to
convertible subordinated debt provided that the Company has satisfied certain
conditions, including obtaining the consent of the banks under the senior credit
facility and the holders of Series 1994 Preferred and the 1994 Series B
Preferred and granting to the holders of the Series 1995 Preferred additional
demand registration rights.
The Company may not, so long as any of the Series 1994 Preferred, the
1994 Series B Preferred or the Series 1995 Preferred is outstanding, alter any
of the rights, preferences or powers of the Series 1994 Preferred, 1994 Series B
Preferred and the Series 1995 Preferred or issue any shares of stock ranking on
a parity with or senior to each series of outstanding Preferred Stock unless the
requisite number of the holders have consented thereto. Holders of each such
series of Preferred Stock also have the right to approve (1) a merger of the
Company where the Company is not the surviving corporation; (2) the issuance of
more than 20% of the Company's Common Stock in connection with a merger or
acquisition; (3) the sale or disposition of substantially all of the Company's
assets; (4) payment of any dividend or distribution, on or for the redemption of
Common Stock of the Company in excess of $50,000 a year; or (5) an increase in
the number of shares of Common Stock issuable under the Company's 1991 Long-term
Incentive Plan.
In addition to the Series 1994 Preferred, the 1994 Series B Preferred
and the Series 1995 Preferred and in connection with the Stockholders' Rights
Plan as described under "Description of Capital Stock -
Stockholders' Rights Plan", the Company has designated and reserved for
issuance 150,000 shares of Preferred Stock, $10.00 par value per share, which,
under the Rights Plan, may be issued in units consisting of one one-hundredth of
a share (each, a "Unit"). Each Unit, if and when issued, will be entitled to
receive a cumulative quarterly cash dividend equal to the greater of $0.375 or
the amount of the dividend or distribution paid per share of Common Stock for
the applicable quarter. Such Preferred Stock dividend rights are senior to the
rights of holders of Common Stock to receive any dividend or distribution. Each
Unit, if and when issued, will be entitled to one vote, voting together with the
Common Stock, on all matters submitted to the holders of the Common Stock. Upon
liquidation, dissolution or winding up of the Company, each Unit issued will be
entitled to the greater of $15.00 plus accrued but unpaid dividends or the
amount to be distributed in respect of each share of Common Stock, with such
Preferred Stock liquidation rights being senior to those of the holders of the
Common Stock. The Company has the option to redeem, in whole or in part, the
Preferred Stock, if issued, at any time for a per Unit price equal to the
greater of $15.00 or the current market price per share of Common Stock at the
time of redemption, in each case together with accrued but unpaid dividends.
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SELLING SECURITY HOLDERS
The following table sets forth certain information as of July 1, 1996
with respect to the Common Stock beneficially owned by the Selling Security
Holders.
Number of Before After
Name and Address of Shares Number Offering Offering
Selling Security Beneficially of Shares Percentage of Percentage of
Holder Owned Offered (4) Common Stock Common Stock (1)
- ----------------------------------------------------------------------------------------------------
Trust Company of the West, 297,037(2)(3) 3,689 2.12% 2.09%
as Trustee of the TCW Debt and
Royalty Fund IVA
865 South Figueroa, Suite 1800
Los Angeles, California 90017
Trust Company of the West, 793,585(2)(3) 9,857 5.46% 5.40%
as Custodial Agent for TCW Debt
and Royalty Fund IVB
865 South Figueroa, Suite 1800
Los Angeles, California 90017
Trust Company of the West, 234,722(2)(3) 4,259 1.67% 1.65%
as Custodial Agent for TCW Debt
and Royalty Fund IVC
865 South Figueroa, Suite 1800
Los Angeles, California 90017
Harris Trust and Saving Bank, 198,027(2)(3) 2,460 1.42% 1.40%
as Trustee for Delta Master Trust
865 South Figueroa, Suite 1800
Los Angeles, California 90017
The Chase Manhattan Bank 495,062(2)(3) 6,149 3.48% 3.44%
as Custodian for
Leland Stanford Junior University
865 South Figueroa, Suite 1800
Los Angeles, California 90017
Trust Company of the West, 247,529(2)(3) 3,075 1.77% 1.75%
as Custodian for Columbia University
865 South Figueroa, Suite 1800
Los Angeles, California 90017
Harris Trust and Savings Bank, 247,529(2)(3) 3,075 1.77% 1.75%
as Custodian for
Searle Trusts Limited Partnership X
865 South Figueroa, Suite 1800
Los Angeles, California 90017
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Number of Before After
Name and Address of Shares Number Offering Offering
Selling Security Beneficially of Shares Percentage of Percentage of
Holder Owned Offered (4) Common Stock Common Stock (1)
- ----------------------------------------------------------------------------------------------------
Harris Trust and Savings Bank, 99,012(2)(3) 1,230 .72% .71%
as Custodian for John G. Searle
Charitable Trusts Partnership
865 South Figueroa, Suite 1800
Los Angeles, California 90017
Trust Company of the West, as 77,458(2)(3) 1,405 .56% .55%
Custodian for the City and County
Employee's Retirement System of
San Francisco
865 South Figueroa, Suite 1800
Los Angeles, California 90017
Trust Company of the West, as 1,719,980(2)(3) 17,599 11.33% 11.03%
Investment Manager and Custodian for
General Mills, Inc.
865 South Figueroa, Suite 1800
Los Angeles, California 90017
---------- --------
4,409,941 52,798 24.39% 24.10%
========== ========
(1) Assumes the sale by Selling Security Holders of all shares offered hereby.
(2) Includes 1,500,000 shares issuable pursuant to conversion of the Series 1994
Preferred. (3) Includes 2,857,143 shares issuable pursuant to conversion of the
Series 1995 Preferred. (4) Represents shares issued in lieu of the payment of
cash dividends on the Series 1995 Preferred.
Transactions with Selling Security Holders
On January 7, 1994, the Company sold 600,000 shares of its Series 1994
Preferred in a private placement for $6 million to certain investors and
investment funds managed by Trust Company of the West.
On June 19, 1995, the Company sold 1,500,000 shares of its Series 1995
Preferred in a private placement for $15 million to certain investors and
investment funds managed by Trust Company of the West, including certain holders
of the Series 1994 Preferred.
PLAN OF DISTRIBUTION
The shares of Common Stock offered hereby are being sold for the
respective account of each Selling Security Holder. The shares may be sold from
time to time by each Selling Security Holder, or by its pledges, donees,
transferees or other successors in interest who acquire such shares pursuant to
a non-sale transaction. Sales may be made on the Nasdaq National Market, or
otherwise, at prices and at terms then prevailing or at prices related to the
then current market price, or in negotiated transactions. The shares may be sold
by one or more of the following: (a) a block trade in which the broker or dealer
15
so engaged will attempt to sell the shares as agent, but may position and resell
a portion of the block as principal to facilitate the transaction; (b) purchases
by a broker or dealer as principal and resale by such broker or dealer for its
account pursuant to this Prospectus; and (c) ordinary brokerage transactions and
transactions in which the broker solicits purchasers. In effecting sales,
brokers or dealers engaged by the Selling Security Holders may arrange for other
brokers or dealers to participate. Brokers or dealers will receive commissions
or discounts from the Selling Security Holders in amounts to be negotiated
immediately prior to the sale. Such brokers or dealers and any other
participating brokers or dealers may be deemed to be "underwriters" within the
meaning of the Securities Act of 1933, as amended, in connection with such
sales. In addition, any securities covered by this Prospectus which qualify for
sale pursuant to Rule 144 may be sold under Rule 144 rather than pursuant to
this Prospectus.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
The Company hereby incorporates the following documents into this
Prospectus by reference:
1. The Company's Annual Report on Form 10-K for the year ended December 31,
1995.
2. The Company's Proxy Statement dated April 17, 1996 in connection with the
Annual Meeting of Stockholders of the Company held on May 15, 1996.
3. The Company's Quarterly Report on Form 10-Q for the three months ended
March 31, 1996.
4. The Company's Current Report on Form 8-K dated May 1, 1996.
All documents filed by the Company pursuant to Sections 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 offering of the Common Stock offered hereby
shall be deemed to be incorporated by reference into this Prospectus.
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for
the Company by Locke Purnell Rain Harrell (A Professional Corporation), Dallas,
Texas.
EXPERTS
The consolidated financial statements of the Company as of December 31,
1995 and for the year then ended and the financial statements of the Black Stone
Acquisition for the three years ended December 31, 1995 incorporated by
reference in this Registration Statement have been audited by Arthur Andersen
LLP, independent public accountants, as indicated in their reports with respect
thereto, and are included therein in reliance upon the authority of said firm as
experts in accounting and auditing in giving said reports.
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