<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 24, 1996
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
------------------------
THE HOUSTON EXPLORATION COMPANY
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 1311 22-2674487
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
JAMES F. WESTMORELAND
1331 LAMAR, SUITE 1065 1331 LAMAR, SUITE 1065
HOUSTON, TEXAS 77010 HOUSTON, TEXAS 77010
(713) 652-2847 (713) 652-2847
(Address, including zip code, and telephone (Name, address, including zip code, and
number, including area code, of registrant's telephone number, including area code, of
principal executive offices) agent for service)
</TABLE>
------------------------
Copies to:
<TABLE>
<S> <C>
DAVID J. GRAHAM JOHN S. WATSON
JEFFREY L. WADE KEITH R. FULLENWEIDER
ANDREWS & KURTH L.L.P. VINSON & ELKINS L.L.P.
4200 TEXAS COMMERCE TOWER 1001 FANNIN STREET, 36TH FLOOR
HOUSTON, TEXAS 77002 HOUSTON, TEXAS 77002
(713) 220-4200 (713) 758-2222
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(b)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------
PROPOSED
MAXIMUM
PROPOSED MAXIMUM AGGREGATE AMOUNT OF
TITLE OF EACH CLASS AMOUNT TO OFFERING PRICE OFFERING REGISTRATION
OF SECURITIES TO BE REGISTERED BE REGISTERED(1) PER SHARE(2) PRICE(2) FEE
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, par value $0.01 per
share........................... 6,555,000 shares $14.00 $91,770,000 $31,645
- --------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------
</TABLE>
(1) Includes 855,000 shares subject to purchase by the Underwriters to cover
over-allotments, if any.
(2) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(a) under the Securities Act.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
THE HOUSTON EXPLORATION COMPANY
CROSS-REFERENCE SHEET
PURSUANT TO ITEM 501(B) OF REGULATION S-K
<TABLE>
<CAPTION>
ITEM NO. ITEM IN FORM S-1 LOCATION OR HEADING IN PROSPECTUS
- -------- ------------------------------------------------ -----------------------------------
<C> <S> <C>
1. Forepart of the Registration Statement and
Outside Front Cover Page of Prospectus........ Outside Front Cover Page
2. Inside Front and Outside Back Cover Pages of
Prospectus.................................... Inside Front Cover Page; Outside
Back Cover Page; Additional
Information
3. Summary Information, Risk Factors and Ratio of
Earnings to Fixed Charges..................... Prospectus Summary; Risk Factors
4. Use of Proceeds................................. Use of Proceeds
5. Determination of Offering Price................. Outside Front Cover Page;
Underwriting
6. Dilution........................................ Dilution
7. Selling Security Holders........................ Not Applicable
8. Plan of Distribution............................ Front Cover Page; Underwriting
9. Description of the Securities to be
Registered.................................... Front Cover Page; Prospectus
Summary; Capitalization;
Description of Capital Stock;
Underwriting
10. Interests of Named Experts and Counsel.......... Not Applicable
11. Information With Respect to the Registrant...... Front Cover Page; Prospectus
Summary; Risk Factors; The
Company; Dividend Policy;
Selected Historical Financial
Data; Management's Discussion and
Analysis of Financial Condition
and Results of Operations;
Business; Management; Related
Party Transactions; Security
Ownership of Certain Beneficial
Owners and Management;
Description of Capital Stock;
Shares Eligible for Future Sale;
Underwriting
12. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities................................... Not Applicable
</TABLE>
<PAGE> 3
***************************************************************************
* *
* INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A *
* REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED *
* WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT *
* BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE *
* REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT *
* CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY *
* NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH *
* SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO *
* REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH *
* STATE. *
* *
***************************************************************************
SUBJECT TO COMPLETION, DATED MAY 24, 1996
[THE HOUSTON 5,700,000 SHARES
EXPLORATION THE HOUSTON EXPLORATION COMPANY
COMPANY LOGO] COMMON STOCK
(PAR VALUE $.01 PER SHARE)
---------------------
All of the shares offered hereby are being sold by the Company. Prior to
the offering, all of the outstanding shares of Common Stock of the Company have
been owned by a wholly-owned subsidiary of The Brooklyn Union Gas Company. Upon
completion of the offering, a wholly-owned subsidiary of The Brooklyn Union Gas
Company will own approximately 67% of the outstanding shares of Common Stock
(approximately 64% if the Underwriters' over-allotment option is exercised in
full). It is currently estimated that the initial public offering price per
share will be between $ and $ . For factors considered in
determining the initial public offering price, see "Underwriting".
SEE "RISK FACTORS" BEGINNING ON PAGE 9 FOR CERTAIN CONSIDERATIONS RELEVANT
TO AN INVESTMENT IN THE COMMON STOCK.
Application will be made to list the Common Stock on the New York Stock
Exchange.
---------------------
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.
---------------------
<TABLE>
<CAPTION>
INITIAL PUBLIC UNDERWRITING PROCEEDS TO
OFFERING PRICE DISCOUNT(1) COMPANY(2)
------------------ ------------------ ------------------
<S> <C> <C> <C>
Per Share.......................... $ $ $
Total(3)........................... $ $ $
</TABLE>
- ---------------
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933. See
"Underwriting".
(2) Before deducting estimated expenses of $ payable by the Company.
(3) The Company has granted the Underwriters an option for 30 days to purchase
up to an additional 855,000 shares of Common Stock at the initial public
offering price per share, less the underwriting discount, solely to cover
over-allotments. If such option is exercised in full, the total initial
public offering price, underwriting discount and proceeds to the Company
will be $ , $ and $ , respectively. See "Underwriting".
---------------------
The shares offered hereby are offered severally by the Underwriters, as
specified herein, subject to receipt and acceptance by them and subject to their
right to reject any order in whole or in part. It is expected that certificates
for the shares will be ready for delivery in New York, New York on or about
, 1996 against payment therefor in immediately available funds.
GOLDMAN, SACHS & CO.
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
PAINEWEBBER INCORPORATED
---------------------
The date of this Prospectus is , 1996.
<PAGE> 4
THE HOUSTON EXPLORATION COMPANY
NATURAL GAS AND OIL PROPERTIES
---------------------
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF
THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK STOCK EXCHANGE, IN THE
OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.
2
<PAGE> 5
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements, including the notes thereto, included
elsewhere in this Prospectus. Unless otherwise indicated, the information in
this Prospectus assumes that the Underwriters' over-allotment option will not be
exercised. In addition, unless otherwise specified, all numbers of shares and
per share amounts have been restated to reflect the reclassification of each
outstanding share of common stock of the Company into 2.40 shares of Common
Stock, par value $.01 per share ("Common Stock"), to be effected immediately
prior to the offering made hereby (the "Offering"). In February 1996, Brooklyn
Union implemented a reorganization of its exploration and production assets by
transferring to the Company certain onshore producing properties and developed
and undeveloped acreage. Unless otherwise indicated, all information set forth
in this Prospectus gives effect to such reorganization. Unless otherwise
indicated, the December 31, 1995 reserve and acreage and the current production
data included in this Prospectus includes the pro forma net reserves, acreage
and production attributable to properties that the Company will acquire in an
acquisition that will close concurrently with this Offering. Investors should
carefully consider the information set forth under "Risk Factors." Oil and gas
industry terms used in this Prospectus are defined in "Glossary of Oil and Gas
Terms."
THE COMPANY
The Houston Exploration Company ("Houston Exploration" or the "Company") is
an independent natural gas and oil company engaged in the exploration,
development and acquisition of domestic natural gas and oil properties. The
Company's offshore properties are located in the shallow waters (up to 600 feet)
of the Gulf of Mexico, and its onshore properties are located in the Arkoma
Basin, East Texas and West Virginia. The Company has grown its Gulf of Mexico
reserves and production through exploratory drilling and subsequent development
of prospects originally generated utilizing in-house geological and geophysical
expertise. The Company has grown its onshore reserves and production through
successful acquisitions and subsequent exploitation and development of low risk,
long-lived reserves. The Company believes that these lower risk projects and the
stable production from its longer-lived onshore properties complement its high
potential exploratory prospects in the Gulf of Mexico by balancing risk and
reducing volatility.
The Company believes that its primary strengths are its high quality
reserves, its substantial inventory of exploration and development
opportunities, its expertise in generating new prospects and its geographic
focus and low-cost operating structure. At December 31, 1995, the Company had
net proved reserves of 233 Bcfe, 55% of which were located in the Gulf of
Mexico. Approximately 97% of the Company's net proved reserves on such date were
natural gas and approximately 81% of proved reserves were classified as proved
developed. The Company operates approximately 82% of its Gulf of Mexico
production and approximately 81% of its onshore production.
The geographic focus of the Company's operations in the Gulf of Mexico and
core onshore areas of operation enable it to manage a large asset base with a
relatively small number of employees and to add production at relatively low
incremental cost. The Company achieved pro forma lease operating expenses of
$0.26 per Mcfe of production and pro forma general and administrative expenses
of $0.17 per Mcfe of production for the year ended December 31, 1995.
3
<PAGE> 6
STRATEGY. The Company's strategy is to expand its reserves and increase its
cash flow through the exploration of Gulf of Mexico prospects which are
internally generated by the Company, the continued development of its existing
offshore and onshore properties and the selective acquisition of additional
properties both offshore and onshore. The Company implements its strategy by
focusing on the following key strengths:
- High potential exploratory drilling in the Gulf of Mexico
- Low risk exploitation and development drilling in core onshore areas of
operation
- Use of advanced technology for in-house prospect generation
- Opportunistic acquisitions with additional exploratory and/or development
potential
- High percentage of operated properties to control operations and costs
- Geographically focused operations
HIGH POTENTIAL EXPLORATORY DRILLING IN THE GULF OF MEXICO. The Company is
currently drilling one exploratory well in the Gulf of Mexico and plans to drill
at least six additional exploratory wells in 1996, the successful completion of
any one of which could substantially increase the Company's reserves. The
Company believes it has assembled a three year inventory of exploration and
development drilling opportunities in the Gulf of Mexico. The Company holds
interests in 49 lease blocks, representing 230,531 gross (147,180 net) acres, in
federal and state waters in the Gulf of Mexico, of which 28 have current
operations. The Company has a 100% working interest in 16 of these lease blocks
and a 50% or greater working interest in 17 other lease blocks. Since the
beginning of 1994, the Company has drilled seven successful exploratory wells
and 11 successful development wells in the Gulf of Mexico, resulting in added
net proved reserves of approximately 62 Bcfe. The Company anticipates that
approximately $50 million of its $58 million 1996 capital expenditure budget
(excluding acquisitions) will be spent on offshore projects. In addition, the
Company intends to continue its participation in federal lease sales and to
actively pursue attractive farm-in opportunities as they become available.
Current net production from the Company's Gulf of Mexico properties is
approximately 51,000 Mcfe per day.
LOW RISK EXPLOITATION AND DEVELOPMENT DRILLING ONSHORE. The Company owns
significant onshore natural gas and oil properties in the Arkoma Basin of
Oklahoma and Arkansas, East Texas and West Virginia, accounting for
approximately 45% of its net proved reserves as of December 31, 1995. Since the
beginning of 1994, the Company has drilled or participated in the drilling of 24
successful development wells and three successful exploratory wells onshore. The
Company plans to drill 14 development wells onshore during the remainder of
1996. The Company believes that these lower risk projects and the stable
production from its longer-lived onshore properties complement its higher
potential Gulf of Mexico operations and reserve base. The Company's onshore
properties represent interests in 904 gross (510 net) wells, and 131,494 gross
(64,890 net) acres. The Company anticipates that approximately $8 million of its
$58 million 1996 capital expenditure budget (excluding acquisitions) will be
spent on onshore projects. In addition, the Company anticipates that it will
continue to acquire onshore properties with exploitation and development
potential in its core areas of operation as opportunities arise. Current net
production from the Company's onshore properties is approximately 27,000 Mcfe
per day.
USE OF ADVANCED TECHNOLOGY FOR IN-HOUSE PROSPECT GENERATION. The Company
generates virtually all of its Gulf of Mexico exploration prospects utilizing
in-house geological and geophysical expertise. The Company uses advanced
technology, including 3-D seismic and in-house computer-aided exploration
technology, to reduce risks, lower costs and prioritize drilling prospects. The
Company has acquired approximately 1,100 square miles of 3-D seismic data,
including 3-D seismic surveys on 29 of its offshore lease blocks and on possible
lease and acquisition prospects, and 60,500 linear miles of 2-D seismic data on
its offshore properties. The Company has 12 geologists/geophysicists with
average industry experience of approximately 30 years and five geophysi-
4
<PAGE> 7
cal workstations for use in interpreting 3-D seismic data. The availability of
3-D seismic data for Gulf of Mexico properties at reasonable costs has enabled
the Company to identify multiple exploration and development prospects in the
Company's existing inventory of properties and to define possible lease and
acquisition prospects.
OPPORTUNISTIC ACQUISITIONS. Although the Company's primary strategy is to
grow its reserves through the drillbit, the Company anticipates making
opportunistic acquisitions in the Gulf of Mexico with exploratory potential and
in core areas of operation onshore with exploitation and development potential.
The Company has a successful track record of building its reserves through
opportunistic acquisitions in the Gulf of Mexico and onshore.
HIGH PERCENTAGE OF OPERATED PROPERTIES. The Company prefers to operate its
properties in order to manage production performance while controlling operating
expenses and the timing and amount of capital expenditures. Properties operated
by the Company account for 82% of its Gulf of Mexico production and
approximately 81% of its onshore production. Houston Exploration operates 16
platforms and 64 wells in the Gulf of Mexico and 768 wells onshore. The Company
also pursues cost savings through the use of outside contractors for much of its
offshore field operations activities and administrative work. As a result of
these and other factors, the Company achieved pro forma lease operating expense
of $0.26 per Mcfe of production and pro forma general and administrative expense
of $0.17 per Mcfe of production for the year ended December 31, 1995.
GEOGRAPHICALLY FOCUSED OPERATIONS. Focusing drilling activities on
properties in a relatively concentrated area in the Gulf of Mexico permits the
Company to utilize its base of geological, engineering, exploration and
production experience in the region. The geographic focus of the Company's
operations allows it to manage a large asset base with a relatively small number
of employees and enables the Company to add production at relatively low
incremental costs. Management believes that the Gulf of Mexico area remains
attractive for future exploration and development activities due to the
availability of geologic data, remaining reserve potential and the
infrastructure of gathering systems, pipelines, platforms and providers of
drilling services and equipment. The Company's onshore strategy is to make
opportunistic acquisitions of low risk, long-lived natural gas reserves of
sufficient size to provide a core area of operation and to use that base to
develop additional acquisition opportunities and exploitation drilling at little
or no incremental overhead cost.
PENDING ACQUISITION. On , 1996, the Company entered into an
asset purchase agreement with Smith Offshore Exploration Company ("Soxco"),
providing for the acquisition by the Company of substantially all of the natural
gas and oil properties and related assets of Soxco, representing approximately
32 Bcfe of the Company's pro forma net proved reserves of 233 Bcfe as of
December 31, 1995 (the "Soxco Acquisition"). Soxco's natural gas and oil
properties consist solely of working interests in producing properties and
developed and undeveloped acreage located in the Gulf of Mexico that are
operated by the Company or in which the Company also has a working interest.
Pursuant to the Soxco Acquisition, the Company will pay Soxco cash in the
aggregate amount of $23.7 million (subject to certain adjustments), and issue to
Soxco a number of shares of Common Stock (estimated to be approximately 909,000
shares) with an aggregate value (determined by reference to the initial public
offering price) of $11.8 million. The cash portion of the purchase price will be
funded with the proceeds of this Offering. In addition to the foregoing, the
Company will pay Soxco a deferred purchase price of up to $17.6 million payable
in two installments, on January 31, 1997 and January 31, 1998. The amount of the
deferred purchase price installments will be determined by the amount of the
probable reserves of Soxco as of December 31, 1995 (approximately 17.6 Bfce)
that are produced prior to or classified as proved as of December 31, 1996 and
December 31, 1997, respectively, provided that Soxco will be entitled to receive
a minimum deferred purchase price of $8.8 million. The amounts so determined
will be paid in shares of Common Stock based upon the fair market value of such
stock at the time of issuance. The Soxco Acquisition will close concurrently
with, is conditioned upon and is a condition to the completion of this Offering.
5
<PAGE> 8
PRINCIPAL STOCKHOLDER. The Company is currently an indirect wholly-owned
subsidiary of The Brooklyn Union Gas Company ("Brooklyn Union"). Brooklyn Union
distributes gas in an area of New York City with a population of four million.
Upon completion of this Offering and giving effect to the Soxco Acquisition, a
wholly-owned subsidiary of Brooklyn Union will own approximately 67% of the
outstanding shares of Common Stock (approximately 64% if the Underwriters'
over-allotment option is exercised in full). Brooklyn Union believes that
Houston Exploration will provide a competitive vehicle with a stand-alone
capital structure through which Brooklyn Union can continue to participate in
the exploration for and production of natural gas and oil to maximize the
long-term value of its substantial investment in that business. Brooklyn Union
has advised the Company that it does not currently intend to engage in the
domestic exploration for and production of natural gas and oil except through
its ownership of Common Stock of the Company.
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the Company.................... 5,700,000 shares
Common Stock to be outstanding after this Offering..... 20,000,000 shares (1)
Proposed New York Stock Exchange symbol................ " "
Use of Proceeds........................................ To repay outstanding indebtedness
under the Company's Credit Facility
and to pay the cash portion of the
purchase price for the Soxco
Acquisition.
</TABLE>
- ---------------
(1) Assumes 909,000 shares to be issued in connection with the Soxco Acquisition
(based upon an assumed initial public offering price of $13.00 per share).
Does not include (i) 1,000,000 shares of Common Stock (1,042,750 shares if
the Underwriters' over-allotment option is exercised) issuable pursuant to
options that will be granted to management and other employees upon
completion of the Offering, at an exercise price per share equal to the
initial public offering price, or (ii) shares of Common Stock with a fair
market value at the time of issuance of up to $17.6 million issuable as the
deferred purchase price for the Soxco Acquisition. See "Management -- 1996
Stock Option Plan" and "Soxco Acquisition."
6
<PAGE> 9
SUMMARY HISTORICAL AND PRO FORMA FINANCIAL DATA
The following table presents certain historical and pro forma financial
data of the Company as of and for each of the periods indicated. The historical
financial data for the years ended December 31, 1993, 1994 and 1995 have been
derived from the audited financial statements of the Company. The historical
financial data for the three months ended March 31, 1995 and 1996 and as of
March 31, 1996 are derived from unaudited financial statements of the Company.
The results for the three months ended March 31, 1996 are not necessarily
indicative of results for the full year. The following information should be
read together with "Management's Discussion and Analysis of Financial Condition
and Results of Operations," "Pro Forma Financial Information" and the Financial
Statements of the Company and Soxco included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, THREE MONTHS ENDED MARCH 31,
--------------------------------------- -----------------------------
PRO FORMA PRO FORMA
1993 1994 1995 1995(1) 1995 1996 1996(1)
------- ------- ------- --------- ------- ------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues:
Natural gas and oil sales........ $37,462 $41,755 $39,431 $49,803 $ 9,498 $ 9,980 $12,783
Other............................ 799 467 1,778 1,778 253 233 233
------- ------- ------- --------- ------- ------- ---------
Total revenues............ 38,261 42,222 41,209 51,581 9,751 10,213 13,016
Expenses:
Lease operating.................. 4,477 5,344 5,468 7,265 1,418 1,828 2,204
Depreciation, depletion and
amortization................... 23,225 25,365 21,969 29,092 5,626 5,674 6,984
General and administrative,
net............................ 2,454 3,460 3,486 4,701 869 1,492 1,787
Nonrecurring charge(2)........... -- -- 12,000 12,000 --
------- ------- ------- --------- ------- ------- ---------
Total operating
expenses................ 30,156 34,169 42,923 53,058 7,913 8,994 10,975
------- ------- ------- --------- ------- ------- ---------
Income (loss) from operations...... 8,105 8,053 (1,714) (1,477) 1,838 1,219 2,041
Interest expense, net.............. 1,764 2,102 2,398 863 621 461 163
------- ------- ------- --------- ------- ------- ---------
Income (loss) before income taxes.. 6,341 5,951 (4,112) (2,340) 1,217 758 1,878
Income tax provision (benefit)..... 1,790 597 (3,809) (3,189) 61 (218) 174
------- ------- ------- --------- ------- ------- ---------
Net income (loss).................. $ 4,551 $ 5,354 $ (303) $ 849 $ 1,156 $ 976 $ 1,704
======= ======= ======= ======== ======= ======= ========
</TABLE>
<TABLE>
<CAPTION>
AT MARCH 31, 1996
------------------------
PRO
HISTORICAL FORMA(3)
-------- -----------
<S> <C> <C>
(IN THOUSANDS)
BALANCE SHEET DATA:
Property, plant and equipment, net........................................... $228,406 $ 272,614
Total assets................................................................. 266,544 310,886
Long-term debt............................................................... 74,964 30,751
Stockholders' equity......................................................... 102,484 182,214
</TABLE>
- ---------------
(1) Gives effect to the Soxco Acquisition and the application of the net
proceeds of the Offering as if such transactions had been consummated as of
the beginning of the period presented and to the incremental general and
administrative expenses associated with becoming a publicly traded entity.
(2) Represents an accrual for a nonrecurring charge incurred in connection with
the reorganization effective in February 1996. See Note 10 of Notes to
Combined Financial Statements.
(3) Gives effect to the Soxco Acquisition and the application of the net
proceeds from this Offering as if such transactions had been consummated on
March 31, 1996.
7
<PAGE> 10
SUMMARY NATURAL GAS AND OIL RESERVE DATA
The following table summarizes the estimates of the Company's historical
and pro forma net proved natural gas and oil reserves as of the dates indicated
and the present value attributable to these reserves at such dates. The reserve
and present value data as of December 31, 1993, 1994 and 1995 have been prepared
by Ryder Scott Company, Netherland, Sewell & Associates, Inc., Huddleston & Co.,
Inc. and Miller and Lents, Ltd., independent petroleum engineering consultants.
For additional information relating to the Company's natural gas and oil
reserves, see "Business -- Natural Gas and Oil Reserves" and the Supplemental
Oil and Gas Information in the Notes to the Combined Financial Statements of the
Company included elsewhere in this Prospectus. Summaries of the December 31,
1995 reserve reports and the letters of the independent petroleum engineering
consultants with respect thereto are included as Appendix A to this Prospectus.
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
---------------------------------------------
PRO FORMA
1993 1994 1995 1995(1)
-------- -------- -------- ---------
($ IN THOUSANDS)
<S> <C> <C> <C> <C>
Proved Reserves:
Natural gas (Mmcf)........................... 118,118 145,945 195,946 226,053
Oil (Mbbls).................................. 536 636 889 1,185
Total (Mmcfe)................................ 121,334 149,761 201,280 233,163
Present value of future net revenues before
income taxes(2).............................. $119,326 $135,869 $206,574 $ 249,814
Standardized measure of discounted future net
cash flows(3)................................ $106,061 $118,434 $171,459 $ 213,946
</TABLE>
- ---------------
(1) Gives effect to the Soxco Acquisition.
(2) The present value of future net revenues attributable to the Company's
reserves was prepared using prices in effect as of the end of the respective
periods presented, discounted at 10% per annum on a pre-tax basis.
(3) The standardized measure of discounted future net cash flows represents the
present value of future net revenues after income tax discounted at 10%.
SUMMARY OPERATING DATA
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH
YEAR ENDED DECEMBER 31, 31,
--------------------------------------- ---------------------------
PRO FORMA PRO FORMA
1993 1994 1995 1995(1) 1995 1996 1996(1)
------- ------- ------- --------- ------ ------ ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Production:
Natural gas (Mmcf)......... 22,555 22,437 21,077 27,372 4,953 5,735 6,897
Oil (Mbbls)................ 101 102 100 126 30 23 28
Total (Mmcfe).............. 23,161 23,049 21,677 28,128 5,133 5,873 7,065
Average sales prices:
Natural gas (per Mcf)(2)... $ 1.58 $ 1.79 $ 1.79 $ 1.74 $ 1.81 $ 1.67 $ 1.79
Oil (per Bbl).............. 16.96 15.85 16.57 16.67 17.49 16.26 16.34
Expenses (per Mcfe):
Lease operating............ $ 0.19 $ 0.23 $ 0.25 $ 0.26 $ 0.27 $ 0.31 $ 0.31
Depreciation, depletion and
amortization............ 1.00 1.10 1.01 1.03 1.10 0.97 0.99
General and administrative,
net..................... 0.11 0.15 0.16 0.17 0.17 0.25 0.25
</TABLE>
- ---------------
(1) Gives effect to the Soxco Acquisition as if such transaction had been
consummated as of the beginning of the period presented and to the
incremental general and administrative expenses associated with becoming a
publicly traded entity.
(2) Reflects the effects of hedging. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and "Business -- Marketing
and Customers."
8
<PAGE> 11
RISK FACTORS
Prospective purchasers of the Common Stock should carefully consider the
risk factors set forth below, as well as the other information contained in this
Prospectus before purchasing the shares of Common Stock offered hereby.
VOLATILITY OF NATURAL GAS AND OIL PRICES
Revenues generated from the Company's operations are highly dependent upon
the price of, and demand for, natural gas and oil. Historically, the markets for
natural gas and oil have been volatile, and such markets are likely to continue
to be volatile in the future. Prices for natural gas and oil are subject to wide
fluctuation in response to relatively minor changes in the supply of and demand
for natural gas and oil, market uncertainty and a variety of additional factors
that are beyond the control of the Company. These factors include the level of
consumer product demand, weather conditions, domestic and foreign governmental
regulations, the price and availability of alternative fuels, political
conditions in the Middle East, the foreign supply of natural gas and oil, the
price of foreign imports and overall economic conditions. It is impossible to
predict future natural gas and oil price movements with any certainty. Declines
in natural gas and oil prices may materially adversely affect the Company's
financial condition, liquidity, ability to finance planned capital expenditures
and results of operations. Lower natural gas and oil prices also may reduce the
amount of natural gas and oil that the Company can produce economically.
In order to reduce its exposure to short-term fluctuations in the price of
natural gas, the Company enters into hedging arrangements from time to time. The
Company's hedging arrangements apply to only a portion of its production and
provide only partial price protection against declines in natural gas prices. In
addition, the Company's hedging arrangements limit the benefit to the Company of
increases in the price of natural gas. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- General" and
"Business -- Marketing and Customers."
The Company uses the full cost method of accounting for its investment in
natural gas and oil properties. Under the full cost method of accounting, all
costs of acquisition, exploration and development of natural gas and oil
reserves are capitalized into a "full cost pool" as incurred, and properties in
the pool are depleted and charged to operations using the unit-of-production
method based on the ratio of current production to total proved natural gas and
oil reserves. To the extent that such capitalized costs (net of accumulated
depreciation, depletion and amortization) less deferred taxes exceed the present
value (using a 10% discount rate) of estimated future net cash flow from proved
natural gas and oil reserves, and the lower of cost or fair value of unproved
properties after income tax effects, such excess costs are charged to
operations. If a writedown is required, it would result in a charge to earnings
but would not have an impact on cash flow from operating activities.
UNCERTAINTY OF RESERVE INFORMATION AND FUTURE NET REVENUE ESTIMATES
There are numerous uncertainties inherent in estimating natural gas and oil
reserves and their estimated values, including many factors beyond the control
of the producer. The reserve data set forth in this Prospectus represents only
estimates. Reservoir engineering is a subjective process of estimating
underground accumulations of natural gas and oil that cannot be measured in an
exact manner. Estimates of economically recoverable natural gas and oil reserves
and of future net cash flows necessarily depend upon a number of variable
factors and assumptions, such as historical production from the area compared
with production from other producing areas, the assumed effects of regulations
by governmental agencies and assumptions concerning future natural gas and oil
prices, future operating costs, severance and excise taxes, development costs
and workover and remedial costs, all of which may in fact vary considerably from
actual results. For these reasons, estimates of the economically recoverable
quantities of natural gas and oil attributable to any
9
<PAGE> 12
particular group of properties, classifications of such reserves based on risk
of recovery, and estimates of the future net cash flows expected therefrom
prepared by different engineers or by the same engineers at different times may
vary substantially and such reserve estimates may be subject to downward or
upward adjustment based upon such factors. Actual production, revenues and
expenditures with respect to the Company's reserves will likely vary from
estimates, and such variances may be material. See "Business -- Natural Gas and
Oil Reserves."
RESERVE REPLACEMENT RISK
In general, the volume of production from natural gas and oil properties
declines as reserves are depleted. The rate of decline depends on reservoir
characteristics, and varies from the steep decline rate characteristic of Gulf
of Mexico reservoirs, where the Company has a significant portion of its
production, to the relatively slow decline rate characteristic of the
longer-lived fields in the Arkoma Basin, East Texas and West Virginia. Except to
the extent the Company acquires properties containing proved reserves or
conducts successful exploration and development activities, or both, the proved
reserves of the Company will decline as reserves are produced. The Company's
future natural gas and oil production is, therefore, highly dependent upon its
level of success in finding or acquiring additional reserves. The business of
exploring for, developing or acquiring reserves is capital intensive. To the
extent cash flow from operations is reduced and external sources of capital
become limited or unavailable, the Company's ability to make the necessary
capital investment to maintain or expand its asset base of natural gas and oil
reserves would be impaired. In addition, there can be no assurance that the
Company's future exploration, development and acquisition activities will result
in additional proved reserves or that the Company will be able to drill
productive wells at acceptable costs.
CONTROL BY PRINCIPAL STOCKHOLDER
Prior to this offering all of the outstanding shares of Common Stock of the
Company have been owned by a wholly-owned subsidiary of Brooklyn Union. After
giving effect to this Offering and the Soxco Acquisition, a wholly-owned
subsidiary of Brooklyn Union will own approximately 67% of the outstanding
shares of Common Stock (approximately 64% if the Underwriters' over-allotment
option is exercised in full). As a result of Brooklyn Union's beneficial
holdings of Common Stock, after consummation of the Offering, Brooklyn Union
will remain in the position to control the election of the entire Board of
Directors of the Company and Brooklyn Union will be able to determine the
outcome of all matters requiring the vote of the Company's stockholders. See
"Related Party Transactions -- Transactions between the Company and Brooklyn
Union and its Affiliates."
RELATIONSHIP WITH BROOKLYN UNION AND POTENTIAL CONFLICTS OF INTEREST
There may be conflicts of interest arising in the future between the
Company and Brooklyn Union and its subsidiaries in a number of areas relating to
their past and ongoing relationships, including dividends, acquisitions of
natural gas and oil businesses or properties, transfers of assets, insurance
matters, marketing, financial commitments, registration rights and issuances and
sales of capital stock of the Company. The Company's Chairman of the Board,
Robert B. Catell, is also the Chairman of the Board of Directors and Chief
Executive Officer of Brooklyn Union. In addition, two other directors of the
Company, Craig G. Matthews and James Q. Riordan, are the President and a
director of Brooklyn Union, respectively. See "Related Party
Transactions -- Transactions between the Company and Brooklyn Union and
Affiliates" and "Management."
DRILLING RISKS
Drilling involves numerous risks, including the risk that no commercially
productive natural gas or oil reservoirs will be encountered. The cost of
drilling, completing and operating wells is often uncertain, and drilling
operations may be curtailed, delayed or canceled as a result of a variety of
factors, including unexpected drilling conditions, pressure or irregularities in
formations, equipment
10
<PAGE> 13
failures or accidents, adverse weather conditions and shortages or delays in the
delivery of equipment. The Company's future drilling activities may not be
successful and, if unsuccessful, such failure will have an adverse effect on the
Company's future results of operations and financial condition.
OPERATING RISKS OF NATURAL GAS AND OIL OPERATIONS
The natural gas and oil business involves certain operating hazards such as
well blowouts, cratering, explosions, uncontrollable flows of oil, natural gas
or well fluids, fires, formations with abnormal pressures, pollution, releases
of toxic gas and other environmental hazards and risks, any of which could
result in substantial losses to the Company. The Company's offshore operations
also are subject to the additional hazards of marine operations, such as severe
weather, capsizing and collision. The availability of a ready market for the
Company's natural gas and oil production also depends on the proximity of
reserves to, and the capacity of, natural gas and oil gathering systems,
pipelines and trucking or terminal facilities. In addition, the Company may be
liable for environmental damages caused by previous owners of property purchased
and leased by the Company. As a result, substantial liabilities to third parties
or governmental entities may be incurred, the payment of which could reduce or
eliminate the funds available for exploration, development or acquisitions or
result in the loss of the Company's properties. In accordance with customary
industry practices, the Company maintains insurance against some, but not all,
of such risks and losses. The Company does not carry business interruption
insurance. The occurrence of such an event not fully covered by insurance could
have a material adverse effect on the financial condition and results of
operations of the Company.
ACQUISITION RISKS
The acquisition of prospects that yield cost-effective and successful
exploration or development opportunities requires assessment of numerous
factors, many of which are beyond the Company's control. While the Company
believes that its technological expertise and geological database give it
advantages over some of its competitors, there can be no assurances that the
Company's acquisition of property interests will be successful and, if
unsuccessful, that such failure will not have an adverse effect on the Company's
future results of operations and financial condition.
SUBSTANTIAL CAPITAL REQUIREMENTS
The Company makes, and will continue to make, substantial capital
expenditures for the exploration, development, acquisition and production of
natural gas and oil reserves. Historically, the Company has financed these
expenditures primarily with cash generated by operations, proceeds from bank
borrowings and capital contributions by Brooklyn Union. The Company plans to
incur capital expenditures (excluding acquisitions) of approximately $58 million
in 1996. Management believes that the Company will have sufficient cash provided
by operating activities and borrowings under the Credit Facility to fund planned
capital expenditures in 1996. If revenues or the Company's borrowing base
decrease as a result of lower natural gas and oil prices, operating difficulties
or declines in reserves, the Company may have limited ability to expend the
capital necessary to undertake or complete future drilling programs or
acquisition opportunities. There can be no assurance that additional debt or
equity financing or cash generated by operations will be available to meet these
requirements. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Liquidity and Capital Resources."
PENDING LEGAL PROCEEDINGS
In connection with the February 1996 reorganization, certain former
employees of Fuel Resources Inc. ("FRI"), the subsidiary of Brooklyn Union that
previously owned the onshore properties, were entitled to remuneration for the
increase in the value of the transferred properties prior to the reorganization.
In February 1996, certain such former employees filed suit against
11
<PAGE> 14
Brooklyn Union, FRI and the Company alleging breach of contract, breach of
fiduciary duty, fraud, negligent misrepresentation and conspiracy, seeking
actual damages in excess of $35 million and punitive damages in excess of $70
million. FRI has agreed to indemnify the Company against such suit. In addition,
THEC Holdings Corp. ("Holdings"), the subsidiary of Brooklyn Union that holds
all of the currently outstanding Common Stock of the Company, has agreed to
indemnify the Company against the suit, and has agreed to pledge all of its
holdings of Common Stock to secure such indemnification obligation. As a result
of such arrangements, the Company believes that it will not be required to pay
any damages resulting from such suit, even if a judgment adverse to the Company
is rendered in the suit. However, the Company would incur a non-cash charge in
addition to the $12 million charge previously taken by the Company in the event
such damages are determined to be in excess of such $12 million amount, which
would have the effect of reducing the Company's reported income (or resulting in
or increasing a loss) in the period in which such additional charge is
determined. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- General" and "Business -- Legal Proceedings."
DEPENDENCE ON KEY PERSONNEL
The Company depends to a large extent on the services of certain key
management personnel. The loss of the services of such management personnel
could have a material adverse effect on the Company's operations. The Company
intends to enter into employment agreements with certain of its executive
officers prior to the completion of the Offering. The Company believes that its
success is also dependent upon its ability to continue to employ and retain
skilled technical personnel. See "Management -- Employment Agreements."
GOVERNMENT REGULATION AND ENVIRONMENTAL MATTERS
The Company's business is regulated by certain local, state and federal
laws and regulations relating to the exploration for, and the development,
production, marketing, pricing, transportation and storage of, natural gas and
oil. The Company's business is also subject to extensive and changing
environmental and safety laws and regulations governing plugging and
abandonment, the discharge of materials into the environment or otherwise
relating to environmental protection. In addition, the Company is subject to
changing and extensive tax laws, and the effect of newly enacted tax laws cannot
be predicted. The implementation of new, or the modification of existing, laws
or regulations, including regulations which may be promulgated under the Oil
Pollution Act of 1990, could have a material adverse effect on the Company. See
"Business -- Abandonment Costs," "-- Regulation" and "-- Environmental Matters."
COMPETITION
The Company encounters competition from other oil and gas companies in all
areas of its operations, including the acquisition of producing properties. The
Company's competitors include major integrated oil and gas companies and
numerous independent oil and gas companies, individuals and drilling and income
programs. Many of its competitors are large, well-established companies with
substantially larger operating staffs and greater capital resources than the
Company's and which, in many instances, have been engaged in the energy business
for a much longer time than the Company. Such companies may be able to pay more
for productive natural gas and oil properties and exploratory prospects and to
define, evaluate, bid for and purchase a greater number of properties and
prospects than the Company's financial or human resources permit. The Company's
ability to acquire additional properties and to discover reserves in the future
will be dependent upon its ability to evaluate and select suitable properties
and to consummate transactions in this highly competitive environment.
12
<PAGE> 15
ABSENCE OF DIVIDENDS ON COMMON STOCK
The Company currently intends to retain its cash for the operation and
expansion of its business, including exploration, development and acquisition
activities. The terms of the Credit Facility contain restrictions on the payment
of dividends to holders of Common Stock. Accordingly, the Company's ability to
pay dividends will depend upon such restrictions and the Company's results of
operations, financial condition, capital requirements and other factors deemed
relevant by the Board of Directors. See "Dividend Policy," "Management's
Discussions and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources" and Note 2 to the Company's
Combined Financial Statements.
CERTAIN ANTI-TAKEOVER PROVISIONS
The Company's Certificate of Incorporation and Bylaws and the Delaware
General Corporation Law contain provisions that may have the effect of
discouraging unsolicited takeover proposals for the Company. These provisions,
among other things, provide for the classification of the board of directors,
restrict the ability of stockholders to take action by written consent,
authorize the Board of Directors to designate the terms of and issue new series
of preferred stock, limit the personal liability of directors, require the
Company to indemnify directors and officers to the fullest extent permitted by
applicable law and impose restrictions on business combinations with certain
interested parties. See "Description of Capital Stock -- Certain Provisions of
the Company's Charter and Bylaws and Delaware Law."
NO PRIOR PUBLIC MARKET
Prior to this Offering, there has been no public market for the shares of
the Common Stock. Although the Company will apply for the listing of its Common
Stock on the New York Stock Exchange, there can be no assurance that an active
trading market for such shares will develop or be sustained. The initial public
offering price for the Common Stock has been determined by negotiations among
the Company and the Underwriters, and may not be indicative of the market price
of the Common Stock after this Offering. See "Underwriting."
SHARES ELIGIBLE FOR FUTURE SALE
The Company, Brooklyn Union, Soxco, each holder of options to purchase
shares of Common Stock, and each director and executive officer of the Company
have agreed not to sell any shares of Common Stock for a period of 180 days from
the date of this Prospectus without the consent of the representatives of the
Underwriters. The lockup provisions in these agreements are subject to waiver by
the parties to these agreements. After expiration of the lockup period, the
13,391,000 currently outstanding shares of Common Stock, will be eligible for
resale, subject to the volume and other limitations of Rule 144 under the
Securities Act, or pursuant to the exercise of demand registration rights. In
connection with the Soxco Acquisition, the Company will issue a number of shares
of Common Stock (estimated to be approximately 909,000 shares) with an aggregate
value (determined by reference to the initial public offering price) of $11.8
million. In addition, the Company will be obligated to issue additional shares
of Common Stock with a value at the time of issuance of between $8.8 and $17.6
million as the deferred purchase price for the Soxco Acquisition. Soxco will
receive demand registration rights relating to such shares. In addition, upon
completion of the Offering, there will be 1,000,000 shares of Common Stock
issuable pursuant to outstanding options held by management and other employees,
all of which are covered by demand or piggyback registration rights or will be
issued pursuant to a registration statement on Form S-8 and become freely
tradeable, subject to certain requirements of Rule 144. See "Shares Eligible for
Future Sale" and "Soxco Acquisition."
13
<PAGE> 16
THE COMPANY
Houston Exploration is an independent natural gas and oil company engaged
in the exploration, development and acquisition of domestic natural gas and oil
properties. The Company's offshore properties are located in the shallow waters
(up to 600 feet) of the Gulf of Mexico, and its onshore properties are located
in the Arkoma Basin, East Texas and West Virginia. At December 31, 1995, the
Company had net proved reserves of 233 Bcfe, 55% of which were located in the
Gulf of Mexico. Approximately 97% of the Company's net proved reserves on such
date were natural gas and approximately 81% of proved reserves were classified
as proved developed. The Company operates approximately 82% of its Gulf of
Mexico production and approximately 81% of its onshore production. The Company
believes its primary strengths are its high quality reserves, its substantial
inventory of exploration and development opportunities, its in-house expertise
in generating new prospects, and its geographic focus and low-cost operating
structure.
The Company was incorporated in Delaware in December 1985 and commenced
operations in January 1986. The Company has focused since its inception
primarily on the exploration and development of high potential prospects
offshore in the Gulf of Mexico. In February 1996, Brooklyn Union implemented a
reorganization of its exploration and production assets by transferring to
Houston Exploration certain onshore producing properties and developed and
undeveloped acreage. Brooklyn Union believes that Houston Exploration will
provide a competitive vehicle with a stand-alone capital structure through which
Brooklyn Union can continue to participate in the exploration for and production
of natural gas and oil and maximize the long-term value of its substantial
investment in that business. Brooklyn Union distributes natural gas in an area
of New York City with a population of four million. A marketing company
affiliated with Brooklyn Union purchases approximately 48% of the Company's
natural gas production at market prices, based upon production as of May 1,
1996. See "Related Party Transactions."
The Company's principal executive offices are located at 1331 Lamar, Suite
1065, Houston, Texas 77010 and its telephone number is (713) 652-2847.
SOXCO ACQUISITION
On , 1996, the Company entered into an asset purchase
agreement with Soxco, providing for the acquisition by the Company of
substantially all of the natural gas and oil properties and related assets of
Soxco, representing approximately 32 Bcfe of the Company's pro forma net proved
reserves of 233 Bcfe as of December 31, 1995. Soxco's natural gas and oil
properties consist solely of working interests in producing properties and
developed and undeveloped acreage located in the Gulf of Mexico that are
operated by the Company or in which the Company also has a working interest.
Pursuant to the Soxco Acquisition, the Company will pay Soxco cash in the
aggregate amount of $23.7 million (subject to certain adjustments), and issue to
Soxco a number of shares of Common Stock (estimated to be approximately 909,000
shares) with an aggregate value (determined by reference to the initial public
offering price) of $11.8 million. The cash portion of the purchase price paid in
connection with the Soxco Acquisition will be funded with the proceeds of this
Offering. In addition to the foregoing, the Company will pay Soxco a deferred
purchase price of up to $17.6 million payable in two installments, on January
31, 1997 and January 31, 1998. The amount of the deferred purchase price
installments will be determined by the probable reserves of Soxco as of December
31, 1995 (approximately 17.6 Bcfe) that are produced prior to or classified as
proved as of December 31, 1996 and December 31, 1997, respectively, provided
that Soxco is entitled to receive a minimum deferred purchase price of
approximately $8.8 million. The amounts so determined will be paid in shares of
Common Stock based on the fair market value of such stock at the time of
issuance. The Soxco Acquisition will close concurrently with, is conditioned
upon and is a condition to the completion of this Offering.
14
<PAGE> 17
Under the terms of the Soxco agreement, the Company has granted three
demand and certain piggyback registration rights with respect to the shares of
Common Stock to be issued in connection with the Soxco Acquisition. Such
registration rights are subject to certain conditions and exercisable beginning
180 days after the date of this Prospectus.
USE OF PROCEEDS
The net proceeds to the Company from this Offering at an assumed initial
public offering price of $13.00 per share are expected to be approximately $67.9
million, after deducting estimated underwriting discounts and offering expenses
($78.2 million if the Underwriters' over-allotment option is exercised in full).
Of such net proceeds, (i) approximately $44.2 million will be used to repay
outstanding indebtedness under the Company's Credit Facility and (ii)
approximately $23.7 million will be used to pay the cash portion of the Soxco
Acquisition purchase price.
The Credit Facility provides for maximum borrowings of $150 million,
subject to borrowing base limitations, on a revolving basis. At May 15, 1996,
the borrowing base was $80 million, $77.9 million of which was borrowed and $1.6
million of which was committed under outstanding letter of credit obligations.
The maximum borrowings and borrowing base under the Credit Facility begin to be
reduced on January 1, 1998, with repayment of amounts outstanding under the
Credit Facility due in eight quarterly installments beginning April 1, 1998 and
final maturity on January 1, 2000. Borrowings under the Credit Facility bear
interest, at the Company's option, at (i) a fluctuating rate equal to the higher
of the Federal Funds Rate plus 0.5% or the agent bank's prime rate or (ii) a
fixed rate equal to a quoted LIBOR rate plus 0.8%. Borrowings under the Credit
Facility are used, together with cash generated from operations, to fund the
Company's exploration and development expenditures and property acquisitions and
to meet working capital needs. For a description of certain other terms of the
Credit Facility, see "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."
DIVIDEND POLICY
The Company currently intends to retain its cash for the operation and
expansion of its business, including exploration, development and acquisition
activities. The Credit Facility contains restrictions on the payment of
dividends to holders of Common Stock. Accordingly, the Company's ability to pay
dividends will depend upon such restrictions and the Company's results of
operations, financial condition, capital requirements and other factors deemed
relevant by the Board of Directors. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and Note 2 to the Company's
Combined Financial Statements.
15
<PAGE> 18
DILUTION
As of March 31, 1996, the pro forma net tangible book value (total tangible
assets less total liabilities) of the Company giving effect to the Soxco
Acquisition as if such transaction had been completed as of March 31, 1996 was
approximately $114.3 million, or $7.99 per share of Common Stock. After giving
effect to the receipt of $67.9 million of estimated net proceeds from this
Offering (net of estimated underwriting discounts and commissions and offering
expenses) at an assumed initial public offering price of $13.00 per share, the
net tangible book value of the Common Stock outstanding at March 31, 1996 would
have been $9.11 per share, representing an immediate increase in net tangible
book value of $1.12 per share to the existing stockholder and an immediate
dilution of $3.89 per share (the difference between the assumed initial public
offering price and the net tangible book value per share after this Offering) to
persons purchasing Common Stock at the assumed initial public offering price.
The following table illustrates such per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............................ $13.00
Pro forma net tangible book value per share before this Offering......... $ 7.99
Increase in net tangible book value per share attributable to the sale of
Common Stock in this Offering......................................... $ 1.12
Net tangible book value per share after giving effect to this Offering..... $ 9.11
Dilution in net tangible book value to the purchasers of Common Stock
offered hereby........................................................... $ 3.89
</TABLE>
The following table sets forth, as of March 31, 1996, the number of shares
of Common Stock purchased from the Company, the total consideration paid
therefor and the average price per share paid by the existing stockholder and by
new investors:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONTRIBUTION AVERAGE
--------------------- ------------------------- PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
---------- ------- ------------ ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholder................ 13,391,000 67% $ 99,354,000(1) 54% $ 7.42
Soxco............................... 909,000 5 11,817,000 6 13.00
New investors....................... 5,700,000 28 74,100,000 40 13.00
---------- --- ------------ --- ------
Total..................... 20,000,000 100% $185,271,000 100% $ 9.26
========== === ============ === ======
</TABLE>
- ---------------
(1) Does not include any amount that may be payable by subsidiaries of Brooklyn
Union pursuant to agreements to indemnify the Company against certain
litigation. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations," "Risk Factors -- Pending Legal Proceedings" and
"Business -- Legal Proceedings."
The foregoing computations do not include (i) 1,000,000 shares of Common
Stock (1,042,750 shares if the Underwriters' over-allotment option is exercised)
issuable pursuant to options that will be granted to management and other
employees upon completion of the Offering, at an exercise price per share equal
to the initial public offering price, or (ii) shares of Common Stock with a fair
market value at the time of issuance of up to $17.6 million issuable as the
deferred purchase price for the Soxco Acquisition. See "Management -- 1996 Stock
Option Plan" and "Soxco Acquisition." If the foregoing calculations assumed
exercise of all such employee options (assuming an initial public offering price
of $13.00 per share), the net tangible book value per share before this Offering
would be $8.32, the net tangible book value per share after this Offering would
be $9.30 and the dilution per share to new investors would be $3.70.
16
<PAGE> 19
CAPITALIZATION
The following table sets forth the capitalization of the Company at March
31, 1996 on a historical basis and on a pro forma basis to reflect the Soxco
Acquisition, sale of the shares of Common Stock in this Offering and the
application of the net proceeds therefrom to repay debt and to pay the cash
portion of the purchase price for the Soxco Acquisition. This table should be
read in conjunction with "Use of Proceeds," "Pro Forma Financial Information,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Combined Financial Statements of the Company and the related
Notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
MARCH 31, 1996
-------------------------
HISTORICAL PRO FORMA(1)
-------- ------------
(IN THOUSANDS)
<S> <C> <C>
Long-term debt (including current maturities)...................... $ 74,964 $ 30,751
Stockholders' equity:
Preferred Stock, $.01 par value, 5,000,000 shares authorized;
no shares issued and outstanding(2)........................... -- --
Common Stock, $.01 par value, 50,000,000 shares
authorized; 13,391,000 shares issued and outstanding;
20,000,000 shares issued and outstanding, as
adjusted(1)(2)(3)............................................ 134 200
Additional paid in capital(2)(4)................................... 99,220 178,884
Retained Earnings.................................................. 3,130 3,130
-------- --------
Total stockholders' equity............................... 102,484 182,214
-------- --------
Total capitalization................................... $177,448 $212,965
======== ========
</TABLE>
- ---------------
(1) Gives effect to the Offering and the Soxco Acquisition, including the
assumed issuance of 6,609,000 shares of Common Stock and the application of
the net proceeds of this Offering to pay the cash portion of the purchase
price of the Soxco Acquisition and to repay a portion of the Company's
outstanding indebtedness under the Credit Facility.
(2) Reflects the number of shares to be authorized, issued and outstanding
immediately prior to the completion of the Offering.
(3) Does not include (i) 1,000,000 shares of Common Stock (1,042,750 shares if
the Underwriters' over-allotment option is exercised) issuable pursuant to
options to purchase Common Stock that will be granted to management and
other employees upon completion of the Offering or (ii) shares of Common
Stock with a fair market value at the time of issuance of up to $17.6
million issuable as the deferred purchase price for the Soxco Acquisition.
See "Management -- 1996 Stock Option Plan" and "Soxco Acquisition."
(4) Does not include any amount that may be payable by subsidiaries of Brooklyn
Union pursuant to agreements to indemnify the Company against certain
litigation. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations," "Risk Factors -- Pending Legal Proceedings" and
"Business -- Legal Proceedings."
17
<PAGE> 20
SELECTED HISTORICAL FINANCIAL DATA
The following table sets forth selected combined historical financial data
for the Company as of and for each of the periods indicated. The financial data
for each of the five years ended December 31, 1995 are derived from the
financial statements for the Company audited by Arthur Andersen LLP, the
Company's independent public accountants. The financial data for the three
months ended March 31, 1995 and 1996 are derived from the Company's unaudited
financial statements, and in the opinion of management, include all adjustments
(which consist only of normal recurring adjustments) necessary for a fair
presentation of the financial position and results of operations of the Company
for such interim periods. The results for the three months ended March 31, 1996
are not necessarily indicative of results for the full year. The following data
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the Company's financial
statements included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
---------------------------------------------------- -------------------
1991 1992 1993 1994 1995 1995 1996
-------- -------- -------- -------- -------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues:
Natural gas and oil sales................ $ 17,566 $ 21,980 $ 37,462 $ 41,755 $ 39,431 $ 9,498 $ 9,980
Other.................................... 1,295 841 799 467 1,778 253 233
-------- -------- -------- -------- -------- -------- --------
Total revenues..................... 18,861 22,821 38,261 42,222 41,209 9,751 10,213
-------- -------- -------- -------- -------- -------- --------
Expenses:
Lease operating.......................... 3,192 3,123 4,477 5,344 5,468 1,418 1,828
Depreciation, depletion and
amortization........................... 10,252 14,440 23,225 25,365 21,969 5,626 5,674
General and administrative, net.......... 3,460 2,840 2,454 3,460 3,486 869 1,492
Nonrecurring charge(1)................... -- -- -- -- 12,000 -- --
Writedown in carrying value of natural
gas and oil properties................. -- 19,697 -- -- -- -- --
-------- -------- -------- -------- -------- -------- --------
Total operating expenses........... 16,904 40,100 30,156 34,169 42,923 7,913 8,994
Income (loss) from operations.............. 1,957 (17,279) 8,105 8,053 (1,714) 1,838 1,219
Interest expense, net...................... 1,700 1,469 1,764 2,102 2,398 621 461
-------- -------- -------- -------- -------- -------- --------
Income (loss) before income taxes.......... 257 (18,748) 6,341 5,951 (4,112) 1,217 758
Income tax provision (benefit)............. (673) (7,440) 1,790 597 (3,809) 61 (218)
-------- -------- -------- -------- -------- -------- --------
Net income (loss).......................... $ 930 $(11,308) $ 4,551 $ 5,354 $ (303) $ 1,156 $ 976
======== ======== ======== ======== ======== ======== ========
BALANCE SHEET DATA:
Property, plant and equipment, net......... $ 92,863 $ 92,698 $127,911 $169,714 $216,678 $ 183,825 $228,406
Total assets............................... 125,491 126,195 165,031 201,678 251,696 211,459 266,544
Long-term debt............................. 34,500 36,841 46,600 65,650 71,862 66,259 74,964
Stockholder's equity....................... 40,252 48,466 65,575 88,866 95,436 100,393 102,484
</TABLE>
- ---------------
(1) Represents an accrual for a nonrecurring charge incurred in connection with
the reorganization effective in February 1996. See Note 10 of Notes to
Combined Financial Statements.
18
<PAGE> 21
PRO FORMA COMBINED FINANCIAL INFORMATION
The unaudited pro forma combined statements of operations for the year
ended December 31, 1995 assume the Soxco Acquisition and give effect to the
application of the net proceeds of the Offering as if such transactions had been
consummated as of January 1, 1995. The unaudited pro forma combined statements
of operations for the three months ended March 31, 1996 assume the Soxco
Acquisition and give effect to the application of the net proceeds of the
Offering as if such transactions had been consummated as of January 1, 1996. The
unaudited pro forma combined balance sheet as of March 31, 1996 assumes the
Soxco Acquisition and the application of the net proceeds of the Offering were
consummated as of March 31, 1996. The unaudited pro forma combined statements of
operations include certain adjustments to the historical combined statement of
operations of the Company to give effect to the acquisition of the natural gas
and oil properties and the estimated increase in general and administrative
expenses associated with becoming a publicly traded entity.
The pro forma combined financial information does not purport to be
indicative of the results of operations of the Company had such transactions
occurred on the dates assumed, nor is the pro forma combined financial
information necessarily indicative of the future results of operations of the
Company. The pro forma combined financial information should be read together
with the Combined Financial Statements of the Company, including the Notes
thereto, included elsewhere in the Prospectus.
19
<PAGE> 22
PRO FORMA COMBINED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995
(UNAUDITED)
<TABLE>
<CAPTION>
HOUSTON SOXCO PRO FORMA
EXPLORATION ACQUISITION PRO FORMA OFFERING COMBINED
HISTORICAL ADJUSTMENTS COMBINED ADJUSTMENTS AS ADJUSTED
----------- ----------- --------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
REVENUES:
Natural gas and oil sales...... $39,431 $10,372(1) $49,803 $49,803
Other.......................... 1,778 -- 1,778 1,778
------- ------- ------- -------
Total revenues............ 41,209 10,372 51,581 51,581
EXPENSES:
Lease operating................ 5,468 1,797(1) 7,265 7,265
Depreciation, depletion and
amortization................ 21,969 7,123(2) 29,092 29,092
General and administrative,
net......................... 3,486 215(3) 3,701 1,000(4) 4,701
Nonrecurring charge............ 12,000 -- 12,000 12,000
------- ------- ------- ------- -------
Total operating
expenses............... 42,923 9,135 52,058 1,000 53,058
INCOME (LOSS) FROM OPERATIONS.... (1,714) 1,237 (477) (1,000) (1,477)
Interest expense, net............ 2,398 -- 2,398 (1,535)(5) 863
------- ------- ------- ------- -------
Income (loss) before income
taxes.......................... (4,112) 1,237 (2,875) 535 (2,340)
Provision (benefit) for federal
income taxes................... (3,809) 433(6) (3,376) 187(7) (3,189)
------- ------- ------- ------- -------
NET INCOME (LOSS)................ $ (303) $ 804 $ 501 $ 348 $ 849
======= ======= ======= ======= =======
</TABLE>
- ---------------
(1) Adjustment to add all revenues and operating expenses related to the oil and
gas properties acquired.
(2) Adjustment to reflect additional depreciation, depletion and amortization
for a combined full cost pool.
(3) Adjustment to general and administrative expense to reflect producing
overhead charged by Houston Exploration to Soxco. Other than this
adjustment, the Company does not expect to incur any other additional
general and administrative expenses as a result of the Soxco Acquisition.
(4) Adjustment for the estimated incremental general and administrative expenses
(approximately $1.0 million annually) associated with the Company becoming a
publicly traded entity.
(5) Adjustment to interest expense to reflect the repayment of $44.2 million of
debt under the Credit Facility with proceeds from the Offering.
(6) Adjustment to income tax expense to reflect Soxco Acquisition adjustments.
(7) Adjustment to income tax expense to reflect the Offering adjustments.
20
<PAGE> 23
PRO FORMA COMBINED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
HOUSTON SOXCO PRO FORMA
EXPLORATION ACQUISITION PRO FORMA OFFERING COMBINED
HISTORICAL ADJUSTMENTS COMBINED ADJUSTMENTS AS ADJUSTED
----------- ----------- --------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
REVENUES:
Natural gas and oil sales.... $ 9,980 $ 2,803(1) $12,783 $12,783
Other........................ 233 -- 233 233
------- ------ ------- -------
Total revenues.......... 10,213 2,803 13,016 13,016
EXPENSES:
Lease operating.............. 1,828 376(1) 2,204 2,204
Depreciation, depletion and
amortization.............. 5,674 1,310(2) 6,984 6,984
General and administrative,
net....................... 1,492 45(3) 1,537 250(4) 1,787
------- ------ ------- ----- -------
Total operating
expenses............. 8,994 1,731 10,725 250 10,975
INCOME (LOSS) FROM OPERATIONS.. 1,219 1,072 2,291 (250) 2,041
Interest expense, net.......... 461 -- 461 (298)(5) 163
------- ------ ------- ----- -------
Income (loss) before income
taxes........................ 758 1,072 1,830 48 1,878
Provision (benefit) for federal
income taxes................. (218) 375(6) 157 17(7) 174
------- ------ ------- ----- -------
NET INCOME (LOSS).............. $ 976 $ 697 $ 1,673 $ 31 $ 1,704
======= ====== ======= ===== =======
</TABLE>
- ---------------
(1) Adjustment to add all revenues and operating expenses related to the oil and
gas properties acquired.
(2) Adjustment to reflect additional depreciation, depletion and amortization
for a combined full cost pool.
(3) Adjustment to general and administrative expense to reflect producing
overhead charged by Houston Exploration to Soxco. Other than this
adjustment, the Company does not expect to incur any other additional
general and administrative expenses as a result of the Soxco Acquisition.
(4) Adjustment for the estimated incremental general and administrative expenses
(approximately $1.0 million annually) associated with the Company becoming a
publicly traded entity.
(5) Adjustment to interest expense to reflect the repayment of the $44.2 million
of debt under the Credit Facility with proceeds from the Offering.
(6) Adjustment to income tax expense to reflect the Soxco Acquisition
adjustments.
(7) Adjustment to income tax expense to reflect the Offering adjustments.
21
<PAGE> 24
PRO FORMA COMBINED BALANCE SHEETS
AS OF MARCH 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
HOUSTON SOXCO PRO FORMA
EXPLORATION ACQUISITION PRO FORMA OFFERING COMBINED
HISTORICAL ADJUSTMENTS COMBINED ADJUSTMENTS AS ADJUSTED
----------- ----------- --------- ----------- -----------
($ IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
ASSETS:
Current assets................... $ 32,835 $ 134(1) $ 32,969 $ 32,969
Net property, plant and
equipment..................... 228,406 44,208(2) 272,614 272,614
Other assets..................... 5,303 5,303 5,303
--------- --------- --------- ------- ---------
TOTAL ASSETS................ $ 266,544 $44,342 $310,886 $ -- $ 310,886
========= ========= ========= ======= =========
LIABILITIES:
Current liabilities.............. 41,457 23,700(3) 65,157 (23,700)(4) 41,457
Long-term debt................... 74,964 74,964 (44,213)(4) 30,751
Deferred federal income tax...... 47,607 47,607 47,607
Other deferred liabilities....... 32 8,825(5) 8,857 8,857
--------- --------- --------- ------- ---------
TOTAL LIABILITIES........... 164,060 32,525 196,585 (67,913) 128,672
STOCKHOLDER'S EQUITY:
Common stock..................... 134(8) 9(6) 143 57(7) 200
Additional paid-in capital....... 99,220(8) 11,808(6) 111,028 67,856(7) 178,884
Retained earnings................ 3,130 -- 3,130 3,130
--------- --------- --------- ------- ---------
TOTAL STOCKHOLDER'S
EQUITY................... 102,484 11,817 114,301 67,913 182,214
--------- --------- --------- ------- ---------
TOTAL LIABILITIES AND
STOCKHOLDER'S EQUITY..... $ 266,544 $44,342 $310,886 $ -- $ 310,886
========= ========= ========= ======= =========
</TABLE>
- ---------------
(1) Adjustment to reflect the assumption of Soxco's tubular inventory and gas
imbalance receivable.
(2) Adjustment to reflect purchase price allocated to natural gas and oil
properties includes: (i) $31.9 million for proved reserves, (ii) $3.5
million for leasehold interests and (iii) $8.8 million for the minimum
deferred purchase price.
(3) Adjustment to reflect the accrual of $23.7 million for the cash portion of
the Soxco purchase price.
(4) Adjustment to reflect: (i) payment of the $23.7 million cash portion of
Soxco purchase price and (ii) $44.2 million of debt under the Credit
Facility.
(5) Adjustment to reflect the deferred portion of the Soxco purchase price.
(6) Adjustment to reflect the issuance of 909,000 shares of Common Stock to
Soxco, based upon an assumed initial public offering price of $13.00 per
share.
(7) Adjustment to reflect the estimated net proceeds from the sale of 5,700,000
million shares of Common Stock in this Offering at an assumed initial public
offering price of $13.00 per share.
(8) Reflects the number of shares to be authorized, issued and outstanding
immediately prior to the completion of the Offering.
22
<PAGE> 25
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion is intended to assist in an understanding of the
Company's historical financial position and results of operations for the three
months ended March 31, 1995 and 1996 and each year of the three-year period
ended December 31, 1995. The Company's historical combined financial statements
and notes thereto included elsewhere in this Prospectus contain detailed
information that should be referred to in conjunction with the following
discussion.
GENERAL
Houston Exploration was incorporated in December 1985 to conduct certain of
the natural gas and oil exploration and development activities of Brooklyn
Union. The Company has focused since its inception primarily on the exploration
and development of high potential prospects in the Gulf of Mexico. Effective
February 29, 1996, Brooklyn Union implemented a reorganization of its
exploration and production assets by transferring to Houston Exploration certain
onshore producing properties and developed and undeveloped acreage. At December
31, 1995, the Company had historical net proved reserves of 201 Bcfe, 97% of
which were natural gas and 83% of which were classified as proved developed.
The Company's revenue, profitability and future rate of growth are
substantially dependent upon prevailing prices for natural gas, oil and
condensate, which are dependent upon numerous factors beyond the Company's
control, such as economic, political and regulatory developments and competition
from other sources of energy. The energy markets have historically been very
volatile, and future decreases in natural gas and oil prices could have a
material adverse effect on the Company's financial position, results of
operations, quantities of natural gas and oil reserves that may be economically
produced, and access to capital.
The Company uses the full cost method of accounting for its investment in
natural gas and oil properties. Under the full cost method of accounting, all
costs of acquisition, exploration and development of natural gas and oil
reserves are capitalized into a "full cost pool" as incurred, and properties in
the pool are depleted and charged to operations using the unit-of-production
method based on the ratio of current production to total proved natural gas and
oil reserves. To the extent that such capitalized costs (net of accumulated
depreciation, depletion and amortization) less deferred taxes exceed the present
value (using a 10% discount rate) of estimated future net cash flow from proved
natural gas and oil reserves, and the lower of cost or fair value of unproved
properties, such excess costs are charged to operations. If a writedown is
required, it would result in a charge to earnings but would not have an impact
on cash flow from operating activities.
In March 1995, the Financial Accounting Standards Board issued Statement
No. 121, "Accounting for the Impairment of Long-Lived Assets to be Disposed Of"
("SFAS 121"), effective for companies with years beginning after December 15,
1995. Because the Company accounts for its oil and gas assets using the full
cost method of accounting, it is currently required to calculate impairment
losses using a cost center ceiling specified by the Securities and Exchange
Commission regulations for full cost companies. Consequently, SFAS 121 will not
have an impact on the Company's financial position or results of operations upon
adoption.
Although the Company will incur additional general and administrative
expenses as a result of becoming a public company and the elimination of certain
overhead reimbursements from Soxco, the Company believes that cost savings
resulting from the February 1996 reorganization, the increase in its interest in
certain Gulf of Mexico properties resulting from the Soxco Acquisition and
expected production increases as recently drilled wells come on-line will result
in decreased general and administrative costs from recent historical levels on a
per unit of production basis. In addition, the Company believes that the
geographic focus of its operations will allow the Company to achieve significant
reserve and production growth without materially increasing the existing level
of general and administrative expenses.
23
<PAGE> 26
The Company incurs certain production gas volume imbalances in the ordinary
course of business and utilizes the entitlements method to account for its gas
imbalances. Under this method, income is recorded based on the Company's net
revenue interest in production or nominated deliveries. Deliveries in excess of
these amounts are recorded as liabilities, while underdeliveries are reflected
as assets. Production imbalances are valued using market value. Management does
not believe that the Company has any material overproduced gas balances.
The Company receives reimbursement for administrative and overhead expenses
incurred on the behalf of other working interest owners of properties operated
by the Company. In addition, the Company capitalizes general and administrative
costs and interest expense directly related to its acquisition, exploration and
development activities.
The Company utilizes natural gas forward contracts or fixed-floating price
swaps for a portion of its gas production to achieve a more predictable cash
flow, as well as to reduce its exposure to adverse price fluctuations of natural
gas. The swap agreements call for the Company to receive or make payment based
upon the differential between a fixed and a variable commodity price specified
in the contracts. The Company accounts for these transactions as hedging
activities and, accordingly, gains or losses are included in natural gas and oil
revenues in the period of the hedged production. As of May 1, 1996, the Company
had entered into contracts covering an average of approximately 41,600 Mmbtu per
day (approximately 40,100 Mcf/d) of its 1996 natural gas production at weighted
average prices of $1.89 per Mmbtu, before transaction and transportation costs.
Prior to the completion of this Offering, Houston Exploration has been
included in the consolidated federal income tax return of its parent Brooklyn
Union. Under the Company's tax sharing agreement with Brooklyn Union, the
Company receives from, or pays to, Brooklyn Union an amount equal to the
reduction or increase in the currently payable federal income taxes of Brooklyn
Union resulting from the inclusion of the Company's taxable income or loss in
the consolidated Brooklyn Union return whether or not such amounts could be
utilized on a separate return basis. After completion of this Offering, the
Company will no longer be included in Brooklyn Union's consolidated federal
income tax return. Thus, any reduction in currently payable federal income taxes
that cannot be utilized by the Company on a separate return basis will now have
to be deferred or, in the case of certain tax credits, possibly forgone.
The Company's combined historical financial statements include the
historical results of operations associated with the onshore producing
properties and developed and undeveloped acreage transferred to the Company by
FRI, a subsidiary of Brooklyn Union, in the February 1996 reorganization
implemented by Brooklyn Union. Accordingly, the Company's historical results of
operations reflect a nonrecurring charge of $12 million accrued in the year
ended December 31, 1995 with respect to remuneration to which certain employees
of FRI were entitled for the increase in the value of the transferred properties
prior to the reorganization. In February 1996, certain of these individuals
filed suit against Brooklyn Union, FRI and the Company alleging breach of
contract, breach of fiduciary duty, fraud, negligent misrepresentation and
conspiracy, seeking actual damages in excess of $35 million and punitive damages
in excess of $70 million. FRI has agreed to indemnify the Company against any
liability associated with the remuneration to which its former employees were
entitled and any damages awarded in the suit. In addition, Holdings, the
subsidiary of Brooklyn Union that holds all of the currently outstanding Common
Stock of the Company, has agreed to indemnify the Company against any such
liabilities, and has agreed to pledge all of its holdings of Common Stock to
secure such indemnification obligation. As a result of such arrangements, the
Company believes that it will not be required to pay any damages resulting from
such suit, even if a judgment adverse to the Company is rendered in the suit.
However, the Company would incur an additional non-cash charge in addition to
the $12 million charge previously taken by the Company in the event it is
determined that the remuneration payable to the former employees of FRI and any
damages from the suit exceed $12 million, which would have the effect of
reducing the Company's reported income (or resulting in or increasing a loss) in
the period in which any such
24
<PAGE> 27
additional charge is determined. See "Risk Factors -- Pending Legal Proceedings"
and "Business -- Legal Proceedings."
RESULTS OF OPERATIONS
The following table sets forth the Company's historical natural gas and oil
production data during the periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------ ---------------
1993 1994 1995 1995 1996
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Production:
Natural gas (Mmcf)............................... 22,555 22,437 21,077 4,953 5,735
Oil (Mbbls)...................................... 101 102 100 30 23
Total (Mmcfe).................................... 23,161 23,049 21,677 5,133 5,873
Average sales prices:
Natural gas (per Mcf)(1)......................... $ 1.58 $ 1.79 $ 1.79 $ 1.81 $ 1.67
Oil (per Bbl).................................... 16.96 15.85 16.57 17.49 16.26
Expenses (per Mcfe):
Lease operating.................................. $ 0.19 $ 0.23 $ 0.25 $ 0.27 $ 0.31
Depreciation, depletion and amortization......... 1.00 1.10 1.01 1.10 0.97
General and administrative, net.................. 0.11 0.15 0.16 0.17 0.25
</TABLE>
- ---------------
(1) Reflects the effects of hedging. Absent the effects of hedging, average
realized natural gas prices would have been $2.06, $1.83 and $1.53 per Mcf
for the years ended December 31, 1993, 1994, and 1995, respectively, and
$1.42 and $2.29 per Mcf for the three months ended March 31, 1995 and 1996,
respectively.
RECENT FINANCIAL AND OPERATING RESULTS
COMPARISON OF QUARTER ENDED MARCH 31, 1995 AND 1996
General. Houston Exploration's production increased 14% or 740 Mmcfe from
5,133 Mmcfe for the first quarter of 1995 to 5,873 Mmcfe for the first quarter
of 1996. The increase in production can be attributed to shut-in production in
the first quarter of 1995 due to severely depressed natural gas prices and the
commencement of production from additional properties.
Natural Gas and Oil Sales. Natural gas and oil sales increased 5% or $0.5
million from $9.5 million for the first quarter of 1995 to $10.0 million for the
first quarter of 1996 as a result of the 14% increase in production; however,
average realized natural gas prices fell 8% or $0.14 per Mcf from $1.81 per Mcf
in the first quarter of 1995 to $1.67 per Mcf in the first quarter of 1996.
As a result of hedging activities, the Company realized an average gas
price of $1.67 per Mcf compared to an average price of $2.29 per Mcf that
otherwise would have been received for the first quarter of 1996, resulting in a
$3.5 million decrease in natural gas revenues for the three month period. For
the first quarter of 1995, the average realized gas price was $1.81 per Mcf
compared to an unhedged average gas price of $1.42, resulting in an increase to
natural gas revenues of $1.9 million for the quarter.
Lease Operating Expenses. Lease operating expenses increased 29% or $0.4
million from $1.4 million for the first quarter of 1995 to $1.8 million for the
first quarter of 1996. On an Mcfe basis, lease operating expenses increased 15%
from $0.27 for the first quarter of 1995 to $0.31 for the first quarter of 1996.
The increase in costs for the first quarter of 1996 reflects the higher initial
operating costs associated with bringing new facilities and wells on line.
Depreciation, Depletion and Amortization. Depreciation, depletion and
amortization expense remained relatively flat for both the first quarter of 1995
and the first quarter of 1996. Depreciation, depletion and amortization expense
per Mcfe decreased from $1.10 for the first quarter of 1995 to
25
<PAGE> 28
$0.97 for the first quarter of 1996. The lower rate for the first quarter of
1996 reflects added reserves.
General and Administrative Expenses. General and administrative expenses,
net of overhead reimbursements received from other working interest owners of
$0.4 million and $0.3 million for the first quarters of 1995 and 1996,
respectively, increased 72% or $0.6 million from $0.9 million for the first
quarter of 1995 to $1.5 million for the first quarter of 1996. The Company
capitalized general and administrative expenses directly related to oil and gas
exploration and development activities of $0.8 million and $1.1 million,
respectively for the first quarters of 1995 and 1996. The increase in net
general and administrative expenses for the first quarter of 1996 as compared to
the first quarter of 1995 is a result of certain one-time expenses incurred in
conjunction with the combination of offshore and onshore operations. On an Mcfe
basis, general and administrative expenses increased from $0.17 for the first
quarter of 1995 to $0.25 for the first quarter of 1996, reflecting increased
expenses during the first quarter of 1996.
Income Tax Provision. Income tax expense decreased from an expense of $0.1
million for the first quarter of 1995 to a benefit of $0.2 million for the first
quarter of 1996 due to the utilization of incremental Section 29 tax credits
associated with increased production from certain onshore properties.
Net Income. Net income decreased from $1.2 million for the first quarter of
1995 to $1.0 million for the first quarter of 1996. Although production
increased for the first quarter of 1996 as compared to the first quarter of
1995, operating income decreased $0.6 million from $1.8 million for the first
quarter of 1995 to $1.2 million for the first quarter of 1996 as a result of a
decline in natural gas revenues of $3.5 million due to hedging activities, new
lease operating costs associated with new properties and an increase in general
and administrative expense during the first quarter of 1996 as compared to the
first quarter in 1995.
COMPARISON OF YEARS ENDED DECEMBER 31, 1994 AND 1995
General. Houston Exploration's production decreased 6% or 1,372 Mmcfe from
23,049 Mmcfe in 1994 to 21,677 Mmcfe in 1995. Lower production rates from year
earlier levels resulted from voluntary shut-ins in the first quarter of 1995 due
to severely depressed natural gas prices, combined with natural production
declines. In addition, capital spending constraints for offshore exploration in
1992 and 1993 contributed to the 1995 production shortfall. Production declines
were offset somewhat by new production at Mustang Island 759 and East Cameron
82. Despite the successful drilling of eight offshore wells, only one of these
new wells, East Cameron 82, was producing by year end 1995. In 1994, capital
expenditures for offshore exploration increased by $11.4 million, more than two
times year earlier levels, and the Company anticipates improvement in production
performance as its 1994 exploratory successes, together with 1995 development
wells, are brought on line beginning in the first quarter of 1996.
Natural Gas and Oil Sales. Natural gas and oil sales decreased 6% or $2.3
million from $41.7 million in 1994 to $39.4 million in 1995 as a result of the
6% decrease in production. Average realized natural gas prices remained flat at
$1.79 per mcf in both 1994 and 1995.
As a result of hedging activities, the Company realized an average gas
price of $1.79 per Mcf compared to an average price of $1.53 per Mcf that
otherwise would have been received, resulting in a $5.6 million increase in
natural gas and oil sales for 1995. For 1994, the average realized gas price was
$1.79 per Mcf compared to an unhedged average gas price of $1.83, resulting in a
$0.8 decrease in natural gas and oil revenues for the year.
Lease Operating Expenses. Lease operating expense for the year ended 1995
increased 2% or $0.1 million from $5.3 million in 1994 to $5.4 million in 1995.
On an Mcfe basis, lease operating costs increased 9% from $0.23 in 1994 to $0.25
in 1995, corresponding to the decrease in 1995 production.
26
<PAGE> 29
Depreciation, Depletion and Amortization. Depreciation, depletion and
amortization expense decreased 13% from $25.4 million in 1994 to $22.0 million
in 1995. The decrease was attributable to a lower depletion rate per Mcfe
combined with decreased production. Depreciation, depletion and amortization
expense per Mcfe decreased from $1.10 in 1994 to $1.01 in 1995, due to a higher
successful drilling rate in 1995 as compared to 1994.
General and Administrative Expenses. General and administrative expenses,
net of overhead reimbursements received from other working interest owners of
$1.3 million and $1.2 million in 1994 and 1995, respectively, remained flat at
$3.5 million for both 1994 and 1995. The Company capitalized general and
administrative expenses directly related to oil and gas exploration and
development activities of $3.9 million and $4.1 million, respectively for 1994
and 1995. On an Mcfe basis, general and administrative expenses increased from
$0.15 in 1994 to $0.16 in 1995, reflecting flat costs and lower production.
Nonrecurring Charge. The Company accrued a $12 million nonrecurring charge
in the year ended December 31, 1995 to reflect the estimated amount of
remuneration payable to former employees of FRI. See "-- General" and Note 10 to
Notes to Combined Financial Statements.
Income Tax Provision. Income tax expense decreased from an expense of $0.6
million in 1994 to a benefit of $3.8 million in 1995 and reflects the tax effect
of the $12.0 million nonrecurring charge. The decrease in the effective tax rate
from 10% in 1994 to 7% in 1995 reflects the utilization of Section 29 tax
credits received for specific onshore properties. The lower effective rate in
1995 is a result of greater percentage depletion of these properties as compared
to 1994.
Net Income (Loss). Net income decreased $5.7 million from $5.4 million in
1994 to a loss of $0.3 million in 1995, primarily as a result of the $12.0
million nonrecurring charge. Operating income before the $12.0 million
nonrecurring charge increased $2.1 million from $8.1 million in 1994 to $10.3
million in 1995 as a result of additional revenues recognized from hedging
activities and lower depreciation, depletion and amortization expense resulting
from lower production volumes and lower depletion rates.
COMPARISON OF YEARS ENDED DECEMBER 31, 1993 AND 1994
General. The Company's production remained flat with only a slight decrease
from 23,161 Mmcfe in 1993 to 23,049 Mmcfe in 1994. Offshore production declined
by approximately 5,000 Mmcfe while onshore production increased by approximately
the same amount. Both onshore and offshore properties were voluntarily shut-in
during October and November 1994 due to severely depressed natural gas prices.
This voluntary shut-in included the Matagorda Island 600 complex, a key offshore
producing property. The net onshore production increases were attributable to
the acquisition of properties in the Arkoma Basin, West Virginia and the Willow
Springs field in East Texas in 1994, combined with a full year of production
from properties acquired in the Arkoma Basin in 1993.
Natural Gas and Oil Sales. Natural gas and oil sales increased 11% from
$37.5 million in 1993 to $41.8 million in 1994. Production of natural gas
decreased from 22,555 Mmcf in 1993 to 22,437 Mmcf in 1994, while the average net
realized price of natural gas increased 13% from $1.58 per Mcf in 1993 to $1.79
per Mcf for the year ended December 31, 1994. Average net realized natural gas
prices would have been $2.06 per Mcf in 1993 and $1.83 per Mcf in 1994 if hedges
had not been in place during such periods. Hedging activities reduced natural
gas sales by $10.7 million in 1993 as compared to a reduction of $0.8 million in
1994.
Lease Operating Expenses. Lease operating expenses increased by $0.8
million or 18% from 1993 to 1994. On an Mcfe basis, lease operating costs
increased by 21% from $0.19 in 1993 to $0.23 in 1994. The cost increase and the
per unit increase reflects the increase in onshore operating costs from acquired
properties.
27
<PAGE> 30
Depreciation, Depletion and Amortization. Total depreciation, depletion and
amortization expense increased by $2.2 million or 9% from $23.2 million in 1993
to $25.4 million in 1994. Depreciation, depletion and amortization expense per
Mcfe increased 10% from $1.00 in 1993 to $1.10 in 1994 due to increases in
finding costs during 1994.
General and Administrative Expenses. General and administrative expenses,
net of overhead reimbursements received by the Company from other working
interest owners of $1.1 million in each of 1993 and 1994, increased 40% from
$2.5 million in 1993 to $3.5 million in 1994. The increase was a result of a
decrease, beginning in the fourth quarter of 1993, in overhead reimbursements
received from a joint interest partner. The Company capitalized general and
administrative costs directly related to gas and oil exploration and
development activities of $4.4 million and $3.9 million for years ended 1993
and 1994.
Income Tax Provision (Benefit). The provision for income taxes decreased
from a provision of $1.8 million in 1993 to $0.6 million in 1994 due to a
decrease in the effective tax rate from 28% in 1993 to 10% in 1994 as a result
of the utilization of additional Section 29 tax credits and an increase in
percentage depletion.
Net Income. Operating income in 1994 remained flat at $8.1 million as
compared to 1993. The Company's income tax provision decreased from $1.8 million
in 1993 to $0.6 million in 1994 and as a result, net income increased from $4.6
million in 1993 to $5.4 million in 1994.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically funded its operations, acquisitions, capital
expenditures and working capital requirements from cash flow from operations,
bank borrowings and capital contributions from Brooklyn Union. The Company had
an $8.6 million working capital deficit as of March 31, 1996, which includes the
$12.0 million accrual for the nonrecurring charge. See "-- General" and
"Business -- Legal Proceedings."
The Company's primary sources of funds for each of the past four years is
reflected in the following table:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------
1992 1993 1994 1995
------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Net cash provided by operating activities........ $ 7,396 $40,896 $26,074 $55,778
Net borrowings under Credit Facility............. 6,300 5,800 19,050 6,212
Capital contributions by Brooklyn Union.......... 21,047 12,558 18,021 6,873
</TABLE>
The Company's net cash provided by operating activities for the first three
months of 1996 was $10.5 million compared to $8.6 million for the same period of
1995.
28
<PAGE> 31
The Company's capital expenditures for each of the past four years is
reflected in the following table:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------------
1992 1993 1994 1995
-------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
OFFSHORE
Acquisitions of properties..................... $ 7,472 $ 9,796 $ 12,890 $ 18,236
Development.................................... 12,146 10,058 9,351 32,228
Exploration.................................... 3,930 5,983 15,370 6,355
------- ------- ------- -------
23,548 25,837 37,611 56,819
ONSHORE
Acquisitions of properties..................... $ 3,519 $ 31,446 $ 22,886 $ 2,803
Development.................................... 5,463 1,274 2,439 8,935
Exploration.................................... -- -- 2,060 869
------- ------- ------- -------
8,982 32,720 27,385 12,607
------- ------- ------- -------
Total................................ $ 32,530 $ 58,557 $ 64,996 $ 69,426
======= ======= ======= =======
</TABLE>
The Company's capital expenditures for the first three months of 1996
consisted of $1.0 million, $8.5 million and $6.4 million for acquisitions of
properties, development and exploration, respectively, offshore, and $0.3
million, $1.7 million and $0.2 million for acquisitions of properties,
development and exploration, respectively, onshore.
The Company's capital expenditure budget for 1996 includes $28 million and
$30 million, respectively, for exploration and development. These amounts
include development costs associated with recently acquired properties and
amounts that are contingent upon drilling success. The Company will continue to
evaluate its capital spending plans through the year. No significant abandonment
or dismantlement costs are anticipated through 1996. Actual levels of capital
expenditures may vary significantly due to a variety of factors, including
drilling results, natural gas and oil prices, industry conditions and outlook
and future acquisitions of properties. The Company believes cash flow from
operations and borrowings under the Credit Facility will be sufficient to fund
these expenditures. The Company will continue to selectively seek acquisition
opportunities for proved reserves with substantial exploration potential both
offshore and onshore. The size and timing of capital requirements for
acquisitions is inherently unpredictable. The Company expects to fund
exploration and development through a combination of cash flow from operations,
borrowing under the Credit Facility, additional borrowing facilities or the
issuance of equity or debt securities.
The Company has entered into a credit facility (the "Credit Facility") with
a syndicate of lenders led by Texas Commerce Bank National Association ("TCB")
which provides a maximum loan amount of $150 million, subject to borrowing base
limitations, on a revolving basis. At May 15, 1996, the borrowing base was $80
million, $77.9 million of which was borrowed. Letter of credit obligations under
the Credit Facility were $1.6 million at May 15, 1996. The maximum borrowings
and borrowing base under the Credit Facility begin to be reduced on January 1,
1998, with repayment of amounts outstanding under the Credit Facility due in
eight quarterly installments beginning April 1, 1998 and final maturity on
January 1, 2000. The Credit Facility is secured by a pledge of all of the
Company's outstanding capital stock, and is guaranteed by another subsidiary of
Brooklyn Union. Advances under the Credit Facility bear interest, at the
Company's election at (i) a fluctuating rate ("Base Rate") equal to the higher
of the Federal Funds Rate plus 0.5% or TCB's prime rate or (ii) a fixed rate
("Fixed Rate") equal to a quoted LIBOR rate plus 0.8%. Interest is due at
calendar quarters for Base Rate loans and at maturity for Fixed Rate loans. The
Credit Facility contains certain covenants of the Company, including maintenance
of a minimum tangible net worth, certain financial ratios, and certain
restrictions on liens. The borrowing base under the Credit Facility is
determined by the Company's lenders in their discretion in accordance with such
lenders' then current standards and
29
<PAGE> 32
practices for similar oil and gas loans taking into account such factors as the
lenders deem appropriate.
Pursuant to the Credit Facility, the Company may declare and pay cash
dividends to its stockholders provided that (i) no defaults exist and the
Company will not be in default with respect to any financial covenants as a
result of such dividend payment and (ii) the Company continues to have a ratio
of consolidated total debt to consolidated total capitalization of less than
50%. Accordingly, the Company's ability to pay dividends will depend upon such
restrictions and the Company's results of operations, financial condition,
capital requirements and other factors deemed relevant by the Board of
Directors. See "Dividend Policy."
The Company intends to amend the Credit Facility prior to the completion of
the Offering to replace the pledge and guarantee that currently secure the
Credit Facility with a security interest in substantially all of the Company's
natural gas and oil properties.
For a description of certain bonding requirements related to offshore
production proposed by the Minerals Management Service, see
"Business -- Environmental Matters."
30
<PAGE> 33
BUSINESS
OVERVIEW
The Houston Exploration Company ("Houston Exploration" or the "Company") is
an independent natural gas and oil company engaged in the exploration,
development and acquisition of domestic natural gas and oil properties. The
Company's offshore properties are located in the shallow waters (up to 600 feet)
of the Gulf of Mexico, and its onshore properties are located in the Arkoma
Basin, East Texas and West Virginia. The Company has grown its Gulf of Mexico
reserves and production through exploratory drilling and subsequent development
of prospects originally generated utilizing in-house geological and geophysical
expertise. The Company has grown its onshore reserves and production through
successful acquisitions and subsequent exploitation and development of low risk,
long-lived reserves. The Company believes that these lower risk projects and the
stable production from its longer-lived onshore properties complement its high
potential exploratory prospects in the Gulf of Mexico by balancing risk and
reducing volatility.
The Company believes its primary strengths are its high quality reserves,
its substantial inventory of exploration and development opportunities, its
expertise in generating new prospects and its geographic focus and low-cost
operating structure. At December 31, 1995, the Company had net proved reserves
of 233 Bcfe, 55% of which were located in the Gulf of Mexico. Approximately 97%
of the Company's net proved reserves on such date were natural gas and
approximately 81% of proved reserves were classified as proved developed. The
Company operates approximately 82% of its Gulf of Mexico production and
approximately 81% of its onshore production.
The geographic focus of the Company's operations in the Gulf of Mexico and
core onshore areas of operation enable it to manage a large asset base with a
relatively small number of employees and to add production at relatively low
incremental cost. The Company achieved pro forma lease operating expenses of
$0.26 per Mcfe of production and pro forma general and administrative expenses
of $0.17 per Mcfe of production for the year ended December 31, 1995.
STRATEGY
The Company's strategy is to expand its reserves and increase its cash flow
through the exploration of Gulf of Mexico prospects which are internally
generated by the Company, the continued development of its existing offshore and
onshore properties and the selective acquisition of additional properties both
offshore and onshore. The Company implements its strategy by focusing on the
following key strengths:
- High potential exploratory drilling in the Gulf of Mexico
- Low risk exploitation and development drilling in core onshore areas of
operation
- Use of advanced technology for in-house prospect generation
- Opportunistic acquisitions with additional exploratory and/or development
potential
- High percentage of operated properties to control operations and costs
- Geographically focused operations
High Potential Exploratory Drilling in the Gulf of Mexico. The Company is
currently drilling one exploratory well in the Gulf of Mexico and plans to drill
at least six additional exploratory wells in 1996, the successful completion of
any one of which could substantially increase the Company's reserves. The
Company believes it has assembled a three year inventory of exploration and
development drilling opportunities in the Gulf of Mexico. The Company holds
interests in 49 lease blocks, representing 230,531 gross (147,180 net) acres, in
federal and state waters in the Gulf of Mexico, of which 28 have current
operations. The Company has a 100% working interest in 16 of these lease blocks
and a 50% or greater working interest in 17 other lease blocks. Since the
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<PAGE> 34
beginning of 1994, the Company has drilled seven successful exploratory wells
and 11 successful development wells in the Gulf of Mexico, resulting in added
net proved reserves of approximately 62 Bcfe. The Company anticipates that
approximately $50 million of its $58 million 1996 capital expenditure budget
(excluding acquisitions) will be spent on offshore projects. In addition, the
Company intends to continue its participation in federal lease sales and to
actively pursue attractive farm-in opportunities as they arise. Current net
production from the Company's Gulf of Mexico properties is approximately 51,000
Mcfe per day.
Low Risk Exploitation and Development Drilling Onshore. The Company owns
significant onshore natural gas and oil properties in the Arkoma Basin of
Oklahoma and Arkansas, East Texas and West Virginia, accounting for
approximately 45% of its net proved reserves as of December 31, 1995. Since the
beginning of 1994, the Company has drilled or participated in the drilling of 24
successful development wells and three successful exploratory wells onshore. The
Company plans to drill 14 development wells onshore during the remainder of
1996. The Company believes that these lower risk projects and the stable
production from its longer-lived onshore properties complement its higher
potential Gulf of Mexico operations and reserve base. The Company's onshore
properties represent interests in 904 gross (510 net) wells, and 131,494 gross
(64,890 net) acres. The Company anticipates that approximately $8 million of its
$58 million 1996 capital expenditure budget (excluding acquisitions) will be
spent on onshore projects. In addition the Company anticipates that it will
continue to acquire onshore properties with exploitation and development
potential in its core areas of operation as opportunities arise. Current net
production from the Company's onshore properties is approximately 27,000 Mcfe
per day.
Use of Advanced Technology for In-House Prospect Generation. The Company
generates virtually all of its Gulf of Mexico exploration prospects utilizing
in-house geological and geophysical expertise. The Company uses advanced
technology, including 3-D seismic and in-house computer-aided exploration
technology, to reduce risks, lower costs and prioritize drilling prospects. The
Company has acquired approximately 1,100 square miles of 3-D seismic data,
including 3-D seismic surveys on 29 of its offshore lease blocks and on possible
lease and acquisition prospects, and 60,500 linear miles of 2-D seismic data on
its offshore properties. The Company has 12 geologists/geophysicists with
average industry experience of approximately 30 years and five geophysical
workstations for use in interpreting 3-D seismic data. The availability of 3-D
seismic data for Gulf of Mexico properties at reasonable costs has enabled the
Company to identify multiple exploration and development prospects in the
Company's existing inventory of properties and to define possible lease and
acquisition prospects.
Opportunistic Acquisitions. Although the Company's primary strategy is to
grow its reserves through the drillbit, the Company anticipates making
opportunistic acquisitions in the Gulf of Mexico with exploratory potential and
in core areas of operation onshore with exploitation and development potential.
The Company has a successful track record of building its reserves through
opportunistic acquisitions in the Gulf of Mexico and onshore.
High Percentage of Operated Properties. The Company prefers to operate its
properties in order to manage production performance while controlling operating
expenses and the timing and amount of capital expenditures. Properties operated
by the Company account for 82% of its Gulf of Mexico production and
approximately 81% of its onshore production. Houston Exploration operates 16
platforms and 64 wells in the Gulf of Mexico and 768 wells onshore. The Company
also pursues cost savings through the use of outside contractors for much of its
offshore field operations activities and administrative work. As a result of
these and other factors, the Company achieved pro forma lease operating expense
of $0.26 per Mcfe of production and pro forma general and administrative expense
of $0.17 per Mcfe of production for the year ended December 31, 1995.
Geographically Focused Operations. Focusing drilling activities on
properties in a relatively concentrated area in the Gulf of Mexico permits the
Company to utilize its base of geological, engineering, exploration and
production experience in the region. The geographic focus of the
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<PAGE> 35
Company's operations allows it to manage a large asset base with a relatively
small number of employees and enables the Company to add production at
relatively low incremental costs. Management believes that the Gulf of Mexico
area remains attractive for future exploration and development activities due to
the availability of geologic data, remaining reserve potential and the
infrastructure of gathering systems, pipelines, platforms and providers of
drilling services and equipment. The Company's onshore strategy is to develop
opportunities for the acquisition of low-risk, long-lived natural gas reserves
of sufficient size to provide a core area of operation and to use that base to
develop additional acquisition opportunities and exploitation drilling at little
or no incremental overhead cost.
GULF OF MEXICO PROPERTIES
The Company holds interests in 49 offshore blocks, of which 28 have current
operations, and operates 22 of these blocks, accounting for approximately 88% of
the Company's offshore production. The following table lists the Company's
working interest, net proved reserves and the operator for the Company's largest
offshore properties as of December 31, 1995, representing 97% of the Company's
Gulf of Mexico proved reserves and 90% of its offshore production:
<TABLE>
<CAPTION>
PRO FORMA PROVED RESERVES AT
DECEMBER 31, 1995
AVERAGE -----------------------------
WORKING GAS OIL TOTAL
FIELD INTEREST (MMCF) (MBBLS) (MMCFE) OPERATOR
- ---------------------------------------- ------- ------- ------- ------- ------------
<S> <C> <C> <C> <C> <C>
Mustang Island Block 858................ 82.5% 21,476 523 24,614 Company
Mustang Island Block 807................ 100.0% 13,190 66 13,586 Company
Mustang Island Block 759................ 25.0% 12,997 50 13,297 Third Party
West Cameron Block 76/77/60/61 Unit..... 10.9% 11,500 48 11,788 Third Party
East Cameron Block 82/83................ 97.8% 9,616 43 9,874 Company
Mustang Island Block 785................ 71.3% 9,363 2 9,375 Company
Matagorda Island Block 650/672/671...... 45.4% 7,946 13 8,024 Company
Matagorda Island Block 651.............. 79.6% 7,491 1 7,497 Company
Vermilion Block 203..................... 50.0% 6,532 52 6,844 Company
Galveston Block 272/252................. 43.9% 5,256 10 5,316 Company
South Marsh Island Block 252/253........ 50.0% 5,129 5 5,159 Company
Eugene Island Block 48.................. 86.5% 4,315 80 4,795 Company
Mustang Island Block 738................ 49.9% 3,444 34 3,648 Company
</TABLE>
1994 AND 1995 OFFSHORE DRILLING ACTIVITY
Since the beginning of 1994, the Company has drilled seven successful
exploratory wells and 11 successful development wells on its Gulf of Mexico
properties. During this same period, the Company drilled four exploratory wells
and one development well that were not successful. Capital spending associated
with the Company's Gulf of Mexico properties during 1994 and 1995 was $94.4
million, including $21.7 million for exploratory drilling, $41.6 million for
development drilling and $31.1 million for acquisitions.
The following is a summary of the Company's most significant exploration
and development activities since the beginning of 1994 as well as additional
exploration and development prospects identified on such properties:
Mustang Island Block 858. The Company acquired a 50% working interest in
Mustang Island Block 858 in September 1990. The Company will acquire an
additional 32.5% working interest in this block in the Soxco Acquisition. The
Company began drilling an exploratory well in Mustang Island Block 858 during
late 1993. The well was successfully completed in 1994. The Company contracted
for a proprietary 3-D seismic survey across the block to assist in planning its
development activity. The Company drilled and completed two development wells on
Mustang Island Block 858 during 1995, and is presently installing production
facilities. The three completed wells have been
33
<PAGE> 36
production tested at a combined rate of 26,000 Mcf/d of gas and 527 Bbls/d of
condensate. The Company expects that initial production will begin in June 1996.
The Company owns substantial leasehold interests in adjacent blocks and is
contemplating additional exploratory and development drilling.
Mustang Island Block 807. The Company acquired a 25% working interest in
Mustang Island Block 807 in September 1993. An exploratory well was successfully
drilled in June 1994. In December 1994, the Company purchased the remaining 75%
working interest in the block.
Mustang Island Block 759. The Company acquired a 25% working interest in
Mustang Island Block 759 in September 1993. An exploratory well was successfully
drilled in December 1993, and development drilling commenced in May 1994 with
the drilling of three development wells. In December 1994, an exploratory well
was successfully drilled to test a new separate fault block not tested by the
previous wells, although the well did not get to its targeted objective because
of drilling difficulties. An additional exploratory well was drilled to reach
the targeted objective of the December 1994 well. The Company participated in
the drilling of one development well on Mustang Island Block 759 in 1995. The
"A" Platform and the "B" Platform were constructed and installed in early 1995,
and four wells on the "A" Platform were completed and two wells on the "B"
Platform were completed. Initial production began in late July 1995. The field
is currently producing 32,000 Mcf/d (6,400 Mcf/d net) of gas and 200 Bbls/d (40
Bbls/d net) of condensate.
East Cameron 82/83. The Company purchased a 100% interest in East Cameron
Blocks 82, 83, 44 and 49 in February 1995. The property currently has two
platforms, one on Block 82 and one on Block 44, and producing wells which are
producing approximately 6,000 Mcf/d of gas. In connection with its purchase of
the field, the Company committed to drill exploratory wells, a shallow well to
be drilled within 90 days of the closing of the acquisition and a deep well to
be drilled after completion of the shallow well. The Company completed the
shallow well in May 1995. The well (in which the Company has a 95% working
interest) commenced production in September 1995, and is currently producing
8,300 Mcf/d (5,600 Mcf/d net) of gas and 43 Bbls/d (28 Bbls/d net) of
condensate. The Company is currently drilling the deep well.
Vermilion Block 203. The Company acquired a 50% working interest in
Vermilion Block 203 in March 1991. The Company successfully drilled an
exploratory well in February 1994. The Company contracted for a proprietary 3-D
seismic survey across the block in May 1994 to assist in planning its
exploration and development activities. The Company drilled three development
wells on Vermilion Block 203 in 1995. Initial production began in the first
quarter of 1996. The field is currently producing 35,000 Mcf/d (17,500 Mcf/d
net) of gas and 100 Bbls/d (50 Bbls/d net) of oil.
1996 OFFSHORE DRILLING PROGRAM
During 1996, the Company intends to focus on exploratory drilling and has
identified at least six exploratory wells to be drilled, along with limited
development drilling. The Company's exploratory projects are located in East
Cameron Block 82, East Cameron Block 185, West Bayou Sale, Matagorda Island
Block 651, Mustang Island Block 785, Matagorda Island Block 680, and Mustang
Island Block 736. The Company's development projects are located in Mustang
Island Block 807 and Mustang Island Block 759. Capital spending for offshore
projects during 1996 is budgeted at approximately $50 million, including $28
million for exploration and $22 million for development and platform
construction. The following is a summary description of the Company's
exploration and development activity during 1996 to date and significant
additional activity that is currently planned during the remainder of 1996. The
Company is the operator of each of these properties except for Mustang Island
Block 736 and Mustang Island Block 759.
East Cameron Block 82. The Company is currently drilling a deep well on
East Cameron Block 82 to test a large untested fault block. The Company has
conveyed a 45% working interest in this well to an industry partner.
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<PAGE> 37
East Cameron Block 185. The Company acquired a 100% working interest in
East Cameron Block 185 in March 1996. The property has one platform currently
producing approximately 2,000 Mcf/d of gas. In connection with its purchase of
the field, the Company committed to drill two exploratory wells. The Company is
currently drilling one of the exploratory wells, and plans to begin drilling the
second exploratory well in the third quarter of 1996.
West Bayou Sale. The Company holds a 25% working interest in a West Bayou
Sale prospect located in South Louisiana that offsets several productive areas.
The Company plans to participate in a deep exploratory test on this prospect
during the 3rd quarter of 1996.
Matagorda Island Block 651. The Company holds a 79.6% working interest in
Matagorda Island Block 651, which currently has a platform and three producing
wells. The Company is preparing to drill a well in an untested fault block to
test objectives that are productive in its adjacent Matagorda Island Block 650
field. The Company plans to begin drilling this well in the second quarter of
1996.
Mustang Island Block 785. The Company holds a 71.3% working interest in
Mustang Island Block 785, which currently has a platform and four producing
wells. The Company is preparing to drill a well in an untested fault block to
test objectives that have been found productive to the west of Mustang Island
Block 785.
Matagorda Island Block 680. The Company holds a 100% working interest in
Matagorda Island Block 680. The Company is preparing to begin drilling an
exploratory well to test objectives that have been found productive to the north
and west of the property. The Company plans to begin drilling this well in the
third quarter of 1996.
Mustang Island Block 736. The Company acquired a 50% working interest in
Mustang Island Block 736 in September 1993. The Company intends to drill a well
in Mustang Island Block 736 to test objectives that have been found productive
in Mustang Island Block 759, one of the Company's properties, located to the
southwest of Mustang Island Block 736.
Mustang Island Block 807. The Company intends to drill an additional
development well in Mustang Island Block 807 to further develop the reserves
discovered by the Company's exploratory well on such block in 1995. The Company
plans to begin platform construction during the fourth quarter of 1996, and to
commence initial production during the first quarter of 1997.
Mustang Island Block 759. The Company intends to participate in additional
development drilling in Mustang Island Block 759 to further develop this
property.
Vermilion Block 203. The Company has identified several untested fault
blocks in Vermilion Block 203 through its 3-D seismic survey which it intends to
begin exploring in 1996 or thereafter.
ONSHORE PROPERTIES
The Company also owns significant onshore natural gas and oil properties in
the Arkoma Basin of Oklahoma and Arkansas, East Texas and West Virginia. These
properties represent interests in 904 gross (510 net) wells, 85% of which the
Company is the operator of record, and 131,494 gross (64,890 net) acres.
The following table lists the Company's average working interest and net
proved reserves for the Company's three largest onshore fields and the
Appalachian Area as of March 31, 1996, representing 96% of the Company's onshore
reserves:
<TABLE>
<CAPTION>
AVERAGE
WORKING GAS OIL TOTAL
FIELD INTEREST (MMCF) (MBBLS) (MMCFE)
- ---------------------------------------------------------- ------- ------ ------- -------
<S> <C> <C> <C> <C>
Chismville/Massard Field.................................. 73% 48,776 -- 48,776
Willow Springs and Surrounding Fields..................... 53% 16,565 134 17,369
Wilburton, Panola and Surrounding Fields.................. 23% 13,663 -- 13,663
Appalachian Area.......................................... 60% 21,068 52 21,380
</TABLE>
35
<PAGE> 38
During 1994 and 1995, the Company participated in the drilling of 20
successful development and three successful exploratory wells on its onshore
properties. During this same period, the Company participated in the drilling of
seven development wells and one exploratory well that were not successful.
Capital spending associated with the Company's onshore drilling program during
1994 and 1995 was approximately $14.3 million, substantially all of which was
used for development drilling.
Since the beginning of 1996, the Company has drilled three successful
development wells in Arkansas and one successful development well in West
Virginia. The Company participated in an unsuccessful exploratory test well in
Oklahoma during the same period. For the remaining eight months of 1996 the
Company has budgeted funds to drill an additional three wells in East Texas, six
wells in Arkansas, and five wells in Oklahoma. The total 1996 capital spending
for onshore projects is budgeted at approximately $8 million with the majority
being spent on development projects. The Company has identified enough
additional development and exploratory projects on its existing acreage to
maintain an active drilling program for the next two to three years.
The following is a description of several of the Company's most significant
onshore properties:
Chismville/Massard Field. The Chismville/Massard Field is located in Logan
and Sebastian Counties, Arkansas. The Company owns working interests in
approximately 66 active wells, of which it operates 56 wells. Working interests
range from 11% to 100% and average approximately 73%. As of December 31, 1995,
production was 13,700 Mcfe/d net to the Company.
Willow Springs and Surrounding Fields. The Willow Springs Field is located
in Gregg, Panola and Harrison Counties, Texas. The Company owns working
interests in 56 active wells, of which it operates 21 wells. Working interests
range from 3% to 100% and average approximately 53%. As of December 31, 1995,
production averaged 3,800 Mcfe/d net to the Company.
Wilburton, Panola and Surrounding Fields. The Wilburton and Panola Fields
are located in Latimer County, Oklahoma. The Company owns working interest in 42
active wells, of which it operates 12 wells. Working interests range from 1% to
63% and average approximately 22%. As of December 31, 1995, production was 3,800
Mcfe/d net to the Company.
Appalachian Area. The Belington, Clarksburg and Seneca Upshur Fields are
located in Barbour, Randolph, Upshur and Mingo Counties, West Virginia. The
Company owns working interests in 675 wells, 660 of which are operated by the
Company. Working interests range from 6% to 100% and average approximately 60%.
As of December 31, 1995, production was 4,800 Mcfe/d net to the Company.
ADDITIONAL FUTURE PROJECTS
In addition to the properties described above, the Company has accumulated
a large inventory of offshore leases comprised of 100,024 undeveloped gross
(73,351 pro forma net) acres. These leases are under review by the Company's
geologists and geophysicists based upon 3-D seismic data acquired in 1994 and
1995. The Company has assembled a team of geologists and geophysicists to
evaluate unleased acreage offshore which will be available at upcoming lease
sales. The Company is also actively pursuing farm-ins from other companies,
interests in other companies' joint ventures and potential acquisitions.
Finally, the Company is also evaluating its producing properties for workovers
and recompletions in which it will undertake in the next several years.
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<PAGE> 39
NATURAL GAS AND OIL RESERVES
The following table summarizes the estimates of the Company's historical
net proved reserves as of December 31, 1994 and 1995 and pro forma reserves as
of December 31, 1995, and the present values attributable to these reserves at
such dates. The reserve data and present values as of December 31, 1994 and 1995
were prepared by Ryder Scott Company ("Ryder Scott"), Netherland, Sewell &
Associates, Inc. ("NSA"), Huddleston & Co., Inc. ("Huddleston") and Miller and
Lents, Ltd. ("Miller and Lents"), independent petroleum engineering consultants.
The pro forma December 31, 1995 reserve data and present values are presented to
include the Soxco Acquisition. Summaries of the December 31, 1995 reserve
reports and the letters of Ryder Scott, NSA, Huddleston and Miller and Lents
with respect thereto are included as Appendix A to this Prospectus.
<TABLE>
<CAPTION>
PRO FORMA
AS OF AS OF AS OF
DECEMBER 31, 1994 DECEMBER 31, 1995 DECEMBER 31, 1995
------------------------------- --------------------------------- ---------------------------------
OFFSHORE ONSHORE TOTAL OFFSHORE ONSHORE TOTAL OFFSHORE ONSHORE TOTAL
-------- -------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Proved
Reserves(1):
Natural gas (Mmcf).. 71,876 74,069 145,945 91,529 104,417 195,946 121,636 104,417 226,053
Oil (Mbbls)......... 326 310 636 665 224 889 961 224 1,185
Total (Mmcfe)....... 73,832 75,929 149,761 95,519 105,761 201,280 127,402 105,761 233,163
Present value of
future net revenues
before income taxes
(000s)(2)........... $69,721 $66,148 $ 135,869 $ 119,490 $ 87,084 $ 206,574 $ 162,679 $ 87,084 $ 249,814
Standardized measure
of discounted future
net cash flows
(000s)(3)........... $54,638 $63,796 $ 118,434 $ 93,637 $ 77,822 $ 171,459 $ 136,124 $ 77,822 $ 213,946
</TABLE>
- ---------------
(1) Ryder Scott, NSA and Huddleston prepared reserve data and present values
with respect to properties comprising approximately 33%, 19% and 3%,
respectively, of the present values attributable to the Company's pro forma
proved reserves as of December 31, 1995, consisting of all of the Company's
Gulf of Mexico properties. Miller and Lents prepared reserve data and
present values with respect to properties comprising approximately 45% of
the present values attributable to the Company's pro forma proved reserves
as of December 31, 1995, consisting of substantially all of the Company's
onshore properties.
(2) The present value of future net revenue attributable to the Company's
reserves was prepared using prices in effect at the end of the respective
periods presented, discounted at 10% per annum on a pre-tax basis.
(3) The standardized measure of discounted future net cash flows represents the
present value of future net revenues after income tax discounted at 10%.
In accordance with applicable requirements of the Securities and Exchange
Commission, estimates of the Company's proved reserves and future net revenues
are made using sales prices estimated to be in effect as of the date of such
reserve estimates and are held constant throughout the life of the properties
(except to the extent a contract specifically provides for escalation).
Estimated quantities of proved reserves and future net revenues therefrom are
affected by gas prices, which have fluctuated widely in recent years. There are
numerous uncertainties inherent in estimating natural gas and oil reserves and
their estimated values, including many factors beyond the control of the
producer. The reserve data set forth in this Prospectus represents only
estimates. Reservoir engineering is a subjective process of estimating
underground accumulations of natural gas and oil that cannot be measured in an
exact manner. The accuracy of any reserve estimate is a function of the quality
of available data and of engineering and geological interpretation and judgment.
As a result, estimates of different engineers, including those used by the
Company, may vary. In addition, estimates of reserves are subject to revision
based upon actual production, results of future development and exploration
activities, prevailing natural gas and oil prices, operating costs and other
factors, which revisions may be material. Accordingly, reserve estimates are
often different from the quantities of natural gas and oil that are ultimately
recovered and are highly
37
<PAGE> 40
dependent upon the accuracy of the assumptions upon which they are based. The
Company's estimated proved reserves have not been filed with or included in
reports to any federal agency.
DRILLING ACTIVITY
The following table sets forth the drilling activity of the Company on its
properties for the years ended December 31, 1993, 1994 and 1995 and the three
months ended March 31, 1996.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------- THREE MONTHS ENDED
1995 MARCH 31, 1996
1993 1994 --------------------------- ---------------------------
----------- ----------- PRO FORMA PRO FORMA
OFFSHORE DRILLING ACTIVITY: GROSS NET GROSS NET GROSS NET NET(1) GROSS NET NET(1)
- ------------------------------- ----- --- ----- --- ----- ---- ------------ ----- ---- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Exploratory:
Productive................... 3 1.0 4 2.3 1 1.0 1.0 2 0.8 .8
Non-productive............... 2 0.5 3 1.5 -- -- -- 1 0.5 .5
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
Total.................. 5 1.5 7 3.8 1 1.0 1.0 3 1.3 1.3
Development:
Productive................... 6 1.8 4 1.3 7 2.8 3.5 -- -- --
Non-productive............... -- -- 1 0.3 -- -- -- -- -- --
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
Total.................. 6 1.8 5 1.6 7 2.8 3.5 -- -- --
ONSHORE DRILLING ACTIVITY:
Exploratory:
Productive................... -- -- -- -- 3 .45 .45 -- -- --
Non-productive............... -- -- 1 0.3 -- -- -- 1 .25 .25
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
Total.................. -- -- 1 0.3 3 .45 .45 1 .25 .25
Development:
Productive................... 1 1.0 8 7.1 12 7.43 7.43 4 2.17 2.17
Non-productive............... -- -- 2 1.7 5 2.52 2.52 -- -- --
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
Total.................. 1 1.0 10 8.8 17 9.95 9.95 4 2.17 2.17
</TABLE>
- ---------------
(1) Gives effect to the Soxco Acquisition as if such transaction had been
consummated at the beginning of the period presented.
PRODUCTIVE WELLS
The following table sets forth the number of productive wells in which the
Company owned an interest as of March 31, 1996.
<TABLE>
<CAPTION>
COMPANY OPERATED WELLS NON-OPERATED WELLS TOTAL PRODUCTIVE WELLS
-------------------------- ------------------------- --------------------------
COMPANY PRO PRO PRO
OPERATED FORMA FORMA FORMA
OFFSHORE PLATFORMS GROSS NET NET(1) GROSS NET NET(1) GROSS NET NET(1)
- ----------------- --------- ----- ----- ------ ----- ---- ------ ----- ----- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Gas.............. 16 64 29.4 38.9 16 2.9 3.3 80 32.3 42.2
Oil.............. -- -- -- -- 7 0.7 0.7 7 0.7 0.7
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Total.... 16 64 29.4 38.9 23 3.6 4.0 87 33.0 42.9
ONSHORE
- -----------------
Gas.............. 765 471.1 471.1 119 29.7 29.7 884 500.8 500.8
Oil.............. 3 2.9 2.9 17 6.3 6.3 20 9.2 9.2
----- ----- ----- ----- ----- ----- ----- ----- -----
Total.... 768 474.0 474.0 136 36.0 36.0 904 510.0 510.0
</TABLE>
- ---------------
(1) Gives effect to the Soxco Acquisition as if such transaction had been
consummated at March 31, 1996.
Productive wells consist of producing wells capable of production,
including gas wells awaiting connections. Wells that are completed in more than
one producing horizon are counted as one well.
38
<PAGE> 41
ACREAGE DATA
The following table sets forth the approximate developed and undeveloped
acreage in which the Company held a leasehold mineral or other interest as of
March 31, 1996. Undeveloped acreage includes leased acres on which wells have
not been drilled or completed to a point that would permit the production of
commercial quantities of natural gas and oil, regardless of whether or not such
acreage contains proved reserves:
<TABLE>
<CAPTION>
DEVELOPED ACRES UNDEVELOPED ACRES
------------------------------- ------------------------------
PRO PRO
FORMA FORMA
GROSS NET NET(2) GROSS NET NET(2)
------- ------- ------- ------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
Offshore(1)........................................ 130,506 57,725 73,829 100,024 58,980 73,351
Onshore............................................ 103,800 60,101 60,101 27,694 4,789 4,789
------- ------- ------- ------- ------ ------
Total...................................... 234,306 117,826 133,930 127,718 63,769 78,140
======= ======= ======= ======= ====== ======
</TABLE>
- ---------------
(1) Offshore includes acreage in federal and state waters.
(2) Gives effect to the Soxco Acquisition as if such transaction had been
consummated at March 31, 1996.
MARKETING AND CUSTOMERS
Substantially all of the Company's production is sold at market prices. The
Company currently sells approximately 48% of its gas production, based upon
production as of May 15, 1996, and has agreed to sell substantially all of its
subsequently developed gas production, to PennUnion Energy Services, L.L.C.
("PennUnion"), an affiliate of Brooklyn Union. The production sold to PennUnion
is sold at market prices, based upon an index price adjusted to reflect the
point of delivery of such production. During 1994 and 1995, PennUnion and BRING
Gas Services Corp. ("BRING") purchased approximately 50% of the natural gas sold
by the Company. The Company believes that the prices at which it sells and has
sold gas to PennUnion and BRING are similar to those it would be able to obtain
in the open market, and that the loss of PennUnion as a purchaser would not have
a material adverse effect on the Company. See Note 5 to the Company's Combined
Financial Statements.
The Company enters into commodity swaps with unaffiliated third parties for
portions of its gas production to achieve more predictable cash flows and to
reduce its exposure to short-term fluctuations in gas prices. As of May 1, 1996,
the Company had entered into futures and swap contracts for an average of 41,600
Mmbtu per day (approximately 40,100 Mcf/d) of its 1996 gas production at a
weighted average price of $1.89 per Mmbtu. The remaining terms of the Company's
existing contracts extend approximately two years. The Company accounts for its
commodity swaps and futures as hedging activities and, accordingly, gains or
losses are included in oil and gas revenues in the period the production occurs.
See Note 8 to the Company's Combined Financial Statements.
Most of the Company's natural gas is transported through gas gathering
systems and gas pipelines which are not owned by the Company. Transportation
space on such gathering systems and pipelines is occasionally limited and at
times unavailable due to repairs or improvements being made to such facilities
or due to such space being utilized by other gas shippers with priority
transportation agreements. While the Company has not experienced any inability
to market its natural gas, if transportation space is restricted or is
unavailable, the Company's cash flow from the affected properties could be
adversely affected.
ABANDONMENT COSTS
The Company is responsible for the payment of abandonment costs on the
natural gas and oil properties pro rata to its working interest. The Company
provides for its expected future abandonment liabilities by accruing for such
costs as a component of depletion, depreciation and amortiza-
39
<PAGE> 42
tion as the properties are produced. As of December 31, 1995, total pro forma
undiscounted abandonment costs estimated to be incurred through the year 2006
were approximately $2.6 million for properties in the federal and state waters
and are not considered significant for onshore properties. Estimates of
abandonment costs and their timing may change due to many factors including
actual drilling and production results, inflation rates, and changes in
environmental laws and regulations.
The Minerals Management Service ("MMS") requires lessees of Outer
Continental Shelf ("OCS") properties to post bonds in connection with the
plugging and abandonment of wells located offshore and the removal of all
production facilities. Operators in the OCS waters of the Gulf of Mexico are
currently required to post an area wide bond of $3 million or $500,000 per
producing lease. The Company is presently exempt from any requirement by MMS to
provide supplemental bonding on its offshore leases, although no assurance can
be made that it will continue to satisfy the requirements for such exemption in
the future. Whether or not the Company qualifies for such exemption, the Company
does not believe that the cost of any such bonding requirements will materially
affect the Company's financial condition or results of operations. Under certain
circumstances, the MMS has the authority to suspend or terminate operations on
federal leases for failure to comply with applicable bonding requirements or
other regulations applicable to plugging and abandonment. Any such suspensions
or terminations of the Company's operations could have a material adverse effect
on the Company's financial condition and results of operations.
TITLE TO PROPERTIES
As is customary in the natural gas and oil industry, the Company makes only
a cursory review of title to farmout acreage and to undeveloped natural gas and
oil leases upon execution of the contracts. Prior to the commencement of
drilling operations, a thorough title examination is conducted and curative work
is performed with respect to significant defects. To the extent title opinions
or other investigations reflect title defects, the Company, rather than the
seller of the undeveloped property, is typically responsible for curing any such
title defects at its expense. If the Company were unable to remedy or cure any
title defect of a nature such that it would not be prudent to commence drilling
operations on the property, the Company could suffer a loss of its entire
investment in the property. The Company has obtained title opinions on
substantially all of its producing properties and believes that it has
satisfactory title to such properties in accordance with standards generally
accepted in the oil and gas industry. Prior to completing an acquisition of
producing natural gas and oil leases, the Company obtains title opinions on the
most significant leases. The Company's natural gas and oil properties are
subject to customary royalty interests, liens for current taxes and other
burdens which the Company believes do not materially interfere with the use of
or affect the value of such properties. Substantially all of the Company's
natural gas and oil properties are and will continue to be mortgaged to secure
borrowings under the Credit Facility.
COMPETITION
The Company encounters competition from other oil and gas companies in all
areas of its operations, including the acquisition of producing properties. The
Company's competitors include major integrated oil and gas companies and
numerous independent oil and gas companies, individuals and drilling and income
programs. Many of its competitors are large, well-established companies with
substantially larger operating staffs and greater capital resources than the
Company's and which, in many instances, have been engaged in the energy business
for a much longer time than the Company. Such companies may be able to pay more
for productive natural gas and oil properties and exploratory prospects and to
define, evaluate, bid for and purchase a greater number of properties and
prospects than the Company's financial or human resources permit. The Company's
ability to acquire additional properties and to discover reserves in the future
will be
40
<PAGE> 43
dependent upon its ability to evaluate and select suitable properties and to
consummate transactions in this highly competitive environment.
OPERATING HAZARDS AND UNINSURED RISKS
The Company's operations are subject to hazards and risks inherent in
drilling for and production and transportation of natural gas and oil, such as
fires, natural disasters, explosions, encountering formations with abnormal
pressures, blowouts, cratering, pipeline ruptures, and spills, any of which can
result in loss of hydrocarbons, environmental pollution, personal injury claims,
and other damage to properties of the Company and others. Additionally, certain
of the Company's natural gas and oil operations are located in an area that is
subject to tropical weather disturbances, some of which can be severe enough to
cause substantial damage to facilities and possibly interrupt production. As
protection against operating hazards, the Company maintains insurance coverage
against some, but not all, potential losses. The Company's coverages include,
but are not limited to, operator's extra expense, to include loss of well,
blowouts and certain costs of pollution control, physical damage on certain
assets, employer's liability, comprehensive general liability, automobile and
worker's compensation. The Company believes that its insurance is adequate and
customary for companies of a similar size engaged in operations similar to those
of the Company, but losses could occur for uninsurable or uninsured risks or in
amounts in excess of existing insurance coverage. The occurrence of an event
that is not fully covered by insurance could have an adverse impact on the
Company's financial condition and results of operations.
REGULATION
The availability of a ready market for natural gas and oil production
depends upon numerous factors beyond the Company's control. These factors
include regulation of natural gas and oil production, federal and state
regulations governing environmental quality and pollution control, state limits
on allowable rates of production by a well or proration unit, the supply of
natural gas and oil available for sale, the availability of adequate pipeline
and other transportation and processing facilities and the marketing of
competitive fuels. For example, a productive natural gas well may be "shut-in"
because of an oversupply of natural gas or the lack of an available natural gas
pipeline in the areas in which the Company may conduct operations. State and
federal regulations generally are intended to prevent waste of natural gas and
oil, protect rights to produce natural gas and oil between owners in a common
reservoir, control the amount of natural gas and oil produced by assigning
allowable rate of production and control contamination of the environment.
Regulation of Natural Gas and Oil Exploration and Production. Exploration
and production operations of the Company are subject to various types of
regulation at the federal, state and local levels. Such regulation includes
requiring permits for the drilling of wells, maintaining bonding requirements in
order to drill or operate wells, and regulating the location of wells, the
method of drilling and casing wells, the surface use and restoration of
properties upon which wells are drilling and the plugging and abandonment of
wells. The Company's operations are also subject to various conservation laws
and regulations. These include the regulation of the size of drilling and
spacing units or proration units and the density of wells which may be drilled
and unitization or pooling of oil and gas properties. In this regard, some
states allow the forced pooling or integration of tracts to facilitate
exploration while other states rely on voluntary pooling of lands and leases. In
addition, state conservation laws establish maximum rates of production from
natural gas and oil wells, generally prohibit the venting or flaring of natural
gas and impose certain requirements regarding the ratability of production. The
effect of these regulations is to limit the amounts of natural gas and oil the
Company's operator or the Company can produce from its wells, and to limit the
number of wells or the locations of which the Company can drill. Legislation
affecting the oil and gas industry also is under constant review for amendment
or expansion. Generally, state-established allowables have been influenced by
overall natural gas market supply and demand in the United States, as well as
the specific "nominations" for natural gas from the parties who produce or
purchase gas from the
41
<PAGE> 44
field and other factors deemed relevant by the agency. The Company cannot
predict whether further changes will be made in how these states set allowables
or what impact, if any, such further changes might have. In addition, numerous
departments and agencies, both federal and state, are authorized by statute to
issue rules and regulations binding on the natural gas and oil industry and its
individual members, some of which carry substantial penalties for failure to
comply. The regulatory burden on the natural gas and oil industry increases the
Company's cost of doing business and, consequently, affects its profitability.
Inasmuch as such laws and regulations are frequently expanded, amended or
reinterpreted, the Company is unable to predict the future cost or impact of
complying with such regulations.
Natural Gas Marketing and Transportation. Federal legislation and
regulatory controls in the United States have historically affected the price of
the natural gas produced by the Company and the manner in which such production
is marketed. The transportation and sale for resale of natural gas in interstate
commerce are regulated pursuant to the Natural Gas Act of 1938 (the "NGA") the
Natural Gas Policy Act of 1978 (the "NGPA") and the Federal Energy Regulatory
Commission (the "FERC"). Although maximum selling prices of natural gas were
formerly regulated, on July 26, 1989, the Natural Gas Wellhead Decontrol Act of
1989 ("Decontrol Act") was enacted, which amended the NGPA to remove completely
by January 1, 1993 price and nonprice controls for all "first sales" of domestic
natural gas, which include all sales by the Company of its own production;
consequently, sales of the Company's natural gas production currently may be
made at market prices, subject to applicable contract provisions. The FERC's
jurisdiction over natural gas transportation was unaffected by the Decontrol
Act.
In July 1994, the FERC eliminated a regulation that had rendered virtually
all sales of natural gas by pipeline and distribution company affiliates, such
as the Company, to be deregulated first sales. As a result, all sales by the
Company of gas for resale in interstate commerce, other than sales by the
Company of its own production, are now jurisdictional sales subject to an NGA
certificate. This includes, for example, sales for resale of gas purchased from
third parties. The Company does not anticipate this change will have any
significant current adverse effects in light of the flexible terms and
conditions of the existing blanket certificate. Such sales are subject to the
future possibility of greater federal oversight, however, including the
possibility the FERC might prospectively impose more restrictive conditions on
such sales.
The FERC also regulates interstate natural gas transportation rates and
service conditions, which affect the marketing of natural gas produced by the
Company, as well as the revenues received by the Company for sales of such
natural gas. Since the latter part of 1985, the FERC has endeavored to make
interstate natural gas transportation more accessible to gas buyers and sellers
on an open and nondiscriminatory basis. The FERC's efforts have significantly
altered the marketing and pricing of natural gas. Commencing in April 1992, the
FERC issued Order Nos. 636, 636-A and 636-B (collectively, "Order No. 636"),
which, among other things, require interstate pipelines to "restructure" to
provide transportation separate or "unbundled" from the pipelines' sales of gas.
Also, Order No. 636 requires pipelines to provide open-access transportation on
a basis that is equal for all gas supplies. Order No. 636 has been implemented
through negotiated settlements in individual pipeline service restructuring
proceedings. In many instances, the result of the Order No. 636 and related
initiatives have been to substantially reduce or bring to an end the interstate
pipelines' traditional role as wholesalers of natural gas in favor of providing
only storage and transportation services. The FERC has issued final orders in
virtually all pipeline restructuring proceedings, and has now commenced a series
of one year reviews to determine whether refinements are required regarding
individual pipeline implementations of Order No. 636.
Although Order No. 636 does not regulate natural gas producers such as the
Company, the FERC has stated that Order No. 636 is intended to foster increased
competition within all phases of the natural gas industry. It is unclear what
impact, if any, increased competition within the natural gas industry under
Order No. 636 will have on the Company and its natural gas marketing efforts. In
addition, numerous petitions seeking judicial review of Order Nos. 636 are
pending. Numerous
42
<PAGE> 45
parties have also sought review of FERC orders implementing Order No. 636 on
individual pipeline systems. Order No. 636 could be reversed in whole or in part
as a result. Because the restructuring requirements that emerge from this
lengthy administrative and judicial review process may be significantly
different from those of Order No. 636 as originally promulgated, it is not
possible to predict what effect, if any, the final rule resulting from Order No.
636 will have on the Company. Although Order No. 636, assuming it is upheld in
its entirety in its current form, could provide the Company with additional
market access and more fairly applied transportation service rates, terms and
conditions, it could also subject the Company to more restrictive pipeline
imbalance tolerances and greater penalties for violation of those tolerances.
The Company does not believe, however, that it will be affected by any action
taken with respect to Order No. 636 materially differently than other natural
gas producers and marketers with which it competes.
The FERC has recently announced its intention to reexamine certain of its
transportation-related policies, including the manner in which interstate
pipeline shippers may release interstate pipeline capacity under Order No. 636
for resale in the secondary markets, and the use of market-based rates for
interstate gas transmission. While any resulting FERC action would affect the
Company only indirectly, the FERC's current rules and policy statements may have
the effect of enhancing competition in natural gas markets by, among other
things, encouraging non-producer natural gas marketers to engage in certain
purchase and sale transactions. The Company cannot predict what action the FERC
will take on these matters, nor can it accurately predict whether the FERC's
actions will achieve the goal of increasing competition in markets in which the
Company's natural gas is sold. However, the Company does not believe that it
will be affected by any action taken materially differently than other natural
gas producers and marketers with which it competes.
Recently, the FERC issued a policy statement on how interstate natural gas
pipelines can recover the costs of new pipeline facilities. While this policy
statement affects the Company only indirectly, in its present form, the new
policy should enhance competition in natural gas markets and facilitate
construction of gas supply laterals. However, requests for rehearing of this
policy statement are currently pending. The Company cannot predict what action
the FERC will take on these requests.
Additional proposals and proceedings that might affect the natural gas
industry are considered from time to time by Congress, the FERC, state
regulatory bodies and the courts. The Company cannot predict when or if any such
proposals might become effective, or their effect, if any, on the Company's
operations. The natural gas industry historically has been very heavily
regulated; therefore, there, there is no assurance that the less stringent
regulatory approach recently pursued by the FERC and Congress will continue
indefinitely into the future.
Offshore Leasing. Certain operations the Company conducts are on federal
oil and gas leases, which the MMS administers. The MMS issues such leases
through competitive bidding. These leases contain relatively standardized terms
and require compliance with detailed MMS regulations and orders pursuant to the
Outer Continental Shelf Lands Act ("OCSLA") (which are subject to change by the
MMS). For offshore operations, lessees must obtain MMS approval for exploration
plans and development and production plans prior to the commencement of such
operations. In addition to permits required from other agencies (such as the
Coast Guard, the Army Corps of Engineers and the Environmental Protection
Agency), lessees must obtain a permit from the MMS prior to the commencement of
drilling. The MMS has promulgated regulations requiring offshore production
facilities located on the OCS to meet stringent engineering and construction
specifications, and has recently proposed additional safety-related regulations
concerning the design and operating procedures for OCS production platforms and
pipelines. The MMS also has issued regulations restricting the flaring or
venting of natural gas, and has recently proposed to amend such regulations to
prohibit the flaring of liquid hydrocarbons and oil without prior authorization.
Similarly, the MMS has promulgated other regulations governing the plugging and
abandonment of wells located offshore and the removal of all production
facilities. To cover the various obligations of lessees on the OCS, the MMS
generally requires that lessees post substantial bonds or other
43
<PAGE> 46
acceptable assurances that such obligations will be met. The cost of such bonds
or other surety can be substantial and there is not assurance that the Company
can obtain bonds or other surety in all cases. See "-- Environmental Matters."
In addition, the MMS is conducting an inquiry into certain contract
settlement agreements from which producers on MMS leases have received
settlement proceeds that are royalty bearing and the extent to which producers
have paid the appropriate royalties on those proceeds.
The MMS has recently issued a notice of proposed rulemaking in which it
proposes to amend its regulations governing the calculation of royalties and the
valuation of natural gas produced from federal leases. The principal feature in
the amendments, as proposed, would establish an alternative market-index based
method to calculate royalties on certain natural gas production sold to
affiliates or pursuant to non-arm's-length contracts. The MMS has proposed this
rulemaking to facilitate royalty valuation in light of changes in the gas
marketing environment. The Company cannot predict what action the MMS will take
on these matters, nor can it predict at this state of the rulemaking proceeding
how the Company might be affected by amendments to the regulations.
The OCSLA requires that all pipelines operating on or across the OCS
provide open-access, non-discriminatory service. Although the FERC has opted not
to impose the regulations of Order No. 509, which implements these requirements
of the OCSLA, on gatherers and other non-jurisdictional entities, the FERC has
retained the authority to exercise jurisdiction over those entities if necessary
to permit non-discriminatory access to services on the OCS. If the FERC were to
apply Order No. 509 to gatherers in the OCS, eliminate the exemption of
gathering lines, and redefine its jurisdiction over gathering lines, then these
acts could result in a reduction in available pipeline space for existing
shippers in the Gulf of Mexico and elsewhere.
Oil Sales and Transportation Rates. Sales of crude oil, condensate and gas
liquids by the Company are not regulated and are made at market prices. The
price the Company receives from the sale of these products is affected by the
cost of transporting the products to market. Effective as of January 1, 1995,
the FERC implemented regulations establishing an indexing system for
transportation rates for oil pipelines, which would generally index such rates
to inflation, subject to certain conditions and limitations. These regulations
are subject to pending petitions for judicial review. The Company is not able to
predict with certainty what effect, if any, these regulations will have on it,
but other factors being equal, under certain conditions the regulations may tend
to increase transportation costs or reduce wellhead prices for such commodities.
Safety Regulation. The Company's gathering operations are subject to safety
and operational regulations relating to the design, installation, testing,
construction, operation, replacement, and management of facilities. Pipeline
safety issues have recently been the subject of increasing focus in various
political and administrative arenas at both the state and federal levels. In
addition, the major federal pipeline safety law is subject to change this year
as it is considered for reauthorization by Congress. For example, federal
legislation addressing pipeline safety issues has been introduced, which, if
enacted, would establish a federal "one call" notification system. Additional
pending legislation would, among other things, increase the frequency with which
certain pipelines must be inspected, as well as increase potential civil and
criminal penalties for violations of pipeline safety requirements. The Company
believes its operations, to the extent they may be subject to current gas
pipeline safety requirements, comply in all material respects with such
requirements. The Company cannot predict what effect, if any, the adoption of
this or other additional pipeline safety legislation might have on its
operations, but the industry could be required to incur additional capital
expenditures and increased costs depending upon future legislative and
regulatory changes.
ENVIRONMENTAL MATTERS
The Company's operations are subject to federal, state and local laws and
regulations governing the discharge of materials into the environment or
otherwise relating to environmental protection. These laws and regulations may
require the acquisition of a permit before drilling
44
<PAGE> 47
commences, restrict the types, quantities and concentration of various
substances that can be released into the environment in connection with drilling
and production activities, limit or prohibit drilling activities on certain
lands lying within wilderness, wetlands and other protected areas, require
remedial measures to prevent pollution from former operations, such as pit
closure and plugging abandoned wells, and impose substantial liabilities for
pollution resulting from the Company's operations. In addition, these laws,
rules and regulations may restrict the rate of oil and natural gas production
below the rate that would otherwise exist. The regulatory burden on the oil and
gas industry increases the cost of doing business and consequently affects its
profitability. Changes in environmental laws and regulations occur frequently,
and any changes that result in more stringent and costly waste handling,
disposal and clean-up requirements could have a significant impact on the
operating costs of the Company, as well as the oil and gas industry in general.
Management believes that the Company is in substantial compliance with current
applicable environmental laws and regulations and that continued compliance with
existing requirements will not have a material adverse impact on the Company.
The Comprehensive Environmental Response, Compensation and Liability Act
("CERCLA"), also known as the "Superfund" law, imposes liability, without regard
to fault or the original conduct, on certain classes of persons who are
considered to be responsible for the release of a "hazardous substance" into the
environment. These persons include the owner or operator of the disposal site or
sites where the release occurred and companies that disposed or arranged for the
disposal of the hazardous substances. Under CERCLA, such persons may be subject
to joint and several liability for the costs of cleaning up the hazardous
substances that have been released into the environment, for damages to natural
resources and for the costs of certain health studies, and it is not uncommon
for neighboring landowners and other third parties to file claims for personal
injury and property damage allegedly caused by the release of hazardous
substances.
The Oil Pollution Act of 1990 (the "OPA") and regulations thereunder impose
a variety of requirements on "responsible parties" related to the prevention of
oil spills and liability for damages resulting from such spills in "waters of
the United States." A "responsible party" includes the owner or operator of a
facility or vessel, or the lessee or permittee of the area in which an offshore
facility is located. The term "waters of the United States" has been broadly
defined to include not only the waters of the Gulf of Mexico but also inland
waterbodies, including wetlands, playa lakes and intermittent streams. The OPA
also requires owners and operators of "offshore facilities" to establish $150
million in financial responsibility to cover environmental cleanup and
restoration costs likely to be incurred in connection with an oil spill. In
August, 1993, the MMS published an advance notice of its intention to adopt a
rule under the OPA that would define "offshore facilities" to include all oil
and gas facilities that have the potential to affect "waters of the United
States." Since the Company has many oil and gas facilities that could affect
"waters of the United States," the Company could become subject to the financial
responsibility rule if it is adopted as proposed. However, in May of 1995, the
U.S. House of Representatives passed a bill that would reduce the level of
financial responsibility required under OPA to $35 million (the current
requirement under the Outer Continental Shelf Lands Act ("OCSLA") and that would
limit the definition of "offshore facility" to include only Territorial Seas and
Outer Continental Shelf production, transportation, and storage facilities. In
November of 1995, the U.S. Senate adopted similar but slightly different
legislation that must be reconciled with the House of Representatives bill
before either bill can be submitted to President Clinton for approval. The
Senate bill would limit the definition of "offshore facility" to not only
Territorial Sea and Outer Continental Shelf production, transportation and
storage facilities but also inland waters, such as coastal bays, estuaries or
perhaps even rivers. Both bills allow the financial responsibility limit to be
increased to $150 million if a formal risk assessment indicates the increase is
warranted. The Company cannot predict the final form of any financial
responsibility rule that may be imposed under the OPA, but any rule that
requires the Company to establish $150 million in financial responsibility for
oil spills has the potential to result in increased annual operating costs. The
Clinton Administration has indicated tentative support for changes to the OPA
financial responsibility requirements. Whether these legislative efforts will
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<PAGE> 48
reduce the Oil Pollution Act financial responsibility requirements applicable to
the Company cannot be determined at this time. In any event, the impact of any
rule is not expected to be any more burdensome to the Company than it will be to
other similarly situated companies involved in oil and gas exploration and
production.
OPA imposes a variety of additional requirements on responsible parties for
vessels or oil and gas facilities related to the prevention of oil spills and
liability for damages resulting from such spills in waters of the United States.
OPA assigns liability to each responsible party for oil spill removal costs and
a variety of public and private damages from oil spills. While liability limits
apply in some circumstances, a party cannot take advantage of liability limits
if the spill is caused by gross negligence or willful misconduct or resulted
from violation of a federal safety, construction or operating regulation. If a
party fails to report a spill or to cooperate fully in the cleanup, liability
limits likewise do not apply. OPA establishes a liability limit for offshore
facilities of all removal costs plus $75,000,000. Few defenses exist to the
liability for oil spills imposed by OPA. OPA also imposes other requirements on
facility operators, such as the preparation of an oil spill contingency plan.
Failure to comply with ongoing requirements or inadequate cooperation in a spill
event may subject a responsible party to civil or criminal enforcement actions.
As of this date, the Company is not the subject of any civil or criminal
enforcement actions under the OPA.
In addition, the OCSLA authorizes regulations relating to safety and
environmental protection applicable to lessees and permittees operating in the
OCS. Specific design and operational standards may apply to OCS vessels, rigs,
platforms, vehicles and structures. Violations of lease conditions or
regulations issued pursuant to OCSLA can result in substantial civil and
criminal penalties, as well as potential court injunctions curtailing operations
and the cancellation of leases. Such enforcement liabilities can result from
either governmental or private prosecution. As of this date, the Company is not
the subject of any civil or criminal enforcement actions under OCSLA.
The Federal Water Pollution Control Act ("FWPCA") imposes restrictions and
strict controls regarding the discharge of produced waters and other oil and gas
wastes into navigable waters. Permits must be obtained to discharge pollutants
to state and federal waters. The FWPCA provides for civil, criminal and
administrative penalties for any unauthorized discharges of oil and other
hazardous substances in reportable quantities and, along with the OPA, imposes
substantial potential liability for the costs of removal, remediation and
damages. State laws for the control of water pollution also provide varying
civil, criminal and administrative penalties and liabilities in the case of a
discharge of petroleum or its derivatives into state waters. In January 1995,
the U.S. Environmental Protection Agency ("EPA") issued general permits
prohibiting the discharge of produced water and produced sand derived from oil
and gas point source facilities to coastal waters in Louisiana and Texas,
effective February 8, 1995. However, concurrent with this action, EPA Region VI
issued an administrative order effectively delaying the prohibition on
discharges of produced water and produced sands to January 1, 1997, unless an
earlier compliance date is required by the State. Although the costs to comply
with zero discharge mandates under federal or state law may be significant, the
entire industry will experience similar costs and the Company believes that
these costs will not have a material adverse impact on the Company's financial
conditions and operations. Some oil and gas exploration and production
facilities are required to obtain permits for their storm water discharges.
Costs may be associated with treatment of wastewater or developing storm water
pollution prevention plans. Further, the Coastal Zone Management Act authorizes
state implementation and development of programs of management measures for
nonpoint source pollution to restore and protect coastal waters.
EMPLOYEES
As of May 15, 1996, the Company had 77 full time employees, 47 of whom are
located at the Company's headquarters in Houston, Texas and the remainder of
whom are located at field offices. None of the Company's employees are
represented by a labor union. The Company contracts with third parties to
conduct its offshore field operations.
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<PAGE> 49
OFFICES
The Company currently leases approximately 54,000 square feet of office
space in Houston, Texas, where its principal offices are located. In addition,
the Company maintains field operations offices in the areas where it operates
onshore properties.
LEGAL PROCEEDINGS
In connection with the February 1996 reorganization, certain former
employees of FRI, the subsidiary of Brooklyn Union that previously owned the
onshore properties, were entitled to remuneration for the increase in the value
of the transferred properties prior to the reorganization. In February 1996,
certain such former employees filed suit against Brooklyn Union, FRI and the
Company alleging breach of contract, breach of fiduciary duty, fraud, negligent
misrepresentation and conspiracy, seeking actual damages in excess of $35
million and punitive damages in excess of $70 million. FRI has agreed to
indemnify the Company against such suit. In addition, Holdings, the subsidiary
of Brooklyn Union that holds all of the currently outstanding Common Stock of
the Company, has agreed to indemnify the Company against the suit, and has
agreed to pledge all of its holdings of Common Stock to secure such
indemnification obligation. As a result of such arrangements, the Company
believes that it will not be required to pay any damages resulting from such
suit, even if a judgment adverse to the Company is rendered in the suit.
However, the Company would incur a non-cash charge in addition to the $12
million charge previously taken by the Company in the event such damages are
determined to be in excess of such $12 million amount, which would have the
effect of reducing the Company's reported income (or resulting in or increasing
a loss) in the period in which such additional charge is determined.
The Company is not a party to any other pending legal proceedings, other
than ordinary routine litigation incidental to its business that management
believes will not have a material adverse effect on its financial condition or
results of operations.
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<PAGE> 50
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The Company's Board of Directors currently has seven members. In accordance
with the Certificate of Incorporation of the Company, the members of the Board
of Directors are divided into three classes and are elected for a term of office
expiring at the third succeeding annual shareholders' meeting following their
election to office or until a successor is duly elected and qualified. The
Certificate of Incorporation also provides that such classes shall be as nearly
equal in number as possible. The terms of office of the Class I, Class II and
Class III directors expire at the annual meeting of stockholders in 1996, 1997
and 1998, respectively. The officers of the Company are elected by, and serve
until their successors are elected by, the Board of Directors.
The following table sets forth certain information with respect to the
executive officers and directors of the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---------------------------- --- --------------------------------------------------
<S> <C> <C>
James G. Floyd.............. 59 President and Chief Executive Officer and Director
(Class III)
Randall J. Fleming.......... 53 Senior Vice President -- Exploration and
Production
Thomas W. Powers............ 51 Senior Vice President -- Business Development and
Finance and Treasurer
James F. Westmoreland....... 40 Vice President, Chief Accounting Officer,
Comptroller and Secretary
Charles W. Adcock........... 42 Vice President -- Project Development
Robert B. Catell............ 59 Chairman of the Board of Directors (Class III)
Gordon F. Ahalt............. 68 Director (Class II)
Russell D. Gordy............ 45 Director (Class I)
Craig G. Matthews........... 53 Director (Class I)
James Q. Riordan............ 69 Director (Class II)
Lester H. Smith............. 53 Director (Class I)
</TABLE>
James G. Floyd has been President and Chief Executive Officer and a
Director of the Company since 1986. Mr. Floyd was President of Seagull E&P Inc.
("Seagull") and a director of Seagull Energy Corporation, Seagull's parent, from
1981 to 1986. Mr. Floyd was general manager of the offshore division of Houston
Oil and Minerals Corporation ("Houston Oil and Minerals") from 1978 to 1981. Mr.
Floyd joined Houston Oil and Minerals in 1972 after five years as an independent
geologist. Mr. Floyd began his career with Amoco Production Company in 1962. Mr.
Floyd holds a B.S. and an M.S. in geology from the University of Florida.
Randall J. Fleming has been Senior Vice President -- Exploration and
Production of the Company since October 1995 and was Vice President --
Exploration of the Company from 1986 to 1995. Mr. Fleming was Vice President --
Geology of Seagull from 1981 to 1986 and was an exploration geologist at
Houston Oil and Minerals from 1976 to 1981. Prior to such time, Mr. Fleming was
an exploration geologist for Superior Oil Company and Sinclair Oil Company.
Mr. Fleming holds a B.A. and M.S. in geology from the University of Alabama.
Thomas W. Powers has been Senior Vice President -- Business Development and
Finance of the Company since October 1995 and Treasurer since May 1996. Mr.
Powers was General Manager for Diversification of Brooklyn Union from 1991 to
1995 and Executive Vice President of Fuel Resources, Inc., a Brooklyn Union
subsidiary, from 1986 to 1991. Prior to joining Brooklyn Union, Mr. Powers was
Manager of Corporate Development of Anglo Energy. Mr. Powers holds a B.S. in
Economics from Bowling Green University and an M.B.A. from Long Island
University.
James F. Westmoreland has been Vice President, Chief Accounting Officer,
Comptroller and Secretary of the Company since October 1995 and was Vice
President and Comptroller of the
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<PAGE> 51
Company from 1986 to 1995. Mr. Westmoreland was supervisor of natural gas and
oil accounting at Seagull from 1983 to 1986. Mr. Westmoreland holds a B.B.A. in
accounting from the University of Houston.
Charles W. Adcock has been Vice President -- Project Development of the
Company since 1996. Mr. Adcock was Vice President of Project Development of Fuel
Resources Inc., the Brooklyn Union subsidiary that previously owned the
Company's onshore properties, from 1993 to 1996. Prior to joining Fuel
Resources, Mr. Adcock worked at NERCO Oil & Gas as Reservoir Engineering
Specialist. Prior to NERCO, he held various engineering positions with Apache,
ANR Production and Aminoil U.S.A. Mr. Adcock is a Registered Professional
Engineer in the State of Texas, and received his B.S. in Civil Engineering from
Texas A&M University in 1975 and an M.B.A. from the University of St. Thomas in
1991.
Robert B. Catell has been Chairman of the Board of Directors of the Company
since 1986. Mr. Catell has been Chairman of the Board and Chief Executive
Officer of Brooklyn Union since 1991 and was President from 1991 to 1996. Mr.
Catell has been associated with Brooklyn Union since 1958 and has been an
officer of Brooklyn Union since 1974. Mr. Catell received both his Bachelor's
and Master's Degrees in Mechanical Engineering from City College of New York. He
holds a Professional Engineer's License in New York State, and attended Columbia
University's Executive Development Program and Harvard Business School's
Advanced Management Program. Mr. Catell is Trustee of Brooklyn Law School,
Independence Savings Bank and Kingsborough Community College Foundation, Inc.;
Chairman and Director of Alberta Northeast Inc. and Boundary Gas, Inc.; Chairman
of Energy Association of New York State; Director and Past Chairman, American
Gas Association; Director of The Business Council of New York State, Inc., Gas
Research Institute, New York City Partnership and New York State Energy Research
and Development Authority.
Gordon F. Ahalt has been a director of the Company since 1996. Mr. Ahalt
has been President of G.F.A. Inc., a petroleum industry financial and management
consulting firm, since 1982. Mr. Ahalt is a consultant to Brooklyn Union and
W.H. Reaves Co., Inc. Mr. Ahalt serves as a director for the Bancroft and
Ellsworth Convertible Funds, the Harbinger Group and Cal Dive International. Mr.
Ahalt received a B.S. in Petroleum Engineering in 1951 from the University of
Pittsburgh, attended New York University's Business School and is a graduate of
Harvard Business School's Advanced Management Program. He worked for Amoco from
1951 to 1955, Chase Manhattan Bank from 1955 to 1972, White Weld from 1972 to
1973, Chase Manhattan Bank from 1974 through 1976, served as President and Chief
Executive Officer of International Energy Bank London from 1977 to 1979 and as
Chief Financial Officer of Ashland Oil Inc. from 1980 to 1981.
Russell D. Gordy has been a Director of the Company since 1986. Mr. Gordy
has been Managing Partner of S.G. Interests, a private firm specializing in oil
and gas investments, since 1988. Prior to forming S.G. Interests, Mr. Gordy was
Managing Partner of Northwind Exploration, a private oil and gas firm formed in
1981 to specialize in exploration along the Texas and Louisiana Gulf Coast. From
1974 to 1981 Mr. Gordy served in various financial capacities for Houston Oil
and Minerals Corporation. Mr. Gordy holds a B.B.A. in accounting from Sam
Houston State University and is a C.P.A.
Craig G. Matthews has been a Director of the Company since 1993. Mr.
Matthews has been President of Brooklyn Union since 1996, was Executive Vice
President of Brooklyn Union since 1994, and was Executive Vice President and
Chief Financial Officer of Brooklyn Union from 1991 to 1994. Mr. Matthews joined
Brooklyn Union in 1965. He graduated from Rutgers University in 1965 with a
Bachelor's Degree in Civil Engineering, and acquired an M.S. Degree in
Industrial Management from Polytechnic University. Mr. Matthews is a member of
the Board of Directors for the Brooklyn Philharmonic, the Public Utilities
Reports, Inc., the Brooklyn Chamber of Commerce, Neighborhood Housing Services,
Greater Jamaica Development Corp., Regional Plan Association,
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<PAGE> 52
Prospect Park Alliance, the National and New York Advisory Board of the
Salvation Army and Inform. Mr. Matthews is the Treasurer of the Society of Gas
Lighters.
James Q. Riordan has been a director of the Company since 1996 and a
director of Brooklyn Union since 1991. Mr. Riordan is the retired Vice Chairman
and Chief Financial Officer of Mobil Corp. He joined Mobil Corp. in 1957 as Tax
Counsel and was named Director and Chief Financial Officer in 1969. Mr. Riordan
served as Vice Chairman of Mobil Corp. from 1986 until his retirement in 1989.
He joined Bekaert Corporation in 1989 and was elected its President, and served
as President until his retirement in 1992. Mr. Riordan is a Director of Dow
Jones & Co., Inc., Tri-Continental Corporation and the Public Broadcasting
Service; Director/Trustee of the mutual funds in the Seligman Group of
investment companies; and Trustee for the Committee for Economic Development and
The Brooklyn Museum.
Lester H. Smith has been a director of the Company since 1996. Mr. Smith is
the founder, Chairman of the Board and President of Soxco. Mr. Smith is Chairman
of the Board and President of Smith Energy Company, an independent oil and gas
exploration company, and Chairman of the Board of Founders International, Ltd.,
an international downhole drilling tool company. Mr. Smith has been active in
the energy business as an independent since 1973. He attended the University of
Oklahoma where he majored in finance.
COMMITTEES
The Company's Board of Directors has established Executive, Audit and
Compensation Committees. The Audit Committee consists of Messrs. Riordan, Ahalt
and Gordy, each of whom is a non-employee director of the Company. The Audit
Committee meets separately with representatives of the Company's independent
auditors and with representatives of senior management in performing its
functions. The Audit Committee reviews the general scope of audit coverages, the
fees charged by the independent auditors, matters relating to the Company's
internal control systems, and other matters related to audit functions.
The Compensation Committee consists of Messrs. Catell, Ahalt and Riordan,
each of whom is a non-employee director of the Company. The Compensation
Committee administers the Company's 1996 Long-Term Stock Incentive Plan, and in
this capacity makes all option grants or awards to Company employees, including
executive officers, under such plans. In addition, the Compensation Committee is
responsible for making recommendations to the Board of Directors with respect to
the compensation of the Company's Chief Executive Officer and its other
executive officers, and is responsible for the establishment of policies dealing
with various compensation and employee benefit matters for the Company.
EMPLOYMENT AGREEMENTS WITH EXECUTIVE OFFICERS
Prior to completion of the Offering, Messrs. James G. Floyd, Randall J.
Fleming, Thomas W. Powers and James F. Westmoreland will enter into employment
agreements with the Company effective as of the closing of this Offering
pursuant to which they serve as executive officers of the Company. Mr. Floyd's
existing employment agreement with the Company will be terminated effective as
of such time.
Such employment agreements provide for Messrs. Floyd, Fleming, Powers and
Westmoreland to receive annual base salaries of $340,000, $220,000, $140,000 and
$130,000, respectively. Under such agreements, Messrs. Floyd, Fleming, Powers
and Westmoreland are entitled to annual incentive bonuses of 60%, 50%, 45% and
45%, respectively, of base salary if the Company meets financial targets
established by the Board of Directors. In addition, Messrs. Floyd, Fleming,
Powers and Westmoreland will be entitled to participate in such incentive
compensation and other programs as are adopted by the Company's Board of
Directors, including the Company's 1996 Long-Term Stock Incentive Plan. The
initial term of each employment agreement extends to the third anniversary of
the effective date of such agreement; provided, however, that the term of each
agreement is
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<PAGE> 53
automatically extended one year on each anniversary unless notice that the
agreement will not be extended is given by either party at least 90 days prior
to such anniversary.
Each of the employment agreements is subject to early termination by the
Company for cause or upon the death or disability of the employee and is subject
to early termination by the employee for any reason. If an employment agreement
is terminated without cause by the Company or with good reason (including
certain changes in control of the Company) by the employee, the Company is
obligated to pay such employee a lump-sum severance payment of 2.99 times the
employee's then current annual rate of total compensation.
DIRECTOR COMPENSATION
Directors currently receive a fee of $1,250 per calendar quarter for
serving on the Board of Directors and $500 per board meeting attended. Upon
completion of this Offering, each director who is not also an officer or
employee of the Company will receive a fee of $4,000 per calendar quarter and
$1,000 per board meeting attended. Members of committees of Board of Directors
will receive a fee of $500 per calendar quarter.
EXECUTIVE COMPENSATION
The following table sets forth certain summary information concerning the
compensation provided by the Company in 1995 to its Chief Executive Officer and
each other person serving as an executive officer during 1995 who earned
$100,000 or more in combined salary and bonus during such year (collectively,
the "Named Executive Officers").
<TABLE>
<CAPTION>
ANNUAL COMPENSATION(1)
---------------------- ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS COMPENSATION(2)
------------------------------------------------- --------- -------- ---------
<S> <C> <C> <C>
James G. Floyd, President and Chief Executive
Officer........................................ $ 250,000 $ 10,000 $ 52,000
Randall J. Fleming, Senior Vice
President -- Exploration and Production........ $ 173,000 $ 7,000 $ 19,000
James F. Westmoreland, Vice President, Chief
Accounting Officer, Comptroller and
Secretary...................................... $ 102,000 $ 4,000 $ 6,000
</TABLE>
- ---------------
(1) Amounts exclude perquisites and other personal benefits because such
compensation did not exceed the lesser of $50,000 or 10% of the total annual
salary and bonus reported for each executive officer.
(2) Consists of the value of overriding royalty interests and net profits
interests in properties of the Company conveyed during 1995. See "Related
Party Transactions -- Transactions Between the Company and Management."
1996 STOCK OPTION PLAN
Prior to completion of the Offering, it is anticipated that the Board of
Directors will adopt the Company's 1996 Stock Option Plan (the "Incentive Plan")
and that the stockholder of the Company will approve the Incentive Plan as
adopted. The purposes of the Incentive Plan are to attract, retain and motivate
key employees, consultants and advisors by means of grants of stock options, to
enable such persons to participate in the long-term growth of the Company. The
aggregate amount of Common Stock with respect to which options may be granted
may not exceed 10% of the shares of the Company's Common Stock outstanding from
time to time.
To comply with the requirements of Rule 16b-3 of the Securities Exchange
Act of 1934, as amended, and Section 162(m) of the Internal Revenue Code of
1986, as amended (the "Code"), the Incentive Plan will be administered following
the Offering by the Compensation Committee of the Board of Directors of the
Company (the "Committee"), which shall be comprised solely of two or more
directors who are "disinterested persons" within the meaning of Rule 16b-3 and
"outside directors" within the meaning of the Treasury Regulations promulgated
under Section 162(m) of
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<PAGE> 54
the Code. To the extent permitted under Rule 16b-3, the Committee will have
complete authority to construe, interpret and administer provisions of the
Incentive Plan, to determine which persons are to be granted options, the terms
and conditions of options, and to make all other determinations necessary or
deemed advisable in the administration of the Incentive Plan. The Committee may
grant any option which is intended to be performance based for purposes of
Section 162(m) based on the attainment over a specified period of performance
targets or parameters, including, but not limited to the attainment of target
levels of net income, cash flows, reserve additions or revisions, acquisitions,
total capitalizations, total or comparative shareholder return, assets,
exploration successes, production volumes, finding and development costs, cost
reductions and savings, reportable incidents in safety or environmental matters,
return or equity, profit margin or sales, and/or earnings per share, as may be
specified by the Committee. Which factors and how much weight may be accorded
each factor for a particular grant will be determined by the Committee. In
addition, the Committee may, in its discretion, accelerate the vesting of any
award upon such circumstances as it deems appropriate, provided the award
continues to qualify as performance based compensation for purposes of the Code
if intended to so qualify on its date of grant.
Options granted under the Incentive Plan may be either nonqualified stock
options or incentive stock options. The exercise price of any option will be as
determined by the Committee as of the date of grant, provided that the exercise
price of such options shall not be less than the fair market value of the Common
Stock as the date of grant. The exercise price must be paid in full in cash at
the time an option is exercised or, if permitted by the Committee, by means of a
"cashless exercise" through a broker, by tendering Common Stock already owned by
the participant, or any combination of the foregoing. The Committee will
determine the period over which individual options become exercisable.
In the event of a change in control of the Company, the Committee in its
discretion may, at the time an option is made or any time thereafter: (i)
provide for the acceleration of any time period relating to the exercise of the
option, (ii) provide for the purchase of the option upon the participant's
request for an amount of cash or other property that could have been received
upon the exercise or realization of the option had the option been currently
exercisable or payable, (iii) adjust the terms of the option in a manner
determined by the Committee to reflect the change in control, (iv) cause the
option to be assumed, or new rights substituted therefor, by another entity, or
(v) make such other provision as the Committee may consider equitable and in the
best interests of the Company.
In the event of any stock dividend, recapitalization, reorganization,
merger, consolidation or other extraordinary event, the Committee may, to the
extent deemed necessary to preserve the benefits under the Incentive Plan,
adjust the number and kind of shares which thereafter may be made the subject of
options, the number and kind of shares subject to outstanding options, and the
grant, exercise or conversion price with respect to any of the foregoing and, if
deemed appropriate, make provision for cash payments to participants. Subject to
certain limitations, the Board of Directors is authorized to amend, suspend or
terminate the Incentive Plan to meet any changes in legal requirements or for
any other purpose permitted by law.
Upon completion of the Offering, options with respect to an aggregate of
600,000 shares of Common Stock will be granted to certain key employees of the
Company, including options for 288,000 shares to Mr. Floyd, options for 150,000
shares to Mr. Fleming, options for 90,000 shares to Mr. Powers and options for
72,000 shares to Mr. Westmoreland. All of these options will have an exercise
price equal to the initial public offering price of the Common Stock, and will
vest in one-fifth increments on each of the first five anniversaries of the
grant date.
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
Effective immediately prior to the Offering, the Company will adopt an
unfunded, nonqualified Supplemental Executive Retirement Plan (the "SERP") for
the benefit of Mr. Floyd. The SERP will
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<PAGE> 55
provide that, if the executive remains with the Company until age 65, upon his
retirement on or after age 65, the executive will be paid $100,000 per year for
life. If, after retirement, the executive predeceases his spouse, 50% of the
executive's SERP benefit will continue to be paid to the executive's surviving
spouse for her life.
401(K) PLAN
The Company maintains a 401(k) Profit Sharing Plan (the "401(k) Plan") for
its employees. Under the 401(k) Plan, eligible employees may elect to have the
Company contribute on their behalf up to 10% of their base compensation (subject
to certain limitations imposed under the Code) on a before tax basis. The
Company makes a matching contribution of $0.50 for each $1.00 of employee
deferral, not to exceed 5% of an employee's base compensation, subject to
limitations imposed by the Code. The amounts contributed under the 401(k) Plan
are held in a trust and invested among various investment funds in accordance
with the directions of each participant. An employee's salary deferral
contributions under the 401(k) Plan are 100% vested. The Company's matching
contributions vest at the rate of 20% per year of service. Participants are
entitled to payment of their vested account balances upon termination of
employment.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Robert B. Catell, a member of the Compensation Committee, is Chairman of
the Board, President and Chief Executive Officer of Brooklyn Union. As a result
of the termination, upon completion of the Offering, of certain options to
purchase Common Stock held by Mr. Catell, the Company will pay $420,000 to Mr.
Catell. See "Related Party Transactions -- Transactions Between the Company and
Brooklyn Union and Affiliates."
RELATED PARTY TRANSACTIONS
TRANSACTIONS BETWEEN THE COMPANY AND BROOKLYN UNION AND AFFILIATES
Houston Exploration was incorporated in December 1985 to conduct certain of
the natural gas and oil exploration and development activities of Brooklyn
Union. The Company has focused since its inception primarily on the exploration
and development of high potential prospects in the Gulf of Mexico. Effective
February 29, 1996, Brooklyn Union implemented a reorganization of its
exploration and production assets by transferring to Houston Exploration certain
onshore producing properties and developed and undeveloped acreage not
previously owned by the Company. Brooklyn Union has advised the Company that it
does not currently intend to engage in the domestic exploration for or
production of natural gas and oil except through ownership of Common Stock of
the Company.
In 1993, 1994 and 1995 Brooklyn Union made capital contributions to the
Company of $12.6 million, $18.0 million and $6.9 million, respectively. Brooklyn
Union made capital contributions to the Company of $10.1 million during the
period from January 1, 1996 to May 1, 1996.
During 1993, 1994 and 1995, the Company had natural gas sales of $32.9
million, $26.4 million and $18.9 million representing 86%, 63% and 48% of total
revenues for the years ended 1993, 1994 and 1995, respectively, to PennUnion
Energy Services, L.L.C. and BRING, both of which are affiliates of Brooklyn
Union.
In July 1994, the Company granted options to purchase an aggregate of
240,000 shares of Common Stock to three officers of Brooklyn Union, including
Messrs. Catell and Matthews, with an exercise price of $11.55 per share. Upon
completion of the Offering, such options will be terminated in exchange for
payment by the Company of an aggregate of $840,000 (assuming an initial public
offering price of $13.00 per share). As a result of the termination of their
options, Messrs. Catell and Matthews will receive payments of $420,000 and
$294,000, respectively.
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<PAGE> 56
The Company has been and will be included in the consolidated federal
income tax returns filed by Brooklyn Union during all periods in which it has
been or will be a wholly-owned subsidiary of Brooklyn Union ("Affiliation
Years"). The Company and Brooklyn Union have entered into an agreement (the "Tax
Sharing Agreement") providing for the manner of determining payments with
respect to federal income tax liabilities and benefits arising in Affiliation
Years. Under the Tax Sharing Agreement, the Company has paid or will pay to
Brooklyn Union an amount equal to the Company's share of Brooklyn Union's
consolidated federal income tax liability, generally determined on a separate
return basis, for the years ended and the portion of 1996 preceding consummation
of the Offering, and Brooklyn Union will pay the Company for any reduction in
Brooklyn Union's consolidated federal income tax liability resulting from
utilization or deemed utilization of deductions, losses, and credits arising in
such periods which are attributable to the Company, in each case net of any
amounts theretofore paid or credited by Brooklyn Union or the Company to the
other with respect thereto. In the event that Brooklyn Union's consolidated
federal income tax liability for any Affiliation Year is adjusted upon audit or
otherwise, the Company will bear any additional liability or receive any refund
which is attributable to adjustments of items of income, deduction, gain, loss
or credit of the Company. Brooklyn Union shall permit the Company to participate
in any audits or litigation with respect to Affiliation Years, but Brooklyn
Union will otherwise have exclusive and sole responsibility and control over any
such proceedings. The Company will cease to be included in the consolidated
federal income tax returns filed by Brooklyn Union, and will file on a separate
basis, with respect to periods after consummation of the Offerings.
Under a Registration Rights Agreement (the "Brooklyn Union Registration
Rights Agreement") to be entered into between the Company and Brooklyn Union,
the Company will file, upon the request of Brooklyn Union, a registration
statement under the Securities Act of 1933 for the purpose of enabling Brooklyn
Union to offer and sell any securities of the Company which Brooklyn Union may
hold. Brooklyn Union may exercise these rights at any time after the expiration
of 180 days following the completion of this Offering. The Company will bear the
costs of any registered offering, except that Brooklyn Union will pay any
underwriting commissions relating to any such offering, any transfer taxes and
any costs of complying with foreign securities laws at Brooklyn Union's request,
and each will pay for its counsel and accountants. The Company has the right to
require Brooklyn Union to delay any exercise by Brooklyn Union of its rights to
require registration and other actions for a period of up to 180 days if, in the
judgment of the Company, the Company or any offering by the Company then being
conducted or about to be conducted would be adversely affected. The Company has
also granted Brooklyn Union the right to include its securities in certain
registration statements covering offerings by the Company, and the Company will
pay all costs of such offerings other than underwriting commissions and transfer
taxes attributable to the securities sold on behalf of Brooklyn Union. The
Company has agreed to indemnify Brooklyn Union, its officers, directors, agents,
any underwriter, and each person controlling any of the foregoing, against
certain liabilities under the Securities Act or the securities laws of any state
or country in which securities of the Company are sold pursuant to the Brooklyn
Union Registration Rights Agreement.
In connection with the February 1996 reorganization, the Company and FRI,
the subsidiary of Brooklyn Union that previously owned the onshore properties,
entered into an agreement whereby the Company assumed FRI's bank debt and the
liabilities of FRI directly related to the transferred properties and acreage.
FRI agreed to indemnify the Company against all of its other liabilities,
including any liabilities associated with the remuneration for the increase in
the value of the transferred properties prior to the reorganization to which
certain former FRI employees were entitled and the suit filed by certain of its
former employees. In addition, the Company entered into an agreement with
Holdings, the subsidiary of Brooklyn Union that holds all of the currently
outstanding Common Stock of the Company, whereby Holdings agreed to indemnify
the Company against any liabilities associated with such remuneration and suit,
and agreed to pledge all of its holdings of Common Stock to secure such
indemnification obligation.
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<PAGE> 57
TRANSACTIONS BETWEEN THE COMPANY AND MANAGEMENT
In , 1996, the Company entered into employment agreements with
Messrs. Floyd, Fleming, Powers and Westmoreland effective as of the completion
of this Offering. These employment agreements will replace the Company's
existing employment agreements with such officers. See "Management -- Employment
Agreements" for a description of such employment agreements.
The Company's existing employment agreement with Mr. Floyd, its President
and Chief Executive Officer, provides Mr. Floyd with the option to obtain up to
a 5% working interest in certain exploration prospects of the Company,
exercisable prior to the commencement of drilling of the initial well on any
such prospect. During 1993, 1994 and 1995, affiliates of Mr. Floyd obtained a 5%
working interest in 12 wells operated by the Company pursuant to such agreement.
In addition, during 1993, 1994 and 1995, respectively, affiliates of Mr. Floyd
paid $0.9 million, $0.7 million and $0.7 million, respectively, in expenses
attributable to working interests owned in properties operated by the Company,
and received $2.4 million, $1.5 million and $0.9 million for years ended 1993,
1994 and 1995, respectively, in distributions attributable to such working
interests. The Company's existing employment with Mr. Floyd, including the
option described above, will be terminated effective upon the completion of this
Offering, provided that such termination shall not affect working interests in
properties of the Company acquired by Mr. Floyd or his affiliates prior to the
date of termination.
The Company's existing employment agreement with Mr. Floyd also provides
for the assignment to Mr. Floyd of a 2% net profits interest in all exploration
prospects of the Company at the time such properties are acquired by the
Company. During 1993, 1994 and 1995, the Company assigned a 2% net profits
interest to Mr. Floyd in all such properties acquired by the Company during such
periods pursuant to such agreement. In addition, during 1993, 1994 and 1995, Mr.
Floyd received $316,000, $244,000 and $308,000, respectively, in distributions
attributable to net profits interests in properties of the Company. The
Company's existing employment with Mr. Floyd, including the rights described
above, will be terminated effective upon the completion of this Offering,
provided that such termination shall not affect net profits interests in
properties of the Company assigned to Mr. Floyd prior to the date of
termination.
The Company's existing employment agreement with Mr. Floyd also provides
for the assignment to certain key employees designated by Mr. Floyd of
overriding royalty interests in certain properties of the Company at the time
such properties are acquired by the Company. During 1993, 1994 and 1995, the
Company assigned overriding royalty interests to Messrs. Fleming and
Westmoreland in all properties acquired by the Company during such periods
pursuant to such agreement. In addition, during 1993, 1994 and 1995, Mr. Fleming
received $433,000, $311,000, and $202,000, respectively, in distributions
attributable to overriding royalty interests in properties of the Company. The
Company's existing employment agreement with Mr. Floyd, including the provisions
described above, will be terminated effective upon the completion of this
offering, provided that such termination shall not affect overriding royalty
interests in properties of the Company assigned to key employees prior to the
date of termination.
The Company's existing employment agreement with Mr. Floyd also provides
for the assignment to Mr. Floyd of a 6.75% after program-payout working interest
in the leases upon which the Company begins drilling an initial exploratory well
(whether or not successful) during a calendar year (a "program"). These working
interests entitle Mr. Floyd to receive 6.75% of the excess, if any, of the
aggregate revenues from the properties within a program over the aggregate costs
(including capital expenditures) associated with such properties. At the date of
this Offering, Mr. Floyd has not received any distributions under this
arrangement. The Company's existing employment agreement, including the rights
described above will be terminated effective upon completion of this Offering,
provided that such termination shall not affect the after program-payout working
interest in properties of the Company assigned to Mr. Floyd prior to date of
termination.
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SOXCO ACQUISITION
Under an agreement with Soxco, Lester H. Smith has received a 1.25% net
profits interest, proportionately reduced for Soxco's interest, in all
properties in which Soxco has participated. Upon the sale by Soxco of its
properties, Mr. Smith has the right to sell all such net profits interests on
the same economic terms to be received by Soxco in the transaction. Mr. Smith
has exercised such right in connection with the Soxco Acquisition, with the
result that his net profits interests will be sold to Soxco prior to the
completion of the Soxco Acquisition and included in the assets to be purchased
by the Company. Soxco estimates that, as a result of the Soxco Acquisition, Mr.
Smith will receive approximately $90,000 in cash, 16,154 initial shares of
Common Stock and additional shares of Common Stock with a value between $100,000
and $200,000.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of May 15, 1996
concerning the persons known by the Company to be beneficial owners of more than
five percent of the Company's outstanding Common Stock, the members of the Board
of Directors of the Company, the Named Executive Officers listed in the Summary
Compensation Table above and all directors and executive officers of the Company
as a group.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP
---------------------------------------
PERCENT
-----------------------
SUBSEQUENT
PRIOR TO TO
NAME OF BENEFICIAL OWNER SHARES OFFERING OFFERING
- --------------------------------------------------------- ----------- -------- ----------
<S> <C> <C> <C>
The Brooklyn Union Gas Company........................... 13,391,000 100% 67.0%
James G. Floyd........................................... -- -- --
Randall J. Fleming....................................... -- -- --
Thomas W. Powers......................................... -- -- --
James F. Westmoreland.................................... -- -- --
Charles W. Adcock........................................ -- -- --
Robert B. Catell(1)...................................... 120,000 * *
Craig G. Matthews(1)..................................... 84,000 * *
Gordon F. Ahalt.......................................... -- -- --
Russell D. Gordy......................................... -- -- --
James Q. Riordan......................................... -- -- --
Lester H. Smith(2)....................................... 16,154(3) -- *
All directors and officers as a group (11
persons)(1)(2)......................................... 220,154 1.5% 1.1%
</TABLE>
- ---------------
* Less than 1%.
(1) Represents shares issuable upon exercise of outstanding stock options that
will be terminated upon completion of the Offering. See "Related
Transactions -- Transactions between the Company and Brooklyn Union and
Affiliates."
(2) Mr. Smith, who is Chairman of the Board and President of Soxco, may be
deemed to be the beneficial owner of the shares of Common Stock to be
issued to Soxco pursuant to the Soxco Acquisition. Mr. Smith disclaims
beneficial ownership of all such shares except for the estimated 16,154
shares of Common Stock to which he will be entitled as a result of the
Soxco Acquisition. See "Related Transactions -- Soxco Acquisition."
(3) Based upon the assumed issuance of 909,000 shares of Common Stock to Soxco
pursuant to the Soxco Acquisition.
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<PAGE> 59
DESCRIPTION OF CAPITAL STOCK
The Company's Restated Certificate of Incorporation (the "Certificate")
provides for authorized capital stock consisting of 50,000,000 shares of Common
Stock, par value $0.01 per share, and 5,000,000 shares of Preferred Stock, par
value $0.01 per share. The following summary is qualified in its entirety by
reference to the Certificate, which is filed as an exhibit to the Registration
Statement of which this Prospectus is a part.
COMMON STOCK
Holders of Common Stock are entitled to one vote per share in the election
of directors and on all other matters submitted to a vote of common stockholders
and do not have cumulative voting rights. Holders of Common Stock are entitled
to receive ratably such dividends, if any, as may be declared by the Board of
Directors out of funds legally available therefore, subject to any preferential
dividend rights of holders of outstanding Preferred Stock. See "Dividend
Policy." Upon the liquidation, dissolution or winding up of the Company, the
holders of Common Stock are entitled to receive ratably the net assets of the
Company available after payment of all debts and other liabilities, subject to
the prior rights of any outstanding shares of Preferred Stock. Holders of Common
Stock have no preemptive, subscription, redemption or conversion rights.
PREFERRED STOCK
The Board of Directors of the Company is empowered, without approval of the
stockholders, to cause shares of Preferred Stock to be issued in one or more
series, with the numbers of shares of each series to be determined by it. The
Board of Directors is authorized to fix and determine variations in the
designations, preferences, and relative, participating, optional or other
special rights (including, without limitation, special voting rights to receive
dividends or assets upon liquidation, rights of conversion into Common Stock or
other securities, redemption provisions and sinking fund provisions) between
series and between the Preferred stock or any series thereof and the Common
Stock, and the qualifications, limitations or restrictions of such rights; and
the shares of Preferred Stock or any series thereof may have full or limited
voting powers, or be without voting powers.
Although the Company has no present intention to issue shares of Preferred
Stock, the issuance of shares of Preferred Stock, or the issuance of rights to
purchase such shares, could be used to discourage an unsolicited acquisition
proposal. For instance, the issuance of a series of Preferred Stock might impede
a business combination by including class voting rights that would enable the
holders to block such a transaction; or such issuance might facilitate a
business combination by including voting rights that would provide a required
percentage vote of the stockholders. In addition, under certain circumstances,
the issuance of Preferred Stock could adversely affect the voting power of the
holders of the Common Stock. Although the Board of Directors is required to make
any determination to issue such stock based on its judgment as to the best
interests of the stockholders of the Company, the Board of Directors could act
in a manner that would discourage an acquisition attempt or other transaction in
that some or a majority of stockholders might believe to be in their best
interest or in which stockholders might receive a premium for their stock over
the then market price for such stock. The Board of Directors does not at present
intend to seek stockholder approval prior to any issuance of currently
authorized stock, unless otherwise required by law or the regulations of the
exchange on which its Common Stock is listed.
CERTAIN PROVISIONS OF THE COMPANY'S CHARTER AND BYLAWS AND DELAWARE LAW
Certain provisions of the Certificate and Bylaws are intended to enhance
the likelihood of continuity and stability in the Board of Directors of the
Company and in its policies, but might have the effect of delaying or preventing
a change in control of the Company and may make more difficult
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<PAGE> 60
the removal of incumbent management even if such transactions could be
beneficial to the interests of stockholders. Set forth below is a summary
description of such provisions:
Classification of Directors; Filling Vacancies. The Company's Bylaws
provide that the directors of the Company shall be divided into three classes as
equal in number as possible serving staggered three-year terms. The Board of
Directors of the Company, acting by a majority of the directors then in office,
may fill any vacancy or newly created directorship.
Stockholder Actions and Meetings. The Company's Certificate provides that
all actions required or permitted to be taken by the stockholders of the Company
may be taken only at a duly held annual or special meeting of the stockholders.
The Company's Bylaws establish procedures, including advance notice procedures,
with regard to the nomination, other than by or at the direction of the Board of
Directors, of candidates for election as directors and for stockholder proposals
to be submitted at meetings of the stockholders. The Company's Bylaws also
provide that special meetings of stockholders may be called only by the
President or by a majority of the directors.
Anti-takeover Provisions. Delaware law permits and the Certificate grants
the Company's Board broad discretionary authority to adopt any and all
anti-takeover measures approved by it in response to any proposal to acquire the
Company, its assets or more than 15% of its outstanding capital stock. Measures
to be adopted could include a shareholder rights plan or by-law provisions
requiring supermajority shareholder approval of acquisition proposals.
Limitation on Personal Liability of Directors. Delaware law authorizes
corporations to limit or eliminate the personal liability of directors to
corporations and their stockholders for monetary damages for breach of
director's fiduciary duty of care. The duty of care requires that, when acting
on behalf of the corporation, directors must exercise an informed business
judgment based on all material information reasonably available to them. Absent
the limitations authorized by Delaware law, directors are accountable to
corporations and their stockholders for monetary damages for conduct
constituting gross negligence in the exercise of their duty of care. Delaware
law enables corporations to limit available relief to equitable remedies such as
injunction or rescission. The Certificate of the Company limits the liability of
directors of the Company to the Company or its stockholders (in their capacity
as directors but not in their capacity as officers) to the fullest extent
permitted by Delaware law. Specifically, directors of the Company will not be
personally liable for monetary damages for breach of a director's fiduciary duty
as a director, except for liability (i) for any breach of the director's duty of
loyalty to the Company or its stockholders, (ii) for acts or omissions not in
good faith or which involve intentional misconduct or a knowing violation of
law, (iii) for unlawful payments of dividends or unlawful stock repurchases or
redemptions as provided in Section 174 of the Delaware General Corporation Law,
or (iv) for any transaction from which the director derived an improper personal
benefit.
The inclusion of this provision in the Certificate may have the effect of
reducing the likelihood of derivative litigation against directors and may
discourage or deter stockholders or management from bringing a lawsuit against
directors for breach of their duty of care, even though such an action, if
successful, might otherwise have benefited the Company and its stockholders. The
Company's Bylaws provide indemnification to the Company's officers and directors
and certain other persons with respect to certain matters.
Indemnification Arrangements. The Certificate of Incorporation and Bylaws
provide that, to the fullest extent permitted by the Delaware General
Corporation Law, the directors and officers of the Company shall be indemnified
and permit the advancement to them of expenses in connection with actual or
threatened proceedings and claims arising out of their status as such. The
Company intends to enter into indemnification agreements with each of its
directors and executive officers that provide for indemnification and expense
advancement to the fullest extent permitted under the Delaware General
Corporation Law.
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The Company is a Delaware corporation and is subject to Section 203 of the
Delaware General Corporation Law. In general, Section 203 prevents an
"interested stockholder" (defined generally as a person owning 15% or more of a
corporation's outstanding voting stock) from engaging in a "business
combination" (as defined) with a Delaware corporation for three years following
the date such person became an interested stockholder unless (i) before such
person became an interested stockholder, the board of directors of the
corporation approved the transaction in which the interested stockholder become
an interested stockholder or approved the business combination; (ii) upon
consummation of the transaction that resulted in the interested stockholder's
becoming an interested stockholder, the interested stockholder owned at least
85% of the voting stock of the corporation outstanding at the time the
transaction commenced (excluding stock held by directors who are also officers
of the corporation and by employee stock plans that do not provide employees
with the rights to determine confidentially whether shares held subject to the
plan will be tendered in a tender or exchange offer); or (iii) following the
transaction in which such person become an interested stockholder, the business
combination was approved by the board of directors of the corporation and
authorized at a meeting of the stockholders by the affirmative vote of the
holders of two-thirds of the outstanding voting stock of the corporation not
owned by the interested stockholder. Under Section 203, the restrictions
described above also do not apply to certain business combination proposed by an
interested stockholder following the announcement or notification of one of
certain extraordinary transactions involving the corporation and a person who
had not been an interested stockholder during the previous three years or who
become an interested stockholder with the approval of a majority of the
corporation's directors, if such extraordinary transaction is approved or not
opposed by a majority of the directors who were directors prior to any person
becoming an interested stockholder during the previous three years or were
recommended for election or elected to succeed such directors by a majority of
such directors.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock will be The Bank of
New York.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this Offering, the Company will have 20,000,000 shares
of Common Stock outstanding. The shares sold in this Offering will be freely
tradeable without restriction or further registration, except for shares owned
by "affiliates" of the Company (as such term is defined under the Securities
Act) which may be sold subject to the resale limitations of Rule 144 promulgated
under the Securities Act ("Rule 144"). All of the remaining 14,300,000
outstanding shares, consisting of 13,391,000 shares of Common Stock owned by
Brooklyn Union and 909,000 shares to be issued to Soxco in the Soxco
Acquisition, constitute "restricted securities" within the meaning of Rule 144.
Such shares may not be resold in a public distribution except pursuant to an
effective registration statement under the Securities Act or an applicable
exemption from registration, including pursuant to Rule 144. In connection with
this Offering, the Company and Brooklyn Union have entered into the Brooklyn
Union Registration Rights Agreement, pursuant to which Brooklyn Union will have
certain demand registration rights at the Company's expense and certain
piggyback registration rights. In connection with the Soxco Acquisition, the
Company will grant Soxco three demand registration rights at the Company's
expense and certain piggyback registration rights. Each of the Company, Brooklyn
Union, Soxco and the officers and directors of the Company have entered into
certain "lock up" agreements with the Underwriters pursuant to which they have
agreed not to offer or sell shares of Common Stock of the Company for a period
of 180 days after the date of this Prospectus without the written consent of the
representatives of the Underwriters. See "Underwriting."
Generally, Rule 144 provides that beginning 90 days after the date of this
Prospectus, a person (or persons whose shares are aggregate) who has
beneficially owned "restricted" securities for at least two years, including a
person who may be deemed an "affiliate" of the Company, as the term
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<PAGE> 62
"affiliate" is defined under the Securities Act, is entitled to sell in
"brokers' transactions" or in transactions directly with a "market maker",
within any three-month period, a number of shares that does not exceed the
greater of 1% of the then outstanding shares of Common Stock or the average
weekly trading volume of the Common Stock on any national securities exchange
and/or over-the-counter market during the four calendar weeks preceding such
sale. Sales under Rule 144 are also subject to certain notice requirements and
the availability of current public information about the Company. A person (or
persons whose shares are aggregated) who is not deemed an "affiliate" of the
Company would be entitled to sell such shares under Rule 144 without regard to
the volume, public information, manner of sale of notice provisions and
limitations described above, once a period of at least three years has elapsed
since the later date the shares were acquired from the Company or from an
"affiliate" of the Company.
Upon completion of the Offering, the Company will grant options to purchase
1,000,000 shares of Common Stock to its employees pursuant to the Incentive
Plan. After this Offering, the Company intends to file a registration statement
on Form S-8 under the Securities Act to register the shares of Common Stock
issuable upon exercise of such options. Accordingly, such shares will be freely
tradeable by holders who are not affiliates of the Company and, subject to the
volume and manner of sale limitations of Rule 144, by holders who are affiliates
of the Company. See "Management -- 1996 Stock Option Plan."
Prior to this Offering, there has been no public market for the Common
Stock of the Company, and no prediction can be made as to the effect, if any,
that future sales of shares or the availability of shares for sale will have on
the market price for Common Stock prevailing from time to time. Sales of
substantial amounts of Common Stock in the public market, or the perception of
the availability of shares for sale, could adversely affect the prevailing
market price of the Common Stock and could impair the Company's ability to raise
capital through the sale of its equity securities.
LEGAL MATTERS
Certain legal matters in connection with the shares of Common Stock offered
hereby are being passed upon for the Company by Andrews & Kurth L.L.P., Houston,
Texas, and for the Underwriters by Vinson & Elkins, L.L.P., Houston, Texas.
EXPERTS
The combined audited financial statements of the Company as of December 31,
1994 and 1995, and for each of the three years in the period ended December 31,
1995, included in this Prospectus have been audited by Arthur Andersen LLP,
independent public accountants, as indicated in their report with respect
thereto, and are included herein in reliance upon the authority of said firm as
experts in giving said report.
The audited financial statements of Soxco as of December 31, 1994 and 1995,
and for each of the three years in the period ended December 31, 1995, included
in this Prospectus have been audited by Arthur Andersen LLP, independent public
accountants, as indicated in their report with respect thereto, and are included
herein in reliance upon the authority of said firm as experts in giving said
report. Reference is made to said report which includes an explanatory paragraph
with respect to the change in the method of accounting for income taxes in 1993
as discussed in Note 2 to the financial statements.
The reserve reports and estimates of the Company's net proved natural gas
and oil reserves included herein have been prepared by Ryder Scott, NSA,
Huddleston and Miller and Lents. The reserve reports and estimates of Soxco's
net proved natural gas and oil reserves included herein have been prepared by
Ryder Scott, NSA and Huddleston. Summaries of these estimates and the audit
letters of Ryder Scott, NSA, Huddleston and Miller and Lents have been included
in this Prospectus as Appendix A in reliance upon such firms as experts with
respect to such matters.
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AVAILABLE INFORMATION
The Company has not previously been subject to the reporting requirements
of the Securities Exchange Act of 1934, as amended. The Company has filed with
the Commission a Registration Statement on Form S-1 (the "Registration
Statement") under the Securities Act, with respect to the offer and sale of
Common Stock pursuant to this Prospectus. This Prospectus, filed as a part of
the Registration Statement, does not contain all of the information set forth in
the Registration Statement or the exhibits and schedules thereto in accordance
with the rules and regulations of the Commission and reference is hereby made to
such omitted information. Statements made in this Prospectus concerning the
contents of any contract, agreement or other document filed as an exhibit to the
Registration Statement are summaries of the terms of such contract, agreement or
document and are not necessarily complete. Reference is made to each such
exhibit for a more complete description of the matters involved and such
statements shall be deemed qualified in their entirety by such reference. The
Registration Statement and the exhibits and schedules thereto filed with the
Commission may be inspected, without charge, and copies may be obtained at
prescribed rates, at the public reference facility maintained by the Commission
at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and at the
regional offices of the Commission at 7 World Trade Center, New York, New York
10048 and Citicorp Center, 500 West Madison Street, Chicago, Illinois 60661. For
further information pertaining to the Common Stock offered by this Prospectus
and the Company, reference is made to the Registration Statement.
The Company intends to furnish holders of its Common Stock annual reports
containing audited consolidated financial statements as well as quarterly
reports containing unaudited consolidated financial statements for the first
three quarters of each fiscal year.
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GLOSSARY OF OIL AND GAS TERMS
The definitions set forth below shall apply to the indicated terms as used
in this Prospectus. All volumes of natural gas referred to herein are stated at
the legal pressure base of the state or area where the reserves exist and at 60
degrees Fahrenheit and in most instances are rounded to the nearest major
multiple.
Bcf. Billion cubic feet.
Bcfe. Billion cubic feet equivalent, determined using the ratio of six Mcf
of natural gas to one Bbl of crude oil, condensate or natural gas liquids.
Bbl. One stock tank barrel, or 42 U.S. gallons liquid volume, used herein
in reference to crude oil or other liquid hydrocarbons.
Bbl/d. One Bbl per day.
Btu. British thermal unit, which is the heat required to raise the
temperature of a one-pound mass of water from 58.5 to 59.5 degrees Fahrenheit.
Completion. The installation of permanent equipment for the production of
oil or gas, or in the case of a dry hole, the reporting of abandonment to the
appropriate agency.
Developed acreage. The number of acres which are allocated or assignable to
producing wells or wells capable of production.
Developed well. A well drilled within the proved area of an oil or gas
reservoir to the depth of a stratigraphic horizon known to be productive.
Dry hole or well. A well found to be incapable of producing hydrocarbons in
sufficient quantities such that proceeds from the sale of such production exceed
production expenses and taxes.
Exploratory well. A well drilled to find and produce oil or gas reserves
not classified as proved, 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.
Farm-in or farm-out. An agreement whereunder the owner of a working
interest in natural gas and oil lease assigns the working interest or a portion
thereof to another party who desires to drill on the leased acreage. Generally,
the assignee is required to drill one or more wells in order to earn its
interest in the acreage. The assignor usually retains a royalty or reversionary
interest in the lease. The interest received by an assignee is a "farm-in" while
the interest transferred by the assignor is a "farm-out."
Field. An area consisting of single reservoir or multiple reservoirs all
grouped on or related to the same individual geological structural feature
and/or stratigraphic condition.
Gross acres or gross wells. The total acres or wells, as the case may be,
in which a working interest is owned.
Mbbls. One thousand barrels of crude oil or other liquid hydrocarbons.
Mbbls/d. One thousand barrels of crude oil or other liquid hydrocarbons per
day.
Mcf. One thousand cubic feet.
Mcf/d. One thousand cubic feet per day.
Mcfe. One thousand cubic feet equivalent, determined using the ratio of six
Mcf of natural gas to one Bbl of crude oil, condensate or natural gas liquids.
Mmbbls. One million barrels of crude oil or other liquid hydrocarbons.
Mmbtu. One million Btus.
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Mmcf. One million cubic feet.
Mmcf/d. One million cubic feet per day.
Mmcfe. One million cubic feet equivalent, determined using the ratio of six
Mcf of natural gas to one Bbl of crude oil, condensate or natural gas liquids.
Net acres or net wells. The sum of the fractional working interests owned
in gross acres or gross wells.
Oil. Crude oil and condensate.
Present value. When used with respect to natural gas and oil reserves, the
estimated future gross revenue to be generated from the production of proved
reserves, net of estimated production and future development costs, using prices
and costs in effect as of the date indicated, without giving effect to
non-property related expenses such as general and administrative expenses, debt
service and future income tax expenses or to depreciation, depletion and
amortization, discounted using an annual discount rate of 10%.
Productive well. A well that is found to be capable of producing
hydrocarbons in sufficient quantities such that proceeds from the sale of such
production exceed production expenses and taxes.
Proved developed producing reserves. Proved developed reserves that are
expected to be recovered from completion intervals currently open in existing
wells and able to produce to market.
Proved developed nonproducing reserves. Proved developed reserves expected
to be recovered from zones behind casing in existing wells.
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 location. A site on which a development well can be
drilled consistent with spacing rules for purposes of recovering proved
undeveloped reserves.
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 from recompletion.
Recompletion. The completion for production of an existing well bore in
another formation from that in which the well has been previously completed.
Reservoir. A porous and permeable underground formation containing a
natural accumulation of producible oil and/or gas that is confined by
impermeable rock or water barriers and is individual and separate from other
reservoirs.
Royalty interest. An interest in a natural gas and oil property entitling
the owner to a share of oil or gas production free of costs of production.
Undeveloped acreage. Lease acreage on which wells have not been drilled or
completed to a point that would permit the production of commercial quantities
of natural gas and oil regardless of whether such acreage contains proved
reserves.
Working interest. The operating interest which gives the owner the right to
drill, produce and conduct operating activities on the property and a share of
production.
Workover. Operations on a producing well to restore or increase production.
63
<PAGE> 66
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
THE HOUSTON EXPLORATION COMPANY:
Report of Independent Public Accountants............................................. F-2
Combined Balance Sheets as of December 31, 1994 and 1995 and (unaudited)
March 31, 1996..................................................................... F-3
Combined Statements of Operations for the Years Ended December 31, 1993, 1994 and
1995 and (unaudited) the Three Months Ended March 31, 1995 and 1996................ F-4
Combined Statement of Stockholder's Equity for the Years Ended December 31, 1993,
1994 and 1995 and (unaudited) the Three Months Ended March 31, 1996................ F-5
Combined Statements of Cash Flows for the Years Ended December 31, 1993, 1994 and
1995 and (unaudited) the Three Months Ended March 31, 1995 and 1996................ F-6
Notes to Combined Financial Statements............................................... F-7
SMITH OFFSHORE EXPLORATION COMPANY:
Report of Independent Public Accountants............................................. F-22
Balance Sheets as of December 31, 1994 and 1995 and (unaudited) March 31, 1996....... F-23
Statements of Operations for the Years Ended December 31, 1993, 1994 and 1995 and
(unaudited) the Three Months Ended March 31, 1995 and 1996......................... F-24
Statements of Cash Flows for the Years Ended December 31, 1993, 1994 and 1995 and
(unaudited) the Three Months Ended March 31, 1995 and 1996......................... F-25
Notes to Financial Statements........................................................ F-26
</TABLE>
F-1
<PAGE> 67
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
We have audited the accompanying combined balance sheets of The Houston
Exploration Company (a Delaware corporation and an indirect wholly-owned
subsidiary of The Brooklyn Union Gas Company) as of December 31, 1994 and 1995,
and the related combined statements of operations, stockholder's equity and cash
flows for each of the three years in the period ended December 31, 1995. These
combined financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of The Houston
Exploration Company, as of December 31, 1994 and 1995, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1995, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
May 9, 1996
F-2
<PAGE> 68
THE HOUSTON EXPLORATION COMPANY
COMBINED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------ MARCH 31,
1994 1995 1996
---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS:
Cash and cash equivalents................................. $ 668 $ 598 $ 2,849
Accounts receivable....................................... 17,995 18,660 21,214
Accounts receivable -- Parent............................. 8,605 6,963 6,365
Inventories............................................... 1,296 963 979
Prepayments and other..................................... 1,557 1,141 1,428
---------- ---------- ----------
Total current assets.............................. 30,121 28,325 32,835
Natural gas and oil properties, full cost method
Unevaluated properties................................. 25,911 42,286 45,686
Properties subject to amortization..................... 257,102 309,378 323,369
Other property and equipment.............................. 7,378 7,707 7,729
---------- ---------- ----------
290,391 359,371 376,784
Less: Accumulated depreciation, depletion and
amortization........................................... (120,677) (142,693) (148,378)
---------- ---------- ----------
169,714 216,678 228,406
Other assets.............................................. 1,843 6,693 5,303
---------- ---------- ----------
TOTAL ASSETS...................................... $ 201,678 $ 251,696 $ 266,544
========== ========== ==========
LIABILITIES:
Accounts payable and accrued expenses..................... $ 18,767 $ 40,657 $ 41,457
---------- ---------- ----------
Total current liabilities......................... 18,767 40,657 41,457
Long-term debt............................................ 65,650 71,862 74,964
Deferred federal income tax............................... 28,314 43,681 47,607
Other deferred liabilities................................ 81 60 32
---------- ---------- ----------
TOTAL LIABILITIES................................. 112,812 156,260 164,060
COMMITMENTS AND CONTINGENCIES (NOTE 10)
STOCKHOLDER'S EQUITY:
Common Stock, $.01 par value, 2,000, 4,000 and 4,000
shares authorized and 2,000, 2,858 and 2,858 issued and
outstanding at December 31, 1994 and 1995 and March 31,
1996, respectively..................................... 20 29 29
Additional paid-in capital................................ 86,389 93,253 99,325
Retained earnings......................................... 2,457 2,154 3,130
---------- ---------- ----------
TOTAL STOCKHOLDER'S EQUITY........................ 88,866 95,436 102,484
---------- ---------- ----------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY........ $ 201,678 $ 251,696 $ 266,544
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-3
<PAGE> 69
THE HOUSTON EXPLORATION COMPANY
COMBINED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
----------------------------------- ----------------------
1993 1994 1995 1995 1996
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES
Natural gas and oil sales....... $ 37,462 $ 41,755 $ 39,431 $ 9,498 $ 9,980
Other........................... 799 467 1,778 253 233
------- -------- -------- -------- --------
Total revenues.......... 38,261 42,222 41,209 9,751 10,213
OPERATING COSTS AND EXPENSES
Lease operating................. 4,477 5,344 5,468 1,418 1,828
Depreciation, depletion and
amortization................. 23,225 25,365 21,969 5,626 5,674
General and administrative,
net.......................... 2,454 3,460 3,486 869 1,492
Nonrecurring charge............. -- -- 12,000 -- --
------- -------- -------- -------- --------
Total operating
expenses.............. 30,156 34,169 42,923 7,913 8,994
INCOME (LOSS) FROM OPERATIONS..... 8,105 8,053 (1,714) 1,838 1,219
Interest expense, net............. 1,764 2,102 2,398 621 461
------- -------- -------- -------- --------
Income (loss) before income
taxes........................... 6,341 5,951 (4,112) 1,217 758
Provision (benefit) for federal
income taxes.................... 1,790 597 (3,809) 61 (218)
------- -------- -------- -------- --------
NET INCOME (LOSS)................. $ 4,551 $ 5,354 $ (303) $ 1,156 $ 976
======= ======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-4
<PAGE> 70
THE HOUSTON EXPLORATION COMPANY
COMBINED STATEMENT OF STOCKHOLDER'S EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONAL RETAINED TOTAL
COMMON PAID IN EARNINGS STOCKHOLDER'S
STOCK CAPITAL (DEFICIT) EQUITY
------ -------- --------- ---------
<S> <C> <C> <C> <C>
Balance at December 31, 1992................ $ -- $ 55,830 $ (7,448) $ 48,382
Capital contributions from Parent........... -- 12,558 -- 12,558
Net income.................................. -- -- 4,551 4,551
------ -------- --------- ---------
Balance at December 31, 1993................ -- 68,388 (2,897) 65,491
Capital contributions from Parent........... 20 18,001 -- 18,021
Net income.................................. -- -- 5,354 5,354
------ -------- --------- ---------
Balance at December 31, 1994................ 20 86,389 2,457 88,866
Capital contributions from Parent........... 9 6,864 -- 6,873
Net loss.................................... -- -- (303) (303)
------ -------- --------- ---------
Balance at December 31, 1995................ 29 93,253 2,154 95,436
------ -------- --------- ---------
Capital contributions from Parent
(unaudited)............................... -- 6,072 -- 6,072
Net income (unaudited)...................... -- -- 976 976
------ -------- --------- ---------
Balance at March 31, 1996 (unaudited)....... $ 29 $ 99,325 $ 3,130 $ 102,484
======= ======== ========= =========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-5
<PAGE> 71
THE HOUSTON EXPLORATION COMPANY
COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
----------------------------------- ----------------------
1993 1994 1995 1995 1996
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)................................... $ 4,551 $ 5,354 $ (303) $ 1,156 $ 976
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation, depletion and amortization.......... 23,225 25,365 21,969 5,626 5,674
Deferred income tax expense....................... 3,028 5,847 8,632 1,273 3,926
Nonrecurring charge............................... -- -- 12,000 -- --
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable........ 672 4,551 977 4,836 (1,956)
Decrease (increase) in inventories................ 78 (229) 333 51 (16)
Decrease (increase) in prepayments and other...... (472) (450) 416 (1,475) (287)
Decrease (increase) in other assets............... 722 (1,188) 1,864 1,175 1,362
Increase (decrease) in accounts payable and
accrued expenses............................... 9,092 (13,176) 9,890 (4,076) 800
-------- -------- -------- -------- --------
Net cash provided by operating activities........... 40,896 26,074 55,778 8,566 10,479
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital Expenditures
Acquisitions...................................... (41,242) (35,776) (21,039) (10,039) (1,289)
Exploration and development....................... (17,315) (29,220) (48,387) (11,293) (16,860)
Dispositions and other............................ (53) (63) 493 1,594 747
-------- -------- -------- -------- --------
Net cash used in investing activities............... (58,610) (65,059) (68,933) (19,738) (17,402)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from long-term borrowings.............. 5,800 19,050 6,212 609 3,102
Capital contributions from Parent................... 12,558 18,021 6,873 10,371 6,072
-------- -------- -------- -------- --------
Net cash provided by financing activities........... 18,358 37,071 13,085 10,980 9,174
Increase (decrease) in cash and cash equivalents.... 644 (1,914) (70) (192) 2,251
Cash and cash equivalents, beginning of period...... 1,938 2,582 668 668 598
-------- -------- -------- -------- --------
Cash and cash equivalents, end of period............ $ 2,582 $ 668 $ 598 $ 476 $ 2,849
======== ======== ======== ======== ========
Cash paid for interest.............................. $ 2,259 $ 3,318 $ 4,658 $ 1,139 $ 1,212
======== ======== ======== ======== ========
Cash paid for income taxes.......................... $ 5,423 $ -- $ -- $ -- $ --
======== ======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-6
<PAGE> 72
THE HOUSTON EXPLORATION COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
The Houston Exploration Company ("Houston Exploration" or the "Company"),
is an indirect wholly owned subsidiary of The Brooklyn Union Gas Company
("Brooklyn Union" or the "Parent"), a New York corporation. Houston Exploration
is a Delaware corporation, incorporated in December 1985, and began operations
in January 1986 for the purpose of conducting certain natural gas and oil
exploration and development activities for Brooklyn Union. The Company's
operations focus on the exploration, development and acquisition of domestic
natural gas and oil properties offshore in the Gulf of Mexico and onshore in
West Virginia, East Texas and the Arkoma Basin.
Effective February 29, 1996 Brooklyn Union implemented a reorganization
(the "Reorganization") of its exploration and production assets and liabilities
by transferring to Houston Exploration certain onshore producing properties and
acreage not previously owned by Houston Exploration. These combined financial
statements have been prepared giving effect to the transfer of these assets and
liabilities from the time of acquisition of such assets and liabilities by
Brooklyn Union. The transfer of assets and liabilities has been accounted for at
historical cost as a reorganization of companies under common control in a
manner similar to a pooling-of-interests and the financial statements reflect
the combined historical results of Houston Exploration and the assets and
liabilities transferred by Brooklyn Union for all of the periods presented.
Interim Financial Statements
The financial statements for the three months ended March 31, 1995 and 1996
have been prepared without audit pursuant to the rules and regulations of the
Securities and Exchange Commission. Accordingly, such statements include all
adjustments, consisting only of normal recurring adjustments, which are, in the
opinion of management, necessary for a fair presentation of the Company's
financial position, results of operations and cash flows. Interim period results
are not necessarily indicative of the results to be achieved for an entire year.
Use of Estimates
The preparation of the combined financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the dates of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. The Company's most significant financial estimates are based
on remaining proved natural gas and oil reserves (see Supplementary Oil and Gas
Disclosures). Because there are numerous uncertainties inherent in the
estimation process, actual results could differ from the estimates.
Natural Gas and Oil Properties
Natural gas and oil properties are accounted for using the full cost method
of accounting. Under this method of accounting, all costs identified with
acquisition, exploration and development of natural gas and oil properties,
including leasehold acquisition costs, geological and geophysical costs, dry
hole costs, tangible and intangible drilling costs, interest and the general and
administrative overhead directly associated with these activities are
capitalized as incurred. The Company computes the provision for depreciation,
depletion and amortization of natural gas and oil properties on a quarterly
basis using the unit-of-production method. The quarterly provision is calculated
by multiplying the natural gas and oil production each quarter by a depletion
rate determined by dividing
F-7
<PAGE> 73
THE HOUSTON EXPLORATION COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
the total unamortized cost of natural gas and oil properties (including
estimates of the costs of future development and property abandonment and
excluding the cost of significant investments in unproved and unevaluated
properties) by net equivalent proved reserves at the beginning of the quarter.
Natural gas and oil reserve quantities represent estimates only. Actual future
production may be materially different from estimated quantities and such
differences could materially affect future amortization of natural gas and oil
properties. The Company believes that unevaluated properties at December 31,
1995 will be fully evaluated within five years.
Proceeds from the dispositions of natural gas and oil properties are
recorded as reductions of capitalized costs, with no gain or loss recognized,
unless such adjustments significantly alter the relationship of unamortized
capitalized costs and total proved reserves.
The Company limits the capitalized costs of natural gas and oil properties,
net of accumulated depreciation, depletion and amortization and related deferred
taxes to the estimated future net cash flows from proved natural gas and oil
reserves discounted at ten percent, plus the lower of cost or fair value of
unproved properties, as adjusted for related income tax effects (the "full cost
ceiling"). A current period charge to operating income is required to the extent
that capitalized costs plus certain estimated costs for future property
development, plugging, abandonment and site restorations, net of related
accumulated depreciation, depletion and amortization and related deferred income
taxes, exceed the full cost ceiling.
In March 1995, the Financial Accounting Standards Board issued Statement
No. 121, "Accounting for the Impairment of Long-Lived Assets to be Disposed Of"
("SFAS 121"), effective for companies with years beginning after December 31,
1995. Because the Company accounts for its oil and natural gas assets using the
full cost method of accounting, it is currently required to calculate impairment
losses using a cost center ceiling specified in the Securities and Exchange
Commission (the "SEC") regulations for full cost companies. Consequently, SFAS
121 will not have an impact on the Company's financial position or results of
operations upon adoption.
Other Property and Equipment
Other property and equipment include the costs of West Virginia gathering
facilities which are depreciated using the unit-of-production basis utilizing
estimated proved reserves accessible to the facilities. Also included in other
property and equipment are costs of office furniture, fixtures and equipment
which are recorded at cost and depreciated using the straight-line method over
estimated useful lives ranging between two to five years.
Income Taxes
The Company adopted Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" ("SFAS 109"), effective January 1, 1993. Under
SFAS 109, deferred taxes are determined based on the estimated future tax effect
of differences between the financial statement and tax basis of assets and
liabilities given the provisions of enacted tax laws. These differences relate
primarily to (i) intangible drilling and development costs associated with
natural gas and oil properties, which are capitalized and amortized for
financial reporting purposes and expensed as incurred for tax reporting purposes
and (ii) provisions for depreciation and amortization for financial reporting
purposes that differ from those used for income tax reporting purposes. The
cumulative effect of adopting SFAS 109 was not significant.
The Company is included in the consolidated federal income tax return of
Brooklyn Union. Under the Company's tax sharing agreement with Brooklyn Union,
the Company receives or pays to Brooklyn Union an amount equal to the reduction
or increase in the currently payable federal income
F-8
<PAGE> 74
THE HOUSTON EXPLORATION COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
taxes for Brooklyn Union resulting from the inclusion of the Company's taxable
income or loss in the consolidated Brooklyn Union return, whether or not such
amounts could be utilized on a separate return basis.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.
Inventories
Inventories consist primarily of tubular goods used in the Company's
operations and are stated at the lower of cost or market value.
General and Administrative Costs and Expenses
The Company receives reimbursement for administrative and overhead expenses
incurred on behalf of other working interest owners of properties operated by
the Company. These reimbursements totaling $1.2 million, and $1.3 million and
$1.2 million for the years ended December 31, 1993, 1994 and 1995, respectively,
were allocated as reductions to general and administrative expenses. The
capitalized general and administrative costs directly related to the Company's
acquisition, exploration and development activities, during 1993, 1994 and 1995,
aggregated $4.4 million, $3.9 million and $4.1 million, respectively.
Capitalization of Interest
The Company capitalizes interest related to its unevaluated natural gas and
oil properties and certain properties under development which are not currently
being amortized. For the years ended December 31, 1993, 1994 and 1995 interest
costs of $0.7 million, $1.5 million and $2.9 million, respectively, were
capitalized.
Gas Imbalances
The Company utilizes the entitlements method to account for its gas
imbalances. Under this method, income is recorded based on the Company's net
revenue interest in production or nominated deliveries. Net deliveries in excess
of these amounts are recorded as liabilities, while net underdeliveries are
reflected as assets. Production imbalances are valued using current market
prices. Production imbalances were not material as of December 31, 1994 and
1995.
Hedging
The Company enters into natural gas futures and forward contracts in the
normal course of business. Principally, these contracts are used to hedge
against the risk of adverse impacts of market price fluctuations of natural gas.
The Company's hedging strategies meet the criteria for hedge accounting
treatment under Statement of Financial Accounting Standards No. 80, "Accounting
for Futures Contracts" ("SFAS 80"). Accordingly, gains and losses are recognized
when the underlying transaction is completed, at which time these gains and
losses are included in earnings as a component of natural gas revenues in
accordance with a hedged transaction. Gas sales revenues were reduced by $10.7
million and $0.8 million during 1993 and 1994 and were increased by $5.6 million
in 1995, relative to these contracts. (See Note 7 -- Financial Instruments).
The Company regularly assesses the relationship between natural gas
commodity prices in the "cash" and futures markets. The correlation between
prices in these markets has been well within a
F-9
<PAGE> 75
THE HOUSTON EXPLORATION COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
range generally deemed to be acceptable. If correlation ceases to exist for more
than a temporary period of time, the Company would account for its financial
instrument positions as trading activities and mark-to-market its open
positions. At December 31, 1995 the Company recognized a pretax loss of $0.7
million attributable to hedges in place at year end that lost correlation with
the cash market price.
The Company also uses interest rate swaps to manage the interest rate
exposure arising from certain borrowings. Swaps used to hedge debt are
designated as hedges and are matched to the debt as to notional amount and
maturity. The periodic receipts or payments from each swap are recognized
ratably over the term of the swap as an adjustment to interest expense. Gains
and losses resulting from the termination of hedge contracts prior to their
stated maturity are recognized ratably over the remaining life of the instrument
being hedged.
Concentration of Credit Risk
Substantially all of the Company's accounts receivable result from natural
gas and oil sales or joint interest billings to third parties in the oil and gas
industry. This concentration of customers and joint interest owners may impact
the Company's overall credit risk in that these entities may be similarly
affected by changes in economic and other conditions. Historically the Company
has not experienced credit losses on such receivables.
Earnings Per Share. Through December 31, 1995, the Company was an indirect
wholly-owned subsidiary of Brooklyn Union; thus, income (loss) per share amounts
are not meaningful and, accordingly, not presented.
NOTE 2 -- LONG-TERM DEBT
Prior Credit Facility. The Company maintained a revolving credit facility
("Prior Credit Facility") with a syndicate of lenders which provided for an
aggregate commitment of $100 million, subject to borrowing base limitations of
$74 million at December 31, 1994 and $76 million as of December 31, 1995 and at
March 31, 1996. The Prior Credit Facility limited advances to a borrowing base
established by a specified formula and was redetermined by the bank at least
semi-annually. At December 31, 1994 and 1995 and March 31, 1996, $65.7 million,
$71.9 million and $74.9 million, respectively, were outstanding under the Prior
Credit Facility, and letter of credit obligations of $1.6 million were
outstanding at the end of both 1994 and 1995 and at March 31, 1996. Borrowings
under the Prior Credit Facility were secured by the stock of the Company.
The Prior Credit Facility provided for payments of interest only until the
scheduled maturity on October 1, 1998. The Company elected to borrow funds at
either (i) a fluctuating base rate ("Base Rate" loan) equal to the higher of the
Federal Funds rate plus 1/2% or the agent bank's prime rate, or (ii) a fixed
rate ("Fixed Rate" loan) at either (at the Company's option) a market Eurodollar
rate or an average market Certificate of Deposit ("CD") rate. Interest was
payable at calendar quarter end on Base Rate loans and at maturity of the
financial instrument (approximately every 90 days) for Fixed Rate loans. In
addition, the Prior Credit Facility required quarterly payments of a commitment
fee of (i) three-eighths of one percent per annum of the daily average unused
portion of the borrowing base and (ii) one-sixteenth of one percent per annum of
the daily average difference between the commitment and the borrowing base and
(iii) one-eighth of one percent per annum of the daily average difference
between the borrowing base and the "Accepted Borrowing Base" as defined in the
Agreement. The weighted average interest rate for the periods ended December 31,
1993, 1994 and 1995 was 6.3%, 7.4% and 6.9%, respectively.
F-10
<PAGE> 76
THE HOUSTON EXPLORATION COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
New Credit Facility. On April 23, 1996, the Company revised the terms and
conditions of the existing Credit Facility ("New Credit Facility"). The New
Credit Facility is provided by a syndicate of lenders led by the Company's prior
agent, Texas Commerce Bank, again as agent, and provides an aggregate commitment
of $150 million, subject to borrowing base limitations of $80 million as of
April 23, 1996. In addition, up to $5 million of the New Credit Facility will be
available for the issuance of letters of credit to support performance
guarantees. On January 1, 1998 the facility converts to a reducing revolver and
amounts outstanding under the New Credit Facility and the letter of credit will
be due and payable in 8 equal quarterly payments beginning April 1, 1998, with
final maturity on January 1, 2000. The New Credit Facility is guaranteed by Fuel
Resources Inc. ("FRI") an indirect wholly owned subsidiaries of Brooklyn Union.
Borrowings are secured by the stock of the Company and the stock of FRI together
with a negative pledge on all the Company's assets.
Interest is payable on borrowings under the New Credit Facility at an
alternated base rate of the greater of the Federal Funds rate plus 0.5% or the
agent bank's prime rate or, at the Company's election, 0.8125% above a quoted
Libor rate. Interest is payable at calendar quarters on base rate loans and at
maturity on Libor loans. In addition a commitment fee of: (1) 0.375% per annum
on the unused portion of the Accepted Borrowing Base, (2) 0.125% per annum on
the difference between the Borrowing Base and the Accepted Borrowing Base with a
0.325% clawback on any usage of the difference, and (3) 0.0625% per annum on the
difference between the Facility Amount and the Borrowing Base.
The New Credit Facility covenants require the maintenance of a defined net
worth, total debt to total capitalization of no greater than 50% and a defined
fixed charge coverage ratio of 2.0 to 1.0. In addition to maintenance of certain
financial ratios, cash dividends and/or purchase or redemption of the Company's
stock is restricted as well as the encumbering of the Company's gas and oil
assets or pledging of the assets as collateral. As of May 9, 1996, the Company
was in compliance with all such covenants.
NOTE 3 -- STOCKHOLDER'S EQUITY
Effective July 1, 1994 the Company adopted a Long-Term Stock Incentive Plan
(the "1994 Incentive Plan") for its officers, directors and other key employees.
The 1994 Incentive Plan allows for the granting of nonqualified stock options,
which may include tandem phantom option shares while the Company remains a
privately owned entity. The number of shares of common stock subject to stock
option grants cannot exceed 10% of the Company's common shares outstanding, and
the exercise price of options granted under the 1994 Incentive Plan may not be
less than the fair market value of the common stock at the date the option is
granted. On July 1, 1994, the Company granted options to purchase an aggregate
of 100,000 shares of common stock to certain officers and directors of the
Parent, with an exercise price of $27.71 per share. As of December 31, 1995, no
options had been exercised. See Note 11.
<TABLE>
<CAPTION>
SHARES PRICE
-------- -------
<S> <C> <C>
Options outstanding at December 31, 1994.............. 100,000 $ 27.71
Options granted during 1995........................... -- --
Options outstanding at December 31, 1995.............. 100,000 $ 27.71
======= ======
Options available for grant........................... --
=======
</TABLE>
F-11
<PAGE> 77
THE HOUSTON EXPLORATION COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 4 -- INCOME TAXES
The components of the federal income tax provision (benefit) are:
<TABLE>
<CAPTION>
1993 1994 1995
------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Current................................ $(1,238) $(5,250) $(12,441)
Deferred............................... 3,028 5,847 8,632
------- ------- --------
Total.................................. $ 1,790 $ 597 $ (3,809)
======= ======= ========
</TABLE>
Amounts received from the Parent pursuant to the established tax-sharing
agreement were $2.3 million and $14.6 million in 1994 and 1995 respectively.
During 1993, the Company paid the Parent $5.4 million pursuant to the
tax-sharing agreement. State taxes are not considered material for the years
ended 1993, 1994 and 1995, respectively.
The following is a reconciliation of statutory federal income tax expense
(benefit) to the Company's income tax provision:
<TABLE>
<CAPTION>
1993 1994 1995
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Income (loss) before income taxes........... $ 6,341 $ 5,951 $(4,112)
Statutory rates............................. 35% 35% 35%
Income tax (benefit) computed at statutory
rates..................................... 2,219 2,083 (1,439)
Reconciling items:
Section 29 tax credits.................... (1,023) (1,529) (1,985)
Percentage depletion...................... (73) (27) (231)
Adjustments from change in tax rates...... 534 -- --
Other..................................... 133 70 (154)
------- ------- -------
Tax expense (benefit)....................... $ 1,790 $ 597 $(3,809)
======= ======= =======
</TABLE>
Deferred Income Taxes
The Company's deferred tax position reflects the net tax effects of
temporary differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax reporting. At
December 31, 1993 and 1994 the Company did not have deferred tax assets (net
operating loss carryforwards or alternative minimum taxes). As of December 31,
1995 the Company has a $4.2 million deferred tax receivable associated with the
$12.0 million nonrecurring charge. The Company's deferred tax liability relates
primarily to its natural gas and oil properties and arises from temporary
differences related to the deduction of intangible drilling costs for tax
purposes versus capitalization for book purposes and temporary differences
between book and tax depreciation.
F-12
<PAGE> 78
THE HOUSTON EXPLORATION COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 5 -- RELATED PARTY TRANSACTIONS
Transactions with the Parent are comprised of the following:
<TABLE>
<CAPTION>
1993 1994 1995
------- ------- -----
(IN THOUSANDS)
<S> <C> <C> <C>
Gas sales..................................... $ 1,067 $ 1,335 $ --
Gathering fee income.......................... 361 244 --
General and administrative costs.............. 839 776 724
</TABLE>
Gas sales with Brooklyn Union were at market prices, based upon an index
price adjusted to reflect the point of delivery of such production. The Company
believes that the prices at which it sold gas to Brooklyn Union were similar to
those it would have been able to obtain in the open market. The Company
reimburses the Parent for certain general and administrative costs and receives
overhead allocations for other general and administrative costs.
Gas Sales
The Company entered into a term supply agreement with BRING Gas Services
Corp. ("BRING") an affiliate of Brooklyn Union in October 1992, amended as of
November 1, 1992. As of April 1, 1995, this contract was superseded when the
Company entered into a term supply agreement with PennUnion Energy Services,
L.L.C. ("PennUnion"), an affiliate of Brooklyn Union. The new contract extends
until March 31, 1998, and year to year thereafter. Under the terms of the
agreement, the Company has agreed to sell and PennUnion has agreed to buy a
substantial portion of the Company's production at index-related prices. The
agreement contains provisions for both the commitment of gas reserves
subsequently developed or acquired by the Company and the release of gas
reserves sold, traded or exchanged to third parties.
For the years ended December 31, 1993, 1994 and 1995, the Company had
natural gas sales of $32.9 million, $26.4 million and $18.9 million,
respectively, to PennUnion and BRING.
Employment Contracts
The Company maintained an employment agreement with its President and Chief
Executive Officer which provided him with the option to participate in up to a
5% working interest in certain exploration prospects of the Company. During
1993, 1994 and 1995, affiliates of the Company's President obtained a 5% working
interest in 12 wells operated by the Company pursuant to such agreement. In
addition, during 1993, 1994 and 1995, affiliates of the Company's President paid
$0.9 million, $0.7 million and $0.7 million, respectively, in expenses
attributable to working interests owned in properties operated by the Company,
and received $2.5 million, $1.6 million and $0.9 million, respectively, in
distributions attributable to such working interests.
The employment agreement also provided for the assignment to the President
of a 2% net profits interest in all prospects of the Company and a 6.75% after
program-payout working interest.
In addition, the employment agreement provided for the assignment to
certain key employees designated by the President of an overriding royalty
interest equivalent in the aggregate to a four percent net revenue interest in
certain properties acquired by the Company. See Note 11.
NOTE 6 -- EMPLOYEE BENEFIT PLAN
The Company maintains a 401(k) Profit Sharing Plan (the "401(k) Plan") for
its employees. Under the 401(k) Plan, eligible employees may elect to have the
Company contribute on their behalf
F-13
<PAGE> 79
THE HOUSTON EXPLORATION COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
up to 10% of their base compensation (subject to certain limitations imposed
under the Internal Revenue Code of 1986, as amended) on a before tax basis. The
Company makes a matching contribution of $0.50 for each $1.00 of employee
deferral, not to exceed 5% of an employee's base compensation, subject to
limitations imposed by the Internal Revenue Service. The amounts contributed
under the 401(k) Plan are held in a trust and invested among various investment
funds in accordance with the directions of each participant. An employee's
salary deferral contributions under the 401(k) Plan are 100% vested. The
Company's matching contributions vest at the rate of 20% per year of service.
Participants are entitled to payment of their vested account balances upon
termination of employment. For the years ended December 31, 1993, 1994 and 1995,
Company's contributions to the 401(k) Plan were $115,000, $145,000 and $157,000,
respectively.
NOTE 7 -- FINANCIAL INSTRUMENTS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------
1994 1995
---------------------- ----------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
-------- ---------- -------- ----------
<S> <C> <C> <C> <C>
Cash and cash equivalents.......................... $ 668 $ 668 $ 598 $ 598
Long-term debt..................................... 65,650 65,650 71,862 71,862
Derivative transactions:
Interest rate swap agreements
In a receivable position...................... -- -- -- --
In a payable position......................... -- -- -- (86)
Commodity price and basis swaps:
In a receivable position...................... -- 6,069 -- --
In a payable position......................... -- -- (704) (3,982)
Commodity futures:
In a receivable position...................... -- 41 -- --
In a payable position......................... -- -- -- (240)
</TABLE>
Cash and Cash Equivalents
The Carrying amount approximates fair value due to the short maturity of
these instruments.
Long-Term Debt
The carrying amount of borrowings outstanding under the Credit Facility
approximates fair value as the interest rate is tied to current market rates.
DERIVATIVE TRANSACTIONS
Interest Rate Swap Agreements
The fair values are obtained from the financial institutions that are
counterparties to the transactions. These values represent the estimated amount
the Company would pay or receive to terminate the agreements, taking into
consideration current interest rates and the current creditworthiness of the
counterparties. The Company's interest rate swap agreements are off balance
sheet transactions and, accordingly, no respective carrying amounts for these
transactions are included in the accompanying combined balance sheets at
December 31, 1995. At December 31, 1995, the Company had three interest rate
swap agreements to exchange an aggregate notional principal of $19.0 million
over various periods from January 1996 through November 1998 at rates between
5.39% and 5.66%.
F-14
<PAGE> 80
THE HOUSTON EXPLORATION COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Commodity Related Transactions
The Company uses derivative financial instruments for non-trading purposes
as a hedging strategy to reduce the impact of market volatility and to ensure
cash flows. Gains and losses on these hedging transactions are recorded when the
related gas production has been produced or delivered. While derivative
financial instruments are intended to reduce the Company's exposure to declines
in the market price of natural gas, the derivative financial instruments may
limit the Company's gain from increases in the market price.
The derivative instruments used to hedge commodity transactions have
historically had high correlation with commodity prices and are expected to
continue to do so. The correlation of indices and prices is regularly evaluated
to ensure that the instruments continue to be effective hedges. In the event
that correlation falls below allowable levels, the gains or losses associated
with the hedging instruments are immediately recognized to the extent that
correlation was lost. In December of 1995, the Company recognized a pretax loss
of $0.7 million due to the loss of correlation of the New York Mercantile
Exchange ("NYMEX") futures market for natural gas with market price for natural
gas in certain parts of the country.
Commodity Price Swaps
Price swap agreements call for one party to make monthly payments to (or
receive from) another party based upon the differential between a fixed and a
variable price (fixed-price swap) or two variable prices (basis swap) for a
notional volume specified by the contract. The fair value is the estimated
amount the Company would receive or pay to terminate swap agreements at year-
end, taking into account the difference between NYMEX natural gas prices or
index prices at year-end and fixed swap prices. At December 31, 1995, the
Company had fixed-price swap agreements and basis swap agreements to exchange a
total notional volume of 38,135 MMmbtu of natural gas over the period January
1996 through December 1997.
Commodity Futures
Natural gas futures contracts and options on natural gas futures contracts
are traded on the NYMEX. Contracts are for fixed units of 10,000 MMBtu. The
Company uses futures contracts to lock in the price for a portion of its
expected future natural gas production when it believes that prices are at
acceptable levels. At December 31, 1995, the Company had a total of 420 net
contracts open (1,650 long and 2,070 short futures contracts). The fair value is
the estimated amount the Company would receive or pay to close the futures
contracts at year-end, taking into account the difference between the NYMEX
natural gas prices at year-end and the fixed futures price. In addition, the
Company had margin deposits relating to futures contracts held with brokers of
$0.2 million outstanding at December 31, 1995.
The Company is exposed to credit risk in the event of nonperformance by
counterparties to futures and swaps contracts. The Company believes that the
credit risk related to the futures and swap contracts is no greater than that
associated with the primary contracts which they hedge, as these contracts are
with major investment grade financial institutions, and that elimination of the
price risk lowers the Company's overall business risk.
NOTE 8 -- SALES TO MAJOR CUSTOMERS
As is the nature of the exploration, development and production business,
production is normally sold to relatively few customers. However, alternate
buyers are available to replace the loss of any of the Company's major
customers. For years ended December 31, 1993, 1994 and
F-15
<PAGE> 81
THE HOUSTON EXPLORATION COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
1995, PennUnion and BRING were the only customers for which sales exceeded 10%
of total revenues. During 1993, 1994 and 1995, sales to PennUnion and BRING
comprised 86%, 63% and 48%, respectively, of total revenues. (See Note
5 -- Related Party Transactions). The Company believes that prices at which it
sells and has sold gas to PennUnion and BRING are similar to those it would be
able to obtain in the open market, and that the loss of PennUnion as a purchaser
would not have a material adverse affect on the Company's operations.
NOTE 9 -- COMMITMENTS AND CONTINGENCIES
Litigation
The Company is involved from time to time in various claims and lawsuits
incidental to its business. In the opinion of management, the ultimate liability
thereunder, if any, will not have a material adverse affect on the financial
position or results of operations of the Company. In addition, the Company has
been named in a suit involving certain former employees of Fuel Resources Inc.
("FRI"), as more fully discussed in Note 10.
Leases
The Company has entered into certain noncancelable operating lease
agreements relative to office space and equipment with various expiration dates
through 2001. Minimum rental commitments under the terms of the leases are as
follows:
<TABLE>
<CAPTION>
MINIMUM NET MINIMUM
RENTAL SUBLEASE RENTAL
COMMITMENTS RENTALS COMMITMENTS
----------- -------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
1996....................................... $ 522 $ (238) $ 284
1997....................................... 431 (244) 187
1998....................................... 354 (246) 108
1999....................................... 361 (250) 111
2000....................................... 364 (252) 112
Thereafter................................. 171 (135) 36
------ ------- ------
$ 2,203 $(1,365) $ 838
======= ======= ======
</TABLE>
Net rental expense related to these leases for the years ended December 31,
1993, 1994 and 1995 were $0.2 million, $0.3 million and $0.3 million,
respectively.
Guarantee of PennUnion Accounts Payable
Pursuant to the PennUnion joint venture agreement between Pennzoil Gas
Marketing and BRING, the Company has guaranteed certain trade payables of
PennUnion. The outstanding balances under these guarantees were $2.9 million and
$3.9 million at December 31, 1994 and 1995. The Company is of the opinion that
PennUnion will be able to perform under its obligations and that no losses will
be incurred pursuant to such guarantees.
NOTE 10 -- NONRECURRING CHARGE
In connection with the February 1996 reorganization, certain former
employees of FRI, the subsidiary of Brooklyn Union that previously owned the
onshore properties, were entitled to remuneration for the increase in the value
of the transferred properties prior to the reorganization. In February 1996,
certain such former employees filed suit against the Parent, FRI and the Company
alleging breach of contract, breach of fiduciary duty, fraud, negligent
misrepresentation and
F-16
<PAGE> 82
THE HOUSTON EXPLORATION COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
conspiracy, seeking actual damages in excess of $35 million and punitive damages
in excess of $70 million. The board of directors of FRI has approved an
agreement whereby FRI would indemnify the Company against such suit. In
addition, the board of directors of THEC Holdings Corp. ("Holdings"), the
subsidiary of Brooklyn Union that holds all of the currently outstanding common
stock of the Company, has approved an agreement whereby Holdings would also
indemnify the Company against the suit, and would pledge all of its holdings of
Common Stock to secure such indemnification obligations. The Company believes
that it will not be required to pay any damages resulting from such suit, even
if a judgment adverse to the Company is rendered in the suit, as a result of
such arrangements. As of December 31, 1995, the Company accrued a $12 million
nonrecurring charge related to these obligations which it believes is adequate
to provide for the settlement of these obligations and the ultimate resolution
of the lawsuit. However, the Company would incur a non-cash charge in addition
to the $12 million charge recorded by the Company in the event such damages are
determined to be in excess of $12 million, which would have the effect of
reducing the Company's reported income (or resulting in or increasing a loss) in
the period in which such additional charge is determined. Accordingly,
management of the Company believes that the ultimate resolution of these claims
will not have a material adverse impact on the Company's future financial
position or results of operations.
NOTE 11 -- SUBSEQUENT EVENTS (UNAUDITED)
Stock Offering
The Company intends to sell approximately 30% of its common stock in an
initial public offering ("Offering").
In connection with the Offering, the Company's board approved an increase
in the authorized capital stock of the Company, consisting of 50,000,000 shares
of common stock, par value $.01 per share, and 5,000,000 shares of preferred
stock, par value $.01 per share. Additionally, approval was obtained to increase
the number of shares issued and outstanding to 13,391,000.
Soxco Acquisition.
On May 9, 1996, the Company's board of directors approved an asset purchase
agreement with Smith Offshore Exploration Company ("Soxco"), providing for the
acquisition by the Company of substantially all of the natural gas and oil
properties and related assets of Soxco, representing approximately 32 Bcfe of
the Company's pro forma net proved reserves of 233 Bcfe as of December 31, 1995
(the "Soxco Acquisition"). Soxco's natural gas and oil properties consist solely
of working interests in properties located in the Gulf of Mexico that are
operated by the Company or in which the Company also has a working interest.
Pursuant to the Soxco Acquisition, the Company will pay Soxco cash in the
aggregate amount of $23.7 million (subject to certain adjustments), and issue to
Soxco a number of shares of Common Stock (estimated to be approximately 909,000
shares) with an aggregate value (determined by reference to the initial public
offering price) of $11.8 million. The cash portion of the purchase price will be
funded with the proceeds of the Offering. In addition to the foregoing, the
Company will pay Soxco a deferred purchase price of up to $17.6 million payable
in two installments, on January 31, 1997 and January 31, 1998. The amount of the
deferred purchase price installments will be determined by the probable reserves
of Soxco as of December 31, 1995 (approximately 17.6 Bcfe) that are produced
prior to or classified as proved as of December 31, 1996 and December 31, 1997,
respectively, provided that Soxco is entitled to receive a minimum deferred
purchase price of approximately $8.8 million. The amounts so determined will be
paid in shares of Common Stock based on the fair market value of such stock
F-17
<PAGE> 83
THE HOUSTON EXPLORATION COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
at the time of issuance. The Soxco Acquisition will close concurrently with, is
conditioned upon and is a condition to the completion of the Offering.
1996 Stock Option Plan
Prior to completion of the Offering, it is anticipated that the Board of
Directors will adopt the Company's 1996 Stock Option Plan (the "Incentive Plan")
and that Holdings will approve the Incentive Plan as adopted.
Employment Contracts
Certain employees of the Company will enter into employment agreements with
the Company effective as of the Closing of the Offering pursuant to which they
serve as executive officers of the Company. The President's existing employment
agreement with the Company will be terminated effective as of such time. (See
Note 5).
Supplemental Executive Retirement Plan
Effective immediately prior to the Offering, the Company will adopt an
unfunded, nonqualified Supplemental Executive Retirement Plan for the benefit of
the President.
1994 Incentive Plan
Upon completion of the Offering, the options under this plan will be
terminated in exchange for a cash payment by the Company in the aggregate amount
of approximately $840,000 (assuming a purchase price of $3.50 per option).
NOTE 12 -- SUPPLEMENTAL INFORMATION ON NATURAL GAS AND OIL EXPLORATION,
DEVELOPMENT AND PRODUCTION ACTIVITIES
The following information concerning the Company's natural gas and oil
operations has been provided pursuant to Statement of Financial Accounting
Standards No. 69, "Disclosures about Oil and Gas Producing Activities." The
Company's natural gas and oil producing activities were conducted onshore within
the continental United States and offshore in federal and state waters of the
Gulf of Mexico. The Company's natural gas and oil reserves were estimated by
independent reserve engineers.
CAPITALIZED COSTS OF NATURAL GAS AND OIL PROPERTIES
As of December 31, 1993, 1994 and 1995, the Company's capitalized costs of
natural gas and oil properties are as follows:
<TABLE>
<CAPTION>
1993 1994 1995
--------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Unevaluated properties, not
amortized........................... $ 11,498 $ 25,911 $ 42,286
Properties subject to amortization.... 205,868 257,102 309,378
--------- ---------- ----------
Capitalized costs..................... 217,366 283,013 351,664
Accumulated depreciation, depletion
and amortization.................... (93,333) (118,392) (137,769)
--------- ---------- ----------
Net capitalized costs................. $ 124,033 $ 164,621 $ 213,895
========= ========== ==========
</TABLE>
F-18
<PAGE> 84
THE HOUSTON EXPLORATION COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The following is a summary of the costs which are excluded from the
amortization calculation as of December 31, 1995, by year of acquisition. The
Company is not able to accurately predict when these costs will be included in
the amortization base; however, the Company believes that unevaluated properties
at December 31, 1995 will be fully evaluated within five years.
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
1995.................................................. $ 27,439
1994.................................................. 10,609
1993.................................................. 2,727
Prior................................................. 1,511
--------------
$ 42,286
============
</TABLE>
Costs incurred for natural gas and oil exploration, development and
acquisition are summarized below. Costs incurred during the years ended December
31, 1993, 1994 and 1995 include general and administrative costs related to
acquisition, exploration and development of natural gas and oil properties, of
$4.4 million, $3.9 million and $4.1 million, respectively.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1993 1994 1995
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Property acquisition:
Unevaluated(1)....................... $ 6,646 $ 11,148 $ 9,902
Proved............................... 34,596 24,628 11,137
Exploration costs...................... 5,983 17,430 7,224
Development costs...................... 11,332 11,790 41,163
-------- -------- --------
Total costs incurred......... $ 58,557 $ 64,996 $ 69,426
======== ======== ========
</TABLE>
- ---------------
(1) These amounts represent costs incurred by the Company and excluded from the
amortization base until proved reserves are established or impairment is
determined.
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS RELATING TO PROVED
NATURAL GAS AND OIL RESERVES (UNAUDITED)
The following summarizes the policies used by the Company in the
preparation of the accompanying gas and oil reserve disclosures, standardized
measures of discounted future net cash flows from proved gas and oil reserves
and the reconciliations of such standardized measures from year to year. The
information disclosed, as prescribed by the Statement of Financial Accounting
Standards No. 69 is an attempt to present such information in a manner
comparable with industry peers.
The information is based on estimates of proved reserves attributable to
the Company's interest in natural gas and oil properties as of December 31 of
the years presented. These estimates were principally prepared by independent
petroleum consultants. Proved reserves are estimated quantities of natural gas
and crude oil which geological and engineering data demonstrate with reasonable
certainty to be recoverable in future years from known reservoirs under existing
economic and operating conditions.
F-19
<PAGE> 85
THE HOUSTON EXPLORATION COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The standardized measure of discounted future net cash flows from
production of proved reserves was developed as follows:
1. Estimates are made of quantities of proved reserves and future
periods during which they are expected to be produced based on year-end
economic conditions.
2. The estimated future cash flows are compiled by applying year-end
prices of natural gas and oil relating to the Company's proved reserves to
the year-end quantities of those reserves except for those reserves devoted
to future production that is hedged. The estimated future cash flows
associated with such reserves are compiled by applying the reference prices
of such hedges to the future production that is hedged. Future price
changes are considered only to the extent provided by contractual
arrangements in existence at year-end.
3. The future cash flows are reduced by estimated production costs,
costs to develop and produce the proved reserves and certain abandonment
costs, all based on year-end economic conditions.
4. Future income tax expenses are based on year-end statutory tax
rates giving effect to the remaining tax basis in the natural gas and oil
properties, other deductions, credits and allowances relating to the
Company's proved natural gas and oil reserves.
5. Future net cash flows are discounted to present value by applying a
discount rate of 10 percent.
The standardized measure of discounted future net cash flows does not
purport, nor should it be interpreted, to present the fair value of the
Company's natural gas and oil reserves. An estimate of fair value would also
take into account, among other things, the recovery of reserves not presently
classified as proved, anticipated future changes in prices and costs and a
discount factor more representative of the time value of money and the risks
inherent in reserve estimates.
The standardized measure of discounted future net cash flows relating to
proved natural gas and oil reserves is as follows:
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-------------------------------------
1993 1994 1995
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Future cash in flows............................ $ 250,745 $ 259,811 $ 418,822
Future production costs......................... (62,125) (45,428) (66,458)
Future development costs........................ (13,494) (21,973) (24,803)
Future income taxes............................. (26,592) (28,714) (74,933)
-------- -------- --------
Future net cash flows........................... 148,534 163,696 252,628
10% annual discount for estimated timing of cash
flows......................................... (42,473) (45,262) (81,169)
-------- -------- --------
Standardized measure of discounted future net
cash flows.................................... $ 106,061 $ 118,434 $ 171,459
======== ======== ========
</TABLE>
F-20
<PAGE> 86
THE HOUSTON EXPLORATION COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes changes in the standardized measure of
discounted future net cash flows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------------------
1993 1994 1995
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Beginning of the year........................... $ 95,255 $ 106,061 $ 118,434
Revisions to previous estimates:
Changes in prices and costs................... (29,083) (10,077) 35,497
Changes in quantities......................... (3,914) (2,393) 11,306
Changes in future development costs........... (7,964) 511 531
Development costs incurred during the period.... 9,231 4,652 8,074
Extensions and discoveries, net of related
costs......................................... 5,515 22,723 51,061
Sales of gas and oil, net of production costs... (32,864) (36,156) (34,843)
Accretion of discount........................... 11,863 11,326 12,815
Net change in income taxes...................... 13,082 (272) (24,720)
Purchase of reserves in place................... 44,544 23,146 11,189
Sale of reserves in place....................... -- (1,906) (19)
Production timing and other..................... 396 819 (17,866)
-------- -------- --------
End of year..................................... $ 106,061 $ 118,434 $ 171,459
======== ======== ========
</TABLE>
ESTIMATED NET QUANTITIES OF NATURAL GAS AND OIL RESERVES (UNAUDITED)
The following table sets forth the Company's net proved reserves, including
changes therein, and proved developed reserves (all within the United States) at
the end of each of the three years in the period ended December 31, 1993, 1994
and 1995.
<TABLE>
<CAPTION>
NATURAL GAS CRUDE OIL AND CONDENSATE
(MMCF) (MBBLS)
----------------------------------- --------------------------
1993 1994 1995 1993 1994 1995
--------- --------- --------- ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Proved developed and undeveloped
reserves:
Beginning of year.............. 88,480 118,118 145,945 498 536 636
Revisions of previous
estimates................... (2,841) (1,912) 15,702 (98) (104) 51
Extensions and discoveries..... 4,022 25,867 45,014 3 151 254
Production..................... (22,555) (22,437) (21,077) (101) (102) (100)
Purchase of reserves in
place....................... 51,012 27,949 10,367 234 205 48
Sale of reserves in place...... -- (1,640) (5) -- (50) --
-------- -------- -------- ----- ----- -----
End of year.................... 118,118 145,945 195,946 536 636 889
======== ======== ======== ===== ===== =====
Proved developed reserves:
Beginning of year.............. 70,679 107,909 104,678 433 478 328
End of year.................... 107,909 104,678 162,784 478 328 774
</TABLE>
F-21
<PAGE> 87
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and
the Board of Directors of
Smith Offshore Exploration Company:
We have audited the accompanying balance sheets of Smith Offshore
Exploration Company (a Delaware corporation) as of December 31, 1995 and 1994,
and the related statements of operations and cash flows for the years then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
As discussed in Note 1, the Company has announced that a definitive
agreement has been negotiated for the sale of substantially all of the Company's
oil and gas assets to The Houston Exploration Company. If the sale transaction
is consummated, the purchaser's basis in the assets will differ from that
reflected in the Company's historical financial statements at December 31, 1995.
The impact of the sale, and ultimate allocation of net proceeds in connection
with the disposition of the Company's other assets and liabilities including
payments to zero coupon noteholders (see Note 4), on the Company's historical
financial statements could be significant; however, no adjustments have been
made in the accompanying financial statements to reflect these proposed
transactions.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Smith Offshore Exploration
Company as of December 31, 1995 and 1994, and the results of its operations and
its cash flows for each of the three years in the period ended December 31, 1995
in conformity with generally accepted accounting principles.
As discussed in Note 2 to the financial statements, effective January 1,
1993, the Company changed its method of accounting for income taxes.
ARTHUR ANDERSEN LLP
Houston, Texas
May 21, 1996
F-22
<PAGE> 88
SMITH OFFSHORE EXPLORATION COMPANY
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------- MARCH 31,
1994 1995 1996
--------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS:
Cash and cash equivalents................................ $ 494 $ 785 $ 1,640
Short-term investments................................... 100 100 100
Accounts receivable
Oil and gas sales..................................... 2,748 1,857 1,612
Gas sales imbalance................................... 135 44 60
Affiliates and other.................................. 12 43 70
Inventory................................................ 131 74 74
Prepaid associated costs and well costs.................. 146 -- --
Prepaid expenses and other assets........................ 84 36 22
--------- -------- ----------
Total current assets............................. 3,850 2,939 3,578
--------- -------- ----------
Oil and gas properties, full-cost method
Evaluated properties.................................. 122,610 130,963 131,324
Unevaluated properties................................ 4,766 5,335 5,391
Less: Accumulated depreciation, depletion and
amortization.......................................... (94,540) (101,418) (102,712)
--------- -------- ----------
32,836 34,880 34,003
--------- -------- ----------
Furniture, fixtures and other, net......................... 151 108 99
Other assets, net.......................................... 63 57 51
--------- -------- ----------
TOTAL ASSETS..................................... $ 36,900 $ 37,984 $ 37,731
========= ======== ==========
LIABILITIES:
Current portion of long-term debt........................ $ 7,614 $ 7,956 $ 10,272
Accounts payable and accrued liabilities................. 2,558 744 754
Accrued interest payable................................. 58 175 151
--------- -------- ----------
Total current liabilities........................ 10,230 8,875 11,177
--------- -------- ----------
Long-term debt............................................. 7,718 10,569 7,375
Zero coupon notes payable.................................. 80,195 92,184 95,435
--------- -------- ----------
TOTAL LIABILITIES................................ 98,143 111,628 113,987
--------- -------- ----------
SHAREHOLDERS' EQUITY:
Preferred Stock (Class A), $0.01 par value; 3,209,375
shares authorized, issued and outstanding............. 32 32 32
Common Stock, $0.01 par value; 4,279,168 shares
authorized; 1,069,792 issued and outstanding.......... 11 11 11
Additional paid-in capital............................... 15,150 15,150 15,150
Accumulated deficit...................................... (76,436) (88,837) (91,449)
--------- -------- ----------
TOTAL SHAREHOLDERS' EQUITY....................... (61,243) (73,644) (76,256)
--------- -------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY....... $ 36,900 $ 37,984 $ 37,731
========= ======== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-23
<PAGE> 89
SMITH OFFSHORE EXPLORATION COMPANY
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS
YEARS ENDED DECEMBER 31, ENDED MARCH 31,
----------------------------- ------------------
1993 1994 1995 1995 1996
------- ------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES:
Oil and gas sales...................... $26,123 $18,536 $10,372 $ 2,343 $ 2,803
Interest income and other income....... 70 89 73 18 14
------- ------- ------- ------- -------
Total Revenues................. 26,193 18,625 10,445 2,361 2,817
------- ------- ------- ------- -------
COSTS AND EXPENSES:
General and administrative............. 569 586 837 167 212
Outside professional services.......... 313 499 501 76 50
Production............................. 2,634 2,654 2,012 546 421
Depreciation, depletion and
amortization........................ 20,317 15,618 6,931 1,604 1,303
Impairment of oil and gas properties... 4,000 20,000 -- -- --
Interest............................... 11,477 11,107 12,550 2,859 3,437
Other.................................. 52 46 15 9 6
------- ------- ------- ------- -------
Total costs and expenses....... 39,362 50,510 22,846 5,261 5,429
------- ------- ------- ------- -------
Loss before income taxes ($0 for all
periods) and cumulative effect of
change in accounting principle......... 13,169 31,885 12,401 2,900 2,612
Cumulative effect of change in accounting
principle (SFAS No. 109)............... 716 -- -- -- --
------- ------- ------- ------- -------
Net loss................................. $12,453 $31,885 $12,401 $ 2,900 $ 2,612
======= ======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-24
<PAGE> 90
SMITH OFFSHORE EXPLORATION COMPANY
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
----------------------------------- --------------------
1993 1994 1995 1995 1996
--------- --------- --------- -------- --------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss........................................ $ (12,453) $ (31,885) $ (12,401) $ (2,900) $ (2,612)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Interest..................................... 10,817 10,339 11,566 2,674 3,098
Depreciation, depletion and amortization..... 20,317 15,618 6,931 1,604 1,303
Impairment of oil and gas properties......... 4,000 20,000 -- -- --
Cumulative effect of change in accounting
principle (SFAS No. 109)................... (716) -- -- -- --
Decrease (Increase) in accounts receivable... 2,413 1,179 951 1,232 203
Decrease (Increase) in prepaid expenses and
other assets............................... (23) (4) 10 34 14
-------- -------- -------- ------- -------
Net cash provided by operating activities....... 24,355 15,247 7,057 2,644 2,006
-------- -------- -------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Changes in prepaid associated costs and well
costs........................................ 597 639 146 75 --
Additions to oil and gas properties............. (14,812) (9,888) (8,351) (2,879) (279)
Increase (Decrease) in amounts owed for oil and
gas property additions....................... 1,530 (2,324) (1,814) (75) 9
Purchases of furniture, fixtures and other...... (46) (97) (10) (8) --
Transfers of inventory.......................... 92 34 95 (1) --
-------- -------- -------- ------- -------
Net cash used in investing activities........ (12,639) (11,636) (9,934) (2,888) (270)
-------- -------- -------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt........ 15,506 5,180 8,268 3,400 51
Repayment of long-term debt..................... (11,500) (10,153) (5,076) (2,538) (929)
Repayment of zero coupon notes.................. (16,047) -- -- -- --
Additions of other assets -- debt costs......... -- (56) (24) -- (3)
-------- -------- -------- ------- -------
Net cash (used in) provided by financing
activities................................... (12,041) (5,029) 3,168 862 (881)
-------- -------- -------- ------- -------
Net increase (decrease) in cash and cash
equivalents..................................... (325) (1,418) 291 618 855
Cash and cash equivalents, beginning of period.... 2,237 1,912 494 494 785
-------- -------- -------- ------- -------
Cash and cash equivalents, end of period.......... $ 1,912 $ 494 $ 785 1,112 1,640
======== ======== ======== ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-25
<PAGE> 91
SMITH OFFSHORE EXPLORATION COMPANY
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND MARCH 31, 1996
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT AGREEMENTS
Organization
Smith Offshore Exploration Company (the "Company") was organized on January
12, 1987, under the laws of the State of Delaware. The Company is active in oil
and gas exploration and development primarily offshore in the Gulf of Mexico
area.
The Exploration Agreement
Pursuant to the terms of an Exploration Agreement, as renewed, extended and
restated (the "Agreement"), the Company agreed to participate with The Houston
Exploration Company ("HOUEX"), formerly Brooklyn Union Exploration Company,
Inc., in the exploration, development and production of oil and gas in the Gulf
of Mexico area. The Agreement provides for HOUEX to be the operator of the
properties. Under the terms of the Agreement, the Company committed to a maximum
of $60,000,000 to be expended for exploration activities over a four-year period
ended December 31, 1990, and a secondary term of two years ended December 31,
1992. The Company now continues to participate in certain exploration and
development activities with HOUEX pursuant to the terms of joint operating
agreements.
The Company pays its proportionate share of costs and expenses. Pursuant to
a letter agreement with HOUEX effective March 1, 1992, the Company and a former
affiliate, Smith Offshore Exploration Company II ("SOXCO II"), paid $375,000 of
HOUEX's general and administrative expenses during the first six months of 1995
and $750,000 during 1994 and 1993. The terms of the letter agreement terminated
on June 30, 1995. Such amounts are allocated between the Company and SOXCO II
based on relative capital and production expenditures during each month. The
Company paid or accrued approximately $219,000, $462,000 and $693,000 as
reimbursement for the Company's share of HOUEX's general and administrative
expenses during the years ended December 31, 1995, 1994 and 1993. The Company
paid or accrued $215,000, $7,779,000 and $8,746,000 for prospect acquisition,
evaluation and drilling costs billed by HOUEX during the three months ended
March 31, 1996 and the years ended December 31, 1995 and 1994, respectively.
In addition, the Company paid HOUEX fees (termed "Associated Costs") of
$6,000,000 prior to 1992. Pursuant to the terms of the Agreement, no additional
Associated Costs are due HOUEX.
The lease interests included in the exploration venture are burdened by a
2% net profits interest on a prospect-by-prospect basis and an overriding
royalty of 4% of the net revenue interest pursuant to agreements between HOUEX
and several individuals. These burdens are shared by the Company in proportion
to its interest in the particular leases.
Agreement Negotiated to Sell Oil and Gas Assets to HOUEX
On April 30, 1996, the Company and HOUEX entered into a non-binding letter
of intent setting forth the general terms pursuant to which HOUEX would acquire
substantially all of the Company's oil and gas assets. A Definitive Asset
Purchase Agreement (the "Agreement") has now been negotiated between the two
companies and has been approved by both companies' boards of directors and
HOUEX's stockholder. The transaction must still be approved by the Company's
stockholders (a majority of the common stock and two-thirds of the preferred
stock). The purchase will take place contemporaneously with an initial public
offering of HOUEX's common stock. The effective date of the transaction will be
January 1, 1996 (the "Effective Date").
F-26
<PAGE> 92
SMITH OFFSHORE EXPLORATION COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1995 AND MARCH 31, 1996
The Company will receive a purchase price ranging from a minimum of
approximately $44.3 million to a maximum of approximately $53.1 million with the
ultimate amount within that range depending upon the amount of probable reserves
that are reclassified to proved by December 31, 1997.
Consideration for the sale of its oil and gas assets will be paid to the
Company on the following basis:
Cash -- The Company will receive approximately $23.7 million of cash
at closing. It will use a substantial portion of such cash proceeds to
retire all outstanding debt (other than zero coupon notes) on the closing
date of the HOUEX transaction (the "Closing").
Stock Issued at Closing -- The Company will receive shares of common
stock of HOUEX (valued at the IPO price) equal to approximately
$11,803,000.
Stock Issued on 1/31/97 and 1/31/98 -- The Company will receive shares
of common stock of HOUEX (valued at the fair market value of the stock on
those dates) equal to a minimum of approximately $8.8 million and a maximum
of approximately $17.6 million (depending upon the amount of probable
reserves transferred to proved as of December 31, 1996 and December 31,
1997) (the "Deferred Purchase Price").
HOUEX stock received by the Company will be unregistered and will
constitute "restricted stock" under the federal securities laws. The Company's
investors will have demand registration rights (once at HOUEX's expense [other
than underwriting discounts and sales commissions] and up to two additional
times at the expense of the investors making such demand), as well as unlimited
"piggyback" registration rights.
The cash portion of the consideration to be paid to the Company on the
Effective Date will be adjusted prior to the Closing as follows:
- HOUEX will be reimbursed for revenues the Company received for production
after the Effective Date,
- the Company will be reimbursed for capital expenditures, lease operating
expenses and production taxes it incurred after the Effective Date, and
- the Company will be reimbursed by HOUEX for interest it paid or accrued
on bank debt and investor loans after the Effective Date.
Pursuant to the terms of the Agreement, the Company will retain the
following assets:
- cash and short-term investments,
- accounts receivable for oil and gas sales as of December 31, 1995,
- all other accounts receivable (except any receivable attributable to gas
imbalances),
- prepaid expenses (other than any prepayments to HOUEX), and
- furniture, fixtures and equipment.
F-27
<PAGE> 93
SMITH OFFSHORE EXPLORATION COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1995 AND MARCH 31, 1996
The Company will retain all liabilities not specifically assumed by HOUEX,
including, without limitation, the following liabilities:
- accounts payable and accrued liabilities as of December 31, 1995,
- Zero Coupon Notes,
- bank debt and investor loans (the Company will retire all debt except ZCN
at closing of the transaction),
- liabilities for federal or state income taxes or franchise taxes,
- liabilities to Smith Management Company or to any third parties for
services rendered,
- severance pay for employees,
- liabilities with respect to operations and events prior to the Effective
Date, and
- liabilities with respect to any breaches or failures of its
representations and warranties to HOUEX (subject to a $100,000
deductible).
The Company and HOUEX would both be bound by the terms of this Agreement
until September 30, 1996. During the term of the Agreement, neither company (nor
its stockholders) may initiate, solicit or negotiate a proposal or offer from
any third person to buy its assets. HOUEX may terminate the Agreement if it
elects not to proceed with the initial public offering because the proposed
initial offering price of its stock values HOUEX at less than $1.15 per Mcfe of
proved reserves. Either party may terminate the Agreement if the closing has not
occurred on or before September 30, 1996.
The sale of assets to HOUEX would be a taxable transaction. The Company
estimates that its tax liability related to the sale would be approximately
$560,000 to $735,000 depending upon the amount of the Deferred Purchase Price.
The president of the Company, Mr. Lester Smith, has exercised the right
(described in Footnote 6) to sell the reserves attributable to his net profits
interest ("NPI") under the same economic terms as the Company. Mr. Smith will
sell his NPI to the Company, which will then include it in the assets sold to
HOUEX. The agreement between Mr. Smith and the Company provides that the Company
will pay for the NPI by allocating a portion of the purchase price and Deferred
Purchase Price to Mr. Smith based on proved and probable reserves assigned by
independent engineering firms to Mr. Smith's NPI. The sale will be conditioned
on the closing of the HOUEX transaction.
It is currently estimated that Mr. Smith's share of the initial purchase
price is $300,000 and that his share of the Deferred Purchase Price is $100,000
to $200,000. The purchase price and Deferred Purchase Price amounts stated in
this footnote for the Company are before considering the estimated portion of
the purchase price and Deferred Purchase Price attributable to Mr. Smith's NPI.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Interim Financial Statements
The financial statements as of the three months ended March 31, 1995 and
1996 have been prepared without audit pursuant to the rules and regulations of
the Securities and Exchange Commission. Accordingly, such statements include all
adjustments, consisting only of normal recurring adjustments, which are, in the
opinion of management, necessary for a fair presentation of
F-28
<PAGE> 94
SMITH OFFSHORE EXPLORATION COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1995 AND MARCH 31, 1996
the Company's financial position, results of operations and cash flows. Interim
period results are not necessarily indicative of the results to be achieved for
an entire year.
Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity of
three months or less to be cash equivalents.
Short-Term Investments
Short-term investments consist of certificates of deposit and are stated at
cost, which approximates market value.
Prepaid Associated Costs and Well Costs
Associated Costs are allocated to oil and gas properties based on the ratio
of exploration and development expenditures incurred by the Company to total
exploration and development expenditures expected to be incurred. During 1994,
such costs which had not yet been allocated to oil and gas properties are
considered prepaid. During 1995, all such costs were allocated to oil and gas
properties.
Inventory
Inventory consists primarily of tubular goods used in the Company's
operations and is stated at the lower of cost or market value, with cost
determined on a weighted average basis.
Interest
Interest that relates to the costs of unevaluated oil and gas properties on
which exploration or development activities are in progress is capitalized. The
Company capitalized interest of approximately $164,000, $674,000, $226,000 and
$674,000 during the three months ended March 31, 1996 and the years ended
December 31, 1995, 1994 and 1993, respectively.
HOUEX's General and Administrative Expenses
The Company capitalizes that portion of HOUEX's general and administrative
expenses which relates to exploration and development activities and expenses
the portion which relates to the operation of producing wells. During the years
ended December 31, 1995, 1994 and 1993, the Company capitalized approximately
$109,000, $231,000 and $347,000, respectively, of HOUEX's general and
administrative expenses. In addition, approximately $110,000, $231,000 and
$346,000 of such costs were charged to production expense during the years ended
December 31, 1995, 1994 and 1993, respectively. No amounts were paid to HOUEX
during 1996 as the agreement to reimburse general and administrative expenses
terminated in June 1995.
Gas Sales Imbalance
The Company records gas sales using the entitlement method. The entitlement
method requires revenue recognition of the Company's share of gas production
from properties in which gas sales are disproportionately allocated to owners
because of marketing or other contractual arrangements. The Company's net
imbalance is recorded as either a receivable or a payable in the accompanying
balance sheets.
F-29
<PAGE> 95
SMITH OFFSHORE EXPLORATION COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1995 AND MARCH 31, 1996
Oil and Gas Properties
The Company follows the full-cost method of accounting for its oil and gas
properties. This method provides for capitalizing all productive and
nonproductive costs incurred in connection with the acquisition, exploration and
development of oil and gas reserves. Such costs include lease acquisition,
geological and geophysical services, delay rentals, drilling, completing and
equipping oil and gas wells and platform fabrication and installation, as well
as interest, Associated Costs and direct general and administrative expenses.
Depreciation, depletion and amortization of oil and gas properties are
provided using the unit-of-production method whereby property costs are
amortized based on the ratio of current year production to total estimated
future production from proved oil and gas reserves. Capitalized costs associated
with the acquisition and exploration of unevaluated properties and major
properties under development are not currently amortized. Amortization of costs
associated with these properties will commence when the properties are
evaluated.
Under the full-cost method, a valuation provision is to be made if the
unamortized costs of oil and gas properties, less related deferred taxes, exceed
the limitation on capitalized costs (the "ceiling limitation"). The ceiling
limitation is the sum of: (1) the present value of future net revenues from
estimated production of proved oil and gas reserves, computed using a discount
factor of 10%; (2) the cost of unevaluated properties; less (3) any related tax
effects. During the years ended December 31, 1994 and 1993, the Company recorded
an impairment of $20,000,000 and $4,000,000, respectively, as a result of this
ceiling limitation. No such impairment was required during the three months
ended March 31, 1996 and the year ended December 31, 1995.
Future abandonment, dismantlement and site restoration costs include costs
to dismantle, relocate and dispose of the Company's offshore production
platforms, gathering systems, wells and related structures. The Company relies
on HOUEX to provide estimates of its future abandonment, dismantlement and site
restoration costs for each of its properties. While such estimates have been
considered in the standardized measure of future cash flows and in the
determination of depreciation, depletion and amortization of oil and gas
properties, the amount has never been significant and, accordingly, has been
recorded in the accompanying financial statements through additional
depreciation, depletion and amortization.
Furniture, Fixtures and Other
Provisions for depreciation of furniture, fixtures and other property are
computed on a straight-line basis over their estimated useful lives of five
years.
Income Taxes
Effective January 1, 1993, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes", which
supersedes SFAS No. 96, and changes the criteria for recognition and measurement
of deferred tax assets and various other requirements of the previous standard.
As a result of such adoption, the Company recognized a cumulative benefit of
$716,000 during 1993. Under the provisions of SFAS No. 109, the Company had a
deferred tax asset of $12,993,000 attributable to regular net operating loss
("NOL") carryforwards as of December 31, 1995. Since it is unlikely that any of
the deferred tax asset will be realized, a valuation allowance of the entire
amount has been recorded.
At December 31, 1995, the Company had NOL carryforwards of approximately
$107,244,000 and alternative minimum net operating loss carryforwards of
approximately $72,429,000, all of
F-30
<PAGE> 96
SMITH OFFSHORE EXPLORATION COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1995 AND MARCH 31, 1996
which are available to reduce future federal income tax liabilities. Such
carryforwards expire during the years 2002 through 2010. The difference between
tax NOL carryforwards and the accumulated deficit at December 31, 1995 is due
primarily to the previous deduction for tax purposes of certain oil and gas
exploration and development costs which were capitalized for financial reporting
purposes.
Impact of Recently Issued Accounting Standards
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." SFAS No. 121
is effective for financial statements for fiscal years beginning after December
15, 1995. SFAS No. 121 will not have an impact on the financial position or
results of operations of the Company.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Fair Value of Financial Instruments
The Company's financial instruments consist of cash and cash equivalents,
accounts receivable, accounts payable, and long-term debt. The carrying amounts
of cash and cash equivalents, accounts receivable, and accounts payable
approximate fair value due to the highly liquid nature of these short-term
instruments. The fair value of long-term debt was determined based upon interest
rates currently available to the Company for borrowings with similar terms. The
fair value of long-term debt approximates the carrying amount as of December 31,
1995.
The fair value of zero coupon notes cannot be determined at this time.
However, it is substantially less than the carrying amount as of March 31, 1996.
Reference is made to discussion of proposed sale of oil and gas assets to HOUEX
at Note 1 and to discussion of potential liquidation of zero coupon notes at
Note 4.
(3) PREFERRED STOCK
The preferred shareholders have preference in liquidation over the holders
of common stock to the extent of $7.50 per share. Each preferred shareholder has
the option to convert each preferred share into one share of common stock on or
after January 15, 1992. Preferred shareholders are not entitled to vote.
Preferred shareholders are entitled to dividends as if they had converted their
shares to common stock when, if ever, common stock dividends are declared;
however, no dividends are expected to be paid on either the preferred stock or
common stock until substantially all of the preferred stock is converted. Under
the renegotiated subscription agreements, preferred shareholders are entitled to
receive a dollar for dollar dividend for each dollar of exploration money spent
over the original $48,140,625 exploration budget. The dividends will be paid
after all debt and zero coupon notes are retired but before any dividends are
paid to common shareholders.
In addition to providing funding for exploration activities, subscribers
agreed to guarantee bank borrowings of or loan to the Company a maximum of
$96,000,000 as additional funds are required for development activities.
Pursuant to the terms of the renegotiated subscription agreements, this
commitment has now been reduced from $96,000,000 to $60,000,000.
F-31
<PAGE> 97
SMITH OFFSHORE EXPLORATION COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1995 AND MARCH 31, 1996
(4) ZERO COUPON NOTES PAYABLE
In order to fund a portion of its exploration commitment under the
Agreement, the Company issued zero coupon notes and $.01 par value preferred
stock to investors for an aggregate consideration of $48,140,625. The zero
coupon notes and preferred stock were issued in four stages during the period
March 1987 through September 1990 pursuant to the terms of Subscription
Agreements between the Company and investors. Zero coupon notes are subordinate
to the Company's bank debt and were to mature six years from the date of their
issuance (on varying maturity dates from March 1993 through September 1996) at a
combined maturity amount of $96,281,250.
By virtue of the intended repayment of zero coupon notes at a maturity
value equal to two times the investors' original cash outlay (i.e., two times
the cash outlay of $48,140,625, or $96,281,250), investors were to receive a
12.25% preferred return on their investment. For accounting and tax purposes,
68% of the proceeds received from investors was allocated to zero coupon notes
and 32% was allocated to preferred stock. This allocation resulted in an
effective annual rate of interest on the zero coupon notes of 18% per annum.
Thus, interest was accrued at 18% per annum on the portion of the proceeds
recorded as zero coupon notes and such interest was added to the face amount of
the notes.
In March 1993, the Company renegotiated the terms of its zero coupon notes.
This renegotiation was necessary because the Company made the decision to not
produce its oil and gas properties at full capacity when gas prices were below
$1.75 per MCF, in order to preserve the Company's gas reserves for production in
periods of higher gas prices. Under the terms of the renegotiated zero coupon
notes, 50% of the first zero coupon note due in March 1993 was paid upon receipt
of executed amendments from investors. The maturity date of the remaining
portion of the first zero coupon note was extended three years and the maturity
dates of the other zero coupon notes were extended 1 1/2 to 3 years. Interest
will accrue on the original maturity value of the zero coupon notes at an
effective rate of 12.25% per annum from the date of original maturity until the
notes are paid off. However, the Company may prepay the zero coupon notes at any
time without penalty.
The revised maturity dates and amounts of zero coupon notes are as follows:
<TABLE>
<CAPTION>
MATURITY DATE OF ZCN MATURITY AMOUNT AMOUNT ACCRUED AT
----------------------------------------- ----------------------------------- -----------------------------------
ORIGINAL REVISED ORIGINAL REVISED 3/31/96 12/31/95
---------------------- ----------------- ---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C>
March 16, 1993
(50% Paid).......... -- $ 16,046,875 $ 16,046,875 $ -- $ --
March 16, 1993
(50%)............... March 16, 1996 16,046,875 23,130,480 23,246,924 22,558,615
January 15, 1994...... January 15, 1997 32,093,750 46,260,949 41,991,930 40,748,677
July 1, 1996.......... March 15, 1998 16,046,875 19,753,553 15,330,430 14,660,751
September 4, 1996..... March 15, 1998 16,046,875 19,336,948 14,865,510 14,216,140
-------------- --------------- -------------- --------------
$ 96,281,250 $ 124,528,805 $ 95,434,794 $ 92,184,183
============== =============== ============== ==============
</TABLE>
Zero coupon notes due on March 16, 1996 have not been paid because any
payment on zero coupon notes prior to retirement of all bank debt would cause
the Company to be in default of the Development and Exploration Credit
Agreements. Interest, however, is being accreted on these zero coupon notes at a
rate of 12.25%. By the terms of the zero coupon notes, the Company cannot make
payments on zero coupon notes if such payment would cause the Company to be in
default of
F-32
<PAGE> 98
SMITH OFFSHORE EXPLORATION COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1995 AND MARCH 31, 1996
senior indebtedness. The Company is currently dedicating all free cash flow to
reduction of debt and projects that it will have retired all debt (except zero
coupon notes) by early 1998.
On May 21, 1996, the board of directors of the Company (which includes
majority representation of zero coupon noteholders) agreed to develop with the
officers of the Company a Plan of Liquidation of SOXCO that will be acceptable
to the Zero Coupon Noteholders (ZCN) if the proposed Sale of Assets to HOUEX is
consummated (see Note 1). In the event that the transaction with HOUEX is not
consummated, the board of directors has agreed to work with the officers of the
Company to renegotiate and extend the terms of payment to the ZCN after
repayment of all bank debt and investor loans. Accordingly, all zero coupon
notes are reflected as long-term at March 31, 1996 at the accrued amounts
summarized above. However, considering present circumstances, including the
proposed sale of assets, the ultimate payment to ZCN will be substantially less
than the amount reflected in the accompanying financial statements.
During the three months ended March 31, 1996 and the years ended December
31, 1995, 1994, and 1993 interest of approximately $3,251,000, $11,989,000,
$10,461,000 and $11,322,000, respectively, was accreted on the zero coupon
notes.
(5) LONG-TERM DEBT
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
MARCH 31, ------------------------------
1996 1995 1994
------------- ------------ ------------
<S> <C> <C> <C>
Development Credit Agreement......... $ 3,760,000 $ 3,760,000 $ 7,520,000
Preferred Shareholders Development
Loans.............................. 987,000 1,317,000 2,632,000
Exploration Credit Agreement......... 11,800,000 12,400,000 5,180,000
Preferred Shareholders Loans......... 1,100,000 1,048,000 --
------------- ------------ -----------
17,647,000 18,525,000 15,332,000
Less: Current Portion of Long-term
Debt............................... (10,272,000) (7,956,000) (7,614,000)
------------- ------------ -----------
Long-term Debt....................... $ 7,375,000 $ 10,569,000 $ 7,718,000
============= ============ ===========
</TABLE>
The current portion of long-term debt at December 31, 1995 and March 31,
1996 includes a portion from each of the above mentioned loans.
Maturities of long-term debt by calendar year are as follows at December
31, 1995:
<TABLE>
<S> <C>
1997.......................................... $ 7,469,000
1998.......................................... 3,100,000
----------
$ 10,569,000
==========
</TABLE>
Development Credit Agreement
As of March 31, 1996, $3,760,000 was outstanding under a $30,068,836 line
of credit agreement, which was used to fund development expenditures (the
"Development Credit Agreement"). As of December 31, 1995 and 1994, the Company
had $3,760,000 and $7,520,000, respectively, outstanding under the Development
Credit Agreement. The Development Credit Agreement, amended in August 1992 and
amended a second time in October 1995, is guaranteed by certain
F-33
<PAGE> 99
SMITH OFFSHORE EXPLORATION COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1995 AND MARCH 31, 1996
preferred shareholders. The debt converted to a term loan on January 1, 1994.
Under the original loan terms, principal was due in eight equal quarterly
payments which began April 1, 1994. Six of eight payments were made prior to
October 1995. Under the second amendment, the debt will be paid in four
quarterly installments which will begin April 1, 1996.
Interest rates on borrowings are based on whichever of the following
methods, as defined in the Development Credit Agreement, the Company elects at
the time of borrowing: 3/4% above the Eurodollar rate, 7/8% above the
certificate of deposit rate, or the alternate base rate. Upon conversion to a
term loan on January 1, 1994, interest rates increased by 1/8%. Interest rates
are adjusted every 30 to 180 days, and interest is payable every 30 to 90 days,
depending upon certain factors. During the three months ended March 31, 1996 and
the years ended December 31, 1995, 1994 and 1993, the weighted average interest
rate was 7.30% and 5.94%, 4.17% and 3.61%, respectively. Also during the three
months ended March 31, 1996 and the years ended December 31, 1995, 1994 and
1993, the Company accrued interest of approximately $68,000, $308,000, $522,000
and $535,000, respectively, on the borrowings under the Development Credit
Agreement, with approximately $92,000, $307,000, $493,000 and $572,000,
respectively, paid.
Commitment fees under the Development Credit Agreement were 3/8% per annum
on the average unutilized commitment until the debt converted to a term loan.
Commitment fees incurred during the year ended December 31, 1993, were
approximately $59,000. None were incurred during the year ended December 31,
1994 as the debt converted to a term loan on January 1, 1994.
The Development Credit Agreement includes covenants which, among other
things, restrict payment of cash dividends on common stock and require the
Company to maintain stated net worth amounts in addition to a specific liquidity
ratio. As of March 31, 1996 and December 31, 1995, the Company was in compliance
with all covenants.
Preferred Shareholders Development Loans
As of March 31, 1996, the Company had $987,000 outstanding under loan
agreements with certain preferred shareholders not electing to guarantee the
Development Credit Agreement. As of December 31, 1995 and 1994, the Company had
$1,317,000 and $2,632,000, respectively, outstanding under the agreements. The
loan agreements were amended in October 1995. The total amount available under
these loan agreements as of December 31, 1995 was $1,317,000. The loans bear
interest at 3/4% above a certain bank's six-month Eurodollar rate, as
determined each August 1 and February 1. Upon conversion of the Development
Credit Agreement to a term loan on January 1, 1994, interest rates increased by
1/8%. Interest is paid in quarterly installments. Under the original loan
terms, principal was due in eight equal quarterly payments which began April 1,
1994. Six of eight payments were made prior to October 1995. Under the amended
terms, principal will be paid in four quarterly installments which will begin
April 1, 1996. The quarterly payment due April 1, 1996 of $330,000 was paid on
March 31, 1996. The weighted average interest rate for the three months ended
March 31, 1996 and the years ending December 31, 1995, 1994 and 1993, was 6.32%,
6.86%, 5.10% and 4.20%, respectively. The Company accrued interest on these
loans of approximately $22,000, $125,000, $215,000 and $221,000 and paid
interest of approximately $46,000, $120,000, $205,000 and $213,000 during the
years ended December 31, 1995, 1994 and 1993, respectively.
Exploration Credit Agreement
On April 29, 1994 the Company entered into a $25,000,000 collateral based
line of credit agreement with a current borrowing base of $11,800,000 which will
be used to fund the remaining exploration activity under the Agreement and other
general corporate activities (the "Exploration
F-34
<PAGE> 100
SMITH OFFSHORE EXPLORATION COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1995 AND MARCH 31, 1996
Credit Agreement"). The borrowing base was reduced in February 1996 from the
base of $12,400,000 at December 31, 1995. A repayment of principal in the amount
of $600,000 was made at that time. The Exploration Credit Agreement has been
written to allow the Company to increase its borrowing base up to $25,000,000 as
additional reserves are added as collateral. As of March 31, 1996, $11,800,000
was outstanding under this agreement. As of December 31, 1995 and 1994,
$12,400,000 and $5,180,000 were outstanding. Under the existing loan terms, the
debt will convert to a term loan on May 29, 1996 to be paid in eight equal
quarterly installments beginning August 1, 1996. The Exploration Credit
Agreement is being amended to extend the revolving period by one additional
year.
Interest rates on borrowings are based on whichever of the following
methods, as defined in the Exploration Credit Agreement, the Company elects at
the time of borrowing: 1 1/2% above the Eurodollar rate, 1 5/8% above the
certificate of deposit rate, or prime rate. After the debt converts to a term
loan on May 29, 1996, interest rates are increased by 1/8%. Interest rates are
adjusted every 30 to 180 days, and interest is payable every month during the
revolving period and every quarter during the term period. During the three
months ended March 31, 1996 and the years ended December 31, 1995 and 1994, the
weighted average interest rates were 7.44%, 7.43% and 5.48%. Also during the
three months ended March 31, 1996 and the years ended December 31, 1995 and
1994, the Company accrued interest of approximately $220,000, $719,000 and
$73,000 on the borrowings under the Exploration Credit Agreement with payments
of approximately $229,000, $643,000 and $71,000.
Commitment fees under the Exploration Credit Agreement are 1/2% per annum
on the average daily unused portion of the Borrowing Base until the debt
converts to a term loan. Commitment fees incurred during the years ended
December 31, 1995 and 1994 were approximately $18,000 and $36,000. None were
incurred during the three months ended March 31, 1996 as the Exploration Credit
Agreement was drawn down to the maximum.
The Exploration Credit Agreement includes covenants which, among other
things, restrict payments of cash dividends on common stock and require the
Company to maintain stated net worth amounts in addition to a specific liquidity
ratio. As of March 31, 1996 and December 31, 1995, the Company was in compliance
with all covenants.
Preferred Shareholder Loans
In September 1995, the Company entered into loan agreements with all
preferred shareholders totalling $2,500,000. As of March 31, 1996 and December
31, 1995, the Company had $1,100,000 and $1,048,000, respectively, outstanding
under the loan agreements. The loans bear interest at 12.25%. Principal and
interest will be paid in full on September 14, 1996. The Company accrued
interest on these loans of approximately $33,000, and $33,000, respectively, and
paid no interest during the three months ended March 31, 1996 and the year ended
December 31, 1995.
(6) RELATED-PARTY TRANSACTIONS
The Company has entered into a management agreement with an affiliated
company. The management agreement provides that the Company will reimburse the
affiliate for general and administrative expenses incurred by the affiliate on
the Company's behalf. During the three months ended March 31, 1996 and the years
ended December 31, 1995, 1994 and 1993, pursuant to the management agreement,
the Company paid or accrued approximately $208,000, $837,000, $586,000 and
$569,000, respectively, for general and administrative expenses incurred by the
affiliate on the Company's behalf. In addition, the Company paid the affiliate
$38,000, $154,000,
F-35
<PAGE> 101
SMITH OFFSHORE EXPLORATION COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1995 AND MARCH 31, 1996
$171,000 and $134,000 for exploration and development services which have been
capitalized as part of the full-cost pool during the three months ended March
31, 1996 and the years ended December 31, 1995, 1994 and 1993, respectively.
As part of the Company's employment agreement with its president, each
prospect acquired by the Company or in which the Company participates is
burdened by a 1.25% net profits interest on a prospect-by-prospect basis,
proportionately reduced to the interest of the Company.
The president has exercised his right to sell the reserves attributable to
the net profits interest under the same economic terms as the Company would be
selling its reserves to HOUEX. See further discussion in Note 1.
During the three months ended March 31, 1996 and the years ended December
31, 1995, 1994 and 1993, the Company paid or accrued approximately $7,000,
$81,000, $80,000 and $65,000, respectively, related to outside professional
services provided pursuant to consulting agreements with an individual who
serves as a director of the Company and as a director of affiliated companies.
An additional $15,000, $23,000 and $15,000 have been capitalized as part of the
full-cost pool during the years ended December 31, 1995, 1994 and 1993,
respectively. No costs were capitalized for the three months ended March 31,
1996.
(7) MAJOR CUSTOMERS
The Company markets its oil and gas production to numerous purchasers under
short-term contracts. During 1995, H&N Gas Limited, Enron Gas Marketing, Inc.
and Dow Hydrocarbons & Resources, Inc. accounted for 42%, 12% and 11%,
respectively, of oil and gas revenues of the Company. During 1994, H&N Gas
Limited, Transco Energy Marketing Company, Enron Gas Marketing, Inc. and Dow
Hydrocarbons & Resources, Inc., accounted for 19%, 13%, 12%, and 10%,
respectively, of oil and gas revenues. During 1993, Transco Energy Marketing
Company, American Central Marketing and Enron Gas Marketing, Inc. accounted for
19%, 12% and 11%, respectively, of oil and gas revenues. The Company believes
that the loss of any single customer would not have a material adverse effect on
the results of operations of the Company.
(8) SUPPLEMENTAL INFORMATION ON OIL AND GAS EXPLORATION AND PRODUCING ACTIVITIES
(UNAUDITED)
Oil and Gas Reserves and Related Financial Data
Information with respect to the Company's oil and gas producing activities
is presented in the following tables. Reserve quantities as well as certain
information regarding future production and discounted cash flows were
determined by independent petroleum consultants; Ryder Scott Company, Huddleston
& Co., Inc. and Netherland, Sewell & Associates, Inc.
The Company cautions that there are many uncertainties inherent in
estimating proved reserve quantities, and in projecting future production rates
and the timing of future development expenditures. In addition, reserve
estimates of new discoveries are more imprecise than those of properties with a
production history. Accordingly, these estimates are subject to change as
additional information becomes available.
Proved oil and gas reserves are the estimated quantities of crude oil,
condensate, natural gas and natural gas liquids that geological and engineering
data demonstrate with reasonable certainty to be recoverable in future years
from known reservoirs under existing economic and operating conditions. Proved
developed oil and gas reserves are those reserves expected to be recovered
through existing wells and existing equipment and operating methods.
F-36
<PAGE> 102
SMITH OFFSHORE EXPLORATION COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1995 AND MARCH 31, 1996
Capitalized Costs Related to Oil and Gas Producing Activities
The following table sets forth information concerning capitalized costs at
December 31, 1995, 1994 and 1993 related to the Company's oil and gas operations
(in thousands of dollars):
<TABLE>
<CAPTION>
1995 1994
---------- ---------
<S> <C> <C>
Capitalized costs:
Evaluated properties..................................... $ 130,963 $ 122,610
Unevaluated properties................................... 5,335 4,766
--------- --------
136,298 127,376
Less -- Accumulated depreciation, depletion and
amortization............................................. (101,418) (94,540)
--------- --------
Net capitalized costs...................................... $ 34,880 $ 32,836
========= ========
</TABLE>
Costs Incurred on Oil and Gas Producing Activities
The following table includes all costs incurred in the years ended December
31, 1995, 1994 and 1993 (in thousands of dollars):
<TABLE>
<CAPTION>
1995 1994 1993
------- -------- --------
<S> <C> <C> <C>
Acquisition -- Unproved properties................. $ -- $ 1,017 $ --
Exploration costs.................................. 872 6,168 6,043
Development costs.................................. 8,050 2,893 9,244
------ ------- -------
Total costs incurred............................... $ 8,922 $ 10,078 $ 15,287
====== ======= =======
</TABLE>
F-37
<PAGE> 103
SMITH OFFSHORE EXPLORATION COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1995 AND MARCH 31, 1996
Estimated Quantities of Proved Oil and Gas Reserves
Estimates prepared by the Company's independent engineers of proved
reserves and proved developed reserves owned at year end and changes in proved
reserves since December 31, 1992 are shown in the following tables:
<TABLE>
<CAPTION>
OIL NATURAL
NATURAL AND GAS
GAS CONDENSATE LIQUIDS
(MMCF) (MBBLS) (MBBLS)
-------- ---- -----
<S> <C> <C> <C>
Proved reserves:
December 31, 1992....................................... 49,991 214 117
Revisions of previous estimates...................... (2,611) (70) (117)
Extensions and discoveries........................... 5,533 56 --
Production........................................... (12,476) (38) --
------- --- ----
December 31, 1993....................................... 40,437 162 --
Revisions of previous estimates...................... (363) 1 --
Extensions and discoveries........................... 1,790 2 --
Production........................................... (9,554) (31) --
------- --- ----
December 31, 1994....................................... 32,310 134 --
Revisions of previous estimates...................... 1,652 115 --
Extensions and discoveries........................... 2,440 73 --
Production........................................... (6,295) (26) --
------- --- ----
December 31, 1995....................................... 30,107 296 --
======= === ====
Proved developed reserves:
December 31, 1992....................................... 44,630 184 85
------- --- ----
December 31, 1993....................................... 34,651 75 --
------- --- ----
December 31, 1994....................................... 28,752 81 --
------- --- ----
December 31, 1995....................................... 20,229 85 --
------- --- ----
</TABLE>
Results of Operations from Producing Activities
The following table sets forth the Company's results of operations from oil
and gas producing activities for the years ended December 31, 1995, 1994 and
1993 (in thousands of dollars):
<TABLE>
<CAPTION>
1995 1994 1993
-------- --------- --------
<S> <C> <C> <C>
Revenues from oil and gas producing activities... $ 10,373 $ 18,536 $ 26,123
Production costs................................. 2,012 2,654 2,634
Depreciation, depletion and amortization......... 6,877 35,550 24,196
------- -------- -------
Total expenses......................... 8,889 38,204 26,830
------- -------- -------
Income tax....................................... -- -- --
Results of operations from producing
activities..................................... $ 1,484 $ (19,668) $ (707)
======= ======== =======
</TABLE>
Standardized Measure
The following disclosure concerning standardized measure of future net cash
flows from proved oil and gas reserves is presented in accordance with Statement
of Financial Accounting
F-38
<PAGE> 104
SMITH OFFSHORE EXPLORATION COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1995 AND MARCH 31, 1996
Standards (SFAS) No. 69, "Disclosures about Oil and Gas Producing Activities".
As prescribed by this statement, the amounts shown are based on prices and costs
at the end of each period discounted at 10% and are not adjusted in anticipation
of increases due to inflation or other factors. At December 31, 1995, the
standardized measure reflects an average oil price of $17.99 per barrel and an
average gas price of $2.20 per MCF. Future income tax estimates are calculated
by applying the appropriate statutory income tax rate to the estimated future
undiscounted pretax net cash flows from proved oil and gas properties and
considering estimates of permanent differences, net operating loss carryforwards
and tax credits.
The above assumptions used to compute the standardized measure are those
specifically required by SFAS No. 69 and, as such, do not reflect the Company's
expectations of actual revenues to be derived from those reserves, and are not
necessarily indicative of the fair value of the Company's oil and gas reserves.
The following table reflects the standardized measure of discounted future
net cash flows relating to the Company's interest in proved oil and gas reserves
as of December 31, 1995, 1994 and 1993 (in thousands of dollars):
<TABLE>
<CAPTION>
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
Future cash inflows........................... $ 71,693 $ 54,217 $ 90,266
Future costs:
Production.................................. (9,036) (10,027) (11,730)
Development and abandonment costs........... (4,680) (6,493) (6,004)
-------- -------- --------
Future net inflows before income tax.......... 57,977 37,697 72,532
Future income taxes........................... (968) (504) (2,377)
-------- -------- --------
Future net cash flows......................... 57,009 37,193 70,155
10% annual discount factor.................... (14,522) (9,228) (15,334)
-------- -------- --------
Standardized Measure at end of year........... $ 42,487 $ 27,965 $ 54,821
======== ======== ========
</TABLE>
The change in the standardized measure of discounted future net cash flows
related to the proved oil and gas reserves for the years ended December 31,
1995, 1994, and 1993 is as follows (in thousands of dollars):
<TABLE>
<CAPTION>
1995 1994 1993
-------- --------- ---------
<S> <C> <C> <C>
Standardized Measure at beginning of year....... $ 27,965 $ 54,821 $ 71,345
Oil and gas sales, net of production costs...... (8,361) (15,882) (23,489)
Net change in oil and gas sales prices, net of
production costs.............................. 12,085 (15,920) (4,802)
Extensions and discoveries, net of future
production and development costs.............. 5,253 2,310 7,667
Changes in estimated future development costs... 771 (1,586) (1,296)
Previously estimated development and abandonment
costs incurred................................ 906 1,647 4,956
Revisions of quantity estimates................. 3,411 (367) (5,713)
Accretion of discount........................... 2,838 5,643 7,777
Net change in income taxes...................... (338) 1,197 4,816
Changes in production rates (timing) and
other......................................... (2,043) (3,898) (6,440)
------- -------- --------
Standardized Measure at end of year............. $ 42,487 $ 27,965 $ 54,821
======= ======== ========
</TABLE>
F-39
<PAGE> 105
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement the
Company has agreed to sell to each of the Underwriters named below, and each of
the Underwriters, for whom Goldman, Sachs & Co., Donaldson, Lufkin & Jenrette
Securities Corporation and PaineWebber Incorporated are acting as
representatives, has severally agreed to purchase from the Company, the
respective number of shares of Common Stock set forth opposite its name below:
<TABLE>
<CAPTION>
NUMBER OF
SHARES OF
UNDERWRITER COMMON STOCK
---------------------------------------------------------------------- ------------
<S> <C>
Goldman, Sachs & Co...................................................
Donaldson, Lufkin & Jenrette Securities Corporation...................
PaineWebber Incorporated..............................................
---------
Total....................................................... 5,700,000
=========
</TABLE>
Under the terms and conditions of the Underwriting Agreement, the
Underwriters are committed to take and pay for all of the shares offered hereby,
if any are taken.
The Underwriters propose to offer the shares of Common Stock in part
directly to the public at the initial public offering price set forth on the
cover page of this Prospectus, and in part to certain securities dealers at such
price less a concession of $ per share. The Underwriters may allow, and such
dealers may reallow, a concession not in excess of $ per share to certain
brokers and dealers. After the shares of Common Stock are released for sale to
the public, the offering price and other selling terms may from time to time be
varied by the representatives.
The Company has granted the Underwriters an option exercisable for 30 days
after the date of this Prospectus to purchase up to an aggregate of 855,000
additional shares of Common Stock solely to cover over-allotments, if any. If
the Underwriters exercise their over-allotment option, the Underwriters have
severally agreed, subject to certain conditions, to purchase approximately the
same percentage thereof that the number of shares to be purchased by each of
them, as shown in the foregoing table, bears to the 5,700,000 shares of Common
Stock offered.
The Company, the Company's executive officers and directors, Brooklyn Union
and Soxco have agreed, during the period beginning from the date of this
Prospectus and continuing to and including the date 180 days after the date of
this Prospectus, not to offer, sell, contract to sell or otherwise dispose of
any securities of the Company (other than pursuant to employee stock option
plans existing on, or on the conversion or exchange of convertible or
exchangeable securities outstanding on the date of this Prospectus) which are
substantially similar to the shares of Common Stock or which are convertible or
exchangeable into securities which are substantially similar to the shares of
Common Stock, without the prior written consent of the representatives of the
Underwriters. See "Shares Eligible for Future Sale."
The representatives of the Underwriters have informed the Company that they
do not expect sales to accounts over which the Underwriters exercise
discretionary authority to exceed five percent of the total number of shares of
Common Stock offered by them.
Prior to this Offering, there has been no public market for the Common
Stock. The initial public offering price of the Common Stock will be negotiated
between the Company and the representa-
U-1
<PAGE> 106
tives of the Underwriters. Among the factors to be considered in determining the
initial public offering price of the Common Stock, in addition to prevailing
market conditions, will be current and historical natural gas and oil prices,
current and prospective conditions in the supply and demand for natural gas and
oil, reserve and production quantities for the Company's natural gas and oil
properties, the history of, and prospects for, the industry in which the Company
operates, the price earnings multiples of publicly traded common stocks of
comparable companies, the cash flow and earnings of the Company and comparable
companies in recent periods and the Company's business potential and cash flow
and earnings prospects.
The Company has agreed to indemnify the several Underwriters against
certain liabilities, including liabilities under the Securities Act of 1993.
U-2
<PAGE> 107
[RYDER SCOTT COMPANY LETTERHEAD]
April 15, 1996
Houston Exploration Company
1331 Lamar, Suite 1065
Houston, Texas 77010
Gentlemen:
Pursuant to your request, we present below our estimates of the net proved
reserves attributable to the interest of Houston Exploration Company (referred
to herein as the Company) as of December 31, 1995. The reserve estimates
utilized in this report were mechanically updated from our September 30, 1995
report which was dated October 17, 1995. At your request, we have revised
product pricing for all properties and production start dates for undeveloped
properties where applicable. The Company's reserves are located in the states
of Louisiana, Texas and in the federal waters offshore Louisiana and Texas.
The estimated reserve volumes and future income amounts presented in this
report are related to hydrocarbon prices. December 1995 hydrocarbon prices
were used in the preparation of this report as required by Securities and
Exchange Commission (SEC) and Financial Accounting Standards Bulletin No. 69
(FASB 69) guidelines; however, actual future prices may vary significantly from
December 1995 prices. Therefore, volumes of reserves actually recovered and
amounts of income actually received may differ significantly from the estimated
quantities presented in this report.
<TABLE>
<CAPTION>
Proved Net Reserves
Mechanically Adjusted from
September 30, 1995 to
December 31, 1995
-------------------------------------
Liquid, Barrels Gas, MMCF
------------------ ------------
<S> <C> <C>
Developed and Undeveloped 263,133 61,872
Developed 162,483 43,349
</TABLE>
The "Liquid" reserves shown above consist of condensate. All hydrocarbon
liquid reserves are expressed in standard 42 gallon barrels. All gas volumes
are sales gas expressed in MMCF at the pressure and temperature bases of the
area where the gas reserves are located.
The proved reserves presented in this report comply with the SEC's
Regulation S-X Part 210.4-10 Sec. (a) as clarified by subsequent Commission
Staff Accounting Bulletins, and are based on the following definitions and
criteria:
Proved reserves of crude oil, condensate, natural gas, and natural gas
liquids are estimated quantities that geological and engineering data
demonstrate with reasonable certainty to be recoverable in the future from
known reservoirs under existing conditions. Reservoirs are considered
proved if economic producibility is supported by actual production or
formation tests. In certain instances, proved reserves are assigned on the
basis of a combination of core analysis and electrical and other type logs
which indicate the reservoirs are analogous to reservoirs in the same
field which are producing or have demonstrated the ability to produce on a
formation test. The area of a reservoir considered proved includes (1)
that portion delineated by drilling and defined by fluid contacts, if any,
and (2) the adjoining portions not yet drilled that can be reasonably
judged as economically productive on the basis of available geological and
engineering data. In the absence of data on fluid contacts, the
A-1
<PAGE> 108
Houston Exploration Company
April 15, 1996
Page 2
lowest known structural occurrence of hydrocarbons controls the lower
proved limit of the reservoir. Proved reserves are estimates of hydrocarbons to
be recovered from a given date forward. They may be revised as hydrocarbons are
produced and additional data become available. Proved natural gas reserves are
comprised of non-associated, associated, and dissolved gas. An appropriate
reduction in gas reserves has been made for the expected removal of natural gas
liquids, for lease and plant fuel, and the exclusion of non-hydrocarbon gases if
they occur in significant quantities and are removed prior to sale. Reserves
that can be produced economically through the application of improved recovery
techniques are included in the proved classification when these qualifications
are met: (1) successful testing by a pilot project or the operation of an
installed program in the reservoir provides support for the engineering analysis
on which the project or program in the reservoir provides support for the
engineering analysis on which the project or program was based, and (2) it is
reasonably certain the project will proceed. Improved recovery includes all
methods for supplementing natural reservoir forces and energy, or otherwise
increasing ultimate recovery in its original sense. Improved recovery also
includes the enhanced recovery methods of thermal, chemical flooding, and the
use of miscible and immiscible displacement fluids. Estimates of proved reserves
do not include crude oil, natural gas, or natural gas liquids being held in
underground storage. Depending on the status of development, these proved
reserves are further subdivided into:
(i) "developed reserves" which are those proved reserves reasonably
expected to be recovered through existing wells with existing
equipment and operating methods, including (a) "developed producing
reserves" which are those proved developed reserves reasonably
expected to be produced from existing completion intervals now open
for production in existing wells, and (b) "developed non-producing
reserves" which are those proved developed reserves which exist behind
the casing of existing wells which are reasonably expected to be
produced through these wells in the predictable future where the cost
of making such hydrocarbons available for production should be
relatively small compared to the cost of a new well; and
(ii) "undeveloped reserves" which are those proved reserves reasonably
expected to be recovered from new wells on undrilled acreage, from
existing wells where a relatively large expenditure is required, and
from acreage for which an application of fluid injection or other
improved recovery technique is contemplated where the technique has
been proved effective by actual tests in the area in the same
reservoir. Reserves from undrilled acreage are limited to those
drilling units offsetting productive units that are reasonably certain
of production when drilled. Proved reserves for other undrilled units
are included only where it can be demonstrated with reasonable
certainty that there is continuity of production from the existing
productive formation.
Because of the direct relationship between volumes of proved undeveloped
reserves and development plans, we include in the proved undeveloped category
only reserves assigned to undeveloped locations that we have been assured will
definitely be drilled and reserves assigned to the undeveloped portions of
secondary or tertiary projects which we have been assured will definitely be
developed.
The Company has interests in certain tracts which have substantial
additional hydrocarbon quantities which cannot be classified as proved and
consequently are not included herein. The Company has active exploratory and
development drilling programs which may result in the reclassification of
significant additional volumes to the proved category. At your request, we have
not reviewed production or performance data since the September 30, 1995 report.
We have utilized the latest product prices and costs supplied by Houston
Exploration and have revised reserves in accordance with the new economic data
where applicable.
A-2
<PAGE> 109
Houston Exploration Company
April 15, 1996
Page 3
In accordance with the requirements of FASB 69, our estimates of future
cash inflows, future costs, and future net cash inflows before income tax as of
December 31, 1995 from this report are presented below.
<TABLE>
<CAPTION>
As of
December 31, 1995
------------------------
<S> <C>
Future Cash Inflows $134,406,042
Future Costs
Production $ 16,085,017
Development 12,328,376
------------
Total Costs $ 28,413,393
Future Net Cash Inflows
Before Income Tax $105,992,649
Present Value at 10%
Before Income Tax $ 78,676,747
</TABLE>
The future cash inflows are gross revenues before any deductions. The
production costs were based on current data and include production taxes, ad
valorem taxes, and certain other items such as transportation costs in addition
to the operating costs directly applicable to the individual leases or wells.
The development costs were based on current data and include dismantlement and
abandonment costs net of salvage for properties where such costs are
relatively significant.
The Company furnished us with gas prices in effect at December 31, 1995
and with its forecasts of future gas prices which take into account SEC
guidelines, current market prices, contract prices, and fixed and determinable
price escalations where applicable. In accordance with SEC guidelines, the
future gas prices used in this report make no allowances for future gas price
increases which may occur as a result of inflation nor do they account for
seasonal variations in gas prices which may cause future yearly average gas
prices to be somewhat higher or lower than December gas prices. For gas sold
under contract, the contract gas price including fixed and determinable
escalations exclusive of inflation adjustments, was used until the contract
expires and then was adjusted to the current market price for the area and held
at this adjusted price to depletion of the reserves.
The Company furnished us with liquid prices in effect at December 31, 1995
and these prices were held constant to depletion of the properties. In
accordance with SEC guidelines, changes in liquid prices subsequent to December
31, 1995 were not considered in this report.
Operating costs for the leases and wells in this report were based on the
operating expense reports of the Company and include only those costs directly
applicable to the leases or wells. When applicable, the operating costs
include a portion of general and administrative costs allocated directly to the
leases and wells under terms of operating agreements. Development costs were
furnished to us by the Company and are based on authorizations for expenditure
for the proposed work or actual costs for similar projects. The current
operating and development costs were held constant throughout the life of the
properties. The estimated net cost of abandonment after salvage was included
for properties where abandonment costs net of salvage are significant. The
estimates of the net abandonment costs furnished by the Company were accepted
without independent verification. No deduction was made for indirect costs
such as general administration and overhead expenses, loan repayments, interest
expenses, and exploration and development prepayments. No attempt was made to
quantify or otherwise account for any accumulated gas production imbalances
that may exist.
A-3
<PAGE> 110
Houston Exploration Company
April 15, 1996
Page 4
The estimates of reserves presented herein are based upon a detailed
study of the properties in which Houston Exploration Company owns an interest;
however, we have not made any field examination of the properties. No
consideration was given in this report to potential environmental liabilities
which may exist nor were any costs included for potential liability to restore
and clean up damages, if any, caused by past operating practices. Houston
Exploration Company has informed us that they have furnished us all of the
accounts, records, geological and engineering data and reports, and other data
required for this investigation. The ownership interests, prices, and other
factual data furnished by Houston Exploration Company were accepted without
independent verification. The reserve estimates presented in this report were
as of September 30, 1995, mechanically adjusted to December 31, 1995 and are
based upon production data available through August 1995. This report was based
upon economic data available through December 1995. We have been informed by
Houston Exploration that there have been no significant changes in the status
or performance of the properties included in this report which would affect the
estimate of reserves.
The reserves included in this report are estimates only and should not
be construed as being exact quantities. They may not be actually recovered, and
if recovered, the revenues therefrom and the actual costs related thereto could
be more or less than the estimated amounts. Moreover, estimates of reserves may
increase or decrease as a result of future operations.
In general, we estimate that future gas production rates will continue
to be the same as the average rate for the latest available 12 months of actual
production until such time that the well or wells are incapable of producing at
this rate. The well or wells were then projected to decline at their decreasing
delivery capacity rate. Our general policy on estimates of future production
rates is adjusted when necessary to reflect actual gas market conditions in
specific cases. The future production rates from wells now on production may be
more or less than estimated because of changes in market demand or allowables
set by regulatory bodies. Wells or locations which are not currently producing
may start producing earlier or later than anticipated in our estimates of their
future production rates.
While it may reasonably be anticipated that the future prices received
for the sale of production and the operating costs and other costs relating to
such production may also increase or decrease from existing levels, such
changes were, in accordance with rules adopted by the SEC, omitted from
consideration in making this evaluation.
Neither we nor any or our employees have any interest in the subject
properties and neither the employment to make this study nor the compensation
is contingent on our estimates of reserves and future cash inflows for the
subject properties.
Very truly yours,
RYDER SCOTT COMPANY
PETROLEUM ENGINEERS
/s/ DOUGLAS L. McBRIDE, P.E.
Douglas L. McBride, P.E.
Vice President
A-4
<PAGE> 111
[RYDER SCOTT COMPANY PETROLEUM ENGINEERS LETTERHEAD]
April 15, 1996
Smith Offshore Exploration Company
811 Dallas, Suite 800
Houston, Texas 77052
Gentlemen:
Pursuant to your request, we present below our estimates of the net
proved reserves attributable to the interest of Smith Offshore Exploration
Company (referred to herein as the Company) as of December 31, 1995. The
reserve estimates utilized in this report were mechanically updated from our
September 30, 1995 report which was dated October 17, 1995. At your request,
we have revised product pricing for all properties and production start dates
for undeveloped properties where applicable. The Company's reserves are located
in the states of Louisiana, Texas and in the federal waters offshore Louisiana
and Texas.
The estimated reserve volumes and future income amounts presented in
this report are related to hydrocarbon prices. December 1995 hydrocarbon prices
were used in the preparation of this report as required by Securities and
Exchange Commission (SEC) and Financial Accounting Standards Bulletin No. 69
(FASB 69) guidelines; however, actual future prices may vary significantly from
December 1995 prices. Therefore, volumes of reserves actually recovered and
amounts of income actually received may differ significantly from the estimated
quantities presented in this report.
<TABLE>
<CAPTION>
Proved Net Reserves
Mechanically Adjusted from
September 30, 1995 to
December 31, 1995
-----------------------------------
Liquid, Barrels Gas, MMCF
--------------- ---------
<S> <C> <C>
Developed and Undeveloped 61,726 12,309
Developed 61,706 11,921
</TABLE>
The "Liquid" reserves shown above consist of condensate. All
hydrocarbon liquid reserves are expressed in standard 42 gallon barrels. All
gas volumes are sales gas expressed in MMCF at the pressure and temperature
bases of the area where the gas reserves are located.
The proved reserves presented in this report comply with the SEC's
Regulation S-X Part 210.4-10 Sec.(a) as clarified by subsequent Commission
Staff Accounting Bulletins, and are based on the following definitions
and criteria:
Proved reserves of crude oil, condensate, natural gas, and
natural gas liquids are estimated quantities that geological and
engineering data demonstrate with reasonable certainty to be recoverable
in the future from known reservoirs under existing conditions.
Reservoirs are considered proved if economic producibility is supported
by actual production of formation tests. In certain instances, proved
reserves are assigned on the basis of a combination of core analysis and
electrical and other type logs which indicate the reservoirs are
analogous to reservoirs in the same field which are producing or have
demonstrated the ability to produce on a formation test. The area of a
reservoir considered proved includes (1) that portion delineated by
drilling and defined by fluid contacts, if any, and (2) the adjoining
portions not yet drilled that can be reasonably judged as economically
productive on the basis of available geological and engineering data. In
the absence of data on fluid contacts, the
A-5
<PAGE> 112
Smith Offshore Exploration Company
April 15, 1996
Page 2
lowest known structural occurrence of hydrocarbons controls the lower provided
limit of the reservoir. Proved reserves are estimates of hydrocarbons to be
recovered from a given date forward. They may be revised as hydrocarbons are
produced and additional data become available. Proved natural gas reserves are
comprised of non-associated, associated, and dissolved gas. An appropriate
reduction in gas reserves has been made for the expected removal of natural gas
liquids, for lease and plant fuel, and the exclusion of non-hydrocarbon gases
if they occur in significant quantities and are removed prior to sale. Reserves
that can be produced economically through the application of improved recovery
techniques are included in the proved classification when these qualifications
are met: (1) successful testing by a pilot project or the operation of an
installed program in the reservoir provides support for the engineering
analysis on which the project or program was based, and (2) it is reasonably
certain the project will proceed. Improved recovery includes all methods for
supplementing natural reservoir forces and energy, or otherwise increasing
ultimate recovery from a reservoir, including (1) pressure maintenance, (2)
cycling, and (3) secondary recovery in its original sense. Improved recovery
also includes the enhanced recovery methods of thermal, chemical flooding, and
the use of miscible and immiscible displacement fluids. Estimates of proved
reserves do not include crude oil, natural gas, or natural gas liquids being
held in underground storage. Depending on the status of development, these
proved reserves are further subdivided into:
(i) "developed reserves" which are those proved reserves reasonably
expected to be recovered through existing wells with existing equipment
and operating methods, including (a) "developed producing reserves"
which are those proved developed reserves reasonably expected to be
produced from existing completion intervals now open for production in
existing wells, and (b) "developed non-producing reserves" which are
those proved developed reserves which exist behind the casing of
existing wells which are reasonably expected to be produced through
these wells in the predictable future where the cost of making such
hydrocarbons available for production should be relatively small
compared to the cost of a new well; and
(ii) "undeveloped reserves" which are those proved reserves reasonably
expected to be recovered from new wells on undrilled acreage, from
existing wells where a relatively large expenditure is required, and
from acreage for which an application of fluid injection or other
improved recovery technique is contemplated where the technique has
been proved effective by actual tests in the area in the same
reservoir. Reserves from undrilled acreage are limited to those
drilling units offsetting productive units that are reasonably certain
of production when drilled. Proved reserves for other undrilled units
are included only where it can be demonstrated with reasonable
certainty that there is continuity of production from the existing
productive formation.
Because of the direct relationship between volumes of proved
undeveloped reserves and development plans, we include in the proved
undeveloped category only reserves assigned to undeveloped locations that we
have been assured will definitely be drilled and reserves assigned to the
undeveloped portions of secondary or tertiary projects which we have been
assured will definitely be developed.
The Company has interest in certain tracts which have substantial
additional hydrocarbon quantities which cannot be classified as proved and
consequently are not included herein. The Company has active exploratory and
development drilling programs which may result in the reclassification of
significant additional volumes to the proved category. At your request, we have
not reviewed production or performance data since the September 30, 1995
report. We have utilized the latest product prices and costs supplied by Smith
Offshore Exploration and have revised reserves in accordance with the new
economic data where applicable.
A-6
<PAGE> 113
Smith Offshore Exploration Company
April 15, 1996
Page 3
In accordance with the requirements of FASB 69, our estimates of future
cash inflows, future costs, and future net cash inflows before income tax as
December 31, 1995 from this report are presented below.
<TABLE>
<CAPTION>
As of
December 31, 1995
----------------------
<S> <C>
Future Cash Inflows $27,789,074
Future Costs
Production $ 4,518,578
Development 2,732,715
-----------
Total Costs $ 7,251,293
Future Net Cash Inflows
Before Income Tax $20,537,781
Present Value at 10%
Before Income Tax $16,165,172
</TABLE>
The future cash inflows are gross revenues before any deductions. The
production costs were based on current data and include production taxes, ad
valorem taxes, and certain other items such as transportation costs in addition
to the operating costs directly applicable to the individual leases or wells.
The development costs were based on current data and include dismantlement and
abandonment costs net of salvage for properties where such costs are relatively
significant.
The Company furnished us with gas prices in effect at December 31, 1995
and with its forecasts of future gas prices which take into account SEC
guidelines, current market prices, contract prices, and fixed and determinable
price escalations where applicable. In accordance with SEC guidelines, the
future gas prices used in this report make no allowances for future gas price
increases which may occur as a result of inflation nor do they account for
seasonal variations in gas prices which may cause future yearly average gas
prices to be somewhat higher or lower than December gas prices. For gas sold
under contract, the contract gas price including fixed and determinable
escalations exclusive of inflation adjustments, was used until the contract
expires and then was adjusted to the current market price for the area and held
at this adjusted price to depletion of the reserves.
The Company furnished us with liquid prices in effect at December 31, 1995
and these prices were held constant to depletion of the properties. In
accordance with SEC guidelines, changes in liquid prices subsequent to December
31, 1995 were not considered in this report.
Operating costs for the leases and wells in this report were based on the
operating expense reports of the Company and include only those costs directly
applicable to the leases or wells. When applicable, the operating costs
include a portion of general and administrative costs allocated directly to the
leases and wells under terms of operating agreements. Development costs were
furnished to us by the Company and are based on authorizations for expenditure
for the proposed work or actual costs for similar projects. The current
operating and development costs were held constant throughout the life of the
properties. The estimated net cost of abandonment after salvage was included
for properties where abandonment costs net of salvage are significant. The
estimates of the net abandonment costs furnished by the Company were accepted
without independent verification. No deduction was made for indirect costs
such as general administration and overhead expenses, loan repayments, interest
expenses, and exploration and development prepayments. No attempt was made to
quantify or otherwise account for any accumulated gas production imbalances
that may exist.
A-7
<PAGE> 114
Smith Offshore Exploration Company
April 15, 1996
Page 4
The estimates of reserves presented herein are based upon a detailed
study of the properties in which Smith Offshore Exploration Company owns an
interest; however, we have not made any field examination of the properties. No
consideration was given in this report to potential environmental liabilities
which may exist nor were any costs included for potential liability to restore
and clean up damages, if any, caused by past operating practices. Smith
Offshore Exploration Company has informed us that they have furnished us all of
the accounts, records, geological and engineering data and reports, and other
data required for this investigation. The ownership interests, prices, and
other factual data furnished by Smith Offshore Exploration Company were
accepted without independent verification. The reserve estimates presented in
this report were as of September 30, 1995, mechanically adjusted to December
31, 1995 and are based upon production data available through August 1995. This
report was based upon economic data available through December 1995. We have
been informed by Smith Offshore Exploration that there have been no significant
changes in the status or performance of the properties included in this report
which would affect the estimate of reserves.
The reserves included in this report are estimates only and should not
be construed as being exact quantities. They may or may not be actually
recovered, and if recovered, the revenues therefrom and the actual costs
related thereto could be more or less than the estimated amounts. Moreover,
estimates of reserves may increase or decrease as a result of future operations.
In general, we estimate that future gas production rates will continue
to be the same as the average rate for the latest available 12 months of actual
production until such time that the well or wells are incapable of producing at
this rate. The well or wells were then projected to decline at their decreasing
delivery capacity rate. Our general policy on estimates of future gas
production rates is adjusted when necessary to reflect actual gas market
conditions in specific cases. The future production rates from wells now on
production may be more or less than estimated because of changes in market
demand or allowables set by regulatory bodies. Wells or locations which are not
currently producing may start producing earlier or later than anticipated in
our estimates of their future production rates.
While it may reasonably the anticipated that the future prices received
for the sale of production and the operating costs and other costs relating to
such production may also increase or decrease from existing levels, such
changes were, in accordance with rules adopted by the SEC, omitted from
consideration in making this evaluation.
Neither we nor any of our employees have any interest in the subject
properties and neither the employment to make this study nor the compensation
is contingent on our estimates of reserves and future cash inflows for the
subject properties.
Very truly yours,
RYDER SCOTT COMPANY
PETROLEUM ENGINEERS
/s/ DOUGLAS L. McBRIDE, P.E.
Douglas L. McBride, P.E.
Vice President
A-8
<PAGE> 115
[NETHERLAND, SEWELL & ASSOCIATES, INC. LETTERHEAD]
May 22, 1996
Mr. James G. Floyd
The Houston Exploration Company
1331 Lamar, Suite 1065
Houston, Texas 77010
Dear Mr. Floyd:
In accordance with your request, we have estimated the proved reserves
and future revenue, as of December 31, 1995, to the combined interests of The
Houston Exploration Company and Smith Offshore Exploration Company (the
Companies) in the Vermilion 203, West Cameron 76, and Mustang Island 858
Fields, located in federal waters offshore Louisiana and Texas. Our estimates
have been prepared using constant prices and costs and conform to the
guidelines of The Securities and Exchange Commission (SEC).
As presented in the following table, we estimate the net reserves and
future net revenue to the Companies' combined interests, as of December 31,
1995, to be:
<TABLE>
<CAPTION>
Net Reserves Future Net Revenue
----------------------- ---------------------------
Oil Gas Present Worth
Category (Barrels) (MCF) Total at 10%
- ------------------ ---------- ---------- ----------- -------------
<S> <C> <C> <C> <C>
Proved Developed
Producing 17,951 4,592,247 $ 9,934,000 $ 7,847,800
Non-Producing 594,425 32,619,997 71,705,100 53,032,100
Proved Undeveloped 11,482 2,296,334 4,617,100 3,074,500
---------- ---------- ----------- -------------
Total Proved 623,858 39,508,578 $86,256,200 $63,954,400
</TABLE>
The oil reserves shown include condensate only. Oil volumes are
expressed in barrels which are equivalent to 42 United States gallons. Gas
volumes are expressed in thousands of standard cubic feet (MCF) at the contract
temperature and pressure bases.
The estimated reserves and future revenue shown herein are for proved
developed producing, proved developed non-producing, and proved undeveloped
reserves. In accordance with SEC guidelines, our estimates do not include any
value for probable or possible reserves which may exist for these properties,
nor do they include any value which could be attributed to interests in
undeveloped acreage beyond those tracts for which undeveloped reserves have
been estimated.
The future net revenue shown herein is the future gross revenue to the
Companies' combined interests after deducting future capital costs, operating
expenses, any applicable payments to net profits interests, and abandonment
costs; but before consideration of federal income taxes. In accordance with
SEC
A-9
<PAGE> 116
guidelines, the future net revenue has been discounted at an annual rate of 10
percent to determine its "present worth." The present worth is shown to
indicate the effect of time on the value of money and should not be construed
as being the fair market value of the properties.
For the purposes of these estimates, a field inspection of the
properties has not been performed nor has the mechanical operation or condition
of the wells and their related facilities been examined. We have not
investigated possible environmental liability related to the properties;
therefore, our estimates do not include any costs which may be incurred due to
such possible liability. Our estimates of future revenue include The Houston
Exploration Company's estimates of the costs to abandon the wells, platforms,
and production facilities. Netherland, Sewell & Associates, Inc. does not
typically include salvage value in abandonment cost estimates. However, as
requested, The Houston Exploration Company's abandonment cost estimates, which
include a substantial salvage value, have been used in our future revenue
estimates. Abandonment costs are included with other capital investments.
The oil and gas prices used are those prices in effect for each
property in December 1995 and are held constant in accordance with SEC
guidelines.
Lease and well operating costs are based on operating expense records
of the Companies. These costs include the per-well overhead expenses allowed
under joint operating agreements along with costs estimated to be incurred at
and below the district and field levels. Headquarters general and
administrative overhead expenses of the Companies are not included. Lease and
well operating costs are held constant in accordance with SEC guidelines.
Capital costs are included as required for workovers, new development wells,
and production equipment.
We have made no investigation of potential gas volume and value
imbalances which may have resulted from overdelivery or underdelivery to the
Companies' combined interests. Therefore, our estimates of reserves and future
revenue do not include adjustments for the settlement of any such imbalances;
our projections are based on the Companies receiving their net revenue interest
shares of estimated future gross gas production.
The reserves included herein are estimates only and should not be
construed as exact quantities. They may or may not be recovered; if recovered,
the revenues therefrom and the costs related thereto could be more or less than
the estimated amounts. A substantial portion of these reserves are for behind
pipe zones and undeveloped locations. Therefore, these reserves are based on
estimates of reservoir volumes and recovery efficiencies along with analogies
to similar production. As such reserve estimates are usually subject to
greater revision than those based on substantial production and pressure data,
it may be necessary to revise these estimates up or down in the future as
additional performance data become available. The sales rates, prices received
for the reserves, and costs incurred in recovering such reserves may vary from
assumptions included herein due to governmental policies and uncertainties of
supply and demand. Also, estimates of reserves may increase or decrease as a
result of future operations.
A-10
<PAGE> 117
In evaluating the information at our disposal concerning these
estimates, we have excluded from our consideration all matters as to which
legal or accounting, rather than engineering and geological, interpretation may
be controlling. As in all aspects of oil and gas evaluation, there are
uncertainties inherent in the interpretation of engineering and geological
data; therefore, our conclusions necessarily represent only informed
professional judgments.
The titles to the properties have not been examined by Netherland,
Sewell & Associates, Inc., nor has the actual degree or type of interest owned
been independently confirmed. The data used in our estimates were obtained
from The Houston Exploration Company, Smith Offshore Exploration Company, and
the nonconfidential files of Netherland, Sewell & Associates, Inc. and were
accepted as accurate. We are independent petroleum engineers, geologists, and
geophysicists; we do not own an interest in these properties and are not
employed on a contingent basis. Basic geologic and field performance data
together with our engineering work sheets are maintained on file in our office.
Very truly yours,
/S/ DANNY D. SIMMONS
MKH:ELM
A-11
<PAGE> 118
[HUDDLESTON & CO., INC. LETTERHEAD]
December 20, 1995
The Houston Exploration Company
Attention: Mr. George Kelly, Jr.
1331 Lamar Street, Suite 1065
Houston, Texas 77010
Re: Future Reserves and Revenues
Matagorda Blocks 650, 671, and 672
Current Price Case
As of December 31, 1995
Gentlemen:
Pursuant to your request, we have estimated the future oil and gas reserves and
projected revenues for the subject properties operated by The Houston
Exploration Company (THEC). These properties are located in federal waters off
Matagorda County, Texas.
Our conclusions, as of December 31, 1995, are as follows:
<TABLE>
<CAPTION>
Net to Appraised Interest - $(Thousands)
----------------------------------------
Proved Developed
--------------------------- Total
Current Price Case Producing Nonproducing Proved
- ------------------ --------- ------------ ------
<S> <C> <C>
Oil/Cond., bbl 2,759 3,325 6,084
Gas, MMcf 1,679.0 2,084.7 3,763.7
Future Gross Revenue, $ 3,475 4,314 7,788
Operating Expenses, $ 719 665 1,383
Net Profit Expenses, $ 96 110 205
Other Costs, $ 0 612 612
Future Net Revenue (FNR), $ 2,661 2,927 5,588
FNR, Disc. at 10%, $ 2,341 1,819 4,160
</TABLE>
<TABLE>
<CAPTION>
Projected Reserves and Revenues - Estimated Revenues, $
<S> <C> <C> <C>
1996 1,407 0 1,407
1997 717 59 776
1998 341 258 599
Thereafter 195 2,610 2,806
Total 2,661 2,927 5,588
</TABLE>
<TABLE>
<CAPTION>
Estimated Production -Annualized
<S> <C> <C> <C>
Oil/Cond., bbl 1,359 0 1,359
Gas, MMcf 819.8 0.0 819.8
</TABLE>
Columns may not add to equal totals because of computer rounding.
A-12
<PAGE> 119
The Houston Exploration Company
December 20, 1995
Page Two
SEC REPORTING REQUIREMENTS
Securities and Exchange Commission (SEC) Regulation S-K, Item 102 and
Regulation S-X, Rule 4-10 and Financial Accounting Standards Board (FASB)
Statement No. 69 require oil and gas reserve information to be reported by
publicly held companies as supplemental financial data. These regulations and
standards provide for estimates of Proved reserves and revenues discounted at
10% based on oil and gas prices in effect on the "as of" date of the report.
The Society of Petroleum Engineers (SPE) requires reserves to be economically
recoverable with prices and costs in effect on the "as of" date of the report
without further escalation. In addition, the SPE has issued Standards
Pertaining to the Estimating and Auditing of Oil and Gas Reserve Information
which sets requirements for the qualifications and independence of reserve
estimators and auditors and accepted methods to be used for estimating future
reserves.
The estimated Proved reserves and associated revenues contained herein have
been prepared in accordance with our understanding of all applicable SEC, FASB,
and SPE regulations and requirements.
RESERVE ESTIMATES
The reserve estimates for the subject properties were based on volumetric
calculations, extrapolation of BHP/Z versus cumulative production and
extrapolation of production history. Reserve estimates with limited or no
production history are typically subject to much greater revision than those
estimates derived from substantial performance history.
Delivery schedules were based on data furnished by THEC. At the request of
THEC, the wells were scheduled at their maximum effective delivery rates.
PROJECTIONS
The projections have been prepared on a calendar year basis for this report.
PRODUCT PRICES
As we understand SEC and FASB requirements, oil and gas prices utilized for
public reporting purposes should be based on those being received on the
effective date of the report without further escalations or reductions. The
projections shown herein have been based on product prices actually received
during December 1995 and have been adjusted to reflect transportation charges
and Btu adjustments. These prices have been held constant over the life of the
properties.
The projections are based on a current oil price of $17.35 per barrel. Gas
prices were projected at $1.9625 per MMBtu and have been adjusted for a healing
value of 1.040 Mcf per MMBtu per Mcf and a transportation charge of $0.16 per
MMcf has been subtracted from the reported net price. There prices were
specified by THEC and have been accepted as represented without review.
Huddleston & Co., Inc.
A-13
<PAGE> 120
The Houston Exploration Company
December 20,1995
Page Three
A comparison of the projected product prices, weighted as a composite for all
reserve categories, is as follows:
<TABLE>
<CAPTION>
Constant Product Prices
---------------------------
Oil/Cond. Gas
$/bbl $/Mcf
--------- ------
<S> <C> <C>
1996 17.35 2.041
Maximum 17.35 2.041
Average Over Life 17.35 2.041
</TABLE>
OPERATING COSTS
Operating expenses, shown as dollars per well per month, were supplied by THEC
and were computed by using platform expenses divided by the number of
completions for the specific platform. THEC has reported approximately no
change in platform expenses from the prior year. No severance or ad valorem
taxes were included because the wells are located in federal waters and are not
subject to these taxes. THEC has requested that the net profits interests
associated with these properties be shown as an expense item and be subtracted
from the gross revenues. The net profits interests (NPI) used in this report
are 2% of those interests that were originally owned by THIEC and a
reversionary back-in NPI of 20% applied to those interests purchased by THEC
from Wisconsin Gas and Electric Company (WEXCO) in 1993. THEC has reported to
us that the reversionary interest change will occur by December 3l, 1995. Other
expenses include remedial and workover costs and were based on estimates
furnished by THEC. The operating expenses and costs were held constant over the
life of the properties. Operating expenses equal 17.8% of the total future
gross revenues for the current price case.
The reserve projections are terminated for the current price case when the
wells cease to be economical.
VALUES NOT CONSIDERED
We have attempted to account for all deductions from gross revenues except for
the following:
1. Federal income tax
2. Depreciation, depletion and/or amortization,)if any (non-cash item)
3. General administrative costs allocated to the properties by THEC
4. Salvage values or costs to plug and abandon the wells
5. Platform abandonment costs
REPORT QUALIFICATIONS
Estimates of future reserves are based on predictions of recoverable
hydrocarbons, rate of production, proration by state and federal agencies,
product prices that are subject to ever-changing regulations, operating costs,
and direct taxes. Any unusual combination of these many factors could result in
actual future receipts considerably less or more than those estimated herein.
THE ESTIMATED FUTURE NET REVENUES AND PRESENT WORTH OF FUTURE NET REVENUES ARE
NOT REPRESENTED TO BE MARKET VALUES FOR THE SUBJECT PROPERTIES.
Huddleston & Co., Inc.
A-14
<PAGE> 121
The Houston Exploration Company
December 20, 1995
Page Four
Platform abandonment costs have not been included in the projections shown
herein at the request of THEC; however, these costs may have a material impact
on projected revenues on both a discounted and undiscounted basis. We have made
no attempt to estimate the magnitude of these expenses or the affect on future
revenues.
DATA SOURCES
Quantum and character of ownership and all other factual data furnished by THEC
were accepted as correct. We retain in our files production histories and
comprehensive files for certain significant properties. We did not inspect the
properties or conduct independent well tests.
Respectfully submitted,
/s/ ERLE E. KELLOGG
Erie E. Kellogg, P.E.
EEK:ek
Huddleston & Co., Inc.
A-15
<PAGE> 122
[HUDDLESTON & CO. INC. LETTERHEAD]
March 28, 1996
Smith Offshore Exploration Company
811 Dallas, Suite 800
Houston, Texas 77002
Attention: Mr. Lester H. Smith
Re: Estimated Future Reserves and Revenues
Matagorda Island Blocks 650, 671, and 672
As of December 31, 1995
Gentlemen:
Pursuant to your request, we have estimated future reserves and projected
revenues for certain properties owned by Smith Offshore Exploration Company
(SOXCO) and operated by The Houston Exploration Company (THEC). The properties
are located on Matagorda Island Blocks 650, 671, and 672 in federal waters
offshore Texas.
Our conclusions, as of December 31, 1995, are as follows:
Net to Appraised Interest - $(Thousands)
----------------------------------------------
Proved Proved
Developed Developed Total
Current Price Case Producing Nonproducing Proved
- ------------------ --------- ------------ ------
Oil/Cond., bbl 3,066 3,695 6,761
Gas, MMcf 1,865.5 2,316.6 4,182.1
Future Gross Revenue, $ 3,990 4,953 8,943
Operating Expenses, $ 798 738 1,537
Net Profit Expenses, $ 104 115 219
Other Costs, $ 0 680 680
Future Net Revenue (FNR), $ 3,088 3,420 6,507
FNR, Discounted at 10%, $ 2,741 2,153 4,894
Projected Reserves and Revenues
- -------------------------------
Estimated Revenues by Year, $
- -----------------------------
1996 1,628 0 1,628
1997 833 71 904
1998 397 302 699
1999 181 664 845
Thereafter 49 2,383 2,432
Total 3,088 3,420 6,507
Estimated Production - Annual 1996
- ----------------------------------
Oil/Cond., bbl 1,511 0 1,511
Gas, MMcf 910.9 0.0 910.9
Columns may not add to equal totals due to computer rounding.
A-16
<PAGE> 123
Smith Offshore Exploration Company
March 28, 1996
Page Two
REPORT PREPARATION
Securities and Exchange Commission (SEC) Regulation S-K, Item 102 and S-X,
Rule 4-10 and Financial Accounting Standards Board (FASB) Statement No. 69
require oil and gas reserve information to be reported by publicly held
entities as supplemental financial data. These regulations and standards
provide for estimates of Proved reserves and revenues discounted at 10% based
on oil and gas prices being received on the effective date of the report. The
SEC has re-stated that product prices in effect on the "as of" date should be
reported even when the actual product prices are in a widely fluctuating
market.
The Society of Petroleum Engineers (SPE) requires reserves to be economically
recoverable with prices and costs in effect on the "as of" date of the report
without future escalations. In addition the SPE has issued Standards Pertaining
to the Estimating and Auditing of Oil and Gas Reserve Information which sets
standards for the qualifications and independence of reserve estimators and
auditors and accepted methods for estimating future reserves.
The estimated reserves and revenues shown herein have been prepared in
accordance with our understanding of all applicable SEC, SPE, and FASB
regulations and requirements.
RESERVE ESTIMATES
Reserve estimates for the producing properties were assigned primarily on the
basis of the extrapolation of pressure data where there was sufficient data to
suggest a decline trend and this method was applicable to the subject
reservoir. The estimates were further supported by volumetric calculations and
consideration of production data. In general, production from these properties
had been subject to significant proration throughout the early portion of the
productive lives of the properties.
Nonproducing reserves were necessarily based on volumetric calculations and
analogy to nearby completions in comparable producing horizons. Reserve
estimates for water drive gas reservoirs, reservoirs lacking sustained,
stabilized production histories, and nonproducing completions will be subject
to much greater revision than those based on the extrapolation of established
production and pressure histories.
The projected reserves and schedules of future production have been prepared
with consideration for historical production rates. The properties have
historically been subject to considerable proration due to a number of factors
which may include pipeline restrictions, market conditions, and/or corporate
policy. In general, production rates have been held at current levels until the
deliverability declines to current production levels and have been declined
thereafter at rates consistent with our estimates of recoverable reserves.
RESERVE RECONCILIATION
We have provided herein our interpretation and reconciliation of reserves and
values from December 31, 1994, to December 31, 1995. All entries in the
reconciliation, except for revisions, are developed directly, i.e., starting
balance, additions, sales, and ending balance. Total revisions are determined
by the sum of the direct entries. In our opinion, the breakout of line items
within the revisions category (accretion, price and other) can only be
approximations due to the interrelation of these factors.
A-17
<PAGE> 124
Smith Offshore Exploration Company
March 28, 1996
Page Three
PROJECTIONS
The attached reserve and revenue projections are on a calendar year basis with
the first time period being January 1, 1996, through December 31, 1996.
PRODUCT PRICES
SEC and FASB requirements specify the use of product prices in effect on the
"as of" date of the report without escalation or reductions for public
reporting purposes. We have utilized product prices specified by SOXCO which
have been represented to be those received for products sold during December
1995. These prices have been adjusted to reflect heating value and
transportation charges and were held constant over the life of properties.
The projections were based on oil and gas prices of $17.70 per barrel and $2.11
per Mcf, respectively. The Btu content was projected at 1.040 MMBtu per Mcf for
all wells and has been included in the gas price. Transportation charges of
$0.16 per Mcf have been netted from the gas price. The product prices shown
herein were accepted as represented by SOXCO without further review.
A comparison of the average product prices, weighted as a composite for all
properties is as follows:
Oil/Cond. Gas
CURRENT PRODUCT PRICES $/bbl $/MMcf
- ---------------------- --------- ------
1996 17.70 2,109.90
Maximum 17.70 2,100.00
Average Over Life 17.70 2,109.90
OPERATING COSTS
Operating expenses, shown as dollars per well per month, were supplied by THEC
and were assigned to the individual completions on the basis of the total
operating costs divided by the number of completions attributable to the
platform. The operating costs for a compressor have been included for specific
wells. The properties included herein are not subject to severance or ad valorem
taxes since the properties are located in federal waters. We have included as
an operating expense item certain "net profits" interests. Drilling and
remedial costs were based on estimates provided by THEC. All operating expenses
and capital costs were held constant over the life of the properties. Operating
expenses were equal to 17.2% of gross revenues for the current price case.
FACTORS NOT INCLUDED
Values were not assigned to nonproducing acreage or to the salvage of surface
and subsurface equipment. No consideration has been included for the costs to
abandon either the production platforms or the wellbores.
General office overhead, federal income taxes, and allowances for depletion,
depreciation and amortization have not been deducted from future revenues.
A-18
<PAGE> 125
Smith Offshore Exploration Company
March 28, 1996
Page Four
Report Qualifications
- ---------------------
THE ESTIMATED FUTURE REVENUES AND PRESENT VALUE OF THESE REVENUES ARE NOT
REPRESENTED TO BE MARKET VALUE.
Initial production rates, product prices, operating expenses, capital costs,
and schedules of future development operations were specified by THEC.
Variation in the level of expenditures, the timing of future operations and
production or changes in actual prices may result in actual results or
operations being materially higher or lower than those shown herein.
Platform abandonment costs were excluded at the request of SOXCO. Inclusion of
these costs may have a material impact on future revenues on both a discounted
and undiscounted basis. We have made no attempt to quantify the potential
impact of these expenses.
Quantum and character of ownership and all other factual data furnished by
SOXCO were accepted as represented. We have generally tested the validity of
these data and believe the information is correct. We express no opinion and
make no representations as to legal or accounting interpretations provided by
THEC and SOXCO. We retain in our files plotted production histories and
comprehensive files for certain significant properties.
We did not conduct independent well tests or inspect the properties and do not
believe it necessary for the purpose of this study.
Respectfully submitted,
/s/ ERLE E. KELLOGG, P.E.
Erle E. Kellogg, P.E.
A-19
<PAGE> 126
[MILLER AND LENTS, LTD. LETTERHEAD]
January 16, 1996
Fuel Resources Inc.
1330 Post Oak Boulevard, Suite 2000
Houston, TX 77056
Attention: Mr. Charles W. Adcock
Re: Reserves Future Net Revenue
As of December 31, 1995
SEC Case
Gentlemen:
At your request, we estimated the proved reserves and the projected future
net revenue attributable to the net interests of Fuel Resources Inc. (FRI) and
Fuel Resources Production and Development, Inc. (FRPD) as of December 31, 1995,
using constant prices and costs. The results of our estimates are presented
below:
Reserves and Future Net Revenue as of December 31, 1995
-------------------------------------------------------
<TABLE>
<CAPTION>
Net Reserves Future Net Revenue
---------------------------- ------------------------------------
Crude and Discounted at
Condensate, Gas, Undiscounted, 10% Per Year,
Reserve Category MBbls. MMcf M$ M$
- --------------------- ----------- --------- ------------- -------------
<S> <C> <C> <C> <C>
Proved Producing 139.1 80,473.3 145,081.9 81,482.5
Proved Nonproducing 76.2 10,572.1 15,026.4 6,381.5
Proved Undeveloped 8.4 13,371.6 17,796.8 8,257.4
----- --------- --------- --------
Total Proved 223.7 104,417.0 177,905.1 96,121.4
</TABLE>
Proved reserves were estimated in accordance with the definitions
contained in the Securities and Exchange Commission Regulation S-X, Rule
4-10(a) as shown on Attachment 1.
A-20
<PAGE> 127
MILLER AND LENTS, LTD.
Fuel Resources Inc. January 16, 1996
Attention: Mr. Charles W. Adcock Page 2
Section 1 of the attachments includes the projections of production and
future net revenue and the one-line summary reports (1) for the total of all
properties within FRI and FRPD summarized by reserve category and (2) for each
of the corporations summarized by state and reserve category. The economic
projections and one-line summary reports included in Section 2 are summarized
by program and reserve category. Section 2 are summarized by program and
reserve category. Section 3 includes one-line summaries showing the economic
results for the fields and for the individual wells sorted by present worth.
Section 4 includes forecasts of revenues estimated to result from gas gathering
systems owned and operated by FRI and FRPD. Section 5 consists of three
volumes, presented as exhibits to this report, and includes the individual well
economic forecasts and production graphs arranged by program, reserve category,
and lease. The one-line summary reports behind each program tab in Section 5
serve as an index to the properties within each program.
The prices used to estimate future net revenue were provided by FRI and
were represented as the prices being received for oil and gas at fiscal
year-end, December 31, 1995. The present worth of future net revenue was
computed by employing a discount rate of 10 percent per annum. Estimates of
future net revenue and the present worth of future net revenue are not intended
and should not be interpreted to represent fair market values for the estimated
reserves.
With the exceptions of changes due to significant drilling activity
during the last quarter of 1995, the projections of production for this report
were taken from our report, "Reserves and Future Net Revenue as of September
30, 1995," dated October 12, 1995.
Reserve estimates were based on decline curve projections, material
balance calculations, analogous well performance, and volumetric estimates.
Reserve estimates from analogies and volumetric calculations are often less
certain than reserve estimates based on well performance obtained over a period
during which a substantial portion of the reserves were produced. No provisions
for the possible consequences, if any, to projected volumes and future net
revenues for the purposes of production balancing are included in this
evaluation.
In conducting this evaluation, we relied upon production histories,
lease ownership, pricing and cost data, tax credit qualification percentages,
Btu content, and other engineering and geological data supplied by FRI. To a
lesser extent, data existing in the Miller and Lents, Ltd., files and those
data which are of public record were used. The Appendix lists the instructed
reserve study assumptions employed in our evaluation.
The "Section 29 Tax Credit" and "Overhead Reimbursement" were
calculated as instructed and are shown in separate columns on the economic
output report pages. The Section 29 Tax Credits were not considered in
determining the economic limit of the individual properties.
Future net revenue as used herein is defined as the total revenue
attributable to the evaluated working interests, inclusive of the tax credit
and fee revenues, less royalties, severance and ad valorem taxes, operating
expenses, and future capital expenditures. Future costs of abandoning
facilities and wells and of the restoration of producing properties to satisfy
environmental standards are not deducted from total revenue as such estimates
are beyond the scope of this assignment.
A-21
<PAGE> 128
MILLER AND LENTS, LTD.
Fuel Resources Inc. January 16, 1996
Attention: Mr. Charles W. Adcock Page 3
At your request, we included an estimate of the revenues resulting from
the operation of certain gas gathering and transportation systems. The
revenues from these systems are not included with the revenues attributed to
the reserves reported above. The results of these estimates as of December 31,
1995, are shown below:
<TABLE>
<CAPTION>
Future Net Revenue
---------------------------------------------
Discounted at
Undiscounted, 10 Percent per year,
Gathering System M$ M$
---------------- ------------- --------------------
<S> <C> <C>
Bailey 8.3 6.6
CDPS 846.0 468.0
SUGS 506.1 263.4
------- -----
Total 1,360.5 738.0
</TABLE>
The evaluations presented in this report, with the exceptions of those
parameters specified by others, reflect our informed judgments based on
accepted standards of professional investigation but are subject to those
generally recognized uncertainties associated with interpretation of
geological, geophysical, and engineering information. Government policies and
market conditions different from those employed in this study may cause the
total quantity of oil or gas to be recovered, actual production rates, prices
received, or operating and capital costs to vary from those presented in this
report.
If you have any questions regarding the above, or if we can be of further
assistance, please call.
Yours very truly,
MILLER AND LENTS, LTD.
By /s/ KAREN F. LOVING
--------------------------
Karen F. Loving
KFL/mk
A-22
<PAGE> 129
Appendix
FUEL RESOURCES INC.
DECEMBER 1995 RESERVE STUDY ASSUMPTIONS - SEC PRICE CASE
================================================================================
GAS PRICING o Wellhead prices per MMBtu net of gathering,
extraction, compression charges, and applicable
basis adjustment, as provided by Fuel Resources
Inc. (FRI)
o No escalation
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
OIL PRICING o $17.00 per barrel, no escalation
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECTION 29 TAX CREDITS o Qualification percentages for Devonian Shale and
tight sands as specified by FRI
o Devonian Shale tax credit rate $1.01/MMBtu
o Tight gas tax credit rate $0.517/MMBtu
o Tax credit expires on December 31, 2002
o Credits adjusted in revenue forecast to Before
Federal Income Tax equivalent, as instructed by
FRI: i.e., divided by [1.0 - (corporate tax rate,
fraction)]
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
LEASE OPERATING EXPENSES o Operating expenses without escalation as provided
by FRI
o For West Virginia properties, "non-billable"
operating expenses, as provided by FRI, applied
against FRPD's net interest
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
OPERATING FEES o As specified by FRI, overhead reimbursement from
non-operating working interest owners is treated
as revenue in forecasts of future net revenue.
This revenue source is designated as "OVERHD
REIMBMT" in the economic projections.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
TAXES o Severance tax as applicable for each property
o Ad valorem tax of 4 percent of revenues to the
net interest for West Virginia properties,
$0.01/Mcf for Arkansas, and 2 percent for all
others
================================================================================
A-23
<PAGE> 130
- ---------------------------------------------------------
- ---------------------------------------------------------
NO 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. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES TO
WHICH IT RELATES OR AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY SUCH
SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS UNLAWFUL.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER
ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary...................... 3
Risk Factors............................ 9
The Company............................. 14
Soxco Acquisition....................... 14
Use of Proceeds......................... 15
Dividend Policy......................... 15
Dilution................................ 16
Capitalization.......................... 17
Selected Historical Financial Data...... 18
Pro Forma Combined Financial
Information........................... 19
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................ 23
Business................................ 31
Management.............................. 48
Related Party Transactions.............. 53
Security Ownership of Certain Beneficial
Owners and Management................. 56
Description of Capital Stock............ 57
Shares Eligible for Future Sale......... 59
Legal Matters........................... 60
Experts................................. 60
Available Information................... 61
Glossary of Oil and Gas Terms........... 62
Index to Financial Statements........... F-1
Underwriting............................ U-1
Reports of Independent Petroleum
Engineers............................. A-1
</TABLE>
THROUGH AND INCLUDING , 1996 (THE 25TH DAY AFTER THE DATE OF
THIS PROSPECTUS), ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK,
WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A
PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A
PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
- ---------------------------------------------------------
- ---------------------------------------------------------
- ---------------------------------------------------------
- ---------------------------------------------------------
5,700,000 SHARES
THE HOUSTON
EXPLORATION COMPANY
COMMON STOCK
(PAR VALUE $.01 PER SHARE)
------------------------
LOGO
------------------------
GOLDMAN, SACHS & CO.
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
PAINEWEBBER INCORPORATED
REPRESENTATIVES OF THE UNDERWRITERS
- ---------------------------------------------------------
- ---------------------------------------------------------
<PAGE> 131
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION(1)
<TABLE>
<S> <C>
SEC Registration Fee............................................................. $ 31,645
NASD Filing Fee.................................................................. 9,677
NYSE Listing Fee................................................................. *
Accounting Fees and Expenses..................................................... *
Legal Fees and Expenses.......................................................... *
Printing Expenses................................................................ *
Blue Sky Qualification Fees and Expenses......................................... *
Transfer Agent's Fees............................................................ *
Miscellaneous.................................................................... *
---------
TOTAL.................................................................. $ *
=========
</TABLE>
- ---------------
(1) The amounts set forth above, except for the SEC and NASD fees, are in each
case estimated.
* To be completed by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Subsection (a) of Section 145 of the General Corporation Law of the State
of Delaware empowers a corporation to indemnify any person who was or is a party
or is threatened to be made a party to any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the corporation) by
reason of the fact that he is or was a director, officer, employee or agent of
the corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by him in connection with such action, suit or proceeding if he acted
in good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the corporation, and, with respect to any criminal action
or proceeding, had no reasonable cause to believe his conduct was unlawful.
Subsection (b) of Section 145 empowers a corporation to indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, or suit by or in the right of the
corporation to procure a judgment in its favor by reason for the fact that such
person acted in any of the capacities set forth above, against expenses
(including attorneys' fees) actually and reasonably incurred by him in
connection with the defense or settlement of such action or suit if he acted in
good faith and in manner he reasonably believed to be in or not opposed to the
best interests of the corporation, except that no indemnification may be made in
respect of any claim, issue or matter as to which such person shall have been
made to be liable to the corporation unless and only to the extent that the
Court of Chancery or the court in which such action or suit was brought shall
determine upon application that, despite the adjudication of liability but in
view of all the circumstances of the case, such person is fairly and reasonably
entitled to indemnity for such expense which the Court of Chancery or such other
court shall deem proper.
Section 145 further provides that to the extent a director or officer of a
corporation has been successful on the merits or otherwise in the defenses of
any action, suit or proceeding referred to in subsections (a) and (b) of Section
145 in the defense of any claim, issue or matter therein, he shall be
indemnified against expenses (including attorneys' fees) actually and reasonably
incurred by him in connection therewith; that indemnification provided for by
Section 145 shall not be deemed
II-1
<PAGE> 132
exclusive of any other rights to which the indemnified party may be entitled;
that indemnification provided for by Section 145 shall, unless otherwise
provided when authorized or ratified, continue as to a person who has ceased to
be a director, officer, employee or agent and shall inure to the benefit of such
person's heirs, executors and administrators; and empowers the corporation to
purchase and maintain insurance on behalf of a director or officer of the
corporation against any liability asserted against him and incurred by him in
any such capacity, or arising out of his status as such whether or not the
corporation would have the power to indemnify him against such liabilities under
Section 145.
Section 102(b)(7) of the General Corporation Law of the State of Delaware
provides that a certificate of incorporation may contain a provision eliminating
or limiting the personal liability of a director to the corporation or its
stockholders for monetary damages for breach of fiduciary duty as a director
provided that such provision shall not eliminate or limit the liability of a
director (i) for any breach of the director's duty of loyalty to the corporation
or its stockholders, (ii) for acts or omissions not in good faith or which
involve intentional misconduct or knowing violation of law, (iii) under Section
174 of the Delaware General Corporation Law, or (iv) for any transaction from
which the director derived an improper personal benefit.
Section 3.07 of the Company's Certificate of Incorporation states that:
(a) No person who is or was a director of the Corporation shall be
personally liable to the Corporation or its stockholders for monetary
damages for breach of fiduciary duty as a director, except for liability
(i) for any breach of the director's duty of loyalty to the Corporation or
its stockholders, (ii) for acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of law, (iii) under
Section 174 of the DGCL or (iv) for any transaction from which the director
derived an improper personal benefit.
(b) If the DGCL is hereafter amended to authorize corporate action
further limiting or eliminating the personal liability of directors, then
the personal liability of the directors to the Corporation or its
stockholders shall be limited or eliminated to the full extent permitted by
the DGCL, as so amended from time to time. Any repeal or modification of
this Section 3.07 shall be prospective only, and shall not adversely affect
any limitation on the personal liability of a director of the Corporation
or its stockholders arising from an act or omission occurring prior to the
time of such repeal or modification.
In addition, Article VI of the Company's Certificate of Incorporation and
Article VIII of the Company's Bylaws further provides that the Company shall
indemnify its officers and, directors to the fullest extent permitted by law.
The Company has entered into indemnification agreements with each of its
directors and executive officers.
Under Section of the Underwriting Agreement filed as Exhibit 1.1 to this
Registration Statement, the Underwriters have agreed to indemnify, under certain
conditions, the Company, its officers and directors, and persons who control the
Company within the meaning of the Securities Act of 1933, as amended, against
certain liabilities.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
The Company issued an aggregate of 2,710,380 shares of Common Stock to THEC
Holdings Corp. in May 1996 pursuant to an exemption from the registration
requirements of the Securities Act of 1933, as amended (the "Act"), pursuant to
Section 4(2) of the Act.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
II-2
<PAGE> 133
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION
- -------------------- ------------------------------------------------------------------------
<S> <C>
*1.1 -- Form of Underwriting Agreement.
*3.1 -- Restated Certificate of Incorporation.
*3.2 -- Restated Bylaws.
*4.1 -- Specimen Common Stock Certificate.
*5.1 -- Opinion of Andrews & Kurth L.L.P. as to the legality of the
securities being registered.
+*10.1 -- Gas Sales Agreement dated as of April 1, 1995 between The Houston
Exploration Company and PennUnion Energy Services, L.L.C.
+*10.2 -- Gas Sales Agreement dated as of April 1, 1995 between Fuel Resources,
Inc. and PennUnion Energy Services, L.L.C.
10.3 -- Confidentiality and Non-Competition Agreement dated as of March 21,
1995 among PennUnion Energy Services, L.L.C., Bring Gas Services
Corp., The Brooklyn Union Gas Company, Fuel Resources, Inc., Fuel
Resources Production and Development, Inc., The Houston Exploration
Company, Gas Energy, Inc., Pennzoil Gas Marketing Company, Pennzoil
Exploration and Development Company, and Pennzoil Company.
10.4 -- Swap Agreement dated September 22, 1994 between Enron Risk Management
Services Corp. and The Houston Exploration Company.
10.5 -- Swap Agreement dated February 21, 1995 between Chemical Bank and The
Houston Exploration Company.
10.6 -- Swap Agreement dated March 2, 1995 between Chemical Bank and The
Houston Exploraton Company.
10.7 -- Swap Agreement dated February 5, 1992 between Chemical Bank and Fuel
Resources Inc.
*10.8 -- Employment Agreement dated , 1996 between The Houston
Exploration Company and James G. Floyd.
*10.9 -- Employment Agreement dated , 1996 between The Houston
Exploration Company and Randall J. Fleming.
*10.10 -- Employment Agreement dated , 1996 between The Houston
Exploration Company and Thomas W. Powers.
*10.11 -- Employment Agreement dated , 1996 between The Houston
Exploration Company and James F. Westmoreland.
*10.12 -- 1996 Stock Option Plan.
*10.13 -- Registration Rights Agreement dated as of , 1996
between the Company and The Brooklyn Union Gas Company.
*10.14 -- Asset Purchase Agreement dated , 1996 between The
Houston Exploration Company and Smith Offshore Exploration Company.
*10.15 -- Form of Registration Rights Agreement between The Houston Exploration
Company and Smith Offshore Exploration Company.
10.16 -- Credit Agreement dated as of April 23, 1996 among The Houston
Exploration Company and Texas Commerce Bank National Association as
Agent and the other Banks Signatory thereto.
*23.1 -- Consent of Andrews & Kurth L.L.P. (included in Exhibit 5.1).
23.2 -- Consent of Arthur Andersen LLP
23.3 -- Consent of Ryder Scott Company
23.4 -- Consent of Netherland, Sewell and Associates, Inc.
23.5 -- Consent of Huddleston & Co., Inc.
23.6 -- Consent of Miller and Lents, Ltd.
24.1 -- Powers of Attorney (included in Part II of this Registration
Statement).
</TABLE>
- ---------------
* To be filed by amendment.
+ Confidential treatment has been requested. The copy filed as an exhibit omits
the information subject to the confidentiality request.
II-3
<PAGE> 134
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act, and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
The undersigned registrant hereby undertakes:
(1) That for purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part of
this Registration Statement in reliance upon Rule 403A and contained in a form
of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this Registration
Statement as of the time it was declares effective.
(2) That for the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
(3) To provide to the underwriter at the closing specified in the
underwriting agreement certificates in such denominations and registered in such
names as required by the underwriters to permit prompt delivery to each
purchaser.
II-4
<PAGE> 135
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-1 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized in the City of Houston, State of Texas, on May , 1996.
THE HOUSTON EXPLORATION COMPANY
By: /s/ JAMES G. FLOYD
------------------------------------
James G. Floyd
President and Chief Executive Officer
POWER OF ATTORNEY
Know all men by these presents, that each person whose signature appears
below constitutes and appoints James G. Floyd and James F. Westmoreland (with
full power to each to act alone) as his true and lawful attorney-in-fact and
agent, with full power of substitution, for him and in his name, place, and
stead, in any and all capacities, to sign, execute and file this Registration
Statement under the Securities Act of 1933, as amended (the "Securities Act")
and any or all amendments (including, without limitation, post-effective
amendments and any amendment or amendments or additional registration statements
filed pursuant to Rule 462 under the Securities Act increasing the amount of
securities for which registration is being sought), with all exhibits and any
and all other documents required to be filed with respect thereto, with the
Securities and Exchange Commission, to sign any and all applications,
registration statements, notices or other documents necessary or advisable to
comply with the applicable state security laws, and to file the same, together
with all other documents in connection therewith, with the appropriate state
securities authorities, granting unto said attorneys-in-fact and agents or any
of them, or their or his substitute or substitutes, full power and authority to
do and perform each and every act and thing requisite and necessary to be done
in and about the premises, as fully to all intents and purposes as he might or
could do in person, thereby ratifying and confirming all that said
attorneys-in-fact and agents or any of them, or their or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------------------------------------------- -------------------------------- ---------------
<C> <S> <C>
/s/ JAMES G. FLOYD President, Chief Executive May 23, 1996
- --------------------------------------------- Officer and Director
James G. Floyd (Principal Executive Officer)
/s/ JAMES F. WESTMORELAND Vice President, Chief Accounting May 23, 1996
- --------------------------------------------- Officer, Comptroller and
James F. Westmoreland Secretary (Principal Financial
Officer and Principal
Accounting Officer)
/s/ ROBERT B. CATELL Chairman of the Board of May 23, 1996
- --------------------------------------------- Directors
Robert B. Catell
/s/ CRAIG G. MATTHEWS Director May 23, 1996
- ---------------------------------------------
Craig G. Matthews
/s/ RUSSELL D. GORDY Director May 23, 1996
- ---------------------------------------------
Russell D. Gordy
/s/ GORDON F. AHALT Director May 23, 1996
- ---------------------------------------------
Gordon F. Ahalt
/s/ JAMES Q. RIORDAN Director May 23, 1996
- ---------------------------------------------
James Q. Riordan
</TABLE>
II-5
<PAGE> 136
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------------------------------------------- -------------------------------- ---------------
<C> <S> <C>
________________________ Director May , 1996
Lester H. Smith
</TABLE>
II-6
<PAGE> 137
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION
- -------------------- ------------------------------------------------------------------------
<S> <C>
*1.1 -- Form of Underwriting Agreement.
*3.1 -- Restated Certificate of Incorporation.
*3.2 -- Restated Bylaws.
*4.1 -- Specimen Common Stock Certificate.
*5.1 -- Opinion of Andrews & Kurth L.L.P. as to the legality of the
securities being registered.
+*10.1 -- Gas Sales Agreement dated as of April 1, 1995 between The Houston
Exploration Company and PennUnion Energy Services, L.L.C.
+*10.2 -- Gas Sales Agreement dated as of April 1, 1995 between Fuel Resources,
Inc. and PennUnion Energy Services, L.L.C.
10.3 -- Confidentiality and Non-Competition Agreement dated as of March 21,
1995 among PennUnion Energy Services, L.L.C., Bring Gas Services
Corp., The Brooklyn Union Gas Company, Fuel Resources, Inc., Fuel
Resources Production and Development, Inc., The Houston Exploration
Company, Gas Energy, Inc., Pennzoil Gas Marketing Company, Pennzoil
Exploration and Development Company, and Pennzoil Company.
10.4 -- Swap Agreement dated September 22, 1994 between Enron Risk Management
Services Corp. and The Houston Exploration Company.
10.5 -- Swap Agreement dated February 21, 1995 between Chemical Bank and The
Houston Exploration Company.
10.6 -- Swap Agreement dated March 2, 1995 between Chemical Bank and The
Houston Exploraton Company.
10.7 -- Swap Agreement dated February 5, 1992 between Chemical Bank and Fuel
Resources Inc.
*10.8 -- Employment Agreement dated , 1996 between The Houston
Exploration Company and James G. Floyd.
*10.9 -- Employment Agreement dated , 1996 between The Houston
Exploration Company and Randall J. Fleming.
*10.10 -- Employment Agreement dated , 1996 between The Houston
Exploration Company and Thomas W. Powers.
*10.11 -- Employment Agreement dated , 1996 between The Houston
Exploration Company and James F. Westmoreland.
*10.12 -- 1996 Stock Option Plan.
*10.13 -- Registration Rights Agreement dated as of , 1996
between the Company and The Brooklyn Union Gas Company.
*10.14 -- Asset Purchase Agreement dated , 1996 between The
Houston Exploration Company and Smith Offshore Exploration Company.
*10.15 -- Form of Registration Rights Agreement between The Houston Exploration
Company and Smith Offshore Exploration Company.
10.16 -- Credit Agreement dated as of April 23, 1996 among The Houston
Exploration Company and Texas Commerce Bank National Association as
Agent and the other Banks Signatory thereto.
*23.1 -- Consent of Andrews & Kurth L.L.P. (included in Exhibit 5.1).
23.2 -- Consent of Arthur Andersen LLP
23.3 -- Consent of Ryder Scott Company
23.4 -- Consent of Netherland, Sewell and Associates, Inc.
23.5 -- Consent of Huddleston & Co., Inc.
23.6 -- Consent of Miller and Lents, Ltd.
24.1 -- Powers of Attorney (included in Part II of this Registration
Statement).
</TABLE>
- ---------------
* To be filed by amendment.
+ Confidential treatment has been requested. The copy filed as an exhibit omits
the information subject to the confidentiality request.
<PAGE> 1
Exhibit 10.3
CONFIDENTIALITY AND NON-COMPETITION AGREEMENT
This Confidentiality and Non-Competition Agreement ("Agreement") is
entered into as of the 21st day of March, 1995, by and among PENNUNION ENERGY
SERVICES, L.L.C. ("LLC"), a Delaware limited liability company, with an address
of 1330 Post Oak Boulevard, 20th Floor, Houston, Texas 77056; BRING GAS SERVICES
CORP. ("BRING"), a Delaware corporation, with an address of 1330 Post Oak
Boulevard, 20th Floor, Houston, Texas 77056; THE BROOKLYN UNION GAS COMPANY
("BU"), a New York corporation, with an address of One MetroTech Center,
Brooklyn, New York 11201; FUEL RESOURCES INC. ("FRI"), a Delaware corporation,
with an address of 1330 Post Oak Blvd., 20th Floor, Houston, Texas 77056; FUEL
RESOURCES PRODUCTION AND DEVELOPMENT COMPANY, INC. ("FRPDC"), a Delaware
corporation, with an address of 1330 Post Oak Blvd., 20th Floor, Houston, Texas
77056; THE HOUSTON EXPLORATION COMPANY ("HOUSTON"), a Delaware corporation, with
an address of 1331 Lamar, Suite 1065, Houston, Texas 77010; GAS ENERGY INC.
("GEI"), a New York corporation, with an address of 111 Livingston Street,
Brooklyn, New York 11201; PENNZOIL GAS MARKETING COMPANY ("PGM"), a Delaware
corporation, with an address of P. O. Box 2967, Houston, Texas 77252-2967;
PENNZOIL EXPLORATION AND DEVELOPMENT COMPANY ("PEPCO"), a Delaware corporation,
with an address of P. O. Box 2967, Houston, Texas 77252-2967; and PENNZOIL
COMPANY ("PC"), a Delaware corporation, with an address of P. O. Box 2967,
Houston, Texas 77252-2967.
WHEREAS, BU, FRI, FRPDC, HOUSTON and GEI are collectively referred to
as the "BRING Affiliates";
WHEREAS, PEPCO and PC are collectively referred to as the "PGM
Affiliates";
WHEREAS, BRING and PGM have formed the LLC for the purpose of, among
other things, purchasing, selling, marketing, gathering, transporting or
otherwise disposing (collectively, "Marketing") of natural gas, including,
without limitation, casinghead gas and residue gas ("Gas");
WHEREAS, in connection with and as a condition to the formation of the
LLC, certain of the BRING Affiliates and certain of the PGM Affiliates will be
entering into (i) gas sales agreements with the LLC (collectively, "Gas Sales
Agreements"), agreeing to sell to the LLC substantially all of their Gas
supplies, and (ii) service agreements with the LLC (collectively, "Service
Agreements"), whereby the LLC will be providing various Gas Marketing services
for these companies;
WHEREAS, the parties desire to set forth their agreement as to their
confidentiality obligations regarding the price of gas paid or received by the
LLC, the BRING Affiliates or the PGM Affiliates, respectively;
- 1 -
<PAGE> 2
WHEREAS, the BRING Affiliates and the PGM Affiliates will benefit,
directly and indirectly, from the formation of the LLC and the execution and
delivery of the Gas Sales Agreements and the Service Agreements;
WHEREAS, in connection with and as a condition to BRING's and PGM's
agreement to the formation of the LLC and the execution and delivery by the LLC
of the Gas Sales Agreements and the Service Agreements, BRING, the BRING
Affiliates, PGM and the PGM Affiliates desire to herein agree to limit their
ability to compete directly or indirectly with the Gas Marketing business of the
LLC, subject to the terms and limitations set forth herein;
WHEREAS, reference is herein made to that certain Confidentiality
Agreement ("Confidentiality Agreement") dated June 3, 1994, between PGM and BU;
WHEREAS, in connection with and as a condition to BRING's and PGM's
agreement to the formation of the LLC and the execution and delivery by the LLC
of the Gas Sales Agreements and the Service Agreements, BRING and the BRING
Affiliates, and PGM and the PGM Affiliates desire to herein adopt, affirm,
ratify, assume, approve and agree to be bound by the Confidentiality Agreement
as if each had been an original signatory party to the Confidentiality
Agreement; and
WHEREAS, the LLC's Gas Marketing business will be irreparably harmed if
BRING, any of the BRING Affiliates, PGM or any of the PGM Affiliates enters into
competition with the LLC.
NOW, THEREFORE, for valuable consideration, the receipt and sufficiency
of which are hereby acknowledged, the LLC, BRING, PGM, the BRING Affiliates, and
the PGM Affiliates agree as follows:
1. Covenant Not to Compete; Offered Opportunity. For the term of the
LLC (or until either BRING or PGM sells or transfers its entire ownership
interest in the LLC, or until BRING or PGM withdraws from the LLC in accordance
with that certain Amended and Restated Limited Liability Company Agreement dated
March 21, 1995, between BRING and PGM, whichever is sooner), neither BRING, PGM,
any of the BRING Affiliates, nor any of the PGM Affiliates shall continue to
conduct (or commence) any business that would be in competition with the Gas
Marketing business of the LLC in the continental 48 states of the United States
of America, except for the purchase or transportation of Gas for BRING's, PGM's,
any of the BRING Affiliates' or any of the PGM Affiliates' sole use or the
delivery of Gas to the LLC or the purchase, sale or transportation of Gas
excluded from the applicable Gas Sales Agreements, and accordingly, BRING, PGM,
the BRING Affiliates, the PGM Affiliates and the LLC hereby agree that to the
fullest extent permitted by the laws of each jurisdiction in which the LLC will
conduct business, BRING, PGM, the BRING Affiliates, and the PGM Affiliates are
hereby restricted from engaging in the aforementioned Gas Marketing business
(with the aforementioned exclusions) in competition with the business of the
LLC; provided, however, that notwithstanding anything stated herein to the
contrary, (i) BRING, PGM, the BRING Affiliates, and the PGM Affiliates shall be
allowed to engage in the business of processing Gas, the business of Marketing
natural gas liquids, condensates, crude oil or refined products and the business
of Gas gathering (insofar and only insofar as such Gas gathering opportunity
concerns the gathering of Gas
- 2 -
<PAGE> 3
from a field or property or through facilities in which BRING, PGM, any of the
BRING Affiliates, or any of the PGM Affiliates itself owns an interest at the
time of such gathering), the business of cogeneration, alternative energy,
independent power production, and exempt wholesale generators (and fuel
management activities related thereto) and the business or use of financial
derivatives or financial derivative products, regardless of whether such
activity may compete directly with the aforementioned Gas Marketing, Gas sales
or Gas transportation business of the LLC, and (ii) BU shall not in any way be
restricted or prohibited from (1) continuing to conduct any of its gas
marketing, gas sales or gas transportation business as it is currently
conducted, or (2) from taking whatever steps it deems necessary in its
discretion to mitigate or improve its unit cost of service; provided, however,
that any such steps may be taken through its own efforts or acting in a joint or
cooperative venture with one or more unaffiliated third parties, and would be
directed only to existing or potential customers in BU's utility service
territory. Further, BU will undertake, solely at its discretion and at a time
which it believes is prudent, to appear before the New York State Public Service
Commission to remove current restrictions in its Orders to allow BU the
flexibility to enter into a mutually acceptable agreement with the LLC as may be
required on behalf of BU utility activities. In addition, in the event that a
particular business opportunity ("Offered Opportunity") which would compete,
directly or indirectly, with the aforementioned Gas Marketing activities of the
LLC are first offered to the LLC by BRING, PGM, any of the BRING Affiliates, or
any of the PGM Affiliates, and the LLC, by a vote of the managers of the LLC who
were not appointed by the offering member of the LLC, elects not to pursue the
Offered Opportunity, then the offering member of the LLC or BRING Affiliate or
PGM Affiliate, as the case may be, shall be free to pursue the same, and such
specific Offered Opportunity shall be deemed to be excepted from this Agreement
(insofar and only insofar as the Offered Opportunity is offered to the LLC, and
any expansion of the Offered Opportunity or any additional business
opportunities which may arise by virtue of the pursuit of the Offered
Opportunity shall be deemed covered by this Agreement and must be offered first
to the LLC). For purposes hereof, the term "Offered Opportunity" shall include,
among other things, any opportunity of BRING, PGM, any of the BRING Affiliates,
or any of the PGM Affiliates to (i) enter into any transaction, agreement or
activity, for profit or not, which competes or may compete, directly or
indirectly, with the aforementioned Gas Marketing activities of the LLC or (ii)
form or acquire an interest in any entity or business association which shall or
may compete, directly or indirectly (whether through its own actions or through
the actions of a subsidiary or affiliate of such entity or business
association), with the aforementioned Gas Marketing activities of the LLC;
provided, however, that in the event that the assets, entity or business
association to be acquired has attributable to it production available for
Marketing in excess of 20,000 Mcf/day (as to the BRING Affiliates other than
Houston), 25,000 Mcf/day (as to Houston), or 250,000 Mcf/day (as to the PGM
Affiliates) and the LLC and the party hereto acquiring the same are unable to
agree as to a price at which the LLC will purchase such excess Gas and the
Marketing company, subsidiary or affiliate is necessary for the party hereto
acquiring the same in order to market such excess Gas, then the term "Offered
Opportunity" shall not include the right to acquire the Marketing company,
subsidiary or affiliate (and the LLC shall have no right to acquire the same
hereunder); provided further, however, that if the Marketing company, subsidiary
or affiliate is excluded as an Offered Opportunity hereunder, then only the
business of said Marketing company, subsidiary or affiliate as it is then
currently conducted with regard to the excess Gas shall be deemed excluded from
this Agreement (and any proposed expansion or modification of its business would
be covered by this Agreement).
- 3 -
<PAGE> 4
The parties hereto specifically agree that these restrictions are
necessary and reasonable to protect the business goodwill of the LLC.
2. Marketing of Canadian Gas. Notwithstanding anything stated herein to
the contrary, any sales by the BRING Affiliates or the PGM Affiliates, or any of
their respective Canadian affiliates, of Gas produced in Canada is expressly
excluded from this Agreement and the obligations set forth in Section 1 above.
3. Confidentiality Agreement. BRING, the BRING Affiliates, PGM and the
PGM Affiliates hereby adopt, affirm, ratify, approve, assume and agree to be
bound by all of the terms, obligations, and provisions of the Confidentiality
Agreement as if each had been an original signatory party to the Confidentiality
Agreement on the original date of execution thereof.
4. Additional Confidentiality Obligations. Each of the BRING Affiliates
hereby agrees that except as may be contractually required or required under
applicable law, it will not disclose to a third party any information regarding
the prices paid or received by PennUnion or any of the PGM Affiliates for gas
purchased or sold by the same without the prior written consent of the party so
purchasing or selling the gas. Each of the PGM Affiliates hereby agrees that
except as may be contractually required or required under applicable law, it
will not disclose to a third party any information regarding the prices paid or
received by PennUnion or any of the BRING Affiliates for gas purchased or sold
without the prior written consent of the party so purchasing or selling the gas.
Notwithstanding anything stated herein to the contrary, nothing shall prevent
any party from disclosing information that becomes generally known to the public
(other than on a result of a breach of this Agreement).
5. Disclosure By LLC. Notwithstanding anything stated herein to the
contrary, nothing herein shall prevent or preclude the LLC from disclosing to a
third party (i) any confidential information covered by the Confidentiality
Agreement, insofar and only insofar as the LLC deems such disclosure to be
appropriate and insofar as the confidential information to be disclosed relates
to the ownership, operation or disposition of the LLC or the LLC's business or
assets or (ii) any of the information relating to prices paid or received by the
LLC for gas purchased or sold by the LLC.
6. Injunctive Relief. The parties hereto agree that the Gas Marketing
business of the LLC is special, unique and an extraordinary value to the LLC,
and BRING, the BRING Affiliates, PGM and the PGM Affiliates acknowledge and
agree that in the event of a violation of any of the provisions of this
Agreement by any of them, the LLC will have no adequate remedy at law. BRING,
the BRING Affiliates, PGM and the PGM Affiliates agree and consent that the LLC
will therefore be entitled to enforce this Agreement by temporary restraining
order, by temporary or permanent injunction or by mandatory relief obtained in
an action or proceeding instituted in any court of competent jurisdiction
without the necessity of proving actual damage and without prejudice to any
other remedies which the LLC may have at law or in equity. In addition to its
other rights and remedies, the LLC shall be entitled to recover and receive from
the party against whom the LLC is seeking enforcement of this Agreement any and
all costs and expenses (including, without limitation, attorneys fees, court
costs,
- 4 -
<PAGE> 5
investigation and other litigation fees) that the LLC incurs in connection with
the enforcement of the obligations hereunder.
7. No Waiver. The failure to enforce at any time any of the provisions
of this Agreement or to require at any time performance by the other party of
any of the provisions hereof shall in no way be construed to be a waiver of such
provisions, to affect either the validity of this Agreement, or any part hereof,
or the right of either party thereafter to enforce each and every provision in
accordance with the terms of this Agreement.
8. Binding on Subsidiaries. Each of BRING, the BRING Affiliates, PGM
and the PGM Affiliates shall cause any and all of their current and future
subsidiaries, to the extent not already parties hereto and to the extent this
Agreement is still in full force and effect, to ratify, approve, assume and
agree to be bound by all of the terms, obligations, and provisions of this
Agreement.
9. Binding on Successors. This Agreement shall be binding upon and
shall inure to the benefit of the LLC, BRING, the BRING Affiliates, PGM and the
PGM Affiliates, and any successors to the same.
10. Applicable Law. THIS AGREEMENT AND THE LEGAL RELATIONS BETWEEN THE
PARTIES THERETO SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS
OF THE STATE OF TEXAS.
11. Severability and Interpretation. In the event that any provision of
this Agreement is held invalid by a court of competent jurisdiction, the
remaining provisions shall nonetheless be enforceable according to their terms.
Further, in the event that any provision is held to be overbroad as written,
such provision shall be deemed amended to narrow its application to the extent
necessary to make the provision enforceable according to applicable law and
enforced as amended.
12. Entire Agreement; Amendments. This Agreement is the entire
agreement between the parties hereto concerning the subject matter hereof, and
all previous agreements (oral or otherwise), including, without limitation, that
certain Agreement to Form a Limited Liability Company Agreement ("Agreement to
Form") dated as of January 23, 1995, between BRING and PGM (insofar and only
insofar as said Agreement to Form concerns the subject matter hereof), are
merged herein and superseded hereby for all purposes, and no modification or
amendment hereof or subsequent agreement relative to the subject matter hereof
shall be binding on any party hereto unless reduced to writing and signed by the
party to be bound.
13. Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be an original, and all of which, together,
shall constitute one and the same agreement.
- 5 -
<PAGE> 6
WITNESS THE EXECUTION HEREOF as of the date first hereinabove referenced.
PENNUNION ENERGY SERVICES, L.L.C.
By:
-------------------------------------
Name:
-----------------------------------
Title:
----------------------------------
BRING GAS SERVICES CORP.
By:
-------------------------------------
Name:
-----------------------------------
Title:
----------------------------------
THE BROOKLYN UNION GAS
COMPANY
By:
-------------------------------------
Name:
-----------------------------------
Title:
----------------------------------
FUEL RESOURCES INC.
By:
-------------------------------------
Name:
-----------------------------------
Title:
----------------------------------
- 6 -
<PAGE> 7
FUEL RESOURCES PRODUCTION
AND DEVELOPMENT COMPANY, INC.
By:
-------------------------------------
Name:
-----------------------------------
Title:
----------------------------------
THE HOUSTON EXPLORATION
COMPANY
By:
-------------------------------------
Name:
-----------------------------------
Title:
----------------------------------
GAS ENERGY INC.
By:
-------------------------------------
Name:
-----------------------------------
Title:
----------------------------------
- 7 -
<PAGE> 8
PENNZOIL GAS MARKETING
COMPANY
By:
-------------------------------------
Name:
-----------------------------------
Title:
----------------------------------
PENNZOIL EXPLORATION AND
DEVELOPMENT COMPANY
By:
-------------------------------------
Name:
-----------------------------------
Title:
----------------------------------
PENNZOIL COMPANY
By:
-------------------------------------
Name:
-----------------------------------
Title:
----------------------------------
- 8 -
<PAGE> 1
[ENRON RISK MANAGEMENT SERVICES CORP. LETTERHEAD]
EXHIBIT 10.4
SWAP AGREEMENT
(Basic Swap)
REVISED (See Item 4: Payment Date)
TO: Houston Exploration Company, Inc. ("Counterparty")
DATE: September 22, 1994
ATTN: Jim Westmoreland
CONTRACT NO.: Enron Risk Management Services Corp. ("ERMS")
Contract No. 08172.00
We are pleased to confirm your offer and enter into the following energy
swap with your company, which transaction was entered into between our
companies pursuant to a telephone conversation between Jim Westmoreland and
Harold Buchanan. In any future correspondence concerning this transaction,
please refer to the above contract number. This Swap Agreement (this
"Agreement" or "Confirmation") is a complete and binding agreement between you
and us as to the terms and conditions of the transaction to which this
Agreement relates. Upon execution by you and us of a Master Swap Agreement,
this Agreement will supplement, form a part of, and be subject to, the Master
Swap Agreement. Prior to execution by you and us of a Master Swap Agreement,
this Agreement and all other swap agreements and option agreements between you
and us shall be considered a single agreement to the same extent as if a Master
Swap Agreement had been executed.
1. TRANSACTION TERMS:
(a) FIXED PRICE PAYOR: ERMS.
(b) FLOATING PRICE PAYOR: Counterparty.
(c) COMMODITY TYPE: Natural Gas.
(d) FIXED PRICE: U.S. Dollars $2.0850 per Quantity Measurement.
(e) FLOATING PRICE: The average of the settlement prices for the
last three scheduled Trading Days of the NYMEX Natural Gas Futures
contract for the applicable Determination Period.
(f) QUANTITY MEASUREMENT: MMBtu.
(g) QUANTITY PER DETERMINATION PERIOD: 20,000 MMBtu per day.
<PAGE> 2
(h) DETERMINATION PERIOD: Each calendar month beginning with November
1, 1994 and ending on October 31, 1997. The "Period End Date" shall be
the last day of each such calendar month.
(i) FLOATING AMOUNT: The Floating Amount in respect of a
Determination Period shall be the product of (i) the Quantity Per
Determination Period and (ii) the Floating Price per Quantity
Measurement in respect of such Determination Period.
(j) FIXED AMOUNT: The Fixed Amount in respect of a Determination
Period shall be the product of (i) the Quantity Per Determination
Period and (ii) the Fixed Price per Quantity Measurement in respect of
such Determination Period.
2. PAYMENT: If for any Determination Period the Fixed Amount is greater
than the Floating Amount, the Fixed Price Payor shall pay to the
Floating Price Payor the amount by which the Fixed Amount is greater
than the Floating Amount. If for any Determination Period the Floating
Amount is greater than the Fixed Amount, the Floating Price Payor shall
pay to the Fixed Price Payor the amount by which the Floating Amount is
greater than the Fixed Amount. Any such amount payable shall be paid by
wire transfer of immediately available funds to a bank account
designated by the party to whom such payment is owed. Payment shall be
made without deduction for taxes based on the representations made in
Section 6(viii) and (ix) of this Agreement.
3. SETOFF: If the Payment Dates for two or more swap or option agreements
between the parties fall on the same day, if each party is required to
pay an amount to the other on such Payment Date, then such amounts with
respect to each party shall be aggregated, and the parties shall
discharge their obligations to pay through offset, in which case the
party, if any, owing the greater aggregate amount shall pay to the
other the difference between the amounts owed.
4. PAYMENT DATE: Amounts owed pursuant to Section 2 in respect of a
Determination Period shall be due and payable on or before 12:00 noon
(Central Time) on the fifth (5th) Business Day succeeding the date on
which the Floating Price is determinable ("Payment Date"). If such
amounts are not paid when due, such overdue amounts shall bear interest
for each day until paid in full, payable on demand, at the Interest Rate
on the basis of the actual number of days elapsed, and on the basis of a
year of three hundred sixty (360) days.
5. INTEREST RATE: With respect to a non-defaulting party, the Interest
Rate shall be a per annum rate of interest equal to the prime lending
rate as may from time to time be published in The Wall Street Journal
under "Money Rates"; provided, however, that with respect to a
Defaulting Party, the Interest Rate shall be a per annum rate of
interest equal to two percent (2%) over such prime lending rate;
provided further that the Interest Rate may never exceed the maximum
lawful rate.
6. REPRESENTATIONS: Each of ERMS and Counterparty represents and warrants
to the other that: (i) solely with respect to ERMS, it is a producer,
processor, or commercial user of, or a merchant handling the Commodity
which is the subject of this transaction, or the products or by-products
thereof; (ii) it is entering into this Agreement in connection with its
line of business; (iii) the execution, delivery and performance of this
Agreement have been duly authorized by all necessary corporate or other
organization action on its part; (iv) this Agreement is its legally
valid and binding obligation, enforceable against it in accordance with
its terms, except as may be limited by bankruptcy, reorganization,
moratorium or other similar laws affecting creditors' rights generally;
(v) it is acting as a principal in this Agreement and is not acting as a
broker or agent for
2
<PAGE> 3
another party; (vi) the terms of this transaction have been individually
tailored and negotiated; (vii) it constitutes an "eligible swap
participant" as such term is defined in Rule 35.1(b)(2) of the
Commodities Futures Trading Commission, 58 Fed. Reg. 5587, 5594 (January
22, 1993), to be codified in Part 35 of Chapter 1 of Title 17 of the
Code of Federal Regulations; (viii) it is a United States person (as
such term is defined in Section 7701 of the Internal Revenue Code); (ix)
during the term hereof, it will not be doing business in any
jurisdiction that imposes any withholding tax or similar levy on any
payment made or received by it under this Agreement; and (x) it has made
or will make all decisions regarding the Transaction entered into
hereunder without relying on any advice, recommendations or information
provided to it by the other party; all such decisions are the result of
arms's-length negotiations between the parties; and it has entered into
the Transaction with full understanding of all the risks thereof and is
capable of assuming and willing to assume such risks.
7. EVENT OF DEFAULT: Shall mean with respect to a party (the "Defaulting
Party"):
(a) the failure by the Defaulting Party to make, when due, any payment
required under this Agreement if such failure is not remedied on or
before two (2) Business Days after notice of such failure is given to
the Defaulting Party; or
(b) any representation or warranty made by the Defaulting Party in
this Agreement shall prove to have been false or misleading in any
material respect when made or deemed to be repeated; or
(c) the breach by the Defaulting Party of any other covenant or
agreement set forth in this Agreement (other than the obligation to make
payment) and such failure is not cured within 10 days after notice
thereof to the Defaulting Party; or
(d) the occurrence of a bankruptcy, reorganization, moratorium or
similar insolvency event with respect to the Defaulting Party (and, if
such a proceeding is instituted against the party, it remains
undismissed for 30 days); or
(e) the occurrence of a Material Adverse Change with respect to ERMS
or Counterparty and the failure of ERMS or Counterparty (as the case may
be) to establish, maintain or increase the Performance Assurance (as
defined in the Confirmation) as required by Annex A and the failure
continues for two (2) Business Days after notice from the other party;
or
(f) the Defaulting Party fails to establish, maintain, renew,
substitute or increase the Performance Assurance (as defined in the
Confirmation) in accordance with the terms and provisions of Annex A and
the failure continues for two (2) Business Days after notice from the
other party; or
(g) if a Guaranty (as defined in the Confirmation) is required to
support such party's obligations under the Confirmation, the Guaranty
shall expire or be terminated or the Guarantor thereunder shall fail to
comply with or perform under the Guaranty; or
(h) in the case of Counterparty, if Brooklyn Union Gas Company ceases
to own directly or indirectly, fifty-one percent (51%) or more of the
outstanding capital stock or other equity interests of Counterparty
having ordinary voting power; or
3
<PAGE> 4
(i) the failure in the payment when due (whether at maturity, by
acceleration, or otherwise) of any obligation in respect of borrowed
money, in an aggregate amount in excess of $5,000,000 with respect to
Counterparty, or $50,000,000 with respect to ERMS and the failure to
remedy the failure within any applicable grace period, or Counterparty
or ERMS fails in the performance of, or there shall occur any other
event of default (however defined) under, any agreement in which such
obligation is created, evidenced, or secured, if such failure or event
of default is not remedied within any applicable grace period and the
effect of such failure or event of default is to cause such obligation
in such an aggregate amount to become, or to permit the holder(s) of
such obligations (or a trustee or agent on behalf of such holder(s)) to
declare such obligation, due prior to its expressed maturity; or
(j) in the case of Counterparty, Brooklyn Union Gas Company shall
have unsecured, long-term, senior indebtedness not supported by third
party credit enchancement that is rated by the Standard & Poor's Rating
Group (a division of McGraw-Hill, Inc.) or its successor below "BBB-";
or
(k) an Event of Default under any other swap or option agreement
between the parties hereto.
8. MATERIAL ADVERSE CHANGE: Shall mean (a) with respect to Counterparty,
it shall have any of the following occur at any time: (i) the ratio of
its Funded Debt to Net Worth is more than 1 to 1, or (ii) its Net Worth
falls below $55,000,000, or (iii) the ratio of its Cash Flow to Current
Maturities of Long Term Debt shall be less than 1.15 to 1, or (b) with
respect to ERMS, its Guarantor shall have unsecured, long-term, senior
indebtedness not supported by third party credit enhancement that is
rated by the Standard & Poor's Rating Group (a division of McGraw-Hill,
Inc.) or its successor below "BBB-".
"Cash Flow" shall mean Net Income of Counterparty plus depreciation and
non-cash charges from the income statement of the Counterparty prepared
in accordance with GAAP (as hereinafter defined).
"Current Maturities of Long Term Debt" shall mean payments required by
third party lenders on long term debt within the next twelve (12)
calendar months determined in accordance with GAAP (as hereinafter
defined).
"Funded Debt" shall mean indebtedness of Counterparty which by its
terms matures more than one year from the date as of which any
calculation of Funded Debt is made. "Funded Debt" shall exclude debt
or notes payable to Brooklyn Union Gas Company.
"Net Income" shall mean gross revenues and other proper income credits
of Counterparty, less all proper income charges, including taxes on
income, all determined in accordance with GAAP.
"Net Worth" shall mean total assets of Counterparty (exclusive of
intangible assets and amounts attributable to notes receivable), minus
total liabilities of Counterparty, each as would be reflected on a
balance sheet of Counterparty prepared in accordance with GAAP. "Net
Worth" shall include debt or notes payable to Brooklyn Union Gas
Company.
9. GUARANTY. Within five (5) Business Days of the date of this
Confirmation, ERMS shall cause to be delivered to Counterparty the duly
executed guaranty ("Guaranty") from its Guarantor in
4
<PAGE> 5
favor of Counterparty in the form attached as Annex C. "Guarantor"
shall mean, with respect to ERMS only, Enron Corp.
10. CREDIT SUPPORT AGREEMENTS. Counterparty and ERMS shall establish,
maintain and increase Performance Assurance as (and only to the extent)
required by Annex A.
11. PERFORMANCE ASSURANCE: means one or more irrevocable standby letters of
credit (each a "Letter of Credit") from a major U.S. commercial bank or
a foreign bank with a U.S. branch office, acceptable to the party in
whose favor the Letter of Credit is issued, and substantially in the
form of Annex B attached hereto.
12. FINANCIAL INFORMATION: Counterparty shall deliver to ERMS (i) as soon
as available and in any event within 120 days after the end of its
fiscal year a copy of its annual reports containing consolidated
financial statements for such fiscal year certified by independent
certified public accountants and prepared in accordance with generally
accepted accounting principles, consistently applied ("GAAP"), (ii) as
soon as available and in any event within sixty (60) days after the end
of each of its first three fiscal quarters of each fiscal year, copies
of its quarterly reports containing unaudited consolidated financial
statements for such fiscal quarter prepared in accordance with GAAP, and
(iii) such other publicly available financial information as ERMS may
reasonably request. Concurrently with the furnishing of the annual and
quarterly financial statements pursuant to this Section, Counterparty
shall deliver to ERMS a Certificate of Compliance substantially in the
form set forth in Annex D attached hereto.
Upon written request, ERMS shall deliver to Counterparty (i) as soon as
available and in any event within 120 days after the end of Enron
Corp.'s fiscal year a copy of Enron Corp.'s annual reports containing
consolidated financial statements for such fiscal year certified by
independent certified public accountants and prepared in accordance
with generally accepted accounting principles, consistently applied
("GAAP"), (ii) as soon as available and in any event within sixty (60)
days after the end of each of Enron Corp.'s first three fiscal quarters
of each fiscal year, copies of its (or in the case of ERMS, Enron
Corp.'s quarterly reports containing unaudited consolidated financial
statements for such fiscal quarter prepared in accordance with GAAP,
and (iii) such other publicly available financial information as
Counterparty may reasonably request.
13. REMEDIES: If an Event of Default shall have occurred and shall be
continuing the non-defaulting party may, in its sole discretion, upon
two (2) Business Days notice to the Defaulting Party designate an early
termination date ("Early Termination Date"); provided, if an Event of
Default under Section 7(d) shall have occurred and be continuing, the
date of occurrence of such Event of Default shall be deemed to be the
Early Termination Date. On the Early termination Date, all obligations
under this Agreement with respect to amounts which would have been
payable pursuant to Section 2 with respect to all Determination Periods
which would have ended after the Early Termination Date shall be
terminated, except as provided below.
If an Early Termination Date has been designated or
automatically occurs, the non-defaulting party shall in good faith
calculate its Gains or Losses and Costs under the Agreement resulting
from the termination of the parties' obligations with respect to all
Payment Dates which would have occurred after the Early Termination
Date had the Early Termination Date not occurred. The non-defaulting
party shall aggregate the Gains, Losses and Costs so calculated and
notify the Defaulting Party of the aggregate amount. If the
non-defaulting party's aggregate Losses and Costs exceed its aggregate
Gains, the Defaulting Party shall, within five (5) days of
receipt of
5
<PAGE> 6
such notice, pay the excess to the non-defaulting party, which amount
shall bear interest at the Interest Rate from the Early Termination
Date until paid. If the non-defaulting party's aggregate Gains exceed
it Losses and Costs, if any, resulting from the Event of Default, the
non-defaulting party shall pay the excess to the Defaulting Party on
the later of (i) the Payment Date for the next succeeding Determination
Period or (ii) the date five (5) days after receipt by the Defaulting
Party of the non-defaulting party's notice given above, which amount
shall bear interest at the Interest Rate from the Early Termination
Date until paid. Any notice of any amount due hereunder shall be
accompanied by a statement in reasonable detail indicating how the
relevant amount was calculated. No party shall be required to pay
incidental, consequential or indirect damages to the other party
(except to the extent that the payments required to be made pursuant to
this Agreement are deemed to be such damages). If and to the extent any
payment made pursuant to this Agreement is deemed to constitute
liquidated damages, the parties acknowledge and agree that damages are
difficult or impossible to determine and that such payment constitutes
a reasonable approximation of the amount of such damages, and not a
penalty.
As used herein:
(a) COSTS: Shall mean, with respect to a party, brokerage fees,
commissions and other similar transaction costs and expenses reasonably
incurred by a party either in terminating any arrangement pursuant to
which the party has hedged its obligations hereunder or entering into
new arrangements which replace this Agreement.
(b) GAINS: Shall mean, with respect to a party, an amount equal to
the present value of the economic benefit, if any, to the party
resulting from the termination of the parties' obligations with respect
to this Agreement, determined in a commercially reasonable manner and
without taking into account Costs.
(c) LOSSES: Shall mean, with respect to a party, an amount equal to
the present value of the economic loss, if any, (exclusive of Costs)
to the party resulting from the termination of the parties' obligations
with respect to this Agreement, determined in a commercially reasonable
manner.
14. BUSINESS DAY: Shall mean a day on which banks in Houston, Texas or New
York, New York are not authorized or required by law to be closed for
business.
15. TRADING DAY: Shall mean a day on which a Floating Price is determinable.
16. GOVERNING LAW: This Agreement shall be governed by and construed in
accordance with the laws of the State of Texas, excluding conflict of
laws principles.
17. EXHIBITS and ANNEXES: All Exhibits and Annexes attached hereto, if any,
are deemed to be a part of this Agreement.
18. ASSIGNMENT: This Agreement shall be binding upon and inure to the
benefit of the parties hereto and their respective successors and
permitted assigns. Neither party shall have the power to assign or
otherwise transfer any of its rights or obligations under this Agreement
(whether by security, pledge or otherwise) or any interest in this
Agreement without prior written consent of the other party, and any
purported assignment or transfer in violation of this provision shall be
void and of no force and effect. Any assignment or purported assignment
in violation hereof, even though void, shall constitute a failure to
perform a covenant under this Agreement.
6
<PAGE> 7
Notwithstanding the foregoing, each party covenants that if it attempts
to assign or otherwise transfer its rights under this Agreement
(whether by security, pledge or otherwise) or any interest in this
Agreement in violation of this provision, it will obtain from the
assignee or transferee a written agreement, for the benefit of the
other party to this Agreement, acknowledging and agreeing that such
assignment or transfer, shall not impair such other party's rights
under this Agreement, including its right of setoff under Section 3 or
otherwise.
19. (a) ADDRESS FOR NOTICES TO ERMS:
Enron Risk Management Services Corp.
P.O. Box 1188
Houston, Texas 77251-1188
Attn: Director, Documentation Department
Telephone: (713) 853-3300
Fax No: (713) 646-3564
A copy of any notice sent to ERMS pursuant to Sections 7 or 13 must
also be sent to (i) the above address to: Enron Risk Management
Services Corp., Attention: Corporate Secretary, and (ii) as follows:
Enron Risk Management Services Corp.
P.O. Box 1188
Houston, Texas 77251-1188
Attn: Assistant General Counsel, Trading Group
Fax No: (713) 646-4818
(b) ADDRESS FOR NOTICES TO COUNTERPARTY:
Houston Exploration Company, Inc.
1331 Lamar, Suite 1065
Houston Texas 77010
Attn: Jim Westmoreland
Telephone: (713) 652-2847
Fax No: (713) 652-4017
We are pleased to have concluded this transaction with you. Please
provide your confirmation that the foregoing accurately reflects our transaction
by signing in the space below and delivering a duly executed counterpart hereof
(which delivery shall be deemed to have been made upon hand delivery thereof at
our principal offices in Houston, Texas or upon our receipt of a facsimile
transmission of a copy thereof to our facsimile number). Your response should
reflect the appropriate person within your organization who has the authority
to enter into this transaction and should be received by ERMS no later than
5:00 p.m. Central Time on the fifth Business Day following the date first
written above. You agree to deliver to ERMS, in the manner set forth above, a
duly executed counterpart hereof (or to notify us of any bona fide error that
would require revision in order to accurately reflect our agreement on the
transaction) by such time. If ERMS has not been notified of a bona fide error
or received a fully executed confirmation by such time in the manner set forth
above, this Agreement shall be deemed binding on Counterparty and ERMS as sent.
7
<PAGE> 8
Signature Page for Confirmation Letter
for Swap Agreement between Houston
Exploration Company, Inc. and ERMS
dated September 22, 1994
Ref. No. 08172.00
Yours very truly,
ENRON RISK MANAGEMENT
SERVICES CORP.
By: /s/ SALLY W. BECK
------------------------------------
Name: Sally W. Beck
------------------------------------
Title: Agent and Attorney-In-Fact
Enron Risk Management Services Corp.
------------------------------------
CONFIRMED AS OF
13 day of October 1994
HOUSTON EXPLORATION COMPANY, INC.
By: /s/ JIM WESTMORELAND
-------------------------
Name: Jim Westmoreland
-------------------------
Title: VP & Controller
-------------------------
8
<PAGE> 1
[CHEMICAL LOGO] EXHIBIT 10.5
----------------------
Chemical Bank Checked By
270 Park Avenue (ILLEGIBLE)
New York, NY 10017-2070 ----------------------
Date: February 21, 1995 ----------------------
DOCUMENTATION
To: Houston Exploration 11 MAR 1996
DERIVATIVES OPERATIONS
Attention: Jim Westmoreland ----------------------
Facsimile No. (713) 652-4017
c.c.: Tom Powers, Brooklyn Union Gas Company
Facsimile No. (718) 488-1781
Re: COMMODITY SWAP TRANSACTION - CASH-SETTLED (OUR REFERENCE NO.
102020)
Ladies and Gentlemen:
The purpose of this letter agreement is to set forth the terms and
conditions of the commodity swap transaction entered into between us on the
Trade Date referred to below (the "Transaction"). It constitutes a
"Confirmation" as referred to in the Master Agreement specified below.
The definitions and provisions contained in the 1993 ISDA Commodity
Derivatives Definitions (the "1993 Definitions"), and in the 1991 ISDA
Definitions (the "1991 Definitions") (each as published by the International
Swaps and Derivatives Association, Inc. ("ISDA")), are incorporated into this
Confirmation. In the event of any inconsistency between the 1993 Definitions
and the 1991 Definitions, the 1993 Definitions will govern, and in the event
of any inconsistency between the 1993 Definitions and this Confirmation, this
Confirmation will govern. Each party represents and warrants to the other that
(i) it is duly authorized to enter into this Transaction and to perform its
obligations hereunder; and (ii) the person executing this Confirmation is duly
authorized to execute and deliver it.
<PAGE> 2
1. This Confirmation supplements, forms a part of, and is subject to,
the Master Agreement in the form published by ISDA (the "Agreement"), as if you
and we had executed that agreement (but without any Schedule thereto) and the
Agreement shall be governed by and construed in accordance with the laws of the
State of New York. All provisions contained or incorporated by reference in the
Agreement shall govern this Confirmation except as expressly modified below. In
addition, you and we agree to use our best efforts promptly to negotiate,
execute and deliver a Master Agreement (in the form published by ISDA). Upon
execution and delivery by you and us of that agreement (the "Master Agreement")
(i) this Confirmation shall supplement, form a part of, and be subject to
the Master Agreement and (ii) all provisions contained or incorporated by
reference in the Master Agreement shall govern this Confirmation except as
expressly modified below.
2. The terms of the Transaction to which this Confirmation relates are
as follows:
National Quantity per Calculation
Period: The amount set forth for such
Calculation Period on the
amortization schedule attached hereto
Commodity: Natural Gas
Trade Date: February 17, 1995
Effective Date: March 1, 1995
Termination Date: November 30, 1997
Calculation Periods: Each calendar month during the Term of
this Transaction
Payment Dates: Five Business Days following the
determination of the Floating Price
for each Calculation Period
FIXED AMOUNT DETAILS:
Fixed Price Payer: Houston Exploration ("Counterparty")
- 2 -
<PAGE> 3
Fixed Price: The price set forth for each Calculation
Period on the schedule attached hereto
FLOATING AMOUNT DETAILS:
Floating Price Payer: Chemical Bank, London Office
("Chemical")
Commodity Reference Price: NATURAL GAS-NYMEX
Specified Price: Arithmetic average of the closing
settlement price for the First Nearby
Month Futures Contract for each
Pricing Date in the relevant Calculation
Period
Pricing Dates: The last three scheduled trading dates
(as set forth on the amortization
schedule attached hereto), subject to
revision by the NYMEX, for the First
Nearby Month Futures Contract for
each Calculation Period
Alternate Commodity Reference
Price:
Commodity: Natural Gas
Unit: MMBtu dry
Price Source: Inside FERC
Currency: USD
Specified Price: Price indicated under "Henry Hub Cash
Price"
Pricing Date: The first Commodity Business Day of
each Calculation Period
Market Disruption:
Market Disruption Event: Price Source Disruption
- 3 -
<PAGE> 4
Disruption Fallbacks: Fallback Reference Price
Negotiated Fallback
Commodity Reference Dealers
Business Days: New York Business Days and London
Business Days
Calculation Agent: Chemical
Credit Support Document: None
Payments to Chemical: Chemical Bank, New York
A/C Chemical Bank, London
A/C No. 400800063
Ref.: Swaps
Payments to Counterparty: [Please provide]
Other provisions: Counterparty agrees to deliver to
Chemical an opinion of counsel in form and
substance satisfactory to Chemical.
Chemical and Counterparty each hereby
represent to the other that:
(a) it is an "eligible swap participant"
as that term is defined in 17 C.F.R.
35.1(b)(2);
(b) it will enter into the Master
Agreement and has entered into this
Transaction in conjunction with its line
of business (which may include financial
intermediation services);
- 4 -
<PAGE> 5
(c) the material terms of the Master
Agreement and this Transaction will be, or
have been, as the case may be,
individually tailored and negotiated and
the creditworthiness of the other party
was a material consideration into its
entering into the Agreement and this
Transaction;
(d) solely with respect to Counterparty,
it is a producer, processor, or commercial
user of, or a merchant handling, the
commodity which is the subject of this
Transaction, or the products or byproducts
thereof, and that it is entering into this
Transaction solely for purposes related to
its business as such; and
(e) solely with respect to Chemical, it
was the offeror of this Transaction and
that Chemical offered to enter into the
Master Agreement with Counterparty and
initiated their trading relationship.
Legal and Out-of-Pocket Expenses: For each party's own account.
Governing Law: The laws of the State of New York
Each party has entered into this Transaction solely in reliance on its own
judgment. Neither party has any fiduciary obligation to the other party
relating to this Transaction. In addition, neither party has held itself out as
advising, or has held out any of its employees or agents as having the
authority to advise, the other party as to whether or not the other party
should enter into this Transaction, any subsequent actions relating to this
Transaction or any other matters relating to this Transaction. Neither party
shall have any responsibility or liability whatsoever in respect of any advice
of this nature given, or views expressed, by it or any of such persons to the
other party relating to this Transaction, whether or not such advice is given
or such views are expressed at the request of the other party.
- 5 -
<PAGE> 6
Please confirm that the foregoing correctly sets forth the terms and
conditions of our agreement by responding within ten (10) Business Days by
either (i) returning via facsimile an executed copy of this Confirmation to the
attention of Paul Kelly (facsimile no. (071) 777-4764; telephone no. (071)
777-3168) or (ii) sending a telex to Paul Kelly (telex no 898371, answer back:
CHEMBK G) substantially to the following effect: "We acknowledge receipt of
your facsimile dated February 21, 1995 with respect to a Transaction with your
reference no. 102020 and confirm that such facsimile correctly sets forth the
terms of our agreement relating to the Transaction described therein. By
(specify name and title of authorized officer)." Failure to respond within such
period shall not affect the validity or enforceability of this Transaction,
and shall be deemed to be an affirmation of the terms and conditions contained
herein, absent manifest error.
Chemical is pleased to have concluded this transaction with you.
Very truly yours,
CHEMICAL BANK
By: /s/ THOMAS D. GROS
--------------------------
Thomas D. Gros
Vice President
Accepted and confirmed as
of the date first written:
HOUSTON EXPLORATION
By:
---------------------------
Name:
Title:
- 6 -
<PAGE> 7
HOUSTON EXPLORATION
COMMODITY SWAP TRANSACTION REFERENCE 102020
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
CALCULATION NOTIONAL FIXED PRICE
PERIOD/DELIVERY QUANTITY USD PER
PRICING DATES MONTH MMBTU DRY MMBTU
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
February 16, 1995 March, 1995 424,000 1.53
February 17, 1995
February 21, 1995
- ----------------------------------------------------------------------------------------------------------
March 21, 1995 April, 1995 423,000 1.53
March 22, 1995
March 23, 1995
- ----------------------------------------------------------------------------------------------------------
April 19, 1995 May, 1995 422,000 1.53
April 20, 1995
April 21, 1995
- ----------------------------------------------------------------------------------------------------------
May 19, 1995 June, 1995 421,000 1.53
May 22, 1995
May 23, 1995
- ----------------------------------------------------------------------------------------------------------
June 20, 1995 July, 1995 420,000 1.53
June 21, 1995
June 22, 1995
- ----------------------------------------------------------------------------------------------------------
July 20, 1995 August, 1995 419,000 1.53
July 21, 1995
July 24, 1995
- ----------------------------------------------------------------------------------------------------------
August 22, 1995 September, 1995 418,000 1.53
August 23, 1995
August 24, 1995
- ----------------------------------------------------------------------------------------------------------
September 19, 1995 October, 1995 417,000 1.53
September 20, 1995
September 21, 1995
- ----------------------------------------------------------------------------------------------------------
October 20, 1995 November, 1995 416,000 1.53
October 23, 1995
October 24, 1995
- ----------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 8
HOUSTON EXPLORATION
COMMODITY TRANSACTION REFERENCE NO. 101020
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
CALCULATION NOTIONAL FIXED PRICE
PERIOD/DELIVERY QUANTITY USD PER
PRICING DATES MONTH MMBTU DRY MMBTU
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
November 17, 1995 December, 1995 415,000 1.53
November 20, 1995
November 21, 1995
- ----------------------------------------------------------------------------------------------------------
December 18, 1995 January, 1996 360,000 1.91
December 19, 1995
December 20, 1995
- ----------------------------------------------------------------------------------------------------------
January 22, 1996 February, 1996 347,000 1.91
January 23, 1996
January 24, 1996
- ----------------------------------------------------------------------------------------------------------
February 20, 1996 March, 1996 334,000 1.91
February 21, 1996
February 22, 1996
- ----------------------------------------------------------------------------------------------------------
March 20, 1996 April, 1996 321,000 1.91
March 21, 1996
March 22, 1996
- ----------------------------------------------------------------------------------------------------------
April 18, 1996 May, 1996 308,000 1.91
April 19, 1996
April 22, 1996
- ----------------------------------------------------------------------------------------------------------
May 20, 1996 June, 1996 295,000 1.91
May 21, 1996
May 22, 1996
- ----------------------------------------------------------------------------------------------------------
June 19, 1996 July, 1996 282,000 1.91
June 20, 1996
June 21, 1996
- ----------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 9
HOUSTON EXPLORATION
COMMODITY TRANSACTION REFERENCE NO. 101020
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
CALCULATION NOTIONAL FIXED PRICE
PERIOD/DELIVERY QUANTITY USD PER
PRICING DATES MONTH MMBTU DRY MMBTU
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
July 22, 1996 August, 1996 269,000 1.91
July 23, 1996
July 24, 1996
- ----------------------------------------------------------------------------------------------------------
August 20, 1996 September, 1996 256,000 1.91
August 21, 1996
August 22, 1996
- ----------------------------------------------------------------------------------------------------------
September 19, 1996 October, 1996 243,000 1.91
September 20, 1996
September 23, 1996
- ----------------------------------------------------------------------------------------------------------
October 22, 1996 November, 1996 230,000 1.91
October 23, 1996
October 24, 1996
- ----------------------------------------------------------------------------------------------------------
November 18, 1996 December, 1996 217,000 1.91
November 19, 1996
November 20, 1996
- ----------------------------------------------------------------------------------------------------------
December 16, 1996 January, 1997 215,000 1.99
December 17, 1996
December 18, 1996
- ----------------------------------------------------------------------------------------------------------
January 21, 1997 February, 1997 213,000 1.99
January 22, 1997
January 23, 1997
- ----------------------------------------------------------------------------------------------------------
February 18, 1997 March, 1997 211,000 1.99
February 19, 1997
February 20, 1997
- ----------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 10
HOUSTON EXPLORATION
COMMODITY TRANSACTION REFERENCE NO. 101020
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
CALCULATION NOTIONAL FIXED PRICE
PERIOD/DELIVERY QUANTITY USD PER
PRICING DATES MONTH MMBTU DRY MMBTU
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
March 20, 1997 April, 1997 209,000 1.99
March 21, 1997
March 24, 1997
- ----------------------------------------------------------------------------------------------------------
April 21, 1997 May, 1997 207,000 1.99
April 22, 1997
April 23, 1997
- ----------------------------------------------------------------------------------------------------------
May 19, 1997 June, 1997 205,000 1.99
May 20, 1997
May 21, 1997
- ----------------------------------------------------------------------------------------------------------
June 19, 1997 July, 1997 203,000 1.99
June 20, 1997
June 23, 1997
- ----------------------------------------------------------------------------------------------------------
July 22, 1997 August, 1997 201,000 1.99
July 23, 1997
July 24, 1997
- ----------------------------------------------------------------------------------------------------------
August 19, 1997 September, 1997 199,000 1.99
August 20, 1997
August 21, 1997
- ----------------------------------------------------------------------------------------------------------
September 19, 1997 October, 1997 197,000 1.99
September 22, 1997
September 23, 1997
- ----------------------------------------------------------------------------------------------------------
October 21, 1997 November, 1997 195,000 1.99
October 22, 1997
October 23, 1997
- ----------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 11
HOUSTON EXPLORATION
COMMODITY TRANSACTION REFERENCE NO. 101020
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
CALCULATION NOTIONAL FIXED PRICE
PERIOD/DELIVERY QUANTITY USD PER
PRICING DATES MONTH MMBTU DRY MMBTU
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
November 17, 1997 December, 1997 193,000 1.99
November 18, 1997
November 19, 1997
- ----------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 1
From
EXHIBIT 10.6
[LOGO] CHEMICAL ---------------------- Previously rec'd
CHECKED BY & checked
9-9-95
Chemical Bank ---------------------- /s/ DJ
270 Park Avenue
New York, NY 10017-2070 ---------------------- -------------------
DOCUMENTATION RECEIVED
[ILLEGIBLE] [ILLEGIBLE]
Date: March 2, 1995 DERIVATIVES OPERATIONS [ILLEGIBLE]
---------------------- -------------------
To: The Houston Exploration Company
Attention: Jim Westmoreland
Facsimile No. (713) 652-4017
c.c.: Tom Powers, Brooklyn Union Gas Company
Facsimile No. (718) 488-1781
Re: Commodity Swap Transaction - Cash-Settled (Our Reference
No. 102021)
THIS SHALL AMEND AND RESTATE OUR CONFIRMATION TO YOU DATED FEBRUARY 21, 1995
Ladies and Gentlemen:
The purpose of this letter agreement is to set forth the terms and
conditions of the commodity swap transaction entered into between us on the
Trade Date referred to below (the "Transaction"). It constitutes a
"Confirmation" as referred to in the Interest Rate and Currency Exchange
Agreement specified below.
The definitions and provisions contained in the 1993 ISDA Commodity
Derivatives Definitions (the "1993 Definitions"), and in the 1991 ISDA
Definitions (the "1991 Definitions") (each as published by the International
Swaps and Derivatives Association, Inc. ("ISDA")), are incorporated into this
Confirmation. In the event of any inconsistency between the 1993 Definitions
and the 1991 Definitions, the 1993 Definitions will govern, and in the event of
any inconsistency between the 1993 Definitions and this Confirmation, this
Confirmation will govern. Each party represents and warrants to the other that
(i) it is duly authorized to enter into this Transaction and to perform its
obligations hereunder; and (ii) the person executing this Confirmation is duly
authorized to execute and deliver it.
<PAGE> 2
1. This Confirmation supplements, forms a part of, and is subject to, the
Interest Rate and Currency Exchange Agreement in the form published by ISDA
(the "Agreement"), as if you and we had executed that agreement (but without
any Schedule thereto) and the Agreement shall be governed by and construed in
accordance with the laws of the State of New York. All provisions contained or
incorporated by reference in the Agreement shall govern this Confirmation
except as expressly modified below. In addition, you and we agree to use our
best efforts promptly to negotiate, execute and deliver an Interest Rate and
Currency Exchange Agreement (in the form published by ISDA). Upon execution and
delivery by you and us of that agreement (the "Master Agreement") (i) this
Confirmation shall supplement, form a part of, and be subject to the Master
Agreement and (ii) all provisions contained or incorporated by reference in the
Master Agreement shall govern this Confirmation except as expressly modified
below.
2. The terms of the Transaction to which this Confirmation relates are as
follows:
Notional Quantity per Calculation
Period: The amount set forth for such
Calculation Period on the amortization
schedule attached hereto
Commodity: Natural Gas
Trade Date: February 17, 1995
Effective Date: March 1, 1995
Termination Date: November 30, 1997
Calculation Periods: Each calendar month during the Term of
this Transaction
Payment Dates: Five Business Days following the
determination of the Floating Price for
each Calculation Period
FIXED AMOUNT DETAILS:
Fixed Price Payer: Chemical Bank, London Office
("Chemical")
- 2 -
<PAGE> 3
Fixed Price: USD 1.745
FLOATING AMOUNT DETAILS:
Floating Price Payer: The Houston Exploration Company
("Counterparty")
Commodity Reference Price: NATURAL GAS-NYMEX
Specified Price: Arithmetic average of the closing
settlement price for the First Nearby
Month Futures Contract for each Pricing
Date in the relevant Calculation Period
Pricing Dates: The last three scheduled trading dates
(as set forth on the amortization
schedule attached hereto), subject to
revision by the NYMEX, for the First
Nearby Month Futures Contract for each
Calculation Period
Alternate Commodity Reference
Price:
Commodity: Natural Gas
Unit: MMBtu dry
Price Source: Inside FERC
Currency: USD
Specified Price: Price indicated under "Henry Hub Cash
Price"
Pricing Date: The first Commodity Business Day of each
Calculation Period
Market Disruption:
Market Disruption Event: Price Source Disruption
Disruption Fallbacks: Fallback Reference Price
Negotiated Fallback
Commodity Reference Dealers
- 3 -
<PAGE> 4
Business Days: New York Business Days and London
Business Days
Calculation Agent: Chemical
Credit Support Document: None
Payments to Chemical: Chemical Bank, New York
A/C Chemical Bank, London
A/C No. 400800063
Ref.: Swaps
Payments to Counterparty: [Please provide]
Other provisions: Counterparty agrees to deliver to
Chemical an opinion of counsel in form
and substance satisfactory to Chemical.
Chemical and Counterparty each hereby
represent to the other that:
(a) it is an "eligible swap participant"
as that term is defined in 17 C.F.R.
35.1(b)(2);
(b) it will enter into the Master
Agreement and has entered into this
Transaction in conjunction with its line
of business (which may include financial
intermediation services);
(c) the material terms of the Master
Agreement and this Transaction will be,
or have been, as the case may be,
individually tailored and negotiated and
the creditworthiness of the other party
was a material consideration into its
entering into the Agreement and this
Transaction;
- 4 -
<PAGE> 5
(d) solely with respect to Counterparty,
it is a producer, processor, or commercial
user of, or a merchant handling, the
commodity which is the subject of this
Transaction, or the products or byproducts
thereof, and that it is entering into this
Transaction solely for purposes related to
its business as such; and
(e) solely with respect to Chemical, it
was the offeror of this Transaction and
that Chemical offered to enter into the
Master Agreement with Counterparty and
initiated their trading relationship.
Legal and Out-of-Pocket Expenses: For each party's own account.
Governing Law: The laws of the State of New York
Each party has entered into this Transaction solely in reliance on its own
judgment. Neither party has any fiduciary obligation to the other party
relating to this Transaction. In addition, neither party has held itself out as
advising, or has held out any of its employees or agents as having the
authority to advise, the other party as to whether or not the other party
should enter into this Transaction, any subsequent actions relating to this
Transaction or any other matters relating to this Transaction. Neither party
shall have any responsibility or liability whatsoever in respect of any advice
of this nature given, or views expressed, by it or any of such persons to the
other party relating to this Transaction, whether or not such advice is given
or such views are expressed at the request of the other party.
- 5 -
<PAGE> 6
Please confirm that the foregoing correctly sets forth the terms and
conditions of our agreement by responding within ten (10) Business Days by
either (i) returning via facsimile an executed copy of this Confirmation to the
attention of Paul Kelly (facsimile no. (071) 777-4764; telephone no. (071)
777-3168) or (ii) sending a telex to Paul Kelly (telex no. 898371, answer back:
CHEMBK G) substantially to the following effect: "We acknowledge receipt of
your facsimile dated March 2, 1995 with respect to a Transaction with your
reference no. 102021 and confirm that such facsimile correctly sets forth the
terms of our agreement relating to the Transaction described therein. By
(specify name and title of authorized officer)." Failure to respond within such
period shall not affect the validity or enforceability of this Transaction, and
shall be deemed to be an affirmation of the terms and conditions contained
herein, absent manifest error.
Chemical is pleased to have concluded this transaction with you.
Very truly yours,
CHEMICAL BANK
By: /s/ THOMAS D. GROS
-------------------------------
Thomas D. Gros
Vice President
Accepted and confirmed as
of the date first written:
THE HOUSTON EXPLORATION COMPANY
By: /s/ JIM WESTMORELAND
----------------------------
Name: Jim Westmoreland
Title: VP & Controller
- 6 -
<PAGE> 7
THE HOUSTON EXPLORATION COMPANY
COMMODITY SWAP TRANSACTION REFERENCE 102021
<TABLE>
<CAPTION>
- -------------------------------------------------------------------
CALCULATION NOTIONAL
PERIOD/DELIVERY QUANTITY
PRICING DATES MONTH MMBTU DRY
- -------------------------------------------------------------------
<S> <C> <C>
February 16, 1995 March, 1995 424,000
February 17, 1995
February 21, 1995
- -------------------------------------------------------------------
March 21, 1995 April, 1995 423,000
March 22, 1995
March 23, 1995
- -------------------------------------------------------------------
April 19, 1995 May, 1995 422,000
April 20, 1995
April 21, 1995
- -------------------------------------------------------------------
May 19, 1995 June, 1995 421,000
May 22, 1995
May 23, 1995
- -------------------------------------------------------------------
June 20, 1995 July, 1995 420,000
June 21, 1995
June 22, 1995
- -------------------------------------------------------------------
July 20, 1995 August, 1995 419,000
July 21, 1995
July 24, 1995
- -------------------------------------------------------------------
August 22, 1995 September, 1995 418,000
August 23, 1995
August 24, 1995
- -------------------------------------------------------------------
September 19, 1995 October, 1995 417,000
September 20, 1995
September 21, 1995
- -------------------------------------------------------------------
October 20, 1995 November, 1995 416,000
October 23, 1995
October 24, 1995
- -------------------------------------------------------------------
</TABLE>
<PAGE> 8
THE HOUSTON EXPLORATION COMPANY
COMMODITY SWAP TRANSACTION REFERENCE 102021
<TABLE>
<CAPTION>
- -------------------------------------------------------------------
CALCULATION NOTIONAL
PERIOD/DELIVERY QUANTITY
PRICING DATES MONTH MMBTU DRY
- -------------------------------------------------------------------
<S> <C> <C>
November 17, 1995 December, 1995 415,000
November 20, 1995
November 21, 1995
- -------------------------------------------------------------------
December 18, 1995 January, 1996 360,000
December 19, 1995
December 20, 1995
- -------------------------------------------------------------------
January 22, 1996 February, 1996 347,000
January 23, 1996
January 24, 1996
- -------------------------------------------------------------------
February 20, 1996 March, 1996 334,000
February 21, 1996
February 22, 1996
- -------------------------------------------------------------------
March 20, 1996 April, 1996 321,000
March 21, 1996
March 22, 1996
- -------------------------------------------------------------------
April 18, 1996 May, 1996 308,000
April 19, 1996
April 22, 1996
- -------------------------------------------------------------------
May 20, 1996 June, 1996 295,000
May 21, 1996
May 22, 1996
- -------------------------------------------------------------------
June 19, 1996 July, 1996 282,000
June 20, 1996
June 21, 1996
- -------------------------------------------------------------------
</TABLE>
-2-
<PAGE> 9
THE HOUSTON EXPLORATION COMPANY
COMMODITY SWAP TRANSACTION REFERENCE 102021
<TABLE>
<CAPTION>
- -------------------------------------------------------------------
CALCULATION NOTIONAL
PERIOD/DELIVERY QUANTITY
PRICING DATES MONTH MMBTU DRY
- -------------------------------------------------------------------
<S> <C> <C>
July 22, 1996 August, 1996 269,000
July 23, 1996
July 24, 1996
- -------------------------------------------------------------------
August 20, 1996 September, 1996 256,000
August 21, 1996
August 22, 1996
- -------------------------------------------------------------------
September 19, 1996 October, 1996 243,000
September 20, 1996
September 23, 1996
- -------------------------------------------------------------------
October 22, 1996 November, 1996 230,000
October 23, 1996
October 24, 1996
- -------------------------------------------------------------------
November 18, 1996 December, 1996 217,000
November 19, 1996
November 20, 1996
- -------------------------------------------------------------------
December 16, 1996 January, 1997 215,000
December 17, 1996
December 18, 1996
- -------------------------------------------------------------------
January 21, 1997 February, 1997 213,000
January 22, 1997
January 23, 1997
- -------------------------------------------------------------------
February 18, 1997 March, 1997 211,000
February 19, 1997
February 20, 1997
- -------------------------------------------------------------------
</TABLE>
-3-
<PAGE> 10
THE HOUSTON EXPLORATION COMPANY
COMMODITY SWAP TRANSACTION REFERENCE 102021
<TABLE>
<CAPTION>
- -------------------------------------------------------------------
CALCULATION NOTIONAL
PERIOD/DELIVERY QUANTITY
PRICING DATES MONTH MMBTU DRY
- -------------------------------------------------------------------
<S> <C> <C>
March 20, 1997 April, 1997 209,000
March 21, 1997
March 24, 1997
- -------------------------------------------------------------------
April 21, 1997 May, 1997 207,000
April 22, 1997
April 23, 1997
- -------------------------------------------------------------------
May 19, 1997 June, 1997 205,000
May 20, 1997
May 21, 1997
- -------------------------------------------------------------------
June 19, 1997 July, 1997 203,000
June 20, 1997
June 23, 1997
- -------------------------------------------------------------------
July 22, 1997 August, 1997 201,000
July 23, 1997
July 24, 1997
- -------------------------------------------------------------------
August 19, 1997 September, 1997 199,000
August 20, 1997
August 21, 1997
- -------------------------------------------------------------------
September 19, 1997 October, 1997 197,000
September 22, 1997
September 23, 1997
- -------------------------------------------------------------------
October 21, 1997 November, 1997 195,000
October 22, 1997
October 23, 1997
- -------------------------------------------------------------------
</TABLE>
-4-
<PAGE> 11
THE HOUSTON EXPLORATION COMPANY
COMMODITY SWAP TRANSACTION REFERENCE 102021
<TABLE>
<CAPTION>
- -------------------------------------------------------------------
CALCULATION NOTIONAL
PERIOD/DELIVERY QUANTITY
PRICING DATES MONTH MMBTU DRY
- -------------------------------------------------------------------
<S> <C> <C>
November 17, 1997 December, 1997 193,000
November 18, 1997
November 19, 1997
- -------------------------------------------------------------------
</TABLE>
-5-
<PAGE> 1
EXHIBIT 10.7
[CHEMICAL BANK LETTERHEAD]
Date: February 5, 1992
To: Fuel Resources Inc.
Attention: Marvin Steakley
Re: Commodity Swap Transaction (Our Reference No. 29321)
Gentlemen:
The purpose of this letter agreement is to set forth the terms and
conditions of the Swap Transaction entered into between us on the Trade Date
referred to below. It constitutes a "Confirmation" as referred to in the ISDA
(defined below) Interest Rate and Currency Exchange Agreement to be entered
into between us dated as of February 3, 1992 (the "Agreement"), and will
supplement, form a part of, and be subject to the Agreement.
The definitions and provisions contained in the 1991 Interest Rate and
Currency Exchange Definitions (as published by the International Swap Dealers
Association, Inc.) ("ISDA") are incorporated into this Confirmation. In the
event of any inconsistency between those definitions and provisions in this
Confirmation, this Confirmation will govern.
All provisions contained or incorporated by reference in the Agreement
shall govern this Confirmation except as expressly modified below. In addition,
until the Agreement is executed, this Confirmation itself evidences a complete
binding agreement between you and us as to the terms and conditions of the Swap
Transaction to which this Confirmation relates. Each party represents to the
other that it is authorized to enter into the Swap Transaction contemplated by
this Confirmation. Each party further agrees that this swap contract is a
financial contract, and that no physical receipt or delivery of Natural Gas is
contemplated.
The terms of the Swap Transaction to which this Confirmation relates
are as follows:
Party A: Chemical Bank
Party B: Fuel Resources Inc.
<PAGE> 2
Trade Date: February 4, 1992
Effective Date: December 1, 1992
Termination Date: December 31, 1997
Natural Gas
Notional Principal: See Exhibit A for
Amortization Amounts.
Fixed Price Payer: Party A
Fixed Price: $1.53 per MMBtu
Floating Price Payer: Party B
Floating Price: Arithmetic average (mean) of the settlement prices,
during the last three scheduled trading days, of the
applicable spot (i.e. first nearby) New York
Mercantile Exchange Natural Gas Contract (see Exhibit A
for details).
Amortization Periods: Monthly (see Exhibit A for exact dates).
Settlement Amounts: At the beginning of each Amortization Period (see
Exhibit A), the Calculation Agent shall determine the
difference between the Floating Price and the Fixed
Price and
(A) If the Fixed Price exceeds the Floating Price,
then Party A will pay Party B this difference,
times the applicable Amortization Amount; or
(B) If the Floating Price exceeds the Fixed Price,
then Party B will pay Party A this difference,
times the applicable Amortization Amount.
Payment Dates: Three Business Days after the beginning of the
Amortization Period.
Payment Basis: Net payment for all Payment Dates in U.S. Dollars.
Business Days: New York
2
<PAGE> 3
Calculation Agent: Party A
Market Disruption
Event: In the event that New York Mercantile
Exchange Settlement prices are not
available, then the floating price
shall be the Natural Gas cash price
(location: Henry Hubb), which
represents the bid week price for the
applicable Amortization Period, as
published in "Inside F.E.R.C.'s Gas
Market Report" (a McGraw-Hill
publication), and the relevant payment
date shall be adjusted accordingly.
Early Termination
(Unwind): Quotes will be provided on a best
efforts basis.
Credit Support
Document: Guaranty as identified in the Agreement.
Account Details
Party A Payment
Instructions: As Agent for Chemical Bank
Manufacturers Hanover Trust Company
Medium Term Swaps
Attention: International Funds Control
Account # 544-7-72797
Party B Payment
Instructions: Manufacturers Hanover Trust Company
New York
In favor of: Fuel Resources Inc.
Account # 028053243
Assignment: This Swap Transaction may not be
assigned by either party without the
prior written consent of the other
party.
Legal and Out-of-
Pocket Expenses: For each party's own account.
Governing Law: The laws of the State of New York.
3
<PAGE> 4
Please confirm that the foregoing correctly sets forth the terms and
conditions of our agreement by signing and returning the copy of this letter
enclosed for that purpose.
Chemical Bank is pleased to have concluded this transaction with you.
Very truly yours,
CHEMICAL BANK
By: /s/ JEFFERY LARSEN
--------------------------------
Name: Jeffery Larsen
Title: Managing Director
By: /s/ [ILLEGIBLE]
--------------------------------
Name: [Illegible]
Title: Vice President
Accepted and confirmed as
of the date first written:
FUEL RESOURCES INC.
By: /s/ MARVIN L. STEAKLEY
-----------------------------
Name: Marvin L. Steakley
Title: Vice President
4
<PAGE> 5
EXHIBIT A
AMORTIZATION SCHEDULE
<TABLE>
<CAPTION>
APPLICABLE SPOT AMORTIZATION PERIOD AMORTIZATION AMOUNT
NYMEX CONTRACT ------------------- -------------------
- ---------------
<S> <C> <C>
January 1/1/93 - 1/31/93 795,000 MMBtu
February 2/1/93 - 2/28/93 780,000 MMBtu
March 3/1/93 - 3/31/93 765,000 MMBtu
April 4/1/93 - 4/30/93 750,000 MMBtu
May 5/1/93 - 5/31/93 735,000 MMBtu
June 6/1/93 - 6/30/93 720,000 MMBtu
July 7/1/93 - 7/31/93 705,000 MMBtu
August 8/1/93 - 8/31/93 690,000 MMBtu
September 9/1/93 - 9/30/93 675,000 MMBtu
October 10/1/93 - 10/31/93 660,000 MMBtu
November 11/1/93 - 11/30/93 645,000 MMBtu
December 12/1/93 - 12/31/93 630,000 MMBtu
January 1/1/94 - 1/31/94 570,000 MMBtu
February 2/1/94 - 2/28/94 557,000 MMBtu
March 3/1/94 - 3/31/94 544,000 MMBtu
April 4/1/94 - 4/30/94 531,000 MMBtu
May 5/1/94 - 5/31/94 518,000 MMBtu
June 6/1/94 - 6/30/94 505,000 MMBtu
July 7/1/94 - 7/31/94 492,000 MMBtu
August 8/1/94 - 8/31/94 479,000 MMBtu
September 9/1/94 - 9/30/94 466,000 MMBtu
October 10/1/94 - 10/31/94 453,000 MMBtu
November 11/1/94 - 11/30/94 440,000 MMBtu
December 12/1/94 - 12/31/94 427,000 MMBtu
January 1/1/95 - 1/31/95 426,000 MMBtu
February 2/1/95 - 2/28/95 425,000 MMBtu
March 3/1/95 - 3/31/95 424,000 MMBtu
April 4/1/95 - 4/30/95 423,000 MMBtu
May 5/1/95 - 5/31/95 422,000 MMBtu
June 6/1/95 - 6/30/95 421,000 MMBtu
</TABLE>
Initials Only:
Chemical A.J.T.
------------------
Fuel Resources /s/ M. L. STEAKLEY
------------------
5
<PAGE> 6
EXHIBIT A
AMORTIZATION SCHEDULE
(CONTINUED)
<TABLE>
<CAPTION>
APPLICABLE SPOT AMORTIZATION PERIOD AMORTIZATION AMOUNT
NYMEX CONTRACT ------------------- -------------------
- ---------------
<S> <C> <C>
July 7/1/95 - 7/31/95 420,000 MMBtu
August 8/1/95 - 8/31/95 419,000 MMBtu
September 9/1/95 - 9/30/95 418,000 MMBtu
October 10/1/95 - 10/31/95 417,000 MMBtu
November 11/1/95 - 11/30/95 416,000 MMBtu
December 12/1/95 - 12/31/95 415,000 MMBtu
January 1/1/96 - 1/31/96 360,000 MMBtu
February 2/1/96 - 2/28/96 347,000 MMBtu
March 3/1/96 - 3/31/96 334,000 MMBtu
April 4/1/96 - 4/30/96 321,000 MMBtu
May 5/1/96 - 5/31/96 308,000 MMBtu
June 6/1/96 - 6/30/96 295,000 MMBtu
July 7/1/96 - 7/31/96 282,000 MMBtu
August 8/1/96 - 8/31/96 269,000 MMBtu
September 9/1/96 - 9/30/96 256,000 MMBtu
October 10/1/96 - 10/31/96 243,000 MMBtu
November 11/1/96 - 11/30/96 230,000 MMBtu
December 12/1/96 - 12/31/96 217,000 MMBtu
January 1/1/97 - 1/31/97 215,000 MMBtu
February 2/1/97 - 2/28/97 213,000 MMBtu
March 3/1/97 - 3/31/97 211,000 MMBtu
April 4/1/97 - 4/30/97 209,000 MMBtu
May 5/1/97 - 5/31/97 207,000 MMBtu
June 6/1/97 - 6/30/97 205,000 MMBtu
July 7/1/97 - 7/31/97 203,000 MMBtu
August 8/1/97 - 8/31/97 201,000 MMBtu
September 9/1/97 - 9/30/97 199,000 MMBtu
</TABLE>
Initials Only:
Chemical A.J.T.
------------------
Fuel Resources /s/ M.L. STEAKLEY
------------------
6
<PAGE> 7
<TABLE>
<S> <C> <C>
October 10/1/97 - 10/31/97 197,000 MMBtu
November 11/1/97 - 11/30/97 195,000 MMBtu
December 12/1/97 - 12/31/97 193,000 MMBtu
Total 25,488,000 MMBtu
----------------------
</TABLE>
CHEMICAL BANK
By: [ILLEGIBLE]
------------------------------
Name: [ILLEGIBLE]
Title: VICE PRESIDENT
Accepted and confirmed
as of the date first written:
FUEL RESOURCES INC.
By:/s/ MARVIN L. STEAKLEY
------------------------------
Name: MARVIN L. STEAKLEY
Title: VICE PRESIDENT
7
<PAGE> 1
EXHIBIT 10.16
CREDIT AGREEMENT
Dated as of April 23, 1996
Among
THE HOUSTON EXPLORATION COMPANY,
as the Company,
and
TEXAS COMMERCE BANK NATIONAL ASSOCIATION,
as Agent
and
THE BANKS SIGNATORY HERETO
$150,000,000 Revolving Credit Facility
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<S> <C>
ARTICLE I
Definitions and Accounting Matters
Section 1.01 Terms Defined Above .......................................... 1
Section 1.02 Certain Defined Terms ........................................ 1
Section 1.03 Accounting Terms and Determinations .......................... 13
ARTICLE II
Commitments
Section 2.01 Loans and Letters of Credit .................................. 14
Section 2.02 Borrowings, Continuations, Conversions, and Issuances ........ 15
Section 2.03 Changes of Commitments ....................................... 17
Section 2.04 Fees ......................................................... 17
Section 2.05 Applicable Lending Offices ................................... 19
Section 2.06 Several Obligations .......................................... 19
Section 2.07 Notes ........................................................ 19
Section 2.08 Prepayments .................................................. 19
Section 2.09 Borrowing Base ............................................... 20
ARTICLE III
Payments of Principal and Interest
Section 3.01 Repayment of Loans ........................................... 22
Section 3.02 Interest ..................................................... 22
ARTICLE IV
Payments; Pro Rata Treatment; Computations; Etc ....................
Section 4.01 Payments ..................................................... 23
Section 4.02 Pro Rata Treatment ........................................... 23
Section 4.03 Computations ................................................. 23
Section 4.04 Non-receipt of Funds by the Agent ............................ 24
Section 4.05 Sharing of Payments, Etc ..................................... 24
</TABLE>
-i-
<PAGE> 3
<TABLE>
<S> <C>
Section 4.06 Assumption of Risks .......................................... 25
Section 4.07 Obligation to Reimburse and to Repay ......................... 25
Section 4.08 Obligations for Letters of Credit ............................ 27
ARTICLE V
Yield Protection; Illegality; Etc
Section 5.01 Additional Costs ............................................. 28
Section 5.02 Limitation on Types of Loans ................................. 29
Section 5.03 Illegality ................................................... 30
Section 5.04 Certain Base Rate Loans pursuant to Sections 5.01 and 5.03 ... 30
Section 5.05 Certain Compensation ......................................... 30
ARTICLE VI
Conditions Precedent
Section 6.01 Initial Loan ................................................. 31
Section 6.02 Initial and Subsequent Loans ................................. 32
Section 6.03 Conditions Relating to Letters of Credit ..................... 32
Section 6.04 Subsequent Environmental Audits--New Acquisitions ............ 33
Section 6.05 Audited Financial Statements ................................. 33
ARTICLE VII
Representations and Warranties
Section 7.01 Corporate Existence .......................................... 33
Section 7.02 Financial Condition .......................................... 34
Section 7.03 Liabilities; Litigation ...................................... 34
Section 7.04 No Breach .................................................... 34
Section 7.05 Corporate Action ............................................. 34
Section 7.06 Approvals .................................................... 35
Section 7.07 Use of Loans ................................................. 35
Section 7.08 ERISA ........................................................ 35
Section 7.09 Taxes ........................................................ 35
Section 7.10 Titles, etc .................................................. 36
Section 7.11 No Material Misstatements .................................... 36
Section 7.12 Investment Company Act ....................................... 36
Section 7.13 Public Utility Holding Company Act ........................... 36
</TABLE>
-ii-
<PAGE> 4
<TABLE>
<S> <C>
Section 7.14 Subsidiaries and Partnerships ................................ 36
Section 7.15 Location of Business and Offices ............................. 36
Section 7.16 Gas Imbalances ............................................... 36
Section 7.17 Rate Filings ................................................. 37
Section 7.18 Environmental Matters ........................................ 37
Section 7.19 Defaults ..................................................... 38
Section 7.20 Compliance with the Law ...................................... 38
Section 7.21 Insurance .................................................... 38
Section 7.22 Credit Agreements ............................................ 39
ARTICLE VIII
Affirmative Covenants
Section 8.01 Financial Statements and Other Reports ....................... 39
Section 8.02 Litigation ................................................... 41
Section 8.03 Corporate Existence, Etc ..................................... 41
Section 8.04 Engineering and Other Reports ................................ 42
Section 8.05 Further Assurances ........................................... 43
Section 8.06 Performance of Obligations ................................... 43
ARTICLE IX
Negative Covenants
Section 9.01 Debt ......................................................... 44
Section 9.02 Guaranties, Etc .............................................. 45
Section 9.03 Liens ........................................................ 45
Section 9.04 Leases ....................................................... 47
Section 9.05 Investments .................................................. 47
Section 9.06 Dividends .................................................... 47
Section 9.07 Sale of Assets ............................................... 47
Section 9.08 Stock of Subsidiaries, Etc ................................... 48
Section 9.09 Transactions with Affiliates ................................. 48
Section 9.10 Mergers, Etc ................................................. 48
Section 9.11 Acquisitions ................................................. 48
Section 9.12 Minimum Consolidated Net Worth ............................... 49
Section 9.13 Fixed Charges Ratio .......................................... 49
Section 9.14 Debt to Total Capitalization Ratio ........................... 49
Section 9.15 Negative Pledge Agreements ................................... 49
Section 9.16 Sale of Oil and Gas Properties ............................... 50
Section 9.17 Environmental Matters ........................................ 50
</TABLE>
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<TABLE>
<S> <C>
Section 9.18 ERISA Compliance ............................................. 51
Section 9.19 Hedging Agreements ........................................... 51
Section 9.20 Subsidiaries and Partnerships ................................ 51
ARTICLE X
Events of Default
Section 10.01 Events of Default ........................................... 51
Section 10.02 Cash Collateral for Letters of Credit ....................... 54
ARTICLE XI
The Agent
Section 11.01 Appointment, Powers and Immunities .......................... 54
Section 11.02 Reliance by Agent ........................................... 55
Section 11.03 Defaults .................................................... 55
Section 11.04 Rights as a Bank ............................................ 55
Section 11.05 Indemnification ............................................. 56
Section 11.06 Non-Reliance on Agent and other Banks ....................... 56
Section 11.07 Failure to Act .............................................. 56
Section 11.08 Resignation or Removal of Agent ............................. 57
ARTICLE XII
Miscellaneous
Section 12.01 Waiver ...................................................... 57
Section 12.02 Notices ..................................................... 57
Section 12.03 Payment of Expenses, Indemnities, etc ....................... 58
Section 12.04 Amendments, Etc ............................................. 59
Section 12.05 Successors and Assigns ...................................... 60
Section 12.06 Assignments and Participations .............................. 60
Section 12.07 Invalidity .................................................. 61
Section 12.08 Counterparts ................................................ 62
Section 12.09 References .................................................. 62
Section 12.10 Termination of Agreement; Survival of Obligations ........... 62
Section 12.11 Captions .................................................... 63
Section 12.12 Governing Law ............................................... 63
Section 12.13 Interest .................................................... 63
Section 12.14 Waiver of Jury Trial ........................................ 64
</TABLE>
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<TABLE>
<S> <C>
Section 12.15 Exculpation Provisions .................................... 65
Section 12.16 No Oral Agreements ........................................ 65
</TABLE>
Exhibit A - Form of Letter of Credit Agreement -- Agent
Exhibit B - Form of Revolving Credit Note
Exhibit C - Form of Compliance Certificate
Exhibit D - Form of Opinion
Exhibit E - Form of Borrowing, Continuation or Conversion Form
Exhibit F - Form of Assignment and Acceptance
Schedule 1.02(b) - Existing Letters of Credit
Schedule 7.03 - Litigation and Liabilities
Schedule 7.08 - ERISA Obligations
Schedule 7.10 - Disclosure of Liens other than Excepted Liens
Schedule 7.14 - Listing of Subsidiaries and Partnerships
Schedule 7.16 - Gas Imbalances
Schedule 7.18 - Environmental Matters
Schedule 7.21 - Insurance
Schedule 7.22 - Credit Agreements, Etc.
Schedule 9.01 - Debt not reflected in Financial Statements
Schedule 9.03 - Investments, loans or advances not reflected
in Financial Statements
Schedule 9.18 - Accumulated Funding Deficiencies
Schedule 9.19 - Hedging Agreements
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<PAGE> 7
THIS CREDIT AGREEMENT dated as of April 23, 1996, is among THE HOUSTON
EXPLORATION COMPANY, a corporation duly organized and validly existing under the
laws of the State of Delaware (the "Company"); each of the banks that is a
signatory hereto, including the hereinafter defined "TCB" (together with their
respective successors or assigns, individually, a "Bank" and, collectively, the
"Banks"); and TEXAS COMMERCE BANK NATIONAL ASSOCIATION, as agent for the Banks
(in such capacity, together with its successors in such capacity, the "Agent").
RECITALS
WHEREAS, the Company has requested that the Banks provide certain loans
to and extensions of credit on behalf of the Company; and
WHEREAS, the Banks have agreed to make such loans and extensions of
credit subject to the terms and conditions of this Agreement;
NOW, THEREFORE, in consideration of the mutual covenants and agreements
herein contained and of the loans and commitments hereinafter referred to, the
parties hereto hereby agree as follows:
ARTICLE I
Definitions and Accounting Matters
Section 1.01 Terms Defined Above. As used in this Credit
Agreement, the terms "Agent", "Bank", "Banks" and "Company" shall have the
meanings indicated above.
Section 1.02 Certain Defined Terms. As used herein, the
following terms shall have the following meanings (all terms defined in this
Article I or in other provisions of this Credit Agreement in the singular to
have the same meanings when used in the plural and vice versa):
"Accepted Borrowing Base" shall have the meaning assigned to that term
in Section 2.09.
"Additional Costs" shall have the meaning assigned to that term in
Section 5.01.
"Affected Loans" shall have the meaning assigned to that term in
Section 5.04.
"Affiliate" of any Person shall mean (i) any Person directly or
indirectly controlled by, controlling or under common control with such first
Person, and (ii) any director, officer, partner or stockholder of such first
Person or of any Person referred to in clause (i) above.
<PAGE> 8
"Agreement" shall mean this Credit Agreement, as the same may from time
to time be amended or supplemented.
"Alternate Reserve Report" shall have the meaning provided in
Subsection 8.04(c).
"Applicable Lending Office" shall mean, for each Bank and for each type
of Loan, the lending office of such Bank (or an affiliate of such Bank)
designated for such type of Loan on the signature pages hereof or such other
offices of such Bank (or of an affiliate of such Bank) as such Bank may from
time to time specify to the Agent and the Company as the office by which its
Loans of such type are to be made and maintained.
"Applicable Margin" shall mean:
(a) with respect to a Base Rate Loan (i) 0% per annum before the
Conversion Date, and (ii) 1/4% per annum on and after the Conversion Date; and
(b) with respect to a Fixed Rate Loan (i) 13/16% per annum before the
Conversion Date, and (ii) 1% per annum on and after the Conversion Date.
"Assignment and Acceptance" shall have the meaning assigned such term
in Section 12.06(b).
"Base Rate" shall mean, with respect to any Base Rate Loan, for any
day, the higher of (a) the Federal Funds Rate for such day plus 1/2 of 1%, or
(b) the Prime Rate for such day. Each change in any interest rate provided for
herein based upon the Base Rate resulting from a change in the Base Rate shall
take effect at the time of such change in the Base Rate.
"Base Rate Loans" shall mean Loans that bear interest at rates based
upon the Base Rate.
"Borrowing Base" shall mean at any time an amount equal to the amount
determined in accordance with Section 2.09.
"BUG" shall mean The Brooklyn Union Gas Company.
"Business Day" shall mean any day on which commercial banks are not
authorized or required to close in the State of Texas and, where such term is
used in the definition of "Quarterly Dates" in this Section 1.02 or if such day
relates to a borrowing of, a payment or prepayment of principal of or interest
on, or a conversion of or into, or the Interest Period for, a Fixed Rate Loan or
a notice by the Company with respect to any such borrowing, payment, prepayment,
conversion or Interest Period, any day which is also a day on which dealings in
Dollar deposits are carried out in the London Interbank Market.
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<PAGE> 9
"Capital Lease" means any lease which has been or should be capitalized
on the books of the lessee in accordance with GAAP.
"Change in Control" shall mean any change in ownership of the shares of
stock of (a) THEC Holdings such that a Person (or group of Persons acting
together) other than BUG acquires shares of stock of THEC Holdings, or (b) the
Company such that a Person (or group of Persons acting together) other than THEC
Holdings acquires a direct or indirect interest in more than 35% of the voting
power of the voting stock of the Company.
"Closing Date" shall mean April 23, 1996.
"Code" shall mean the Internal Revenue Code of 1986, as amended.
"Commitment" shall mean, as to each Bank, the obligation of such Bank
to make Loans to the Company or of the Agent to issue, reissue, renew or extend
Letters of Credit on behalf of such Bank for the account of the Company, in an
aggregate amount at any one time outstanding equal to the amount set forth
opposite such Bank's name on the signature pages hereof under the caption
"Commitment" (as the same may be reduced from time to time pursuant to Section
2.03 hereof); provided, however, the total Commitments of all Banks shall be
subject to the Borrowing Base pursuant to the terms of this Agreement including,
without limitation, Sections 2.01(a) and (b).
"Consolidated Cash Flow" shall mean at the end of any fiscal quarter,
for the four consecutive quarters ending with such quarter, the sum of (a)
Consolidated Net Income after taxes, plus (b) depreciation, depletion,
amortization and other noncash expenses used in the determination of
Consolidated Net Income, as determined in accordance with GAAP of the Company
and its Subsidiaries, all as determined on a consolidated basis.
"Consolidated Fixed Charges" shall mean at the end of any fiscal
quarter, for the four consecutive fiscal quarters ending with such quarter, the
sum of (a) all principal due and payable on Debt, (b) all interest accrued on
Debt (including any and all capitalized interest), and (c) all fees for the
issuance of Letters of Credit paid or incurred in connection with Debt, by the
Company or its Subsidiaries, all as determined on a consolidated basis in
accordance with GAAP.
"Consolidated Net Income" shall mean, for any period, the amount which,
in conformity with GAAP, would be set forth opposite the caption "net income or
loss" (or any like caption) on a consolidated income statement of the Company
and its Subsidiaries for such period.
"Consolidated Net Worth" shall mean, at a particular date, all amounts
which would be included under shareholder's equity on a consolidated balance
sheet of the Company and its Subsidiaries, as determined on a consolidated basis
in accordance with GAAP.
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<PAGE> 10
"Consolidated Total Capitalization" shall mean the sum of (a)
Consolidated Total Debt and (b) the total capital represented by the capital
stock of the Company at such time outstanding based, in the case of stock having
a par value, upon its par value, and, in the case of stock of no par value, upon
the value stated on the books of the Company, plus the total amount of paid-in
capital surplus and earned surplus of the Company, or less the amount of any net
deficit in the surplus account of the Company and plus the amount of any premium
on capital stock of the Company not included in surplus and less the amount, if
any, by which capital surplus has at any time been increased as a result of a
restatement of the amount at which any assets of the Company are recorded on the
books of the Company.
"Consolidated Total Debt" shall mean Total Debt of the Company and its
Subsidiaries, as determined on a consolidated basis in accordance with GAAP.
"Conversion Date" shall mean January 1, 1998, unless extended pursuant
to Section 2.01(c).
"Debt" shall mean, for any Person, the sum of the following (without
duplication): (a) all obligations of such Person for borrowed money or evidenced
by bonds, debentures, notes or other similar instruments; (b) all obligations of
such Person (whether contingent or otherwise) in respect of letters of credit,
bankers' acceptances, surety or other bonds and similar instruments; (c) all
obligations of such Person to pay the deferred purchase price of Property or
services, except trade accounts payable (other than for borrowed money) arising
in the ordinary course of business of such Person; (d) all obligations under
Capital Leases; (e) all Debt and other obligations secured by a Lien on any
asset of such Person, whether or not such Debt is assumed by such Person; (f)
guaranties, endorsements (other than for collection in the ordinary course of
business) and other contingent obligations to purchase, to provide funds for
payment, to supply funds to invest in any Person, or otherwise to assure a
creditor against loss; and (g) all obligations or undertakings of such Person to
maintain or cause to be maintained the financial position or covenants of other
Persons.
"Default" shall mean the occurrence of any event which with notice or
lapse of time or both would become an Event of Default.
"Dollars" and "$" shall mean lawful money of the United States of
America.
"Drawdown Termination Date" shall mean January 1, 2000, unless the
Commitment shall be sooner terminated pursuant to Section 2.03(b), or unless
extended pursuant to Section 2.01(c).
"Engagement Letter" shall mean that certain letter dated of even date
herewith from the Agent to and accepted by the Company relating to certain fees
payable by the Company to the Agent.
"Engineering Reports" shall have the meaning assigned to that term in
Section 2.09(c).
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<PAGE> 11
"Environmental Laws" shall mean any and all laws, statutes, ordinances,
rules, regulations, orders, or determinations, whether now existing or hereafter
existing or rendered, of any Governmental Authority pertaining to the
environment applicable to the Company or its Subsidiaries or any of their
respective Property in effect in any and all jurisdictions in which the Company
or its Subsidiaries are conducting or at any time have conducted business, or
where the Properties of the Company and its Subsidiaries are located, or where
any hazardous substances generated by or disposed of by the Company or its
Subsidiaries are located, including but not limited to the Oil Pollution Act of
1990 ("OPA"), the Clean Air Act, as amended, the Comprehensive Environmental,
Response, Compensation, and Liability Act of 1980 ("CERCLA"), as amended, the
Federal Water Pollution Control Act, as amended, the Occupational Safety and
Health Act of 1970, as amended, the Resource Conservation and Recovery Act of
1976 ("RCRA"), as amended, the Safe Drinking Water Act, as amended, the Toxic
Substances Control Act, as amended, the Superfund Amendments and Reauthorization
Act of 1986, as amended, and other environmental conservation or protection
laws. The terms "hazardous substance," "release" and "threatened release" shall
have the meanings specified in CERCLA, and the terms "solid waste" and
"disposal" (or "disposed") shall have the meanings specified in RCRA and the
term "oil" shall have the meaning specified in OPA; provided, however, that (i)
in the event either CERCLA, RCRA or OPA is amended so as to broaden the meaning
of any term defined thereby, such broader meaning shall apply subsequent to the
effective date of such amendment with respect to all provisions of this
Agreement other than Article VII hereof, (ii) to the extent the laws of the
state or states in which any Property of the Company or its Subsidiaries is
located establish a meaning for "hazardous substance," "release," "threatened
release," "solid waste", "disposal" or "oil" which is broader than that
specified in CERCLA, RCRA or OPA, such broader meaning shall apply.
"ERISA" shall mean the Employee Retirement Income Security Act of 1974,
as amended from time to time.
"ERISA Affiliate" shall mean any corporation or trade or business which
is a member of the same controlled group of corporations (within the meaning of
Section 414(b) of the Code) as the Company or a Subsidiary or is under common
control (within the meaning of Section 414(c) of the Code) with the Company or a
Subsidiary.
"Event of Default" shall have the meaning assigned to that term in
Article X.
"Excepted Liens" shall mean: (i) Liens for taxes, assessments or other
governmental charges or levies not yet due and payable or, if due and payable,
being contested in good faith by appropriate action and for which appropriate
reserves are maintained; (ii) Liens in connection with workmen's compensation,
unemployment insurance or other social security, old age pension or public
liability obligations not yet due or which are being contested in good faith by
appropriate action; (iii) operator's, vendors', carriers', warehousemen's,
repairmen's, mechanics', workmen's, materialmen's, construction or other like
Liens arising by operation of law in the ordinary course of business or incident
to the exploration, development, operation and maintenance of Oil and Gas
-5-
<PAGE> 12
Properties of the Company and its Subsidiaries and statutory landlord's liens in
respect of obligations none of which shall remain unpaid more than 90 days or
which are being contested in good faith by appropriate proceedings; (iv) any
Liens securing indebtedness, neither assumed nor guaranteed by the Company or
any Subsidiary nor on which the Company or any Subsidiary pays interest,
existing upon real estate or rights in or relating to real estate acquired by
the Company or any Subsidiary for substation, metering station, pump station,
storage, gathering line, transmission line, transportation line, distribution
line or right of way purposes, and any Liens reserved in leases for rent and for
compliance with the terms of the leases in the case of leasehold estates, to the
extent that any such Lien referred to in this clause (iv) does not materially
impair the use of the Property covered by such Lien for the purposes for which
such Property is held by the Company or a Subsidiary; and (v) encumbrances
(other than to secure the payment of borrowed money or the deferred purchase
price of Property or services), easements, restrictions, servitudes, permits,
conditions, covenants, exceptions or reservations in any rights of way or other
Property of the Company or its Subsidiaries for the purpose of roads, pipelines,
transmission lines, transportation lines, distribution lines for the removal of
gas, oil, coal or other minerals or timber, and other like purposes, or for the
joint or common use of real estate, rights of way, facilities and equipment, and
defects, irregularities and deficiencies in title of any rights of way or other
Property which in the aggregate do not materially impair the use of such rights
of way or other Property for the purposes of which such rights of way and other
Property are held by the Company or a Subsidiary.
"Federal Funds Rate" shall mean, for any day, the rate per annum
(rounded upwards, if necessary, to the nearest 1/100 of 1%) equal to the
weighted average of the rates on overnight Federal funds transactions with
members of the Federal Reserve System arranged by Federal funds brokers on such
day, as published by the Federal Reserve Bank of Dallas on the Business Day next
succeeding such day, provided that (i) if the date for which such rate is to be
determined is not a Business Day, the Federal Funds Rate for such day shall be
such rate on such transactions on the next succeeding Business Day, and (ii) if
such rate is not so published for any day, the Federal Funds Rate for such day
shall be the average rate charged to TCB on such day on such transactions as
determined by the Agent.
"Financial Statements" shall mean the financial statement or statements
of the Company de- scribed or referred to in Section 7.02.
"Fixed Base Rate" shall mean with respect to any Fixed Rate Loan, the
rate per annum (rounded upwards, if necessary, to the nearest 1/100 of 1%)
quoted by the Agent at approximately 11:00 a.m. London time (or as soon
thereafter as practicable) two Business Days prior to the first day of the
Interest Period for such Loan for the offering by the Agent to leading banks in
the London interbank market as determined by the Agent in its sole discretion of
Dollar deposits having a term comparable to such Interest Period and in an
amount comparable to the principal amount of the Fixed Rate Loan to be made by
the Agent for such Interest Period.
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<PAGE> 13
"Fixed Rate" shall mean, for any Fixed Rate Loan, a rate per annum
(rounded upwards, if necessary, to the nearest 1/100 of 1%) determined by the
Agent to be equal to the quotient of (i) the Fixed Base Rate for such Loan for
the Interest Period therefor, divided by (ii) one minus the Reserve Requirement
for such Loan for such Interest Period.
"Fixed Rate Loans" shall mean any Loan when and to the extent the
interest rate therefor is determined on the basis of rates referred to in the
definition of "Fixed Base Rate".
"FRI" shall mean Fuel Resources Inc., a Delaware corporation.
"FRI Credit Agreement" shall mean that certain Credit Agreement dated
November 23, 1993, among FRI, the Agent and the Banks, as heretofore amended and
supplemented and as the same may from time to time be further amended or
supplemented.
"GAAP" shall mean generally accepted accounting principles in the
United States of America as in effect from time to time, applied on a basis
consistent with those used in the preparation of the Financial Statements
(except for changes concurred in by the Company's independent public
accountants).
"Governmental Authority" shall include the United States, the state,
county, parish, province, municipal and political subdivisions in which any
Property of the Company or the Subsidiaries is located or which exercises
jurisdiction over any such Property, and any court, agency, department,
commission, board, bureau or instrumentality of any of them which exercises
jurisdiction over any such Property.
"Governmental Requirement" shall mean any law, statute, code,
ordinance, order, rule, regulation, judgment, decree, injunction, franchise,
permit, certificate, license, authorization or other direction or requirement
(including, without limitation, Environmental Laws, energy regulations and
occupational, safety and health standards or controls) of any Governmental
Authority.
"Guarantors" shall mean FRI and each Subsidiary which may execute a
Guaranty Agreement pursuant to Section 9.20.
"Guaranty Agreements" shall mean the guaranty agreements dated as of
the Closing Date (or the date of execution, if such guaranty agreements are
executed after the Closing Date) executed by each of the Guarantors, as same may
be amended from time to time, guaranteeing prompt payment and/or performance of
the Indebtedness.
"Hedging Agreement" shall mean (i) any interest or currency rate swap,
rate cap, rate floor, rate collar, exchange transaction, put or call option,
forward agreement, foreign exchange or other exchange or rate protection
agreement or any option with respect to any such transaction and (ii) any cap,
floor, collar, exchange transaction, contract for sale for future delivery of
oil or gas (whether
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<PAGE> 14
or not the subject oil or gas is to be delivered), hedging contract, forward
contract, swap agreement, futures contract, call or put option or any other
similar agreement or other exchange or protection agreement relating to
Hydrocarbons or any option with respect to any such transaction (whether or not
any of the foregoing contemplates physical deliveries or only financial
contracts).
"Highest Lawful Rate" shall mean, with respect to each Bank, the
maximum nonusurious interest rate, if any, that at any time or from time to time
may be contracted for, taken, reserved, charged or received on the Notes or on
other Indebtedness under laws applicable to such Bank which are presently in
effect or, to the extent allowed by law, under such applicable laws which may
hereafter be in effect and which allow a higher maximum nonusurious interest
rate than applicable laws now allow.
"Hydrocarbon Interests" shall mean all rights, titles, interests and
estates now owned or hereafter acquired in and to oil and gas leases, oil, gas
and mineral leases, or other liquid or gaseous hydrocarbon leases, mineral fee
interests, overriding royalty and royalty interests, net profit interests and
production payment interests, including any reserve or residual interest of
whatever nature.
"Hydrocarbons" shall mean oil, gas, casinghead gas, drip gasoline,
natural gasoline, condensate, distillate, liquid hydrocarbons, gaseous
hydrocarbons and all products refined therefrom and all other minerals
customarily produced in association therewith.
"Indebtedness" shall mean (i) any and all amounts owing or to be owing
by the Company to the Banks in connection with the Notes, any Letter of Credit
or Letter of Credit Agreement, or any Security Instrument, including this
Agreement, and (ii) all renewals, extensions, replacements, amendments and/or
rearrangements thereof.
"Indemnity Matters" shall have the meaning assigned to that term in
Section 12.03(c).
"Initial Funding" shall mean the funding of the initial Loans pursuant
to Section 6.01 hereof.
"Initial Reserve Report" shall mean, collectively, the reports of
Huddleston and Company dated as of December 31, 1995; Netherland, Sewell and
Associates dated as of December 31, 1995; Ryder Scott Company dated as of
December 31, 1995; and Miller & Lents dated December 31, 1995, with respect to
Oil and Gas Properties of the Company, a copy of which has been delivered to the
Banks.
"Interest Period" shall mean the period commencing on the date a Loan
is made and ending, as the Company may select pursuant to Section 2.02: (a) in
the case of Base Rate Loans, on the next succeeding Quarterly Date; and (b) in
the case of Fixed Rate Loans, on the numerically corresponding day in the first,
second, third, or sixth calendar month thereafter, provided that each such
Interest Period which commences on the last Business Day of a calendar month (or
on any day for which there is no numerically corresponding day in the
appropriate subsequent calendar month)
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<PAGE> 15
shall end on the last Business Day of the appropriate calendar month.
Notwithstanding the foregoing: (i) no Interest Period may commence before and
end after the scheduled maturity of the Notes; (ii) each Interest Period which
would otherwise end on a day which is not a Business Day shall end on the next
succeeding Business Day (or, if such next succeeding Business Day falls in the
next succeeding calendar month, on the next preceding Business Day); and (iii)
no Interest Period on Fixed Rate Loans shall have a duration of less than one
month.
"LC Exposure" shall mean at any time the aggregate undrawn face amount
of all outstanding Letters of Credit and the aggregate of all amounts drawn
under Letters of Credit and not yet reimbursed or funded as a Loan pursuant to
Section 4.07(b).
"Letter of Credit Agreements" shall mean the written agreements between
the Company and the Agent executed or hereafter executed in connection with the
issuance by the Agent of the Letters of Credit, such agreements to be in
substantially the form attached hereto as Exhibit A, or on any other customary
form for letters of credit of comparable amount and purpose, as from time to
time agreed to by the Company and the Agent.
"Letters of Credit" shall mean (i) the letters of credit outstanding on
the Closing Date and described on Schedule 1.02(b) hereof, together with all
renewals, replacements, extensions and substitutions thereof, (ii) the letters
of credit hereafter issued by the Agent on behalf of the Banks pursuant to
Section 2.01(b), and (iii) all reimbursement obligations pertaining to any such
letters of credit; and "Letter of Credit" shall mean any one of the Letters of
Credit and the reimbursement obligation pertaining thereto.
"Liens" shall mean, with respect to any asset, any mortgage, lien,
pledge, charge (including, without limitation, production payments and the like
payable out of Oil and Gas Properties), security interest or encumbrance of any
kind in respect of such asset. For the purposes of this Agreement, the Company
and the Subsidiaries shall be deemed to own subject to a Lien any asset which
they have acquired or hold subject to the interest of a vendor or lessor under
any conditional sale agreement, Capital Lease or other title retention agreement
relating to such asset.
"Loans" shall mean the Revolving Credit Loans.
"Majority Banks" shall mean, at any time, Banks having at least
seventy-five percent (75%) of the aggregate amount of the Commitments.
"Material Adverse Effect" shall mean any material and adverse effect on
(i) the assets, liabilities, financial condition, business, operations, affairs
or circumstances of the Company and its Subsidiaries on a combined basis from
those reflected in the Financial Statements or from the facts represented or
warranted in this Agreement or any other Security Instrument, or (ii) the
ability of the Company and its Subsidiaries on a combined basis to carry out
their respective business as at the date of this Agreement or as proposed at the
date of this Agreement to be conducted or meet their
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<PAGE> 16
respective obligations under the Notes, the Letters of Credit and Letter of
Credit Agreements, this Agreement or the other Security Instruments on a timely
basis.
"Material Change" shall mean a Change in Control.
"Multiemployer Plan" shall mean a Plan defined as such in Section 3(37)
of ERISA to which contributions have been made by the Company or any ERISA
Affiliate and which is covered by Title IV of ERISA.
"Notes" shall mean the Revolving Credit Notes.
"Oil and Gas Properties" shall mean Hydrocarbon Interests; the
Properties now or hereafter pooled or unitized with Hydrocarbon Interests; all
presently existing or future unitization, pooling agreements and declarations of
pooled units and the units created thereby (including without limitation all
units created under orders, regulations and rules of any governmental body or
agency having jurisdiction) which may affect all or any portion of the
Hydrocarbon Interests; all operating agreements, contracts and other agreements
which relate to any of the Hydrocarbon Interests or the production, sale,
purchase, exchange or processing of Hydrocarbons from or attributable to such
Hydrocarbon Interests; all Hydrocarbons in and under and which may be produced
and saved or attributable to the Hydrocarbon Interests, the lands covered
thereby and all oil in tanks and all rents, issues, profits, proceeds, products,
revenues and other income from or attributable to the Hydrocarbon Interests; all
tenements, hereditaments, appurtenances and Properties in anywise appertaining,
belonging, affixed or incidental to the Hydrocarbon Interests, Properties,
rights, titles, interests and estates described or referred to above, including
any and all Property, real or personal, now owned or hereinafter acquired and
situated upon, used, held for use or useful in connection with the operating,
working or development of any of such Hydrocarbon Interests or Property
(excluding drilling rigs, automotive equipment or other personal property which
may be on such premises for the purpose of drilling a well or for other similar
temporary uses) and including any and all oil wells, gas wells, injection wells
or other wells, buildings, structures, fuel separators, liquid extraction
plants, plant compressors, pumps, pumping units, field gathering systems, tanks
and tank batteries, fixtures, valves, fittings, machinery and parts, engines,
boilers, meters, apparatus, equipment, appliances, tools, implements, cables,
wires, towers, casing, tubing and rods, surface leases, rights-of-way, easements
and servitudes together with all additions, substitutions, replacements,
accessions and attachments to any and all of the foregoing.
"PBGC" shall mean the Pension Benefit Guaranty Corporation or any
entity succeeding to any or all of its functions under ERISA.
"Person" shall mean any individual, corporation, company, voluntary
association, partnership, joint venture, trust, unincorporated organization or
government or any agency, instrumentality or political subdivision thereof, or
any other form of entity.
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<PAGE> 17
"Phase I Audit" shall mean an inspection of property and an evaluation
of operations conducted thereon of a scope and in such detail as would be
conducted by a reasonably prudent purchaser, lender, or investor in light of all
relevant facts and circumstances to identify adverse environmental conditions or
violations of Environmental Laws that would subject a past, present, or future
owner or operator of such property to liabilities under applicable Environmental
Laws as a result of such environmental conditions and/or violations of
Environmental Laws; provided, however, that the scope and detail of the
inspection and evaluation shall be no less extensive than the minimum standards
set forth in the most recent version of ASTM Standard E 1527, as adopted by the
American Society for Testing and Materials.
"Plan" shall mean an employee pension benefit or other plan established
or maintained by the Company or any Subsidiary or any ERISA Affiliate and which
is covered by Title IV of ERISA, other than a Multiemployer Plan.
"Pledgor" has the meaning given such term in the Security Agreement.
"Post-Default Rate" shall mean, with respect to the principal of any
Loan and, to the extent permitted by law, any other amount payable by the
Company under this Agreement or any Note or any Letter of Credit Agreement that
is not paid when due (whether at stated maturity, by acceleration or otherwise),
a rate per annum during the period from and including the due date, to, but
excluding the date on which such amount is paid in full equal to 2% above the
Base Rate as in effect from time to time plus the Applicable Margin (if any)
(provided that, if the amount so in default is principal of a Fixed Rate Loan
and the due date thereof is a day other than the last day of the Interest period
therefor, the "Post-Default Rate" for such principal shall be, for the period
from and including the due date and to but excluding the last day of the
Interest period therefor, 2% above the interest rate for such Loan as provided
in Section 3.02 hereof and, thereafter, the rate provided for above in this
definition).
"Prime Rate" shall mean the rate of interest from time to time
determined by TCB at the Principal Office as its prime commercial lending rate.
Such rate is set by TCB as a general reference rate of interest, taking into
account such factors as TCB may deem appropriate, it being understood that many
of TCB's commercial or other loans are priced in relation to such rate, that it
is not necessarily the lowest or best rate actually charged to any customer and
that TCB may make various commercial or other loans at rates of interest having
no relationship to such rate. Changes in the rate of interest on that portion of
any Loans maintained as Base Rate Loans will take effect simultaneously with
each change in the Prime Rate. The Agent will give notice promptly to the
Company of changes in the Prime Rate.
"Principal Office" shall mean the principal office of the Agent and
TCB, presently located at 712 Main Street, Houston, Texas 77002.
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<PAGE> 18
"Property" shall mean any interest in any kind of property or asset,
whether real, personal or mixed, or tangible or intangible.
"Quarterly Dates" shall mean the last day of each March, June,
September, and December in each year, the first of which shall be the first such
day after the Closing Date; provided that if any such day is not a Business Day,
then such Quarterly Date shall be the next succeeding Business Day.
"Regulation D" shall mean Regulation D of the Board of Governors of the
Federal Reserve System (or any successor), as the same may be amended or
supplemented from time to time.
"Regulatory Change" shall mean, with respect to any Bank, any change
after the date of this Agreement in United States Federal, state or foreign law
or regulations (including Regulation D) or the adoption or making after such
date of any interpretations, directives or requests applying to a class of
lenders or insurance companies (including such Bank or its Applicable Lending
Office) of or under any United States Federal, state or foreign law or
regulations (whether or not having the force of law) by any court or
governmental or monetary authority charged with the interpretation or
administration thereof.
"Required Payment" shall have the meaning assigned to that term in
Section 4.04.
"Reserve Report" shall have the meaning assigned to that term in
Section 8.04(a).
"Reserve Requirement" shall mean, for any Interest Period for any Fixed
Rate Loan, the average maximum rate at which reserves (including any marginal,
supplemental or emergency reserves) are required to be maintained during the
Interest Period for such Loan under Regulation D by member banks of the Federal
Reserve System in Dallas with deposits exceeding $1,000,000,000 against
"Eurocurrency liabilities" (as such term is used in Regulation D). Without
limiting the effect of the foregoing, the Reserve Requirement shall also reflect
any other reserves required to be maintained by such member banks by reason of
any Regulatory Change against (i) any category of liabilities which includes
deposits by reference to which the Fixed Base Rate for Fixed Rate Loans is to be
determined as provided in the definition of "Fixed Base Rate" in this Section
1.01, or (ii) any category of extensions of credit or other assets which include
Fixed Rate Loans.
"Revolving Credit Loans" shall mean the revolving credit loans as
provided for by Section 2.01(a).
"Revolving Credit Notes" shall mean the promissory notes of the Company
provided for in Section 2.07 and being in the form of Exhibit B hereto, together
with any and all renewals, extensions for any period, increases or
rearrangements thereof.
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<PAGE> 19
"Security Agreement" shall mean the security agreement executed by THEC
Holdings in favor of the Agent dated as of the Closing Date and granting a
security interest in the stocks and other securities of the Company as same may
be amended from time to time.
"Security Instruments" shall mean this Agreement, the Notes, the Letter
of Credit Agreements, the Guaranty Agreements, the Security Agreement and
related assignment separate from stock certificate and financing statement, the
original stock certificate or certificates evidencing the stock of the Company
pledged by the Security Agreement, and any and all other agreements or
instruments now or hereafter executed and delivered by the Company, a Subsidiary
or any other Person (other than participation or similar agreements between any
Bank and any other bank or creditor with respect to any Indebtedness pursuant to
this Agreement) in connection with, or as security for the payment or
performance of, the Notes, any Letter of Credit or Letter of Credit Agreement,
or this Agreement, as such instruments or agreements may be amended or
supplemented from time to time.
"Subsidiary" shall mean any corporation, partnership, joint venture or
other entity of which at least a majority of the outstanding shares of stock or
other equity interests having by the terms thereof ordinary voting power or
economic interests to elect a majority of the board of directors or other
managers of such corporation, partnership, joint venture or other entity
(irrespective of whether or not at the time stock or other equity interests of
any other class or classes of such corporation, partnership, joint venture or
other entity shall have or might have voting power by reason of the happening of
any contingency) is at the time directly or indirectly owned or controlled by
the Company or one or more of the Subsidiaries, or by the Company and one or
more of the Subsidiaries.
"TCB" shall mean Texas Commerce Bank National Association, individually
and not as Agent.
"THEC Holdings" shall mean THEC Holdings Corp., a Delaware corporation.
"Total Debt" means (a) all Debt for money borrowed or for the purchase
price of Property, (b) trade Debt incurred in the ordinary course of business
which is not paid when due, (c) liabilities under any bond, note, security,
letter of credit (other than letters of credit issued for trade credit but
including letters of credit issued as performance guarantees), acceptance
facility, or similar agreement, (d) all obligations under direct or indirect
guaranties in respect of, and obligations (contingent or otherwise) to purchase
or otherwise acquire, or otherwise to assure a creditor against loss in respect
of, Debt or obligations of other Persons, and (e) Capital Lease obligations.
Section 1.03 Accounting Terms and Determinations. Unless
otherwise specified herein, all accounting terms used herein shall be
interpreted, all determinations with respect to accounting matters hereunder
shall be made, and all financial statements and certificates and reports as to
financial matters required to be furnished to the Agent or the Banks hereunder
shall be
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prepared, in accordance with GAAP, applied on a basis consistent with the
Financial Statements (except for changes concurred with by the Company's
independent public accountants).
ARTICLE II
Commitments
Section 2.01 Loans and Letters of Credit. Each Bank severally agrees,
on the terms of this Agreement, to make the following Loans to the Company, and
the Agent on behalf of the Banks agrees to issue, reissue, renew and extend
Letters of Credit for the account of the Company in accordance with the
following:
(a) Revolving Credit Loans - during the period from and including the
Closing Date to and including the Drawdown Termination Date, Revolving Credit
Loans in an aggregate principal amount at any one time outstanding up to, but
not exceeding, the amount of such Bank's Commitment as then in effect; provided,
however, that the aggregate principal amount of all Revolving Credit Loans made
by all Banks hereunder at any one time outstanding shall not exceed, in the
aggregate (A) the lesser of (1) the Borrowing Base or (2) the aggregate
Commitments, as then in effect, minus (B) the LC Exposure. Subject to the terms
of this Agreement, during the period from the Closing Date to and including the
Drawdown Termination Date, the Company may borrow, repay and reborrow the amount
of the Commitments, as then in effect.
Subject to the other terms and provisions of this Agreement, at the option of
the Company unless otherwise provided herein, the Loans may be Base Rate Loans
or Fixed Rate Loans (each a "type" of Loan). For purposes of this Section
2.01(a), Fixed Rate Loans having different Interest Periods, regardless of
whether they commence on the same date, shall be considered separate Loans.
(b) Letters of Credit:
(i) During the period from and including the Closing Date to
and including the Drawdown Termination Date, the Banks agree to extend
credit to the Company at any time and from time to time by
participating in the issuance, renewal, extension or reissuance of
Letters of Credit pursuant to this Agreement; provided, that all such
Letters of Credit issued on or after the Closing Date shall be issued
by the Agent; and further provided, however, the aggregate amount of
all Letters of Credit at any one time outstanding shall not exceed (A)
the lesser of (1) $5,000,000, or (2) the lesser of (x) the Borrowing
Base, or (y) the aggregate Commitments, as then in effect, minus (B)
the aggregate principal amount of all Loans then outstanding.
(ii) Each of the Letters of Credit issued after the Closing
Date shall (A) be issued by the Agent, (B) contain such terms and
provisions as are required by the Letter of Credit
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<PAGE> 21
Agreement executed in connection therewith and (to the extent not in conflict
with the Letter of Credit Agreement) those then customarily used by the Agent in
letters of credit, (C) be for the account of the Company, (D) be issued to
support trade payables and performance guarantees, and (E) expire not later than
the Drawdown Termination Date.
(iii) In conjunction with the issuance of a Letter of Credit,
the Company shall execute a Letter of Credit Agreement. In the event of
any conflict between any provision of a Letter of Credit Agreement and
this Agreement, the Company, the Agent and the Banks hereby agree that
the provisions of this Agreement shall govern.
(c) Extensions - With the written consent of all Banks, which may or
may not be granted in the discretion of the Banks, the Company may, on an annual
basis, obtain one year extensions of the Conversion Date and the Drawdown
Termination Date by delivering a written request for same to the Agent not more
than four (4) months and not less than sixty (60) days prior to the Conversion
Date and Drawdown Termination Date respectively.
Section 2.02 Borrowings, Continuations, Conversions, and Issuances.
(a) The Company shall give the Agent (which shall promptly notify the
Banks) advance notice as hereinafter provided of each borrowing, continuation,
and conversion and each request for issuance, renewal or extension of a Letter
of Credit hereunder which request shall be in the form of Exhibit E hereto,
which shall specify the aggregate amount of such Loan or such Letter of Credit,
the date (which shall be a Business Day) of the Loans to be borrowed, continued
or converted, or the Letters of Credit to be issued, renewed or extended, the
type of Loan to be borrowed, continued or converted, the beneficiary and other
terms of such Letter of Credit, and in the case of Fixed Rate Loans, the
duration of the Interest Period therefor, all of which (other than the
beneficiary) must not conflict with the other terms and provisions of this
Agreement.
(b) All Base Rate Loans (as part of the same borrowing) shall be in
aggregate amounts among all Banks of at least $500,000 (or increments of
$100,000 in excess thereof) or the remaining unused portion of the Commitments,
or the amount disbursed under a Letter of Credit and advanced hereunder pursuant
to Section 4.07(b) hereof, if less. All Fixed Rate Loans (as part of the same
borrowing) shall be in aggregate amounts among all Banks of at least $1,000,000
(or increments of $100,000 in excess thereof).
(c) All borrowings, continuations and conversions of Loans, or requests
for issuance, renewal, extension or reissuance of Letters of Credit shall
require advance written notice from the Company to the Agent, which in each case
(other than the issuance, renewal, extension or reissuance of Letters of Credit)
shall be irrevocable and effective only upon receipt by the Agent and shall be
received by the Agent not later than 10:00 a.m. Houston time on a day which is
not less than the number of Business Days prior to the date of such borrowing,
continuation or conversion specified below opposite the type of such Loans:
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<PAGE> 22
<TABLE>
<CAPTION>
Number of
Type Business Days
---- -------------
<S> <C> <C>
Base Rate Loans 0
Fixed Rate Loans 3;
</TABLE>
and four (4) Business Days prior to the date such Letter of Credit is to be
issued, renewed, extended or reissued.
(d) Not later than 12:00 noon Houston time on the date specified for
each borrowing hereunder, each Bank shall make available in immediately
available funds the amount of the Loan to be made by such Bank on such date to
the Agent, to an account which the Agent shall specify for the account of the
Company. The amounts so received by the Agent shall, subject to the terms and
conditions of this Agreement, be made available to the Company by depositing the
same, in immediately available funds, in an account of the Company designated by
the Company and maintained with TCB at the Principal Office.
(e) On the date specified for the issuance, renewal or extension of a
Letter of Credit, the Agent shall issue such Letter of Credit to the beneficiary
thereof.
(f) Subject to the terms of this Agreement, the Company may elect to
continue all or any part of any Fixed Rate Loan beyond the expiration of the
then current Interest Period relating thereto by giving advance notice to the
Agent of such election, specifying the amount of such Loan to be continued and
the Interest Period therefor. In the absence of such a timely and proper
election in accordance with the terms of Section 2.02(a) and (c), the Company
shall be deemed to have elected to convert such Fixed Rate Loan to a Base Rate
Loan. All or any part of any Fixed Rate Loan may be continued as provided
herein, provided that (i) any continuation of any such Loan shall be (as to each
Loan as continued for an applicable Interest Period) in the principal amount of
not less than $1,000,000, and (ii) no Event of Default shall have occurred and
be continuing. If an Event of Default shall have occurred and be continuing,
each Fixed Rate Loan shall be converted to a Base Rate Loan on the last day of
the Interest Period applicable thereto.
(g) Subject to the terms of this Agreement:
(i) The Company may elect to convert any Fixed Rate Loan on
the last day of the then current Interest Period relating thereto to a
Base Rate Loan by giving advance notice to the Agent of such election.
(ii) The Company may elect to convert all or any part of a
Base Rate Loan at any time and from time to time to a Fixed Rate Loan
by giving advance notice to the Agent of such election. All or any part
of any outstanding Loan may be converted as provided herein,
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<PAGE> 23
provided that any conversion of any Base Rate Loan into a Fixed Rate
Loan shall be (as to each such Loan into which there is a conversion
for an applicable Interest Period) in the principal amount not less
than $1,000,000. If no Event of Default shall have occurred and be
continuing, each Loan may be converted as provided in this Section. If
an Event of Default shall have occurred and be continuing, no Loan may
be converted into a Fixed Rate Loan.
Section 2.03 Changes of Commitments.
(a) The Commitments shall be reduced as follows:
(i) The aggregate amount of the Commitments in effect on the
Conversion Date shall be reduced to an amount equal to (a) the
aggregate principal balance of all Loans outstanding on the Conversion
Date, plus (b) the LC Exposure as of the Conversion Date.
(ii) Commencing on April 1, 1998, and on the first day of each
quarter thereafter, the aggregate amount of the Commitments shall be
reduced by an amount equal to one-eighth (1/8) of the aggregate amount
of the Commitments in effect on January 1, 1998.
(b) The Company shall have the right to terminate or to reduce the
amount of the Commitments at any time or from time to time upon not less than
three (3) Business Day's prior written notice to the Agent (which shall promptly
notify the Banks) of each such termination or reduction, which notice shall
specify the effective date thereof and the amount of any such reduction (which
shall not be less than $1,000,000 or any increment of $1,000,000 in excess
thereof) and shall be irrevocable and effective only upon receipt by the Agent.
(c) The Commitments once terminated or reduced may not be reinstated.
(d) In the event the Conversion Date is extended for one (1) year
pursuant to Section 2.01(c) hereof prior to January 1, 1998 or prior to any
extended Conversion Date, the reductions of the Commitments set forth in Section
2.03(a)(ii) hereof shall be delayed for one (1) year and shall commence on April
1 of the year following the year in which the extended Conversion Date occurs.
Further, in the event the Conversion Date is extended after the Commitments have
begun to reduce pursuant to Section 2.03(a)(ii) hereof, any further reductions
set forth in said Section 2.03(a)(ii) shall be delayed for one (1) year.
Section 2.04 Fees.
(a) The Company shall pay to the Agent for the account of each Bank (i)
a commitment fee on the daily average of the amount by which the Accepted
Borrowing Base exceeds the sum of (A) the LC Exposure, plus (B) the aggregate
principal amount of all outstanding Loans, for the period from and including the
last Borrowing Base determination date to the earlier of the date the
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<PAGE> 24
Commitments are terminated or the date of the next effective Borrowing Base
determination date at a rate per annum equal to 3/8%, (ii) a commitment fee on
the daily average difference between the Borrowing Base and the Accepted
Borrowing Base for the period from and including the last Borrowing Base
determination date to the earlier of the date the Commitments are terminated or
the date of the next Borrowing Base determination at a rate per annum equal to
1/8% (with a commitment fee on the daily average usage of such difference during
such period at a rate per annum equal to 5/16%, such commitment fee to be
calculated from the first day of the current fiscal quarter to the date
notification of the acceptance by the Company of the redetermined Accepted
Borrowing Base is given pursuant to Section 2.09), and (iii) a commitment fee on
the daily average difference between the Commitments and the Borrowing Base for
the period from and after the last Borrowing Base determination date to the
earlier of the date the Commitments are terminated or the date of the next
Borrowing Base determination at a rate per annum equal to 1/16%. All such
commitment fees shall be calculated on the basis of a year of 365 (or, in a leap
year, 366) days for the actual number of days elapsed. The accrued commitment
fees shall be due and payable in arrears upon any reduction or termination of
the Commitments and on the last Business Day of each December, March, June and
September and on the Drawdown Termination Date, commencing on the first such
date after the Closing Date.
(b) The Company shall pay to the Agent a fee for the issuance of
Letters of Credit (calculated separately for each Letter of Credit) under this
Agreement at a rate per annum equal to 1% on the aggregate amount available to
be drawn under each Letter of Credit. Such fees shall be payable semi-annually
in advance, commencing on the date of issuance of such Letter of Credit and
shall be non-refundable. 1/8% of each such fee shall be retained by the Agent
with the remaining 7/8% of each such fee being shared pro rata by the Banks.
(c) The Company shall pay to the Agent for the account of each Bank on
the Closing Date a fee in the amount of $64,500 to be shared pro rata with the
Lenders in proportion to their Commitments.
(d) For the period from and including the Closing Date to the Drawdown
Termination Date, the Company agrees to pay to the Agent on the Closing Date and
on the first day of each October thereafter an engineering fee of $18,000.
$8,000 of each such engineering fee shall be retained by the Agent with the
balance being shared by the Banks (excluding TCB) pro rata in proportion to
their Commitments.
(e) If the Company exercises its option to cause the Banks to
redetermine the Borrowing Base pursuant to Section 2.09(e), then for each
exercise of such option, the Company shall pay (i) a fee to the Agent, the
amount of which to be negotiated by the Agent and the Company at the time of
each exercise of such option, and (ii) a fee of $2,500 to the Banks (excluding
TCB) which $2,500 shall be shared by the Banks (excluding TCB) pro rata in
proportion to their Commitments.
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<PAGE> 25
(f) The Company shall pay to the Agent as compensation for its services
hereunder an agency fee in cash or such other type of compensation as may be
mutually agreed in the amount heretofore mutually agreed, all as set forth in
the Engagement Letter. The agency fee shall be due and payable on the Closing
Date and on each anniversary thereof during the term of this Agreement and on
the termination of this Agreement (in which case such fee shall be appropriately
prorated based on the fraction of a year that has elapsed between the latest
anniversary of the Closing Date and the date the Commitments and all other
obligations of the Banks and the Agent under this Agreement are terminated).
Section 2.05 Applicable Lending Offices. The Loans of each type made by
each Bank shall be made and maintained at such Bank's Applicable Lending Office
for Loans of such type.
Section 2.06 Several Obligations. The failure of any Bank to make any
Loan to be made by it or to provide funds for disbursements under Letters of
Credit on the date specified therefor shall not relieve any other Bank of its
obligation to make its Loan or provide such funds on such date, but no Bank
shall be responsible for the failure of any other Bank to make a Loan to be made
by such other Bank or to provide such funds to be provided by such other Bank.
Section 2.07 Notes.
(a) The Revolving Credit Loans made by each Bank shall be evidenced by
a single promissory note of the Company in substantially the form of Exhibit B
hereto, dated (i) the Closing Date or (ii) the effective date of an Assignment
pursuant to Section 12.06(b), payable to the order of such Bank in a principal
amount equal to the maximum amount of its Commitment as originally in effect and
otherwise duly completed. The date, amount, type, interest rate and maturity
date of each Loan made by each Bank, and all payments made on account of the
principal thereof, shall be recorded by such Bank on its books and, prior to any
transfer of a Note held by it, endorsed by such Bank on the schedule attached to
such Note or any continuation thereof; provided, however, such Bank shall have
no liability to the Company if it fails to record any such information and in no
event shall such failure diminish or impair the Company's obligation to repay
all amounts owing to such Bank under such Note.
(b) No Bank shall be entitled to have its Note subdivided, by exchange
for promissory notes of lesser denominations or otherwise, except in connection
with a permitted assignment of all or any portion of such Bank's Commitment,
Loans and Note pursuant to Subsection 12.06(b).
Section 2.08 Prepayments.
(a) The Company may prepay Loans on any Business Day upon notice to the
Agent (which shall promptly notify the Banks), which notice shall be given by
the Company not later than 10:00 a.m. Houston time on such Business Day, shall
specify the amount of the prepayment (which shall be not less than $500,000 or
the remaining balance of any Loans outstanding, if less) and shall
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<PAGE> 26
be irrevocable and effective only upon receipt by the Agent, provided that
interest on the principal prepaid, accrued to the prepayment date, shall be paid
on the next quarterly interest payment date unless the prepayment is of the
remaining balance of all Loans outstanding. Any prepayment of any Fixed Rate
Loans shall be subject to the provisions of Section 5.05 hereof.
(b) If at any time the sum of the outstanding aggregate principal
amount of the Loans and the LC Exposure exceeds the lesser of the then effective
Borrowing Base or the aggregate amount of the Commitments, then the Company
shall (i) within 30 days following such event, pay or prepay the amount of such
excess amount for application first, towards reduction of all amounts previously
drawn under Letters of Credit, but not yet funded as a Revolving Credit Loan
pursuant to Section 4.07(b) or reimbursed, second, if necessary, towards
reduction of the outstanding principal balance of the Notes by prepaying Base
Rate Loans, if any, then outstanding, and third, if necessary, at the election
of the Company, either toward a reduction of the outstanding principal balance
of the Notes by prepaying Fixed Rate Loans, if any, then outstanding or by
paying such amount to the Agent as cash collateral for outstanding Letters of
Credit, which amount shall be held by the Agent as cash collateral to secure the
Company's obligation to reimburse the Agent and the Banks for drawings under the
Letters of Credit, or (ii) within 30 days following such event, provide the
Banks with additional collateral acceptable to the Banks to eliminate such
Borrowing Base deficiency. The Company shall also pay any amounts payable
pursuant to Section 5.05 in connection with any payment or prepayment made
pursuant to this Section 2.08(b).
Section 2.09 Borrowing Base.
(a) During the period from and after the Closing Date of this Agreement
to and including April 1, 1996, the amount of the Borrowing Base shall be
$80,000,000.
(b) On April 1, 1996, and on the first day of each July and January
thereafter, the Banks, in their sole discretion shall redetermine the amount of
the Borrowing Base in accordance with this Section 2.09.
(c) Upon receipt of the reports required by Section 8.04 and such other
reports, data, and supplemental information as may, from time to time, be
reasonably requested by the Agent (the "Engineering Reports"), together with a
certificate from the President or chief financial officer of the Company that,
to the best of his knowledge and in all material respects, (i) the information
upon which the Engineering Reports are based is true and correct, (ii) the
certificate identifies the properties covered by the Engineering Reports that
have not been previously included in any prior Engineering Reports, and (iii) no
Oil and Gas Properties of the Company, its Affiliates or its Subsidiaries have
been sold since the date of the last Borrowing Base determination except as set
forth on an exhibit to the certificate, which certificate shall list all Oil and
Gas Properties of the Company, its Affiliates and its Subsidiaries sold in
compliance with Section 9.16 and in such detail as reasonably required by the
Agent, the Banks will evaluate the Properties covered by the Engineering
Reports. Based upon such information and such other information as the Banks
deem
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<PAGE> 27
appropriate the Banks will determine the Borrowing Base. Such redetermination
shall be accomplished not later than the first day of each February and August
commencing on August 1, 1996 (provided that the Company shall have furnished the
Engineering Reports in a timely and complete manner). Each redetermination of
the Borrowing Base must be approved by the Majority Banks.
Each redetermination of the Borrowing Base shall be effective and
applicable for all purposes of this Agreement until the effective date of the
next redetermination, except as provided elsewhere in this Agreement and except
for such redetermination as the Majority Banks may conduct in good faith and at
their sole discretion, after notice to the Company of their intention to so
redetermine the Borrowing Base, upon the occurrence of any event or change
having a Material Adverse Effect or a material change in the value or nature of
the Property included in the Borrowing Base. The Agent will promptly notify the
Company in writing of each redetermination of the Borrowing Base made by the
Banks. Until such notification, the Borrowing Base established for the directly
preceding period shall remain in effect, and thereafter the new Borrowing Base
as set forth in such notification shall be in effect.
(d) Upon the Company's receipt of written notice from the Agent of the
amount of the Borrowing Base then in effect, the Company may accept all or a
lesser amount of such Borrowing Base (the "Accepted Borrowing Base") by
providing written notice to the Agent of the amount of the Accepted Borrowing
Base within 5 Business Days following receipt of said notice from the Agent. If
the Company does not provide such written notice to the Agent within such 5
Business Day period, the Accepted Borrowing Base shall be deemed to be as set
forth in the aforementioned written notice from the Agent to the Company;
provided, however, during each Borrowing Base period the Company shall have an
opportunity to adjust the Accepted Borrowing Base by providing the Agent with
written notice anytime at least 5 Business Days but not more than 30 Business
Days in advance of its intent to accept a different Accepted Borrowing Base
based upon the Agent's most recent written notice to the Company of the
Borrowing Base.
(e) The Company shall have the option to cause the Banks to redetermine
the Borrowing Base from time to time; provided, however, any such
redetermination must be approved by the Majority Banks, and each request for
such redetermination must be accompanied by such information, reports and
certificates as the Agent shall reasonably require to support such redetermined
Borrowing Base.
(f) Notwithstanding anything to the contrary contained in this
Agreement, so long as the respective Guaranty Agreement of FRI is in full force
and effect, each determination or redetermination of the Borrowing Base pursuant
to this Section 2.09 shall be performed by evaluating, on a consolidated basis
the Properties of the Company, its Affiliates and its Subsidiaries covered by
the Engineering Reports.
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ARTICLE III
Payments of Principal and Interest
Section 3.01 Repayment of Loans. The Company will pay to the Agent for
account of each Bank the then outstanding principal amount of each Loan made by
such Bank on or before the Drawdown Termination Date.
Section 3.02 Interest.
(a) The Company will pay to the Agent for account of each Bank interest
on the unpaid principal amount of each Loan made by such Bank for the period
commencing on the date of such Loan to but excluding the date such Loan shall be
paid in full, at the following rates per annum:
(i) if such Loan is a Base Rate Loan, the Base Rate (as in
effect from time to time) plus the Applicable Margin, if any, but in no
event to exceed the Highest Lawful Rate; and
(ii) if such Loan is a Fixed Rate Loan, for each Interest
Period relating thereto (excluding the last day thereof), the Fixed
Rate for such Loan plus the Applicable Margin, but in no event to
exceed the Highest Lawful Rate.
Notwithstanding the foregoing, the Company will pay to the Agent for
the account of each Bank interest at the applicable Post-Default Rate on any
principal of any Loan made by such Bank and, to the fullest extent permitted by
law, on any other amount payable by the Company hereunder, under any Note or
under any other Security Instrument, which shall not be paid in full when due
(whether at stated maturity, by acceleration or otherwise), for the period
commencing on the due date thereof until the same is paid in full, but in no
event to exceed the Highest Lawful Rate.
(b) Accrued interest on each Base Rate Loan shall be payable quarterly
on each Quarterly Date and accrued interest on each Fixed Rate Loan shall be
payable on the last day of the Interest Period therefor and, if an Interest
Period is longer than three months or 90 days, at three month intervals
following the first day of such Interest Period, except that interest payable at
the Post- Default Rate shall be payable from time to time on demand and interest
on any Fixed Rate Loan that is converted into a Base Rate Loan (pursuant to
Section 5.04) shall be payable on the date of conversion (but only to the extent
so converted).
(c) Promptly after the determination of any interest rate provided for
herein or any change therein, the Agent shall notify the Banks to which such
interest is payable and the Company thereof.
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ARTICLE IV
Payments; Pro Rata Treatment; Computations; Etc.
Section 4.01 Payments. Except to the extent otherwise provided herein,
all payments of principal, interest and other amounts to be made by the Company
under this Agreement, the Notes and the Letter of Credit Agreements shall be
made in Dollars, in immediately available funds, to the Agent at such account as
the Agent shall specify by notice to the Company from time to time, not later
than 10:00 a.m. Houston time on the date on which such payments shall become due
(each such payment made after such time on such due date to be deemed to have
been made on the next succeeding Business Day). The Company shall, at the time
of making each payment under this Agreement, any Note or any Letter of Credit
Agreement, specify to the Agent the Loans or other amounts payable by the
Company hereunder to which such payment is to be applied (and in the event that
it fails to so specify, or if an Event of Default has occurred and is
continuing, the Agent may distribute such payment to the Banks in such manner as
it or the Majority Banks determine to be appropriate, subject to Section 4.02).
Each payment received by the Agent under this Agreement or any Note for account
of a Bank shall be paid promptly to such Bank, in immediately available funds,
for account of such Bank's Applicable Lending Office for the Loan in respect of
which such payment is made. If the due date of any payment under this Agreement,
any Note or any Letter of Credit Agreement, would otherwise fall on a day which
is not a Business Day, such due date shall be extended to the next succeeding
Business Day and interest shall be payable for any principal so extended for the
period of such extension.
Section 4.02 Pro Rata Treatment. Except to the extent otherwise
provided herein: (a) each borrowing from the Banks under Section 2.01 shall be
made from the Banks, each payment of commitment fee or other fees under Section
2.04 shall be made for account of the Banks unless otherwise provided in Section
2.04, and each termination or reduction of the amount of the Commitments under
Section 2.03 shall be applied to the Commitments of the Banks, pro rata
according to the amounts of their respective unused Commitments, (b) each
payment of principal of Loans by the Company shall be made for account of the
Banks pro rata in accordance with the respective unpaid principal amount of the
Loans held by the Banks and (c) each payment of interest on Loans by the Company
shall be made for account of the Banks pro rata in accordance with the amounts
of interest due and payable to the respective Banks.
Section 4.03 Computations. Interest on Fixed Rate Loans shall be
computed on the basis of a year of 360 days and actual days elapsed (including
the first day but excluding the last day) occurring in the period for which
payable, unless such calculation would result in a usurious rate, in which case
interest shall be calculated on the per annum basis of a year of 365 or 366
days, as the case may be. Interest on Base Rate Loans and fees shall be computed
on the basis of (a) a year of 365 or 366 days, as the case may be, and actual
days elapsed (including the first day but excluding the last day) occurring in
the period for which payable with respect to the Prime Rate, and (b) a year of
360 days and actual days elapsed (including the first day but excluding the last
day) occurring in
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the period for which payable, unless such calculation would result in a usurious
rate, in which case interest shall be calculated on a per annum basis of a year
of 365 or 366 days, as the case may be, with respect to the Federal Funds Rate.
Section 4.04 Non-receipt of Funds by the Agent. Unless the Agent shall
have been notified by a Bank or the Company prior to the date on which such
notifying party is scheduled to make payment to the Agent of (in the case of a
Bank) the proceeds of a Loan to be made by it hereunder or (in the case of the
Company) a payment to the Agent for account of one or more of the Banks
hereunder (such payment being herein called the "Required Payment"), which
notice shall be effective upon receipt, that it does not intend to make the
Required Payment to the Agent, the Agent may assume that the Required Payment
has been made and may, in reliance upon such assumption (but shall not be
required to), make the amount thereof available to the intended recipient(s) on
such date and, if such Bank or the Company (as the case may be) has not in fact
made the Required Payment to the Agent, the recipient(s) of such payment shall,
on demand, repay to the Agent the amount so made available together with
interest thereon in respect of each day during the period commencing on the date
such amount was so made available by the Agent until the date the Agent recovers
such amount at a rate per annum equal to (i) the Federal Funds Rate (but not to
exceed the Highest Lawful Rate), for Required Payments required to be made by
any Bank, or (ii) the Post- Default Rate (but not to exceed the Highest Lawful
Rate), for Required Payments required to be made by the Company.
Section 4.05 Sharing of Payments, Etc. The Company agrees that, in
addition to (and without limitation of) any right of set-off, bankers' lien or
counterclaim a Bank may otherwise have, each Bank shall be entitled (upon
consent of the Agent), at its option, to offset balances held by it for account
of the Company at any of its offices, in Dollars or in any other currency,
against any principal of or interest on any of such Bank's Loans, or any other
amount payable to such Bank hereunder or under any Letter of Credit Agreement,
which is not paid when due (regardless of whether such balances are then due to
the Company), in which case such Bank shall promptly notify the Company and the
Agent thereof, provided that such Bank's failure to give such notice shall not
affect the validity thereof. If any Bank shall obtain payment of any principal
of or interest on any Loan made by it to the Company under this Agreement or
payment of any reimbursement obligation under a Letter of Credit Agreement
through the exercise of any right of set-off, banker's lien or counterclaim or
similar right or otherwise, and, as a result of such payment, such Bank shall
have received a greater percentage of the principal or interest then due
hereunder or under the respective Letter of Credit Agreement, as the case may
be, by the Company to such Bank than the percentage received by any other Banks,
such Bank shall promptly rebate such excess amount to the Agent for distribution
in accordance with the terms of Section 4.02 hereof, and the Banks shall make
such other adjustments from time to time as shall be equitable, to the end that
all the Banks shall share the benefit of such excess payment (net of any
expenses which may be incurred by such Bank in obtaining or preserving such
excess payment) pro rata in accordance with the unpaid principal and/or interest
on the Loans held by each of the Banks or pro rata in accordance with the unpaid
reimbursement obligation owed to each of the Banks. To such end, all the Banks
shall make
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appropriate adjustments among themselves if such payment is rescinded or must
otherwise be restored. Nothing contained herein shall require any Bank to
exercise any such right or shall affect the right of any Bank to exercise any
such right with respect to any other indebtedness or obligation of the Company
to such Bank; provided, however, with respect to the Indebtedness or any other
indebtedness owed by the Company or any Subsidiary to any Bank or any Affiliate
of a Bank, all the Banks shall share the benefit of any set-off pertaining to
the Indebtedness or such other indebtedness pro rata in accordance with the
unpaid principal and/or interest on the Loans held by each of the Banks and the
aforementioned other indebtedness or pro rata in accordance with the unpaid
reimbursement owed to each of the Banks and the aforementioned other
indebtedness. If under any applicable bankruptcy, insolvency or other similar
law, any Bank receives a secured claim in lieu of a set-off to which this
Section 4.05 applies, such Bank shall, to the extent practicable, exercise its
rights in respect of such secured claim in a manner consistent with the rights
of the Banks entitled under this Section 4.05 to share the benefits of any
recovery on such secured claim.
Section 4.06 Assumption of Risks. The Company assumes all risks of the
acts or omissions of beneficiaries of any of the Letters of Credit with respect
to its use of the Letters of Credit. Except in the case of gross negligence or
willful misconduct on the part of the Agent or any of its employees, neither the
Agent, the Agent's correspondent banks, nor any Bank shall be responsible: (i)
for the validity or genuineness of certificates or other documents, even if such
certificates or other documents should in fact prove to be invalid, fraudulent
or forged; (ii) for errors, omissions, interruptions or delays in transmissions
or delivery of any messages by mail, telex, or otherwise, whether or not they be
in code; (iii) for errors in translation or for errors in interpretation of
technical terms; or (iv) for any other consequences arising from causes beyond
the Agent's control. In addition, neither the Agent nor any Bank shall be
responsible for any error, neglect, or default of any of the Agent's
correspondent banks; and none of the above shall affect, impair or prevent the
vesting of any of the Agent's rights or any Bank's rights or powers hereunder or
under the Letter of Credit Agreements, all of which rights shall be cumulative.
The Agent and the Agent's correspondent banks may accept certificates or other
documents that appear on their face to be in order, without responsibility for
further investigation. In furtherance and not in limitation of the foregoing
provisions, the Company agrees that any action, inaction or omission taken or
not taken by the Agent or any correspondent bank in absence of gross negligence
or willful misconduct by the Agent or any correspondent bank in connection with
any Letter of Credit, or any related drafts, certificates, documents or
instruments, shall be binding on the Company and shall not put the Agent or the
Agent's correspondent banks or any Bank under any resulting liability to the
Company. The Agent agrees to use reasonable judgment in its selection of
correspondent banks.
Section 4.07 Obligation to Reimburse and to Repay.
(a) If any draft or claim shall be presented for payment under a Letter
of Credit, after confirming that such draft or claim complies with all
requirements of the relevant Letter of Credit, the Agent shall promptly notify
the Company of the date and the amount of the draft or claim presented for
payment and shall promptly notify each Bank thereof and of the Business Day on
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which such draft or claim is to be honored and the ratable share of such draft
or claim attributable to such Bank on the basis of its Commitment.
(b) If a disbursement by the Agent is made under any Letter of Credit
and no Event of Default under this Agreement shall have occurred and be
continuing, the Company may elect to have the amount of such disbursement up to
the amount of the Commitments then available treated as a Revolving Credit Loan
to the Company as provided in Section 2.01(a) hereof, subject to the terms and
conditions set forth in this Agreement. To evidence such election, the Company
shall (promptly after receipt of notice that a Letter of Credit has been drawn
upon) give written notice of same to the Agent contemporaneously with delivery
of the notice of borrowing (in the form attached as Exhibit E hereto). With
respect to any disbursement under a Letter of Credit for which no such election
is made or after and during the continuance of an Event of Default, the Company
shall pay to the Agent promptly after notice of any such disbursement is
received by the Company in federal or other immediately available funds, the
amount of each such disbursement made by the Agent under the Letter of Credit
(if such payment is not sooner effected as may be required hereunder or under
other provisions of the Letter of Credit Agreement), together with interest on
the amount disbursed from and including the date of disbursement until payment
in full of such disbursed amount at a varying rate per annum equal to (x) the
Base Rate (as in effect from time to time) plus the Applicable Margin for Base
Rate Loans (but in no event to exceed the Highest Lawful Rate) for the first
Business Day following the date of such disbursement and (y) the Post-Default
Rate for Base Rate Loans (but in no event to exceed the Highest Lawful Rate) for
the period from and including the second Business Day following the date of such
disbursement to and including the date of repayment in full of such disbursed
amount.
(c) The Company's obligation to make each such payment shall be
absolute and unconditional and shall not be subject to any defense or be
affected by any right of setoff, counterclaim or recoupment which the Company
may now or hereafter have against any beneficiary of any Letter of Credit, the
Agent, any Bank, or any other Person for any reason whatsoever (but, without
prejudice to any other provisions hereof, any such payment shall not waive,
impair or otherwise adversely affect any claim, if any, that the Company may
have against any beneficiary of a Letter of Credit, the Agent, any Bank or any
other Person).
(d) In the event of the occurrence of any Event of Default, upon
request of the Majority Banks made during the continuation of such occurrence,
an amount equal to the entire remaining obligation of the Agent under each
outstanding Letter of Credit shall be deemed to be forthwith due and owing by
the Company to the Agent as of the date of any such occurrence to be held by the
Agent as cash collateral, and the Company's obligation to pay such amount shall
be absolute and unconditional, without regard to whether any beneficiary of any
such Letter of Credit has attempted to draw down all or a portion of such amount
under the terms of a Letter of Credit. In addition, the Company's obligation
shall not be subject to any defense or be affected by a right of setoff,
counterclaim or recoupment which the Company may now or hereafter have against
any such beneficiary, the Agent, any Bank, or any other Person for any reason
whatsoever (but, without
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prejudice to any other provisions hereof, any such payment shall not waive,
impair or otherwise adversely affect any claim, if any, that the Company may
have against any beneficiary of a Letter of Credit, the Agent, any Bank or any
other Person). The Company hereby grants a security interest in any such amounts
to the Agent for the benefit of the Banks as security for all Indebtedness now
or hereafter owing hereunder. In the event of any such deposit (or prepayment of
Letters of Credit pursuant to Section 2.08) by the Company of amounts
contingently owing under outstanding Letters of Credit and in the event that
thereafter drafts or other demands for payment complying with the terms of such
Letters of Credit are not made prior to the respective expiration dates thereof,
the Agent agrees, if no Event of Default has occurred and is continuing or if no
other amounts are then due and payable under this Agreement, any Note or the
Security Instruments, to remit to the Company amounts of such cash collateral,
deposits or prepayments for which the contingent obligations evidenced by such
Letters of Credit have ceased.
Section 4.08 Obligations for Letters of Credit.
(a) Immediately upon issuance of any Letter of Credit by the Agent,
each Bank shall be deemed to be a participant through the Agent in the
obligation of the Agent under such Letter of Credit. Upon the delivery by such
Bank to the Agent of funds requested for a disbursement pursuant to Section
4.08(c) hereof, such Bank shall be deemed as having purchased a participating
interest in the Company's reimbursement obligations with respect to such Letter
of Credit in an amount equal to such funds delivered to the Agent.
(b) Each Bank severally agrees with the Agent and the Company that it
shall be unconditionally liable, without regard to the occurrence of any Event
of Default, for its pro-rata share based upon the ratio of its Commitment to the
total Commitments of all Banks, to reimburse on demand, the Agent for the amount
of each disbursement under a Letter of Credit; provided, however,
notwithstanding anything to the contrary contained in this Section 4.08(b), if
due to the gross negligence or willful misconduct of the Agent a Letter of
Credit is improperly issued or improperly honored, the Banks shall not be liable
to reimburse the Agent for their pro rata share of any disbursement under such
Letter of Credit.
(c) The Agent shall promptly request from each Bank its ratable share
of any disbursement under any Letter of Credit that the Company has not elected
hereunder to treat as a Revolving Credit Loan pursuant to Section 4.07, which
amount shall be made available by each Bank to the Agent at its Principal Office
in immediately available funds no later than 2:00 p.m. Houston time on the date
requested. If such amount due to the Agent is made available later than 2:00
p.m. Houston time on the date requested, then such Bank shall pay to the Agent
such amount with interest thereon in respect of each day during the period
commencing on the date such amount was requested until the date the Agent
receives such amount at a rate per annum equal to the Federal Funds Rate (but
not to exceed the Highest Lawful Rate).
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ARTICLE V
Yield Protection; Illegality; Etc.
Section 5.01 Additional Costs.
(a) The Company shall pay directly to each Bank from time to time on
demand such amounts as such Bank may reasonably determine to be necessary to
compensate it for any costs which such Bank determines are attributable to its
making or maintaining any Loans under this Agreement or its Note or the
participation in Letters of Credit, or its obligation to make any such Loans or
participate in Letters of Credit hereunder, or any reduction in any amount
receivable by such Bank hereunder in respect of any such Loans or Letters of
Credit or such obligation (such increases in costs and reductions in amounts
receivable being herein called "Additional Costs"), resulting from any
Regulatory Change which: (i) changes the basis of taxation of any amounts
payable to such Bank under this Agreement or its Note in respect of any Loans or
Letters of Credit (other than taxes imposed on the overall net income of such
Bank or of its Applicable Lending Office); or (ii) imposes or modifies any
reserve, special deposit, deposit insurance or assessment, minimum capital,
capital ratio or similar requirements relating to any extensions of credit or
other assets of, or any deposits with or other liabilities of, such Bank
(including any Loans or any deposits referred to in the definition of "Fixed
Base Rate" in Section 1.01); or (iii) imposes any other condition affecting this
Agreement or its Note (or any of such extensions of credit or liabilities). Each
Bank will notify the Company of any event occurring after the date of this
Agreement which will entitle such Bank to compensation pursuant to this Section
5.01(a) as promptly as practicable after it obtains knowledge thereof, if it
determines to request such compensation, and will set forth in reasonable detail
the basis for and manner of determining such compensation. If any Bank requests
compensation from the Company under this Section 5.01(a), or under Section
5.01(c), the Company may, by notice to such Bank (with a copy to the Agent),
suspend the obligation of such Bank to make Loans of the type with respect to
which such compensation is requested.
(b) Without limiting the effect of the foregoing provisions of this
Section 5.01, in the event that, by reason of any Regulatory Change, any Bank
either (i) incurs Additional Costs based on or measured by the excess above a
specified level of the amount of a category of deposits or other liabilities of
such Bank which includes deposits by reference to which the interest rate on
Fixed Rate Loans is determined as provided in this Agreement or a category of
extensions of credit or other assets of such Bank which includes Fixed Rate
Loans or (ii) becomes subject to restrictions on the amount of such a category
of liabilities or assets which it may hold, then, if such Bank so elects by
notice to the Company (with a copy to the Agent), the obligation of such Bank to
make Loans of such type hereunder shall be suspended until the earlier to occur
of (y) the date such Bank is no longer within the restrictions of such
Regulatory Change or (z) the date such Regulatory Change ceases to be in effect
(in which case the provisions of Section 5.04 shall be applicable).
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<PAGE> 35
(c) Without limiting the effect of the foregoing provisions of this
Section 5.01 (but without duplication), the Company shall pay directly to each
Bank from time to time on request such amounts as such Bank may reasonably
determine to be necessary to compensate such Bank for any increased costs which
it determines are attributable to the maintenance by it or any of its affiliates
pursuant to any law or regulation of any jurisdiction or any interpretation,
directive or request (whether or not having the force of law and whether in
effect on the date of this Agreement or thereafter) of any court or governmental
or monetary authority of capital in respect of its Loans or Letters of Credit
hereunder or its obligation to make Loans or participate in Letters of Credit
hereunder (such compensation to include, without limitation, an amount equal to
any reduction in return on assets or equity of such Bank to a level below that
which it could have achieved but for such law, regulation, interpretation,
directive or request). Each Bank will notify the Company if it is entitled to
compensation pursuant to this Section 5.01(c) as promptly as practicable after
it obtains knowledge of the facts that entitled it to such compensation, if it
determines to request such compensation, and will set forth in reasonable detail
the basis for and manner of determining such compensation.
(d) Determinations and allocations by a Bank for purposes of this
Section 5.01 of the effect of any Regulatory Change pursuant to subsections (a)
or (b), or of the effect of capital maintained pursuant to subsection (c), on
its costs of making or maintaining Loans or its obligation to make Loans or
participate in Letters of Credit, or on amounts receivable by, or the rate of
return to, it in respect of Loans, Letters of Credit or such obligation, and of
the additional amounts required to compensate such Bank under this Section 5.01,
shall be conclusive, provided that such determinations and allocations are made
on a reasonable basis.
Section 5.02 Limitation on Types of Loans. Anything herein to the
contrary notwithstanding, if:
(a) the Agent reasonably determines that quotations of interest rates
for the relevant deposits referred to in the definition of "Fixed Base Rate" in
Section 1.02 are not being provided in the relevant amounts or for the relevant
maturities for purposes of determining the rate of interest for Fixed Rate Loans
as provided in this Agreement; or
(b) the Majority Banks determine (which determination shall be
conclusive) and notify the Agent that the relevant rates of interest referred to
in the definition of "Fixed Rate" in Section 1.02 upon the basis of which the
rate of interest for Fixed Rate Loans is to be determined do not adequately
cover the cost to the Banks of making or maintaining such Loans;
then the Agent shall give the Company and each Bank prompt notice thereof, and
so long as such condition remains in effect, the Banks shall be under no
obligation to make Fixed Rate Loans of such type; provided, however, such Loans
shall be made as Base Rate Loans. Notwithstanding the foregoing, the Banks shall
maintain until the end of the Interest Period then in effect such Fixed Rate
Loans then outstanding.
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Section 5.03 Illegality. Notwithstanding any other provision in this
Agreement, in the event that it becomes unlawful, as the result of circumstances
not reasonably within the control of any Bank, for such Bank or its Applicable
Lending Office to honor its obligation to make or maintain Fixed Rate Loans
hereunder, then such Bank shall promptly notify the Company thereof (with a copy
to the Agent) and such Bank's obligation to make or maintain Fixed Rate Loans
hereunder shall be suspended until such time as such Bank may again make and
maintain such affected Loans (in which case the provisions of Section 5.04 shall
be applicable).
Section 5.04 Certain Base Rate Loans pursuant to Sections 5.01 and
5.03. If the obligations of any Bank to make Fixed Rate Loans ("Affected Loans")
shall be suspended pursuant to Section 5.01 or 5.03, all Affected Loans which
would otherwise be made by such Bank shall be made instead as Base Rate Loans
and, if an event referred to in Section 5.01(b) or 5.03 has occurred and such
Bank so requests by notice to the Company (with a copy to the Agent), all
Affected Loans of such Bank then outstanding shall be automatically converted
into Base Rate Loans on the date specified by such Bank in such notice, and, to
the extent that Affected Loans are so made as (or converted into) Base Rate
Loans, all payments of principal which would otherwise be applied to such Bank's
Affected Loans shall be applied instead to its Base Rate Loans.
Section 5.05 Certain Compensation. The Company shall pay to the Agent
for the account of each Bank, upon the request of such Bank through the Agent,
such amount or amounts as shall be sufficient (in the reasonable opinion of such
Bank) to compensate it for any loss, cost or expense which such Bank reasonably
determines is attributable to:
(a) any payment of a Fixed Rate Loan made by the Company on a date
other than the last day of an Interest Period for such Loan (whether by reason
of acceleration or otherwise); or
(b) any failure by the Company to borrow a Fixed Rate Loan to be made
by such Bank on the date specified therefor in the relevant notice under Section
2.02.
Without limiting the foregoing, such compensation shall include an
amount equal to the excess, if any, of: (i) the amount of interest which
otherwise would have accrued on the principal amount so paid or not borrowed for
the period from and including the date of such payment or failure to borrow to
but excluding the last day of the Interest Period for such Loan (or, in the case
of a failure to borrow, to but excluding the last day of the Interest Period for
such Loan which would have commenced on the date specified therefor in the
relevant notice) at the applicable rate of interest for such Loan provided for
herein; over (ii) the amount of interest (as reasonably determined by such Bank)
such Bank would have bid in the London interbank market for Dollar deposits for
amounts comparable to such principal amount and maturities comparable to such
period. A determination of any Bank as to the amounts payable pursuant to this
Section 5.05 shall be prima facie evidence of the correctness of such
determination.
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ARTICLE VI
Conditions Precedent
Section 6.01 Initial Loan.
The obligation of the Banks to make the initial Loans hereunder is
subject to the receipt by the Agent of all fees payable pursuant to Section 2.04
or otherwise under this Agreement and the following documents and satisfaction
of the other conditions provided in this Article VI, each of which shall be
satisfactory to the Agent in form and substance:
(a) Certificates of the Secretary or Assistant Secretary of the Company
and each Guarantor setting forth (i) resolutions of its board of directors in
form and substance satisfactory to the Agent with respect to the authorization
of the Notes, Letters of Credit and Letter of Credit Agreements, this Agreement
and the other Security Instruments provided herein, (ii) the officers of the
Company and each Guarantor (y) who are authorized to sign this Agreement, the
Notes, Letter of Credit Agreement and the other Security Instruments and request
Letters of Credit hereunder, and (z) who will, until replaced by another officer
or officers duly authorized for that purpose, act as its representative for the
purposes of signing documents and giving notices and other communications in
connection with this Agreement and the transactions contemplated hereby, and
(iii) specimen signatures of the officers so authorized. The Agent and the Banks
may conclusively rely on such certificate until the Agent receives notice in
writing from the Company to the contrary.
(b) A copy, certified as true by the Secretary or Assistant Secretary
of the Company and each Guarantor of the articles or certificate of
incorporation and the bylaws of the Company and each Guarantor.
(c) Certificates of the appropriate state agencies with respect to the
valid existence and good standing of the Company and each Guarantor and the
qualification of each to do business as a foreign corporation in any
jurisdiction in which the ownership of Property or the nature of activities
requires such qualification except where the failure to so qualify would not
have a Material Adverse Effect.
(d) A compliance certificate which shall be true and correct in the
form of Exhibit C, duly and properly executed by an executive officer of the
Company, and dated as of the date of the funding of the first Loan provided for
in Section 2.01 of this Agreement.
(e) The Notes, duly completed and executed.
(f) Guaranty Agreement duly executed by FRI in favor of the Agent.
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<PAGE> 38
(g) A favorable opinion of Andrews & Kurth, L.L.P., counsel to the
Company, THEC Holdings and FRI, substantially in the form of Exhibit D hereto.
(h) A favorable opinion of Cullen & Dykman concerning the Public
Utility Holding Company Act.
(i) The Security Agreement duly executed by THEC Holdings, covering the
stock of the Company, together with related assignments separate from stock
certificate and the original certificate or certificates evidencing the stock of
the Company pledged by the Security Agreement.
(j) A Financing Statement naming THEC Holdings, as Debtor, and the
Agent, as Secured Party, relating to the Security Agreement.
(k) Such other documents as the Agent or any Bank or special counsel to
the Agent may reasonably request.
Section 6.02 Initial and Subsequent Loans. The obligation of the Banks
to make, convert or continue Loans (other than Base Rate Loans which are made
pursuant to the terms hereof solely to convert existing Loans in the normal
course on the last day of an Interest Period therefor) to the Company upon the
occasion of each borrowing hereunder (including the initial borrowing) or of the
Agent to issue, renew, extend or reissue Letters of Credit is subject to the
further conditions precedent that, as of the date of such Loans, conversions or
continuations or issuance, renewal, extension or reissuance of such Letter of
Credit and after giving effect thereto: (i) no Event of Default shall have
occurred and be continuing; (ii) no condition causing a Material Adverse Effect
shall have occurred and be continuing; and (iii) the representations and
warranties made by the Company in Article VII shall be true in material respects
on and as of the date of the making, conversion or continuation of such Loans or
the issuance, renewal, extension or reissuance of such Letters of Credit with
the same force and effect as if made on and as of such date and following such
new borrowing, conversion or continuation or issuance, renewal, extension or
reissuance except as such representations and warranties are modified to give
effect to transactions expressly permitted hereby. Each request for a borrowing,
conversion or continuation and selection of an Interest Period (other than Base
Rate Loans which are made pursuant to the terms hereof solely to convert
existing Loans in the normal course on the last day of an Interest Period
therefor) or request for the issuance, renewal, extension or reissuance of a
Letter of Credit by the Company hereunder shall constitute a certification by
the Company to the effect set forth in the preceding sentence (both as of the
date of such notice and, unless the Company otherwise notifies the Agent prior
to the date of and immediately following such borrowing, conversion or
continuation, or issuance, renewal, extension or reissuance as of the date
thereof).
Section 6.03 Conditions Relating to Letters of Credit. In addition to
the satisfaction of all other conditions precedent set forth in this Article VI,
the issuance, renewal, extension or reissuance of the Letters of Credit referred
to in Section 2.01(b) is subject to the following conditions precedent:
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(a) At least four (4) Business Days prior to the date of the issuance,
renewal, extension or reissuance of each Letter of Credit, the Agent shall have
received a written request for a Letter of Credit as described in Section 2.02.
(b) The Company shall have duly and validly executed and delivered to
the Agent a Letter of Credit Agreement pertaining to the Letter of Credit.
Section 6.04 Subsequent Environmental Audits--New Acquisitions. Prior
to each acquisition of Oil and Gas Properties or other real property interests
by the Company or any Subsidiary after the Effective Date, the Company shall
have prepared (and shall timely deliver to the Agent) a Phase I Audit pertaining
to the Property being acquired. The Phase I Audit may be prepared by the
Company, unless the value of the Oil and Gas Properties or other real property
interests being acquired is greater than $1,000,000, in which case, the Banks
may require the Company to engage an environmental consulting or engineering
firm to conduct the Phase I Audit. Such Phase I Audit shall be completed and
received by the Agent on or before 45 days following the date the Company begins
or engages said environmental consulting or engineering firm.
Section 6.05 Audited Financial Statements. As soon as available and in
any event within 30 days after the Closing Date, the Company shall deliver to
the Agent the audited financial statements of the Company for the calendar year
ended December 31, 1995, accompanied by the related opinion of Arthur Andersen &
Co. stating that said financial statements fairly present the financial
conditions and results of operations of the Company as at the end of, and for,
such calendar year.
ARTICLE VII
Representations and Warranties
The Company represents and warrants to the Banks that (each
representation and warranty herein is given as of the date of this Agreement and
shall be deemed repeated and reaffirmed on the dates provided in Section 6.02):
Section 7.01 Corporate Existence. The Company and each Subsidiary: (a)
is a corporation duly organized, validly existing and in good standing under the
laws of the jurisdictions in which it is incorporated (b) has all requisite
corporate power, and has all material governmental licenses, authorizations,
consents and approvals necessary to own its assets and carry on its business as
now being or as proposed to be conducted; and (c) is qualified to do business in
all jurisdictions in which the nature of the business conducted by it makes such
qualification necessary and where failure so to qualify would have a Material
Adverse Effect.
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Section 7.02 Financial Condition.
(a) The unaudited financial statements of the Company for the period
ended September 30, 1995, heretofore furnished to each of the Banks, are
complete and correct and fairly present the financial condition of the Company
and the results of its operations as at said date and for the period stated
(subject only to normal year-end audit adjustments with respect to such
unaudited interim statements), all in accordance with GAAP applied on a
consistent basis.
(b) Neither the Company nor any Subsidiary have had, on the respective
dates set forth above, any material contingent liabilities, liabilities for
taxes, unusual forward or long-term commitments or unrealized or anticipated
losses from any unfavorable commitments, except as referred to or reflected or
provided for in such Financial Statements or otherwise provided to the Agent and
the Banks in writing. Since the date of the most recent financial statements of
the Company delivered to the Agent, there has been no change or event having a
Material Adverse Effect, except as otherwise disclosed to the Agent and the
Banks in writing on or before the Closing Date.
Section 7.03 Liabilities; Litigation. Except for liabilities incurred
in the normal course of business, neither the Company nor any Subsidiary has any
material (individually or in the aggregate) liabilities, direct or contingent,
except as disclosed or referred to in the most recent financial statements of
the Company delivered to the Agent or as disclosed to the Banks in Schedule 7.03
hereto. Except as disclosed in Schedule 7.03, to the best of the Company's
knowledge and belief, as of the Closing Date, there is no litigation, legal,
administrative or arbitral proceeding, investigation or other action of any
nature pending or, to the knowledge of the Company threatened against or
affecting the Company or any Subsidiary which involves the possibility (other
than customary deductibles) of any judgment or liability not fully covered by
insurance, and which would have a Material Adverse Effect.
Section 7.04 No Breach. Except for waivers or consents obtained in
writing by the Company prior to the Closing Date, neither the execution and
delivery by the Company of this Agreement, the Notes, or the other Security
Instruments, nor compliance with the terms and provisions hereof will conflict
with or result in a breach of, or require any consent under, the respective
charter or by-laws of the Company or any Subsidiary, or any applicable law or
regulation, or any order, writ, injunction or decree of any court or
governmental authority or agency, or any agreement or instrument to which the
Company or any Subsidiary is a party or by which the Company or any Subsidiary
is bound or to which the Company or any Subsidiary is subject, or constitute a
default under any such agreement or instrument, or result in the creation or
imposition of any Lien upon any of the revenues or assets of the Company or any
Subsidiary pursuant to the terms of any such agreement or instrument.
Section 7.05 Corporate Action. The Company is duly authorized and
empowered to create and issue the Notes; and the Company and each Subsidiary are
duly authorized and empowered to
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execute, deliver and perform the Security Instruments, including this Agreement,
to which they respectively are parties; all corporate action on the Company's
part requisite for the due creation and issuance of the Notes and on the
Company's and each Subsidiary's respective part for the due execution, delivery
and performance of the Security Instruments, including this Agreement, to which
the Company and each Subsidiary respectively are parties has been duly and
effectively taken; and this Agreement does, and the Notes and other Security
Instruments to which the Company and each Subsidiary respectively are parties
upon their creation, issuance, execution and delivery will, constitute valid and
binding obligations of the Company and each Subsidiary, respectively, enforce-
able in accordance with their terms.
Section 7.06 Approvals. No authorizations, approvals or consents of,
and no filings or registrations with, any governmental or regulatory authority
or agency are necessary for the execution, delivery or performance by the
Company or any Subsidiary of this Agreement, the Notes, or the Security
Instruments to which they respectively are parties or for the validity or
enforceability thereof.
Section 7.07 Use of Loans. The proceeds of the Loans shall be used by
the Company (i) to pay in full the indebtedness of FRI under the FRI Credit
Agreement, (ii) to provide working capital for exploration and production of Oil
and Gas Properties of the Company and its Subsidiaries, and (iii) for capital
expenditures and acquisitions which would otherwise be permitted by this
Agreement. Neither the Company nor any Subsidiary is engaged principally, or as
one of its important activities, in the business of extending credit for the
purpose, whether immediate, incidental or ultimate, of buying or carrying margin
stock (within the meaning of Regulation U or X of the Board of Governors of the
Federal Reserve System) and no part of the proceeds of any Loan hereunder will
be used to buy or carry any margin stock.
Section 7.08 ERISA. Except as set out in Schedule 7.08 hereof, each of
the Company and the ERISA Affiliates have fulfilled its obligations under the
minimum funding standards of ERISA and the Code with respect to each Plan and
are in compliance in all material respects with the presently applicable
provisions of ERISA and the Code, and have not incurred any liability to the
PBGC or any Plan or Multiemployer Plan.
Section 7.09 Taxes. To the best knowledge of the Company, BUG has filed
all consolidated United States Federal income tax returns and all other material
tax returns which are required to be filed with respect to the Company and its
Subsidiaries and all taxes due pursuant to such returns or pursuant to any
assessment with respect to the Company and its Subsidiaries received by BUG,
THEC Holdings, the Company or any Subsidiary have been paid, except for such
assessments which are being contested in good faith by appropriate proceedings.
The charges, accruals and reserves on the books of BUG, THEC Holdings, the
Company and/or its Subsidiaries in respect of taxes and other governmental
charges with respect to the Company and its Subsidiaries are, in the opinion of
the Company, adequate.
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Section 7.10 Titles, etc. The Company has and upon the Initial Funding
will have good and indefeasible title to its material (individually or in the
aggregate) Properties, free and clear of all Liens except Excepted Liens, Liens
permitted by Section 9.03, and Liens disclosed to the Banks in Schedule 7.10.
After giving full effect to the Excepted Liens and Liens disclosed to the Banks
in Schedule 7.10, upon the Initial Funding, the Company will acquire and own the
net interests in production attributable to the wells and units reflected in the
Initial Reserve Report and the owner- ship of such Properties shall not in any
material respect obligate the Company to bear the costs and expenses relating to
the maintenance, development and operations of each such Property in an amount
in excess of the working interest of each Property set forth in the Initial
Reserve Report. Further, upon delivery of each reserve report furnished to the
Banks pursuant to Sections 8.04(a) or (b) the statements made in the preceding
sentence shall be true with respect to such furnished reserve reports. All
information contained in the Initial Reserve Report is true and correct in all
material respects as of the date thereof and as of the date of the Initial
Funding.
Section 7.11 No Material Misstatements. No material information,
statement, exhibit, certificate, document or report furnished to the Banks by
the Company or any Subsidiary in connection with the negotiation of this
Agreement contained any material misstatement of fact or omitted to state a
material fact or any fact necessary to make the statement contained therein not
materially misleading.
Section 7.12 Investment Company Act. Neither the Company nor any
Subsidiary is an "investment company" or a company "controlled" by an
"investment company," within the meaning of the Investment Company Act of 1940,
as amended.
Section 7.13 Public Utility Holding Company Act. Neither the Company
nor any Subsidiary is a "holding company," or a "subsidiary company" of a
"holding company," or an "affiliate" of a "holding company" or of a "subsidiary
company" of a "holding company," or a "public utility" within the meaning of the
Public Utility Holding Company Act of 1935, as amended.
Section 7.14 Subsidiaries and Partnerships. The Company has no
Subsidiaries and no interest in any partnerships (excluding tax partnerships)
except those shown on Schedule 7.14 hereto, which Exhibit is complete and
accurate. The Company owns 100% of the issued and outstanding shares of stock of
each such Subsidiary, unless otherwise disclosed on Schedule 7.14.
Section 7.15 Location of Business and Offices. The Company's principal
place of business and chief executive offices are located at the address stated
on the signature page of this Agreement.
Section 7.16 Gas Imbalances. Except as set forth on Schedule 7.16,
there are no gas imbalances, take or pay or other prepayments with respect to
any of the Company's or Subsidiaries' Oil and Gas Properties which would require
the Company or its Subsidiaries to deliver Hydrocarbons produced from their
respective Oil and Gas Properties at some future time without then or
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promptly thereafter receiving full payment therefor which would exceed 500
m.m.c.f. in the aggregate.
Section 7.17 Rate Filings. To the best of the Company's knowledge,
neither the Company nor any Subsidiary has violated any provisions of The
Natural Gas Act or The Natural Gas Policy Act of 1978 or any other Federal or
State law or any of the regulations thereunder (including those of the
respective Conservation Commissions and Land Offices of the various
jurisdictions having authority over the Company's and the Subsidiaries' Oil and
Gas Properties) with respect to the Company's and the Subsidiaries' Oil and Gas
Properties which have a Material Adverse Effect which is continuing or which
might in the future result in a Material Adverse Effect, and the Company and
each Subsidiary has or will have made all necessary rate filings, certificate
applications, well category filings, interim collection filings and notices, and
any other filings or certifications, and has or will have received all necessary
regulatory authorizations (including without limitation necessary
authorizations, if any, with respect to any processing arrangements conducted by
it or others respecting the Company's and the Subsidiaries' Oil and Gas
Properties or production therefrom) required under said laws and regulations
with respect to all of the Company's and the Subsidiaries' Oil and Gas
Properties or production therefrom so as not to have a Material Adverse Effect.
To the best of the Company's knowledge, said material rate filings, certificate
applications, well category filings, interim collection filings and notices, and
other filings and certifications contain no untrue statements of material facts
nor do they omit any statements of material facts necessary in said filings.
Section 7.18 Environmental Matters. Except for those matters disclosed
in Schedule 7.18, or such other matters which would not have a Material Adverse
Effect (or with respect to (c), (d), and (e) below, where the failure to take
such actions would not have such a Material Adverse Effect):
(a) None of the Properties owned by the Company or its Subsidiaries or
the operations conducted thereon violate any Environmental Laws or the order of
any court or Governmental Authority with respect to Environmental Laws;
(b) Without limitation of clause (a) above, none of the Properties
owned by the Company or its Subsidiaries or the operations currently conducted
thereon or by any prior owner or operator of such Property or operation, are in
violation of or subject to any existing, pending or (to the knowledge of the
Company) threatened action, suit, investigation, inquiry or proceeding by or
before any court or Governmental Authority with respect to Environmental Laws or
to any remedial obligations under Environmental Laws;
(c) All notices, permits, licenses or similar authorizations, if any,
required to be obtained or filed in connection with the operation or use of any
and all Property of the Company and its Subsidiaries, including without
limitation past or present treatment, storage, disposal or release of a
hazardous substance or solid waste into the environment, have been duly obtained
or filed;
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(d) All hazardous substances, if any, generated at any and all Property
of the Company and its Subsidiaries have in the past been transported, treated
and disposed of only by carriers maintaining valid permits under RCRA and any
other Environmental Law and only at treatment, storage and disposal facilities
maintaining valid permits under RCRA and any other Environmental Law, which
carriers and facilities have been and are operating in compliance with such
permits;
(e) The Company and each Subsidiary have taken all reasonable steps
necessary to determine and is determining (on a continuing basis) that no
hazardous substances or hazardous waste have been disposed of or otherwise
released and there has been no threatened release of any hazardous substances on
or to any Property of the Company and its Subsidiaries except in compliance with
Environmental Laws; and
(f) Neither the Company nor any Subsidiary has material contingent
liability in connection with any release or threatened release of any hazardous
substance or solid waste into the environment.
Each of the representations and warranties in this Section 7.18 is absolute to
the extent that it relates to any Property during the period such Property has
been owned by the Company or its Subsidiaries, and is made to the best of the
Company's knowledge as to any prior periods with respect to such Property.
Section 7.19 Defaults. Neither the Company nor any Subsidiary is in
default nor has any event or circumstance occurred which, but for the expiration
of any applicable grace period or the giving of notice, or both, would
constitute a default (in any respect which would have a Material Adverse Effect)
under any material agreement or other instrument to which the Company or any
Subsidiary is a party or by which the Company or any Subsidiary is bound. No
Event of Default hereunder has occurred and is continuing.
Section 7.20 Compliance with the Law. Neither the Company nor any
Subsidiary has violated any Governmental Requirement or failed to obtain any
license, permit, franchise or other governmental authorization necessary for the
ownership of any of their respective Properties or the conduct of their
respective business; which violation or failure would have (in the event such
violation or failure were asserted by any Person through appropriate action) a
Material Adverse Effect.
Section 7.21 Insurance. The Company has, and has caused all its
Subsidiaries to have (a) all insurance policies sufficient for the compliance by
each of them with all Requirements of Law, and (b) insurance coverage in at
least such amounts and against such risks (including public liability) that are
usually insured against by companies engaged in the same or a similar business
under the same or similar circumstances for the assets and operations of the
Company and its Subsidiaries. Schedule 7.21 sets forth the material insurance
policies of the Company and its Subsidiaries which are in full force and effect
as of the Closing Date.
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Section 7.22 Credit Agreements. Schedule 7.22 is a complete and correct
list, as of the Closing Date, of each credit agreement, loan agreement,
indenture, purchase agreement, guarantee or other arrangement providing for or
otherwise relating to any Debt of the Company, the principal or face amount of
which equals or exceeds (or may equal or exceed) $100,000, and the aggregate
principal or face amount outstanding or which may become outstanding under each
such arrangement is correctly described in such Schedule 7.22.
ARTICLE VIII
Affirmative Covenants
So long as any of the Notes shall remain unpaid or any Bank shall have
any Commitment under this Agreement or any Letter of Credit shall remain
outstanding, the Company agrees that:
Section 8.01 Financial Statements and Other Reports. The Company shall
deliver, or shall cause to be delivered, to each of the Banks:
(a) As soon as available and in any event within 90 days after the end
of each calendar year (except as otherwise provided in Section 6.05), the
audited statements of income, stockholders' equity and cash flows of the Company
and its Subsidiaries on a consolidated basis for such calendar year, and the
related balance sheet of the Company and its Subsidiaries on a consolidated
basis as at the end of such calendar year, and commencing with respect to the
calendar year ended December 31, 1995, setting forth in each case in comparative
form the corresponding figures for the preceding calendar year, and accompanied
by the related opinion of Arthur Andersen & Co. or such other independent public
accountants of recognized national standing acceptable to the Agent which
opinion shall state that said financial statements fairly present the financial
condition and results of operations of the Company and its Subsidiaries as at
the end of, and for, such calendar year, and a certificate of such accountants
stating that, in making the examination necessary for their opinion, they
obtained no knowledge, except as specifically stated, of any Event of Default.
(b) As soon as available and in any event within 60 days after the end
of each of the first three (3) quarterly periods of each calendar year,
unaudited statements of income, stockholders' equity and cash flows of the
Company and its Subsidiaries on a consolidated basis for such period and for the
period from the beginning of the respective calendar year to the end of such
period, and the related unaudited balance sheet of the Company and its
Subsidiaries on a consolidated basis as at the end of such period, and
commencing with respect to the quarter ending March 31, 1996, setting forth in
each case in comparative form the corresponding figures for the corresponding
period in the preceding calendar year, accompanied by the certificate of the
senior financial officer of the Company, which certificate shall state that said
financial statements fairly present the financial condition and results of
operations of the Company and its Subsidiaries in accordance with GAAP
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consistently applied, as at the end of, and for, such period (subject to normal
year-end audit adjustments).
(c) As soon as possible, and in any event within 10 days after the
Company knows that any of the events or conditions specified below with respect
to any Plan or Multiemployer Plan have occurred or exist, a statement signed by
a senior financial officer of the Company setting forth details respecting such
event or condition and the action, if any, which the Company or its ERISA
Affiliate proposes to take with respect thereto (and a copy of any report or
notice required to be filed with or given to PBGC by the Company or an ERISA
Affiliate with respect to such event or condition):
(i) any reportable event, as defined in Section 4043(b) of ERISA
and the regulations issued thereunder, with respect to a Plan, as to
which PBGC has not by regulation waived the requirement of Section
4043(a) of ERISA that it be notified within 30 days of the occurrence
of such event (provided that a failure to meet the minimum funding
standard of Section 412 of the Code or Section 302 of ERISA shall be a
reportable event regardless of the issuance of any waivers in
accordance with Section 412(d) of the Code);
(ii) the filing under Section 4041 of ERISA of a notice of intent
to terminate any Plan or the termination of any Plan;
(iii) the institution by PBGC of proceedings under Section 4042 of
ERISA for the termination of, or the appointment of a trustee to
administer, any Plan, or the receipt by the Company or any ERISA
Affiliate of a notice from a Multiemployer Plan that such action has
been taken by PBGC with respect to such Multiemployer Plan;
(iv) the complete or partial withdrawal by the Company or any ERISA
Affiliate under Section 4201 or 4204 of ERISA from a Multiemployer
Plan, or the receipt by the Company or any ERISA Affiliate of notice
from a Multiemployer Plan that is in reorganization or insolvency
pursuant to Section 4241 or 4245 of ERISA or that it intends to
terminate or has terminated under Section 4041A of ERISA; and
(v) the institution of a proceeding by a fiduciary of any
Multiemployer Plan against the Company, any Subsidiary or any ERISA
Affiliate to enforce Section 515 of ERISA, which proceeding is not
dismissed within 30 days.
(d) Promptly after the Company knows of any occurrence constituting an
Event of Default or having a Material Adverse Effect, a notice of such Event of
Default or Material Adverse Effect, describing the same in reasonable detail and
what action if any, the Company proposes to take in response thereto.
(e) Promptly upon their becoming available, one copy of each financial
statement, report, notice or proxy statement sent by the Company or any
Subsidiary to stockholders generally, and of each regular or periodic report and
any registration statement, prospectus or written communication
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(other than transmittal letters) in respect thereof filed by the Company or any
Subsidiary with or received by the Company or any Subsidiary in connection
therewith from, any securities exchange or the Securities and Exchange
Commission or any successor agency; provided, however, the foregoing shall not
require the Company to provide the Banks copies of routine business reports sent
by the Company to its parent company in the ordinary course of business.
(f) From time to time such other information regarding the business,
affairs or financial condition of the Company or any Subsidiary (including,
without limitation, any Plan or Multiemployer Plan and any reports or other
information required to be filed under ERISA) as any Bank or the Agent may
reasonably request.
(g) Promptly after the furnishing thereof, copies of any statement or
report furnished to any Person pursuant to the terms of any indenture, loan or
credit or other similar agreement (other than documents executed in connection
with this Agreement), and not otherwise required to be furnished to the Banks
pursuant to any other provision of this Section 8.01.
The Company will furnish to each Bank, at the time it furnishes each set of
financial statements pursuant to paragraph (a) or (b) above, a certificate of a
senior financial officer of the Company (i) to the effect that no Event of
Default has occurred and is continuing (or, if any Event of Default has occurred
and is continuing, describing the same in reasonable detail) and (ii) setting
forth in reasonable detail the computations necessary to determine whether the
Company is in compliance with all of the terms, conditions, agreements and
covenants contained in this Agreement including, without limitation, the
covenants contained in Sections 9.12, 9.13 and 9.14 as of the end of the
respective fiscal quarter or calendar year.
Section 8.02 Litigation. The Company shall promptly give to each Bank
notice of all legal or arbitral proceedings, and of all proceedings before any
Governmental Authority, affecting the Company or any Subsidiary, except
proceedings which, if adversely determined, would not have a Material Adverse
Effect.
Section 8.03 Corporate Existence, Etc.
(a) The Company shall and shall cause each Subsidiary to (i) preserve
and maintain its corporate existence and all of its material rights, privileges
and franchises; (ii) keep books of record and account in which full, true and
correct entries will be made of all dealings or transactions in relation to its
business and activities; (iii) comply with the requirements of all applicable
laws, rules, regulations and orders of governmental or regulatory authorities if
failure to comply with such requirements would have a Material Adverse Effect;
(iv) pay and discharge all taxes, assessments and governmental charges or levies
imposed on it or on its income or profits or on any of its Property prior to the
date on which penalties attach thereto, except for any such tax, assessment,
charge or levy the payment of which is being contested in good faith and by
proper proceedings and against which adequate reserves are being maintained; (v)
permit representatives of any Bank or the Agent,
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during normal business hours upon reasonable prior notice, to examine, copy and
make extracts from its books and records, to inspect its Properties, and to
discuss its business and affairs with its officers, all to the extent reasonably
requested by such Bank or the Agent (as the case may be); and (vi) keep insured
by financially sound and reputable insurers all property of a character usually
insured by corporations engaged in the same or similar business similarly
situated against loss or damage of the kinds and in the amounts customarily
insured against by such corporations and carry such other insurance as is
usually carried by such corporations.
(b) The Company will at its own expense do or cause to be done and will
cause each Subsidiary to do or cause to be done all things reasonably necessary
to preserve and keep in good repair, working order and efficiency all Properties
owned by the Company and each Subsidiary including, without limitation, all
equipment, machinery and facilities, and from time to time will make all the
reasonably necessary repairs, renewals and replacements so that at all times the
state and condition of the Properties owned by the Company and each Subsidiary
will be fully preserved and maintained. The Company will and will cause each
Subsidiary to operate their respective Properties or cause or use best efforts
to cause such Properties to be operated in accordance with the practices of the
industry and in compliance with all applicable contracts and agreements and in
compliance in all material respects with all Governmental Requirements, except
for any non-compliance that would not result in a Material Adverse Effect.
Section 8.04 Engineering and Other Reports.
(a) As soon as available and in any event prior to December 31 of each
calendar year, commencing on or before December 31, 1996, the Company shall
furnish to the Banks a report (the "Reserve Report") in form and substance
satisfactory to the Banks prepared by an independent petroleum consultant(s)
acceptable to the Banks, which Reserve Report shall evaluate as of the end of
the current calendar year the Oil and Gas Property of the Company, its
Affiliates and its Subsidiaries and which shall, together with any other
information reasonably requested by the Majority Banks, set forth the proved oil
and gas reserves attributable to such Property together with a projection of the
rate of production and future net income with respect thereto as of such date,
based upon the pricing assumptions consistent with Securities and Exchange
Commission reporting requirements at the time.
(b) As soon as available and in any event prior to June 30 of each
calendar year, the Company shall furnish to the Banks a production report
prepared by the Company detailing by field the oil and gas volumes produced,
product price received, and lease operating expenses by month for the interim
six month period from the preceding December through May.
(c) If requested by the Majority Banks, the Company shall furnish to
the Banks, within 45 days following such request, a report (the "Alternate
Reserve Report") in form and substance satisfactory to the Banks which may be
prepared by or under the supervision of a petroleum engineer who shall be an
employee of the Company and certified by the chief engineer of the Company as to
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its truth and accuracy and shall have been reviewed by the independent petroleum
consultant referred to in Section 8.04(a) above who shall certify such report to
have been prepared using customary engineering disciplines, which shall further
evaluate the Property evaluated in the immediately preceding Reserve Report, and
which shall, together with any other information reasonably requested by the
Majority Banks, set forth the proved oil and gas reserves attributable to such
Property as of December 31 or June 30, as applicable, of the current calendar
year, together with a projection of the rate of production and net future income
with respect thereto as of such date, based upon the pricing assumptions
consistent with Securities and Exchange Commission reporting requirements at the
time.
(d) With the delivery of the reports required in Subsections (a), (b)
and (c) above, the Company shall provide to the Banks a statement reflecting any
material changes in the net revenue interest of each well or lease as reflected
in the immediately preceding report after giving effect to all encumbrances from
the net revenue interests as reflected in such report, along with an explanation
as to any material discrepancies between the two net revenue interest
disclosures.
(e) Concurrently with the delivery of the reports required in
Subsections (a), (b) and (c) above, the Company shall provide to the Banks a
report in form and substance satisfactory to the Banks prepared and certified by
the chief financial officer of the Company, which report shall, together with
any other information requested by the Majority Banks, fully set forth and
disclose the volume, estimated amount and nature of any and all gas imbalances
with respect to the Oil and Gas Properties of the Company, its Affiliates and
its Subsidiaries as of the previous quarterly date.
Section 8.05 Further Assurances. The Company will cure and will cause
each Guarantor to cure promptly any defects in the creation and issuance of the
Notes and the execution and delivery of the Security Instruments, including this
Agreement. The Company at its expense will promptly execute and deliver to the
Agent upon request all such other and further documents, agreements and
instruments in compliance with or accomplishment of the covenants and agreements
of the Company in the Security Instruments, including this Agreement, or to
further evidence and more fully describe the collateral intended as security for
the Notes, or to correct any omissions in the Security Instruments, or more
fully state the security obligations set out herein or in any of the Security
Instruments, or to perfect, protect or preserve any Liens created pursuant to
any of the Security Instruments, or to make any recordings, to file any notices,
or obtain any consents, all as may be necessary or appropriate in connection
therewith.
Section 8.06 Performance of Obligations. The Company will pay the Notes
according to the reading, tenor and effect thereof; and the Company will do and
perform every act and discharge all of the obligations provided to be performed
and discharged by the Company under the Security Instruments, including this
Agreement, at the time or times and in the manner specified.
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ARTICLE IX
Negative Covenants
So long as any of the Notes shall remain unpaid or any Bank shall have
any Commitment under this Agreement or any Letter of Credit shall remain
outstanding, the Company shall not:
Section 9.01 Debt. Create, incur, assume or suffer to exist, or permit
any of its Subsidiaries to create, incur, assume or suffer to exist any Debt,
except:
(a) Debt of the Company under this Agreement, the Notes, the Letters of
Credit and Letter of Credit Agreements and the other Security Instruments;
(b) Debt described in Schedule 9.01, including renewals, extensions or
refinancings thereof, provided that the principal amount thereof does not
increase;
(c) Debt of the Company subordinated on terms satisfactory to the Banks
to the Company's obligations under this Agreement and the Notes, the Letters of
Credit and Letter of Credit Agreements and any other Security Instrument in an
aggregate principal amount not to exceed $10,000,000 at any one time
outstanding;
(d) Debt of the Company to any Guarantor or any other Subsidiary which
becomes a Guarantor prior to the incurrence of such Debt, and Debt of any
Guarantor or any such Subsidiary to the Company or to any other Guarantor or any
such Subsidiary;
(e) Debt of the Company to any Subsidiary (other than a Guarantor or
any Subsidiary which becomes a Guarantor prior to the incurrence of such Debt)
or Debt of any Subsidiary (other than a Guarantor or any Subsidiary which
becomes a Guarantor prior to the incurrence of such Debt) to the Company in an
aggregate principal amount not exceeding $1,000,000 at any one time outstanding;
(f) accounts payable (other than for borrowed money) to trade creditors
for goods or services incurred in the ordinary course of business and which are
not in excess of 30 days past the due date, or, if greater than 30 days past
due, are being contested in good faith and by appropriate proceedings;
(g) Debt of the Company and any Subsidiary (other than newly-formed
Subsidiaries created specifically for the purpose of investing in project
finance transactions) incurred to purchase or to finance the purchase of, fixed
assets in an aggregate principal amount not exceeding as to the Company and its
Subsidiaries $15,000,000 at any time outstanding;
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(h) all indebtedness, obligations and liabilities of the Company, any
of its Affiliates or any Subsidiary in favor of any Bank or any Affiliate of
such Bank pursuant to any Hedging Agreement including, without limitation (i)
that certain Commodity Swap Transaction between the Company and Chemical Bank,
being that certain 25,488,000 MMBtu Commodity Swap dated effective December 1,
1992, (ii) Chemical Swap Number 102020 between the Company and Chemical Bank,
(iii) Chemical Swap Number 102021 between the Company and Chemical Bank, (iv)
that certain Interest Rate and Currency Exchange Agreement dated April 12, 1994,
between the Company and Chemical Bank, (v) that certain Commodity Swap
transaction between the Company and [Enron], being that certain 21,600,000 MMBtu
Commodity Swap dated September 22, 1994, and (vi) certain Hedging Agreements of
FRI described or referred to on Schedule 9.19; and
(i) Debt of the Company incurred in the ordinary course of business in
connection with performance bonds required of operators by the Minerals
Management Service which the Company is required to post in connection with its
activities as operator on offshore Oil and Gas Properties up to the aggregate
amount of $3,300,000 at any one time outstanding.
Section 9.02 Guaranties, Etc. Assume, guarantee, endorse or otherwise
be or become directly or contingently responsible or liable, or permit any of
its Subsidiaries to assume, guarantee, endorse or otherwise be or become
directly or indirectly responsible or liable (including, but not limited to, an
agreement to purchase any obligation, stock, assets, goods or services or to
supply or advance any funds, asset, goods or services, or an agreement to
maintain or cause such Person to maintain a minimum working capital or net worth
or otherwise to assure the creditors of any Person against loss) for the
obligations of any Person (except for Debt of the Company to the Agent and/or
the Banks), except for guaranties by endorsement of negotiable instruments for
deposit or collection or similar transactions in the ordinary course of
business.
Section 9.03 Liens. Create, incur, assume or suffer to exist, or permit
any of its Subsidiaries to create, incur, assume or suffer to exist, any Lien,
upon or with respect to any of its properties, now owned or hereafter acquired,
except:
(a) Liens in favor of the Agent on behalf of the Banks securing the
Indebtedness hereunder;
(b) Excepted Liens;
(c) Liens, deposits or pledges to secure the performance of bids,
tenders, contracts (other than contracts for the payment of money), leases
(permitted under the terms of this Agreement), public or statutory obligations,
surety, stay, appeal, indemnity, performance or other similar bonds, or other
similar obligations arising in the ordinary course of business;
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(d) Judgment and other similar Liens arising in connection with court
proceedings; provided that the execution or other enforcement of such Liens is
effectively stayed and the claims secured thereby are being actively contested
in good faith and by appropriate proceedings;
(e) Liens covering real or personal property in existence at the time
of acquisition thereof by the Company or any Subsidiary after the Closing Date,
provided, that no such Lien covers, or is extended to cover, any other property
owned by the Company or any such Subsidiary after the Closing Date;
(f) Landowner's royalties, overriding royalties and other royalty
interests incurred in the ordinary course of business which, in the aggregate,
do not materially detract from the value of the Property burdened thereby or
interfere with the ordinary course of the business of the Company; and
(g) Liens in existence on the Closing Date which are listed on Schedule
7.10, provided, that no such Lien permitted by this clause (g) is spread to
cover any additional Property after the Closing Date and that the amount of Debt
secured thereby is not increased;
provided, however, that the Company may create, assume or suffer to exist any
Lien on the proved reserves or the probable reserves included in the Borrowing
Base of the type specified in clauses (b) through (e) and clause (g) above,
provided, that the Debt secured by such Liens shall not exceed $1,000,000 in the
aggregate at any one time outstanding.
(h) purchase money Liens on any Property hereafter acquired or the
assumption of or taking subject to any Lien on Property existing at the time of
such acquisition, or a Lien incurred in connection with any conditional sale or
other title retention agreement or a Capital Lease; provided that:
(i) any Property subject to any of the foregoing is acquired by the
Company or any such Subsidiary in the ordinary course of its business
and the Lien on any such Property is created or assumed, or such
Property is taken subject to the Lien, contemporaneously with such
acquisition;
(ii) the obligation secured by any such Lien shall not exceed
66-2/3% of the lesser of cost or fair market value as of the time of
acquisition of the Property covered thereby to the Company or such
Subsidiary acquiring the same;
(iii) each such Lien shall attach to no Property of the Company or
any Subsidiary other than the Property so acquired and fixed
improvements thereon;
(iv) the principal amount of Debt secured by all such Liens shall
not exceed $15,000,000 at any time outstanding in the aggregate; and
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(v) the obligations secured by such Lien are permitted by the
provisions of Section 9.01(g).
Section 9.04 Leases. Create, incur, assume or suffer to exist, or
permit any of its Subsidiaries to create, incur, assume or suffer to exist, any
obligation as lessee for the rental or hire of any real or personal property,
except: (a) leases existing on the date of this Agreement and any extensions or
renewals thereof; (b) Capital Leases; (c) leases (other than Capital Leases)
which do not in the aggregate require the Company and its Subsidiaries on a
consolidated basis to make payments (including taxes, insurance, maintenance and
similar expense which the Company or any Subsidiary is required to pay under the
terms of any lease) in any calendar year in excess of $500,000; (d) leases
between the Company and any Subsidiary or between any Subsidiaries and (e) oil
and gas leases entered into in the ordinary course of business.
Section 9.05 Investments. Make, or permit any of its Subsidiaries to
make, any loan or advance to any Person or purchase or otherwise acquire, or
permit any such Subsidiary to purchase or otherwise acquire, any capital stock,
assets, obligations or other securities of, make any capital contribution to, or
otherwise invest in, or acquire any interest in, any Person, except: (a) direct
obligations of the United States of America or any agency thereof with
maturities of one year or less from the date of acquisition; (b) commercial
paper of a domestic issuer rated at least "A-1" by Standard & Poor's Corporation
or "P-1" by Moody's Investors Service, Inc.; (c) certificates of deposit with
maturities of one year or less from the date of acquisition issued by any Bank
or any commercial bank operating within the United States of America having
capital and surplus in excess of $50,000,000; (d) for stock, obligations or
securities received in settlement of debts (created in the ordinary course of
business) owing to the Company or any such Subsidiary; (e) any Acceptable
Acquisition permitted by Section 9.11; (f) loans and advances to FRI or any
Subsidiary; and (g) loans and advances to employees in the ordinary course of
business not to exceed $50,000 in the aggregate at any one time outstanding.
Section 9.06 Dividends. Declare or pay any dividends, purchase, redeem,
retire or otherwise acquire for value any of its capital stock now or hereafter
outstanding, or make any distribution of assets to its stockholders as such
whether in cash, assets or in obligations of the Company, or allocate or
otherwise set apart any sum for the payment of any dividend or distribution on,
or for the purchase, redemption or retirement of any shares of its capital
stock, or make any other distribution by reduction of capital or otherwise in
respect of any shares of its capital stock or permit any of its Subsidiaries to
purchase or otherwise acquire for value any stock of the Company or another such
Subsidiary, except that the Company may declare and pay cash dividends if, after
giving effect to such dividend, (a) no Event of Default has occurred and is
continuing, (b) no Event of Default will be caused by such action, and (c) the
Company continues to have a ratio of Consolidated Total Debt to Consolidated
Total Capitalization of less than 45%.
Section 9.07 Sale of Assets. Without the prior written consent of all
of the Banks, sell, lease, assign, transfer or otherwise dispose of, or permit
any of its Subsidiaries to sell, lease, assign,
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transfer or otherwise dispose of, any of its now owned or hereafter acquired
assets (including, without limitation, shares of stock and indebtedness of such
Subsidiaries, receivables and leasehold interests); except: (a) for Oil and Gas
Properties pursuant to Section 9.16, (b) for inventory disposed of in the
ordinary course of business; (c) the sale or other disposition of assets no
longer used or useful in the conduct of its business; and (d) that any such
Subsidiary may sell, lease, assign, or otherwise transfer its assets to the
Company or any other Subsidiary.
Section 9.08 Stock of Subsidiaries, Etc. Sell or otherwise dispose of
any shares of capital stock of any of its Subsidiaries, except in connection
with a transaction permitted under Section 9.10, or permit any such Subsidiary
to issue any additional shares of its capital stock, except (a) directors'
qualifying shares, and (b) shares of its capital stock issued to the Company or
another Subsidiary, provided, however, any such shares shall be pledged by the
Company or such Subsidiary, as applicable, promptly upon the issuance thereof,
as security for the Indebtedness.
Section 9.09 Transactions with Affiliates. Enter into any transaction,
including, without limitation, the purchase, sale or exchange of Property or the
rendering of any service, with any Affiliate or permit any of its Subsidiaries
to enter into any transaction, including, without limitation, the purchase, sale
or exchange of property or the rendering of any service, with any Affiliate,
except in the ordinary course of and pursuant to the reasonable requirements of
the Company's or such Subsidiary's business and upon fair and reasonable terms
no less favorable to the Company or such Subsidiary than would obtain in a
comparable arm's length transaction with a Person not an Affiliate.
Section 9.10 Mergers, Etc. Merge or consolidate with, or sell, assign,
lease or otherwise dispose of (whether in one transaction or in a series of
transactions) all or substantially all of its assets (whether now owned or
hereafter acquired) to, any Person, or acquire all or substantially all of the
assets or the business of any Person (or enter into any agreement to do any of
the foregoing), or permit any of its Subsidiaries to do so except that: (a) any
such Subsidiary may merge into or transfer assets to the Company; (b) any
Subsidiary may merge into or consolidate with or transfer assets to any other
Subsidiary; and (c) the Company may effect any Acceptable Acquisition permitted
by Section 9.11.
Section 9.11 Acquisitions. Make any Acquisition other than an
Acceptable Acquisition; provided, however (a) the market value of any single
such Acceptable Acquisition shall not exceed $10,000,000 and (b) the market
value of all such Acceptable Acquisitions shall not exceed the aggregate amount
of $35,000,000 in any calendar year.
"Acceptable Acquisition" means any Acquisition of (a) a corporation in
the same line of business as the Company which has been either (i) approved by
the Board of Directors of the corporation which is the subject of such
Acquisition, or (ii) recommended by such Board to the shareholders of such
corporation, (b) all or substantially all of the business or assets of any
corporation or other business entity in the same line of business as the
Company, and (c) Oil and Gas
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Properties in the normal course of business, so long as all other terms and
conditions of this Agreement are complied with.
"Acquisition" means any transaction pursuant to which the Company or
any of its Subsidiaries (a) acquires equity securities (or warrants, options or
other rights to acquire such securities) of any corporation other than the
Company or any corporation which is not then a Subsidiary of the Company,
pursuant to a solicitation of tenders therefor, or in one or more negotiated
block, market or other transactions not involving a tender offer, or a
combination of any of the foregoing, or (b) makes any corporation a Subsidiary
of the Company, or causes any such corporation to be merged into the Company or
any of its Subsidiaries, in any case pursuant to a merger, purchase of assets or
any reorganization providing for the delivery or issuance to the holders of such
corporation's then outstanding securities, in exchange for such securities, of
cash or securities of the Company or any of its Subsidiaries, or a combination
thereof, (c) purchases all or substantially all of the business or assets of any
corporation or (d) acquires Oil and Gas Properties in the normal course of
business, so long as all other terms and conditions of this Agreement are
complied with.
Section 9.12 Minimum Consolidated Net Worth. At any time permit the
Consolidated Net Worth of the Company and its Subsidiaries to be less than
$95,000,000, with such minimum amount to be permanently increased by an amount
equal to (i) 50% of the Consolidated Net Income for each calendar year
commencing the calendar year ending December 31, 1996, plus (ii) 75% of net
proceeds received from the issuance of stock of the Company for each calendar
quarter commencing the quarter ending March 31, 1996, plus (iii) 75% of all
capital contributions received by the Company from BUG for each calendar quarter
of the Company commencing the quarter ending December 31, 1996, all as
determined in accordance with GAAP, provided such minimum amount shall not be
decreased as a result of losses or negative Consolidated Net Income.
Section 9.13 Fixed Charges Ratio. Permit the ratio of Consolidated Cash
Flow to Consolidated Fixed Charges to be less than 2.0 to 1.0 at the end of any
calendar quarter.
Section 9.14 Debt to Total Capitalization Ratio. At any time permit the
ratio of Consolidated Total Debt to Consolidated Total Capitalization to be
greater than 50%.
Section 9.15 Negative Pledge Agreements. The Company will not create,
incur, assume or suffer to exist, or permit any Subsidiary to create, incur,
assume or suffer to exist, any contract, agreement or understanding (other than
this Agreement, the Security Instruments and any contract or agreement
evidencing an Excepted Lien, but only with respect to the Property covered by
such Excepted Lien) which in any way prohibits or restricts the granting,
conveying, creation or imposition of any Lien on any Property of the Company or
any Subsidiary, or which requires the consent of or notice to other Persons in
connection therewith, except customary consents to assignment provisions
contained in any instrument constituting Oil and Gas Properties, and in any
conveyance thereof in the Company's or any Subsidiaries' chain of title.
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Section 9.16 Sale of Oil and Gas Properties. The Company will not, nor
permit any Subsidiary or Affiliate to sell, assign, transfer or convey any
interest in any Oil and Gas Properties except as follows:
(a) Hydrocarbons sold in the ordinary course of business as and when
produced;
(b) Routine farm-outs of non-proven acreage;
(c) Sales of Properties provided the sales of all such Properties
permitted under this clause since the date of the last redetermination of the
Borrowing Base do not have a market value in excess of $500,000 in the
aggregate; and
(d) In addition to sales permitted above, sales of Properties included
in the Borrowing Base, provided simultaneously with any such sale the Borrowing
Base is reduced by amounts agreed to at the time by the Majority Banks and, if
required by the Majority Banks, the net proceeds received in any such sale are
applied to prepay the Notes as determined by the Banks.
Section 9.17 Environmental Matters. Except as disclosed in Schedule
7.18, neither the Company nor any Subsidiary will cause or permit any of its
Property to be in violation of, or do anything or permit anything to be done
which will subject any such Property to any remedial obligations under any
Environmental Laws, assuming disclosure to the applicable Governmental Authority
of all relevant facts, conditions and circumstances, if any, pertaining to such
Property, and the Company will promptly notify the Agent in writing of any
existing, pending or threatened (of which the Company has knowledge) action or
investigation by any Governmental Authority in connection with any Environmental
Laws, except for any such violations or remedial obligations (individually or in
the aggregate) which would not have a Material Adverse Effect. The Company will
establish and implement such procedures as may be necessary to continuously
determine and assure that (i) no solid wastes are disposed of on any Property
owned by the Company or any Subsidiary in quantities or locations that would
require remedial action under any Environmental Laws, (ii) no hazardous
substance will be released on or to any such Property in a quantity equal to or
exceeding that quantity which requires reporting pursuant to Section 103 of
CERCLA, (iii) no hazardous substance is released on or to any such Property so
as to pose an imminent and substantial endangerment to public health or welfare
or the environment; (iv) all hazardous substances and solid wastes generated by
the Company or any Subsidiary or on any Property of the Company or any
Subsidiary will be transported only by carriers maintaining valid permits under
RCRA and treated, stored, and disposed of only by facilities operating in
compliance with RCRA, and (v) the Company, each Subsidiary and their respective
Property and operations will be maintained and operated in compliance with all
permits, licenses, and similar authorizations required pursuant to any
Environmental Laws, except for any non-compliance with clauses (i) through (v)
of this Section that would not have a Material Adverse Effect. The Company
covenants and agrees to keep or cause all of its and its Subsidiaries' Property
to be kept free of any hazardous waste or contaminants to the extent required by
applicable Environmental Laws, and either to remove the same (or if removal is
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prohibited by law, to take whatever action is required by law) promptly upon
discovery at its sole expense or to take other appropriate response to the
extent required by applicable Environmental Laws.
Section 9.18 ERISA Compliance. The Company will not at any time permit
any Plan maintained by it or any ERISA Affiliate to:
(a) engage in any "prohibited transaction" as such term is defined in
Section 4975 of the Code;
(b) except as provided in Schedule 9.18, incur any "accumulated funding
deficiency" as such term is defined in Section 302 of ERISA; or
(c) terminate any such Plan in a manner which could result in the
imposition of a Lien on the Property of the Company or any Subsidiary pursuant
to Section 4068 of ERISA.
Section 9.19 Hedging Agreements. Except for those Hedging Agreements
described in Schedule 9.19, the Company will not enter into or become obligated
under, or permit any of its Subsidiaries to enter into or become obligated under
any Hedging Agreement except for such agreements which in the aggregate do not
cover at any time a volume of oil and gas (on a barrel of oil equivalent basis)
equal to more than 70% for any 12 month period of the projected production for
such period of oil and gas (on a barrel of oil equivalent basis) from the Oil
and Gas Properties included in the Borrowing Base and such contracts are for
delivery or settlement on or before the end of the second calendar year after
the calendar year of the date of such contract.
Section 9.20 Subsidiaries and Partnerships. The Company shall not
create any additional Subsidiaries or partnerships or permit any Subsidiary to
do so without prior written notice to the Agent and the Banks. In every such
case, each new Subsidiary shall forthwith execute and deliver a Guaranty
Agreement in favor of the Agent.
ARTICLE X
Events of Default
Section 10.01 Events of Default. If one or more of the following events
("Events of Default") shall occur and be continuing:
(a) (i) The Company shall default in the payment when due of any
principal of or interest on any Loan or of any reimbursement obligation for
disbursement made under any Letter of Credit or other amount payable by it
hereunder, or (ii) the Company shall default in the payment of any fees
hereunder; or
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(b) The Company or any Subsidiary shall default in the payment when due
of any principal of or interest on any of its other Debt in an amount in excess
of $500,000, unless, in the case of trade creditors, such default is being
contested in good faith; or any non-monetary default specified in any note,
agreement, indenture or other document evidencing or relating to any other Debt
of the Company or any Subsidiary shall occur if the effect of such event is to
cause, or to permit the holder or holders of such Debt (or a trustee or agent on
behalf of such holder or holders) to cause, such Debt to become due prior to its
stated maturity; or
(c) Any representation, warranty or certification made or deemed made
herein or in any other Security Instrument by the Company or any Subsidiary, or
any certificate furnished to any Bank or the Agent pursuant to the provisions
hereof or any other Security Instrument, shall prove to have been false or
misleading as of the time made or furnished in any material respect; or
(d) The Company shall default in the performance of any of its other
material obligations in this Agreement or under any Security Instrument, and
such default shall continue unremedied for a period of 30 days after notice
thereof to the Company by the Agent or any Bank (through the Agent); provided,
however, that the grace period referred to in this Section 10.01(d) shall not
apply to the obligations of the Company to promptly pay principal, interest and
fees or to any of its obligations under Article IX, except for its obligations
under Sections 9.12, 9.13 and 9.14 of Article IX as to which Sections 9.12, 9.13
and 9.14 such 30-day grace period shall apply; or
(e) The Company shall admit in writing its inability to, or be
generally unable to, pay its Debts as such Debts become due; or
(f) The Company shall (i) apply for or consent to the appointment of,
or the taking of possession by, a receiver, custodian, trustee or liquidator of
itself or of all or a substantial part of its Property, (ii) make a general
assignment for the benefit of its creditors, (iii) commence a voluntary case
under the Federal Bankruptcy Code (as now or hereafter in effect), (iv) file a
petition seeking to take advantage of any other law relating to bankruptcy,
insolvency, reorganization, winding-up, or composition or readjustment of debts,
(v) fail to controvert in a timely and appropriate manner, or acquiesce in
writing to, any petition filed against it in an involuntary case under the
Federal Bankruptcy Code, or (vi) take any corporate action for the purpose of
effecting any of the foregoing; or
(g) A proceeding or case shall be commenced, without the application or
consent of the Company, in any court of competent jurisdiction, seeking (i) its
liquidation, reorganization, dissolution or winding-up, or the composition or
readjustment of its Debt, (ii) the appointment of a trustee, receiver,
custodian, liquidator or the like of the Company or of all or substantially all
of its assets, or (iii) similar relief in respect of the Company under any law
relating to bankruptcy, insolvency, reorganization, winding-up, or composition
or adjustment of Debt, and such proceeding or case shall continue undismissed,
or an order, judgment or decree approving or ordering any of the foregoing shall
be entered and continue unstayed and in effect, for a period of 90 days; or an
order
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for relief against the Company shall be entered in an involuntary case under the
Federal Bankruptcy Code; or
(h) A final judgment or judgments for the payment of money in excess of
$500,000 in the aggregate shall be rendered by a court or courts against the
Company or any Subsidiary (which is not otherwise covered by insurance) and the
same shall not be discharged (or provision shall not be made for such
discharge), or a stay of execution thereof shall not be procured, within 30 days
from the date of entry thereof and the Company or any Subsidiary shall not,
within said period of 30 days, or such longer period during which execution of
the same shall have been stayed, appeal therefrom and cause the execution
thereof to be stayed during such appeal; or
(i) An event or condition specified in Section 8.01(c) shall occur or
exist with respect to any Plan or Multiemployer Plan and, as a result of such
event or condition, together with all other such events or conditions, the
Company or any ERISA Affiliate shall incur or in the opinion of the Majority
Banks shall be reasonably likely to incur a liability to a Plan, a Multiemployer
Plan or PBGC (or any combination of the foregoing) which is, in the
determination of the Majority Banks would result in a Material Advance Effect;
(j) Any Subsidiary takes, suffers or permits to exist as to such
Subsidiary any of the events or conditions referred to in Sections 10.01 (e),
(f), (g) or (h) hereof; or
(k) The occurrence of a Material Change without the written consent of
the Banks; or
(l) The occurrence of any event having a Material Adverse Effect, which
remains unremedied for a period of 30 days after such occurrence; or
(m) The failure of the Company to satisfy any post Initial Loan
condition specified in Section 6.04 hereof on or before the deadline specified
therein, which remains unremedied for a period of 30 days after such occurrence;
or
(n) Any Guaranty Agreement shall at any time after its execution and
delivery and for any reason cease to be in full force and effect or shall be
declared null and void and the Guarantor thereunder fails to execute an
enforceable and effective Guaranty Agreement in replacement thereof, or the
validity or enforceability thereof shall be contested by the Guarantor or the
Guarantor shall deny it has any further liability or obligation thereunder or
shall fail to perform its obligations thereunder; or
(o) The Security Agreement shall at any time after its execution and
delivery and for any reason cease: (i) to create a valid and perfected first
priority security interest in and to the property purported to be subject
thereto; or (ii) to be in full force and effect or shall be declared null and
void, or the validity or enforceability thereof shall be contested by the
Pledgor, or the Pledgor shall deny
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it has any further liability or obligation under the Security Agreement or the
Pledgor shall fail to perform any of its obligations thereunder.
THEREUPON: (i) in the case of an Event of Default other than one referred to in
clause (e), (f) or (g), or clause (j) to the extent it refers to clauses (e),
(f) or (g) of this Section 10.01, the Agent may and, upon request of the
Majority Banks, shall, by notice to the Company, cancel the Commitments and/or
declare the principal amount then outstanding of and the accrued interest on the
Loans and all other amounts payable by the Company hereunder and under the Notes
to be forthwith due and payable, whereupon such amounts shall be immediately due
and payable without presentment, demand, protest, notice of intent to
accelerate, notice of acceleration or other formalities of any kind, all of
which are hereby expressly waived by the Company; provided, however,
notwithstanding the foregoing waivers, the Agent will give the Company one (1)
Business Day's prior notice of the acceleration of Notes under this clause (i);
and (ii) in the case of the occurrence of an Event of Default referred to in
clause (e), (f) or (g), or clause (j) to the extent it refers to clauses (e),
(f) or (g), of this Section 10.01 the Commitments shall be automatically
cancelled and the principal amount then outstanding of, and the accrued interest
on, the Loans and all other amounts payable by the Company hereunder and under
the Notes shall become automatically immediately due and payable without
presentment, demand, protest, notice of intent to accelerate, notice of
acceleration or other formalities of any kind, all of which are hereby expressly
waived by the Company.
Section 10.02 Cash Collateral for Letters of Credit. Without limitation
of any right or remedy specified in Section 10.01, if any of the Indebtedness
(other than the LC Exposure) shall have become due and payable pursuant to the
immediately foregoing paragraph of Section 10.01, the Agent, upon the request of
the Majority Banks, shall, proceed to enforce remedies under the Security
Instruments. Upon realization of any of the collateral covered by the Security
Instruments, all such cash and cash proceeds shall be applied first, to the
payment of all unreimbursed fees and expenses outstanding hereunder or under any
of the other Security Instruments, then, to the amount of outstanding balance of
the Indebtedness, and then, held by the Agent as cash collateral to secure the
Company's obligation to reimburse the Agent and the Banks for drawings for the
LC Exposure.
ARTICLE XI
The Agent
Section 11.01 Appointment, Powers and Immunities. Each Bank hereby
irrevocably appoints and authorizes the Agent to act as its agent hereunder with
such powers as are specifically delegated to the Agent by the terms of this
Agreement, together with such other powers as are reasonably incidental thereto.
The Agent (which term as used in this sentence and in Section 11.05 and the
first sentence of Section 11.06 shall include reference to its affiliates and
its own and its affiliates' officers, directors, employees and agents): (a)
shall have no duties or responsibilities except those expressly set forth in
this Agreement, and shall not by reason of this Agreement be a
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trustee for any Bank; (b) shall not be responsible to the Banks for any
recitals, statements, representations or warranties contained in this Agreement,
or in any certificate or other document referred to or provided for in, or
received by any of them under, this Agreement, or for the value, validity,
effectiveness, genuineness, enforceability or sufficiency of this Agreement, any
Note or any other document referred to or provided for herein or for any failure
by the Company or any other Person to perform any of its obligations hereunder
or thereunder; (c) shall not be required to initiate or conduct any litigation
or collection proceedings hereunder; and (d) shall not be responsible for any
action taken or omitted to be taken by it hereunder or under any other document
or instrument referred to or provided for herein or in connection herewith, even
if such actions or omissions are foreseeably caused by the ordinary negligence
of the Agent, except for its own gross negligence or willful misconduct. The
Agent may employ agents and attorneys-in-fact and shall not be responsible for
the negligence or misconduct of any such agents or attorneys-in-fact selected by
it in good faith. The Agent may deem and treat the payee of any Note as the
holder thereof for all purposes hereof unless and until a written notice of the
assignment or transfer thereof shall have been filed with the Agent, together
with the written consent of the Company to such assignment or transfer.
Section 11.02 Reliance by Agent. The Agent shall be entitled to rely
upon any certification, notice or other communication (including any thereof by
telephone, telex, telegram or cable) believed by it to be genuine and correct
and to have been signed or sent by or on behalf of the proper Person or Persons,
and upon advice and statements of legal counsel, independent accountants and
other experts selected by the Agent. As to any matters not expressly provided
for by this Agreement, the Agent shall in all cases be fully protected in
acting, or in refraining from acting, hereunder in accordance with instructions
signed by the Majority Banks, and such instructions of the Majority Banks and
any action taken or failure to act pursuant thereto shall be binding on all of
the Banks.
Section 11.03 Defaults. The Agent shall not be deemed to have knowledge
of the occurrence of an Event of Default (other than the non-payment of
principal of or interest on Loans or of fees) unless the Agent has received
notice from a Bank or the Company specifying such Event of Default and stating
that such notice is a "Notice of Default." In the event that the Agent receives
such a notice of the occurrence of an Event of Default, the Agent shall give
prompt notice thereof to the Banks (and shall give each Bank and the Company
prompt notice of each such non-payment). The Agent shall (subject to Section
11.07) take such action with respect to such Event of Default as shall be
directed by the Majority Banks, provided that, unless and until the Agent shall
have received such directions, the Agent may (but shall not be obligated to)
take such action, or refrain from taking such action, with respect to such Event
of Default as it shall deem advisable in the best interest of the Banks.
Section 11.04 Rights as a Bank. With respect to its Commitments, the
Loans made by it and the Letters of Credit, TCB (and any successor acting as
Agent) in its capacity as a Bank hereunder shall have the same rights and powers
hereunder as any other Bank and may exercise the same as though it were not
acting as the Agent, and the term "Bank" or "Banks" shall, unless the context
otherwise indicates, include the Agent in its individual capacity. TCB (and any
successor
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acting as Agent) and its affiliates may (without having to account therefor to
any Bank) accept deposits from, lend money to and generally engage in any kind
of banking, trust or other business with the Company (any and of its affiliates)
as if it were not acting as the Agent, and TCB and its affiliates may accept
fees and other consideration from the Company for services in connection with
this Agreement or otherwise without having to account for the same to the Banks.
Section 11.05 Indemnification. THE BANKS AGREE TO INDEMNITY THE AGENT
(TO THE EXTENT NOT REIMBURSED UNDER SECTION 12.03, BUT WITHOUT LIMITING THE
OBLIGATIONS OF THE COMPANY UNDER SAID SECTION 12.03), RATABLY IN ACCORDANCE WITH
THE AGGREGATE PRINCIPAL AMOUNT OF THE LOANS MADE BY THE BANKS (OR, IF NO LOANS
ARE AT THE TIME OUTSTANDING, RATABLY IN ACCORDANCE WITH THEIR RESPECTIVE
COMMITMENTS), FOR ANY AND ALL LIABILITIES, OBLIGATIONS, LOSSES, DAMAGES,
PENALTIES, ACTIONS, JUDGMENTS, SUITS, COSTS, EXPENSES OR DISBURSEMENTS OF ANY
KIND AND NATURE WHATSOEVER WHICH MAY BE IMPOSED ON, INCURRED BY OR ASSERTED
AGAINST THE AGENT IN ANY WAY RELATING TO OR ARISING OUT OF THIS AGREEMENT OR ANY
OTHER DOCUMENTS CONTEMPLATED BY OR REFERRED TO HEREIN OR THE TRANSACTIONS
CONTEMPLATED HEREBY (INCLUDING, WITHOUT LIMITATION, THE COSTS AND EXPENSES WHICH
THE COMPANY IS OBLIGATED TO PAY UNDER SECTION 12.03 BUT EXCLUDING, UNLESS AN
EVENT OF DEFAULT HAS OCCURRED AND IS CONTINUING, NORMAL ADMINISTRATIVE COSTS AND
EXPENSES INCIDENT TO THE PERFORMANCE OF ITS AGENCY DUTIES HEREUNDER OR THE
ENFORCEMENT OF ANY OF THE TERMS HEREOF OR OF ANY SUCH OTHER DOCUMENTS, PROVIDED
THAT NO BANK SHALL BE LIABLE FOR ANY OF THE FOREGOING TO THE EXTENT THEY ARISE
FROM THE GROSS NEGLIGENCE OR WILLFUL MISCONDUCT OF THE PARTY TO BE INDEMNIFIED.
Section 11.06 Non-Reliance on Agent and other Banks. Each Bank agrees
that it has, independently and without reliance on the Agent or any other Bank,
and based on such documents and information as it has deemed appropriate, made
its own credit analysis of the Company and decision to enter into this Agreement
and that it will, independently and without reliance upon the Agent or any other
Bank, and based on such documents and information as it shall deem appropriate
at the time, continue to make its own analysis and decisions in taking or not
taking action under this Agreement. The Agent shall not be required to keep
itself informed as to the performance or observance by the Company of this
Agreement or any other document referred to or provided for herein or to inspect
the Properties or books of the Company. Except for notices, reports and other
documents and information expressly required to be furnished to the Banks by the
Agent hereunder, the Agent shall not have any duty or responsibility to provide
any Bank with any credit or other information concerning the affairs, financial
condition or business of the Company (or any of its affiliates) which may come
into the possession of the Agent or any of its affiliates.
Section 11.07 Failure to Act. Except for action expressly required of
the Agent hereunder, the Agent shall in all cases be fully justified in failing
or refusing to act hereunder unless it shall be indemnified to its satisfaction
by the Banks against any and all liability and expenses which may be incurred by
it by reason of taking or continuing to take any such action.
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Section 11.08 Resignation or Removal of Agent. Subject to the
appointment and acceptance of a successor Agent as provided below, the Agent may
resign at any time by giving notice thereof to the Banks and the Company and the
Agent may be removed at any time with or without cause by the Majority Banks.
Upon any such resignation or removal, the Majority Banks, after consultation
with the Company, shall have the right to appoint a successor Agent. If no
successor Agent shall have been so appointed by the Majority Banks and shall
have accepted such appointment within 30 days after the retiring Agent's giving
of notice of resignation or the Majority Banks' removal of the retiring Agent,
then the retiring Agent may, on behalf of the Banks, after consultation with the
Company, appoint a successor Agent. Upon the acceptance of any appointment as
Agent hereunder by a successor Agent, such successor Agent shall thereupon
succeed to and become vested with all the rights, powers, privileges and duties
of the retiring Agent, and the retiring Agent shall be discharged from its
duties and obligations hereunder. After any retiring Agent's resignation or
removal hereunder as Agent, the provisions of this Section 11 shall continue in
effect for its benefit in respect of any actions taken or omitted to be taken by
it while it was acting as the Agent.
ARTICLE XII
Miscellaneous
Section 12.01 Waiver. No failure on the part of the Agent or any Bank
to exercise and no delay in exercising, and no course of dealing with respect
to, any right, power or privilege under this Agreement or any Note shall operate
as a waiver thereof, nor shall any single or partial exercise of any right,
power or privilege under this Agreement or any Note preclude any other or
further exercise thereof or the exercise of any other right, power or privilege.
The remedies provided herein are cumulative and not exclusive of any remedies
provided by law.
Section 12.02 Notices. All notices and other communications provided
for herein and in the other Security Instruments (including, without limitation,
any modifications of, or waivers or consents under, this Agreement or the other
Security Instruments) shall be given or made by telex, telecopy, telegraph,
cable or in writing and telexed, telecopied, telegraphed, cabled, mailed or
delivered to the intended recipient at the "Address for Notices" specified below
its name on the signature pages hereof or in the other Security Instruments; or,
as to any party, at such other address as shall be designated by such party in a
notice to each other party. Except as otherwise provided in this Agreement or in
the other Security Instruments, all such communications shall be deemed to have
been duly given when transmitted by telex or telecopier, delivered to the
telegraph or cable office or personally delivered or, in the case of a mailed
notice, upon receipt, in each case given or addressed as aforesaid.
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Section 12.03 Payment of Expenses, Indemnities, etc. The Company agrees
to:
(a) whether or not the transactions hereby contemplated are
consummated, pay all reasonable expenses of the Agent in the
administration (both before and after the execution hereof and
including advice of counsel as to the rights and duties of the Agent
and the Banks with respect thereto) of, and in connection with the
negotiation, investigation, preparation, execution and delivery of,
recording or filing of, preservation of rights under, enforcement of,
and refinancing, renegotiation or restructuring of, this Agreement, the
Notes and the other Security Instruments and any amendment, waiver or
consent relating thereto (including, without limitation, the reasonable
fees and disbursements of counsel for the Agent and in the case of
enforcement for any of the Banks); and promptly reimburse the Agent for
all reasonable amounts expended, advanced or incurred by the Agent or
the Banks to satisfy any obligation of the Company under this Agreement
or any Security Instrument;
(b) pay and hold each of the Banks harmless from and against any
and all present and future stamp and other similar taxes with respect
to the foregoing matters and save each Bank harmless from and against
any and all liabilities with respect to or resulting from any delay or
omission to pay such taxes; and
(C) INDEMNIFY THE AGENT AND EACH BANK, ITS OFFICERS, DIRECTORS,
EMPLOYEES, REPRESENTATIVES, AGENTS AND AFFILIATES FROM, HOLD EACH OF
THEM HARMLESS AGAINST, PROMPTLY UPON DEMAND PAY OR REIMBURSE EACH OF
THEM FOR, AND REFRAIN FROM CREATING OR ASSERTING AGAINST ANY OF THEM,
ANY AND ALL ACTIONS, SUITS, PROCEEDINGS (INCLUDING ANY INVESTIGATIONS,
LITIGATION OR INQUIRIES), CLAIMS, DEMANDS, CAUSES OF ACTION, LOSSES,
LIABILITIES, DAMAGES AND REASONABLY INCURRED COSTS OR EXPENSES OF ANY
KIND OR NATURE WHATSOEVER REGARDLESS OF WHETHER FORESEEABLY CAUSED BY
THE ORDINARY NEGLIGENCE OF THE AGENT AND/OR THE BANKS (COLLECTIVELY THE
"INDEMNITY MATTERS") WHICH MAY BE INCURRED BY OR ASSERTED AGAINST OR
INVOLVE ANY OF THEM (WHETHER OR NOT ANY OF THEM IS DESIGNATED A PARTY
THERETO) AS A RESULT OF, ARISING OUT OF OR RELATED TO (I) ANY ACTUAL OR
PROPOSED USE BY THE COMPANY OF THE PROCEEDS OF ANY OF THE LOANS OR (II)
ANY OTHER ASPECT OF THIS AGREEMENT, THE NOTES, AND THE OTHER SECURITY
INSTRUMENTS, INCLUDING, WITHOUT LIMITATION, THE REASONABLE FEES AND
DISBURSEMENTS OF COUNSEL AND ALL OTHER REASONABLE EXPENSES INCURRED IN
CONNECTION WITH INVESTIGATING, DEFENDING OR PREPARING TO DEFEND ANY
SUCH ACTION, SUIT, PROCEEDING (INCLUDING ANY INVESTIGATIONS, LITIGATION
OR INQUIRIES) OR CLAIM, BUT EXCLUDING HEREFROM ALL INDEMNITY MATTERS
ARISING
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SOLELY BY REASON OF CLAIMS BETWEEN THE BANKS OR ANY BANK AND THE AGENT
OR A BANK SHAREHOLDER AGAINST THE BANK OR SOLELY BY REASON OF GROSS
NEGLIGENCE OR WILLFUL MISCONDUCT ON THE PART OF THE PARTY SEEKING
INDEMNITY; AND
(D) INDEMNIFY AND HOLD THE AGENT AND EACH BANK, ITS OFFICERS,
DIRECTORS, EMPLOYEES, REPRESENTATIVES, AGENTS AND AFFILIATES HARMLESS
AGAINST, PROMPTLY TO PAY ON DEMAND OR REIMBURSE EACH OF THEM WITH
RESPECT TO, ANY AND ALL CLAIMS, DEMANDS, CAUSES OF ACTION, LOSS,
DAMAGE, LIABILITIES, AND REASONABLY INCURRED COSTS AND EXPENSES
REGARDLESS OF WHETHER FORESEEABLY CAUSED BY THE ORDINARY NEGLIGENCE OF
THE AGENT AND/OR THE BANKS OF ANY AND EVERY KIND OR NATURE WHATSOEVER
ASSERTED AGAINST OR INCURRED BY ANY OF THEM BY REASON OF OR ARISING OUT
OF OR IN ANY WAY RELATED TO (I) THE BREACH OF ANY REPRESENTATION OR
WARRANTY AS SET FORTH HEREIN REGARDING ENVIRONMENTAL LAWS, OR (II) THE
FAILURE OF THE COMPANY TO PERFORM ANY OBLIGATION HEREIN REQUIRED TO BE
PERFORMED PURSUANT TO ENVIRONMENTAL LAWS. THE FOREGOING INDEMNITY SHALL
NOT APPLY WITH RESPECT TO MATTERS CAUSED BY OR ARISING OUT OF THE SOLE
NEGLIGENCE, SOLE GROSS NEGLIGENCE OR SOLE WILLFUL MISCONDUCT OF THE
PARTY SEEKING INDEMNITY. THE AGENT OR BANK, AS APPROPRIATE SHALL GIVE
NOTICE TO THE COMPANY OF ANY SUCH CLAIM OR DEMAND BEING MADE AGAINST
THE AGENT OR SUCH BANK AND THE COMPANY SHALL HAVE THE NON-EXCLUSIVE
RIGHT TO JOIN IN THE DEFENSE AGAINST ANY SUCH CLAIM OR DEMAND. THE
PROVISIONS OF THIS PARAGRAPH SHALL SURVIVE THE FINAL PAYMENT OF ALL
INDEBTEDNESS AND THE TERMINATION OF THIS AGREEMENT AND SHALL CONTINUE
THEREAFTER IN FULL FORCE AND EFFECT.
The Company's obligations under this Section 12.03 shall survive any
termination of this Agreement and the payment of the Notes.
Section 12.04 Amendments, Etc. Any provision of this Agreement or any
other Security Instruments may be amended, modified or waived with the Majority
Banks' consent; provided that no amendment, modification or waiver which (i)
extends the maturity of the Loans, (ii) releases all or substantially all of the
collateral or the obligations of the Company or any Guarantor, (iii) modifies or
waives the payment of any principal, interest, fees or other amount due
hereunder or under the Notes or any Letter of Credit or Letter of Credit
Agreement, (iv) modifies or reduces the total Commitments of all of the Banks or
the Commitment of any one of the Banks (except by assignment or participation
under this Agreement), (v) changes the interest rate applicable to the
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Loans, or (vi) modifies any provision of this Agreement requiring the vote of
100% of the Banks, shall be effective without prior written consent of all
Banks. The Company's written agreement is needed for any amendment or
modification of this Agreement or any other Security Instrument.
Section 12.05 Successors and Assigns. This Agreement shall be binding
upon and inure to the benefit of the parties hereto and their respective
successors and permitted assigns.
Section 12.06 Assignments and Participations.
(a) The Company may not assign its rights or obligations
hereunder or under the Notes or under any Letter of Credit Agreement
without the prior consent of all of the Banks and the Agent.
(b) Each Bank may, upon the written consent of the Company
which consent shall not be unreasonably withheld, assign to one or more
assignees all or a portion of its rights and obligations under this
Agreement pursuant to an Assignment and Acceptance Agreement
substantially in the form of Exhibit F (an "Assignment and Acceptance")
provided, however, that (i) any such assignment shall be in the
aggregate amount of at least $5,000,000 or such lesser amount to which
the Company has consented, and (ii) the assignee shall pay to the Agent
a processing and recordation fee of $2,000. Any such assignment will
become effective upon the issuance by the Agent of a letter of
acknowledgment reflecting such assignment and the resultant effects
thereof on the Commitments of the assignor and assignee, and the
principal amount outstanding of the Loans owed to the assignor and
assignee, the Agent hereby agreeing to effect such issuance no later
than five (5) Business Days after its receipt of an Assignment and
Acceptance executed by all parties thereto. Promptly after receipt of
an Assignment and Acceptance executed by all parties thereto, the Agent
shall send to the Company a copy of such executed Assignment and
Acceptance. Upon receipt of such executed Assignment and Acceptance,
the Company, will, at its own expense, execute and deliver new Notes to
the assignor and/or assignee, as appropriate, in accordance with their
respective interests as they appear on the Agent's letter of
acknowledgment. Upon the effectiveness of any assignment pursuant to
this Section, the assignee will become a "Bank," if not already a
"Bank," for all purposes of this Agreement and the other Security
Instruments. The assignor shall be relieved of its obligations
hereunder to the extent of such assignment (and if the assigning Bank
no longer holds any rights or obligations under this Agreement, such
assigning Bank shall cease to be a "Bank" hereunder). The Agent will
prepare on the last Business Day of each month during which an
assignment has become effective pursuant to this Section a new schedule
giving effect to all such assignments effected during such month, and
will promptly provide the same to the Company and each of the Banks.
(c) Each Bank may, following written notice to the Company,
transfer, grant or assign participations in all or any part of such
Bank's interests hereunder pursuant to this
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subsection to any Person, provided that: (i) such Bank shall remain a
"Bank" for all purposes of this Agreement and the transferee of such
participation shall not constitute a "Bank" hereunder; and (ii) no
participant under any such participation shall have rights to approve
any amendment to or waiver of this Agreement, the Notes or any Security
Instrument except to the extent such amendment or waiver would (x)
extend the Drawdown Termination Date, (y) reduce the interest rate
(other than as a result of waiving the applicability of any
post-default increases in interest rates) or fees applicable to any of
the Commitments or Loans in which such participant is participating, or
postpone the payment of any thereof, or (z) release all or
substantially all of the collateral (except as expressly provided in
the Security Instruments) supporting any of the Commitments or Loans in
which such participant is participating. In the case of any such
participation, the participant shall not have any rights under this
Agreement or any of the Security Instruments (the participant's rights
against the granting Bank in respect of such participation to be those
set forth in the agreement with such Bank creating such participation),
and all amounts payable by the Company hereunder shall be determined as
if such Bank had not sold such participation, provided that such
participant shall be entitled to receive additional amounts under
Article V on the same basis as if it were a Bank.
(d) Notwithstanding any other provisions of this Section 12.06,
no transfer or assignment of the interests or obligations of any Bank
hereunder or any grant of participations therein shall be permitted if
such transfer, assignment or grant would require the Company to file a
registration statement with the SEC or to qualify the Loans under the
"Blue Sky" laws of any state.
(e) The Banks may furnish any information concerning the
Company in the possession of the Banks from time to time (i) to
assignees and participants and (ii) following the prior consent of the
Company (which will not be unreasonably withheld) to prospective
assignees and participants; provided, however, neither the Agent nor
any of the Banks shall have any liability with respect to any
inadvertent disclosure of information to prospective assignees and
participants.
(f) Notwithstanding anything in this Section 12.06 to the
contrary, any Bank may assign and pledge all or any of its Notes to any
Federal Reserve Bank or the United States Treasury as collateral
security pursuant to Regulation A of the Board of Governors of the
Federal Reserve System and any operating circular issued by such
Federal Reserve System and/or such Federal Reserve Bank. No such
assignment and/or pledge shall release the assigning and/or pledging
Bank from its obligations hereunder.
Section 12.07 Invalidity. In the event that any one or more of the
provisions contained in the Notes, this Agreement or in any other Security
Instrument shall, for any reason, be held invalid, illegal or unenforceable in
any respect, such invalidity, illegality or unenforceability shall not affect
any other provision of the Notes, this Agreement or any other Security
Instrument.
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Section 12.08 Counterparts. This Agreement may be executed in any
number of counterparts, all of which taken together shall constitute one and the
same instrument and any of the parties hereto may execute this Agreement by
signing any such counterpart.
Section 12.09 References. The words "herein," "hereof," "hereunder" and
other words of similar import when used in this Agreement refer to this
Agreement as a whole, and not to any particular article, section or subsection.
Any reference herein to a Section or Subsection shall be deemed to refer to the
applicable Section or Subsection of this Agreement unless otherwise stated
herein. Any reference herein to an exhibit or schedule shall be deemed to refer
to the applicable exhibit or schedule attached hereto unless otherwise stated
herein.
Section 12.10 Termination of Agreement; Survival of Obligations.
(a) This Agreement and the Security Instruments shall terminate
and cease to be of legal force and effect upon the payment in full of
the Indebtedness and the termination of the Commitments. To the extent
that any payments on the Indebtedness or proceeds of the collateral are
subsequently invalidated, declared to be fraudulent or preferential,
set aside or required to be repaid to a trustee, debtor in possession,
receiver or other Person under any bankruptcy law, common law or
equitable cause, then to such extent the Indebtedness so satisfied
shall be revived and continue as if such payment or proceeds had not
been received by the Agent or the Banks, and the security interests,
rights, powers and remedies of the Agent and the Banks under this
Agreement and the Security Instruments shall continue in full force and
effect. In such event, this Agreement shall be automatically reinstated
pursuant to the terms of Subsection 12.10(b) if it shall theretofore
have been terminated.
(b) The grant of a security interest under the Security
Instruments and all of the Agent's and the Banks' rights, powers and
remedies under this Agreement and under the Security Instruments shall
remain in full force and effect until the Agent has retransferred and
delivered all collateral described therein in its possession to the
Company, including without limitation all shares of stock, and executed
a written release or termination statement and reassigned to the
Company without recourse or warranty any remaining collateral,
including without limitation all shares of stock, and all rights
conveyed hereby. Upon the complete payment of the Indebtedness and the
compliance by the Company with all covenants and agreements hereof, the
Agent and the Banks at the written request and expense of the Company,
will deliver to the Company the Notes marked "paid" or with such other
notation as is appropriate and will release, reassign and transfer the
collateral, including without limitation all shares of stock, to the
Company or such other Person as is appropriate and declare this
Agreement and the Security Instruments to be of no further force or
effect. Notwithstanding the foregoing, the obligations of the Company
under Sections 5.01, 5.05 and 12.03 shall survive the repayment of the
Loans and the termination of the Commitments.
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Section 12.11 Captions. Captions and section headings appearing herein
are included solely for convenience of reference and are not intended to affect
the interpretation of any provision of this Agreement.
Section 12.12 Governing Law; Submission to Jurisdiction.
(A) THIS AGREEMENT AND THE NOTES SHALL BE GOVERNED BY, AND
CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF TEXAS; EXCEPT
THAT TEX. REV. CIV. STAT. ANN. ART. 5069, CH. 15 (WHICH REGULATES
CERTAIN REVOLVING CREDIT LOAN ACCOUNTS AND REVOLVING TRI-PARTY
ACCOUNTS) SHALL NOT APPLY TO THIS AGREEMENT OR THE NOTES.
(B) ANY LEGAL ACTION OR PROCEEDING WITH RESPECT TO THIS
AGREEMENT, THE NOTES OR THE OTHER SECURITY INSTRUMENTS MAY BE BROUGHT
IN THE COURTS OF THE STATE OF TEXAS OR OF THE UNITED STATES OF AMERICA
FOR THE SOUTHERN DISTRICT OF TEXAS, AND, BY EXECUTION AND DELIVERY OF
THIS AGREEMENT, THE COMPANY HEREBY ACCEPTS FOR ITSELF AND (TO THE
EXTENT PERMITTED BY LAW) IN RESPECT OF ITS PROPERTY, GENERALLY AND
UNCONDITIONALLY, THE JURISDICTION OF THE AFORESAID COURTS. THE COMPANY
HEREBY IRREVOCABLY WAIVES ANY OBJECTION, INCLUDING, WITHOUT LIMITATION,
ANY OBJECTION TO THE LAYING OF VENUE OR BASED ON THE GROUNDS OF FORUM
NON CONVENIENS, WHICH IT MAY NOW OR HEREAFTER HAVE TO THE BRINGING OF
ANY SUCH ACTION OR PROCEEDING IN SUCH RESPECTIVE JURISDICTIONS. THIS
SUBMISSION TO JURISDICTION IS NONEXCLUSIVE AND DOES NOT PRECLUDE THE
AGENT OR ANY BANK FROM OBTAINING JURISDICTION OVER THE COMPANY IN ANY
COURT OTHERWISE HAVING JURISDICTION.
Section 12.13 Interest. It is the intention of the parties hereto that
each Bank shall conform strictly to usury laws applicable to it. Accordingly, if
the transactions contemplated hereby would be usurious as to any Bank under laws
applicable to it (including the laws of the United States of America and the
State of Texas or any other jurisdiction whose laws may be mandatorily
applicable to such Bank notwithstanding the other provisions of this Agreement),
then, in that event, notwithstanding anything to the contrary in the Notes, this
Agreement or in any other Security Instrument or agreement entered into in
connection with or as security for the Notes, it is agreed as follows: (i) the
aggregate of all consideration which constitutes interest under law applicable
to any Bank that is contracted for, taken, reserved, charged or received by such
Bank under the Notes, this Agreement or under any of the other aforesaid
Security Instruments or agreements or otherwise in connection with the Notes
shall under no circumstances exceed the maximum amount allowed by such
applicable law, and any excess shall be cancelled automatically and if
theretofore paid shall be
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credited by such Bank on the principal amount of the Indebtedness (or, to the
extent that the principal amount of the Indebtedness shall have been or would
thereby be paid in full, refunded by such Bank to the Company); and (ii) in the
event that the maturity of the Notes is accelerated by reason of an election of
the holder thereof resulting from any Event of Default under this Agreement or
otherwise, or in the event of any required or permitted prepayment, then such
consideration that constitutes interest under law applicable to any Bank may
never include more than the maximum amount allowed by such applicable law, and
excess interest, if any, provided for in this Agreement or otherwise shall be
cancelled automatically by such Bank as of the date of such acceleration or
prepayment and, if theretofore paid, shall be credited by such Bank on the
principal amount of the Indebtedness (or, to the extent that the principal
amount of the Indebtedness shall have been or would thereby be paid in full,
refunded by such Bank to the Company). All sums paid or agreed to be paid to any
Bank for the use, forbearance or detention of sums due hereunder shall, to the
extent permitted by law applicable to such Bank, be amortized, prorated,
allocated and spread in equal parts throughout the full term of the Loans
evidenced by the Notes until payment in full so that the rate or amount of
interest on account of any Loans hereunder does not exceed the maximum amount
allowed by such applicable law. If at any time and from time to time (i) the
amount of interest payable to any Bank on any date shall be computed at the
Highest Lawful Rate applicable to such Bank pursuant to this Section 12.13 and
(ii) in respect of any subsequent interest computation period the amount of
interest otherwise payable to such Bank would be less than the amount of
interest payable to such Bank computed at the Highest Lawful Rate applicable to
such Bank, then the amount of interest payable to such Bank in respect of such
subsequent interest computation period shall continue to be computed at the
Highest Lawful Rate applicable to such Bank until the total amount of interest
payable to such Bank shall equal the total amount of interest which would have
been payable to such Bank if the total amount of interest had been computed
without giving effect to this Section.
To the extent that Article 5069-1.04 of the Texas Revised Civil
Statutes is relevant to any Bank for the purpose of determining the Highest
Lawful Rate, each such Bank hereby elects to determine the applicable rate
ceiling under such Article by the indicated (weekly) rate ceiling from time to
time in effect.
Section 12.14 Waiver of Jury Trial. EACH OF THE PARTIES HERETO WAIVES,
TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY RIGHT TO A TRIAL BY JURY
IN ANY ACTION OR PROCEEDING TO ENFORCE OR TO DEFEND ANY RIGHTS UNDER THIS
AGREEMENT, THE NOTES OR ANY OTHER SECURITY INSTRUMENT OR UNDER ANY AMENDMENT,
INSTRUMENT, DOCUMENT OR AGREEMENT DELIVERED OR WHICH MAY IN THE FUTURE BE
DELIVERED IN CONNECTION HEREWITH OR THEREWITH OR ARISING FROM ANY RELATIONSHIP
EXISTING IN CONNECTION WITH THIS AGREEMENT, THE NOTES OR ANY OTHER SECURITY
INSTRUMENT AND AGREES THAT ANY SUCH ACTION OR PROCEEDING SHALL BE TRIED BEFORE A
COURT AND NOT BEFORE A JURY.
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Section 12.15 Exculpation Provisions. EACH OF THE PARTIES HERETO
SPECIFICALLY AGREES THAT IT HAS A DUTY TO READ THIS AGREEMENT AND THE OTHER
SECURITY INSTRUMENTS AND AGREES THAT IT IS CHARGED WITH NOTICE AND KNOWLEDGE OF
THE TERMS OF THIS AGREEMENT AND THE OTHER SECURITY INSTRUMENTS; THAT IT HAS IN
FACT READ THIS AGREEMENT AND IS FULLY INFORMED AND HAS FULL NOTICE AND KNOWLEDGE
OF THE TERMS, CONDITIONS AND EFFECTS OF THIS AGREEMENT; THAT IT HAS BEEN
REPRESENTED BY INDEPENDENT LEGAL COUNSEL OF ITS CHOICE THROUGHOUT THE
NEGOTIATIONS PRECEDING ITS EXECUTION OF THIS AGREEMENT AND THE OTHER SECURITY
INSTRUMENTS; AND HAS RECEIVED THE ADVICE OF ITS ATTORNEY IN ENTERING INTO THIS
AGREEMENT AND THE OTHER SECURITY INSTRUMENTS; AND THAT IT RECOGNIZES THAT
CERTAIN OF THE TERMS OF THIS AGREEMENT AND THE OTHER SECURITY INSTRUMENTS RESULT
IN ONE PARTY ASSUMING THE LIABILITY INHERENT IN SOME ASPECTS OF THE TRANSACTION
AND RELIEVING THE OTHER PARTY OF ITS RESPONSIBILITY FOR SUCH LIABILITY. EACH
PARTY HERETO AGREES AND COVENANTS THAT IT WILL NOT CONTEST THE VALIDITY OR
ENFORCEABILITY OF ANY EXCULPATORY PROVISION OF THIS AGREEMENT AND THE OTHER
SECURITY INSTRUMENTS ON THE BASIS THAT THE PARTY HAD NO NOTICE OR KNOWLEDGE OF
SUCH PROVISION OR THAT THE PROVISION IS NOT "CONSPICUOUS."
Section 12.16 No Oral Agreements. THIS WRITTEN AGREEMENT, THE NOTES,
AND THE OTHER SECURITY INSTRUMENTS REPRESENT THE FINAL AGREEMENT BETWEEN THE
PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR
SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL
AGREEMENTS AMONG THE PARTIES.
-65-
<PAGE> 72
The parties hereto have caused this Agreement to be duly executed as of
the day and year first above written.
COMPANY:
THE HOUSTON EXPLORATION
COMPANY
By:___________________________
Name: James F. Westmoreland
Title: Vice President
Address: 1331 Lamar
Suite 1065
Houston, Texas 77010
Telecopier No.: 713/652-4017
Telephone No.: 713/652-2847
Attention: Mr. James F. Westmoreland
-66-
<PAGE> 73
BANKS:
Commitment TEXAS COMMERCE BANK NATIONAL
ASSOCIATION
$60,000,000.00
By:___________________________
Name: Paul J. Nidoh
Title: Vice President
Applicable Lending Office for Base Rate Loans:
Address: 712 Main Street
Houston, Texas 77002
Applicable Lending Office for Fixed Rate
Loans:
Address: 712 Main Street
Houston, Texas 77002
Address for Notices:
Address: 712 Main Street
Houston, Texas 77002
Telecopier No.: 713/216-4117
Telephone No.: 713/216-4110
Attention: Mr. Paul J. Nidoh
S-TCBN-86
with a copy to:
Address: 1111 Fannin
Houston, Texas 77002
Telecopier No.: 713/750-3810
Telephone No.: 713/750-2784
Attention: Mr. Gale Manning
9-MS-46
-67-
<PAGE> 74
Commitment THE BANK OF NOVA SCOTIA
$45,000,000.00 By: The Bank of Nova Scotia, Atlanta
Agency
By:______________________________________
Name:____________________________________
Title:___________________________________
Applicable Lending Office for Base Rate
Loans, Fixed Rate Loans and Address for
Notices:
Address: 600 Peachtree Street, N.E.
Suite 2700
Atlanta, Georgia 30308
Telecopier No.: 404/888-8998
Telephone No.: 404/877-1552
Attention: Ms. Phyllis Walker
With Copy to:
The Bank of Nova Scotia
Houston Representative Office
1100 Louisiana Street
Suite 3000
Houston, Texas 77002
Telecopier No.: 713/752-2425
Telephone No.: 713/759-3441
Attention: Mr. Mark A. Ammerman
-68-
<PAGE> 75
Commitment CANADIAN IMPERIAL BANK OF
COMMERCE
$45,000,000.00
By: _____________________________________
Name: Gary C. Gaskill
Title: Authorized Signatory
Applicable Lending Office for Base Rate
Loans and Eurodollar Loans:
Address: 2727 Paces Ferry Road
Suite 1200
2 Paces West
Atlanta, Georgia 30339
Telecopier No.: 404/319-4950
Telephone No.: 404/319-4824
Attention: VP - Credit Operations
Address for Notices:
Address: 2727 Paces Ferry Road
Suite 1200
2 Paces West
Atlanta, Georgia 30339
Telecopier No.: 404/319-4950
Telephone No.: 404/319-4822
Attention: Ms. Suzanne P. Miles
Senior Associate
with a copy to:
Address: 909 Fannin, Suite 1200
Houston, Texas 77010
Telecopier No.: 713/658-9922
Telephone No.: 713/655-5209
Attention: Mr. C. Scott Wilson
-69-
<PAGE> 76
AGENT:
TEXAS COMMERCE BANK NATIONAL
ASSOCIATION, as Agent
By:___________________________
Name: Paul J. Nidoh
Title: Vice President
Address for Notices to Agent:
712 Main Street, 8-TCBS-27
Houston, Texas 77002
Telecopier No.: 713/216-4919
Telephone No.: 713/216-5001
Attention: Ms. Norma Benzon,
Manager of Capital
Markets Loan
Operations
-70-
<PAGE> 77
EXHIBIT A
STANDARD FORM
TEXAS COMMERCE BANK NATIONAL ASSOCIATION
APPLICATION AND AGREEMENT FOR IRREVOCABLE
STANDBY LETTER OF CREDIT
A-1
<PAGE> 78
EXHIBIT B
FORM OF
REVOLVING CREDIT NOTE
$_________________ Houston, Texas April ____, 1996
THE HOUSTON EXPLORATION COMPANY (hereinafter called the "Company"), a
Delaware corporation, with offices at 1331 Lamar, Suite 1065, Houston, Texas
77010, for value received, promises and agrees to pay on or before October 1,
1999, to the order of ____________________ (hereinafter called the "Bank") at
the banking quarters of TEXAS COMMERCE BANK NATIONAL ASSOCIATION, as Agent,
located at 712 Main Street, Houston, Texas 77002, in coin or currency of the
United States of America which at the time of payment is legal tender for the
payment of public and private debts, the principal sum of _____________________
DOLLARS ($___________________), or so much thereof as may be advanced pursuant
to the Credit Agreement hereinafter mentioned, as shown on the schedules
attached hereto and any continuation of such schedules.
All capitalized terms which are used but not defined in this Note shall
have the same meanings as in the Credit Agreement dated as of April 23, 1996,
between the Company, Texas Commerce Bank National Association, as Agent, the
Bank and each other bank signatory thereto (such Credit Agreement, together with
all amendments or supplements thereto, being the "Credit Agreement").
In addition to the principal sum referred to in the first paragraph of
this Note, the Company also agrees to pay interest on all amounts hereof so
advanced and remaining from time to time unpaid hereon from the date hereof
until maturity at the rates and on the dates provided for in the Credit
Agreement. Past due principal and interest shall bear interest at the
Post-Default Rate.
The Bank is hereby authorized to record all loans and all payments and
prepayments hereunder on account of principal and interest on the schedules
attached hereto and made a part hereof for all purposes and to provide
continuations to such schedules as may be necessary. The date, type, interest
rate and maturity of each Loan made by the Bank to the Company, and each payment
made on account of the principal thereof, shall be recorded by the Bank on its
books and, prior to any transfer of this Note, endorsed by the Bank on the
schedules attached hereto or any continuation thereof.
This Note is a "Revolving Credit Note" under the Credit Agreement, is
issued pursuant to and is entitled to the benefits of the Credit Agreement.
Reference is made to the Credit Agreement for provisions for the acceleration of
the maturity hereof on the occurrence of certain events specified
B-1
<PAGE> 79
therein, for interest rate computations in the event that the otherwise agreed
rate is at any time limited by the Highest Lawful Rate, for the reimbursement of
attorneys' fees or other costs of collection or enforcement, and for all other
pertinent purposes. It is contemplated that by reason of prepayment hereon there
may be times when no Indebtedness is owing hereunder; but notwithstanding such
occurrences, this Note shall remain valid and shall be in full force and effect
as to loans made pursuant to the Credit Agreement subsequent to each occurrence.
This Note has been made and issued and is payable in the State of Texas
and shall be governed by the laws of such State.
THE HOUSTON EXPLORATION COMPANY
By: _______________________________
Name: James F. Westmoreland
Title: Vice President
B-2
<PAGE> 80
EXHIBIT C
FORM OF
COMPLIANCE CERTIFICATE
The undersigned hereby certifies that he is the ______________________
of The Houston Exploration Company, a Delaware corporation (the "Company"), and
that as such he is authorized to execute this certificate on behalf of the
Company. With reference to the Credit Agreement dated as of April 23, 1996
(together with all amendments or supplements thereto being the "Agreement"),
among the Company, Texas Commerce Bank National Association, individually and as
agent ("the Agent") for itself and the other banks signatory thereto (the
"Banks"), the undersigned further certifies, represents and warrants as follows
(each capitalized term used herein having the same meaning given to it in the
Agreement unless otherwise specified):
(a) The representations and warranties of the Company contained
in the Agreement and otherwise made in writing by or on behalf of the
Company pursuant to the Agreement were true and correct when made, and
are repeated at and as of the time of delivery hereof and are true and
correct at and as of the time of delivery hereof, or has notified the
Agent of any failure thereof.
(b) The Company has performed and complied with all agreements
and conditions contained in the Agreement required to be performed or
complied with by it prior to or at the time of delivery hereof.
(c) Neither the Company nor any Subsidiary has incurred any
material liabilities, direct or contingent, since December 31, 1995,
except those (i) set forth in Schedule 7.03 to the Agreement, (ii)
disclosed on the most recent financial statements of the Company and
the Subsidiaries delivered to the Agent and (iii) consented to by the
Agent and the Banks in writing.
(d) Since December 31, 1995, no change has occurred, either in
any case or in the aggregate, in the condition, financial or otherwise,
of the Company or any Subsidiary which would have a Material Adverse
Effect, except as disclosed to the Agent in writing.
(e) There exists, and, after giving effect to the loan or loans
or extensions of credit with respect to which this certificate is being
delivered, will exist, no Event of Default under the Agreement or any
event or circumstance which constitutes, or with notice or lapse of
time (or both) would constitute, an event of default under any loan or
credit agreement, indenture, deed of trust, security agreement or other
agreement or instrument evidencing or pertaining to any Debt of the
Company or any
C-1
<PAGE> 81
Subsidiary, or under any material agreement or instrument to which the
Company or any Subsidiary is a party or by which the Company or any
Subsidiary is bound.
(f) Based upon the detailed computations set forth on Schedule
8.01 attached hereto, the Company is in compliance with the provisions
of Sections 9.12, 9.13 and 9.14 of the Agreement as of
__________________, 19______.
EXECUTED AND DELIVERED this ____ day of ___________, 19__.
THE HOUSTON EXPLORATION COMPANY
By: __________________________________
Name:_________________________________
Title: _______________________________
C-2
<PAGE> 82
EXHIBIT E
FORM OF
BORROWING, CONTINUATION AND CONVERSION REQUEST
____________, 19__
The Houston Exploration Company, a Delaware corporation (the
"Company"), pursuant to the Credit Agreement dated as of April 23, 1996 (as the
same may be amended or supplemented, the "Agreement"), among the Company, Texas
Commerce Bank National Association, individually and as agent, and the other
banks signatory thereto hereby makes the requests indicated below (unless
otherwise defined herein, capitalized terms are defined in the Agreement):
/ / 1. Revolving Credit Loans:
(a) Aggregate amount of new Revolving Credit Loans to be $____________;
(b) Requested funding date is _________________, 199__;
(c) $_______________ of such borrowings are to be Fixed Rate Loans;
$_______________ of such borrowings are to be Base Rate Loans; and
(d) Length of Interest Period for Fixed Rate Loans is ________________.
/ / 2. Fixed Rate Loan Continuation for Fixed Rate Loans maturing on
___________________:
(a) Aggregate amount to be continued as Fixed Rate Loans is $_________;
(b) Aggregate amount to be converted to Base Rate Loans is
$_______________; and
(c) Length of Interest Period for continued Fixed Rate Loans is
______________-___________.
/ / 3. Conversion of Outstanding Base Rate Loans to Fixed Rate Loans:
E-1
<PAGE> 83
Convert $__________________ of the outstanding Base Rate Loans to Fixed
Rate Loans on ____________________ with an Interest Period of
__________________.
/ / 4. Letter of Credit
(a) Account Party: _____________________________________
(b) Issuance Date: _____________________________, 19 ___
(c) Beneficiary: _______________________________________
(d) Expiration Date: ___________________________, 19 ___
(e) Delivery Instructions: _____________________________
____________________________________________________
The undersigned certifies that he is the __________________ of the
Company, and that as such he is authorized to execute this certificate on behalf
of the Company. The undersigned further certifies, represents and warrants on
behalf of the Company that the Company is entitled to receive the requested loan
or loans or extension of credit under the terms and conditions of the Agreement.
THE HOUSTON EXPLORATION COMPANY
By: ______________________________________
Name: ____________________________________
Title: ___________________________________
E-2
<PAGE> 84
EXHIBIT F
FORM OF
ASSIGNMENT AND ACCEPTANCE
Dated: _________ , 199__
Reference is made to that certain Credit Agreement dated as of April
23, 1996, among The Houston Exploration Company, a Delaware corporation (the
"Company"), Texas Commerce Bank National Association, individually and as Agent,
and the other banks signatory thereto (such Credit Agreement together with all
amendments and supplements thereto being the "Credit Agreement"). Capitalized
terms used herein and not otherwise defined shall have the meanings assigned to
such terms in the Credit Agreement. This Assignment and Acceptance, between the
Assignor (as defined and set forth on Schedule I hereto and made a part hereof)
and the Assignee (as defined and set forth on Schedule I hereto and made a part
hereof) is dated as of the Effective Date (as set forth on Schedule I hereto and
made a part hereof).
1. The Assignor hereby irrevocably sells and assigns to the Assignee
without recourse to the Assignor, and the Assignee hereby irrevocably purchases
and assumes from the Assignor without recourse to the Assignor, as of the
Effective Date, an undivided interest (the "Assigned Interest") in and to all
the Assignor's rights and obligations under the Credit Agreement respecting
those, and only those, Commitments and Loans contained in the Credit Agreement
as are set forth on Schedule I, in a principal amount as set forth on Schedule
I.
2. The Assignor (i) represents and warrants that it owns the Assigned
Interest free and clear from any lien or adverse claim; (ii) other than the
representation and warranty set forth in clause (i) above, makes no
representation or warranty and assumes no responsibility with respect to any
statements, warranties or representations made in or in connection with the
Credit Agreement or any other instrument, document or agreement delivered in
connection therewith, or the execution, legality, validity, enforceability,
genuineness, sufficiency or value of the Credit Agreement, or any other
instrument or document furnished pursuant thereto, other than that it is the
legal and beneficial owner of the interest being assigned by it hereunder and
that such interest is free and clear of any adverse claim; (iii) makes no
representation or warranty and assumes no responsibility with respect to the
financial condition of the Company or the performance or observance by either
the Guarantors, the Company or its Subsidiaries or of any of their respective
obligations under the Credit Agreement, or any other instrument or document
furnished pursuant thereto; and (iv) attaches the Note held by it evidencing the
Assigned Interest and requests that the Company exchange such Note for a new
Note payable to the Assignor (if the Assignor has retained any interest in the
Assigned Interest) and a new Note payable to the Assignee in the respective
amounts which reflect the assignment being made hereby (and after giving effect
to any other assignments which have become effective on the Effective Date).
F-1
<PAGE> 85
3. The Assignee (i) represents and warrants that it is legally
authorized to enter into this Assignment and Acceptance; (ii) confirms that it
has received a copy of the Credit Agreement, together with copies of the
financial statements referred to in Section 7.02, or if later, the most recent
financial statements delivered pursuant to Section 8.01 thereof, and such other
documents and information as it has deemed appropriate to make its own credit
analysis; (iii) agrees that it will, independently and without reliance upon
either the Agent, any other Bank or the Assignor and based on such documents and
information as it shall deem appropriate at the time, continue to make its own
credit decisions in taking or not taking action under the Credit Agreement; (iv)
agrees that it will be bound by the provisions of the Credit Agreement and will
perform in accordance with its terms all the obligations which by the terms of
the Credit Agreement are required to be performed by it; and (v) if the Assignee
is organized under the laws of a jurisdiction outside the United States,
attaches the forms prescribed by the Internal Revenue Service of the United
States certifying as to the Assignee's exemption from United States withholding
taxes with respect to all payments to be made to the Assignee under the Credit
Agreement or such other documents as are necessary to indicate that all such
payments are subject to such tax at a rate reduced by an applicable tax treaty.
4. Following the execution of this Assignment and Acceptance, it will
be delivered to the Company effective as of the Effective Date (which Effective
Date shall, unless otherwise agreed, be at least five (5) Business Days after
the execution of this Assignment and Acceptance).
5. Upon delivery to the Company, all payments under the Credit
Agreement in respect of the Assigned Interest (including without limitation, all
payments of principal, interest and fees with respect thereto) for the period up
to, but not including, the Effective Date, shall be made to the Agent for the
benefit of the Assignor, and for the period from and after the Effective Date
shall be made to the Agent for the benefit of the Assignee. Assignor and
Assignee hereby agree that if Assignor receives any of the payments referred to
in the preceding sentence which should have been made to Assignee, or if
Assignee receives any of the payments referred to in the previous sentence which
should have been made to Assignor, such payments shall promptly be paid by
Assignor to Assignee, or by Assignee to Assignor, as the case may be, in full.
6. From and after the Effective Date, (i) the Assignee shall be a party
to the Credit Agreement and, to the extent provided in this Assignment and
Acceptance and Section 12.06 of the Credit Agreement, shall have the rights and
obligations thereunder, and (ii) the Assignor shall, to the extent provided in
this Assignment and Acceptance and Section 12.06 of the Credit Agreement,
relinquish its rights and be released from its obligations under the Credit
Agreement.
7. THIS ASSIGNMENT AND ACCEPTANCE SHALL BE GOVERNED BY, AND CONSTRUED
IN ACCORDANCE WITH, THE LAWS OF THE STATE OF TEXAS.
F-2
<PAGE> 86
IN WITNESS WHEREOF, the parties hereto have caused this Assignment and
Acceptance to be executed by their respective duly authorized officers on
Schedule I hereto.
_____________________________________________
as Assignor
By: _________________________________________
Name: _______________________________________
Title: ______________________________________
_____________________________________________
as Assignee
By: _________________________________________
Name: _______________________________________
Title: ______________________________________
F-3
<PAGE> 87
APPROVED:
THE HOUSTON EXPLORATION COMPANY
By: ________________________________________
Name: ______________________________________
Title: _____________________________________
TEXAS COMMERCE BANK NATIONAL
ASSOCIATION, as Agent
By: ________________________________________
Name: ______________________________________
Title: _____________________________________
F-4
<PAGE> 88
SCHEDULE I
TO
ASSIGNMENT AND ACCEPTANCE
Assignor: ________________________
Total Commitment of Assignor Prior to Effective Date: $___________
Total Commitment of Assignor After Effective Date: $___________
Assignee: ________________________
Total Commitment of Assignee Prior to Effective Date: $___________
Total Commitment of Assignee After Effective Date: $___________
Effective Date of Assignment: _________________, 199_
Amount of Total Commitment Assigned: $_______________
Principal Amount Percentage Assigned
Facilities (or amount of) (Shown as a percentage
Assigned Commitment) Assigned of aggregate Commitments)
Revolving Credit $___________________ ____________%
Assignee's Base Rate Address for Notice:
Lending Office:
_____________________________ ___________________________
_____________________________ ___________________________
_____________________________ ___________________________
Attn:__________________________
Telex No:______________________
Assignee's Eurodollar Telecopy No:___________________
Lending Office: Telephone No:__________________
_____________________________
_____________________________
_____________________________
Schedule I-1
<PAGE> 89
SCHEDULE 1.02(B)
EXISTING LETTERS OF CREDIT
Texas Commerce Bank National Association
<TABLE>
<CAPTION>
Amount Maturity L/C #
------ -------- -----
<S> <C> <C>
$ 50,000.00 11/1/96 I440622
$740,500.00 4/8/97 I443971
$455,696.19 4/24/97 I444444
$300,000.00 6/6/96 I445680
The Chase Manhattan Bank, N.A.
------------------------------
Amount Maturity L/C #
------ -------- -----
$75,000.00 1/31/97 I514821
</TABLE>
Schedule 1.02(b)-1
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
reports (and to all references to our Firm) included in or made part of this
registration statement.
ARTHUR ANDERSEN LLP
Houston, Texas
May 23, 1996
<PAGE> 1
EXHIBIT 23.3
[RYDER SCOTT COMPANY LETTERHEAD]
CONSENT OF RYDER SCOTT COMPANY
We hereby consent to the references to us under the headings
"Prospectus Summary - Summary Natural Gas and Oil Reserve Data", "Business -
Natural Gas and Oil Reserves" and "Experts" in the Prospectus constituting part
of this Registration Statement on Form S-1 of The Houston Exploration Company.
/s/ RYDER SCOTT COMPANY
PETROLEUM ENGINEERS
RYDER SCOTT COMPANY
PETROLEUM ENGINEERS
Houston, Texas
May 22, 1996
<PAGE> 1
[NETHERLAND, SEWELL & ASSOCIATES, INC. LETTERHEAD]
CONSENT OF NETHERLAND, SEWELL & ASSOCIATES, INC.
------------------------------------------------
We hereby consent to the references to us under the headings
"Prospectus Summary-Summary Natural Gas and Oil Reserve Data",
"Business-Natural Gas and Oil Reserves", "Smith Offshore Exploration Company
Notes to Financial Statements-Supplemental Information on Oil and Gas
Exploration and Producing Activities", and "Experts" in the Prospectus
constituting part of this Registration Statement on Form S-1 of The Houston
Exploration Company.
NETHERLAND, SEWELL & ASSOCIATES, INC.
By: /s/ DANNY D. SIMMONS
----------------------------------
Danny D. Simmons
Senior Vice President
Houston, Texas
May 22, 1996
<PAGE> 1
EXHIBIT 23.5
[HUDDLESTON & CO., INC. LETTERHEAD]
May 22, 1996
CONSENT OF HUDDLESTON & CO., INC.
We hereby consent to the references to us under the headings "Prospectus
Summary--Summary Natural Gas and Oil Reserve Data," "Business--Natural Gas and
Oil Reserves" and "Experts" in the Prospectus constituting part of this
Registration Statement on Form S-1 of The Houston Exploration Company, dated
May 1996.
Very truly yours,
HUDDLESTON & CO., INC.
By: /s/ PETER D. HUDDLESTON
--------------------------
Peter D. Huddleston, P.E.
President
PDH:ek
<PAGE> 1
EXHIBIT 23.6
CONSENT OF MILLER AND LENTS, LTD.
We hereby consent to the use of our report for Fuel Resources Incorporated
(currently known as The Houston Exploration Company) dated January 16, 1996,
entitled, "Reserves and Future Net Revenue as of December 31, 1995" in the
Prospectus constituting part of this Registration Statement on Form S-1 and the
references to Miller and Lents, Ltd. under the headings, "Natural Gas and Oil
Reserves."
MILLER AND LENTS, LTD.
By /s/ LARRY M. GRING
-------------------
Larry M. Gring
Senior Vice President
Houston, Texas
May 22, 1996
