<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 6, 1996
REGISTRATION NUMBER 333-12707
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
MARINER ENERGY, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 1311 86-0460233
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
------------------------
580 WESTLAKE PARK BLVD., SUITE 1300
HOUSTON, TEXAS 77079
(713) 584-5500
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
------------------------
JAMES M. FITZPATRICK
VICE PRESIDENT OF LAND AND LEGAL AND CORPORATE SECRETARY
MARINER ENERGY, INC.
580 WESTLAKE PARK BLVD., SUITE 1300
HOUSTON, TEXAS 77079
(713) 584-5500
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
------------------------
Copies to:
CHARLES H. STILL
FULBRIGHT & JAWORSKI L.L.P.
1301 MCKINNEY, SUITE 5100
HOUSTON, TEXAS 77010-3095
(713) 651-5151
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO THE
PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
------------------------
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 THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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<PAGE> 2
CROSS-REFERENCE SHEET
(PURSUANT TO RULE 404(a) UNDER THE SECURITIES ACT OF 1933)
<TABLE>
<CAPTION>
FORM S-4 ITEM AND CAPTION LOCATION OR PROSPECTUS CAPTION
----------------------------------------------------- -----------------------------------
<C> <S> <C>
1. Forepart of 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, Page 3
3. Risk Factors, Ratio of Earnings to Fixed Charges and Summary; Risk Factors; Pro Forma
Other Information.................................. Financial Data; Selected
Historical Data
4. Terms of the Transaction............................. Summary; The Exchange Offer;
Description of the Exchange
Notes; Certain U.S. Federal Tax
Considerations
5. Pro Forma Financial Information...................... Pro Forma Financial Data
6. Material Contacts with the Company Being Acquired.... Not applicable
7. Additional Information Required for Reoffering by
Persons and Parties Deemed to Be Underwriters...... Not applicable
8. Interests of Named Experts and Counsel............... Not applicable
9. Disclosure of Commission Position on Indemnification
for Securities Act Liabilities..................... Not applicable
10. Information with Respect to S-3 Registrants.......... Not applicable
11. Incorporation of Certain Information by Reference.... Not applicable
12. Information with Respect to S-2 or S-3 Registrants... Not applicable
13. Incorporation of Certain Information by Reference.... Not applicable
14. Information with Respect to Registrants Other Than Summary; Selected Historical Data;
S-3 or S-2 Registrants............................. Management's Discussion and
Analysis of Financial Condition
and Results of Operation;
Business; Financial Statements
15. Information with Respect to S-3 Companies............ Not applicable
16. Information with Respect to S-2 or S-3 Companies..... Not applicable
17. Information with Respect to Companies Other Than S-3
or S-2 Companies................................... Not applicable
18. Information if Proxies, Consents or Authorizations
are to be Solicited................................ Not applicable
19. Information if Proxies, Consents or Authorizations Ownership of Securities; Certain
are not to be Solicited or in an Exchange Offer.... Transactions
</TABLE>
<PAGE> 3
PROSPECTUS
OFFER TO EXCHANGE
ALL OUTSTANDING
[MARINER 10 1/2% SENIOR SUBORDINATED NOTES DUE 2006, SERIES A
ENERGY, ($100,000,000 PRINCIPAL AMOUNT OUTSTANDING)
INC. FOR
LOGO] 10 1/2% SENIOR SUBORDINATED NOTES DUE 2006, SERIES B
($100,000,000 PRINCIPAL AMOUNT)
OF
MARINER ENERGY, INC.
------------------------
THE EXCHANGE OFFER WILL EXPIRE AT 12:00 MIDNIGHT, NEW YORK CITY TIME, ON
, 1997, UNLESS EXTENDED.
------------------------
Mariner Energy, Inc., a Delaware corporation (the "Company"), hereby makes
an offer (the "Exchange Offer"), on the terms and subject to the conditions set
forth in this Prospectus and the accompanying Letter of Transmittal (the "Letter
of Transmittal"), to exchange up to an aggregate principal amount of
$100,000,000 of its 10 1/2% Senior Subordinated Notes Due 2006, Series B (the
"Exchange Notes"), for an equal principal amount of its outstanding 10 1/2%
Senior Subordinated Notes Due 2006, Series A (the "Outstanding Notes", sometimes
referred to collectively with the Exchange Notes as the "Notes"), in integral
multiples of $1,000. The Exchange Notes will be subordinated to all Senior
Indebtedness (as defined herein) of the Company and will be substantially
identical (including principal amount, interest rate, maturity and redemption
rights) to the Outstanding Notes for which they may be exchanged pursuant to the
Exchange Offer, except for certain transfer restrictions. As of the date of this
Prospectus, the Company has no Senior Indebtedness outstanding. However, the
Company expects to incur substantial indebtedness under the Revolving Credit
Facility (as defined herein) in the future, and such indebtedness will
constitute Senior Indebtedness. The Outstanding Notes have been, and the
Exchange Notes will be, issued under an Indenture dated as of August 1, 1996
(the "Indenture"), between the Company and United States Trust Company of New
York, as trustee (the "Trustee"). See "Description of the Exchange Notes". Under
the terms of the Registration Agreement (as defined herein), upon the
consummation of the Exchange Offer, certain registration rights relating to the
Outstanding Notes and certain interest provisions relating to such rights will
terminate. There will be no proceeds to the Company from this offering; however,
pursuant to a Registration Agreement dated as of August 9, 1996 (the
"Registration Agreement"), among the Company and the Placement Agents (as
defined herein), the Company will bear certain offering expenses.
Each broker-dealer that receives Exchange Notes for its own account
pursuant to the Exchange Offer (a "Participating Broker-Dealer") must
acknowledge that it will deliver a prospectus in connection with any resale of
such Exchange Notes. The Letter of Transmittal states that by acknowledging that
it will deliver and by delivering a prospectus, a broker-dealer will not be
deemed to admit that it is an "underwriter" within the meaning of the Securities
Act of 1933 (the "Securities Act"). This Prospectus, as it may be amended or
supplemented from time to time, may be used by a broker-dealer in connection
with resales of Exchange Notes received in exchange for Outstanding Notes where
such Outstanding Notes were acquired by such broker-dealer as a result of
market-making activities or other trading activities. The Company has agreed
that, for a period of 90 days after the Expiration Date (as defined herein), it
will make this Prospectus available to any broker-dealer for use in connection
with any such resale. See "Plan of Distribution".
The Company will accept for exchange any and all validly tendered
Outstanding Notes before 12:00 midnight, New York City time, on ,
1997, unless that date is extended (the "Expiration Date"). Tenders of
Outstanding Notes may be withdrawn at any time before 12:00 midnight, New York
City time, on the Expiration Date; otherwise tenders are irrevocable. United
States Trust Company of New York is acting as Exchange Agent in connection with
the Exchange Offer. The Exchange Offer is not conditioned on any minimum
principal amount of Outstanding Notes being tendered for exchange, but is
otherwise subject to certain customary conditions.
(continued on page 3)
------------------------
SEE "RISK FACTORS", BEGINNING ON PAGE 17, FOR A DISCUSSION OF CERTAIN
FACTORS TO BE CONSIDERED BY HOLDERS WHO TENDER OUTSTANDING NOTES IN THE EXCHANGE
OFFER.
------------------------
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.
------------------------
THE DATE OF THIS PROSPECTUS IS , 1996
<PAGE> 4
(COLOR MAP HERE)
UNTIL , 1997 (90 DAYS AFTER COMMENCEMENT OF THIS OFFERING), ALL
DEALERS EFFECTING TRANSACTIONS IN THE EXCHANGE NOTES, WHETHER OR NOT
PARTICIPATING IN THE EXCHANGE OFFER, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
2
<PAGE> 5
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Summary................................... 5
Risk Factors.............................. 17
The Exchange Offer........................ 25
Use of Proceeds........................... 35
Capitalization............................ 36
Pro Forma Financial Data.................. 37
Selected Historical Data.................. 39
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.............................. 41
Business.................................. 50
The Transactions.......................... 67
Management................................ 70
Ownership of Securities................... 81
<CAPTION>
PAGE
----
<S> <C>
Certain Transactions...................... 82
Description of Revolving Credit
Facility................................ 86
Description of the Exchange Notes......... 87
Certain U.S. Federal Tax Considerations... 116
Plan of Distribution...................... 119
Legal Matters............................. 119
Independent Auditors...................... 119
Independent Petroleum Engineers........... 120
Available Information..................... 120
Incorporation of Certain Documents........ 120
Glossary.................................. 122
Index to Financial Statements............. F-1
</TABLE>
---------------------
(continued from cover page)
The Exchange Notes will bear interest from the date of issuance of the
Exchange Notes at a rate equal to 10 1/2% per annum and on the same terms as the
Outstanding Notes. Interest on the Exchange Notes will be payable in arrears
semiannually on February 1 and August 1 of each year, commencing on the first
such date following the date of issuance of the Exchange Notes. Outstanding
Notes that are accepted for exchange will cease to accrue interest on and after
the date on which interest on the Exchange Notes begins to accrue. Accrued and
unpaid interest on the Outstanding Notes that are tendered in exchange for the
Exchange Notes will be payable on or before the first February 1 or August 1
following the date of issuance of the Exchange Notes.
The Outstanding Notes were sold by the Company on August 14, 1996, to
Morgan Stanley & Co. Incorporated, ECT Securities Corp. and NationsBanc Capital
Markets, Inc. (the "Placement Agents") in transactions not registered under the
Securities Act in reliance on the exemption provided in Section 4(2) of the
Securities Act. The Placement Agents subsequently placed the Outstanding Notes
with qualified institutional buyers in reliance on Rule 144A under the
Securities Act, in offshore transactions in reliance on Regulation S under the
Securities Act and with two institutional "accredited investors" (as defined in
Rule 501(a)(1),(2),(3) or (7) under the Securities Act ("Institutional
Accredited Investors")). Accordingly, the Outstanding Notes may not be
reoffered, resold or otherwise transferred in the United States unless
registered under the registration requirements of the Securities Act or unless
an exemption from such registration requirements is available. The Exchange
Notes are being offered hereunder to satisfy the obligations of the Company
under the Registration Agreement. See "The Exchange Offer".
Based on an interpretation by the staff of the Securities and Exchange
Commission (the "Commission") set forth in no-action letters issued to third
parties, the Company believes that Exchange Notes issued pursuant to this
Exchange Offer may be offered for resale, resold and otherwise transferred by a
holder who is not a Participating Broker-Dealer or an affiliate of the Company
without compliance with the registration and prospectus delivery provisions of
the Securities Act, if the holder acquires the Exchange Notes in its ordinary
course of business and is not participating in and has no arrangement or
understanding with any person to participate in the distribution (within the
meaning of the Securities Act) of the Exchange Notes. Persons wishing to
exchange Outstanding Notes in the Exchange Offer must represent to the Company
that such conditions have been met.
The Company does not intend to list the Exchange Notes on any national
securities exchange or to seek the admission thereof to trading in the National
Association of Securities Dealers Automated Quotation System. Although certain
of the Placement Agents have advised the Company that, following consummation of
the Exchange Offer, they currently intend to make a market in the Exchange
Notes, they are not obligated to do so, and any market-making activity with
respect to the Exchange Notes may be discontinued at any time
3
<PAGE> 6
without notice. Accordingly, no assurance can be given that an active public or
other market will develop for the Exchange Notes or as to the liquidity of or
the trading market for the Exchange Notes.
Any Outstanding Notes not tendered and accepted in the Exchange Offer will
remain outstanding. To the extent that any Outstanding Notes are tendered and
accepted in the Exchange Offer, a holder's ability to sell untendered
Outstanding Notes could be adversely affected. Following consummation of the
Exchange Offer, the holders of Outstanding Notes will continue to be subject to
the existing restrictions on transfer thereof.
The Company expects that the Exchange Notes issued pursuant to this
Exchange Offer will be issued in the form of a Global Exchange Note (as defined
under the caption "Description of the Exchange Notes"), which will be deposited
with, or on behalf of, The Depository Trust Company (the "DTC") and registered
in its name or in the name of Cede & Co., the DTC's nominee. Beneficial
interests in the Global Exchange Note representing the Exchange Notes will be
shown on, and transfers thereof to qualified institutional buyers will be
effected through, records maintained by the DTC and its participants. After the
initial issuance of the Global Exchange Note, Exchange Notes in certificated
form will be issued in exchange for the Global Exchange Note on the terms set
forth in the Indenture. See "Description of the Exchange Notes -- Book-Entry;
Delivery and Form".
------------------------
No dealer, salesperson or other person has been authorized to give
information or to make any representations not contained in this Prospectus,
and, if given or made, such information or representations must not be relied
upon as having been authorized by the Company. This Prospectus does not
constitute an offer to sell or the solicitation of an offer to buy any security
other than the Exchange Notes offered hereby, nor does it constitute an offer to
sell or the solicitation of an offer to buy any of the Exchange Notes to any
person in any jurisdiction in which it is unlawful to make such an offer or
solicitation to such person. Neither the delivery of this Prospectus nor any
sale made hereunder shall under any circumstances create any implication that
the information contained herein is correct as of any date subsequent to the
date hereof.
------------------------
This Prospectus includes "forward-looking statements" within the meaning of
various provisions of the Securities Act and the Securities Exchange Act of 1934
(the "Exchange Act"). All statements, other than statements of historical facts,
included in this Prospectus which address activities, events or developments
which the Company expects or anticipates will or may occur in the future,
including such things as estimated future net revenues from oil and gas reserves
and the present value thereof, future capital expenditures (including the amount
and nature thereof), business strategy and measures to implement strategy,
competitive advantages, goals, expansion and growth of the Company's business
and operations, plans, references to future success and other such matters are
forward-looking statements. These statements are based on certain assumptions
and analyses made by the Company in light of its experience and its perception
of historical trends, current conditions and expected future developments as
well as other factors it believes are appropriate in the circumstances. However,
whether actual results and developments will conform with the Company's
expectations and predictions is subject to a number of risks and uncertainties,
including the risk factors discussed in this Prospectus; general economic,
market or business conditions; the opportunities (or lack thereof) that may be
presented to and pursued by the Company; competitive actions by other oil and
gas companies; changes in laws or regulations; and other factors, many of which
are beyond the control of the Company. Consequently, all of the forward-looking
statements made in this Prospectus are qualified by these cautionary statements
and there can be no assurance that the actual results or developments
anticipated by the Company will be realized or, even if substantially realized,
that they will have the expected consequences to or effects on the Company or
its business or operations.
4
<PAGE> 7
SUMMARY
The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information, financial statements and
notes thereto and other data included elsewhere in this Prospectus. As used
herein, references to the "Company" or "Mariner" mean Mariner Energy, Inc., a
Delaware corporation. Certain oil and gas terms used in this Prospectus are
defined in the "Glossary" included herein. Unless otherwise noted herein, all
information contained in this Prospectus gives effect to (i) the recent purchase
of all the outstanding common stock of the Company by Mariner Holdings, Inc., a
Delaware corporation ("Mariner Holdings"), (ii) the incurrence of $50.0 million
of indebtedness under the Revolving Credit Facility (as defined herein), (iii)
the payment of an aggregate of $92.0 million in dividends to Mariner Holdings
and (iv) the issuance of the Outstanding Notes and the application of the
proceeds therefrom, including repayment of amounts outstanding under the
Revolving Credit Facility. Joint Energy Development Investments Limited
Partnership ("JEDI"), a limited partnership between the California Public
Employees' Retirement System ("CalPERS") and an affiliate of Enron Capital &
Trade Resources Corp. ("ECT"), owns approximately 96% of the stock of Mariner
Holdings with the remaining approximate 4% thereof being owned by key personnel
of the Company. ECT is a subsidiary of Enron Corp. ("Enron"), and an affiliate
of ECT is the general partner of JEDI.
THE COMPANY
Mariner is an independent energy company engaged in oil and gas
exploration, exploitation, development and production in three geographic areas:
the shallow water or "shelf" (less than 600 feet deep) of the U.S. Gulf of
Mexico (the "Gulf") and onshore areas near the Gulf; Gulf deepwater (greater
than 600 feet deep); and the Permian Basin of West Texas. At March 31, 1996,
approximately 85% in value (based on the present value of estimated future net
revenues) of the Company's oil and gas reserves and most of its current efforts
were located in or near the Gulf, which historically has been a prolific
hydrocarbon producing area. The Company utilizes advanced evaluation and,
particularly in the Gulf, advanced completion technologies to explore for and
produce oil and natural gas.
On March 31, 1996, the Company had proved reserves of 6.8 Mmbbls of oil and
96.3 Bcf of natural gas, aggregating 137.3 Bcfe, with approximately 70% of the
Company's proved reserves attributable to natural gas. At such date, the present
value of estimated future net revenues attributable to the Company's proved
reserves was approximately $161.0 million, of which approximately $150.0 million
was attributable to proved developed reserves. In addition to its properties
holding proved reserves, the Company had an inventory of 25 specific prospects
as of November 30, 1996, which it expects will account for most of its
exploratory and exploitation drilling activities over the next two years. In the
aggregate, the Company has a total undeveloped leasehold inventory of
approximately 128,000 net acres, including 65 undeveloped Gulf blocks, and holds
under license or other arrangement approximately 5,800 square miles of 3-D
seismic data and approximately 178,000 linear miles of 2-D seismic data.
From June 1, 1989 (when under new ownership the Company began to focus its
efforts on the Gulf), through September 30, 1996, the Company drilled 228 gross
(73.0 net) wells, including 76 gross (25.1 net) exploratory and deepwater
exploitation wells. Of such wells, 23 were completed (21 in Gulf shallow water
or onshore and two in Gulf deepwater), representing a 31% success rate on its
exploration and deepwater exploitation activities. During the same period, the
Company completed approximately 92% of its development wells. At September 30,
1996, the Company was in the process of drilling one gross (0.2 net) exploratory
well.
As a result of its successful exploration and exploitation efforts, from
January 1, 1990, through March 31, 1996, the Company had increases in proved
reserves of 48% to approximately 137 Bcfe and increases in production of 182% to
approximately 70 Mmcfe per day. The Company achieved a 161% average annual
reserve replacement ratio for the six years ended December 31, 1995, at an
average finding and development cost of $0.97 per Mcfe of proved reserves.
Between November 1, 1995 and September 30, 1996, average daily production
increased 57% due to six new wells being brought online; 66% of this production
increase was attributable to the Company's three deepwater Gulf wells and 34% to
activities in Gulf shallow water and near
5
<PAGE> 8
onshore areas. Consistent with this recent increase in production, for the six
months ended September 30, 1996, compared to the six months ended September 30,
1995, the Company's total revenues increased 120% to $32.8 million from $14.9
million, and the Company's EBITDA increased 152% to $26.0 million from $10.3
million.
STRATEGY
Mariner's strategy is to increase reserves, production and cash flows in a
cost effective manner primarily "through the drillbit" -- by exploring,
exploiting and developing prospects, as contrasted with increasing reserves by
purchasing proved and producing properties. Mariner emphasizes internal growth
through exploration, exploitation and development of internally generated
prospects and prefers to operate the wells in which it participates and to hold
substantial working interests therein.
The Company applies a "portfolio management" approach to its drilling
activities that is directed at balancing (i) its views as to the moderate risks
of its exploration program in the Gulf and near onshore areas, the relatively
lower risk of exploitation in Gulf deepwater and the still lower risk of
development of the Company's interests in the Permian Basin of West Texas with
(ii) its views as to the potential for adding significant value from such
activities, particularly in the shallow water and deepwater of the Gulf.
In Gulf shallow water and near onshore fields, the Company focuses on
prospects with attractive value-adding potential and attractive rates of return
resulting from expected short production lead times, quick payout periods, low
lease operating expenses and favorable leasehold costs. At March 31, 1996,
approximately 68% in value of the Company's reserves, and as of September 30,
1996, approximately 70% of the Company's average daily production, were located
in Gulf shallow water and near onshore fields.
Mariner's Gulf deepwater operations have been focused on the exploitation
of previously discovered reservoirs which the Company believes are too small to
be of interest to large oil companies. The Company believes that its deepwater
expertise and low operating costs enable it to develop small and midsize fields
in deeper water of the Gulf profitably. At March 31, 1996, approximately 17% in
value of the Company's reserves, and, as of September 30, 1996, approximately
24% of the Company's average daily production, were located in Gulf deepwater.
The Company recently decided to expand its efforts in Gulf deepwater to include
moderate risk exploration for undrilled reservoirs because of (i) the large
reserve potential (relative to the Company's size) that it believes can be found
in deepwater areas targeted by it, (ii) the relative immaturity of these
exploration activities compared to other Gulf activities and (iii) the limited
competition for the Company's targeted reservoir sizes.
The Company's operations in the Spraberry Trend of the Permian Basin of
West Texas, which, at March 31, 1996, accounted for approximately 15% in value
of the Company's reserves, and, as of September 30, 1996, approximately 6% of
the Company's average daily production, have been important to the Company's
internal growth strategy by providing a consistent source of cash flow for use
in the Company's other activities.
The Company currently plans to focus the majority of its prospect
acquisition, exploration, exploitation and development efforts in the shallow
water and deepwater of the Gulf. In furtherance of its leasehold acquisition
program in such areas, Mariner acquired 19 offshore blocks in 1995 through lease
sales and farm-ins and was the successful bidder on eight additional blocks in
the Gulf in April 1996. Additionally, in September 1996, the Company was the
high bidder on 16 blocks in the Gulf (13 in deepwater). The Minerals Management
Service, an agency of the U.S. Department of the Interior (the "MMS"), has
awarded leases to the Company on 6 of these blocks and continues to evaluate the
remaining 10 high bids. Although the Company expects that most, if not all, of
its remaining high bids will result in lease awards, there can be no assurance
of that result.
6
<PAGE> 9
COMPETITIVE ADVANTAGES
Mariner believes that the following competitive advantages, which it
endeavors to emphasize in the implementation of its strategy, distinguish it
from other independent oil and gas companies and are responsible to a
significant extent for the success of the Company's exploration and exploitation
efforts in recent years.
Geographic Focus. A substantial portion of the Company's activities is
concentrated in the Gulf where the Company has been successful in developing
valuable reserves. The Company believes that exploration and development in
shallow water of the Gulf offer attractive returns because of short production
lead times, high production rates and relatively low capital and operating
costs. The Company believes that its activities in Gulf deepwater offer
attractive returns because of (i) large reserve potential, (ii) technological
developments, (iii) the early stages of development in the area and (iv) a
favorable competitive niche directed at exploiting small to moderate potential
fields previously discovered by large oil companies but bypassed for
exploitation by them as they search for larger fields -- a niche which few other
independent oil companies of the Company's size are pursuing because of the
significant technological and capital expenditure requirements. With a
significant portion of its reserves in the Gulf, the Company benefits from the
lower lease operating expenses associated with offshore wells which are
generally more productive than typical onshore wells and allow for concentration
of labor and equipment. In addition, production from such wells is not burdened
by severance or ad valorem taxes, and royalties paid on Gulf oil and gas
production to the federal government are generally lower than royalties paid in
respect of onshore production to private landowners. Moreover, gas produced in
the Gulf and near onshore areas usually receives top current prices because of
its quality and proximity to competitive pipeline transportation, and oil
produced in the areas of the Company's geographic focus is usually of good
quality (as opposed to heavy crude or high sulfur content crude oil which
require special processing) and typically carries prices which reflect such
quality.
Concentration of Reserves and Efficient Operations. The Company actively
manages its portfolio of producing reserves to optimize concentration within its
geographic areas of focus. At March 31, 1996, approximately 85% by value of the
Company's reserves were located in six fields. This concentration enables the
Company to achieve efficiencies in its operations and to control its general and
administrative expenses relative to competitors that have more widespread
operations. For the twelve months ended December 31, 1995, the Company's direct
operating costs (consisting of lease operating expenses and general and
administrative expenses) were $0.57 per Mcfe produced. Consistent with its
emphasis on reserve concentration and low cost of operations, the Company
regularly reviews its properties and, when appropriate, sells properties that
are marginally profitable or outside of its areas of concentration.
Application of Technology. The Company applies state-of-the-art technology
to minimize exploration risk and maximize returns. Although the Company's
database includes extensive 2-D and 3-D seismic data, virtually all of the
Company's exploration and exploitation prospects are generated using 3-D seismic
data. While 2-D seismic data, which historically has been used by oil and gas
exploration companies, is still an important exploration tool, the use of 3-D
data lowers the risk of dry holes and optimizes exploitation and development
spending. The Company also utilizes state-of-the-art subsea production
technology to lower the level of capital expenditures that might otherwise be
associated with deepwater developments (for example, the construction of
additional production platforms). The ability to utilize these and other
technologies often allows the Company economically to pursue attractive projects
below the size thresholds of large oil companies.
Disciplined Approach to Exploration. The Company employs careful risk
analysis to determine its drilling priorities, balancing the required capital
outlay against the expected value of the well. Having confidence in its staff of
explorationists, the Company typically has generated its own prospects and
conducted its own risk analysis. The exploration, exploitation and development
of internally generated prospects accounted for 80% by value of the Company's
reserves at March 31, 1996. The Company attempts to focus its exploration and
exploitation efforts on prospects with high value-adding potential while at the
same time managing its risks by drilling approximately 10 to 12 exploitation and
exploratory wells per year. Furthermore, the Company generally keeps its working
interests at or below 50% by seeking industry participants in its exploitation
and exploration activities in order to reduce its exposure on any single
undertaking.
7
<PAGE> 10
Experienced Management with Significant Equity Incentives. The Company has
a management team that has considerable expertise in the oil and gas industry
and significant experience working with the Company. All present key employees
of, and consultants to, the Company are eligible to participate in a management
incentive program which provides overriding royalty interests in successful
projects. The Company believes that its overriding royalty program provides a
strong alignment of management's and investors' interests. In addition, the
Company believes that this program is a significant reason why the Company has
been able to retain the services of the members of its senior management team,
most of whom have been working together at the Company for over 10 years. In
connection with the Acquisition (as defined below), certain members of
management and other key personnel of the Company (the "Management
Stockholders") also purchased approximately 4% of the common stock of Mariner
Holdings (the "Management Investment") and acquired options to purchase an
additional 11% of the common stock of Mariner Holdings.
THE TRANSACTIONS
Pursuant to a Stock Purchase Agreement dated as of April 1, 1996 (the
"Purchase Agreement"), by and among Hardy Oil & Gas plc ("Hardy plc") and its
wholly owned subsidiary Hardy Holdings Inc., on the one hand, and ECT and
Mariner Holdings, on the other hand, Mariner Holdings acquired, effective as of
such date, all the capital stock of the Company from Hardy Holdings Inc. (the
"Acquisition") for an aggregate purchase price of approximately $185.5 million,
including $14.5 million for net working capital of the Company. In connection
with the Acquisition, substantial intercompany indebtedness and receivables and
other third party indebtedness of the Company were eliminated. The Acquisition
was financed by a $92.0 million bridge loan from JEDI (the "JEDI Bridge Loan")
and $95.0 million in equity from JEDI (the "JEDI Equity"). In connection with
the Acquisition, ECT, Mariner Holdings and certain persons entered into a
Stockholders' Agreement dated April 2, 1996 (as amended, the "Stockholders'
Agreement"), pursuant to which the Management Stockholders made the Management
Investment.
In connection with the Acquisition, which was accounted for as a purchase
transaction, the Company incurred a "ceiling test" writedown under full cost
accounting requirements of approximately $22.5 million. The "ceiling test" is
applied, in general, to reduce the carrying value of oil and gas properties to
an amount not greater than the present value of estimated future net revenues
determined in accordance with the requirements of the Commission -- based in
this instance on prices in effect as to the Company's oil and gas production on
the closing date of the Acquisition. The writedown is an accounting charge and
as such did not affect the Company's cash flow from operating activities.
On June 28, 1996, the Company entered into a Credit Agreement (the
"Revolving Credit Facility") with NationsBank of Texas, N.A., as agent for a
group of banks (the "Lenders"), and borrowed $50.0 million thereunder to pay a
dividend to Mariner Holdings (the "Mariner Dividend"), which was used by Mariner
Holdings to partially repay the JEDI Bridge Loan (the "JEDI Bridge Repayment").
On August 14, 1996, the Company issued the Outstanding Notes to the
Placement Agents (the "Note Offering") pursuant to a Placement Agreement dated
August 9, 1996 (the "Placement Agreement"). Of the net proceeds of the Note
Offering, $42.0 million was used to pay a dividend to Mariner Holdings, which in
turn used the dividend to repay the remaining balance of the JEDI Bridge Loan,
and $50.0 million was used to repay all indebtedness outstanding under the
Revolving Credit Facility.
The Acquisition, the JEDI Equity, the JEDI Bridge Loan, the Management
Investment, the Mariner Dividend, the JEDI Bridge Repayment and the Note
Offering and the application of the proceeds therefrom are collectively referred
to as the "Transactions". See "Use of Proceeds" and "The Transactions".
---------------------
The Company was incorporated in Delaware in 1983. The Company's executive
offices are located at 580 WestLake Park Blvd., Suite 1300, Houston, Texas
77079, and its telephone number is (713) 584-5500.
8
<PAGE> 11
THE NOTE OFFERING
THE OUTSTANDING NOTES...... The Outstanding Notes were sold by the Company on
August 14, 1996, to the Placement Agents pursuant
to the Placement Agreement. The Placement Agents
subsequently resold the Outstanding Notes to
qualified institutional buyers in reliance on Rule
144A under the Securities Act, in offshore
transactions in reliance on Regulation S under the
Securities Act and to Institutional Accredited
Investors.
REGISTRATION AGREEMENT..... The Company and the Placement Agents have entered
into the Registration Agreement, which grants the
holders of the Outstanding Notes certain exchange
and registration rights. The Exchange Offer is
intended to satisfy such exchange rights, which
terminate on the consummation of the Exchange
Offer. If applicable law or applicable
interpretations of the staff of the Commission do
not permit the Company to effect the Exchange
Offer, or in certain other circumstances, the
Company has agreed to file a shelf registration
statement (the "Shelf Registration Statement")
covering resales of Transfer Restricted Notes (as
defined in the Registration Agreement). See "The
Exchange Offer -- Shelf Registration Statement".
THE EXCHANGE OFFER
SECURITIES OFFERED......... $100,000,000 aggregate principal amount of 10 1/2%
Senior Subordinated Notes Due 2006, Series B.
THE EXCHANGE OFFER......... $1,000 principal amount of the Exchange Notes in
exchange for each $1,000 principal amount of
Outstanding Notes. As of the date hereof,
$100,000,000 aggregate principal amount of
Outstanding Notes are outstanding. The Company will
issue the Exchange Notes as soon as practicable
after the Expiration Date.
Based on an interpretation by the staff of the
Commission set forth in no-action letters issued to
third parties, the Company believes that Exchange
Notes issued pursuant to the Exchange Offer in
exchange for Outstanding Notes may be offered for
resale, resold and otherwise transferred by any
holder thereof (other than any such holder which is
an "affiliate" of the Company within the meaning of
Rule 405 under the Securities Act or a
Participating Broker-Dealer) without compliance
with the registration and prospectus delivery
provisions of the Securities Act, provided that
such Exchange Notes are acquired in the ordinary
course of such holder's business and that such
holder does not intend to participate and has no
arrangement or understanding with any person to
participate in the distribution of such Exchange
Notes.
Each Participating Broker-Dealer must acknowledge
that it will deliver a prospectus in connection
with any resale of Exchange Notes. A broker-dealer
that delivers a prospectus to purchasers in
connection with such resales will be subject to
certain of the civil liability provisions under the
Securities Act and will be bound by the provisions
of the Registration Agreement (including certain
indemnification rights and obligations). This
Prospectus, as it may be amended or supplemented
from time to time, may be used by a broker-dealer
in connection with resales of Exchange Notes
received in exchange for Outstanding Notes where
such Outstanding Notes were acquired by such
broker-dealer as a result of
9
<PAGE> 12
market-making activities or other trading
activities. The Company has agreed that, for a
period of 90 days after the Expiration Date, it
will make this Prospectus available to any
broker-dealer for use in connection with any such
resale. See "Plan of Distribution".
Any holder who tenders in the Exchange Offer with
the intention to participate, or for the purpose of
participating, in a distribution of the Exchange
Notes may not rely on the position of the staff of
the Commission enunciated in Exxon Capital Holdings
Corporation (available May 13, 1988) and Morgan
Stanley & Co. Incorporated (available June 5, 1991)
or similar no-action letters and, in the absence of
an exemption from applicable legislative
requirements, must comply with the registration and
prospectus delivery requirements of the Securities
Act in connection with the resale transaction.
Failure to comply with such requirements in those
instances may result in the holder incurring
liability under the Securities Act for which the
holder is not indemnified by the Company.
EXPIRATION DATE............ 12:00 midnight, New York City time, on
, 1997, unless that date is extended.
INTEREST ON THE NOTES...... The Exchange Notes will bear interest from the date
of issuance of the Exchange Notes. Outstanding
Notes that are accepted for exchange will cease to
accrue interest on and after the date on which
interest on the Exchange Notes begins to accrue.
Accrued and unpaid interest on the Outstanding
Notes that are tendered in exchange for the
Exchange Notes will be payable on or before the
first February 1 or August 1 following the date of
issuance of the Exchange Notes.
PROCEDURES FOR TENDERING
OUTSTANDING NOTES........ Each holder of Outstanding Notes wishing to accept
the Exchange Offer must complete, sign and date the
accompanying Letter of Transmittal, or a facsimile
thereof, in accordance with the instructions
contained herein and therein, and mail or otherwise
deliver such Letter of Transmittal, or such
facsimile, together with the Outstanding Notes and
any other required documentation, to the Exchange
Agent at the address set forth herein. By executing
the Letter of Transmittal, each holder will
represent to the Company that, among other things,
the holder or the person receiving Exchange Notes,
whether or not such person is the holder, is
acquiring the Exchange Notes in the ordinary course
of business and that neither the holder nor any
such other person has any arrangement or
understanding with any person to participate in the
distribution of the Exchange Notes. In lieu of
physical delivery of the certificates representing
Outstanding Notes, tendering holders may transfer
notes pursuant to the procedure for book-entry
transfer as set forth under "The Exchange
Offer -- Procedures for Tendering".
SPECIAL PROCEDURES FOR
BENEFICIAL OWNERS.......... Any beneficial owner whose Outstanding Notes are
registered in the name of a broker-dealer,
commercial bank, trust company or other nominee and
who wishes to tender should contact the registered
holder promptly and instruct the registered holder
to tender on the beneficial owner's behalf. If the
beneficial owner wishes to tender on the beneficial
owner's own behalf, it must, before completing and
executing the Letter of Transmittal and delivering
its Outstanding Notes, either make appro-
10
<PAGE> 13
priate arrangements to register ownership of the
Outstanding Notes in its name or obtain a properly
completed bond power from the registered holder.
The transfer of registered ownership may take
considerable time.
GUARANTEED DELIVERY
PROCEDURES............... Holders of Outstanding Notes who wish to tender
their Outstanding Notes and whose Outstanding Notes
are not immediately available or who cannot deliver
their Outstanding Notes, the Letter of Transmittal
or any other documents required by the Letter of
Transmittal to the Exchange Agent (or comply with
the procedures for book-entry transfer) on or
before the Expiration Date must tender their
Outstanding Notes according to the guaranteed
delivery procedures set forth in "The Exchange
Offer -- Guaranteed Delivery Procedures".
WITHDRAWAL RIGHTS.......... Tenders may be withdrawn at any time before 12:00
midnight, New York City time, on the Expiration
Date pursuant to the procedures described under
"The Exchange Offer -- Withdrawal of Tenders".
ACCEPTANCE OF OUTSTANDING
NOTES AND DELIVERY OF
EXCHANGE NOTES........... Subject to certain conditions, the Company will
accept for exchange any and all Outstanding Notes
that are properly tendered in the Exchange Offer
before 12:00 midnight, New York City time, on the
Expiration Date. The Exchange Notes issued pursuant
to the Exchange Offer will be delivered on the date
of issuance of the Exchange Notes. See "The
Exchange Offer -- Terms of the Exchange Offer".
FEDERAL INCOME TAX
CONSIDERATIONS........... The exchange pursuant to the Exchange Offer should
not be a taxable event for federal income tax
purposes. See "Certain U.S. Federal Tax
Considerations".
EFFECT ON HOLDERS OF
OUTSTANDING NOTES.......... As a result of the making of this Exchange Offer,
the Company will have fulfilled one of its
obligations under the Registration Agreement, and,
with certain exceptions noted below, holders of
Outstanding Notes who do not tender their
Outstanding Notes will not have any further
registration rights under the Registration
Agreement or otherwise. They will continue to hold
the untendered Outstanding Notes and will be
entitled to all the rights and subject to all the
limitations applicable thereto under the Indenture,
except to the extent such rights or limitations, by
their terms, terminate or cease to have further
effect as a result of the Exchange Offer. All
untendered Outstanding Notes will continue to be
subject to certain restrictions on transfer.
Accordingly, if any Outstanding Notes are tendered
and accepted in the Exchange Offer, the trading
market of the untendered Outstanding Notes could be
adversely affected.
SHELF REGISTRATION
STATEMENT.................. If (i) the Company determines that the Exchange
Offer may not be consummated as soon as practicable
after the Expiration Date because it would violate
applicable law or the applicable interpretations of
the staff of the Commission, (ii) the Exchange
Offer is not consummated within 180 days of the
date of the Registration Agreement, (iii) the
Placement Agents so request with respect to the
Outstanding Notes not eligible to be exchanged for
Exchange Notes in the Exchange Offer and held by
them following consummation of the Exchange Offer
or (iv) any holder
11
<PAGE> 14
of an Outstanding Note (other than an Exchanging
Dealer (as defined in the Registration Agreement))
is not eligible to participate in the Exchange
Offer or, in the case of any holder of Outstanding
Notes (other than an Exchanging Dealer) that
participates in the Exchange Offer, the holder does
not receive freely tradable Exchange Notes on the
date of the exchange for validly tendered (and not
withdrawn) Outstanding Notes, the Company has
agreed to file and maintain a shelf registration
statement that would allow resales of transfer
restricted Outstanding Notes or Exchange Notes
owned by such holders.
EXCHANGE AGENT............. United States Trust Company of New York.
CORRECTIVE AMENDMENT TO THE
INDENTURE................ Promptly after completion of the Exchange Offer,
the Company intends to effect an amendment (the
"Amendment") to the Indenture that will cure an
unintended and inadvertent omission, defect and
inconsistency in the Indenture. The tender of an
Outstanding Note together with a Letter of
Transmittal pursuant to the Exchange Offer shall
constitute the agreement of the Holder of that
Outstanding Note that the Company may cure this
unintended and inadvertent omission, defect and
inconsistency in the Indenture without further
action or approval by holders of the Notes. The
Amendment is described in greater detail under the
heading "The Exchange Offer -- Corrective Amendment
to the Indenture".
SUMMARY OF TERMS OF THE EXCHANGE NOTES
ISSUER..................... Mariner Energy, Inc.
SECURITIES OFFERED......... $100,000,000 aggregate principal amount of 10 1/2%
Senior Subordinated Notes Due 2006, Series B.
MATURITY................... August 1, 2006.
INTEREST................... Payable semiannually in cash, on February 1 and
August 1, commencing on the first such date
following the date of issuance of the Exchange
Notes.
OPTIONAL REDEMPTION BY
COMPANY.................. The Exchange Notes are redeemable at the option of
the Company, in whole or in part, at any time on or
after August 1, 2001, initially at 105.25% of their
principal amount, plus accrued interest, declining
ratably to 100% of their principal amount, plus
accrued interest, on or after August 1, 2003.
In addition, at the option of the Company, at any
time prior to August 1, 1999, the Exchange Notes
will be redeemable from the net proceeds of one or
more Public Equity Offerings (as defined under the
caption "Description of the Exchange Notes"), at
110.5% of their principal amount, plus accrued
interest; provided, however, that at least $65.0
million in aggregate principal amount of Exchange
Notes, together with the Outstanding Notes, must
remain outstanding immediately after the occurrence
of any such redemption. See "Description of the
Exchange Notes -- Optional Redemption".
CHANGE OF CONTROL.......... Upon a Change of Control (as defined under the
caption "Description of the Exchange Notes"), each
holder of Exchange Notes (a "Holder")
12
<PAGE> 15
will have the right to require the Company to
repurchase all or any portion of such Holder's
Exchange Notes at a purchase price equal to 101% of
the principal amount thereof, plus accrued
interest. See "Description of the Exchange
Notes -- Certain Covenants -- Change of Control".
RANKING.................... The Exchange Notes will be unsecured, general
obligations of the Company, subordinated in right
of payment to all Senior Indebtedness (as defined
under the caption "Description of the Exchange
Notes") of the Company, including indebtedness
under the Revolving Credit Facility. The Exchange
Notes will rank pari passu in right of payment with
any future senior subordinated indebtedness of the
Company and will be senior in right of payment to
all other future subordinated indebtedness of the
Company. In addition, the Exchange Notes will be
effectively subordinated to all liabilities of the
Company's subsidiaries, including trade payables.
As of the date of this Prospectus, the Company's
only outstanding indebtedness for money borrowed is
the Outstanding Notes. However, the Company expects
to incur substantial indebtedness under the
Revolving Credit Facility in the future, and such
indebtedness will constitute Senior Indebtedness.
See "Risk Factors -- Subordination of the Exchange
Notes" and "Description of the Exchange Notes --
Ranking".
CERTAIN COVENANTS.......... The indenture pursuant to which the Exchange Notes
will be issued contains certain covenants for the
benefit of the Holders, including, among others,
covenants limiting the incurrence of additional
indebtedness, the payment of dividends, the
redemption of capital stock, the making of certain
investments, the issuance of capital stock of
subsidiaries, the creation of dividend and other
restrictions affecting subsidiaries, transactions
with affiliates, asset sales and certain mergers
and consolidations. However, these limitations will
be subject to a number of important qualifications
and exceptions. See "Description of the Exchange
Notes -- Certain Covenants".
BOOK-ENTRY; DELIVERY AND
FORM..................... The Exchange Notes will be represented by one
permanent Global Exchange Note in definitive, fully
registered form deposited with the Trustee as
custodian for, and registered in the name of a
nominee of, DTC. See "Description of the Exchange
Notes -- Book-Entry; Delivery and Form".
RISK FACTORS
PROSPECTIVE INVESTORS SHOULD CONSIDER CAREFULLY CERTAIN MATTERS RELATING TO
AN INVESTMENT IN THE EXCHANGE NOTES. SEE "RISK FACTORS".
13
<PAGE> 16
SUMMARY INFORMATION
The following table sets forth for the periods indicated certain summary
historical financial, operating and reserve data of the Company and certain pro
forma financial data. See "Pro Forma Financial Data", "Selected Historical Data"
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations". The historical data should be read in conjunction with the
Financial Statements of the Company included elsewhere in this Prospectus. As a
part of the Transactions, Mariner Holdings consummated the Acquisition on May
16, 1996; however, for accounting purposes, the Acquisition is treated as if it
had occurred on April 1, 1996. The Acquisition has been accounted for using the
purchase method of accounting, and Mariner Holdings' cost of acquiring the
Company has been allocated to the assets and liabilities of the Company based on
estimated fair values. As a result, the Company's financial position and
operating results subsequent to the Acquisition reflect a new basis of
accounting and are not comparable to prior periods. The pro forma information,
which reflects the Transactions, should be read in conjunction with "Pro Forma
Financial Data". Neither the historical results nor the pro forma results are
necessarily indicative of the Company's future operations or financial results.
The Company has not paid a dividend out of earnings in any of the periods
presented. On June 28, 1996, the Company paid a special dividend of $50.0
million to Mariner Holdings, its sole stockholder, from the proceeds of a
borrowing under the Revolving Credit Facility, which was used to repay a portion
of the JEDI Bridge Loan. On August 14, 1996, the Company paid a special dividend
of $42.0 million to Mariner Holdings from the proceeds of the Note Offering,
which was used to repay the remainder of the JEDI Bridge Loan. See "Use of
Proceeds" and "The Transactions -- Financing". These dividends were not paid out
of earnings but were a means of refinancing the JEDI Bridge Loan, under which
Mariner Holdings was the primary obligor, with debt of the Company. The
Revolving Credit Facility and the Indenture restrict the Company's ability to
pay dividends. See "Description of Revolving Credit Facility" and "Description
of the Exchange Notes -- Certain Covenants -- Limitation on Restricted
Payments".
<TABLE>
<CAPTION>
PREDECESSOR COMPANY(1)
----------------------------------------------------------------------------------
HISTORICAL
------------------------------------
YEAR ENDED DECEMBER 31, SIX
---------------------------------------------------------- THREE MONTHS PRO FORMA
NINE MONTHS MONTHS ENDED NINE MONTHS
HISTORICAL PRO ENDED ENDED SEPTEMBER ENDED
------------------------------------------------- FORMA SEPTEMBER MARCH 30, SEPTEMBER
1991 1992 1993 1994 1995 1995(2) 30, 1995 31, 1996 1996 30, 1996(2)
-------- ------- ------- ------- -------- ------- ------------ -------- ------------ ------------
(IN THOUSANDS, EXCEPT RATIOS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF
OPERATIONS DATA:
Total revenues... $ 21,587 $20,972 $34,295 $35,856 $ 33,309 $33,309 $ 22,545 $13,778 $ 32,751 $ 46,529
Lease operating
expenses....... 6,310 6,312 7,746 7,118 7,331 7,331 5,279 2,872 5,211 8,083
Depreciation,
depletion and
amortization... 9,236 8,572 15,607 16,221 15,635 17,065 11,915 6,309 17,674 24,889
Impairment of oil
and gas
properties..... 16,325 6,296 6,257 22,500
General and
administrative
expenses....... 1,661 1,948 2,242 1,830 2,028 2,028 1,535 712 1,537 2,249
-------- ------- ------- ------- -------- ------- ------- ------- -------- -------
Operating
income
(loss)....... (11,945) 4,140 2,404 4,430 8,315 6,885 3,816 3,885 (14,171) 11,308
Interest
income......... 172 1,021 1,513 1,084 9,255 783 6,948 2,167 310 370
Interest
expense........ (4,113) (4,940) (7,358) (8,125) (12,772) (9,286 ) (9,550) (3,391 ) (5,102) (7,830)
Write-off bridge
loan fees...... (2,392)
-------- ------- ------- ------- -------- ------- ------- ------- -------- -------
Income (loss)
before income
taxes........ (15,886) 221 (3,441) (2,611) 4,798 (1,618 ) 1,214 2,661 (21,355) 3,848
Provision for
income taxes... 338 338 362
-------- ------- ------- ------- -------- ------- ------- ------- -------- -------
Income (loss)
after income
taxes.......... $(15,886) $ 221 $(3,441) $(2,611) $ 4,460 $(1,956) $ 852 $ 2,661 $(21,355) $ 3,848
======== ======= ======= ======= ======== ======= ======= ======= ======== =======
OTHER DATA:
EBITDA(3)........ $ 13,616 $12,712 $24,307 $26,908 $ 23,950 $23,950 $ 15,732 $10,194 $ 26,003 $ 36,197
Ratio of EBITDA
to net interest
expense(4)..... 2.7x 2.5x 3.6x 3.5x 4.3x 2.2 x 3.7x 7.4 x 3.4x 4.4x
Ratio of net debt
to EBITDA(5)... 5.8x 7.1x 3.7x 3.9x 2.5x 4.2 x
Ratio of earnings
to fixed
charges(6)..... 1.3x 1.0x 1.7 x 1.4x
</TABLE>
14
<PAGE> 17
<TABLE>
<CAPTION>
PREDECESSOR COMPANY(1)
-------------------------------------------------------------------------------
HISTORICAL
YEAR ENDED DECEMBER 31, -----------------------------------------
--------------------------------------------------- THREE SIX
NINE MONTHS MONTHS MONTHS
HISTORICAL ENDED ENDED ENDED
--------------------------------------------------- SEPTEMBER 30, MARCH 31, SEPTEMBER 30,
1991 1992 1993 1994 1995 1995 1996 1996
------- -------- -------- -------- -------- ------------- --------- -------------
(IN THOUSANDS, EXCEPT RATIOS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CAPITAL EXPENDITURES:
Leasehold acquisition.......... $ 5,246 $ 1,694 $ 590 $ 2,521 $ 4,594 $ 4,288 $ 949 $ 13,366
Oil and gas exploration........ 10,240 11,437 11,695 16,495 12,866 8,465 3,903 11,775
Oil and gas development and
other........................ 12,777 14,639 15,681 17,907 24,312 19,346 2,643 2,814
-------- ------- ------- ------- -------- ------- ------- --------
$28,263 $ 27,770 $ 27,966 $ 36,923 $ 41,772 $ 32,099 $ 7,495 $ 27,955
======== ======= ======= ======= ======== ======= ======= ========
</TABLE>
<TABLE>
<CAPTION>
PREDECESSOR COMPANY(1)
---------------------------------------------------------------
AT DECEMBER 31, AT
--------------------------------------------------- MARCH 31, AT SEPTEMBER
1991 1992 1993 1994 1995 1996 30, 1996
------- -------- -------- -------- -------- --------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total assets................................... $93,162 $125,532 $138,435 $138,202 $250,726 $254,301 $ 192,394
Long-term receivable from affiliates........... 15,000 18,000 4,000 106,000 104,000
10 1/2% Senior Subordinated Notes Due 2006..... 99,512
Other long-term debt, less current
maturities................................... 79,000 105,000 109,000 105,500 162,500 162,500
Stockholder's equity........................... 6,128 8,350 20,909 18,789 69,258 71,919 74,390
</TABLE>
SUMMARY OPERATING AND RESERVE DATA
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED DECEMBER 31, ENDED
--------------------------------------------------- SEPTEMBER 30,
1991 1992 1993 1994 1995 1996
------- ------- ------- ------- ------- -------------
<S> <C> <C> <C> <C> <C> <C>
PRODUCTION DATA:
Oil (Mbbls)...................................... 586 525 470 459 424 570
Natural gas (Mmcf)............................... 5,437 5,896 12,507 14,362 13,770 15,655
Natural gas equivalent (Mmcfe)................... 8,953 9,046 15,327 17,116 16,314 19,075
AVERAGE SALES PRICE PER UNIT:
Oil (per Bbl, including effects of hedging)...... $ 20.58 $ 19.51 $ 17.07 $ 15.86 $ 17.19 $ 18.39
Oil (per Bbl, excluding effects of hedging)...... 20.58 19.51 17.07 15.86 17.19 19.81
Natural gas (per Mcf, including effects of
hedging)....................................... 1.75 1.82 2.10 1.99 1.76(7) 2.30
Natural gas (per Mcf, excluding effects of
hedging)....................................... 1.75 1.94 2.16 1.94 1.70(7) 2.44
Natural gas equivalent (per Mcfe, including
effects of hedging)............................ 2.41 2.32 2.24 2.09 2.04 2.44
COSTS PER MCFE:
Lease operating expense.......................... 0.70 0.70 0.51 0.42 0.45 0.42(13)
Depreciation, depletion and amortization......... 1.03 0.95 1.02 0.95 0.96 1.30(13)
General and administrative expense............... 0.19 0.22 0.15 0.11 0.12 0.12(13)
Average finding and development cost(8).......... 1.03 0.98 1.12 1.07 0.97 1.12(13)
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31, AT
--------------------------------------------------------- MARCH 31,
1991 1992 1993 1994 1995 1996
------- -------- ------- ------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
ESTIMATED PROVED RESERVES:
Total proved reserves (Mmcfe)................... 118,264 117,977 127,828 142,045 138,344 137,333
Annual reserve replacement ratio(9)............. 3.9x 1.9x 1.7x 2.0x 1.2x
Estimated reserve life (in years)(10)........... 11.7 8.7 7.8 7.4 6.3 5.2
Present value of estimated future net revenues
(in thousands)(11)............................ $77,140 $100,064 $94,243 $95,318 $173,421 $161,048
Standardized measure of discounted net
cash flows(12)................................ 69,716 92,223 90,657 89,604 160,515 152,229
</TABLE>
15
<PAGE> 18
- ---------------
(1) For purposes of this Prospectus, the term "Predecessor Company" refers to
Mariner Energy, Inc. (formerly named "Hardy Oil & Gas USA Inc.") prior to
the effective date of the Acquisition.
(2) The pro forma Statement of Operations Data reflects the effect of the
Transactions. See "Pro Forma Financial Data" for a discussion of the
preparation of the pro forma information. See also "Use of Proceeds", "Pro
Forma Capitalization" and "The Transactions".
(3) EBITDA is calculated as operating income before interest, income taxes,
depletion, depreciation, amortization and impairment of oil and gas
property. EBITDA is not a measure of cash flow as determined by generally
accepted accounting principles ("GAAP"). The Company has included
information concerning EBITDA because EBITDA is a measure used by certain
investors in determining a company's historical ability to service its
indebtedness. EBITDA should not be considered as an alternative to, or more
meaningful than, net income or cash flow as determined in accordance with
GAAP as an indicator of the Company's operating performance or liquidity.
EBITDA is not necessarily comparable to a similarly titled measure of
another company. The Revolving Credit Facility requires the Company to
maintain certain financial ratios related to EBITDA, and the Indenture
limits the Company's ability to incur certain indebtedness, pay dividends
and engage in certain other transactions if certain financial ratios
related to EBITDA are not met. See "Description of Revolving Credit
Facility", "Description of the Exchange Notes -- Certain
Definitions -- EBITDA" and "Description of the Exchange Notes -- Certain
Covenants".
(4) For purposes of computing the ratio of EBITDA to net interest expense, net
interest expense consists of interest expense plus capitalized interest and
reduced by interest income relating to long-term receivables from
affiliates attributable to the fact that the Company was used to provide
financing for its affiliates. In the absence of advances to affiliates
(reflected in long-term receivables from affiliates), total long-term debt,
and the interest expense thereon, would have been reduced.
(5) Net debt has been calculated by reducing total long-term debt by the
long-term receivables from affiliates. In the absence of advances to
affiliates (reflected in long-term receivables from affiliates), total
long-term debt would have been reduced.
(6) For purposes of computing the ratio of earnings to fixed charges, earnings
consist of pretax income from continuing operations plus fixed charges,
excluding capitalized interest. Fixed charges consist of interest expense,
capitalized interest and the amortization of debt expense. For the years
ended December 31, 1991, 1992, 1993 and 1994, earnings were insufficient to
cover fixed charges by $16.8 million, $0.8 million, $4.4 million, and $3.2
million, respectively. For the six months ended September 30, 1996,
earnings were insufficient to cover fixed charges by $21.6 million. For the
pro forma year ended December 31, 1995, earnings would have been
insufficient to cover fixed charges by $3.7 million.
(7) Excludes the settlement of a bankruptcy claim against Columbia Gas
Transmission Company, which is classified as natural gas sales elsewhere
herein.
(8) Average finding and development cost per Mcfe is a rolling average
calculated by dividing capital expenditures (including future capital
expenditures) relating to properties which have been evaluated for the
rolling period by the ultimate reserve additions for the same period. For
the nine-month period ended September 30, 1996, and the years ended
December 31, 1995 and 1994, the rolling period is six years, which
management believes is an appropriate period for meaningful presentation.
As a result of the demerger of the Company in 1989, for the periods ended
December 31, 1993, 1992 and 1991, a five year, a four year and three year
rolling period, respectively, have been used because less than six years of
data were available.
(9) The annual reserve replacement ratio is calculated by dividing total
reserve additions, including revisions, on an Mcfe basis for the year by
actual production on an Mcfe basis for such year.
(10) The estimated reserve life is calculated by dividing the proved reserves on
an Mcfe basis by the forecasted production on an Mcfe basis for the 12
months following the date indicated (both as estimated by the Company's
independent reserve engineers as of December 31 of each year).
(11) Discounted at an annual rate of 10%. See "Glossary" included elsewhere in
this Prospectus for the definition of "present value of estimated future
net revenues".
(12) Represents after-tax present value of estimated future net revenues.
Because the Company had significant net operating loss carry-forwards for
federal income tax purposes, the information presented may not be
representative.
(13) For purposes of computing the Costs per Mcfe, costs for the nine months
ended September 30, 1996, are based on the pro forma results of operations
for the period.
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RISK FACTORS
Prospective investors should consider carefully the following factors, as
well as the other information contained in this Prospectus, in evaluating an
investment in the Exchange Notes. This Prospectus contains forward-looking
statements of the Company. The Company cautions prospective investors that the
following important factors could affect the Company's actual results in the
future.
SUBSTANTIAL LEVERAGE
As of September 30, 1996, after the Note Offering and the application of
the proceeds therefrom, the Company had total indebtedness for money borrowed of
approximately $99.5 million and stockholders' equity of approximately $74.4
million. The Company intends to incur additional indebtedness for money borrowed
in the future as it executes its strategy for prospect acquisition, exploration,
exploitation and development. The Company's leverage could have important
consequences to the holders of the Exchange Notes, including the following: (i)
the Company's ability to obtain additional financing for working capital,
capital expenditures, acquisitions or general corporate purposes may be impaired
in the future; (ii) a substantial portion of the Company's cash flow from
operations will be required for the payment of principal and interest on its
indebtedness for money borrowed, thereby reducing the funds available to the
Company for its operations and other purposes; (iii) the Company may be
substantially more leveraged than certain of its competitors, which may place
the Company at a competitive disadvantage; and (iv) the Company's substantial
degree of leverage may hinder its ability to adjust rapidly to changing market
conditions and could make it more vulnerable in the event of a downturn in
general economic conditions or its business. In addition, certain of the
Company's borrowings are and will continue to be at variable rates of interest,
which exposes the Company to the risk of increased interest rates. See
"-- Substantial Capital Requirements", "Capitalization", "Pro Forma Financial
Data", "Management's Discussion and Analysis of Financial Condition and Results
of Operations", "Description of Revolving Credit Facility" and "Description of
the Exchange Notes".
The Company's ability to make scheduled payments of principal of, to pay
interest on or to refinance its indebtedness for money borrowed (including the
Exchange Notes) depends on its future performance and successful strategy
implementation, which is subject not only to its own actions but also to general
economic, financial, competitive, legislative, regulatory and other factors
beyond its control, as well as to the prevailing market prices for oil, natural
gas and natural gas liquids. There can be no assurance that the Company's
business will generate sufficient cash flow from operations or that future
credit will be available in an amount sufficient to enable the Company to
service its indebtedness for money borrowed, including the Exchange Notes, or
make necessary capital expenditures. In addition, depending on the levels of its
cash flow and capital expenditures (the latter of which are, to a large extent,
discretionary), the Company may need to refinance a portion of the principal
amount of the Exchange Notes at or prior to their maturity. However, there can
be no assurance that the Company would be able to obtain financing to complete a
refinancing of the Exchange Notes. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources".
DEPLETION OF RESERVES; NECESSITY OF SUCCESSFUL EXPLORATION AND DEVELOPMENT
Producing oil and natural gas reservoirs generally are characterized by
declining production rates that vary depending upon reservoir characteristics
and other factors. The Company's future oil and natural gas reserves and
production, and, therefore, cash flow and income, are highly dependent upon the
Company's success in efficiently developing and exploiting its current reserves
and economically finding additional reserves that are economically recoverable.
At March 31, 1996, approximately 85% by value of the Company's reserves were
located in six fields. Without reserve additions in excess of production through
successful exploration and development activities, the Company's reserves and
production will decline. There can be no assurance that the Company will be able
to find and develop or acquire additional reserves to replace its current and
future production.
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SUBSTANTIAL CAPITAL REQUIREMENTS
The Company is dependent upon its ability to obtain financing for
prospecting, acquiring, exploring, exploiting and developing oil and natural gas
properties beyond its internally generated cash flow. Historically, the Company
has financed these activities primarily with internally generated funds and
capital from its former parent, Hardy plc. The Company currently has plans for
substantial capital expenditures to continue its exploration and development
programs. The Company expects to utilize the Revolving Credit Facility to borrow
funds required from time to time to supplement its own available cash. The
Revolving Credit Facility limits the amounts the Company may borrow thereunder
to amounts determined by the Lenders in their sole discretion, based upon the
Lenders' projected net revenues from the Company's oil and natural gas
properties and other considerations, and restricts the amounts the Company may
borrow under other credit facilities. The Lenders may adjust the borrowings
permitted to be outstanding under the Revolving Credit Facility semiannually and
on one other occasion during each year. The Lenders may require that outstanding
borrowings in excess of the borrowing limit be repaid in two equal
payments -- one three months and one six months following a determination of
such an excess -- and all amounts owed under the Revolving Credit Facility are
due and payable on June 28, 1999. If revenues or the Company's borrowing base
decrease as a result of lower oil and gas prices, operating difficulties or
declines in reserves, the Company may have limited ability to expend the capital
necessary to undertake or complete future activities. No assurances can be given
that the Company will have adequate funds available to it under the Revolving
Credit Facility to carry out its strategy or that the Company will be able to
make any mandatory principal payments required by the Lenders. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources". For a description of the
Revolving Credit Facility and its principal terms and conditions, see
"Description of Revolving Credit Facility".
VOLATILITY OF OIL, NATURAL GAS AND NATURAL GAS LIQUIDS PRICES
The Company's financial results are significantly affected by the price
received for the Company's oil, natural gas and natural gas liquids production.
Historically, the markets for oil, natural gas and natural gas liquids have been
volatile and are likely to continue to be volatile in the future. The prices
received by the Company for its oil, natural gas and natural gas liquids
production and the levels of such production are subject to wide fluctuations
and depend on numerous factors beyond the Company's control, including market
uncertainty, changes in global supply of and demand for oil, natural gas and
natural gas liquids, weather conditions, the condition of the United States
economy (particularly the manufacturing sector), the price and quantity of
foreign imports, the price and availability of alternative fuels, political
conditions (including embargoes) in or affecting other oil-producing and natural
gas-producing countries, the actions of the Organization of Petroleum Exporting
Countries and domestic government regulation, legislation and policies. The
Company's future financial condition and results of operations will be
dependent, in part, upon the prices received for the Company's oil and natural
gas production, as well as the costs of finding, developing and producing
reserves. If oil and natural gas prices fall materially below their current
levels, the availability of funds and the Company's ability to repay outstanding
amounts under the Revolving Credit Facility and the Exchange Notes could be
materially adversely affected. See "-- Substantial Capital Requirements" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations".
RESTRICTIVE DEBT COVENANTS
The Revolving Credit Facility and the Indenture each contain a number of
significant covenants that, among other things, restrict the ability of the
Company to dispose of assets, incur additional indebtedness, repay other
indebtedness, pay dividends, enter into certain investments or acquisitions,
repurchase or redeem capital stock, engage in mergers or consolidations, or
engage in certain transactions with subsidiaries and affiliates and that will
otherwise restrict corporate activities. There can be no assurance that such
restrictions will not adversely affect the Company's ability to finance its
future operations or capital needs or engage in other business activities that
may be in the interest of the Company. In addition, the Revolving Credit
Facility requires the Company to maintain compliance with certain financial
ratios. The ability of the Company to comply with such ratios may be affected by
events beyond the Company's control. A breach of any of these
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covenants or the inability of the Company to comply with the required financial
ratios could result in a default under the Revolving Credit Facility. In the
event of any such default, the Lenders could elect to declare all borrowings
outstanding under the Revolving Credit Facility, together with accrued interest
and other fees, to be due and payable, to require the Company to apply all of
its available cash to repay such borrowings or to prevent the Company from
making debt service payments on the Exchange Notes. If the indebtedness under
the Revolving Credit Facility or the Exchange Notes were to be accelerated,
there can be no assurance that the assets of the Company would be sufficient to
repay such indebtedness in full. See "Description of Revolving Credit Facility"
and "Description of the Exchange Notes".
UNCERTAINTIES IN ESTIMATING RESERVES AND FUTURE NET REVENUES
There are numerous uncertainties not only in generating valuable oil and
gas prospects and successfully exploring and developing them but also in
estimating quantities of proved reserves believed to have been discovered and in
projecting future rates of production and the timing of development
expenditures, including many factors beyond the control of the Company. The
reserve data set forth in this Prospectus are only estimates. Reserve estimates
are inherently imprecise and may be expected to change as additional information
becomes available. Furthermore, estimates of oil and gas reserves, of necessity,
are projections based on engineering data, and there are uncertainties inherent
in the interpretation of such data as well as the projection of future rates of
production and the timing of development expenditures. Reserve engineering is a
subjective process of estimating underground accumulations of oil and natural
gas that cannot be measured exactly, and the accuracy of any reserve estimate is
a function of the quality of available data and of engineering and geological
interpretation and judgment. Accordingly, estimates of the economically
recoverable quantities of oil and natural gas attributable to any 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. There also can be no assurance that the reserves set forth herein
will ultimately be produced or that the proved undeveloped reserves set forth
herein will be developed within the periods anticipated. It is likely that
variances from the estimates will be material. In addition, the estimates of
future net revenues from proved reserves of the Company and the present value
thereof are based upon certain assumptions about future production levels,
prices and costs that may not be correct when judged against actual subsequent
experience. The Company emphasizes with respect to the estimates prepared by
independent petroleum engineers that the discounted future net cash flows should
not be construed as representative of the fair market value of the proved
reserves owned by the Company since discounted future net cash flows are based
upon projected cash flows which do not provide for changes in oil and natural
gas prices from those in effect on the date indicated or for escalation of
expenses and capital costs subsequent to such date. The meaningfulness of such
estimates is highly dependent upon the accuracy of the assumptions upon which
they were based. Actual results will differ, and are likely to differ
materially, from the results estimated. Prospective investors in Exchange Notes
are cautioned not to place undue reliance on the reserve data included in this
Prospectus.
BUSINESS RISKS; OPERATING HAZARDS AND UNINSURED RISKS
Oil and gas drilling activities are subject to numerous risks, including
the risk that no commercially viable oil or natural gas production will be
obtained, and many of such risks are beyond the Company's control. The decision
to purchase, explore, develop or otherwise exploit a prospect or property will
depend in part on the evaluation of data obtained through geophysical and
geological analyses, production data and engineering studies, the results of
which are often inconclusive or subject to varying interpretations. See
"Business -- Oil and Natural Gas Reserves". The cost of drilling, completing and
operating wells, including especially offshore wells, is often uncertain, and
overruns in budgeted expenditures are common risks which can make a particular
project uneconomical. Drilling may be curtailed, delayed or canceled as a result
of many factors, including title problems, weather conditions, compliance with
government permitting requirements, shortages of or delays in obtaining
equipment, reductions in product prices and limitations in the market for
products. At present, the level of drilling activity in the Gulf has resulted in
significant increased demand for, and therefore increased costs associated with,
drilling equipment and the services and products of other vendors to the
industry. This circumstance presents the risk to the Company of the
unavailability of necessary equipment and
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services at economical prices. The availability of a ready market for the
Company's oil and natural gas production also depends on a number of factors,
including the demand for and supply of oil and natural gas and the proximity of
reserves to pipelines or trucking and terminal facilities and, offshore, the
proximity and ability to tie into existing production platforms owned or
operated by others and the ability to negotiate commercially satisfactory
arrangements with such owners or operators. Natural gas wells may be shut in for
lack of a market or because of inadequacy or unavailability of natural gas
pipeline or gathering system capacity.
The Company's oil and natural gas business is also subject to all of the
operating risks associated with the drilling for and production of oil and
natural gas, including, but not limited to, uncontrollable flows of oil, natural
gas, brine or well fluids into the environment (including groundwater and
shoreline contamination), blowouts, cratering, mechanical difficulties, fires,
explosions, pollution and other risks, any of which could result in substantial
losses to the Company. Although the Company maintains insurance at levels which
it believes are consistent with industry practices, it is not fully insured
against all risks. Losses and liabilities arising from uninsured and
underinsured events could have a material adverse effect on the financial
condition and operations of the Company.
WRITEDOWNS OF CARRYING VALUES
The Company periodically reviews the carrying value of its oil and gas
properties under the full cost accounting rules of the Commission. Under these
rules, capitalized costs of oil and natural gas properties may not exceed the
present value of estimated future net revenues from proved reserves, discounted
at 10%, plus the lower of cost or fair market value of unproved properties.
Application of this "ceiling" test generally requires pricing future revenue at
the unescalated prices in effect as of the end of each fiscal quarter and
requires a writedown for accounting purposes if the ceiling is exceeded, even if
prices declined for only a short period of time and even if prices increase in
subsequent periods. The risk that the Company will be required to write down the
carrying value of its oil and natural gas properties increases when oil and
natural gas prices are depressed or decline substantially. Any time a writedown
is required, it will result in a charge to earnings but will not affect cash
flow from operating activities.
GOVERNMENT LAWS AND REGULATIONS
The Company's operations are affected from time to time in varying degrees
by political developments and federal and state laws and regulations. In
particular, oil and natural gas production, operations and economics are or have
been affected by price controls, taxes and other laws relating to the oil and
natural gas industry, by changes in such laws and by changes in administrative
regulations. The Company cannot predict how existing laws and regulations may be
interpreted by enforcement agencies or court rulings, whether additional laws
and regulations will be adopted or the effect such changes may have on its
business or financial condition. See "Business -- Regulation".
The Company's operations are subject to complex and constantly changing
environmental laws and regulations adopted by federal, state and local
governmental authorities. The discharge of oil, natural gas, oil and gas
exploration and production wastes or other pollutants into the air, soil or
water may give rise to liabilities on the part of the Company to the government
and third parties and may require the Company to incur costs of remediation. No
assurance can be given that existing environmental laws or regulations, as
currently interpreted or reinterpreted in the future, or future laws or
regulations, will not materially adversely affect the Company's operations and
financial condition or that material indemnity claims will not arise against the
Company with respect to properties acquired or sold by the Company. See
"Business -- Regulation".
RISKS OF HEDGING TRANSACTIONS
The Company regularly enters into hedging transactions for its oil and
natural gas production, and in the future likely will continue to do so. Such
transactions may limit potential gains by the Company if oil and natural gas
prices were to rise substantially over the price established by the hedges and
may expose the
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Company to the risk of financial loss in certain circumstances, including
possibly instances where the Company's production is less than expected or there
is an unexpected event materially affecting prices. The Revolving Credit
Facility imposes certain limitations on the Company's ability to enter into
hedging transactions. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Results of Operations", "Description of
Revolving Credit Facility" and Note 6 to the Financial Statements of the Company
included elsewhere in this Prospectus.
CONFLICTS OF INTEREST
Enron is the parent of ECT, and an affiliate of Enron and ECT is the
general partner of JEDI. Accordingly, Enron may be deemed to control JEDI,
Mariner Holdings and the Company. In addition, five of the Company's directors
are officers of Enron or affiliates of Enron. Enron and certain of its
subsidiaries and other affiliates collectively participate in nearly all phases
of the oil and natural gas industry and are, therefore, competitors of the
Company. In addition, ECT and JEDI have provided, and may in the future provide,
and ECT Securities Corp., another affiliate of Enron, has assisted, and may in
the future assist, in arranging, financing to non-affiliated participants in the
oil and natural gas industry who are or may become competitors of the Company.
Because of these various possible conflicting interests, ECT, the Company, JEDI
and the Management Stockholders have entered into an agreement that is intended
to make clear that Enron and its affiliates have no duty to make business
opportunities available to the Company. The Company has not instituted any
formal plan or arrangement to address potential conflicts of interest that may
arise between the Company and Enron and its affiliates. There can be no
assurance than any conflicts of interest will be resolved in favor of the
Company.
The Company expects that from time to time it will engage in various
commercial transactions and have various commercial relationships with Enron and
certain affiliates of Enron, such as holding and exploring, exploiting or
developing joint working interests in particular prospects and properties,
engaging in hydrocarbon price hedging arrangements and entering into other oil
and gas related or financial transactions. There can be no assurance that the
terms of any future arrangements between the Company and Enron and affiliates of
Enron will be on terms as favorable to the Company as would exist in an
agreement with a third party. See "Certain Transactions -- Enron".
COMPETITION
The Company operates in a highly competitive environment with respect to
acquiring prospects, marketing oil and natural gas and securing trained
personnel. Many of the Company's larger competitors possess and employ financial
and personnel resources substantially greater than those available to the
Company. Such companies may be able to pay more for productive oil and natural
gas 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 personnel resources permit. The Company's ability to acquire
additional prospects and to discover reserves in the future will be dependent
upon its ability to evaluate and select suitable properties and to consummate
transactions in a highly competitive environment. In addition, there is
substantial competition for capital available for investment in the oil and
natural gas industry. There can be no assurance that the Company will be able to
compete successfully in the future in acquiring prospective reserves, developing
reserves, marketing hydrocarbons, attracting and retaining quality personnel,
and raising additional capital.
DEPENDENCE ON KEY PERSONNEL
The Company believes that its operations are dependent to a significant
extent upon the efforts of three members of its senior management and one of its
consultants, most of whom have been with the Company for more than 10 years. The
loss of the services of any of these key individuals could have a material
adverse effect upon the Company. The Company currently does not maintain any
insurance against the loss of any of these individuals.
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SUBORDINATION OF THE EXCHANGE NOTES
The Exchange Notes will be subordinated in right of payment to all Senior
Indebtedness of the Company, which includes all indebtedness under the Revolving
Credit Facility. As of September 30, 1996, after the Note Offering and the
application of the proceeds therefrom, the Company had no Senior Indebtedness
and would have had up to $50.0 million available under the Revolving Credit
Facility which, if borrowed, would be Senior Indebtedness. Although the Company
currently does not conduct any business through subsidiaries, future operations
of the Company could be conducted through subsidiaries. Claims of creditors of
subsidiaries, including trade creditors, secured creditors and creditors holding
indebtedness and guarantees issued by such subsidiaries, and claims of preferred
stockholders (if any) of such subsidiaries, generally will have priority with
respect to the assets and earnings of such subsidiaries over the claims of
creditors of the Company, including holders of the Exchange Notes, even if such
obligations do not constitute Senior Indebtedness of such subsidiaries. However,
in certain circumstances, the Exchange Notes may be guaranteed by certain
subsidiaries of the Company. See "Description of the Exchange Notes -- Certain
Covenants -- Future Guarantors". Any such guarantees, however, will be
subordinate in right of payment to any Senior Indebtedness of such subsidiaries.
Although the Indenture limits the incurrence of Indebtedness and preferred stock
of certain subsidiaries, such limitation is subject to a number of significant
qualifications. Moreover, the Indenture does not impose any limitation on the
incurrence by subsidiaries of liabilities that are not considered Indebtedness
under the Indenture. See "Description of the Exchange Notes -- Certain
Covenants -- Limitation on Indebtedness".
If the Exchange Notes are guaranteed by a subsidiary guarantor, the
obligations of such subsidiary under its guaranty will be senior subordinated
obligations. As such, the rights of Noteholders to receive payment by a
subsidiary guarantor will be subordinated in right of payment to the rights of
holders of Senior Indebtedness of such subsidiary. The terms of the
subordination with respect to the Company's obligations under the Exchange Notes
will apply equally to a subsidiary guarantor and the obligations of such
subsidiary under its guaranty.
In the event of liquidation, dissolution, reorganization, bankruptcy or any
similar proceeding regarding the Company, the assets of the Company will be
available to pay obligations on the Exchange Notes only after the Senior
Indebtedness of the Company has been paid in full. Accordingly, there may not be
sufficient funds remaining to pay amounts due on all or any of the Exchange
Notes. In addition, the subordination provisions of the Indenture provide that
no cash payment may be made with respect to the Exchange Notes during the
continuance of a payment default under any Senior Indebtedness of the Company.
Furthermore, if certain non-payment defaults exist with respect to certain
Senior Indebtedness of the Company, the holders of such Senior Indebtedness will
be able to prevent payments on the Exchange Notes for certain periods of time.
See "Description of the Exchange Notes -- Ranking".
PAYMENT UPON A CHANGE OF CONTROL
Upon the occurrence of a Change of Control, each holder of the Exchange
Notes may require the Company to repurchase all or a portion of such holder's
Exchange Notes at 101% of the principal amount of the Exchange Notes, together
with accrued and unpaid interest to the date of repurchase. The Indenture
requires that, prior to such a repurchase, the Company must either repay all
outstanding Senior Indebtedness or obtain any required consents to such
repurchase. Further, under the Revolving Credit Facility, an event of default is
deemed to occur if JEDI, Enron, CalPERS, ECT and affiliates of such entities (or
a combination of such entities) cease to own, directly or indirectly,
outstanding capital stock of the Company (on either an undiluted or fully
diluted basis) that in the aggregate permits such entities to elect a majority
of the Board of Directors of the Company. In such circumstances, the Lenders
could require the repayment of all outstanding borrowings under the Revolving
Credit Facility. If a Change of Control were to occur, the Company may not have
the financial resources to repay all of the Senior Indebtedness, the Exchange
Notes and any other indebtedness that would become payable upon the occurrence
of such Change of Control. See "-- Subordination of the Exchange Notes" and
"Description of the Exchange Notes -- Certain Covenants -- Change of Control".
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FRAUDULENT CONVEYANCE LAWS
A portion of the proceeds of the Note Offering was used to repay
outstanding indebtedness incurred to pay a cash dividend to Mariner Holdings,
and a portion of the proceeds of the Note Offering was used to pay an additional
cash dividend to Mariner Holdings. Mariner Holdings has used those dividends to
repay the JEDI Bridge Loan. Under federal or state fraudulent transfer laws, if
a court of competent jurisdiction were to find, in a lawsuit by an unpaid
creditor or a representative of creditors, such as a trustee in bankruptcy or a
debtor-in-possession, that the Company paid such dividend or incurred such
indebtedness with the intent to hinder, delay or defraud present or future
creditors, or received less than a reasonably equivalent value or fair
consideration for any such indebtedness or payment, and at the time of such
incurrence or payment (i) was insolvent, (ii) was rendered insolvent by reason
of such incurrence or payment, (iii) was engaged or about to engage in a
business or transaction for which its remaining assets constituted unreasonably
small capital to carry on its business or (iv) intended to incur, or believed or
reasonably should have believed that it would incur, debts beyond its ability to
pay as such debts matured, such court could avoid the Company's obligations to
the holders of the Exchange Notes, subordinate the Company's obligations to the
holders of the Exchange Notes to all other indebtedness of the Company or take
other action detrimental to the holders of the Exchange Notes. In that event,
there can be no assurance that any repayment on the Exchange Notes could ever be
recovered by the holders of the Exchange Notes. Any guarantee of the Exchange
Notes by a subsidiary of the Company required pursuant to the terms of the
Indenture may also be subject to challenge under fraudulent transfer laws and,
in any case, will be limited to amounts that any such subsidiary can guarantee
without violating such laws. See "Description of the Exchange Notes -- Certain
Definitions -- Subsidiary Guaranty".
LACK OF PUBLIC MARKET FOR THE EXCHANGE NOTES
The Outstanding Notes currently are owned by a relatively small number of
beneficial owners. The Outstanding Notes have not been registered under the
Securities Act and will be subject to significant restrictions on resale. The
Exchange Notes will constitute a new issue of securities with no established
trading market. The Company does not intend to list the Outstanding Notes or the
Exchange Notes on any national securities exchange or to seek the admission
thereof to trading in the National Association of Securities Dealers Automated
Quotation System. Although certain Placement Agents have advised the Company
that, following consummation of the Exchange Offer, they currently intend to
make a market in the Exchange Notes, they are not obligated to do so, and any
market making activity with respect to the Exchange Notes may be discontinued at
any time without notice. In addition, such market making activity will be
subject to the limits imposed in the Exchange Act, and may be limited during the
Exchange Offer or the pendency of the Shelf Registration Statement. Accordingly,
no assurance can be given that an active public or other market will develop for
the Exchange Notes or as to the liquidity of or the trading market for the
Exchange Notes.
EXCHANGE OFFER PROCEDURES
Issuance of the Exchange Notes in exchange for Outstanding Notes pursuant
to the Exchange Offer will be made only after a timely receipt by the Company of
the Outstanding Notes, a properly completed and duly executed Letter of
Transmittal and all other required documents. Therefore, holders of the
Outstanding Notes desiring to tender their Outstanding Notes in exchange for
Exchange Notes should allow sufficient time to ensure timely delivery. The
Company is under no duty to give notification of defects or irregularities with
respect to the tenders of Outstanding Notes for exchange. Outstanding Notes that
are not tendered or are tendered but not accepted will, following the
consummation of the Exchange Offer, continue to be subject to the existing
restrictions on transfer thereof. On consummation of the Exchange Offer, the
registration rights under the Registration Agreement will terminate except that
if (i) the Company determines that the Exchange Offer may not be consummated as
soon as practicable after the Expiration Date because it would violate
applicable law or the applicable interpretations of the staff of the Commission,
(ii) the Exchange Offer is not consummated within 180 days of the date of the
Registration Agreement, (iii) the Placement Agents so request with respect to
the Outstanding Notes not eligible to be exchanged for Exchange Notes in the
Exchange Offer and held by them following consummation of the Exchange Offer or
(iv) any holder of an
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Outstanding Note (other than an Exchanging Dealer) is not eligible to
participate in the Exchange Offer or, in the case of any holder of Outstanding
Notes (other than an Exchanging Dealer) that participates in the Exchange Offer,
such holder does not receive freely tradeable Exchange Notes on the date of the
exchange for validly tendered (and not withdrawn) Outstanding Notes, the Company
has agreed to file and maintain the Shelf Registration Statement that would
allow resales or transfer of restricted Outstanding Notes or Exchange Notes
owned by such holders. In addition, any holder of Outstanding Notes who tenders
in the Exchange Offer for the purpose of participating in a distribution of the
Exchange Notes may be deemed to have received restricted securities and, if so,
will be required to comply with the registration and prospectus delivery
requirements of the Securities Act in connection with any resale transaction.
Each broker-dealer that receives Exchange Notes for its own account in exchange
for Outstanding Notes that were acquired by the broker-dealer as a result of
market-making activities or other trading activities must acknowledge that it
will deliver a prospectus in connection with any resale of the Exchange Notes.
See "Plan of Distribution". To the extent that Outstanding Notes are tendered
and accepted in the Exchange Offer, the trading market for untendered and
tendered but unaccepted Outstanding Notes could be adversely affected. See "The
Exchange Offer".
CONSEQUENCES OF THE EXCHANGE OFFER ON NON-TENDERING HOLDERS OF OUTSTANDING NOTES
The Company intends for the Exchange Offer to satisfy its registration
obligations under the Registration Agreement. If the Exchange Offer is
consummated, the Company does not, except in very limited circumstances set
forth in the Registration Agreement, intend to file additional registration
statements for the sale or other disposition of Outstanding Notes. Consequently,
following completion of the Exchange Offer, holders of Outstanding Notes seeking
liquidity in their investment would have to rely on an exemption from the
registration requirements of applicable securities laws, including the
Securities Act, with respect to any sale or other disposition of Outstanding
Notes.
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<PAGE> 27
THE EXCHANGE OFFER
PURPOSE AND EFFECT OF THE EXCHANGE OFFER
The Outstanding Notes were sold by the Company on August 14, 1996, to the
Placement Agents pursuant to the Placement Agreement. The Placement Agents
subsequently resold the Outstanding Notes to qualified institutional buyers in
reliance on Rule 144A under the Securities Act, in offshore transactions in
reliance on Regulation S under the Securities Act and to two Institutional
Accredited Investors. In conjunction with the Placement Agreement, the Company
entered into the Registration Agreement with the Placement Agents, which
requires, among other things, that the Company file with the Commission a
registration statement under the Securities Act with respect to an offer by the
Company to the holders of the Outstanding Notes to issue and deliver to such
holders, in exchange for Outstanding Notes, a like principal amount of Exchange
Notes. The Company is required to use its best efforts to cause the registration
statement relating to the Exchange Offer to be declared effective by the
Commission under the Securities Act, to commence the Exchange Offer and to
issue, on or prior to the Exchange Date, the Exchange Notes. The Exchange Notes
will be issued without a restrictive legend and may be reoffered and resold by
the holder without restrictions or limitations under the Securities Act (other
than a holder that is an "affiliate" of the Company within the meaning of Rule
405 under the Securities Act or a Participating Broker-Dealer). A copy of the
Registration Agreement has been filed as an exhibit to the Registration
Statement of which this Prospectus is a part. The term "Holder" with respect to
the Exchange Offer means any person in whose name the Outstanding Notes are
registered on the books of the Company or any other person who has obtained a
properly completed bond power from the registered holder. Each broker-dealer
that receives Exchange Notes for its own account in exchange for Outstanding
Notes, where such Outstanding Notes were acquired by such broker-dealer as a
result of market-making activities or other trading activities, must acknowledge
that it will deliver a prospectus in connection with any resale of such Exchange
Notes. See "Plan of Distribution".
TERMS OF THE EXCHANGE OFFER
On the terms and subject to the conditions set forth in this Prospectus and
in the Letter of Transmittal, the Company will accept any and all Outstanding
Notes validly tendered and not withdrawn before 12:00 midnight, New York City
time, on the Expiration Date. As soon as practicable after the Expiration Date,
the Company will issue $1,000 principal amount of Exchange Notes in exchange for
$1,000 principal amount of Outstanding Notes accepted in the Exchange Offer.
Holders may tender some or all of their Outstanding Notes pursuant to the
Exchange Offer; however, Outstanding Notes may be tendered only in integral
multiples of $1,000.
The form and terms of the Exchange Notes are the same as the form and terms
of the Outstanding Notes except that the Exchange Notes have been registered
under the Securities Act and hence will not bear legends restricting the
transfer thereof. In addition, the rights of the Holders of the Outstanding
Notes under the terms of the Registration Agreement relating to the registration
of the Outstanding Notes and certain interest provisions relating thereto will
terminate upon the consummation of the Exchange Offer. The Exchange Notes will
evidence the same debt as the Outstanding Notes and will be entitled to the
benefits of the Indenture.
As of the date of this Prospectus, $99,250,000 aggregate principal amount
of the Outstanding Notes was outstanding and registered in the name of Cede &
Co., as nominee for the DTC, and $750,000 aggregate principal amount of the
Outstanding Notes was outstanding and registered in the name of two other
holders. The Company has fixed the close of business of , 1996, as the
record date for the Exchange Offer for purposes of determining the persons to
whom this Prospectus and the Letter of Transmittal will be mailed initially.
Holders of Outstanding Notes do not have any appraisal or dissenters'
rights under the General Corporation Law of the State of Delaware or the
Indenture in connection with the Exchange Offer. The Company intends to conduct
the Exchange Offer in accordance with the applicable requirements of the
Exchange Act and the rules and regulations of the Commission thereunder,
including Rule 14e-1 thereunder.
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<PAGE> 28
The Company shall be deemed to have accepted validly tendered Outstanding
Notes when, as and if the Company has given oral or written notice thereof to
the Exchange Agent. The Exchange Agent will act as agent for the tendering
Holders for the purpose of receiving the Exchange Notes from the Company.
If any tendered Outstanding Notes are not accepted for exchange because of
an invalid tender, the occurrence of certain other events set forth herein or
otherwise, the certificates for any such unaccepted Outstanding Notes will be
returned, without expense, to the tendering Holder thereof as promptly as
practicable after the Expiration Date.
Holders who tender Outstanding Notes in the Exchange Offer will not be
required to pay brokerage commissions or fees or, subject to the instructions in
the Letter of Transmittal, transfer taxes with respect to the exchange of
Outstanding Notes pursuant to the Exchange Offer. The Company will pay all
charges and expenses, other than transfer taxes in certain circumstances, in
connection with the Exchange Offer. See "-- Fees and Expenses".
CORRECTIVE AMENDMENT TO THE INDENTURE
Promptly after the completion of the Exchange Offer, the Company intends to
effect an amendment to the Indenture that will cure an unintended and
inadvertent omission, defect and inconsistency in the Indenture -- a correction
that the Company believes will not materially affect the rights of holders of
the Notes. After the closing of the Note Offering, the Company discovered that a
phrase had been omitted from the Indenture, the omission of which the Company
believes causes the covenant (the "Negative Pledge Covenant") described under
"Description of the Exchange Notes -- Certain Covenants -- Limitation on Liens"
to be defective and inconsistent with other provisions of the Indenture. As
currently drafted, the Negative Pledge Covenant prohibits the Company from
granting a Lien (other than a Permitted Lien) covering any of its properties
unless the Company also secures the Notes equally and ratably with the holder of
that Lien. The persons who negotiated the Indenture intended that the Negative
Pledge Covenant be similar to the comparable covenants in similar recent debt
offerings by similar issuers, which permit the granting of Liens to secure
Senior Indebtedness. The Company and the lead initial purchaser of the
Outstanding Notes are of the view that the absence of a phrase in the Negative
Pledge Covenant that excepts Liens granted to secure Senior Indebtedness was
unintentional. The absence of this exception makes the Negative Pledge Covenant
now in the Indenture inconsistent with the contractual subordination provisions
of the Indenture, which provide that the Notes are subordinated in right of
payment to all Senior Indebtedness, whether secured or unsecured. Currently, the
Indenture expressly permits the granting of Permitted Liens in a number of
instances, including Liens to secure Senior Indebtedness arising under credit
facilities having an aggregate principal amount not in excess of the Borrowing
Base. Therefore, the Amendment has no bearing on the Company's ability to secure
the Revolving Credit Facility. See "Description of the Exchange Notes -- Certain
Definitions -- Permitted Liens".
If the Company were to grant a Lien (other than a Permitted Lien) on any of
its property in favor of any holder of Senior Indebtedness and, pursuant to the
Indenture as currently drafted, attempt to secure the Notes equally and ratably,
the Notes would continue to be contractually subordinated in right of payment to
all Senior Indebtedness in accordance with the terms of the Indenture,
regardless of whether the Senior Indebtedness is secured or unsecured. The
omission of an exception for Liens granted to secure Senior Indebtedness was
inadvertent and does not reflect the intentions of the persons who negotiated
the Indenture. To correct this omission or defect, the Company proposes to amend
the Indenture by inserting into the Negative Pledge Covenant a phrase that
commonly appears in indentures governing senior subordinated debt, which phrase
would permit the Company to create Liens securing Senior Indebtedness without
equally and ratably securing the Notes. See "Description of the Exchange
Notes -- Corrective Amendment to the Indenture". The Company is not currently
contemplating any transaction that would require the Company to grant a Lien to
secure the Notes pursuant to the terms of the Negative Pledge Covenant as
currently in effect and believes that any such transaction is unlikely in the
future. Moreover, the Revolving Credit Facility restricts the granting of any
such Lien.
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<PAGE> 29
The Indenture provides that the Company and the Trustee may amend the
Indenture without notice to or the consent of any holder of Notes, among other
things, to cure any ambiguity, omission, defect or inconsistency. See
"Description of the Exchange Notes -- Amendments and Waivers". Since, however,
the Notes were so recently issued and the Exchange Offer was in progress at the
time the omission was discovered, the Company has concluded that it is
advisable, in conjunction with the Exchange Offer, to explain the situation to
holders of the Notes and to ask for an acknowledgement from them that the
Company may cure the omission, defect and inconsistency in the manner described
above.
Accordingly, the Company has provided in the Letter of Transmittal that the
tender of an Outstanding Note pursuant to the Exchange Offer constitutes the
agreement of the Holder of that Outstanding Note with the Company's
interpretation that it may so effect the Amendment through the execution, with
the Trustee, of a supplemental indenture.
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The term "Expiration Date" shall mean 12:00 midnight, New York City time,
on , 1997, unless the Company, in its sole discretion, extends the
expiration date for the Exchange Offer, in which case the term "Expiration Date"
shall mean the latest date and time to which the Exchange Offer is extended.
To extend the expiration date for the Exchange Offer, the Company will
notify the Exchange Agent of the extension by oral or written notice, will mail
to the registered Holders an announcement thereof, each prior to 9:00 a.m., New
York City time, on the next business day after the previously scheduled
expiration date, and will make a public announcement of the extension.
The Company reserves the right, in its sole discretion, (i) to delay
accepting any Outstanding Notes, to extend the Exchange Offer or to terminate
the Exchange Offer if any of the conditions set forth below under
"-- Conditions" shall not have been satisfied, by giving oral or written notice
of such delay, extension or termination to the Exchange Agent or (ii) to amend
the terms of the Exchange Offer in any manner. Any such delay in acceptance,
extension, termination or amendment will be followed as promptly as practicable
by oral or written notice thereof to the registered holders. If the Exchange
Offer is amended in a manner determined by the Company to constitute a material
change, the Company will promptly disclose such amendment by means of a
prospectus supplement that will be distributed to the registered Holders, and,
depending on the significance of the amendment and the manner of disclosure to
the registered Holders, the Company will extend the Exchange Offer for a period
of five to 10 business days if the Exchange Offer would otherwise expire during
such five to 10 business day period.
Without limiting the manner in which the Company may choose to make public
announcement of any delay, extension, amendment or termination of the Exchange
Offer, the Company shall have no obligation to publish, advertise or otherwise
communicate any such public announcement, other than by making a timely release
to the Dow Jones News Service.
INTEREST ON THE NOTES
The Exchange Notes will bear interest from the date of issuance of the
Exchange Notes. Interest on the Exchange Notes will be payable semi-annually on
each February 1 and August 1, commencing on the first such date following the
date of issuance of the Exchange Notes. Outstanding Notes that are accepted for
exchange will cease to accrue interest on and after the date on which interest
on the Exchange Notes begins to accrue. Accrued and unpaid interest on the
Outstanding Notes that are tendered in exchange for the Exchange Notes will be
payable on or before the first February 1 or August 1 following the date of
issuance of the Exchange Notes.
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<PAGE> 30
PROCEDURES FOR TENDERING
Only a Holder of Outstanding Notes may tender them in the Exchange Offer.
To tender in the Exchange Offer, a Holder must complete, sign and date the
Letter of Transmittal, or a facsimile thereof, have the signatures thereon
guaranteed if required by the Letter of Transmittal and mail or otherwise
deliver the Letter of Transmittal or facsimile, together with the Outstanding
Notes and any other required documents, to the Exchange Agent before 12:00
midnight, New York City time, on the Expiration Date. To be tendered
effectively, the Outstanding Notes, Letter of Transmittal and other required
documents must be received by the Exchange Agent at the address set forth below
under "Exchange Agent" before 12:00 midnight, New York City time, on the
Expiration Date. Delivery of the Outstanding Notes may be made by book-entry
transfer in accordance with the procedures described below. Confirmation of
book-entry transfer must be received by the Exchange Agent before the Expiration
Date.
By executing the Letter of Transmittal, each Holder will (i) make to the
Company the representation set forth below in the second paragraph under the
heading "Resale of Exchange Notes" and (ii) agree that the Company may effect
the Amendment without further action or approval by holders of the Notes.
The tender by a Holder and the acceptance thereof by the Company will
constitute agreement between the Holder and the Company in accordance with the
terms and subject to the conditions set forth herein and in the Letter of
Transmittal.
THE METHOD OF DELIVERY OF OUTSTANDING NOTES AND THE LETTER OF TRANSMITTAL
AND ALL OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE ELECTION AND
RISK OF THE HOLDER. INSTEAD OF DELIVERY BY MAIL, IT IS RECOMMENDED THAT HOLDERS
USE AN OVERNIGHT OR HAND DELIVERY SERVICE. IN ALL CASES, SUFFICIENT TIME SHOULD
BE ALLOWED TO ASSURE DELIVERY TO THE EXCHANGE AGENT BEFORE THE EXPIRATION DATE.
NO LETTER OF TRANSMITTAL OR OUTSTANDING NOTES SHOULD BE SENT TO THE COMPANY.
HOLDERS MAY REQUEST THEIR RESPECTIVE BROKERS, DEALERS, COMMERCIAL BANKS, TRUST
COMPANIES OR NOMINEES TO EFFECT THE ABOVE TRANSACTIONS FOR THE HOLDERS.
A beneficial owner whose Outstanding Notes are registered in the name of a
broker, dealer, commercial bank, trust company or other nominee and who wishes
to tender should contact the registered Holder promptly and instruct the
registered Holder to tender on the beneficial owner's behalf.
Signatures on the Letter of Transmittal or a notice of withdrawal, as the
case may be, must be guaranteed by an Eligible Institution (as defined below)
unless the Outstanding Notes tendered thereby are tendered (i) by a registered
Holder who has not completed the box entitled "Special Registration
Instructions" or "Special Delivery Instructions" on the Letter of Transmittal or
(ii) for the account of an Eligible Institution. If signatures on a Letter of
Transmittal or a notice of withdrawal, as the case may be, are required to be
guaranteed, the guaranty must be by a member firm of a registered national
securities exchange or of the National Association of Securities Dealers, Inc.,
a commercial bank or trust company having an office or correspondent in the
United States or an "eligible guarantor institution" within the meaning of Rule
17Ad-15 under the Exchange Act (an "Eligible Institution").
If the Letter of Transmittal is signed by a person other than the
registered Holder of any Outstanding Notes listed therein, the Outstanding Notes
must be endorsed or accompanied by a properly completed bond power, signed by
the registered Holder as the registered Holder's name appears on the Outstanding
Notes with the signature thereon guaranteed by an Eligible Institution.
If the Letter of Transmittal or any Outstanding Notes or bond powers are
signed by trustees, executors, administrators, guardians, attorneys-in-fact,
officers of corporations or others acting in a fiduciary or representative
capacity, such persons should so indicate when signing, and, unless waived by
the Company, evidence satisfactory to the Company of their authority to so act
must be submitted with the Letter of Transmittal.
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<PAGE> 31
The Company understands that the Exchange Agent will make a request
promptly after the date of this Prospectus to establish accounts with respect to
the Exchange Notes at the DTC (the "Book-Entry Transfer Facility") for the
purpose of facilitating the Exchange Offer, and, subject to the establishment
thereof, any financial institution that is a participant in the Book-Entry
Transfer Facility's system may make book-entry delivery of the Outstanding Notes
by causing the Book-Entry Transfer Facility to transfer the Outstanding Notes
into the Exchange Agent's account with respect to the Outstanding Notes in
accordance with the Book-Entry Transfer Facility's procedures for transfer.
Although delivery of the Outstanding Notes may be effected through book-entry
transfer into the Exchange Agent's account at the Book-Entry Transfer Facility,
an appropriate Letter of Transmittal properly completed and duly executed with
any required signature guaranty and all other required documents must in each
case be transmitted to and received or confirmed by the Exchange Agent at its
address set forth below on or before the Expiration Date, or, if the guaranteed
delivery procedures described below are complied with, within the time period
provided under such procedures; provided, however, that a participant in the
DTC's book-entry system may, in accordance with DTC's Automated Tender Offer
Program procedures and in lieu of physical delivery to the Exchange Agent of a
Letter of Transmittal, electronically acknowledge its receipt of, and agreement
to be bound by, the terms of the Letter of Transmittal. Delivery of documents to
the Book-Entry Transfer Facility does not constitute delivery to the Exchange
Agent.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance of tendered Outstanding Notes and withdrawal of tendered
Outstanding Notes and any notices relating thereto will be determined by the
Company in its sole discretion, which determination will be final and binding.
The Company reserves the absolute right to reject any and all Outstanding Notes
not properly tendered or any Outstanding Notes the Company's acceptance of which
would, in the opinion of counsel for the Company, be unlawful. The Company also
reserves the right to waive any defects, irregularities or conditions of tender
as to particular Outstanding Notes. The Company's interpretation of the terms
and conditions of the Exchange Offer (including the instructions in the Letter
of Transmittal) will be final and binding on all parties. Unless waived, any
defects or irregularities in connection with tenders of Outstanding Notes must
be cured within such time as the Company shall determine. Although the Company
intends to notify Holders of defects or irregularities with respect to tenders
of Outstanding Notes, neither the Company, the Exchange Agent nor any other
person shall incur any liability for failure to give such notification. Tenders
of Outstanding Notes will not be deemed to have been made until such defects or
irregularities have been cured or waived. Any Outstanding Notes received by the
Exchange Agent that are not properly tendered and as to which the defects or
irregularities have not been cured or waived will be returned by the Exchange
Agent to the tendering Holders as soon as practicable following the Expiration
Date.
Each broker-dealer that receives Exchange Notes for its own account in
exchange for Outstanding Notes, where such Outstanding Notes were acquired by
such broker-dealer as a result of market-making activities or other trading
activities, must acknowledge that it will deliver a prospectus in connection
with any resale of such Exchange Notes. See "Plan of Distribution".
GUARANTEED DELIVERY PROCEDURES
Holders who wish to tender their Outstanding Notes and (i) whose
Outstanding Notes are not immediately available or (ii) who cannot deliver their
Outstanding Notes, the Letter of Transmittal or any other required documents to
the Exchange Agent or complete the procedures for book-entry transfer prior to
the Expiration Date, may effect a tender if:
(a) the tender is made through an Eligible Institution;
(b) prior to the Expiration Date, the Exchange Agent receives from
such Eligible Institution a properly completed and duly executed Notice of
Guaranteed Delivery (by facsimile transmission, mail or hand delivery)
setting forth the name and address of the Holder, the number(s) of such
Outstanding Notes and the principal amount of Outstanding Notes tendered,
stating that the tender is being made thereby and guaranteeing that, within
five New York Stock Exchange trading days after the Expiration Date, the
Letter of Transmittal (or facsimile thereof), together with the
certificate(s) representing the
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<PAGE> 32
Outstanding Notes (or a confirmation of book-entry transfer of such
Outstanding Notes into the Exchange Agent's account at the Book-Entry
Transfer Facility) and any other documents required by the Letter of
Transmittal, will be deposited by the Eligible Institution with the
Exchange Agent; and
(c) such properly completed and executed Letter of Transmittal (or
facsimile thereof), as well as the certificate(s) representing all tendered
Outstanding Notes in proper form for transfer (or a confirmation of
book-entry transfer of such Outstanding Notes into the Exchange Agent's
account at the Book-Entry Transfer Facility) and all other documents
required by the Letter of Transmittal, are received by the Exchange Agent
within five New York Stock Exchange trading days after the Expiration Date.
Upon request to the Exchange Agent, a Notice of Guaranteed Delivery will be
sent to Holders who wish to tender their Outstanding Notes according to the
guaranteed delivery procedures set forth above.
WITHDRAWALS OF TENDERS
Except as otherwise provided herein, tenders of Outstanding Notes may be
withdrawn at any time prior to 12:00 midnight, New York City time, on the
Expiration Date.
To withdraw a tender of Outstanding Notes in the Exchange Offer, a written
or facsimile transmission notice of withdrawal must be received by the Exchange
Agent at its address set forth herein prior to 12:00 midnight, New York City
time, on the Expiration Date. Any such notice of withdrawal must (i) specify the
name of the person having deposited the Outstanding Notes to be withdrawn (the
"Depositor"), (ii) identify the Outstanding Notes to be withdrawn (including the
certificate number(s) and principal amount of such Outstanding Notes, or, in the
case of Outstanding Notes transferred by book-entry transfer, the name and
number of the account at the Book-Entry Transfer Facility to be credited), (iii)
be signed by the Holder in the same manner as the original signature on the
Letter of Transmittal by which such Outstanding Notes were tendered (including
any required signature guarantees) or be accompanied by documents of transfer
sufficient to have the Trustee with respect to the Outstanding Notes register
the transfer of such Outstanding Notes into the name of the person withdrawing
the tender, (iv) specify the name in which any such Outstanding Notes are to be
registered, if different from that of the Depositor, and (v) if applicable
because the Outstanding Notes have been tendered pursuant to book-entry
procedures, specify the name and number of the participant's account at DTC to
be credited, if different from that of the Depositor. All questions as to the
validity, form and eligibility (including time of receipt) of such notices will
be determined by the Company, whose determination shall be final and binding on
all parties. Any Outstanding Notes so withdrawn will be deemed not to have been
validly tendered for purposes of the Exchange Offer and no Exchange Notes will
be issued with respect thereto unless the Outstanding Notes so withdrawn are
validly retendered. Any Outstanding Notes which have been tendered but which are
not accepted for exchange will be returned to the Holder thereof without cost to
such Holder as soon as practicable after withdrawal, rejection of tender or
termination of the Exchange Offer. Properly withdrawn Outstanding Notes may be
retendered by following one of the procedures described above under
"-- Procedures for Tendering" at any time prior to the Expiration Date.
CONDITIONS
Notwithstanding any other term of the Exchange Offer, the Company shall not
be required to accept for exchange, or to issue Exchange Notes for, any
Outstanding Notes, and may terminate or amend the Exchange Offer as provided
herein before the acceptance of such Outstanding Notes, if:
(a) any action or proceeding is instituted or threatened in any court
or by or before any governmental agency with respect to the Exchange Offer
that might materially impair the ability of the
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<PAGE> 33
Company to proceed with the Exchange Offer or any material adverse
development has occurred in any existing action or proceeding with respect
to the Company or any of its subsidiaries;
(b) any change, or any development involving a prospective change, in
the business or financial affairs of the Company or any of its subsidiaries
has occurred that might materially impair the ability of the Company to
proceed with the Exchange Offer;
(c) any law, statute, rule, regulation or interpretation by the staff
of the Commission is proposed, adopted or enacted that might materially
impair the ability of the Company to proceed with the Exchange Offer or
materially impair the contemplated benefits of the Exchange Offer to the
Company;
(d) there shall occur a change in the current interpretation by the
staff of the Commission that permits the Exchange Notes issued pursuant to
the Exchange Offer in exchange for Outstanding Notes to be offered for
resale, resold and otherwise transferred by Holders thereof (other than
broker-dealers and any such Holder that is an "affiliate" of the Company
within the meaning of Rule 405 under the Securities Act) without compliance
with the registration and prospectus delivery provisions of the Securities
Act; provided that such Exchange Notes are acquired in the ordinary course
of such Holders' business and such Holders have no arrangement or
understanding with any person to participate in the distribution of such
Exchange Notes; or
(e) any governmental approval has not been obtained, which approval
the Company shall deem necessary for the consummation of the Exchange Offer
as contemplated hereby.
If the Company determines in good faith and in the exercise of its
reasonable discretion that any of the conditions are not satisfied, the Company
may (i) refuse to accept any Outstanding Notes and return all tendered
Outstanding Notes to the tendering Holders, (ii) extend the Exchange Offer and
retain all Outstanding Notes tendered prior to the expiration of the Exchange
Offer, subject, however, to the rights of Holders to withdraw such Outstanding
Notes (see "-- Withdrawal of Tenders") or (iii) waive such unsatisfied
conditions with respect to the Exchange Offer and accept all properly tendered
Outstanding Notes which have not been withdrawn. If such waiver constitutes a
material change to the Exchange Offer, the Company will promptly disclose such
waiver by means of a prospectus supplement that will be distributed to the
registered Holders, and, depending upon the significance of the waiver and the
manner of disclosure to the registered Holders, the Company will extend the
Exchange Offer for a period of five to 10 business days if the Exchange Offer
would otherwise expire during such five to 10 day period.
EXCHANGE AGENT
United States Trust Company of New York has been appointed as Exchange
Agent for the Exchange Offer. Questions and requests for assistance, requests
for additional copies of this Prospectus or of the Letter of Transmittal and
requests for copies of the Notice of Guaranteed Delivery should be directed to
the Exchange Agent addressed as follows:
<TABLE>
<S> <C> <C>
By Hand Delivery: By Overnight Courier: By Mail:
111 Broadway 770 Broadway Box 843
Lower Level 13th Floor Peter Cooper Station
New York, NY 10005 New York, NY 10003 New York, NY 10276
Attn: Corporate Trust Attn: Corporate Trust Service Attn: Corporate Trust
Window
By Facsimile Transmission: For Information:
(For Eligible Institutions Only) (800) 548-6565
(212) 420-6152
Confirm by Telephone:
(800) 548-6565
</TABLE>
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<PAGE> 34
FEES AND EXPENSES
The expenses of soliciting tenders pursuant to the Exchange Offer will be
borne by the Company. The principal solicitation is being made by mail; however,
additional solicitation may be made by telegraph, telephone or in person by
officers and regular employees of the Company and its affiliates.
The Company has not retained any dealer-manager in connection with the
Exchange Offer and will not make any payments to brokers or others soliciting
acceptances of the Exchange Offer. The Company, however, will pay the Exchange
Agent reasonable and customary fees for its services and registration expenses,
including fees and expenses of the Trustee, filing fees, blue sky fees and
printing and distribution expenses.
The Company will pay all transfer taxes, if any, applicable to the transfer
and exchange of the Outstanding Notes to it or its order pursuant to the
Exchange Offer. If, however, certificates representing the Exchange Notes or the
Outstanding Notes for the principal amounts not tendered or accepted for
exchange are to be delivered to, or are to be issued in the name of, any person
other than the person signing the Letter of Transmittal, or if a transfer tax is
imposed for any other reason, other than the exchange of the Outstanding Notes
pursuant to the Exchange Offer, then the amount of any such transfer taxes
(whether imposed on the registered Holder or any other person) will be payable
by the tendering Holder.
ACCOUNTING TREATMENT
The Exchange Notes will be recorded at the same carrying value as the
Outstanding Notes, which is face value as adjusted for original issue discount,
as reflected in the Company's accounting records on the date of exchange.
Accordingly, no gain or loss for accounting purposes will be recognized. The
expenses of the Exchange Offer will be amortized over the term of the Exchange
Notes.
RESALE OF EXCHANGE NOTES
The Company has not requested, and does not intend to request, an
interpretation by the staff of the Commission with respect to whether the
Exchange Notes issued in the Exchange Offer in exchange for the Outstanding
Notes may be offered for sale, resold or otherwise transferred by any holder
thereof without compliance with the registration and prospectus delivery
requirements of the Securities Act. Based on an interpretation by the staff of
the Commission set forth in no-action letters issued to third parties, the
Company believes that Exchange Notes issued pursuant to the Exchange Offer in
exchange for Outstanding Notes may be offered for resale, resold and otherwise
transferred by any holder of such Exchange Notes (other than any such holder
which is an "affiliate" of the Company within the meaning of Rule 405 under the
Securities Act or a Participating Broker-Dealer) without compliance with the
registration and prospectus delivery provisions of the Securities Act, or an
exemption therefrom, provided that such Exchange Notes are acquired in the
ordinary course of such holder's business and such holder does not intend to
participate and has no arrangement or understanding with any person to
participate in the distribution of such Exchange Notes. Any holder who tenders
in the Exchange Offer with the intention to participate, or for the purpose of
participating, in a distribution of the Exchange Notes may not rely on the
position of the staff of the Commission enunciated in Exxon Capital Holdings
Corporation (available May 13, 1988) and Morgan Stanley & Co. Incorporated
(available June 5, 1991), or similar no-action letters, but rather must comply
with the registration and prospectus delivery requirements of the Securities Act
in connection with any resale transaction. In addition, any such resale
transaction should be covered by an effective registration statement containing
the selling security holders information required by Item 507 of Regulation S-K
of the Securities Act. Each broker-dealer that receives Exchange Notes for its
own account in exchange for Outstanding Notes, where such Outstanding Notes were
acquired by such broker-dealer as a result of market-making activities or other
trading activities, must acknowledge that it will deliver a prospectus in
connection with any resale of such Exchange Notes. See "Plan of Distribution".
By tendering in the Exchange Offer, each Holder will represent to the
Company that, among other things, (i) the Exchange Notes acquired pursuant to
the Exchange Offer are being obtained in the ordinary course of business of the
person receiving such Exchange Notes, whether or not such person is a Holder,
(ii) neither the Holder nor any such other person has an arrangement or
understanding with any person to participate in the
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<PAGE> 35
distribution of such Exchange Notes and (iii) the Holder and such other person
acknowledge that if they participate in the Exchange Offer for the purpose of
distributing the Exchange Notes (a) they must, in the absence of an exemption
therefrom, comply with the registration and prospectus delivery requirements of
the Securities Act in connection with any resale of the Exchange Notes and
cannot rely on the no-action letters referenced above and (b) failure to comply
with such requirements in such instance could result in such Holder or any such
person incurring liability under the Securities Act for which such Holder and
any such persons are not indemnified by the Company. Further, by tendering in
the Exchange Offer, each Holder or the person receiving the Exchange Note that
may be deemed an "affiliate" (as defined under Rule 405 of the Securities Act)
of the Company will represent to the Company that such Holder understands and
acknowledges that the Exchange Notes may not be offered for resale, resold or
otherwise transferred by that Holder or such other person without registration
under the Securities Act or an exemption therefrom.
As set forth above, affiliates of the Company are not entitled to rely on
the foregoing interpretations of the staff of the Commission with respect to
offers for resale, resales or other transfers of the Exchange Notes without
compliance with the registration and prospectus delivery requirements of the
Securities Act or an exception therefrom.
CONSEQUENCES OF FAILURE TO EXCHANGE
As a result of making the Exchange Offer, the Company will have fulfilled
one of its obligations under the Registration Agreement, and, except as
described under "-- Shelf Registration Statement", Holders of Outstanding Notes
who do not tender their Outstanding Notes will not have any further registration
rights under the Registration Agreement or otherwise. Accordingly, any Holder of
Outstanding Notes that does not exchange its Outstanding Notes for Exchange
Notes will continue to hold the untendered Outstanding Notes and will be
entitled to all the rights and subject to all the limitations applicable thereto
under the Indenture, except to the extent such rights or limitations, by their
terms, terminate or cease to have further effectiveness as a result of the
Exchange Offer.
The Outstanding Notes that are not exchanged for Exchange Notes pursuant to
the Exchange Offer will remain restricted securities. Accordingly, such
Outstanding Notes may be resold only (i) to the Company or any subsidiary
thereof (upon redemption thereof or otherwise), (ii) pursuant to an effective
registration statement under the Securities Act, (iii) so long as the
Outstanding Notes are eligible for resale pursuant to Rule 144A, to a qualified
institutional buyer within the meaning of Rule 144A under the Securities Act in
a transaction meeting the requirements of Rule 144A, (iv) outside the United
States to persons other than U.S. persons pursuant to the exemption from the
registration requirements of the Securities Act provided by Regulation S
thereunder, (v) to an institutional accredited investor that, prior to such
transfer, furnishes to the Trustee a signed letter containing certain
representations and agreements relating to the restrictions on transfer of the
Outstanding Notes evidenced thereby (the form of which letter can be obtained
from the Trustee) or (vi) pursuant to another available exemption from the
registration requirements of the Securities Act, in each case in accordance with
any applicable securities laws of any state of the United States.
Accordingly, to the extent that Outstanding Notes are tendered and accepted
in the Exchange Offer, the trading market for the untendered Outstanding Notes
could be adversely affected.
SHELF REGISTRATION STATEMENT
If (i) the Company determines that the Exchange Offer may not be
consummated as soon as practicable after the Expiration Date because it would
violate applicable law or the applicable interpretations of the staff of the
Commission, (ii) the Exchange Offer is not consummated within 180 days of the
date of the Registration Agreement, (iii) the Placement Agents so request with
respect to the Outstanding Notes not eligible to be exchanged for Exchange Notes
in the Exchange Offer and held by them following consummation of the Exchange
Offer or (iv) any holder of an Outstanding Note (other than an Exchanging
Dealer) is not eligible to participate in the Exchange Offer or, in the case of
any holder of Outstanding Notes (other than an Exchanging Dealer) that
participates in the Exchange Offer, such holder does not receive freely
tradeable Exchange Notes on the date of the exchange for validly tendered (and
not withdrawn) Outstanding Notes, the
33
<PAGE> 36
Company has agreed to file and maintain the Shelf Registration Statement that
would allow resales of transfer restricted Outstanding Notes or Exchange Notes
owned by such holders.
OTHER
Participation in the Exchange Offer is voluntary and holders should
carefully consider whether to accept. Holders of the Outstanding Notes are urged
to consult their financial and tax and other professional advisors in making
their own decision on what action to take.
No person has been authorized to give any information or to make any
representations in connection with the Exchange Offer other than those contained
in this Prospectus. If given or made, such information or representations should
not be relied upon as having been authorized by the Company. Neither the
delivery of this Prospectus nor any exchange made hereunder shall, under any
circumstances, create any implication that there has been no change in the
affairs of the Company since the respective dates as of which information is
given herein. The Exchange Offer is not being made to (nor will tender be
accepted from or, on behalf of) holders of Outstanding Notes in any jurisdiction
in which the making of the Exchange Offer or the acceptance thereof would not be
in compliance with the laws of such jurisdiction. However, the Company may, at
its discretion, take such action as it may deem necessary to make the Exchange
Offer in any such jurisdiction and extend the Exchange Offer to holders of
Outstanding Notes in such jurisdiction. In any jurisdiction the securities laws
or blue sky laws of which require the Exchange Offer to be made by a licensed
broker or dealer, the Exchange Offer is being made on behalf of the Company by
one or more registered brokers or dealers which are licensed under the laws of
such jurisdiction.
The Company may in the future seek to acquire untendered Outstanding Notes
in the open market or privately negotiated transactions, through subsequent
exchange offers or otherwise. The Company has no present plans to acquire any
Outstanding Notes that are not tendered in the Exchange Offer or to file a
registration statement to permit resales of any untendered Outstanding Notes,
except for the filing, if required, of the Shelf Registration Statement.
34
<PAGE> 37
USE OF PROCEEDS
This Exchange Offer is intended to satisfy certain of the Company's
obligations under the Purchase Agreement and the Registration Agreement. The
Company will not receive any cash proceeds from the issuance of the Exchange
Notes offered hereby. In consideration for issuing the Exchange Notes
contemplated in this Prospectus, the Company will receive Outstanding Notes in
like principal amount, the form and terms of which are the same as the form and
terms of the Exchange Notes (which they replace), except as otherwise described
herein. The Outstanding Notes surrendered in exchange for Exchange Notes will be
retired and canceled and cannot be reissued. Accordingly, issuance of the
Exchange Notes will not result in any increase or decrease in the indebtedness
of the Company.
The net proceeds of the Note Offering were approximately $97.0 million. Of
such proceeds, $42.0 million was used to pay a dividend to Mariner Holdings,
which in turn used the dividend to repay the remaining balance of the JEDI
Bridge Loan incurred by Mariner Holdings in connection with the acquisition of
the Company.
Of the remaining net proceeds, $50.0 million was used to repay all
indebtedness outstanding under the Revolving Credit Facility (which had an
outstanding balance of $50.0 million at August 14, 1996). The indebtedness under
the Revolving Credit Facility was incurred to pay a dividend to Mariner Holdings
to repay a portion of the JEDI Bridge Loan. The Revolving Credit Facility
matures June 28, 1999, and borrowings thereunder bear interest at a variable
rate per annum of LIBOR plus 0.75% to 1.25%, depending upon the level of
utilization of the borrowing base. Currently $50.0 million is available for
borrowing under the Revolving Credit Facility and, together with the balance of
the net proceeds of the Note Offering of approximately $5.0 million, will be
available for general corporate purposes, including the acquisition,
exploration, development and exploitation of oil and natural gas properties. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources" and "Description of Revolving
Credit Facility".
The following chart depicts the Company's use of the net proceeds of the
Note Offering.
[NET PROCEEDS CHART]
35
<PAGE> 38
CAPITALIZATION
The following table sets forth the historical capitalization of the Company
as of September 30, 1996.
<TABLE>
<CAPTION>
AT
SEPTEMBER 30,
1996
--------------
HISTORICAL
--------------
(IN THOUSANDS)
<S> <C>
Long-term debt:
Revolving Credit Facility.................................................... $ --
10 1/2% Senior Subordinated Notes Due 2006................................... 99,512
--------
Total long-term debt................................................. 99,512
--------
Stockholder's equity:
Common stock................................................................. 1
Additional paid-in capital................................................... 95,744
Accumulated deficit.......................................................... (21,355)
--------
Total stockholder's equity........................................... 74,390
--------
Total capitalization............................................ $173,902
========
</TABLE>
36
<PAGE> 39
PRO FORMA FINANCIAL DATA
The following pro forma financial data are based on the Financial
Statements of the Company included elsewhere in this Prospectus, as adjusted to
give pro forma effect to the Transactions. The pro forma statements of
operations give effect to the Transactions as if they had occurred on January 1,
1995. A pro forma balance sheet is not presented as the effect of the
Transactions were fully recorded at September 30, 1996, except for approximately
$0.2 million in unamortized debt issuance cost related to the revolving credit
facility. The pro forma adjustments are based upon available information and
certain assumptions that management of the Company believes are reasonable. The
pro forma financial information does not purport to represent what the Company's
results of operations or financial position would actually have been had the
Transactions in fact occurred on such dates or to project the Company's results
of operations or financial position for or at any future period or date. The pro
forma financial information should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations", "The
Transactions" and the Financial Statements of the Company included elsewhere in
this Prospectus. Because the Exchange Notes are being issued under the same
financial terms and conditions of, and will replace, the Outstanding Notes, the
Exchange Offer has no material impact on the Company's pro forma financial data.
The pro forma information with respect to the Transactions is based on the
Financial Statements of the Company included elsewhere in this Prospectus. The
Acquisition has been accounted for under the purchase method of accounting. The
total purchase price for the Acquisition has been allocated to the tangible and
identifiable intangible assets and liabilities of the Company based upon the
Company's preliminary estimates of their fair values. The allocation of the
purchase price for the Acquisition is preliminary. It is not expected that the
final allocation of the purchase price will produce materially different results
than those presented.
37
<PAGE> 40
UNAUDITED PRO FORMA STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PREDECESSOR COMPANY
------------------------------------------------ SIX
THREE MONTHS
MONTHS ENDED NINE
ENDED SEPTEMBER MONTHS ENDED
YEAR ENDED DECEMBER 31, 1995 MARCH 31, 30, SEPTEMBER 30,
------------------------------------ 1996 1996 1996
HISTORICAL ADJUSTMENTS PRO FORMA HISTORICAL HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- --------- --------- ------------ ----------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
REVENUES:
Oil and gas sales........... $ 33,309 $33,309 $13,778 $ 32,751 $46,529
------- ------- ------- -------- -------
COSTS AND EXPENSES:
Lease operating expenses.... 7,331 7,331 2,872 5,211 8,083
Depreciation, depletion, and
amortization.............. 15,635 $ 1,430(1) 17,065 6,309 17,674 $ 906(1) 24,889
Impairment of oil and
gas properties............ 22,500 (22,500)(2)
General and administrative
expenses.................. 2,028 2,028 712 1,537 2,249
------- -------- ------- ------- -------- -------- -------
Total cost and
expenses............ 24,994 1,430 26,424 9,893 46,922 (21,594) 35,221
------- -------- ------- ------- -------- -------- -------
Operating income (loss)..... 8,315 (1,430) 6,885 3,885 (14,171) 21,594 11,308
------- -------- ------- ------- -------- -------- -------
Interest income............. 9,255 (8,472)(3) 783 2,167 310 (2,107)(3) 370
Interest expense............ (12,772) 3,486(4) (9,286) (3,391) (5,102) 663(4) (7,830)
Write-off bridge loan
fees...................... (2,392) 2,392(5)
------- -------- ------- ------- -------- -------- -------
Income (loss) before
income taxes.............. 4,798 (6,416) (1,618) 2,661 (21,355) 22,542 3,848
Provision for income
taxes..................... 338 338(6) (6)
------- -------- ------- ------- -------- -------- -------
Net income (loss)..... $ 4,460 $ (6,416) $(1,956) $ 2,661 $(21,355) $ 22,542 $ 3,848
======= ======== ======= ======= ======== ======== =======
</TABLE>
- ---------------
(1) Depreciation, depletion and amortization have been adjusted to reflect the
amount of the purchase price allocated to property and equipment.
(2) To eliminate the writedown of oil and gas properties resulting from the
Acquisition.
(3) Interest income has been eliminated on the intercompany notes receivable
that were repaid in connection with the Acquisition.
(4) Interest expense has been adjusted to reflect the following:
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED SEPTEMBER
DECEMBER 31, 30,
1995 1996
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
10 1/2% Senior Subordinated Notes Due 2006................. $ 10,500 $ 6,504
Capitalized interest costs................................. (1,579) (290)
Amortization of debt issuance costs........................ 300 204
Amortization of Outstanding Note discount.................. 65 39
Elimination of historical interest expense................. (13,715) (7,081)
Elimination of historical capitalized interest............. 1,265 233
Elimination of historical amortization of debt issuance
costs.................................................... (322) (272)
-------- -------
Pro forma interest expense adjustment.................. $ (3,486) $ (663)
======== =======
</TABLE>
(5) To eliminate the write-off of debt fees resulting from the refinancing of a
portion of the JEDI Bridge Loan with the Revolving Credit Facility.
(6) Generally no income tax expense or benefit is recorded as a result of the
Company recording a full valuation allowance for the Company's net deferred
tax assets. The $338 thousand recorded in 1995 is the alternative minimum
taxes resulting from the gain (for tax purposes) on the 1995 sale of the
North Shongaloo Properties. A comparable sale has not been made subsequent
to 1995 nor is one anticipated.
38
<PAGE> 41
SELECTED HISTORICAL DATA
The following table sets forth for the periods indicated selected
historical operating and financial data of the Company. The selected historical
financial data as of and for each of the years in the five-year period ended
December 31, 1995, have been derived from the historical statements of the
Company, which were audited by Deloitte & Touche LLP, independent auditors. As
part of the Transactions, Mariner Holdings consummated the Acquisition on May
16, 1996; however, for accounting purposes, the Acquisition is treated as if it
had occurred on April 1, 1996. The Acquisition has been accounted for using the
purchase method of accounting, and Mariner Holdings' cost of acquiring the
Company has been allocated to the assets and liabilities of the Company based on
estimated fair values. As a result, the Company's financial position and
operating results subsequent to the Acquisition reflect a new basis of
accounting and are not comparable to prior periods.
The Company has not paid a dividend out of earnings in any of the periods
presented. On June 28, 1996, the Company paid a special dividend of $50.0
million to Mariner Holdings, its sole stockholder, from the proceeds of a
borrowing under the Revolving Credit Facility, which was used to repay a portion
of the JEDI Bridge Loan. On August 14, 1996, the Company paid a special dividend
of $42.0 million to Mariner Holdings from the proceeds of the Note Offering,
which was used to repay the remainder of the JEDI Bridge Loan. See "Use of
Proceeds" and "The Transactions -- Financing". These dividends were not paid out
of earnings but were a means of refinancing the JEDI Bridge Loan, under which
Mariner Holdings was the primary obligor, with debt of the Company. The
Revolving Credit Facility and the Indenture restrict the Company's ability to
pay dividends. See "Description of Revolving Credit Facility" and "Description
of the Exchange Notes -- Certain Covenants -- Limitation on Restricted
Payments".
The information below should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Financial Statements of the Company included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
PREDECESSOR COMPANY
----------------------------------------------------------------------------------
NINE MONTHS THREE MONTHS SIX MONTHS
ENDED ENDED ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30, MARCH 31, SEPTEMBER 30,
----------------------------------------------------- ------------- ------------ -------------
1991 1992 1993 1994 1995 1995 1996 1996
-------- -------- -------- -------- --------- ------------- ------------ -------------
(IN THOUSANDS, EXCEPT RATIOS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenues............. $ 21,587 $ 20,972 $ 34,295 $ 35,856 $ 33,309 $ 22,545 $ 13,778 $ 32,751
Lease operating expenses... 6,310 6,312 7,746 7,118 7,331 5,279 2,872 5,211
Depreciation, depletion and
amortization............. 9,236 8,572 15,607 16,221 15,635 11,915 6,309 17,674
Impairment of oil and gas
properties............... 16,325 6,296 6,257 22,500
General and administrative
expenses................. 1,661 1,948 2,242 1,830 2,028 1,535 712 1,537
-------- -------- -------- -------- --------- --------- ------- ---------
Operating income
(loss)................. (11,945) 4,140 2,404 4,430 8,315 3,816 3,885 (14,171)
Interest income............ 172 1,021 1,513 1,084 9,255 6,948 2,167 310
Interest expense........... (4,113) (4,940) (7,358) (8,125) (12,772) (9,550) (3,391) (5,102)
Write-off bridge loan
fees..................... (2,392)
-------- -------- -------- -------- --------- --------- ------- ---------
Income (loss) before
income taxes........... $(15,886) $ 221 $ (3,441) $ (2,611) $ 4,798 $ 1,214 $ 2,661 $ (21,355)
Provision for income
taxes.................... 338 362
-------- -------- -------- -------- --------- --------- ------- ---------
Income (loss) after income
taxes.................... $(15,886) $ 221 $ (3,441) $ (2,611) $ 4,460 $ 852 $ 2,661 $ (21,355)
======== ======== ======== ======== ========= ========= ======= =========
OTHER DATA:
EBITDA (1)................. $ 13,616 $ 12,712 $ 24,307 $ 26,908 $ 23,950 $ 15,732 $ 10,194 $ 26,003
Ratio of EBITDA to net
interest expense (2)..... 2.7x 2.5x 3.6x 3.5x 4.3x 3.7x 7.4x 3.4x
Ratio of net debt to EBITDA
(3)...................... 5.8x 7.1x 3.7x 3.9x 2.5x
Ratio of earnings to fixed
charges (4).............. 1.3x 1.0x 1.7x
STATEMENTS OF CASH FLOW DATA:
Net cash flows from
operating activities..... (5,361) 12,228 11,268 22,554 21,416 13,920 5,630 28,351
Net cash flows from
investing activities..... (28,369) (40,803) (31,058) (19,648) (123,295) (118,603) (5,648) (205,788)
Net cash flows from
financing activities..... 34,000 28,000 20,000 103,000 103,000 192,266
CAPITAL EXPENDITURES:
Leasehold acquisition...... $ 5,246 $ 1,694 $ 590 $ 2,521 $ 4,594 $ 4,288 $ 949 $ 13,366
Oil and gas exploration.... 10,240 11,437 11,695 16,495 12,866 8,465 3,903 11,775
Oil and gas development and
other.................... 12,777 14,639 15,681 17,907 24,312 19,346 2,643 2,814
-------- -------- -------- -------- --------- --------- ------- ---------
$ 28,263 $ 27,770 $ 27,966 $ 36,923 $ 41,772 $ 32,099 $ 7,495 $ 27,955
======== ======== ======== ======== ========= ========= ======= =========
</TABLE>
39
<PAGE> 42
<TABLE>
<CAPTION>
PREDECESSOR COMPANY
----------------------------------------------------------
AT AT
AT DECEMBER 31, MARCH 31, SEPTEMBER 30,
----------------------------------------------- --------- -------------
1991 1992 1993 1994 1995 1996 1996
------- -------- -------- -------- -------- --------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total assets....................................... $93,162 $125,532 $138,435 $138,202 $250,726 254,301 192,394
Long-term receivable from affiliates............... 15,000 18,000 4,000 106,000 104,000
10 1/2% Senior Subordinated Notes Due 2006......... 99,512
Other long-term debt, less current maturities...... 79,000 105,000 109,000 105,500 162,500 162,500
Stockholder's equity............................... 6,128 8,350 20,909 18,789 69,258 71,919 74,390
</TABLE>
- ---------------
(1) EBITDA is calculated as operating income before interest, income taxes,
depletion, depreciation, amortization and impairment of oil and gas
property. EBITDA is not a measure of cash flow as determined by GAAP. The
Company has included information concerning EBITDA because EBITDA is a
measure used by certain investors in determining a company's historical
ability to service its indebtedness. EBITDA should not be considered as an
alternative to, or more meaningful than, net income or cash flow as
determined in accordance with GAAP as an indicator of the Company's
operating performance or liquidity. EBITDA is not necessarily comparable to
a similarly titled measure of another company. The Revolving Credit Facility
requires the Company to maintain certain financial ratios related to EBITDA,
and the Indenture limits the Company's ability to incur certain
indebtedness, pay dividends and engage in certain other transactions if
certain financial ratios related to EBITDA are not met. See "Description of
Revolving Credit Facility," "Description of the Exchange Notes -- Certain
Definitions -- EBITDA" and "Description of the Exchange Notes -- Certain
Covenants."
(2) For purposes of computing the ratio of EBITDA to net interest expense, net
interest expense consists of interest expense plus capitalized interest and
reduced by interest income relating to long-term receivables from affiliates
attributable to the fact that the Company was used to provide financing for
its affiliates. In the absence of advances to affiliates (reflected in
long-term receivables from affiliates), total long-term debt, and the
interest expense thereon, would have been reduced.
(3) Net debt has been calculated by reducing total long-term debt by the
long-term receivables from affiliates. In the absence of advances to
affiliates (reflected in long-term receivables from affiliates), total
long-term debt would have been reduced.
(4) For purposes of computing the ratio of earnings to fixed charges, earnings
consist of pretax income from continuing operations plus fixed charges,
excluding capitalized interest. Fixed charges consist of interest expense,
capitalized interest and the amortization of debt expense. For the years
ended December 31, 1991, 1992, 1993, and 1994, earnings were insufficient to
cover fixed charges by $16.8 million, $0.8 million, $4.4 million, and $3.2
million, respectively. For the six months ended September 30, 1996, earnings
were insufficient to cover fixed charges by $21.6 million.
40
<PAGE> 43
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following information should be read in conjunction with the
information contained in the Financial Statements of the Company included
elsewhere in this Prospectus.
OVERVIEW
The Company is an independent energy company engaged in oil and gas
exploration, exploitation, development and production in three geographic areas:
the shallow water or "shelf" (less than 600 feet deep) of the Gulf and onshore
areas near the Gulf; Gulf deepwater (greater than 600 feet deep); and the
Permian Basin of West Texas.
The Company's strategy is to increase reserves, production and cash flows
in a cost effective manner primarily "through the drillbit" -- by exploring,
exploiting and developing prospects as contrasted with increasing reserves by
purchasing proved and producing properties. Mariner emphasizes internal growth
through exploration, exploitation and development of internally generated
prospects and prefers to operate the wells in which it participates and to hold
substantial working interests therein.
Mariner Holdings purchased all the capital stock of the Company from Hardy
Holdings Inc. effective April 1, 1996. The Acquisition was financed by the JEDI
Bridge Loan and the JEDI Equity. In June 1996, 24 individuals who are employees
of or consultants to the Company purchased approximately 4% of the common stock
of Mariner Holdings for a consideration valued at approximately $4.0 million and
acquired options to purchase an additional 11% of the common stock of Mariner
Holdings.
In connection with the Acquisition, which was accounted for as a purchase
transaction, the Company incurred a "ceiling test" writedown under full cost
accounting requirements of approximately $22.5 million. The "ceiling test" is
applied, in general, to reduce the carrying value of oil and gas properties to
an amount not greater than the present value of estimated future net revenues
determined in accordance with the requirements of the Commission -- based in
this instance on prices in effect as to the Company's oil and gas production on
the closing date of the Acquisition. The writedown is an accounting charge and
as such did not affect the Company's cash flow from operating activities.
On June 28, 1996, the Company entered into the Revolving Credit Facility
with NationsBank of Texas, N.A., as agent for the Lenders, and borrowed $50.0
million thereunder to pay a dividend to Mariner Holdings, which was used by
Mariner Holdings to partially repay the JEDI Bridge Loan.
On August 14, 1996, the Company issued the Outstanding Notes. Of the net
proceeds of the Note Offering, $42.0 million was used to pay a dividend to
Mariner Holdings, which in turn used the dividend to repay the remaining balance
of the JEDI Bridge Loan, and $50.0 million was used to repay all indebtedness
outstanding under the Revolving Credit Facility.
As part of the Transactions, Mariner Holdings consummated the Acquisition
on May 16, 1996; however, for accounting purposes, the Acquisition is treated as
if it had occurred on April 1, 1996. The Acquisition has been accounted for
using the purchase method of accounting, and Mariner Holdings' cost of acquiring
the Company has been allocated to the assets and liabilities of the Company
based on estimated fair values. As a result, the Company's financial position
and operating results subsequent to the Acquisition reflect a new basis of
accounting and are not comparable to prior periods.
41
<PAGE> 44
RESULTS OF OPERATIONS
The following table sets forth certain operating data regarding the net
production, average sales price and production cost associated with the
Company's oil and natural gas operations for the periods indicated on an
historical basis.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------- -------------------
1993 1994 1995 1995 1996
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Net production:
Oil (Mbbls)................................................... 470 459 424 303 570
Natural gas (Mmcf)............................................ 12,507 14,362 13,770 10,130 15,655
Average sales price, including the effects of hedging:
Oil (per Bbl)................................................. $ 17.07 $ 15.86 $ 17.19 $ 17.25 $ 18.39
Natural gas (per Mcf)......................................... 2.10 1.99 1.76 1.71 2.30
Lease operating expense (per Mcfe).............................. 0.51 0.42 0.45 0.44 0.42
Total revenues (in thousands)................................... 34,295 35,856 33,309 22,545 46,529
</TABLE>
Pro forma Nine Months Ended September 30, 1996, Compared to the Historical
Nine Months Ended September 30, 1996
Depreciation, depletion, and amortization expense increased 4% to $24.9
million for the pro forma nine months ended September 30, 1996, from $24.0
million for the historical nine months ended September 30, 1996, due to an
increase in the unit-of-production depreciation, depletion and amortization rate
to $1.30 per Mcfe from $1.26 per Mcfe.
Interest expense decreased 8% to $7.8 million for the pro forma nine months
ended September 30, 1996, from $8.5 million for the historical nine months ended
September 30, 1996, due to replacing average outstanding debt of $117.6 million
at 9.45% average interest with outstanding debt of $100.0 million at 10.50%
interest. The $2.4 million write-off of the bridge loan fees was eliminated for
the pro forma nine months ended September 30, 1996.
Interest income decreased 84% to $0.4 million for the pro forma nine months
ended September 30, 1996, from $2.5 million for the historical nine months ended
September 30, 1996, due to the elimination of interest income related to
intercompany notes receivable that were repaid in connection with the
Acquisition.
There is no provision for income taxes for either the historical or the pro
forma nine months ended September 30, 1996, as generally no income tax expense
or benefit is recorded due to the Company's recording a full valuation allowance
for the Company's net deferred tax assets.
Historical Nine Months Ended September 30, 1996, Compared to the Historical
Nine Months Ended September 30, 1995
Total revenues increased 107% to $46.5 million for the nine months ended
September 30, 1996, from $22.5 million for the nine months ended September 30,
1995, due to higher oil and gas production volumes and prices, partially offset
by the effects of the Company's hedging activities.
Natural gas revenues increased 108% to $36.0 million for the nine months
ended September 30, 1996, from $17.3 million for the nine months ended September
30, 1995, as volumes sold increased 55% to 15,655 Mmcf from 10,130 Mmcf. The
increase in volumes was due primarily to new fields that began producing
subsequent to September 30, 1995. The average price received per Mcf of natural
gas, including the effects of hedging, increased 35% to $2.30 for the nine
months ended September 30, 1996, from $1.71 for the nine months ended September
30, 1995. Hedging activities of natural gas for the nine months ended September
30, 1996, had the effect of reducing the average sales price received per Mcf by
$0.14 and reducing revenues by $2.2 million, whereas in the nine months ended
September 30, 1995, such activities had the effect of increasing the average
sales price received per Mcf by $0.12 and increasing revenues by $1.2 million.
42
<PAGE> 45
Crude oil revenues increased 102% to $10.5 million for the nine months
ended September 30, 1996, from $5.2 million for the nine months ended September
30, 1995, as the volumes sold increased 88% during such period to 570 Mbbls from
303 Mbbls. The increase in volumes was due primarily to new fields that began
producing subsequent to September 30, 1995. The average price per Bbl received
increased 7% during such period to $18.39 from $17.25. Hedging activities of
crude oil which commenced during the nine months ended September 30, 1996 had
the effect of reducing the average sales price received per Bbl by $1.42 and
reducing revenues by $0.8 million.
Lease operating expenses increased 53% to $8.1 million for the nine months
ended September 30, 1996, from $5.3 million for the nine months ended September
30, 1995, due primarily to new fields that began production subsequent to
September 30, 1995.
Depreciation, depletion and amortization expense increased 102% to $24.0
million for the nine months ended September 30, 1996, from $11.9 million for the
nine months ended September 30, 1995, as a result of 60% higher equivalent
volumes produced due to initial production on three major properties at the end
of 1995 and to a 27% increase in the unit-of-production depreciation, depletion
and amortization rate to $1.26 per Mcfe from $1.00 per Mcfe.
General and administrative expenses increased 47% to $2.2 million for the
nine months ended September 30, 1996, from $1.5 million for the nine months
ended September 30, 1995, due primarily to expenses incurred in the first
quarter of 1996 in connection with the sale of the predecessor company, the
office relocation and lower overhead recovery due to the completion of three
major projects at the end of 1995.
Interest expense decreased 11% to $8.5 million for the nine months ended
September 30, 1996, from $9.6 million for the nine months ended September 30,
1995, due primarily to the 29% decrease in average outstanding debt to $117.6
million, from $165.0 million, which was partially offset by a 15% increase in
the average interest rate paid on outstanding debt to 9.45%, from 8.22%. During
the nine months ended September 30, 1996, the Company wrote off $2.4 million of
loan fees related to the JEDI Bridge Loan as a result of refinancing a portion
of the amount with the Revolving Credit Facility. Interest income decreased 64%
to $2.5 million for the nine months ended September 30, 1996, from $6.9 million
for the nine months ended September 30, 1995, due primarily to the retirement of
receivables from affiliates resulting from the Acquisition.
Income (loss) before income taxes decreased to a $18.7 million loss for the
nine months ended September 30, 1996, from $1.2 million income for the nine
months ended September 30, 1995. This decrease was due to the $22.5 million
impairment of oil and gas property (i.e., the ceiling test writedown) and higher
lease operating and depreciation expense associated with the increased
production, partially offset by the increase in oil and natural gas production
volumes and prices.
There is no provision for income tax for the nine months ended September
30, 1996, compared to $0.4 million of tax payments in the nine months ended
September 30, 1995, due to the imposition of alternative minimum taxes as a
result of a gain on sale of oil and gas properties in 1995.
Pro Forma Year Ended December 31, 1995, Compared to the Historical Year Ended
December 31, 1995
Depreciation, depletion, and amortization expense increased 10% to $17.1
million for the pro forma year ended December 31, 1995, from $15.6 million for
the historical year ended December 31, 1995, due to an increase in the
unit-of-production depreciation, depletion and amortization rate to $1.05 per
Mcfe from $0.96 per Mcfe.
Interest expense decreased 27% to $9.3 million for the pro forma year ended
December 31, 1995, from $12.8 million for the historical year ended December 31,
1995, due to replacing average outstanding debt of $165.1 million at 8.19%
average interest with outstanding debt of $100.0 million at 10.50% interest.
Interest income decreased 91% to $0.8 million for the pro forma year ended
December 31, 1995, from $9.3 million for the historical year ended December 31,
1995 due to the elimination of interest income related to intercompany notes
receivable that were repaid in connection with the Acquisition.
43
<PAGE> 46
Historical Year Ended December 31, 1995, Compared to the Historical Year Ended
December 31, 1994
Total revenues decreased 7% to $33.3 million in 1995 from $35.9 million in
1994. Operating revenues decreased primarily as a result of lower natural gas
prices and production volumes, partially offset by higher crude oil prices and
settlement, in 1995, for $1.7 million of a claim in bankruptcy against Columbia
Gas Transmission Company.
Natural gas revenues decreased 15% to $24.3 million (net of the $1.7
million benefit recorded for the Columbia Gas bankruptcy settlement) in 1995
from $28.6 million in 1994, as the volumes sold decreased 4% to 13,770 Mmcf from
14,362 Mmcf. The decrease in volumes was due primarily to depletion of existing
fields and sale of non-strategic properties. The average price received per Mcf
of natural gas, including the effects of hedging, decreased 11% to $1.76 in 1995
from $1.99 in 1994. Hedging activities of natural gas in 1995 had the effect of
increasing the average sales price per Mcf by $0.06 and increasing revenues by
$1.0 million, and in 1994 such activities had the effect of increasing the
average sales price per Mcf by $0.05 and increasing revenues by $0.9 million.
Crude oil revenues remained constant for both periods at $7.3 million. The
8% decrease in volume to 424 Mbbls in 1995 from 459 Mbbls in 1994 was offset by
an 8% increase in the average price per Bbl received to $17.19 from $15.86. The
decrease in volumes was due primarily to depletion of existing fields.
Lease operating expenses increased 3% to $7.3 million in 1995 from $7.1
million in 1994, primarily due to higher direct operating costs of $0.5 million
in 1995, partially offset by lower marketing expenses and production taxes of
$0.3 million.
Depreciation, depletion and amortization expense decreased 4% to $15.6
million in 1995, from $16.2 million in 1994, as a result of lower equivalent
volumes produced due to the sale of producing properties in late 1994 and early
1995, which was partially offset by an increase in the unit-of-production
depreciation, depletion and amortization rate to $0.96 per Mcfe in 1995 from
$.95 per Mcfe in 1994.
There was no impairment of oil and gas properties in 1995 compared to $6.3
million in 1994.
General and administrative expenses increased 11% to $2.0 million in 1995
from $1.8 million in 1994, in part because general and administrative expenses
in 1994 were offset by a refund of state franchise taxes.
Interest expense increased 58% to $12.8 million in 1995 from $8.1 million
in 1994, due to the issuance of $60 million of senior notes in January 1995. The
average outstanding debt increased 52% to $165.1 million in 1995 from $108.6 in
1994. The average interest rate paid on outstanding debt increased 15% to 8.19%
in 1995 from 7.10% in 1994. Interest income increased 745% to $9.3 million in
1995 from $1.1 million in 1994, due to the increase in the long-term receivable
from affiliate caused by the receipt of funds from the issuance of $60 million
of senior notes and a $46 million equity contribution from the Company's parent
company.
Income (loss) before income taxes was $4.8 million in 1995 compared to a
loss of $2.6 million in 1994. Included in 1995 net income was a $1.7 million
benefit from the proceeds received from the Columbia Gas bankruptcy settlement.
Additionally, the 1994 net loss included a $6.3 million impairment of oil and
gas properties for the writedown of the unamortized capital costs of the proved
properties to the present value of estimated future net revenues.
Income taxes in 1995 were $0.3 million compared to no provision in 1994,
due to the imposition of alternative minimum taxes as a result of a gain on sale
of oil and gas properties in 1995.
Historical Year Ended December 31, 1994, Compared to the Historical Year Ended
December 31, 1993
Total revenues increased 5% to $35.9 million in 1994 from $34.3 million in
1993, primarily due to higher natural gas production volumes and the effects of
hedging activities.
44
<PAGE> 47
Natural gas revenues increased 9% to $28.6 million in 1994 from $26.3
million in 1993, as the volumes sold increased 15% to 14,362 Mmcf from 12,507
Mmcf. The increase in volumes was due primarily to production from new wells.
The average price received per Mcf of natural gas, including the effects of
hedging, decreased 5% to $1.99 in 1994 from $2.10 in 1993. Hedging activities of
natural gas in 1994 had the effect of increasing the average sales price per Mcf
by $0.05 and increasing revenues by $0.9 million, whereas in 1993 such
activities had the effect of decreasing the average sales price per Mcf by $0.06
and decreasing revenues by $0.9 million.
Crude oil revenues decreased 9% to $7.3 million in 1994 from $8.0 million
in 1993, as the average price per Bbl received decreased 7% to $15.86 from
$17.07. Volumes sold decreased 2% to 459 Mbbls in 1994 from 470 Mbbls in 1993.
The decrease in volumes was due primarily to depletion of existing fields,
partially offset by production from new wells.
Lease operating expenses decreased 8% to $7.1 million in 1994 from $7.7
million in 1993, primarily due to lower marketing expenses and direct operating
costs.
Depreciation, depletion and amortization expense increased 4% to $16.2
million in 1994, from $15.6 million in 1993, as a result of higher equivalent
volumes produced due to commencement of production on new offshore wells, which
was partially offset by a decrease in the unit-of-production depreciation,
depletion and amortization rate to $0.95 per Mcfe in 1994 from $1.02 per Mcfe in
1993.
Impairment of oil and gas properties remained level at $6.3 million in 1994
as compared to 1993.
General and administrative expenses decreased 18% to $1.8 million in 1994
from $2.2 million in 1993, in part because general and administrative expenses
in 1994 were offset by a refund in 1994 of state franchise taxes.
Interest expense increased 9% to $8.1 million in 1994 from $7.4 million in
1993, due to larger average outstanding borrowings in 1994 compared to 1993. The
average outstanding debt increased 1% to $108.6 million in 1994 from $107.3 in
1993. The average interest rate paid on outstanding debt increased 8% to 7.10%
in 1994 from 6.58% in 1993. Interest income decreased 27% to $1.1 million in
1994 from $1.5 million in 1993, due to a decrease in the long-term receivable
from affiliates.
Loss before income taxes decreased 24% to $2.6 million in 1994 from $3.4
million in 1993, primarily due to a positive effect on revenues from hedging
activities and a decrease in lease operating expenses, partially offset by
higher depreciation and interest expenses.
Changes in Prices and Hedging Activities
In an effort to reduce the effects of the volatility of the price of oil
and natural gas on the Company's operations, management has adopted a policy of
hedging oil and natural gas prices through the use of commodity futures, options
and swap agreements. While the use of these hedging arrangements limits the
downside risk of adverse price movements, it may also limit future gains from
favorable movements. The Revolving Credit Facility imposes certain limitations
on the Company's ability to enter into hedging transactions, but such
limitations are not expected to constrain the Company's hedging activities in
any material respect.
The annual average oil and natural gas prices received by the Company have
fluctuated significantly over the past three years. The Company's weighted
average natural gas price received per Mcf (including the effects of hedging
transactions) was $1.76, $1.99 and $2.10 during the years ended December 31,
1995, 1994 and 1993, respectively. Hedging transactions resulted in the
Company's weighted average natural gas price received per Mcf being higher by
$0.06 and $0.05 in 1995 and 1994, respectively, and lower by $0.06 in 1993. The
Company's weighted average oil prices received per Bbl during the years ended
December 31, 1995, 1994 and 1993, were $17.19, $15.86 and $17.07, respectively.
45
<PAGE> 48
The following table sets forth the Company's open hedging contracts for oil
and natural gas and the weighted average NYMEX prices hedged under various swap
agreements as of September 30, 1996.
<TABLE>
<CAPTION>
CRUDE OIL NATURAL GAS
----------------- ------------------
BBLS PRICE MMBTU PRICE
------- ------ --------- -----
<S> <C> <C> <C> <C>
October 1996 through November 1996...................... 122,000 $18.55 3,141,700 $2.33
December 1996 through February 1997..................... 180,000 18.55 3,346,500 2.36
</TABLE>
The following table sets forth the increase (decrease) in the Company's
natural gas sales as a result of hedging transactions and the effects of hedging
transactions on price per Mcf during the periods indicated.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
----------------------- -----------------
1993 1994 1995 1995 1996
----- ---- ------ ------ -------
<S> <C> <C> <C> <C> <C>
Increase (decrease) in natural gas sales (in
thousands)......................................... $(882) $877 $1,020 $1,209 $(2,171)
Increase (decrease) in oil sales (in thousands)...... (811)
Effect of hedging transactions on average gas sales
price (per Mcf).................................... (0.06) 0.05 0.06 0.12 (0.14)
Effect of hedging transactions on average oil sales
price (per Bbl).................................... (1.42)
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
Cash Flows
As of September 30, 1996, the Company had cash and cash equivalents
aggregating approximately $14.8 million and working capital of approximately
$6.3 million. Cash provided by operating activities in 1995 was approximately
$21.4 million compared to $22.6 million in 1994. Cash flows used in investing
activities increased to $123.3 million in 1995 from $19.6 million in 1994,
primarily as a result of a $107.0 million receivable issued to an affiliate
during 1995, which was partially offset by an increase in the sale of assets in
1995 to $20.7 million from $3.5 million in 1994. Cash flows provided by
financing activities were increased to $103.0 million in 1995 as the Company
issued $60.0 million of new senior notes and received a $46.0 million equity
contribution from its parent company, which was partially offset by a $3.0
million principal payment on long-term debt. The following section discusses the
expected impact of the Transactions on the Company's financial position and
results of operations.
Trade receivables increased 7% to $6.5 million at September 30, 1996, from
$6.1 million at December 31, 1995, due primarily to higher production volumes
resulting from initial production on three principal properties over the period
from November 1995 through January 1996, as trade receivables reflect one to
three months oil and natural gas sales. Joint owner receivables decreased 60% to
$1.9 million at September 30, 1996, from $4.8 million at December 31, 1995, due
primarily to the completion of three major projects in the last quarter of 1995.
The Company currently plans to maintain in 1996 its 1995 level of capital
expenditures of approximately $42.0 million, to enable it to continue its
exploration and development programs. The Company expects to use the Revolving
Credit Facility to borrow funds required from time to time to supplement its
available resources.
46
<PAGE> 49
The Acquisition
In contemplation of the consummation of the Acquisition, ECT and Mariner
Holdings entered into certain agreements with representatives of the Company's
management providing for a continuing role of management in the Company after
the Acquisition. The sources and uses of funds related to financing the
Acquisition were as follows:
<TABLE>
<CAPTION>
(IN
MILLIONS)
<S> <C>
Sources of Funds(1):
JEDI Bridge Loan.......................................................... $ 92.0
Common stock purchased by JEDI............................................ 95.0
Working capital provided by the Company................................... 6.0
------
$193.0
======
Uses of Funds:
Acquisition purchase price................................................ $185.5
Acquisition costs and other expenses...................................... 7.5
------
$193.0
======
</TABLE>
- ---------------
(1) The JEDI Bridge Loan was incurred by Mariner Holdings to fund a portion of
the consideration paid in the Acquisition, which has been pushed down for
accounting purposes to the Company. Mariner Holdings repaid $50.0 million of
the original amount it borrowed from JEDI ($92.0 million) from a $50.0
million dividend it received from the Company from proceeds borrowed under
the Revolving Credit Facility. The Company used a portion of the net
proceeds of the Note Offering to (i) pay an additional dividend of $42.0
million to Mariner Holdings, which Mariner Holdings used to pay the
remaining balance of the JEDI Bridge Loan, and (ii) repay the $50.0 million
borrowed under the Revolving Credit Facility. After the Acquisition, the
Management Stockholders purchased approximately 4% of the capital stock of
Mariner Holdings (and thereby acquired beneficial ownership of approximately
4% of the capital stock of the Company) for an aggregate consideration
valued at approximately $4.0 million. Such consideration consisted of
approximately $0.6 million in cash and assignments of portions of their
overriding royalty interests held under the terms of their then existing
arrangements with the Company. The Management Stockholder contributions are
not included in the above sources and uses of funds.
Liquidity
Following the consummation of the Exchange Offer, the Company's liquidity
needs will arise primarily from debt service on the Exchange Notes and any
untendered Outstanding Notes and any amounts borrowed under the Revolving Credit
Facility and from planned capital expenditures. Immediately following the
issuance of the Exchange Notes, the Company's only outstanding indebtedness for
money borrowed will be the Exchange Notes and any untendered Outstanding Notes.
However, the Company expects to incur substantial indebtedness for capital
expenditures under the Revolving Credit Facility after the Exchange Offer. See
"Risk Factors -- Substantial Leverage" and "Risk Factors -- Substantial Capital
Requirements".
Debt Service
The Company incurred substantial indebtedness in connection with the
Acquisition and is significantly leveraged. Interest payments on the Exchange
Notes and any untendered Outstanding Notes and principal and interest payments
on amounts borrowed under the Revolving Credit Facility will represent
significant obligations of the Company affecting its liquidity following
consummation of the Exchange Offer. As of September 30, 1996, after the Note
Offering, the Company had total indebtedness for money borrowed of approximately
$100.0 million. Pro forma interest expense for 1995 would have been
approximately $9.3 million. See "-- Revolving Credit Facility". It is expected
that the Company's future net interest expense will be higher and will have a
greater proportionate impact on net income in comparison to pre-Note Offering
periods.
Future Financing and Cash Flows
Based upon the Company's current level of operations and anticipated
growth, management of the Company believes that available cash, together with
available borrowings under the Revolving Credit Facility
47
<PAGE> 50
and cash provided by operating activities, will be adequate to meet the
Company's anticipated future requirements for working capital, capital
expenditures and scheduled payments of principal of, and interest on, its
indebtedness, including the Exchange Notes and any untendered Outstanding Notes.
There can be no assurance that such anticipated growth will be realized, that
the Company's business will generate sufficient cash flow from operations or
that future borrowings will be available in an amount sufficient to enable the
Company to service its indebtedness, including the Exchange Notes and any
untendered Outstanding Notes, or make necessary capital expenditures. In
addition, depending on the levels of its cash flow and capital expenditures (the
latter of which are, to a large extent, discretionary), the Company may need to
refinance a portion of the principal amount of the Exchange Notes and any
untendered Outstanding Notes at or prior to their maturity. However, there can
be no assurance that the Company would be able to obtain financing to complete a
refinancing of the Exchange Notes and any untendered Outstanding Notes. See
"Risk Factors -- Substantial Leverage".
Capital Expenditures
The Company has planned exploration, development and exploitation
activities for all of its primary operating areas. The Company has budgeted
capital spending of approximately $42.0 million in 1996, but is not
contractually committed to expend all of such funds. The Company's budget
assumed a price of $21 per barrel on West Texas Intermediate Oil through the end
of 1996 and a price of $18 per barrel after 1996. There can be no assurance as
to the accuracy of the Company's budgeting assumptions. Historically, the
Company has used its operating cash flow and other indebtedness to fund these
operations. The Company's ability to borrow in the future is subject to
restrictions imposed by the Revolving Credit Facility and the Indenture as more
fully described below. See "Description of Revolving Credit Facility" and
"Description of the Exchange Notes".
Revolving Credit Facility
On June 28, 1996, the Company entered into the Revolving Credit Facility,
which provides for a maximum $150.0 million revolving credit loan and matures
June 28, 1999, at which time all amounts owed under such Facility are due and
payable. The amount of credit available to the Company under the Revolving
Credit Facility (the "Borrowing Base") is currently $50.0 million and is subject
to redetermination every six months (and, at the election of the Lenders, one
additional time per year) by the Lenders at the Lenders' sole discretion and in
accordance with their customary practices and standards in effect from time to
time for oil and natural gas loans to borrowers similar to the Company. The
Lenders may require that outstanding borrowings in excess of the borrowing limit
be repaid in two equal payments -- one three months and one six months following
a determination of such an excess. The Company currently has no indebtedness
outstanding under the Revolving Credit Facility.
So long as no default or event of default (as defined in the Revolving
Credit Facility) is continuing, borrowings under the Revolving Credit Facility
bear interest, at the option of the Company, at either (i) LIBOR plus 0.75% to
1.25% (depending upon the level of utilization of the Borrowing Base) or (ii)
the higher of (a) the agent's prime rate and (b) the federal funds rate plus
0.5%. The Company incurs a quarterly commitment fee ranging from 0.25% to 0.375%
per annum on the average unused portion of the Borrowing Base, depending upon
the level of utilization.
The Revolving Credit Facility contains covenants which, among other things,
restrict the payment of dividends, limit the amount of debt the Company may
incur, limit the Company's ability to make certain loans and investments, limit
the Company's ability to enter into certain hedge transactions and provide that
the Company must maintain a specified relationship between cash flow and fixed
charges and cash flow and interest on indebtedness. See "Description of
Revolving Credit Facility".
The Outstanding Notes and the Exchange Notes
The Indenture contains a number of significant covenants that, among other
things, restrict the ability of the Company to dispose of assets, incur
additional indebtedness, repay other indebtedness, pay dividends,
48
<PAGE> 51
enter into certain investments or acquisitions, repurchase or redeem capital
stock, engage in mergers or consolidations, or engage in certain transactions
with subsidiaries and affiliates and that otherwise restrict corporate
activities. There can be no assurance that such restrictions will not adversely
affect the Company's ability to finance its future operations or capital needs
or engage in other business activities that may be in the interest of the
Company. A breach of any of these covenants could result in a default under the
Indenture. In the event of any such default that is not cured or waived, the
Trustee or the holders of at least 25% in aggregate principal amount of the
Outstanding Notes and the Exchange Notes may declare the principal of and
accrued but unpaid interest on all the Outstanding Notes and the Exchange Notes
to be immediately due and payable. If the indebtedness under the Outstanding
Notes and the Exchange Notes were to be accelerated, there can be no assurance
that the assets of the Company would be sufficient to repay such indebtedness in
full. See "Description of the Exchange Notes".
49
<PAGE> 52
BUSINESS
OVERVIEW
Mariner is an independent energy company engaged in oil and gas
exploration, exploitation, development and production in three geographic areas:
the shallow water or "shelf" (less than 600 feet deep) of the Gulf and onshore
areas near the Gulf; Gulf deepwater (greater than 600 feet deep); and the
Permian Basin of West Texas. At March 31, 1996, approximately 85% in value
(based on the present value of estimated future net revenues) of the Company's
oil and gas reserves and most of its current efforts were located in or near the
Gulf, which historically has been a prolific hydrocarbon producing area. The
Company utilizes advanced evaluation and, particularly in the Gulf, advanced
completion technologies to explore for and produce oil and natural gas.
On March 31, 1996, the Company had proved reserves of 6.8 Mmbbls of oil and
96.3 Bcf of natural gas, aggregating 137.3 Bcfe, with approximately 70% of the
Company's proved reserves attributable to natural gas. At such date, the present
value of estimated future net revenues attributable to the Company's proved
reserves was approximately $161.0 million, of which approximately $150.0 million
was attributable to proved developed reserves. In addition to its properties
holding proved reserves, the Company had an inventory of 25 specific prospects
as of October 31, 1996, which it expects will account for most of its
exploratory and exploitation drilling activities over the next two years. In the
aggregate, the Company has a total undeveloped leasehold inventory of
approximately 128,000 net acres, including 65 undeveloped Gulf blocks, and holds
under license or other arrangement approximately 5,800 square miles of 3-D
seismic data and approximately 178,000 linear miles of 2-D seismic data.
From June 1, 1989 (when under new ownership the Company began to focus its
efforts on the Gulf), through September 30, 1996, the Company drilled 228 gross
(73.0 net) wells, including 76 gross (25.1 net) exploratory and deepwater
exploitation wells. Of such wells, 23 were completed (21 in Gulf shallow water
or onshore and two in Gulf deepwater), representing a 31% success rate on its
exploration and deepwater exploitation activities. During the same period, the
Company completed approximately 92% of its development wells. At September 30,
1996, the Company was in the process of drilling one gross (0.2 net) exploratory
well.
As a result of its successful exploration and exploitation efforts, from
January 1, 1990, through March 31, 1996, the Company had increases in proved
reserves of 48% to approximately 137 Bcfe and increases in production of 182% to
approximately 70 Mmcfe per day. The Company achieved a 161% average annual
reserve replacement ratio for the six years ended December 31, 1995, at an
average finding and development cost of $0.97 per Mcfe of proved reserves.
Between November 1, 1995 and September 30, 1996, average daily production
increased 57% due to six new wells being brought online; 66% of this production
increase was attributable to the Company's three deepwater Gulf wells and 34% to
activities in Gulf shallow water and near onshore areas. Consistent with this
recent increase in production, for the six months ended September 30, 1996,
compared to the six months ended September 30, 1995, the Company's total
revenues increased 120% to $32.8 million from $14.9 million, and the Company's
EBITDA increased 152% to $26.0 million from $10.3 million.
The Company began its operations in 1983 as a subsidiary of Trafalgar House
plc, a large U.K. conglomerate. As such, the Company carried on the U.S. oil and
gas operations of the Trafalgar House group. In 1989, Trafalgar House decided to
spinoff to its public shareholders its oil and gas operations in a new company
called Hardy Oil & Gas plc, of which the Company became a subsidiary, and
thereafter the Company carried on the U.S. oil and gas operations of Hardy plc.
The Company's existence as a subsidiary of Hardy plc ended with the Acquisition
in May 1996. See "The Transactions".
50
<PAGE> 53
The following table sets forth certain summary information with respect to
the Company's oil and gas activities and results during the five years ended
December 31, 1995, and the three months ended March 31, 1996. Reserve volumes
and values were determined under the method prescribed by the Commission, which
requires the application of year-end oil and natural gas prices for each year,
held constant throughout the projected reserve life. See "-- Oil and Natural Gas
Reserves" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations".
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, THREE MONTHS
------------------------------------------------------------- ENDED MARCH 31,
1991 1992 1993 1994 1995 1996
------- -------- ------- ------- -------- ---------------
(IN THOUSANDS, EXCEPT RATIOS AND PER UNIT AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
Present value of proved
reserves..................... $77,140 $100,064 $94,243 $95,318 $173,421 $ 161,048
Proved reserves
Crude oil and natural gas
liquids (Bbls)............. 7,326 6,190 6,128 6,900 6,669 6,836
Natural gas (Mmcf)........... 74,308 80,837 91,060 100,645 98,330 96,317
Natural gas equivalent
(Mmcfe).................... 118,264 117,977 127,828 142,045 138,344 137,333
Annual reserve replacement
ratio(1)..................... 3.9x 1.9x 1.7x 2.0x 1.2x
Total capital costs
incurred..................... $28,263 $ 27,770 $27,966 $36,923 $ 41,772 $ 7,495
Percentage of total capital
costs attributable to:
Prospect exploration......... 36.2% 41.2% 41.8% 44.7% 30.8% 52.1%
Development.................. 45.2 52.7 56.0 48.5 58.2 35.3
Acquisition.................. 18.6 6.1 2.1 6.8 11.0 12.7
Average crude oil prices per
barrel at end of period
indicated.................... $ 17.25 $ 18.25 $ 12.88 $ 16.28 $ 17.78 $ 20.27
Average natural gas prices per
Mcf at end of period
indicated.................... 1.81 2.00 2.07 1.67 2.72 2.42
</TABLE>
- ---------------
(1) The annual reserve replacement ratio for a year is calculated by dividing
aggregate reserve additions, including revisions, on an Mcfe basis for the
year by actual production on an Mcfe basis for such year.
STRATEGY
Mariner's strategy is to increase reserves, production and cash flows in a
cost effective manner primarily "through the drillbit" -- by exploring,
exploiting and developing prospects as contrasted with increasing reserves by
purchasing proved and producing properties. Mariner emphasizes internal growth
through exploration, exploitation and development of internally generated
prospects and prefers to operate the wells in which it participates and to hold
substantial working interests therein.
The Company applies a "portfolio management" approach to its drilling
activities that is directed at balancing (i) its views as to the moderate risks
of its exploration program in the Gulf and near onshore areas, the relatively
lower risk of exploitation in Gulf deepwater and the still lower risk of
development of the Company's interests in the Permian Basin of West Texas with
(ii) its views as to the potential for adding significant value from such
activities, particularly in the shallow water and deepwater of the Gulf.
In Gulf shallow water and near onshore fields, the Company focuses on
prospects with attractive value-adding potential and attractive rates of return
resulting from expected short production lead times, quick payout periods, low
lease operating expenses and favorable leasehold costs. At March 31, 1996,
approximately 68% in value of the Company's reserves, and, as of September 30,
1996, approximately 70% of the Company's average daily production, were located
in Gulf shallow water and near onshore fields.
Mariner's Gulf deepwater operations have been focused on the exploitation
of previously discovered reservoirs which the Company believes are too small to
be of interest to large oil companies. The Company believes that its deepwater
expertise and low operating costs enable it to develop small and midsize fields
in
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<PAGE> 54
deeper water of the Gulf profitably. At March 31, 1996, approximately 17% in
value of the Company's reserves, and as of September 30, 1996, approximately 24%
of the Company's average daily production, were located in Gulf deepwater. The
Company recently decided to expand its efforts in Gulf deepwater to include
moderate risk exploration for undrilled reservoirs because of (i) the large
reserve potential (relative to the Company's size) that it believes can be found
in deepwater areas targeted by it, (ii) the relative immaturity of these
exploration activities compared to other Gulf activities and (iii) the limited
competition for the Company's targeted reservoir sizes.
The Company's operations in the Spraberry Trend of the Permian Basin of
West Texas, which, at March 31, 1996, accounted for approximately 15% in value
of the Company's reserves, and, as of September 30, 1996, approximately 6% of
the Company's average daily production, have been important to the Company's
internal growth strategy by providing a consistent source of cash flow for use
in the Company's other activities.
The Company currently plans to focus the majority of its prospect
acquisition, exploration, exploitation and development efforts in the shallow
water and deepwater of the Gulf. In furtherance of its leasehold acquisition
program in such areas, Mariner acquired 19 offshore blocks in 1995 through lease
sales and farm-ins and was the successful bidder on eight additional blocks in
the Gulf in April 1996. Additionally, in September 1996, the Company was the
high bidder on 16 blocks in the Gulf (13 in deepwater). The MMS has awarded
leases to the Company on 6 of these blocks and continues to evaluate the
remaining 10 high bids. Although the Company expects that most, if not all, of
its remaining high bids will result in lease awards, there can be no assurance
of that result.
COMPETITIVE ADVANTAGES
Mariner believes that the following competitive advantages, which it
endeavors to emphasize in the implementation of its strategy, distinguish it
from other independent oil and gas companies and are responsible to a
significant extent for the success of the Company's exploration and exploitation
efforts in recent years.
Geographic Focus. A substantial portion of the Company's activities is
concentrated in the Gulf where the Company has been successful in developing
valuable reserves. The Company believes that exploration and development in
shallow water of the Gulf offer attractive returns because of short production
lead times, high production rates and relatively low capital and operating
costs. The Company believes that its activities in Gulf deepwater offer
attractive returns because of (i) large reserve potential, (ii) technological
developments, (iii) the early stages of development in the area and (iv) a
favorable competitive niche directed at exploiting small to moderate potential
fields previously discovered by large oil companies but bypassed for
exploitation by them as they search for larger fields -- a niche which few other
independent oil companies of the Company's size are pursuing because of the
significant technological and capital expenditure requirements. In Gulf
deepwater the Company's experience is that major oil companies are willing to
farmout prospects with potential for small and moderately sized fields and that
a cost effective operator like the Company can economically develop such fields
in such deepwater by generating sound geological and geophysical evaluations and
on that basis bringing in other industry participants to share the necessary
capital expenditures. Deepwater production enjoys a favorable circumstance as to
royalty costs compared to onshore production -- under federal law as to leases
in deepwater there is actually complete relief from royalty obligations for
certain initial volumes of production, depending upon the depth of the water
under a particular lease. The Company has also had success in the traditional
onshore areas of the Gulf, particularly in Texas, where it has operations that
provide a steady cash flow obtained at reasonable costs. With a significant
portion of its reserves in the Gulf, the Company benefits from the lower lease
operating expenses associated with offshore wells which are generally more
productive than typical onshore wells and allow for concentration of labor and
equipment. In addition, production from such wells is not burdened by severance
or ad valorem taxes. Moreover, gas produced in the Gulf and near onshore areas
usually receives top current prices because of its quality and proximity to
competitive pipeline transportation, and oil produced in the areas of the
Company's geographic focus is usually of good quality (as opposed to heavy crude
or high sulfur content crude oil which require special processing) and typically
carries prices which reflect such quality.
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<PAGE> 55
Concentration of Reserves and Efficient Operations. The Company actively
manages its portfolio of producing reserves to optimize concentration within its
geographic areas of focus. At March 31, 1996, approximately 85% by value of the
Company's reserves were located in six fields. This concentration enables the
Company to achieve efficiencies in its operations and to control its general and
administrative expenses relative to competitors that have more widespread
operations. For the twelve months ended December 31, 1995, the Company's direct
operating costs (consisting of lease operating expenses and general and
administrative expenses) were $0.57 per Mcfe produced. Consistent with its
emphasis on reserve concentration and low cost of operations, the Company
regularly reviews its properties and, when appropriate, sells properties that
are marginally profitable or outside of its areas of concentration.
Application of Technology. The Company applies state-of-the-art technology
to minimize exploration risk and maximize returns. Although the Company's
database includes extensive 2-D and 3-D seismic data, virtually all of the
Company's exploration and exploitation prospects are generated using 3-D seismic
data. While 2-D seismic data, which historically has been used by oil and gas
exploration companies, is still an important exploration tool, the use of 3-D
data lowers the risk of dry holes and optimizes exploitation and development
spending. In addition to seismic data, the Company utilizes and analyzes
existing well data available to it (including data available from government
sources as to offshore prospects) in its exploration and exploitation activities
and combines such information with seismic data to construct subsurface
geological models and make other subsurface comparisons. The Company also
utilizes state-of-the-art subsea production technology to lower the level of
capital expenditures that might otherwise be associated with deepwater
developments (for example, the construction of additional production platforms).
The ability to utilize these and other technologies often allows the Company
economically to pursue attractive projects below the size thresholds of large
oil companies.
Disciplined Approach to Exploration. The Company employs careful risk
analysis to determine its drilling priorities, balancing the required capital
outlay against the expected value of the well. Having confidence in its staff of
explorationists, the Company typically has generated its own prospects and
conducted its own risk analysis. The exploration, exploitation and development
of internally generated prospects accounted for 80% by value of the Company's
reserves at March 31, 1996. The Company attempts to focus its exploration and
exploitation efforts on prospects with high value-adding potential while at the
same time managing its risks by drilling at approximately 10 to 12 exploitation
and exploratory wells per year. Furthermore, the Company generally keeps its
working interests at or below 50% by seeking industry participants in its
exploitation and exploration activities in order to reduce its exposure on any
single undertaking.
Experienced Management with Significant Equity Incentives. The Company has
a management team that has considerable expertise in the oil and gas industry
and significant experience working with the Company. All present key employees
of, and consultants to, the Company are eligible to participate in a management
incentive program which provides overriding royalty interests in successful
projects. The Company believes that its overriding royalty program provides a
strong alignment of management's and investors' interests. In addition, the
Company believes that this program is a significant reason why the Company has
been able to retain the services of the members of its senior management team,
most of whom have been working together at the Company for over 10 years. In
connection with the Acquisition, the Management Stockholders also purchased
approximately 4% of the common stock of Mariner Holdings and acquired options to
purchase an additional 11% of the common stock of Mariner Holdings.
PRINCIPAL PRODUCING PROPERTIES
The Company owns oil and gas properties, both producing and for future
exploration, onshore in Texas and offshore in the Gulf, primarily in federal
waters. The Company currently has six principal producing properties, which in
the aggregate accounted for, as of March 31, 1996, 85% in value of the Company's
proved reserves and which provide a base for the Company's emphasis on growth in
its reserves, production and cash flow.
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Gulf of Mexico Deepwater
The following Gulf deepwater operations demonstrate the Company's ability
to utilize state-of-the-art production technology successfully, particularly the
technology of subsea tiebacks.
Green Canyon 136. Green Canyon 136 was generated by the Company and
acquired through a farmout transaction with Texaco, Inc. ("Texaco") and achieved
initial production in 1995. The 5,000 acre block is located offshore Louisiana
at water depths of approximately 840 to 1,040 feet. The Company operated the
property through the date of first production when Texaco became the operator.
The Company has a 25% working interest and an approximate 21.7% net revenue
interest. Two producing wells have been drilled thus far, with no additional
drilling currently planned. At September 30, 1996, gross average daily
production was 340 Bbls and 47.5 Mmcf and average daily production net to the
Company was 74 Bbls and 10.3 Mmcf. As of March 31, 1996, total estimated net
proved reserves and the present value of estimated future net revenues
attributable to the Company's interest in Green Canyon 136 were 7,395 Mmcfe and
$13.3 million, respectively. Green Canyon 136 is tied back, by a specially laid
pipeline and connecting system, to a production platform operated by Texaco
approximately 10 miles from the well sites, and its production is commingled and
marketed with Texaco's production. The field has an estimated remaining life of
nine years.
Garden Banks 240. Garden Banks 240 was generated by the Company and
acquired through a swap transaction with Shell Oil Company and achieved initial
production in January 1996. The 5,760 acre block is located offshore Louisiana
at a water depth of approximately 830 feet. The Company is the operator of the
property and has a 33 1/3% working interest and an approximate 27.2% net revenue
interest. One producing well has been drilled thus far, with no additional
drilling currently planned. Further exploitation is possible by recompletion of
the well at another depth, but no decisions have been made regarding such
activity. At September 30, 1996, gross average daily production was 189 Bbls and
20.5 Mmcf and average daily production net to the Company was 52 Bbls and 5.6
Mmcf. As of March 31, 1996, total estimated net proved reserves and the present
value of estimated future net revenues attributable to the Company's interest in
Garden Banks 240 were 7,830 Mmcfe and $12.3 million, respectively. Garden Banks
240 is tied back to a production platform operated by Chevron approximately 12
miles from the well site, and its production is commingled and marketed with
Chevron's production. The field has an estimated remaining life of 10 years.
Gulf Shallow Water and Near Onshore Areas
The following properties reflect the results of the Company's Gulf shallow
water and near onshore exploration and development strategy.
Sandy Lake. The Sandy Lake property, located onshore in the Pine Island
Bayou Field of the Texas Gulf Coast, having been generated by the Company,
achieved initial production in 1994. The majority of the 4,870 acre property is
located within the city limits of Beaumont, Texas. The Company is the operator
of the property and has an approximate 48% working interest and an approximate
34.5% net revenue interest. Six wells have been drilled thus far, five of which
are producing. The Company also contemplates increasing the capacity of its gas
processing facility at Sandy Lake, which in effect controls production, by 50%
in 1997 -- a measure which is expected to increase production from the Sandy
Lake field significantly. At September 30, 1996, gross average daily production
was 4,033 Bbls and 22.5 Mmcf, and average daily production net to the Company
was 1,412 Bbls and 7.9 Mmcf. As of March 31, 1996, total estimated net proved
reserves and the present value of estimated future net revenues attributable to
the Company's interest in the Sandy Lake property were 22,423 Mmcfe and $41.7
million, respectively. The field has an estimated remaining life of six years.
Brazos A-105. Brazos A-105 was generated by the Company and achieved
initial production in 1993. The approximate 4,300 acre block is located offshore
Texas at a water depth of approximately 190 feet. Union Oil Company of
California ("UNOCAL") is the operator of the property, and the Company holds a
12.5% working interest and an approximate 9.9% net revenue interest. Five
producing wells have been drilled thus far, and the drilling of two development
wells is possible in the future, but such activities have not yet been
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<PAGE> 57
budgeted. At September 30, 1996, gross average daily production was 159 Bbls and
106.0 Mmcf, and average daily production net to the Company was 16 Bbls and 10.5
Mmcf. As of March 31, 1996, total estimated net proved reserves and the present
value of estimated future net revenues attributable to the Company's interest in
Brazos A-105 were 18,528 Mmcfe and $28.3 million, respectively. The field has an
estimated remaining life of 13 years.
Matagorda Island 683/703. Matagorda Island 683 and 703 were acquired by
several companies in a bid group, including the Company, and achieved initial
production in 1993. The two 5,760 acre blocks are located offshore Texas at a
water depth of approximately 125 feet. Vastar Resources, Inc. is the operator of
the property, and the Company holds a 25% working interest and an approximate
19.8% net revenue interest. Three producing wells have been drilled thus far,
with no additional drilling currently planned. At September 30, 1996, gross
average daily production was 12 Bbls and 21.9 Mmcf, and average daily production
net to the Company was 2 Bbls and 4.3 Mmcf. As of March 31, 1996, total
estimated net proved reserves and the present value of estimated future net
revenues attributable to the Company's interest in Matagorda Island 683 and 703
were 6,765 Mmcfe and $9.4 million, respectively. The field has an estimated
remaining life of 11 years.
The Permian Basin of West Texas
Spraberry Aldwell Unit. In 1985, the Company acquired its interest in the
Aldwell Unit property, which has been producing since 1949. The 15,776 acre
fieldwide unit is located within the Spraberry Trend and produces from the
unitized Spraberry Formation and non-unitized Dean Formation in Reagan County in
West Texas. The Company is the operator of the property and has an approximate
64% working interest and, effectively, an approximate 54% net revenue interest.
The Company implemented an infill well drilling program in 1987, and subsequent
to such date 53 wells have been drilled, all of which are currently producing.
The drilling of 30 to 43 additional infill wells (targeted at bringing into
production proved undeveloped reserves in such property) is planned during the
next three to four years at a projected cost to the Company of approximately
$195,000 per well. At September 30, 1996, gross average daily production was 605
Bbls and 3.1 Mmcf, and average daily production net to the Company was 351 Bbls
and 1.9 Mmcf. As of March 31, 1996, total estimated net proved reserves and the
present value of estimated future net revenues attributable to the Company's
interest in the Spraberry Aldwell Unit property were 38,919 Mmcfe and $22.1
million, respectively. The field has an estimated remaining life of 45 years.
HEDGING
In order to manage its exposure to the volatility of crude oil and natural
gas prices, the Company hedges a substantial portion of its oil and natural gas
production. The Company customarily conducts its hedging strategy through the
use of swap arrangements that establish an index-related price above which the
Company pays the hedging partner and below which the Company is paid by the
hedging partner. Such arrangements represent approximately 70% of the Company's
anticipated average daily production for 1996. Hedging arrangements may expose
the Company to the risk of financial loss in certain circumstances, including
instances where the Company's production, which is in effect hedged, is less
than expected or where there is a sudden, unexpected event materially impacting
prices. The Revolving Credit Facility places certain restrictions on the
Company's use of hedging.
PROSPECT ACQUISITION, EXPLOITATION AND EXPLORATION
The Company seeks to complement its strategy of building the base of its
revenues through development and exploitation of its existing oil and gas
properties by directing a substantial part of its activities and capital
expenditures to (i) the acquisition of promising prospects for future
exploitation or exploration and (ii) the exploitation or exploration of selected
properties from its inventory by drilling thereon.
The Company's oil and gas exploitation or exploration process typically
begins with the selection of a defined geographical area and is followed by the
collection and analysis of various types of data, including
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seismic data and any available existing well data, that may provide information
as to the existence and location of potential oil and natural gas reservoirs
within the target area.
In recent years the oil and gas industry generally, and the Company
specifically, has focused on reducing risks and costs and increasing
productivity in exploration, exploitation and production. During this same
period, somewhat lower and more volatile oil and gas prices have created
additional impetus for energy companies, including the Company, to find ways to
reduce risks and costs associated with their exploration, exploitation and
development programs. This trend has led to an increasing reliance by energy
companies, including the Company, on sophisticated data gathering, processing
and interpretation techniques such as 3-D analytical techniques. Seismic data
are a principal source of information used by the Company's explorationists to
map potential oil and natural gas bearing formations and their geologic
boundaries. After seismic data are collected, they are processed and analyzed
with sophisticated computer imaging software to assist in the interpretation of
the subsurface lithology and structure. As computing costs have declined and new
software has become available, 3-D analytical techniques previously affordable
only to the largest integrated oil companies have become available to
independent oil companies, including the Company. The Company owns and routinely
uses four advanced computer work stations running state-of-the-art exploration
software. By improving the visualization of subsurface structures, 3-D seismic
models are used by the Company to evaluate prospects before drilling to improve
drilling success rates, to increase the amount of reserves found per well
drilled through optimal location of the well bore and to reduce the number of
wells required to develop a reservoir. In addition to seismic data available to
the Company, the Company uses, particularly in its efforts to exploit reservoirs
offshore, existing well data which is available from governmental sources
pursuant to applicable governmental regulations relating to oil and gas
operations on public lands. The availability of 3-D seismic data, the evolution
and enhancement of computer aided exploration and development programs and the
evolution and improvement in well logging and coring technology and related
analysis of well data have significantly increased the Company's ability to
optimize prospect acquisition, exploitation opportunities, exploratory well
location and other drilling decisions.
After assessing a prospect, the Company formulates a budget for its
acquisition and then attempts to acquire the prospect, or a working interest in
the prospect, from an existing owner (such as pursuant to a farmout agreement)
or, often in the case of new offshore prospects, in a lease auction.
Particularly with respect to offshore lease sales, the Company will acquire
interests in leases as part of bid groups. Prospects are then held in inventory
for future exploration or exploitation possibilities.
At present the Company holds in inventory for possible future exploration
or exploitation 24 offshore prospects, consisting of 156,297 gross acres (67,720
net acres) and one onshore prospect, consisting of 1,060 gross acres (530 net
acres). In addition, the Company holds under licenses or other arrangements
seismic information as to approximately 5,800 square miles of property (mostly
offshore) which were investigated using 3-D seismic technology and seismic data
as to 178,000 linear miles investigated by more traditional 2-D seismic
techniques. Such seismic data were acquired by the Company over recent years to
enable it to evaluate identified leads and prospects and producing properties as
well as to provide regional background and to use for prospecting in new areas.
During the last quarter of 1996, the Company estimates that it will spend
approximately $6.0 million on exploratory activities. While all oil and gas
activities are subject to numerous risks, the risks associated with prospect
acquisitions and offshore exploitation and exploration activities are greater
than those associated with development and exploitation activities in existing
fields, particularly onshore fields. Because of such risks, the Company
historically has solicited (and will continue to do so) industry partners to
participate with it on offshore exploitation and exploration projects on
negotiated terms. Accordingly, the level of the Company's capital expenditures
for its projects, and in particular for any single project, and its working and
revenue interests therein, will vary depending on terms agreed to with other
participating oil companies. In general, the Company prefers that its working
interest on any particular project be in the range of 25% to 50%. The Company
also prefers to operate the wells in which it participates and currently
operates wells representing approximately 53% in value of its proved reserves.
By owning a substantial percentage of the working interest in wells in which it
participates and operating wells to the extent possible, the Company believes it
is able to
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maintain greater control over (i) timing of, and planning for, future
development, (ii) drilling, completion and operating costs and (iii) marketing
of production.
With respect to its offshore exploration program, the Company typically
targets prospects where it believes that reserves of 30 to 200 Bcfe may be found
and produced -- typically a smaller target than the offshore reserves targeted
by large oil companies.
DRILLING AND COMPLETION ACTIVITIES
After the completion of all necessary geological and geophysical studies,
and assuming ownership of a leasehold or a right to operate thereon (such as
pursuant to a farmout agreement), the next step in the production of oil and gas
from the prospect is the drilling of the well at the specifically selected site.
Drilling operations are carried out by independent contractors engaged for such
purposes. Typically drilling contractors are hired on a day-rate basis under
which they are paid for each day the rig is on location, and they supply the
rig, crew and miscellaneous supplies and other support. In the course of
drilling, cuttings from the well bore brought to the surface are examined and
various logging techniques (methods of measuring the physical properties of
subsurface rock formations) are applied, all for the purpose of evaluating the
well. Assuming that the well is judged to be capable of commercial production,
it is completed by a process that includes setting casing pipe, applying
appropriate cementing and perforating the well so that the fluids of oil and gas
in the formation can flow up through the well bore. The wellhead is typically
capped off with a device (sometimes called a "tree") containing valves and other
equipment that is typically connected to a pipeline that in turn gathers the
production from the well.
Offshore drilling operations in water depths of up to 300 feet ordinarily
are carried out by the use of jack-up rigs and, in deeper waters, by
semi-submersible rigs. Particularly in offshore operations, the Company is
involved in technical planning and supervision of drilling and related
activities. Onshore drilling operations are carried on by traditional rotary rig
contractors and generally require less attention and expertise from the Company.
The completion of undersea wells in particular involves complex
technologies and techniques provided by specialized vendors. Subsea tiebacks in
turn require even more complexity because the site of production and production
control is ordinarily many miles away from the actual site of the wellhead. In
the Company's case, its own experts supervise contracts with, and activities of,
specialized vendors who lay a pipeline and other connecting lines from the
wellhead to an existing production platform a distance away. The Company makes
commercial arrangements with the platform operator to receive, and perform
certain processing measures on, the production from the subsea well.
At present, increased exploration activity in the Gulf has resulted in a
significant tightening of supplies of drilling services and equipment to the
offshore oil and gas exploration and production industry, including a particular
tightening in the availability of semi-submersible rigs. With the increased
demand for offshore vendor services and equipment, day rates for offshore rigs
have risen substantially in recent periods, and there is a lessened availability
of equipment and services which is particularly acute in the case of
semi-submersible rigs capable of drilling in water deeper than 1,500 feet where
much of the existing fleet of such rigs has been contracted for extended periods
by large oil companies. Accordingly, the Company must take into account
increased drilling and completion costs in evaluating offshore projects and must
carefully plan for and arrange the services of its vendors. In the case of
semi-submersible rigs with the deepest capabilities, the Company expects, in the
foreseeable future in order to carry out certain possible deepwater projects, to
be required to look for windows of opportunities to arrange (on a "subrental"
basis) rig availability from larger oil companies which have booked such rigs
for longer periods of time. While the Company has experienced a tightening in
the supply of equipment and services, and a related escalation in prices
therefor, the Company does not at present foresee such circumstances as
materially interfering with its ability to carry on its currently planned
exploitation and exploration activities.
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DISPOSITION OF PROPERTIES
The Company periodically evaluates, and, when appropriate, sells, certain
of its producing properties that it considers to be marginally profitable or
outside of its areas of concentration. Such sales enable the Company to maintain
financial flexibility, reduce overhead and redeploy the proceeds therefrom to
activities that the Company believes have a higher potential financial return.
During 1995, the Company sold nonstrategic oil and natural gas properties
located primarily in Louisiana and Arkansas for an aggregate amount of $20.6
million and during 1996 has sold such properties for $7.5 million.
OIL AND NATURAL GAS RESERVES
The following tables set forth certain information with respect to the
Company's reserves. Such reserve volumes and values were determined under the
method prescribed by the Commission which requires the application of year-end
prices for each year, held constant throughout the projected reserve life. The
reserve information as of March 31, 1996, is based in part upon a reserve report
prepared by the independent petroleum consulting firm of Ryder Scott Company.
The following table sets forth the estimated quantities of proved and
proved developed reserves of crude oil (including condensate and natural gas
liquids) and natural gas owned by the Company as of December 31, 1993, 1994 and
1995 and March 31, 1996, and principal components of the changes in the
quantities of reserves for each of the periods then ended.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, THREE MONTHS
-------------------------------------------------------- ENDED MARCH 31,
1993 1994 1995 1996
---------------- ----------------- ----------------- ----------------
OIL GAS OIL GAS OIL GAS OIL GAS
(MBBL) (MMCF) (MBBL) (MMCF) (MBBL) (MMCF) (MBBL) (MMCF)
------ ------- ------ -------- ------ -------- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PROVED RESERVES:
Beginning balance....... 6,190 80,837 6,128 91,060 6,900 100,645 6,669 98,330
Revisions of previous
estimates............ 353 7,266 423 4,241 307 14,113 32 (1,619)
Extensions, discoveries,
improved recovery and
other additions...... 61 15,483 829 21,842 46 2,476 335 4,713
Sale of reserves........ 6 19 21 2,136 160 5,134
Production.............. 470 12,507 459 14,362 424 13,770 200 5,107
---- ----- ---- ----- ---- ----- ---- -----
Ending balance.......... 6,128 91,060 6,900 100,645 6,669 98,330 6,836 96,317
==== ===== ==== ===== ==== ===== ==== =====
PROVED DEVELOPED RESERVES:
Beginning balance....... 3,641 62,329 3,653 67,263 4,037 83,192 4,357 87,843
Ending balance.......... 3,653 67,263 4,037 83,192 4,357 87,843 4,418 85,699
</TABLE>
The following table sets forth the present value of estimated future net
revenues from proved reserves as of December 31, 1993, 1994 and 1995 and March
31, 1996.
<TABLE>
<CAPTION>
AT DECEMBER 31,
------------------------------ AT MARCH 31,
1993 1994 1995 1996
------- ------- -------- ---------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Proved developed........................... $88,203 $81,354 $165,784 $ 150,464
Proved undeveloped......................... 6,040 13,964 7,637 10,584
----- ----- ----- -----
Total proved..................... $94,243 $95,318 $173,421 $ 161,048
===== ===== ===== =====
</TABLE>
Consistent with the Company's strategy of disposing of marginal properties
when appropriate, subsequent to March 31, 1996, the Company sold reserves in the
Permian Basin of West Texas having a present value of estimated future net
revenues at such date of approximately $11.0 million, including $1.2 million in
proved undeveloped reserves, for cash consideration of approximately $7.5
million. Such reserves (which consisted of
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<PAGE> 61
approximately 1,650 Mbbls of oil and 8,600 Mmcf of natural gas) are included in
the above data but were not included in the report of Ryder Scott Company at
March 31, 1996, which otherwise covered substantially all of the Company's
reserves as of such date. The reserves sold were generally very long-lived and
were associated, for the most part, with approximately 250 marginal wells with
high lease operating expenses. The Company considered these properties to be of
marginal value.
There are numerous uncertainties in estimating quantities of proved
reserves believed to have been discovered and in projecting future rates of
production and the timing of development expenditures, including many factors
beyond the control of the Company. The reserve data set forth in this Prospectus
are only estimates. Reserve estimates are inherently imprecise and may be
expected to change as additional information becomes available. Furthermore,
estimates of oil and gas reserves, of necessity, are projections based on
engineering data, and there are uncertainties inherent in the interpretation of
such data as well as the projection of future rates of production and the timing
of development expenditures. Reserve engineering is a subjective process of
estimating underground accumulations of oil and natural gas that cannot be
measured exactly, and the accuracy of any reserve estimate is a function of the
quality of available data and of engineering and geological interpretation and
judgment. Accordingly, estimates of the economically recoverable quantities of
oil and natural gas attributable to any 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. There also can be
no assurance that the reserves set forth herein will ultimately be produced or
that the proved undeveloped reserves set forth herein will be developed within
the periods anticipated. It is likely that variances from the estimates will be
material. In addition, the estimates of future net revenues from proved reserves
of the Company and the present value thereof are based upon certain assumptions
about future production levels, prices and costs that may not be correct when
judged against actual subsequent experience. The Company emphasizes with respect
to the estimates prepared by independent petroleum engineers that the discounted
future net cash flows should not be construed as representative of the fair
market value of the proved reserves owned by the Company since discounted future
net cash flows are based upon projected cash flows which do not provide for
changes in oil and natural gas prices from those in effect on the date indicated
or for escalation of expenses and capital costs subsequent to such date. The
meaningfulness of such estimates is highly dependent upon the accuracy of the
assumptions upon which they were based. Actual results will differ, and are
likely to differ materially, from the results estimated. Holders of Outstanding
Notes and prospective holders of Exchange Notes are cautioned not to place undue
reliance on the reserve data included in this Prospectus.
The information set forth in the preceding tables includes revisions of
reserve estimates attributable to proved properties included in the preceding
year's estimates. Such revisions reflect additional information from subsequent
exploitation and development activities, production history of the properties
involved and any adjustments in the projected economic life of such properties
resulting from changes in product prices.
In accordance with the Commission's guidelines, the engineers' estimates of
future net revenues from the Company's properties and the present value thereof
are made using oil and natural gas sales prices in effect as of the dates of
such estimates and are held constant throughout the life of the properties.
Since December 31, 1995, the Company has not filed any estimates of total
proved net oil or natural gas reserves with any federal authority or agency. See
Note 9 to the Financial Statements of the Company included elsewhere in this
Prospectus for certain additional information concerning the proved reserves of
the Company.
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<PAGE> 62
PRODUCTIVE WELLS AND ACREAGE
As of December 31, 1995, the Company had working interests in 90 gross
(66.6 net) active oil wells and 84 gross (12.8 net) active natural gas wells.
These totals do not include the Company's royalty and overriding royalty
interests in approximately 8 gross (0.1 net) producing oil and natural gas
wells.
The following table sets forth certain information with respect to the
developed and undeveloped acreage of the Company as of December 31, 1995.
<TABLE>
<CAPTION>
AT DECEMBER 31, 1995
------------------------------------------
UNDEVELOPED
DEVELOPED ACRES(1) ACRES(2)
------------------ -------------------
GROSS NET GROSS NET
------- ------ ------- -------
<S> <C> <C> <C> <C>
Texas (Onshore)...................................... 33,253 16,611 19,239 9,247
All other states (Onshore)........................... 2,010 336 51,682 14,160
Offshore............................................. 136,880 24,677 311,553 116,111
------- ------ ------- -------
Total...................................... 172,143 41,624 382,474 139,518
======= ====== ======= =======
</TABLE>
- ---------------
(1) Developed acres are acres spaced or assigned to productive wells.
(2) Undeveloped acres are acres on which wells have not been drilled or
completed to a point that would permit the production of commercial
quantities of oil and natural gas regardless of whether such acreage
contains proved reserves.
DRILLING ACTIVITIES
Certain information with regard to the Company's drilling activities during
the years ended December 31, 1993, 1994 and 1995, and the nine months ended
September 30, 1996, is set forth below.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------------------ -------------
1993 1994 1995 1996
-------------- ------------- ------------- -------------
GROSS NET GROSS NET GROSS NET GROSS NET
----- ----- ----- ---- ----- ---- ----- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Exploratory wells:
Oil.................................
Natural gas......................... 6 1.43 1 0.25
Dry................................. 11 3.86 7 3.26 6 2.38 4 1.40
----- ----- ----- ---- ----- ---- ----- ----
Total....................... 11 3.86 13 4.69 6 2.38 5 1.65
==== ===== ==== ==== ==== ==== ==== ====
Development wells:
Oil................................. 19 7.97 1 0.20
Natural gas......................... 5 0.98 6 1.97 3 0.85 2 0.83
Dry................................. 2 0.43 3 1.72
----- ----- ----- ---- ----- ---- ----- ----
Total....................... 26 9.38 9 3.69 3 0.85 3 1.03
==== ===== ==== ==== ==== ==== ==== ====
Total wells:
Producing........................... 24 8.95 12 3.40 3 0.85 4 1.28
Dry................................. 13 4.29 10 4.98 6 2.38 4 1.40
----- ----- ----- ---- ----- ---- ----- ----
Total....................... 37 13.24 22 8.38 9 3.23 8 2.68
==== ===== ==== ==== ==== ==== ==== ====
</TABLE>
At December 31, 1995, the Company was not in the process of drilling any
development or exploratory well. At September 30, 1996, the Company was in the
process of drilling one gross (or 0.2 net) exploratory well.
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<PAGE> 63
PRODUCTION AND SALES
The following table presents certain information with respect to oil and
natural gas production attributable to the Company's properties, average sales
price received, average production costs and the revenue derived from the sale
of such production during the three years ended December 31, 1993, 1994 and
1995, and the nine months ended September 30, 1996.
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED DECEMBER 31, ENDED
----------------------------- SEPTEMBER 30,
1993 1994 1995 1996
------- ------- ------- -------------
<S> <C> <C> <C> <C>
Production:
Oil (Mbbls)...................................... 470 459 424 570
Natural gas (Mmcf)............................... 12,507 14,362 13,770 15,655
Gas equivalent (per Mmcfe)....................... 15,327 17,116 16,314 19,075
Average sales price including effects of hedging:
Oil (per Bbl).................................... $ 17.07 $ 15.86 $ 17.19 $ 18.39
Natural gas (per Mcf)............................ 2.10 1.99 1.76 2.30
Gas equivalent (per Mcfe)........................ 2.24 2.09 2.04 2.44
Lease operating expenses (per Mcfe)................ 0.51 0.42 0.45 0.42
Revenue (in thousands):
Oil.............................................. $ 8,021 $ 7,281 $ 7,288 $10,483
Natural gas...................................... 26,274 28,575 26,021 36,046
-------- -------- -------- --------
Total.................................... $34,295 $35,856 $33,309 $46,529
======== ======== ======== ========
</TABLE>
PRODUCT MARKETS AND MAJOR CUSTOMERS
The revenues generated by the Company's operations are highly dependent
upon the prices of, and demand for, oil and natural gas. Historically, the
markets for oil, natural gas and natural gas liquids have been volatile and are
likely to continue to be volatile in the future. The prices received by the
Company for its oil, natural gas and natural gas liquids production and the
levels of such production are subject to wide fluctuations and depend on
numerous factors beyond the Company's control, including market uncertainty,
changes in global supply of and demand for oil, natural gas and natural gas
liquids, weather conditions, the condition of the United States economy
(particularly the manufacturing sector), the price and quantity of foreign
imports, the price and availability of alternative fuels, political conditions
(including embargoes) in or affecting other oil-producing and natural
gas-producing countries, the actions of the Organization of Petroleum Exporting
Countries and domestic government regulation, legislation and policies.
Decreases in the prices of oil and natural gas have had, and could have in the
future, an adverse effect on the value of the Company's proved reserves and the
Company's revenues, profitability and cash flow. See "-- Oil and Natural Gas
Reserves".
Certain of the Company's natural gas production has been in the past, and
may be in the future, curtailed from time to time depending on the quality of
the natural gas produced and transportation alternatives. In addition, market,
economic and regulatory factors may in the future adversely affect the Company's
ability to sell its natural gas production.
Before 1985, substantially all of the Company's natural gas production was
sold directly to pipeline companies which were responsible for resale and
transportation of the natural gas to end-users. Since that time, however, with
the adoption of various orders by the Federal Energy Regulatory Commission (the
"FERC") and the deregulation of natural gas pursuant to the Natural Gas Policy
Act of 1978 (the "NGPA") and the Natural Gas Wellhead Decontrol Act of 1989 (the
"Decontrol Act"), the FERC has actively promoted competition in the nationwide
market for natural gas and has encouraged pipelines to reduce significantly
their role as merchants of natural gas and to make transportation services
available on an "open-access", nondiscriminatory basis. See
"-- Regulation -- Transportation and Sale of Natural Gas". Since these
regulatory initiatives were begun, natural gas producers such as the Company
have been able to sell their natural gas supplies directly to utilities and
other end-users.
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<PAGE> 64
In addition to the regulatory changes discussed above, deregulation of
natural gas prices under the NGPA and the Decontrol Act has increased
competition and volatility of natural gas prices. Since demand for natural gas
is generally highest during winter months, prices received for the Company's
natural gas are subject to seasonal variations and other fluctuations. All of
the Company's natural gas production is currently sold under various
arrangements which yield prices consistent with current market prices. As to gas
produced from the Aldwell Unit, the Company has a long-term agreement as to the
sale of such gas and the processing thereof which the Company believes to be
reasonably competitive. Similarly, the Company has a gas processing agreement on
its gas production from Sandy Lake which the Company believes has the effect of
pricing its gas production favorably compared to market prices at such location.
The Company routinely enters into financial arrangements to hedge its exposure
to oil and gas price fluctuations. See "-- Hedging".
For the nine months ended September 30, 1996, Texaco Natural Gas, Inc.,
Transco Gas Marketing Company ("Transco"), Howell Crude Oil Company and Seneca
Resources Corp. accounted for approximately 18%, 15%, 13% and 10%, respectively,
of the Company's total revenues. For the year ended December 31, 1995, Seneca
Resources Corp, Transco and Marathon Petroleum Co. ("Marathon") accounted for
approximately 20%, 20% and 12%, respectively, of the Company's total revenues.
For the year ended December 31, 1994, UNOCAL, Apache Corporation ("Apache") and
Marathon accounted for approximately 25%, 13% and 11%, respectively, of the
Company's total revenues. For the year ended December 31, 1993, Apache, UNOCAL,
Lyle Energy Sources and Marathon accounted for approximately 14%, 14%, 12% and
12%, respectively, of the Company's total revenues. Due to the nature of the
markets for oil and natural gas, the Company does not believe that the loss of
any one of these customers would have a material adverse effect on the Company's
financial condition or results of operations.
COMPETITION
The Company's competitors include major integrated oil and natural gas
companies and numerous independent oil and natural gas companies, individuals
and drilling and income programs. Many of the Company's larger competitors
possess and employ financial and personnel resources substantially greater than
those available to the Company. Such companies may be able to pay more for
productive oil and natural gas 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 personnel resources permit. The
Company's ability to acquire additional prospects and to discover reserves in
the future will be dependent upon its ability to evaluate and select suitable
properties and to consummate transactions in a highly competitive environment.
In addition, there is substantial competition for capital available for
investment in the oil and natural gas industry.
REGULATION
The Company's operations are subject to extensive and continually changing
regulation, as legislation affecting the oil and natural gas industry is under
constant review for amendment and expansion. Many departments and agencies, both
federal and state, are authorized by statute to issue and have issued rules and
regulations binding on the oil and natural gas industry and its individual
participants. The failure to comply with such rules and regulations can result
in substantial penalties. The regulatory burden on the oil and natural gas
industry increases the Company's cost of doing business and, consequently,
affects its profitability. However, the Company does not believe that it is
affected in a significantly different manner by these regulations than are its
competitors in the oil and natural gas industry. Because of the myriad and
complex federal and state statutes and regulations which may affect the Company,
directly or indirectly, the following discussion of certain statutes and
regulations should not be relied upon as an exhaustive review of all matters
affecting the Company's operations.
Transportation and Sale of Natural Gas
Prior to January 1, 1993, various aspects of the Company's natural gas
operations were subject to regulations by the FERC under the Natural Gas Act of
1938 (the "NGA") and the NGPA with respect to "first sales" of natural gas,
including price controls and certificate and abandonment authority regulations.
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<PAGE> 65
However, as a result of the enactment of the Decontrol Act, the remaining "first
sales" restrictions imposed by the NGA and the NGPA terminated on January 1,
1993.
The FERC regulates interstate natural gas pipeline transportation rates and
service conditions, which affect the marketing of 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 adopted policies intended to make
natural gas transportation more accessible to gas buyers and sellers on an open
and nondiscriminatory basis. The FERC's most recent action in this area, Order
No. 636, reflected the FERC's finding that, under the then-existing regulatory
structure, interstate pipelines and other gas merchants, including producers,
did not compete on a "level playing field" in selling gas. Order No. 636
instituted individual pipeline services restructuring proceedings, designed
specifically to "unbundle" those services provided by many interstate pipelines
(for example, transportation, sales and storage) so that buyers of natural gas
may secure supplies and delivery services from the most economical source,
whether interstate pipelines or other parties. The FERC has issued final orders
in the restructuring proceedings, and a number of pipelines have filed tariff
sheets reflecting refinements in the implementation of Order No. 636 following
three years of operation under the program. In addition, the FERC has announced
its intention to reexamine certain of its transportation related policies,
including the appropriate manner in which interstate pipelines release
transportation capacity under Order No. 636 and, more recently, the price that
shippers can charge for released capacity. The FERC also has issued a new policy
regarding the use of nontraditional methods of setting rates for interstate gas
pipelines in certain circumstances as alternatives to cost-of-service based
rates. A number of pipelines have obtained FERC authorization to charge
negotiated rates as one such alternative.
Although the FERC's actions, such as Order No. 636, do not regulate gas
producers such as the Company, these actions are intended to foster increased
competition within all phases of the natural gas industry. To date, the FERC's
pro-competition policies have not materially affected the Company's business or
operations. On a prospective basis, however, such orders may substantially
increase the burden on the producers and transporters to nominate and deliver on
a daily basis a specified volume of natural gas. Producers and transporters
which deliver deficient volume or volumes in excess of such daily nominations
could be subject to additional charges by the pipeline carriers.
The United States Court of Appeals for the District of Columbia Circuit has
affirmed the FERC's Order No. 636 restructuring rule and remanded certain issues
for further explanation or clarification. Numerous petitions seeking judicial
review of the individual pipeline restructuring orders are currently pending in
the United States Court of Appeals for the District of Columbia Circuit. It is
not possible to predict what, if any, effect the order on remand or the Court's
decision in the individual pipeline cases will have on the Company. The Company
does not believe, however, that it will be affected any differently than other
gas producers or marketers with which it competes.
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; thus there is no assurance that the less stringent regulatory
approach recently pursued by the FERC and Congress will continue indefinitely
into the future.
Transportation and Sale of Crude Oil
Sales of crude oil and condensate can be made by the Company at market
prices not subject at this time to price controls. The price that the Company
receives from the sale of these products is affected by the cost of transporting
the products to market. Commencing in October 1993, the FERC issued a series of
orders (Order Nos. 561 and 561-A) in which it revised its regulations governing
the rates that may be charged by oil pipelines. The new rules, which became
effective January 1, 1995, provide a simplified, generally applicable method for
regulating such rates by use of an index for setting rate ceilings. In certain
circumstances, the new rules permit oil pipelines to establish rates using
traditional costs of service and other methods of ratemaking. On October 28,
1994, the FERC issued two separate Orders (Nos. 571 and 572), which adopt
additional regulations governing rates that an oil pipeline may be authorized to
charge. Order No. 571 authorizes a
63
<PAGE> 66
pipeline to implement cost-of-service based rates, provided it can demonstrate
that there is a substantial divergence between the actual costs experienced by
the carrier and the indexed rate that the pipeline is directed to charge under
Order No. 561. In Order No. 572, the FERC adopted regulations that authorize a
pipeline to charge market-based rates, provided it can demonstrate that it lacks
significant market power in the market(s) in which it proposes to charge such
rates. These rules have been affirmed by the U.S. Court of Appeals for the
District of Columbia Circuit. The effect that these new rules may have on moving
the Company's liquid products to market cannot yet be determined.
Regulation of Production
The production of oil and natural gas is subject to regulation under a wide
range of state and federal statutes, rules, orders and regulations. State and
federal statutes and regulations require permits for drilling operations,
drilling bonds and reports concerning operations. Most states in which the
Company owns and operates properties have regulations governing conservation
matters, including provisions for the unitization or pooling of oil and natural
gas properties, the establishment of maximum rates of production from oil and
natural gas wells and the regulation of the spacing, plugging and abandonment of
wells. Many states also restrict production to the market demand for oil and
natural gas and several states have indicated interest in revising applicable
regulations. The effect of these regulations is to limit the amount of oil and
natural gas the Company can produce from its wells and to limit the number of
wells or the locations at which the Company can drill. Moreover, each state
generally imposes an ad valorem, production or severance tax with respect to
production and sale of crude oil, natural gas and gas liquids within its
jurisdiction.
Environmental Regulations
General. Various federal, state and local laws and regulations governing
the discharge of materials into the environment, or otherwise relating to the
protection of the environment, affect the Company's operations and costs. In
particular, the Company's exploration, development and production operations,
its activities in connection with storage and transportation of crude oil and
other liquid hydrocarbons and its use of facilities for treating, processing or
otherwise handling hydrocarbons and wastes therefrom are subject to stringent
environmental regulation. As with the industry generally, compliance with
existing regulations increases the Company's overall cost of business. Such
areas affected include unit production expenses primarily related to the control
and limitation of air emissions and the disposal of produced water, capital
costs to drill exploration and development wells resulting from expenses
primarily related to the management and disposal of drilling fluids and other
oil and gas exploration wastes and capital costs to construct, maintain and
upgrade equipment and facilities.
The Company incurs some expenses related to the disposition of drilling
fluids and produced waters, but these costs do not constitute a material expense
to the Company. The Company anticipates that it will incur additional expenses
related to compliance with environmental regulations at the time it abandons a
producing property or lease. The amount of these costs will vary, but based on
the Company's experience, the amount and timing of these costs should not
materially increase the Company's overall cost of business. In addition, the
Company does not anticipate that it will be required to make any significant
capital expenditures to comply with current environmental requirements.
Environmental regulations have historically been subject to frequent change
by regulatory authorities, and the Company is unable to predict its ongoing cost
to comply with these laws and regulations or the future impact of such
regulations on its operations. However, the Company does not believe that
changes to these regulations will materially adversely affect its competitive
position because its competitors are similarly affected. A discharge of
hydrocarbons or hazardous substances into the environment could subject the
Company to substantial expense, including both the cost to comply with
applicable regulations pertaining to the remediation of releases of hazardous
substances into the environment and claims by neighboring landowners and other
third parties for personal injury and property damage. The Company maintains
some insurance which may provide some protection against environmental
liabilities, but the coverage of such insurance and the amount of protection
afforded thereby cannot be predicted with respect to any particular possible
environmental liability and may not be adequate to protect the Company from
substantial expense.
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<PAGE> 67
Water. The Oil Pollution Act (the "OPA") was enacted in 1990 and amends
provisions of the Federal Water Pollution Control Act of 1972 (the "FWPCA") and
other statutes as they pertain to prevention and response to oil spills. The OPA
subjects owners of facilities to strict, joint and potentially unlimited
liability for removal costs and certain other consequences of an oil spill,
where such spill is into navigable waters, along shorelines or in the exclusive
economic zone. In the event of an oil spill into such waters, substantial
liabilities could be imposed upon the Company. States in which the Company
operates also have enacted similar laws. Regulations are being developed under
both the OPA and state laws that may impose additional regulatory burdens on the
Company.
In addition, the OPA, as recently amended, requires the lessee or permittee
of the offshore area in which an oil or natural gas facility is located to
establish and maintain evidence of financial responsibility in the amount of
$35.0 million to cover liabilities related to an oil spill for which such person
is statutorily responsible. Prior to its amendment, the OPA required such lessee
or permittee to maintain evidence of financial responsibility in the amount of
$150.0 million, and the amended statute authorizes the President of the United
States to increase the amount of financial responsibility to $150.0 million
depending on the risks posed by the quantity or quality of oil that is handled
by the facility. The MMS published an advance notice of its intention to adopt
regulations implementing the OPA's financial responsibility requirements for
offshore facilities, and it is probable that the MMS will proceed with the
promulgation of such regulations under the amended statute. The Company cannot
predict the final form of any financial responsibility regulations that will be
adopted by the MMS, but the impact of any such regulations should not be any
more adverse to the Company than it will be to other similarly situated
companies.
The FWPCA imposes restrictions and strict controls regarding the discharge
of produced waters and other oil and gas wastes into navigable waters. These
controls have become more stringent over the years, and it is probable that
additional restrictions will be imposed in the future. Permits must be obtained
to discharge pollutants into 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 impose
liabilities in the case of a discharge of petroleum or its derivatives, or other
hazardous substances, into state waters. In addition, the Environmental
Protection Agency ("EPA") has promulgated regulations that require many oil and
gas production operations to obtain permits to discharge storm water runoff. The
Company believes that compliance with existing permits and with foreseeable new
permit requirements will not have a material adverse effect on the Company's
financial condition or results of operations.
Air Emissions. The operations of the Company are subject to the Federal
Clean Air Act and comparable state and local statutes. The Company believes that
its operations are in substantial compliance with such statutes in all states in
which it operates.
Amendments to the Federal Clean Air Act enacted in 1990 require or will
require most industrial operations in the United States to incur capital
expenditures in order to meet air emission control standards developed by the
EPA and state environmental agencies. Although no assurances can be given, the
Company believes implementation of such amendments will not have a material
adverse effect on the Company's financial condition or results of operations.
Solid Waste. The Federal Resource Conservation and Recovery Act ("RCRA") is
the principal federal statute governing the treatment, storage and disposal of
hazardous wastes. RCRA imposes stringent operating requirements (and liability
for failure to meet such requirements) on a person who is either a "generator"
or "transporter" of hazardous waste or an "owner" or "operator" of a hazardous
waste treatment, storage or disposal facility. At present, RCRA includes a
statutory exemption that allows oil and gas exploration and production wastes to
be classified as non-hazardous waste. A similar exemption is contained in many
of the state counterparts to RCRA. As a result, the Company is not required to
comply with a substantial portion of RCRA's requirements because the Company's
operations generate minimal quantities of hazardous wastes. However, at various
times in the past, proposals have been made to rescind the exemption that
excludes oil and gas exploration and production wastes from regulation as
hazardous waste under RCRA. Repeal or
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<PAGE> 68
modification of this exemption by administrative, legislative or judicial
process, or through changes in applicable state statutes, would increase the
volume of hazardous waste to be managed and disposed of by the Company.
Hazardous wastes are subject to more rigorous and costly disposal requirements
than are non-hazardous wastes. Such changes in the regulations may result in
additional capital expenditures or operating expenses by the Company.
Superfund. The Comprehensive Environmental Response, Compensation and
Liability Act ("CERCLA"), also known as "Superfund", imposes liability, without
regard to fault or the legality of the original act, on certain classes of
persons that contributed to the release of a "hazardous substance" into the
environment. These persons include the "owner" or "operator" of the site and
companies that disposed or arranged for the disposal of the hazardous substances
found at the site. CERCLA also authorizes the EPA and, in some instances, third
parties to act in response to threats to the public health or the environment
and to seek to recover from the responsible classes of persons the costs they
incur. In the course of its ordinary operations, the Company may generate waste
that may fall within CERCLA's definition of a "hazardous substance". The Company
may be jointly and severally liable under CERCLA for all or part of the costs
required to clean up sites at which such wastes have been disposed.
The Company currently owns or leases, and has in the past owned or leased,
numerous properties that for many years have been used for the exploration and
production of oil and gas. Although the Company has utilized operating and
disposal practices that were standard in the industry at the time, hydrocarbons
or other wastes may have been disposed of or released on or under the properties
owned or leased by the Company or on or under other locations where such wastes
have been taken for disposal. In addition, many of these properties have been
operated by third parties whose actions with respect to the treatment and
disposal or release of hydrocarbons or other wastes were not under the Company's
control. These properties and wastes disposed thereon may be subject to CERCLA,
RCRA and analogous state laws. Under such laws, the Company could be required to
remove or remediate previously disposed wastes (including wastes disposed of or
released by prior owners or operators), to clean up contaminated property
(including contaminated groundwater) or to perform remedial plugging operations
to prevent future contamination.
TITLE TO PROPERTIES
The Company's properties are subject to customary royalty interests, liens
incident to operating agreements, liens for current taxes and other burdens,
including other mineral encumbrances and restrictions. The Company does not
believe that any of these burdens materially interferes with the use of such
properties in the operation of its business.
The Company believes that it has satisfactory title to or rights in all of
its producing properties. As is customary in the oil and natural gas industry,
minimal investigation of title is made at the time of acquisition of undeveloped
properties. Title investigation is made, and title opinions of local counsel are
generally obtained, only before commencement of drilling operations. The Company
believes that title issues generally are not as likely to arise on offshore oil
and gas properties as on onshore properties.
EMPLOYEES
As of November 1, 1996, the Company had approximately 50 full-time
employees, none of whom is represented by any labor union.
LEGAL PROCEEDINGS
The Company, in the ordinary course of business, is a claimant and/or a
defendant in various legal proceedings, including proceedings as to which it has
insurance coverage, in which its exposure, individually and in the aggregate, is
not considered material to the Company.
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<PAGE> 69
THE TRANSACTIONS
THE ACQUISITION
Pursuant to the Purchase Agreement by and among Hardy plc and its wholly
owned subsidiary Hardy Holdings Inc., on the one hand, and ECT and Mariner
Holdings, on the other hand, Mariner Holdings acquired all the capital stock of
the Company from Hardy Holdings Inc. (the "Acquisition") for an aggregate
purchase price of approximately $185.5 million, including $14.5 million for net
working capital of the Company. In connection with the Acquisition, substantial
intercompany indebtedness and receivables and third-party indebtedness of the
Company were eliminated. The Acquisition was consummated on May 16, 1996;
however, for accounting purposes, the Acquisition is treated as if it had
occurred on April 1, 1996. The Acquisition was financed by the proceeds from the
JEDI Bridge Loan and from the purchase by JEDI of stock of Mariner Holdings. See
"-- Stockholders' Agreement and Related Matters" and "-- Financing".
In connection with the Acquisition, which was accounted for as a purchase
transaction, the Company incurred a "ceiling test" writedown under full cost
accounting requirements of approximately $22.5 million. The "ceiling test" is
applied, in general, to reduce the carrying value of oil and gas properties to
an amount not greater than the present value of estimated future net revenues
determined in accordance with the requirements of the Commission -- based in
this instance on prices in effect as to the Company's oil and gas production on
the closing date of the Acquisition. The writedown is an accounting charge and
as such did not affect the Company's cash flow from operating activities.
Under the Purchase Agreement, Hardy Holdings Inc. and Mariner Holdings will
make an election under section 338(h)(10) of the Code with the effect that the
tax basis of the Company's assets will be increased to the deemed purchase price
of the assets. It is expected that this additional basis will result in
increased income tax deductions and, accordingly, reduced income taxes payable
by the Company. Under the Purchase Agreement, and except to the extent such
taxes are accrued as a current liability on the audited balance sheet of the
Company as of March 31, 1996, Hardy plc and Hardy Holdings Inc. are responsible
for (i) all U.S. federal, foreign, state and local taxes with respect to the
Company for all periods or portions thereof ending on or before March 31, 1996,
and audit adjustments to such taxes, (ii) any taxes of any corporation (other
than the Company) that is or was a member of the affiliated group of
corporations filing a consolidated federal income tax return of which Hardy
Holdings Inc. is the common parent (the "Seller Group"), (iii) any withholding
taxes with respect to any payment pursuant to the Purchase Agreement by the
Company to Hardy plc of any net intercompany account balance between the
Company, on the one hand, and Hardy plc and its affiliates, on the other hand,
and (iv) any taxes resulting from such section 338(h)(10) election and any
similar election under any applicable state income tax law. Hardy Holdings Inc.
is also responsible for all taxes due with respect to all periods or portions
thereof ending on or before May 16, 1996 that are covered by any consolidated
federal income tax return or any state consolidated, combined or unitary income
tax return of the Seller Group that includes the Company. Mariner Holdings is
responsible for all other taxes owing with respect to the Company.
Pursuant to a Participation Agreement dated as of May 16, 1996 (the
"Participation Agreement") by and between Hardy plc and Mariner Holdings, Hardy
plc has an option to purchase participation rights in certain prospects
generated by the Company until May 16, 1999. This option entitles Hardy plc to
acquire up to 25% of any leasehold or working interest the Company holds in any
exploitation prospect that (i) is located in the Gulf, (ii) the Company, in its
reasonable judgment, plans to develop, (iii) the Company reasonably expects to
exploit using a floating production facility or a subsea tieback system that
will require estimated gross capital expenditures in excess of $150.0 million
and (iv) is generated by the Company and is expected to be operated by the
Company. The Company is required to provide notice to Hardy plc within ten days
of acquiring an interest, or a contractual right to acquire an interest, in such
a prospect. Hardy plc must exercise its option with respect to such prospect
within ten days of receiving such notice from the Company. If Hardy plc
exercises its participation right as to any prospect, it must pay the Company a
ratable portion of the Company's costs and expenses in generating and acquiring
the prospect, including a ratable portion of a $250,000 prospect fee. In
addition to the interest in the prospect it acquires from the Company, Hardy plc
would then have the right to copy any geological and geophysical data owned by
the Company and pertaining
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to the prospect in which it is participating, unless the Company is restricted
from doing so by another agreement.
STOCKHOLDERS' AGREEMENT AND RELATED MATTERS
In contemplation of the consummation of the Acquisition, ECT, Mariner
Holdings and representatives of the Company's management (Robert E. Henderson,
Richard R. Clark, Michael W. Strickler and David S. Huber) entered into the
Stockholders' Agreement. The Stockholders' Agreement provides for the
capitalization of Mariner Holdings by ECT, its affiliates and certain employees
and consultants of the Company, certain aspects of Mariner Holdings'
organization and management and certain rights and obligations of the
stockholders of Mariner Holdings.
In May 1996, in accordance with the terms of the Stockholders' Agreement,
JEDI purchased 950,000 shares of the common stock of Mariner Holdings for an
aggregate consideration of $95.0 million; JEDI and Mariner Holdings entered into
the JEDI Bridge Loan; Mariner Holdings borrowed $92.0 million under the JEDI
Bridge Loan; and Mariner Holdings purchased the stock of the Company.
On June 27, 1996, in accordance with the terms of the Stockholders'
Agreement, 24 individuals who are employees of or consultants to the Company
(the "Management Stockholders") purchased an aggregate of 35,947 shares of the
common stock of Mariner Holdings (the "Management Investment") and received
options to purchase an additional 128,331 shares of the common stock of Mariner
Holdings. The aggregate purchase price for those shares was valued at
approximately $4.0 million, which the Management Stockholders paid by means of
cash or assignments of a portion of their overriding royalty interests held
under the terms of their then-existing employment or consulting arrangements
with the Company. In addition, in accordance with the terms of the Stockholders'
Agreement, the Management Stockholders who had Change of Control Agreements
relinquished their rights thereunder. Concurrently with the purchase of shares
of Mariner Holdings, each Management Stockholder (other than Messrs. Henderson,
Clark, Strickler and Huber, who were already parties) became a party to the
Stockholders' Agreement.
As a result of these transactions, the Management Stockholders and JEDI own
approximately 4% and approximately 96%, respectively, of the outstanding shares
of Mariner Holdings stock. On a fully diluted basis (that is, assuming that all
options granted to the Management Stockholders pursuant to the Stockholders'
Agreement have been exercised), the Management Stockholders would own or have
the right to acquire an aggregate of 164,278 shares, which would represent
approximately 15% of all shares that would be outstanding, and JEDI would own
approximately 85% of all outstanding shares on that basis. The stock options
granted to the Management Stockholders are not currently exercisable, are
subject to vesting schedules and are more fully described under the caption
"Management -- Employment, Consulting and Stock Option Agreements".
Under the terms of the Stockholders' Agreement, each Management Stockholder
entered into a new or amended employment or consulting agreement with the
Company. See "Management -- Employment, Consulting and Stock Option Agreements".
These agreements, among other things, afford all but three of the Management
Stockholders the benefits of the Company's overriding royalty program. See
"Management -- Overriding Royalty Interests".
The Stockholders' Agreement requires that the board of directors of Mariner
Holdings (as well as the board of directors of each subsidiary of Mariner
Holdings, including the Company) will include at least three nominees of the
Management Stockholders (the "Management Directors"). Currently, those three
representatives are Messrs. Henderson, Clark and Strickler. The Stockholders'
Agreement requires that the remaining board members consist of nominees of JEDI.
See "Management -- Executive Officers and Directors". In addition, any executive
committee of the board of directors must include at least two members who are
Management Directors and any compensation committee of the board of directors
must include at least one member who is a Management Director; however, no
Management Director is to be appointed to any audit committee.
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<PAGE> 71
The Stockholders' Agreement contains several additional provisions relating
to the management of Mariner Holdings and the rights and duties of stockholders
of Mariner Holdings. For further details, see "Certain
Transactions -- Stockholders' Agreement and Related Matters".
FINANCING
JEDI Bridge Loan
In connection with the Acquisition and pursuant to the requirements of the
Stockholders' Agreement, Mariner Holdings and JEDI entered into a Credit,
Subordination and Further Assurances Agreement dated as of May 16, 1996,
pursuant to which JEDI provided a loan commitment to Mariner Holdings for the
JEDI Bridge Loan. Mariner Holdings borrowed $92.0 million pursuant to the JEDI
Bridge Loan to partially fund the Acquisition. There is no outstanding balance
under the JEDI Bridge Loan, and it has terminated according to its terms.
Revolving Credit Facility
On June 28, 1996, the Company entered into the Revolving Credit Facility
that currently provides for a revolving credit facility of up to $50.0 million
with NationsBank of Texas, N.A., as the agent for the Lenders. On June 28, 1996,
the Company borrowed $50.0 million under the Revolving Credit Facility and used
the proceeds to pay a dividend to Mariner Holdings, which was used by Mariner
Holdings to partially repay the JEDI Bridge Loan. During August 1996, the
outstanding balance of the Revolving Credit Facility was repaid with the
proceeds from the issuance of the 10 1/2% Senior Subordinated Notes. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources" and "Description of Revolving
Credit Facility".
The Note Offering
On August 14, 1996, the Company issued the Outstanding Notes. Of the net
proceeds of the Note Offering, $42.0 million was used to pay a dividend to
Mariner Holdings, which in turn used the dividend to repay the remaining balance
of the JEDI Bridge Loan, and $50.0 million was used to repay all indebtedness
outstanding under the Revolving Credit Facility. See "Use of Proceeds".
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<PAGE> 72
MANAGEMENT
EXECUTIVE OFFICERS, KEY CONSULTANT AND DIRECTORS
Set forth below are the names, ages and positions of the executive officers
and directors of the Company and a key consultant to the Company as of December
2, 1996. All directors are elected for a term of one year and serve until their
successors are elected and qualified. All executive officers hold office until
their successors are elected and qualified.
<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE COMPANY
----------------------------------- --- -----------------------------------------------
<S> <C> <C>
Robert E. Henderson................ 43 Chairman of the Board, President and Chief
Executive Officer
Richard R. Clark................... 41 Senior Vice President of Production and
Director
Michael W. Strickler............... 41 Senior Vice President of Exploration and
Director
James M. Fitzpatrick............... 45 Vice President of Land and Legal, Corporate
Secretary
Gregory K. Harless................. 47 Vice President of Oil and Gas Marketing
W. Hunt Hodge...................... 40 Vice President of Administration
Frank A. Pici...................... 40 Vice President of Finance and Chief Financial
Officer
Clinton D. Smith................... 41 Vice President of Operations
David S. Huber..................... 46 Consultant
James V. Derrick, Jr............... 51 Director
Andrew S. Fastow................... 34 Director
Gene E. Humphrey................... 49 Director
Jere C. Overdyke, Jr............... 45 Director
Frank Stabler...................... 44 Director
</TABLE>
Mr. Henderson has been Chairman of the Board of the Company since May 1996,
President and Chief Executive Officer since 1987 and a director since 1985. From
1984 to 1987, he served the Company or predecessors in various other positions.
From 1976 to 1984, he held various positions with ENSTAR Corporation.
Additionally, Mr. Henderson served as the Company's Chief Financial Officer from
August 1996, when the former Chief Financial Officer ceased to serve in that
position, through November 1996.
Mr. Clark has served the Company in various engineering and operations
activities since 1984 and has been Senior Vice President of Production since
1991 and a director since 1988. Prior to joining the Company he worked as a
Production Engineer in the Offshore Production Group of Shell Oil Company.
Mr. Strickler joined the Company in 1984 and has served the Company since
such time in its geological and exploration activities. He has served as Senior
Vice President of Exploration of the Company since 1991 and a director since
1989.
Mr. Fitzpatrick joined the Company in 1984 and has served as Vice President
of Land and Legal since 1990 and Corporate Secretary since May 1996. Prior to
joining the Company he had been a petroleum landman for Pend Oreille Oil and Gas
Company and for Exxon Company U.S.A.
Mr. Harless has served as Vice President of Oil and Gas Marketing of the
Company since 1990. Prior to joining the Company in 1988, he was Vice President
of Marketing and Regulatory Affairs of Enron Oil and Gas Company.
Mr. Hodge has served as Vice President of Administration of the Company
since 1991. Prior to joining the Company in 1985, he was Purchasing Manager of
Santa Fe Minerals Company.
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Mr. Pici became Vice President of Finance and Chief Financial Officer in
December 1996. Prior to joining the Company, Mr. Pici was employed by Cabot Oil
& Gas Corporation holding several positions since 1989, including Corporate
Controller since 1994.
Mr. Smith joined the Company in 1987 and has served as Vice President of
Operations since 1991. Prior to joining the Company he worked on both domestic
and international assignments for Phillips Oil Company and Eaton Engineering.
Mr. Huber, a consultant to the Company, serves the Company in a number of
respects, particularly with respect to exploration, exploitation and development
of deepwater prospects, in which he has significant expertise, and is regarded
by the Company as a key personnel resource. Mr. Huber is an independent project
management consultant and is the Company's deepwater project manager. The
Company has engaged the services of Mr. Huber from time to time since 1991. Mr.
Huber was employed by Hamilton Oil Corporation (which was acquired by BHP
Petroleum in 1991) in the North Sea from 1981 to 1991, holding the positions of
production manager, planning and economics manager, and engineering manager. He
was the deepwater drilling engineering supervisor for Esso Exploration, Inc.
from 1974 to 1980.
Mr. Derrick has served as a director since May 1996. He is currently Senior
Vice President and General Counsel of Enron. He serves on the Management
Committee of Enron and is a director of Enron Global Power & Pipelines LLC, a
New York Stock Exchange-listed entity that owns interests in certain
international pipeline and power projects. Mr. Derrick also serves on the board
of directors of Coda Energy, Inc., an oil and gas exploration and production
company in which JEDI owns 98.5% of the common stock. He has been associated
with Enron since 1991. Prior to that he was for many years engaged in the
private practice of law in Houston, Texas.
Mr. Fastow has served as a director since July 1996. Since 1990 he has been
an employee of ECT, currently serving as a Managing Director. Prior to joining
ECT Mr. Fastow was a Senior Director in Continental Bank's Asset Securitization
Group.
Mr. Humphrey has served as a director since May 1996. Since 1990 he has
been an employee of ECT, currently serving as a Managing Director. He serves on
the board of directors of Coda Energy, Inc. Prior to joining ECT Mr. Humphrey
was a Vice President in Citibank's Petroleum Department.
Mr. Overdyke has served as a director since May 1996. Since 1991 he has
been an employee of ECT, currently serving as a Managing Director. Mr. Overdyke
has approximately 20 years of experience in the energy sector and has held
various financial and management positions with public and private independent
exploration and production companies.
Mr. Stabler has served as a director since May 1996. He is currently a Vice
President of ECT and has held positions with ECT since 1992. From 1989 to 1992,
Mr. Stabler served as Manager of Investor Services for American Exploration
Company.
The Stockholders' Agreement requires that the Board of Directors of the
Company include at least three nominees of the Management Stockholders.
Currently, those three representatives are Messrs. Henderson, Clark and
Strickler. The remaining board members are to include nominees of JEDI. See
"Certain Transactions -- Stockholders' Agreement and Related Matters".
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<PAGE> 74
EXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets forth the annual compensation for the Company's
Chief Executive Officer and the four other most highly compensated executive
officers for the fiscal year ended December 31, 1995. Such individuals are
sometimes referred to as the "named executive officers".
<TABLE>
<CAPTION>
AGGREGATE LONG-
TERM COMPENSATION
ANNUAL COMPENSATION RECEIVED AS A
--------------------------- RESULT OF
OTHER ANNUAL OVERRIDING ROYALTY ALL OTHER
NAME AND PRINCIPAL POSITION SALARY COMPENSATION(1) PROGRAM(2) COMPENSATION(3)
- ----------------------------------- -------- --------------- ------------------ ---------------
<S> <C> <C> <C> <C>
Robert E. Henderson................ $232,350 $ 6,000 $216,585 $ 306
President and Chief Executive
Officer
Richard R. Clark................... 161,625 6,000 142,040 306
Senior Vice President of
Production
Michael W. Strickler............... 145,500 5,640 151,512 306
Senior Vice President of
Exploration
Clinton D. Smith................... 127,525 4,944 67,764 306
Vice President of Operations
Gary M. Pedlar(4).................. 122,600 4,872 85,469 306
Vice President of Finance and
Chief Financial Officer
</TABLE>
- ---------------
(1) Amounts shown reflect the Company's contribution under the discretionary
profit sharing feature of its Employee Capital Accumulation Plan. See
"-- 401(k) Plan". For each of the named executive officers, the aggregate
amount of perquisites and other personal benefits did not exceed the lesser
of $50,000 and 10% of the officer's total annual salary and bonus and
information with respect thereto is not included.
(2) Does not include amounts received as a result of sales of overriding royalty
interests by individuals, normally in connection with sales of properties
by the Company; in 1995 proceeds of such sales were as follows for the
individuals indicated: Mr. Henderson ($301,307), Mr. Clark ($153,086), Mr.
Strickler ($353,061), Mr. Smith ($0) and Mr. Pedlar ($86,014). See
"-- Overriding Royalty Interests".
(3) Amounts shown reflect insurance premiums paid by the Company with respect to
term life insurance for the benefit of the named executive officers.
(4) Mr. Pedlar ceased to be the Company's Chief Financial Officer in August 1996
and ceased to be Vice President of Finance of the Company as of September
30, 1996. See "-- Employment, Consulting and Stock Option
Agreements -- Employment Agreements".
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<PAGE> 75
Overriding Royalty Program
Pursuant to agreements implementing the Company's overriding royalty
program, 22 employees or consultants of the Company, including each of the named
executive officers, are entitled to receive, based on production from the
Company's oil and gas properties in which he is assigned an overriding royalty
interest, royalty payments that vary from time to time based on production. See
"-- Overriding Royalty Interests". Set forth below is certain information
relating to the participation of Messrs. Henderson, Clark, Strickler, Smith and
Pedlar in the overriding royalty program.
<TABLE>
<CAPTION>
TOTAL NUMBER OF
PROSPECTS
IN WHICH AGGREGATE CASH
OVERRIDING AMOUNTS RECEIVED
ROYALTY AS A RESULT OF
INTERESTS OVERRIDING
WERE RECEIVED ROYALTY
NAME IN 1995(1) PROGRAM IN 1995(2)
- ---------------------------------------------------------- --------------- ------------------
<S> <C> <C>
Robert E. Henderson....................................... 4 $216,585
President and Chief Executive Officer
Richard R. Clark.......................................... 4 142,040
Senior Vice President of Production
Michael W. Strickler...................................... 4 151,512
Senior Vice President of Exploration
Clinton D. Smith.......................................... 4 67,764
Vice President of Operations
Gary M. Pedlar(3)......................................... 4 85,469
Vice President of Finance and Chief Financial Officer
</TABLE>
- ---------------
(1) At the time overriding royalty interests are received, they have only a
nominal value because no reserves have been proven at such time on the
prospects to which such interests relate.
(2) Does not include amounts received as a result of sales of overriding
royalty interests by individuals, normally in connection with sales of
properties by the Company; in 1995 proceeds of such sales were as follows
for the individuals indicated: Mr. Henderson ($301,307), Mr. Clark
($153,086), Mr. Strickler ($353,061), Mr. Smith ($0) and Mr. Pedlar
($86,014). See "-- Overriding Royalty Interests".
(3) Mr. Pedlar ceased to be the Company's Chief Financial Officer in August 1996
and ceased to be Vice President of Finance of the Company as of September
30, 1996. See "-- Employment, Consulting and Stock Option
Agreements -- Employment Agreements".
DIRECTORS' COMPENSATION
Members of the Board of Directors of the Company do not receive
compensation for any services provided in their capacities as directors, other
than the reimbursement of reasonable expenses incurred in connection with
attending meetings of the Board of Directors.
EMPLOYMENT, CONSULTING AND STOCK OPTION AGREEMENTS
Employment Agreements
The Company and 21 employees (each, an "Employee" and collectively, the
"Employees") have entered into employment agreements or amended and restated
employment agreements generally effective as of June 27, 1996 (each, an
"Employment Agreement" and collectively, the "Employment Agreements"), except
for Mr. Pici's, which is effective as of December 2, 1996. The Employment
Agreements with ten of the Employees (the "Senior Employees"), including Messrs.
Henderson, Clark, Strickler and Smith, are for initial terms of three or five
years (one year in the case of Mr. Pici), depending upon the Employment
Agreement (five years in the case of Messrs. Henderson, Clark and Strickler and
three years in the case of Mr. Smith), and thereafter are extended for terms of
either three or six months (eighteen months in the case of Mr. Pici), depending
upon the Employment Agreement (six months in the case of Messrs. Henderson,
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Clark and Strickler and three months in the case of Mr. Smith), unless notice of
termination is given by either the Company or the Senior Employee at least three
or six months, depending upon the Employment Agreement (six months in the case
of Messrs. Henderson, Clark, Strickler and Smith) before the end of the initial
or any extended term thereof (the "Senior Employee Notice Period"). The
Employment Agreements with the remaining 11 employees (the "Other Employees")
are for terms of two years. Under the Employment Agreements, the annual salaries
range from $61,700 to $236,000 ($236,000, $166,500, $150,000 and $131,500 in the
case of Messrs. Henderson, Clark, Strickler and Smith, respectively), which may
be reviewed at such times as may be determined by the Company, and the Company
may in its discretion increase an Employee's salary. The Employees are eligible
for participation in such medical, dental, life and accidental death and
dismemberment insurance programs and retirement, pension, deferred compensation
and other benefit programs instituted by the Company from time to time. The
Employees are also entitled to vacation, reimbursement of certain expenses and,
depending upon the Employment Agreement, either an automobile allowance or a
leased vehicle of the Company's choice and reimbursement for expenses related to
the use of such leased vehicle. As incentive compensation, the Senior Employees
and, under letter agreements (each, an "ORI Letter Agreement" and collectively,
the "ORI Letter Agreements"), eight of the Other Employees are entitled to
overriding royalty interests in certain oil and gas prospects acquired by the
Company. See "-- Overriding Royalty Interests".
If a Senior Employee's Employment Agreement is terminated by the Company
upon notice to such Senior Employee during the Senior Employee Notice Period, by
the Company without Cause (as defined in such Senior Employee's Employment
Agreement) other than by such notice to such Senior Employee, or by such Senior
Employee for Good Reason (as defined in such Senior Employee's Employment
Agreement) and assuming no notice of termination has been given by such Senior
Employee to the Company during the Senior Employee Notice Period, such Senior
Employee will be entitled to, among other things, (i) his or her salary and
other benefits through the end of the initial term or extended term of the
Employment Agreement (which salary will be paid in a lump sum cash payment in
the case of termination by the Company without Cause other than by such notice
to the Senior Employee or termination by the Senior Employee for Good Reason),
(ii) a lump sum cash payment equal to three, six, nine or 12 months' salary,
depending upon the Employment Agreement (12 months in the case of Mr. Henderson,
nine months in the case of Messrs. Clark and Strickler and six months in the
case of Mr. Smith), (iii) a lump sum cash payment equal to all vacation time
carried forward from a previous year and all earned and unused vacation time for
the then current year and (iv) an assignment of vested overriding royalty
interests. See "-- Overriding Royalty Interests". If a Senior Employee's
Employment Agreement is terminated by such Senior Employee upon notice to the
Company during the Senior Employee Notice Period, or if the Company at its
option consents to a request by a Senior Employee to terminate his or her
Employment Agreement at a time other then the end of the initial or any extended
term thereof (in which case the date requested by such Senior Employee and
agreed to by the Company will be the end of the term thereof), such Senior
Employee will be entitled to the amounts specified in the preceding sentence
except that such Senior Employee will not be entitled to the lump sum cash
payment equal to three, six, nine or 12 months' salary, depending upon the
Employment Agreement (12 months in the case of Mr. Henderson, nine months in the
case of Messrs. Clark and Strickler and six months in the case of Mr. Smith).
If an Other Employee's Employment Agreement terminates at the end of the
two-year term thereof, is terminated by the Company without Cause (as defined in
such Other Employee's Employment Agreement) or by an Other Employee for Good
Reason (as defined in such Other Employee's Employment Agreement), or if the
Company at its option consents to a request by an Other Employee to terminate
his or her Employment Agreement at a time other then the end of the term thereof
(in which case the date requested by such Other Employee and agreed to by the
Company will be the end of the term thereof), such Other Employee will be
entitled to, among other things, (i) his or her salary and other benefits
through the end of the term of the Employment Agreement (which salary will be
paid in a lump sum cash payment in the case of termination by the Company
without Cause or termination by such Other Employee for Good Reason), (ii) a
lump sum cash payment equal to all vacation time carried forward from a previous
year and all earned and unused vacation time for the then current year and (iii)
an assignment of vested overriding royalty interests, if any.
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<PAGE> 77
If an Employee's Employment Agreement is terminated by the Company for
Cause, such Employee is entitled to payment of salary and other benefits through
the month of discharge (prorated in the case of salary for such month of
discharge) and an assignment of vested overriding royalty interests, if any. If
an Employee becomes unable to perform his or her duties by reason of disability
(as defined in the Employment Agreements), such Employee is entitled to receive,
in addition to any insurance benefits, all of his or her salary for the first
month of disability and one-half of his or her salary for the next three months
of disability.
During the term of the Senior Employees' Employment Agreements, and for six
or 12 months thereafter, depending upon the Employment Agreement (12 months in
the case of Messrs. Henderson, Clark and Strickler and six months in the case of
Mr. Smith), if a Senior Employee's Employment Agreement is terminated by the
Company for Cause or by a Senior Employee other than for Good Reason (including
termination by a Senior Employee during the Senior Employee Notice Period), such
Senior Employee may not, directly or indirectly, (i) engage in, or render
advice, services or assistance to any person who is engaged directly or
indirectly in, any business that is in competition with the Company (a) in any
geographic area or market where the Company or its subsidiaries are conducting
any business as of the date of such termination or have conducted any business
during the previous 12 months, or (b) in any geographic area or market where the
Senior Employee knew the Company contemplated entering any business as of the
date of such termination, but only if the Company had, as of the date of such
termination, invested significant resources towards entering such business in
any such geographic area or market, or (ii) induce any employee of the Company
or its subsidiaries to terminate his or her employment with the Company or its
subsidiaries or hire or assist in the hiring of any such employee by any person
not affiliated with the Company. Additionally, if any payment or distribution by
the Company or its affiliates to or for the benefit of an Employee would be
subject to the "golden parachute excise tax" imposed by Section 4999 of the
Internal Revenue Code of 1986, as amended (the "Code"), then the Employee will
be entitled to receive an additional gross-up payment or payments in an amount
such that after payment of all taxes by the Employee attributable to such
additional gross-up payment or payments, such Employee retains an amount equal
to such excise tax imposed upon such payments and distributions. Under the
Employment Agreements, on the effective date thereof, the Change in Control
Agreements dated effective as of February 12, 1996, between the Company and the
Employees were terminated.
The Company entered into a letter agreement (the "Letter Agreement") with
Mr. Pedlar under which Mr. Pedlar ceased to be Vice President of Finance of the
Company and to be employed by the Company in any other capacity as of September
30, 1996. Pursuant to the Letter Agreement, Mr. Pedlar is entitled to (i)
payment of salary and an automobile allowance through September 30, 1996, (ii) a
lump sum payment of approximately $339,500, (iii) until the earlier of (a) March
31, 1999 and (b) the date on which Mr. Pedlar becomes a full-time employee of
another party, insurance and certain other benefits substantially similar to
those enjoyed by Mr. Pedlar prior to the termination of his employment, (iv)
continued benefit from any overriding royalty interest granted pursuant to a
separate agreement, as modified by the Letter Agreement, and in which Mr. Pedlar
has a vested interest as of September 30, 1996, (v) vested benefits under the
Company's Employee Capital Accumulation Plan and (vi) certain outplacement
services. See "-- Overriding Royalty Interests".
Consulting Agreements
The Company and five consultants (each, a "Consultant" and collectively,
the "Consultants") have entered into a consulting services agreement or amended
and restated consulting services agreements generally effective as of June 27,
1996 (each, a "Consulting Agreement" and collectively, the "Consulting
Agreements"). The Consulting Agreements are for initial or extended terms
ranging from one to five years and thereafter are extended for each successive
calendar month until either the Company or the Consultant gives the other 30
days' written notice. Under Mr. Huber's Consulting Agreement (pursuant to which
he provides strategic deepwater project management services to the Company), the
daily retainer fee is $850 per day worked, and the Company guarantees Mr. Huber
a minimum of 200 days' retainer fee during each year under
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his Consulting Agreement. Under the other Consultants' Consulting Agreements
(pursuant to which the consultants perform prospect generation and evaluation
services for the exclusive benefit of the Company), the annual retainer fees are
reviewed and determined by the Company from time to time. The Consultants are
also entitled to, among other things, allowances and reimbursement of certain
expenses and are provided an office and parking at the Company's office. Under
the Consulting Agreements, on the effective date thereof, the Change in Control
Agreements dated effective as of February 12, 1996, between the Company and the
Consultants were terminated.
During the five-year term and any extended term of Mr. Huber's Consulting
Agreement, and except for services to be provided to the Company under his
Consulting Agreement, Mr. Huber may not, directly or indirectly, for himself or
others, engage in any oil or gas exploration, development or production activity
in the Gulf. Additionally, if any payment or distribution by the Company or its
affiliates to or for the benefit of Mr. Huber would be subject to the "golden
parachute excise tax" imposed by Section 4999 of the Code, then Mr. Huber will
be entitled to receive an additional gross-up payment or payments in an amount
such that after payment of all taxes by Mr. Huber attributable to such
additional gross-up payment or payments, Mr. Huber retains an amount equal to
such excise tax imposed upon such payments and distributions.
Stock Option Agreements
Under the Mariner Holdings, Inc. 1996 Stock Option Plan (the "Stock Option
Plan"), a committee of the board of directors of Mariner Holdings (the
"Committee") is authorized to grant options to purchase shares of Mariner
Holdings common stock, including options qualifying as "incentive stock options"
under Section 422 of the Code ("ISOs") and options that do not so qualify
("NSOs"), to employees and consultants as additional compensation for their
services to Mariner Holdings and its subsidiaries. The Stock Option Plan is
intended to promote the long-term financial interests of Mariner Holdings and
its subsidiaries by providing a means whereby designated employees and
consultants may develop a sense of proprietorship and personal involvement in
the development and financial success of Mariner Holdings and its subsidiaries,
and to encourage them to remain with and devote their best efforts to the
business of Mariner Holdings and its subsidiaries, thereby advancing the
interests of Mariner Holdings and its stockholders. The Stock Option Plan became
effective upon its adoption by the board of directors of Mariner Holdings and
approval by the stockholders of Mariner Holdings.
The aggregate number of shares of Mariner Holdings common stock that may be
issued under options granted under the Stock Option Plan will not exceed 142,800
shares, subject to adjustment in the event of a stock split, stock dividend or
other change in the Mariner Holdings common stock or the capital structure of
Mariner Holdings.
The Stock Option Plan is administered by the Committee. Subject to the
provisions of the Stock Option Plan, the Committee is authorized to determine
who may participate in the Stock Option Plan, the number of shares that may be
issued under each option and the terms, conditions and limitations applicable to
each grant. In addition, the Committee is authorized to interpret the Stock
Option Plan and may from time to time adopt such rules and regulations
consistent with the provisions of the Stock Option Plan as it may deem advisable
to carry out the Stock Option Plan. Subject to certain limitations, the board of
directors of Mariner Holdings is authorized to amend, alter or terminate the
Stock Option Plan.
Under the Stock Option Plan, options will be exercisable over such period
as may be determined by the Committee. These options will be evidenced by option
agreements that may provide for the surrender of the right to purchase shares
under the option in return for a payment in cash or shares of Mariner Holdings
common stock or a combination of cash and shares of Mariner Holdings common
stock equal in value to the excess of the fair market value of the shares with
respect to which the right to purchase is surrendered over the purchase price
therefor. No option may be transferable other than by will or by the laws of
descent and distribution or pursuant to a qualified domestic relations order and
will be exercisable during the optionee's lifetime only by the optionee or the
optionee's guardian or legal representative. The purchase price of Mariner
Holdings common stock subject to an option will be determined by the Committee,
but in the case of ISOs, such purchase price will not be less than 100% of the
fair market value of such Mariner Holdings common
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stock on the date of grant. Such purchase price may be paid in full in cash,
Mariner Holdings common stock or a combination of both as may be determined by
the Committee.
On June 27, 1996, options ("Options") to purchase 128,331 shares of Mariner
Holdings common stock, including both ISOs and NSOs, were granted to the
Employees and four of the Consultants at an exercise price of $100 per share.
The Options generally vest and become exercisable as to one-fifth thereof on
each of the first five anniversaries of the date of grant. The Options expire
seven years after the date of grant. Upon termination of such optionee's
employment or consulting arrangement with Mariner Holdings or its subsidiaries,
(i) if such termination results from death, disability, termination by the
Company without Cause (as defined in the Employment Agreements, in the case of
the Employees, and in the stock option agreements, in the case of the
Consultants) or, in the case of the Employees, voluntary termination by the
Employee for Good Reason, then such Option will become immediately exercisable
in full and will remain fully exercisable until the expiration of the seven-year
option period, (ii) if such termination results from, in the case of the
Consultants, termination by the Consultant and there has not occurred an event
constituting Cause prior to such termination by the Consultant or, in the case
of the Employees, voluntary termination by the Employee other than for Good
Reason, then all portions of such Options vested as of the date of such
termination will remain exercisable at any time during the period ending 30 days
after the date of such termination, or (iii) if termination is, in the case of
Consultants, by the Consultant or the Company and there has occurred an event
constituting Cause prior to such termination or, in the case of the Employees,
by the Company for Cause, then such Options will terminate immediately and cease
to be exercisable. In addition, the Options will become exercisable in full upon
the occurrence of an initial public offering, which is defined as an offering
that is underwritten on a firm commitment basis by a nationally recognized
investment banking firm or in a merger or other business combination involving
Mariner Holdings if immediately thereafter Mariner Holdings (or its successor)
is subject to the reporting requirements of Section 13 or Section 15 of the
Exchange Act. Any unvested portion of an optionee's Options may also be
exercised to the extent, but only to the extent, necessary to allow the Employee
or the Consultant to sell shares of Mariner Holdings common stock the Employee
or the Consultant is actually selling pursuant to his or her tagalong rights
under the Stockholders' Agreement. See "Certain Transactions -- Stockholders'
Agreement and Related Matters".
Shares of Mariner Holdings common stock purchased pursuant to the exercise
of an Option are subject to the terms of the Stockholders' Agreement. See
"Certain Transactions -- Stockholders' Agreement and Related Matters". After any
exercise of NSOs, Mariner Holdings is required to pay to the Employee or the
Consultant in cash an amount such that after payment by him or her of federal
income taxes on such amount (which taxes shall be assumed to be assessed at the
highest ordinary income tax rate applicable to individuals on such date), he or
she retains a portion of the payment equal to the difference, if any, between
(i) the amount of federal income tax payable on the difference between the fair
market value on such date of the Mariner Holdings common stock acquired by such
exercise over the purchase price paid therefor (the "Spread") at the highest
ordinary income tax rate applicable to individuals on such date and (ii) the
amount of federal income tax payable on the Spread at the highest long-term
capital gains tax rate applicable to individuals on such date; provided,
however, that Mariner Holdings will have no obligation to make any such payment
if a change in federal tax laws enacted after the date of grant of such NSOs
eliminates Mariner Holdings' right to deduct the Spread from its taxable income.
OVERRIDING ROYALTY INTERESTS
Pursuant to agreements, the Consultants and certain of the Employees are
entitled to receive from the Company, as incentive compensation, overriding
royalty interests ("Overriding Royalty Interests") in certain oil and gas
prospects ("Prospects") acquired by the Company. These agreements generally
apply to Prospects acquired by the Company on or after April 18, 1996. Under
similar predecessor agreements that pre-date the above-referenced agreements,
certain employees and consultants of the Company became entitled to receive
Overriding Royalty Interests in respect of Prospects that were acquired by the
Company during various periods prior to April 18, 1996. Under these agreements,
the aggregate percentage of all Overriding Royalty Interests affecting the
Company's working interests in Prospects does not exceed 3% before well payout,
or 7.5% after well payout, of the Company's working interest in such Prospects.
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Employees
Each Employment Agreement with a Senior Employee and each ORI Letter
Agreement (each, an "ORI Agreement" and collectively, the "ORI Agreements")
provides that the Employee is entitled to receive, as incentive compensation,
Overriding Royalty Interests equal to certain specified undivided percentages of
the Company's working interest percentage in Prospects acquired by the Company
within the United States and its coastal waters while the Employee is employed
by the Company and during the term or extended term of the ORI Agreement. For
purposes of each ORI Agreement, oil and gas prospects acquired by the Company on
or after April 18, 1996 (or, in the case of one ORI Agreement, May 16, 1996, and
in the case of another ORI Agreement, December 2, 1996), are deemed to have been
acquired by the Company during the term of the ORI Agreement.
The Overriding Royalty Interest percentage of the Company's working
interest percentage to which each such Employee is entitled with respect to each
well drilled on a Prospect, for the period before well payout, is one-fourth of
such Employee's Overriding Royalty Interest percentage for the period after well
payout. These percentages range from 0.032083% to 0.23250% before payout and
from 0.128333% to 0.93000% after payout for each such Employee depending
generally upon the level of management responsibility of the particular
Employee.
Although each such Employee is entitled to receive the revenue arising from
his or her Overriding Royalty Interest in respect of any Prospect whether or not
he or she has become entitled to receive a recordable assignment of such
Overriding Royalty Interest from the Company, other than in exceptional cases
the Employee is not entitled to receive recordable assignments of his or her
interests until his or her completion of three years of employment by the
Company. In certain exceptional cases, the Employee becomes entitled to receive
recordable assignments of his or her accrued Overriding Royalty Interests in
Prospect leases not yet assigned, without regard to whether he or she has then
completed three years of employment by the Company. In such cases, the
Employee's Overriding Royalty Interest percentages in respect of the Company's
working interest in such Prospects (being in a before/after payout ratio of 1 to
4 as mentioned above) are adjusted at the time of assignment such that the
Employee's after-payout interest is reduced to one-half of the Employee's
after-payout interest stated in the ORI Agreement, and the Employee's
before-payout interest is increased to twice the Employee's before-payout
interest stated in the ORI Agreement, with the result that the Employee's
interests before and after payout are "equalized" upon delivery by the Company
of such recordable assignment. The exceptional cases in which the Employee is
entitled to receive such recordable assignments from the Company on an
"equalized basis" include the following: (i) a change in control of the Company
during the term or extended term of the ORI Agreement; (ii) the foreclosure or
conveyance in lieu of foreclosure of the Company's working interest in any
Prospect during the term or extended term of the ORI Agreement; and (iii) the
sale, transfer or conveyance to an unaffiliated third party during the term or
extended term of the ORI Agreement of all or substantially all of the Company's
working interests in all or substantially all exploratory acreage then owned by
the Company. For purposes of the ORI Agreements, a change in control of the
Company is deemed to have occurred if (i) any person or group other than JEDI or
an affiliate of Enron becomes the beneficial owner of 2/3 or more of the
Company's voting stock, (ii) the Company approves (a) a merger or consolidation
that would result in any person or group other than JEDI or an affiliate of
Enron becoming the beneficial owner of 2/3 or more of the Company's voting
stock, (b) a sale, lease, exchange or transfer of 2/3 or more of the Company's
assets or (c) the dissolution of the Company or (iii) the Company effects a
sale, exchange or transfer of 2/3 or more of its assets. Under Texas law, the
governing law of the ORI Agreements, there is no consistently predictable
measure of what constitutes a sale, lease, exchange or transfer of "all or
substantially all" of the Company's assets. As a result, the Company and an
Employee may not agree as to what constitutes a sale, lease, exchange or
transfer of "all or substantially all" of the Company's assets, in which case
the Employee may have the burden of proving that a sale, lease, exchange or
transfer of "all or substantially all" of the Company's assets has occurred.
In instances in which all or a portion of the Company's working interest in
a Prospect will be sold or farmed out to unaffiliated third parties, and the
Company determines in good faith that the Company's interest will not be
marketable on satisfactory terms if marketed subject to the Employee's
Overriding Royalty Interest affecting such Prospect, the Company, as a general
rule, may elect to adjust the Employee's Overriding
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Royalty Interest in such Prospect. In such instances, a committee designated by
the Board of Directors of the Company (at least half of the members of which are
required to be individuals who have been granted an Overriding Royalty Interest
by the Company) are to exercise discretion on behalf of the Company in reducing
or modifying the Employee's Overriding Royalty Interest in such Prospect in
accordance with certain parameters set forth in the ORI Agreement. Certain
decisions of the committee require the approval of the Board of Directors of the
Company. Such modifications or reductions of the Employee's Overriding Royalty
Interest apply only to the portion of the Company's working interest sold or
farmed out to such third party and do not affect the Employee's Overriding
Royalty Interest in any interest retained by the Company. Such discretionary
adjustments to the Employee's Overriding Royalty Interest may not be made
following delivery to the Employee of a recordable assignment with respect to
such Prospect if such assignment was made pursuant to any of the exceptional
cases described in clauses (i), (ii) and (iii) above.
In addition to the provisions for reduction or other adjustment of the
Employee's Overriding Royalty Interest as mentioned above, the Company may also
elect in its sole discretion, within 60 days after the end of each fiscal year
of the Company, to reduce the Employee's Overriding Royalty Interest set forth
in the ORI Agreement with respect to all Prospects subject to the ORI Agreement
that were acquired by the Company during such fiscal year, based upon certain
levels of exploration and development costs actually incurred by the "Company
Group" (which consists of the Company and certain other entities affiliated with
the Company or anticipated to participate in exploration prospects with the
Company) during such fiscal year in respect of all Prospects subject to the ORI
Agreement. Further, with respect to certain deepwater types of Prospects, the
Company may elect in its sole discretion to make other reductions and
adjustments to the Employee's Overriding Royalty Interest based upon certain
levels of exploration and development costs estimated to be incurred by the
Company Group in respect of such deepwater types of Prospects.
The Company retains a right of first refusal to purchase any Overriding
Royalty Interest assigned to the Employee pursuant to the ORI Agreement, which
right applies to any third party offer received by the Employee during the term
or within one year from the expiration of the ORI Agreement.
Consultants
Except for the Consulting Agreement with Mr. Huber, which is described
separately below, each Consulting Agreement provides that the Consultant is
entitled to receive, as incentive compensation, recordable assignments of
Overriding Royalty Interests equal to certain specified undivided percentages of
the Company's working interest percentage in Prospects acquired by the Company
within the United States and its coastal waters during the term of the
Consulting Agreement or within 12 months after the term thereof. For purposes of
all but one of the Consulting Agreements, oil and gas prospects acquired by the
Company on or after April 18, 1996, are deemed to have been acquired by the
Company during the term of the Consulting Agreement.
The Overriding Royalty Interest percentage of the Company's working
interest percentage to which each Consultant is entitled with respect to a
Prospect is specified in the Consulting Agreement as the same percentage before
and after well payout, except for certain types of deepwater Prospects as to
which the Consultant's before and after payout percentages are in a 1 to 4
ratio. The Consultant's percentage participation is greater where the particular
Prospect idea was generated by the Consultant or the other member of the
two-person geological/geophysical team of which the Consultant is a part, and is
smaller where the Prospect idea was generated by other Company or non-Company
generators. Further, the Consultant's Overriding Royalty Interest percentage is
smaller for certain deepwater types of Prospects than for other Prospects, and,
in the case of deepwater types of Prospects, may be reduced even further in the
Company's sole discretion, in accordance with certain parameters set forth in
the Consulting Agreement.
In instances in which all or a portion of the Company's working interest in
a Prospect will be sold or farmed out to unaffiliated third parties, and the
Company determines in good faith that the Company's interest will not be
marketable on satisfactory terms if marketed subject to the Consultant's
Overriding Royalty Interest affecting such Prospect, the Company, as a general
rule, may elect to adjust the Consultant's Overriding Royalty Interest in such
Prospect. In such instances, any such adjustments are to be made in the
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same manner and in the same proportion as the adjustment to Overriding Royalty
Interests in such Prospect of the Company's employees participating in the
Company's employee Overriding Royalty Interest pool that is also made by the
Company to facilitate such sale or farmout. The Consultant is not entitled to
receive assignments in respect of such Prospects until the Company's decision
concerning adjustment of Overriding Royalty Interests of such employees has been
made, except that the Consultant is entitled to receive such assignments upon
the occurrence of any of the events described in the exceptional cases mentioned
under "-- Employees" above. In such exceptional cases, the Consultant is
entitled to receive such assignment on an "equalized" basis as described above,
in the case of the deepwater types of Prospects mentioned above as to which the
Consultant's before and after payout percentages specified in the Consulting
Agreement are in a 1 to 4 ratio.
The Company retains a right of first refusal to purchase any Overriding
Royalty Interest assigned to the Consultant pursuant to the Consulting
Agreement, which right applies to any third party offer received by the
Consultant during the term or within one year from the expiration of the
Consulting Agreement.
The Consulting Agreement with Mr. Huber provides that he is entitled to
receive, as incentive compensation, Overriding Royalty Interests equal to
certain specified undivided percentages of the Company's working interest
percentage in Prospects acquired by the Company during the term or extended term
of such Consulting Agreement in certain deepwater areas of the United States
Gulf only. Except for the geographic limitation mentioned above, the terms and
provisions governing Mr. Huber's Overriding Royalty Interest participation are
essentially the same as those described under "-- Employees" above.
401(K) PLAN
The Company has an Employee Capital Accumulation Plan that is intended to
be a Section 401(k) plan under the Code. All employees of the Company, including
the named executive officers of the Company, are eligible to participate in such
plan, and employees may make contributions thereto under a salary reduction
program. The Company may, in its discretion, make, and in every year since such
feature was implemented has made, so-called "profit sharing" contributions to
such plan on behalf of the plan participants. Contributions by both employees
and the Company to the plan are restricted in number and amount, and the
aggregate contributions by the Company are not significant. This plan is a
continuation of a plan provided by the Predecessor Company. See Note 5 to the
Financial Statements of the Company.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
In 1995, the Board of Directors of the Company had no compensation
committee since the Company was a wholly owned subsidiary of Hardy plc, which
through its board of directors and officers set the compensation of the
executive officers of the Company. As a director of Hardy plc until the
Acquisition, Mr. Henderson participated in deliberations concerning the
compensation of executive officers of the Company.
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OWNERSHIP OF SECURITIES
The Company is a wholly owned subsidiary of Mariner Holdings. The following
table sets forth the name and address of the only stockholder of Mariner
Holdings that is known by the Company to beneficially own more than 5% of the
outstanding shares of common stock of Mariner Holdings, the number of shares
beneficially owned by such stockholder, and the percentage of outstanding shares
of common stock of Mariner Holdings so owned, as of December 1, 1996. As of
December 1, 1996, there were 985,947 shares of common stock of Mariner Holdings
outstanding.
<TABLE>
<CAPTION>
AMOUNT AND
NAME AND ADDRESS NATURE OF PERCENT
TITLE OF CLASS OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP OF CLASS
- ------------------------------- ----------------------------------- -------------------- --------
<S> <C> <C> <C>
Common Stock of Joint Energy Development 950,000 96.4%
Mariner Holdings Investments Limited Partnership(1)
1400 Smith Street
Houston, Texas 77002
</TABLE>
- ---------------
(1) JEDI primarily invests in and manages certain natural gas and energy related
assets. JEDI's general partner is an affiliate of ECT, and JEDI's limited
partner is CalPERS. Each partner has a 50% interest in JEDI. The general
partner exercises sole voting and investment power with respect to such
shares.
The table appearing below sets forth information as of December 1, 1996,
with respect to shares of common stock of Mariner Holdings beneficially owned by
each of the Company's directors, the Company's Chief Executive Officer and the
four other most highly compensated executive officers for the fiscal year ended
December 31, 1995, a key consultant of the Company and all directors and
executive officers and such key consultant as a group, and the percentage of
outstanding shares of common stock of Mariner Holdings so owned by each.
<TABLE>
<CAPTION>
DIRECTORS, KEY CONSULTANT AND AMOUNT AND NATURE OF PERCENT
NAMED EXECUTIVE OFFICERS BENEFICIAL OWNERSHIP(1) OF CLASS
- --------------------------------------------------------------- ----------------------- --------
<S> <C> <C>
Robert E. Henderson............................................ 5,570 *
Richard R. Clark............................................... 3,920 *
Michael W. Strickler........................................... 3,920 *
Gary M. Pedlar(2).............................................. 0 *
Clinton D. Smith............................................... 2,500 *
David S. Huber................................................. 3,795 *
James V. Derrick, Jr........................................... 0 *
Andrew S. Fastow............................................... 0 *
Gene E. Humphrey............................................... 0 *
Jere C. Overdyke, Jr........................................... 0 *
Frank Stabler.................................................. 0 *
All directors and executive officers and key consultant as a
group
(14 persons)................................................. 24,918 3%
</TABLE>
- ---------------
* Less than one percent.
(1) All shares are owned directly by the named person and such person has sole
voting and investment power with respect to such shares.
(2) Mr. Pedlar ceased to be employed by the Company as of September 30, 1996.
See "Management -- Employment, Consulting and Stock Option
Agreements -- Employment Agreements".
In June 1996, in accordance with the terms of the Stockholders' Agreement,
24 individuals who are employees of or consultants to the Company received
options to purchase an aggregate of 128,331 shares of the common stock of
Mariner Holdings. In addition, the Stockholders' Agreement provides for certain
preemptive and registration rights. See "Management -- Employment, Consulting
and Stock Option Agreements" and "Certain Transactions -- Stockholders'
Agreement and Related Matters".
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CERTAIN TRANSACTIONS
STOCKHOLDERS' AGREEMENT AND RELATED MATTERS
Mariner Holdings, ECT, JEDI and each other stockholder of Mariner Holdings
is a party to the Stockholders' Agreement. The Stockholders' Agreement was
originally entered into by ECT, Mariner Holdings, and Messrs. Henderson, Clark,
Strickler and Huber in contemplation of Mariner Holdings' acquisition of all of
the outstanding shares of stock of the Company. Mariner Holdings was formed by
ECT for the purpose of acquiring the Company. The Stockholders' Agreement
provides for the capitalization of Mariner Holdings by ECT, its affiliates and
certain employees and consultants of the Company, certain aspects of Mariner
Holdings' organization and management and certain rights and obligations of the
stockholders of Mariner Holdings.
In May 1996, in accordance with the terms of the Stockholders' Agreement,
JEDI purchased 950,000 shares of the common stock of Mariner Holdings for an
aggregate consideration of $95.0 million; JEDI and Mariner Holdings entered into
the JEDI Bridge Loan; Mariner Holdings borrowed $92.0 million under the JEDI
Bridge Loan; and Mariner Holdings purchased the stock of the Company. Mariner
Holdings has since repaid the JEDI Bridge Loan in full, and it has terminated
according to its terms.
In June 1996, in accordance with the terms of the Stockholders' Agreement,
the Management Stockholders purchased an aggregate of 35,947 shares of the
common stock of Mariner Holdings, received options to purchase an additional
128,331 shares of the common stock of Mariner Holdings and entered into new or
amended employment or consulting agreements with the Company. The aggregate
purchase price for those shares was valued at approximately $4.0 million, which
the Management Stockholders paid by means of cash or assignments of a portion of
their overriding royalty interests held under the terms of their then-existing
employment or consulting arrangements with the Company. In addition, in
accordance with the terms of the Stockholders' Agreement, the Management
Stockholders who had Change of Control Agreements relinquished their rights
thereunder. Concurrently with the purchase of shares of Mariner Holdings, each
Management Stockholder (other than Messrs. Henderson, Clark, Strickler and
Huber, who were already parties) became a party to the Stockholders' Agreement.
As a result of these transactions, the Management Stockholders and JEDI own
approximately 4% and approximately 96%, respectively, of the outstanding shares
of Mariner Holdings stock. On a fully diluted basis (assuming that all options
granted to the Management Stockholders pursuant to the Stockholders' Agreement
have been exercised), the Management Stockholders would own or have the right to
acquire an aggregate of 164,278 shares, which would represent approximately 15%
of all shares that would be outstanding, and JEDI would own approximately 85% of
all outstanding shares on that basis. The stock options granted to the
Management Stockholders are not currently exercisable, are subject to vesting
schedules and are more fully described under the caption
"Management -- Employment, Consulting and Stock Option Agreements".
Under the Stockholders' Agreement, Mariner Holdings paid or agreed to pay
certain amounts, including (i) an arrangement fee and facility fee payable to
JEDI, as the lender under the JEDI Bridge Loan, (ii) a fee payable to an
affiliate of ECT equal to 2.5% of the total principal amount of any refinancing
or substitution for the JEDI Bridge Loan if an affiliate of ECT is the sole
placement agent or financial advisor in connection with the refinancing or
substitution and otherwise a fee that would be commercially reasonable for a
transaction of the nature of the refinancing or substitution and (iii) payment
or reimbursement to ECT, JEDI and the Management Stockholders for all reasonable
fees and expenses of third parties incurred by them in connection with the
Stockholders' Agreement, the JEDI Bridge Loan and Mariner Holdings' purchase of
the stock of the Company. In addition, Mariner Holdings agreed to reimburse each
Management Stockholder who paid for shares of Mariner Holdings stock by
assignment of overriding royalty interests for any additional taxes and related
costs incurred by such Management Stockholder to the extent, if any, that the
transfer of the overriding royalty interests does not qualify as a tax-free
exchange under federal tax laws. In addition, in connection with JEDI's purchase
of Mariner Holdings stock, JEDI received a fee equal to 3% of the total purchase
price paid by JEDI. Of the amounts agreed to be paid by Mariner Holdings,
approximately $5.0 million was, or will be, paid by the Company. In addition,
Mariner Holdings has certain ongoing obligations pursuant to the Stockholders'
Agreement. Since Mariner Holdings has no independent cash flow
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<PAGE> 85
and no assets other than its interest in the Company, it will be dependent upon
dividends, distributions or advances from the Company to meet any cash
requirements flowing from such obligations.
Under the terms of the Stockholders' Agreement, each Management Stockholder
entered into a new or amended employment or consulting agreement with the
Company. See "Management -- Employment, Consulting and Stock Option Agreements".
These agreements, among other things, afford the Management Stockholders the
benefits of the Company's overriding royalty program. See
"Management -- Overriding Royalty Interests". In addition, the Company must keep
certain employee benefit plans in effect until June 1999.
The Stockholders' Agreement requires that the board of directors of Mariner
Holdings (as well as the board of directors of each subsidiary of Mariner
Holdings, including the Company) will include at least three Management
Directors. Currently, those three representatives are Messrs. Henderson, Clark
and Strickler. The Stockholders' Agreement requires that the remaining board
members consist of nominees of JEDI. See "Management -- Executive Officers and
Directors". In addition, any executive committee of the board of directors must
include at least two members who are Management Directors and any compensation
committee of the board of directors must include at least one member who is a
Management Director; however, no Management Director is to be appointed to any
audit committee. The Stockholders' Agreement also requires that certain
provisions be included in the certificate of incorporation and bylaws of Mariner
Holdings (as well as each of its subsidiaries, including the Company) to ensure
that the Management Directors are elected to the board and that certain
provisions indemnifying the officers, directors and employees of Mariner
Holdings and of the Company are maintained.
Under the terms of the Stockholders' Agreement, Enron and its affiliates
(which include, without limitation, ECT and JEDI) are specifically permitted to
compete with Mariner Holdings and the Company, and neither Enron nor any of its
affiliates has any obligation to bring any business opportunity to Mariner
Holdings or the Company. Similarly, Mariner Holdings and the Company may compete
with Enron and its affiliates and do not have any obligation to bring any
business opportunity to Enron or any affiliate of Enron, including, without
limitation, ECT and JEDI. See "-- Enron".
The Stockholders' Agreement requires that any transfer or issuance of
shares of Mariner Holdings stock be made in compliance with applicable
securities laws. Subject to those laws, JEDI may transfer its shares of Mariner
Holdings stock at any time. Also subject to those laws, after June 2001, a
Management Stockholder may transfer shares, but before that time a Management
Stockholder may not voluntarily transfer shares unless they are transferred to a
family member or to another Management Stockholder, although a Management
Stockholder may make a bona fide pledge or mortgage of shares. In addition, if
any stockholder or group of stockholders of Mariner Holdings proposes to sell or
exchange Mariner Holdings stock in one transaction or a series of related
transactions that will result in any person who is not a "financial participant"
(as defined below), together with that person's affiliates or members of a
group, beneficially owning at least 30% of the outstanding Mariner Holdings
stock, then the Management Stockholders will have a right (a "tagalong right")
to participate in the transaction on the same terms as the stockholder or group
of stockholders that is proposing the transaction. If the transaction will
result in ownership by the acquiring persons of more than 30% but less than 50%
of the outstanding Mariner Holdings stock, then each Management Stockholder is
permitted to transfer or exchange a number of shares representing the Management
Stockholder's proportion of all shares owned by, or acquirable pursuant to stock
options of, the Management Stockholder, over the sum of all shares owned by all
stockholders and all shares acquirable pursuant to all stock options; if,
however, the proposed transaction will result in ownership by the acquiring
persons of 50% or more of the outstanding Mariner Holdings stock, a Management
Stockholder may sell or exchange all of his shares, unless JEDI, ECT or
affiliates controlled by them remain as stockholders, in which case a Management
Stockholder must retain a proportion of his shares equal to the number of shares
retained by JEDI, ECT or affiliates controlled by them over the total number of
shares of Mariner Holdings stock acquired by JEDI pursuant to the Stockholders'
Agreement in May 1996. Management Stockholders electing to exercise their
tagalong rights may exercise their stock options to do so, even if the options
have not vested. A "financial participant" is an entity which has represented in
writing that (i) as to any part of the entity's business engaged in or relating
to the oil and gas industry, the entity is primarily engaged in investing in
other
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entities and (ii) the entity is not the operator of any oil or gas wells and
does not have a significant oil and gas management team, including geologists
and production engineers. The Management Stockholders' tagalong rights do not
apply if the acquiring person is Mariner Holdings or ECT or any entity
controlled by either of them or if Mariner Holdings has consummated an initial
public offering.
Under the terms of the Stockholders' Agreement, the stockholders of Mariner
Holdings have the preemptive right to acquire additional securities proposed to
be issued by Mariner Holdings to any other party, on the same terms proposed to
be applicable to the other party. Each stockholder has the right to acquire a
number of shares representing his or her proportionate interest in all of the
outstanding shares of Mariner Holdings, but to the extent a stockholder does not
exercise any preemptive rights, the remaining stockholders have the right to
acquire the shares offered to the non-acquiring stockholder.
The Stockholders' Agreement also provides for certain registration rights.
First, at any time after the expiration of 90 days after Mariner Holdings has
consummated an initial public offering, JEDI may request Mariner Holdings to
register its stock under federal securities laws. If that request is made, the
other stockholders of Mariner Holdings have the right to register their shares
as well. Mariner Holdings is obligated to so register its stock on three
occasions only and is not obligated to so register its stock if the board of
directors determines that to do so would materially adversely affect a pending
or proposed public offering, acquisition, merger, recapitalization,
reorganization or similar transaction or negotiations with respect thereto.
Second, if Mariner Holdings has not consummated an initial public offering by
June 2001, then JEDI or an assignee of JEDI, if it owns at least 30% of the
outstanding stock of Mariner Holdings, may request Mariner Holdings to register
its stock under federal securities laws. If that request is made, the other
stockholders of Mariner Holdings will have the right to register their shares as
well. Mariner Holdings is obligated to so register its stock on one occasion
only and is not obligated to so register its stock if its board of directors
determines that to do so would materially adversely affect a pending or proposed
public offering, acquisition, merger, recapitalization, reorganization or
similar transaction or negotiations with respect thereto. Finally, if Mariner
Holdings proposes to register its shares of stock under federal securities laws
at any time (excluding registrations relating to employee benefit plans or
certain business combinations), it will use its best efforts to permit its
stockholders to include their shares in the registration if they so request.
The Stockholders' Agreement provides for indemnification by Mariner
Holdings of Messrs. Henderson, Clark, Strickler and Huber for any expenses they
incur in an action based on their participation in the transactions described in
the Stockholders' Agreement brought by or in the right of the Company's former
parent, Hardy plc.
The Stockholders' Agreement prohibits any transfer of Mariner Holdings
stock or any issuance of Mariner Holdings stock unless the transferee or person
to whom the stock is proposed to be issued has become a party to the
Stockholders' Agreement. Amendments to the Stockholders' Agreement require the
approval by the holders of two-thirds of the outstanding Mariner Holdings stock,
the approval of each stockholder who owns at least 10% of the outstanding
Mariner Holdings stock, a majority of the Management Directors and at least one
Management Director who became a stockholder in June 1996. However, no amendment
may impose any additional material obligation on any party to the Stockholders'
Agreement without that party's written consent. The Stockholders' Agreement
terminates on the earliest of the following events: (i) Mariner Holdings'
bankruptcy or dissolution, (ii) the occurrence of an event that reduces the
number of stockholders to one, (iii) the merger or consolidation of Mariner
Holdings with another corporation if Mariner Holdings is not the surviving
corporation and if the stockholders do not hold at least 50% of the outstanding
voting stock of the surviving corporation, (iv) the sale of substantially all of
the assets of Mariner Holdings or of the Company, (v) the acquisition by one
person or group of affiliated persons not affiliated with ECT of more than
two-thirds of the outstanding stock (unless the holders of at least 90% of the
outstanding stock elect not to terminate the Stockholders' Agreement and the
non-termination is approved by the Management Directors), (vi) the consummation
of an initial public offering, (vii) the consummation of a business combination
pursuant to which Mariner Holdings becomes a reporting company under federal
securities laws and (viii) May 2006; however, the registration rights provided
for in the Stockholders' Agreement will survive any termination as a result of
the consummation of an initial public offering, and Mariner Holdings'
obligations to reimburse the Management Stockholders for any tax liabilities
resulting from paying for stock by assignments
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of overriding royalty interests (as discussed above) will survive any
termination due to any of the above-described events.
ENRON
Enron is the parent of ECT, and an affiliate of Enron and ECT is the
general partner of JEDI. Accordingly, Enron may be deemed to control JEDI,
Mariner Holdings and the Company. In addition, five of the Company's directors
are officers of Enron or affiliates of Enron: Mr. Derrick is Senior Vice
President and General Counsel of Enron and holds other positions with affiliates
of Enron; Messrs. Fastow, Humphrey and Overdyke are Managing Directors of ECT;
and Mr. Stabler is a Vice President of ECT.
Enron and certain of its subsidiaries and other affiliates collectively
participate in nearly all phases of the oil and natural gas industry and are,
therefore, competitors of the Company. In addition, ECT and JEDI have provided,
and may in the future provide, and ECT Securities Corp. has assisted, and may in
the future assist, in arranging financing to non-affiliated participants in the
oil and natural gas industry who are or may become competitors of the Company.
Because of these various conflicting interests, ECT, the Company, JEDI and the
Management Stockholders have entered into an agreement that is intended to make
clear that Enron and its affiliates have no duty to make business opportunities
available to the Company.
ECT Securities Corp., one of the Placement Agents, is an indirect
subsidiary of Enron and, accordingly, is an affiliate of ECT, JEDI, Mariner
Holdings and the Company. In connection with the Transactions, the Company and
Mariner Holdings, in the aggregate, have paid ECT affiliates arrangement and
financial services fees of approximately $2.9 million. In addition, pursuant to
the JEDI Bridge Loan, Mariner Holdings has paid JEDI approximately $2.6 million
in arrangement and facility fees. Of the net proceeds of the Note Offering,
$42.0 million was used to pay a dividend to Mariner Holdings, which in turn used
the dividend to repay the remaining balance of the JEDI Bridge Loan. See "Use of
Proceeds", "The Transactions" and "Management".
JEDI, an affiliate of Enron, owns approximately 96% of the capital stock of
Mariner Holdings. In May 1996, JEDI provided the JEDI Bridge Loan to Mariner
Holdings. Mariner Holdings borrowed $92.0 million under the JEDI Bridge Loan,
which has been repaid in full and terminated according to its terms in August
1996. See "Use of Proceeds" and "The Transactions".
Under the Revolving Credit Facility, the Company has covenanted that
neither it nor Mariner Holdings nor any subsidiary of either will engage in any
transaction with any of its affiliates (including Enron, ECT, JEDI and
affiliates of such entities) providing for the rendering of services or sale of
property unless such transaction is as favorable to such party as could be
obtained in an arm's-length transaction with an unaffiliated party in accordance
with prevailing industry customs and practices. The Revolving Credit Facility
excludes from this covenant (i) any transaction permitted by the Stockholders'
Agreement, (ii) any transaction permitted by the JEDI Bridge Loan, (iii) the
grant of options to purchase or sales of equity securities to directors,
officers, employees and consultants of the Company and Mariner Holdings and (iv)
the assignment of any overriding royalty interest pursuant to an employee
incentive compensation plan. See "The Transactions", "Management -- Overriding
Royalty Interests" and "Description of Revolving Credit Facility".
The Company expects that from time to time it will engage in various
commercial transactions and have various commercial relationships with Enron and
certain affiliates of Enron, such as holding and exploring, exploiting and
developing joint working interests in particular prospects and properties,
engaging in hydrocarbon price hedging arrangements and entering into other oil
and gas related or financial transactions. For example, there are several
prospects in which both an affiliate of Enron and the Company have working
interests. Such interests were acquired in the ordinary course of business
pursuant to bids, joint or otherwise. Any wells drilled will be subject to joint
operating agreements relating to exploration and possible production and will be
subject to customary business terms. Furthermore, the Company has entered into
several agreements with Enron or affiliates of Enron for the purpose of hedging
oil and natural gas prices on the Company's future production. The Company
believes that its current agreements with Enron and its affiliates are, and
anticipates that, but can provide no assurances that, any future agreements with
Enron and its affiliates will be, on terms no less favorable to the Company than
would be contained in an agreement with a third party.
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DESCRIPTION OF REVOLVING CREDIT FACILITY
The Revolving Credit Facility provides for a maximum $150.0 million
revolving credit loan and matures June 28, 1999, at which time all amounts owed
under such facility are due and payable. The Revolving Credit Facility is
unsecured. The Borrowing Base under the Revolving Credit Facility is currently
$50.0 million and is subject to redetermination every six months (and, at the
election of the Lenders, one additional time per year) by the Lenders at the
Lenders' sole discretion and in accordance with their customary practices and
standards in effect from time to time for oil and natural gas loans to borrowers
similar to the Company. Determination of the Borrowing Base may be affected by,
among other things, estimates and projections of reserves and production rates
with respect to the Company's oil and natural gas properties and changes in oil
and natural gas prices. The Company's obligations under the Revolving Credit
Facility are guaranteed by Mariner Holdings.
So long as no default or event of default (as defined in the Revolving
Credit Facility) is continuing, borrowings under the Revolving Credit Facility
bear interest, at the option of the Company, at either (i) LIBOR plus 0.75% to
1.25% (depending upon the level of utilization of the Borrowing Base) or (ii)
the higher of (a) the agent's prime rate and (b) the federal funds rate plus
0.5%. The Company incurs a quarterly commitment fee ranging from 0.25% to 0.375%
per annum on the average unused portion of the Borrowing Base, depending upon
the level of utilization.
The Revolving Credit Facility contains covenants which, among other things,
restrict the payment of dividends, limit the amount of debt the Company may
incur, limit the Company's ability to make certain loans and investments, limit
the Company's ability to enter into certain hedge transactions and provide that
the Company must maintain a specified relationship between cash flow and fixed
charges and cash flow and interest on indebtedness. At each fiscal quarter, the
Company's ratio of (i) EBITDA for the four previous fiscal quarters to (ii) the
sum of (a) interest expense for the same period, (b) the sum of 1/4 of the
amount of annual maintenance capital expenditures set forth in the then most
recent third-party engineering report delivered to the agent for each such
quarter and (c) income taxes paid by the Company during the four previous fiscal
quarters, must not be less than 1.50 to 1.00. Additionally, at each fiscal
quarter, the Company's ratio of (i) EBITDA for the four previous fiscal quarters
to (ii) interest expense for the same period, must not be less than 2.25 to
1.00. Further, under the Revolving Credit Facility, an event of default is
deemed to occur if JEDI, Enron, CalPERS, ECT and affiliates of such entities (or
a combination of such entities) cease to own, directly or indirectly,
outstanding capital stock of the Company (on either an undiluted or fully
diluted basis) that in the aggregate permits such entities to elect a majority
of the Board of Directors of the Company. For purposes of the Revolving Credit
Facility, the calculation of EBITDA may vary from the calculation of EBITDA for
purposes of the Indenture.
The total credit commitment and Borrowing Base under the Revolving Credit
Facility at present is $50.0 million. As of the date of this Prospectus, there
are no outstanding borrowings under the Revolving Credit Facility and the
commitment fee in effect is 0.375%.
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DESCRIPTION OF THE EXCHANGE NOTES
The Exchange Notes will be issued as a separate series of notes under an
indenture (the "Indenture") dated as of August 1, 1996, among the Company and
United States Trust Company of New York, as trustee (the "Trustee"). The
Exchange Notes will be subordinated to all existing and future Senior
Indebtedness (as defined herein) of the Company and are substantially identical
(including principal amount, interest rate, maturity and redemption rights) to
the Outstanding Notes for which they may be exchanged pursuant to the Exchange
Offer, except for certain transfer restrictions. Under the terms of the
Indenture, the covenants and events of default will apply equally to the
Exchange Notes and the Outstanding Notes, and the Exchange Notes and the
Outstanding Notes will be treated as one class for all actions to be taken by
the holders thereof and for determining their respective rights under the
Indenture. References to the "Notes" include the Exchange Notes and the
Outstanding Notes unless the context otherwise requires. The Outstanding Notes
were issued under the Indenture on August 14, 1996, in an aggregate principal
amount of $100,000,000. The Indenture is subject to and governed by the Trust
Indenture Act of 1939, as amended (the "Trust Indenture Act"). The following
summary of certain provisions of the Indenture, the Notes and the Registration
Agreement does not purport to be complete and is subject to, and is qualified in
its entirety by reference to, all of the provisions of the Indenture, the Notes
and the Registration Agreement, including the definition of certain terms
contained therein and those terms that are made a part of the Indenture by
reference to the Trust Indenture Act. Copies of the Indenture, the Registration
Agreement and forms of the Outstanding Notes and the Exchange Notes have been
filed as exhibits to the Registration Statement of which this Prospectus is a
part. Capitalized terms not otherwise defined below or elsewhere in this
Prospectus have the meanings given to them in the Indenture. The definitions of
certain capitalized terms used in the summary are set forth below under
"-- Certain Definitions".
GENERAL
The Exchange Notes, like the Outstanding Notes, will be unsecured senior
subordinated obligations of the Company, limited, together with the Outstanding
Notes, to $100.0 million aggregate principal amount, and will mature on August
1, 2006. The Exchange Notes will bear interest at the rate per annum of 10 1/2%
from the date of issuance of the Exchange Notes, payable semiannually to Holders
of record at the close of business on the January 15 or July 15 immediately
preceding the interest payment date on February 1 and August 1 of each year,
commencing on the first such date following the date of issuance of the Exchange
Notes. Outstanding Notes that are accepted for exchange will cease to accrue
interest on and after the date on which interest on the Exchange Notes begins to
accrue. Accrued and unpaid interest on the Outstanding Notes that are tendered
in exchange for the Exchange Notes will be payable on or before the first
February 1 or August 1 following the date of issuance of the Exchange Notes.
Interest on overdue principal and (to the extent permitted by law) on overdue
installments of interest will accrue at 1% per annum in excess of such rate.
Interest on the Notes will be computed on the basis of a 360-day year of twelve
30-day months.
The Exchange Notes will be issued only in fully registered form, without
coupons, in denominations of $1,000 and any integral multiple of $1,000. No
service charge shall be made for any registration of transfer or exchange of
Exchange Notes, but the Company may require payment of a sum sufficient to cover
any transfer tax or other similar governmental charge payable in connection
therewith.
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OPTIONAL REDEMPTION
Except as set forth in the following paragraph, the Exchange Notes, like
the Outstanding Notes, will not be redeemable at the option of the Company prior
to August 1, 2001. Thereafter, the Exchange Notes will be redeemable, at the
Company's option, in whole or in part, at any time or from time to time, upon
not less than 30 nor more than 60 days' prior notice mailed by first-class mail
to each Holder's registered address, at the following redemption prices
(expressed in percentages of principal amount), plus accrued interest to the
redemption date (subject to the right of Holders of record on the relevant
record date to receive interest due on the relevant interest payment date), if
redeemed during the 12-month period commencing on August 1 of the years set
forth below:
<TABLE>
<CAPTION>
REDEMPTION
PERIOD PRICE
---------------------------------------------------------- ----------
<S> <C>
2001...................................................... 105.250%
2002...................................................... 102.625
2003 and thereafter....................................... 100.000
</TABLE>
In addition, at any time and from time to time prior to August 1, 1999, the
Company may redeem in the aggregate up to 35% of the original principal amount
of the Notes with the proceeds of one or more Public Equity Offerings following
which there is a Public Market, at a redemption price (expressed as a percentage
of principal amount) of 110.5% plus accrued interest to the redemption date
(subject to the right of Holders of record on the relevant record date to
receive interest due on the relevant interest payment date); provided, however,
that at least $65.0 million aggregate principal amount of the Notes must remain
outstanding after each such redemption; provided further, however, that any such
redemption shall occur within 60 days of the date of the closing of such Public
Equity Offering.
In the case of any partial redemption, selection of the Exchange Notes for
redemption will be made by the Trustee on a pro rata basis, by lot or by such
other method as the Trustee in its sole discretion shall deem to be fair and
appropriate, although no Note of $1,000 in original principal amount or less
shall be redeemed in part. If any Exchange Note is to be redeemed in part only,
the notice of redemption relating to such Exchange Note shall state the portion
of the principal amount thereof to be redeemed. A new Exchange Note in principal
amount equal to the unredeemed portion thereof will be issued in the name of the
Holder thereof upon cancellation of the original Exchange Note.
SINKING FUND
There will be no sinking fund payments for the Exchange Notes.
REGISTRATION RIGHTS
In the event that applicable interpretations of the staff of the SEC do not
permit the Company to effect the Exchange Offer, or under certain other
circumstances, the Company shall, at its cost, use its best efforts to cause to
become effective the Shelf Registration Statement with respect to resales of the
Outstanding Notes and to keep the Shelf Registration Statement effective until
August 14, 1999. The Company shall, in the event of such a shelf registration,
provide to each Holder copies of the prospectus, notify each Holder when the
Shelf Registration Statement for the Outstanding Notes has become effective and
take certain other actions as are required to permit resales of the Outstanding
Notes. A Holder that sells its Outstanding Notes pursuant to the Shelf
Registration Statement generally will be required to be named as a selling
security holder in the related prospectus and to deliver a prospectus to
purchasers, will be subject to certain of the civil liability provisions under
the Securities Act in connection with such sales and will be bound by the
provisions of the Registration Agreement that are applicable to such a holder
(including certain indemnification obligations).
In the event that the Exchange Offer is not consummated, or a Shelf
Registration Statement is not declared effective, on or prior to February 14,
1997, then, from and after such date, the annual interest rate borne by the
Outstanding Notes shall be permanently increased to 11%.
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If the Company effects the Exchange Offer, the Company will be entitled to
close the Exchange Offer 20 business days after the commencement thereof;
provided, however, that it has accepted all Outstanding Notes theretofore
validly surrendered in accordance with the terms of the Exchange Offer.
Outstanding Notes not tendered in the Exchange Offer shall bear interest at the
rate per annum of 10 1/2% and be subject to all of the terms and conditions
specified in the Indenture and to certain transfer restrictions. After the
consummation of the Exchange Offer, the registration rights described herein
(including the right to receive a higher rate of interest on the Notes) shall
terminate.
RANKING
The indebtedness evidenced by the Exchange Notes, like the Outstanding
Notes, will be unsecured, general obligations of the Company, subordinated in
right of payment, as set forth in the Indenture, to the prior payment of all
Senior Indebtedness of the Company, including the Company's obligations under
the Credit Agreement. As of the date of this Prospectus, the Company's only
outstanding indebtedness for money borrowed is the Outstanding Notes.
Only Indebtedness of the Company that is Senior Indebtedness will rank
senior to the Exchange Notes in accordance with the provisions of the Indenture.
The Exchange Notes, like the Outstanding Notes, will in all respects rank pari
passu with all other Senior Subordinated Indebtedness of the Company. The
Company has agreed in the Indenture that it will not Incur, directly or
indirectly, any Indebtedness that is subordinate or junior in ranking in right
of payment to its Senior Indebtedness unless such Indebtedness is Senior
Subordinated Indebtedness or is expressly subordinated in right of payment to
Senior Subordinated Indebtedness. Unsecured Indebtedness is not deemed to be
subordinated or junior to Secured Indebtedness merely because it is unsecured.
Although the Company currently does not conduct any business through
subsidiaries, future operations of the Company could be conducted through
subsidiaries. Claims of creditors of subsidiaries, including trade creditors,
secured creditors and creditors holding indebtedness and guarantees issued by
such subsidiaries, and claims of preferred stockholders (if any) of such
subsidiaries, generally will have priority with respect to the assets and
earnings of such subsidiaries over the claims of creditors of the Company,
including holders of the Notes, even if such obligations do not constitute
Senior Indebtedness of such subsidiaries. However, in certain circumstances, the
Notes may be guaranteed by certain subsidiaries of the Company. See "-- Certain
Covenants -- Future Guarantors". Any such guarantees, however, will be
subordinate in right of payment to any Senior Indebtedness of such subsidiaries.
Although the Indenture limits the incurrence of Indebtedness and preferred stock
of certain subsidiaries, such limitation is subject to a number of significant
qualifications. Moreover, the Indenture does not impose any limitation on the
incurrence by subsidiaries of liabilities that are not considered Indebtedness
under the Indenture. See "-- Certain Covenants -- Limitation on Indebtedness".
The Company may not pay principal of, premium (if any) or interest on, the
Notes or make any deposit pursuant to the provisions described under
"Defeasance" below and may not repurchase, redeem or otherwise retire any Notes
(collectively, "pay the Notes") if (i) any Designated Senior Indebtedness is not
paid when due or (ii) any other default on Designated Senior Indebtedness occurs
and the maturity of such Designated Senior Indebtedness is accelerated in
accordance with its terms unless, in either case, the default has been cured or
waived and any such acceleration has been rescinded or such Designated Senior
Indebtedness has been paid in full. However, the Company may pay the Notes
without regard to the foregoing if the Company and the Trustee receive written
notice approving such payment from the Representative of the Designated Senior
Indebtedness with respect to which either of the events set forth in clause (i)
or (ii) of the immediately preceding sentence has occurred and is continuing.
During the continuance of any default (other than a default described in clause
(i) or (ii) of the second preceding sentence) with respect to any Designated
Senior Indebtedness pursuant to which the maturity thereof may be accelerated
immediately without further notice (except such notice as may be required to
effect such acceleration) or the expiration of any applicable grace periods, the
Company may not pay the Notes for a period (a "Payment Blockage Period")
commencing upon the receipt by the Trustee (with a copy to the Company) of
written notice (a "Blockage Notice") of such default from the Representative of
the holders of such Designated Senior Indebtedness specifying an election
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to effect a Payment Blockage Period and ending 179 days thereafter (or earlier
if such Payment Blockage Period is terminated (i) by written notice to the
Trustee and the Company from the Person or Persons who gave such Blockage
Notice, (ii) because the default giving rise to such Blockage Notice is no
longer continuing or (iii) because such Designated Senior Indebtedness has been
repaid in full). Notwithstanding the provisions described in the immediately
preceding sentence, unless the holders of such Designated Senior Indebtedness or
the Representative of such holders have accelerated the maturity of such
Designated Senior Indebtedness, the Company must resume payments on the Notes
after the end of such Payment Blockage Period. The Notes shall not be subject to
more than one Payment Blockage Period in any consecutive 360-day period,
irrespective of the number of defaults with respect to Designated Senior
Indebtedness during such period.
Upon any payment or distribution of the assets of the Company upon a total
or partial liquidation or dissolution or reorganization of or similar proceeding
relating to the Company or its property, the holders of Senior Indebtedness will
be entitled to receive payment in full of such Senior Indebtedness before the
Noteholders are entitled to receive any payment, and until the Senior
Indebtedness is paid in full, any payment or distribution to which Noteholders
would be entitled but for the subordination provisions of the Indenture will be
made to holders of such Senior Indebtedness as their interests may appear. If a
distribution is made to Noteholders that, due to the subordination provisions,
should not have been made to them, such Noteholders are required to hold it in
trust for the holders of Senior Indebtedness and pay it over to them as their
interests may appear.
If payment of the Exchange Notes is accelerated because of an Event of
Default, the Company or the Trustee shall promptly notify the holders of
Designated Senior Indebtedness or the Representative of such holders of the
acceleration.
If the Notes are guaranteed by a Subsidiary Guarantor, the obligations of
such Subsidiary Guarantor under its Subsidiary Guaranty will be senior
subordinated obligations. As such, the rights of Noteholders to receive payment
by a Subsidiary Guarantor pursuant to its Subsidiary Guaranty will be
subordinated in right of payment to the rights of holders of Senior Indebtedness
of such Subsidiary Guarantor. The terms of the subordination provisions
described above with respect to the Company's obligations under the Notes will
apply equally to a Subsidiary Guarantor and the obligations of such Subsidiary
Guarantor under its Subsidiary Guaranty.
By reason of the subordination provisions contained in the Indenture, in
the event of insolvency, creditors of the Company who are holders of Senior
Indebtedness may recover more, ratably, than the holders of the Exchange Notes,
and creditors of the Company who are not holders of Senior Indebtedness may
recover less, ratably, than holders of Senior Indebtedness and may recover more,
ratably, than the holders of the Exchange Notes.
Notwithstanding the foregoing, payment from the money or the proceeds of
U.S. Government Obligations held in any defeasance trust described under
"Defeasance" below will not be contractually subordinated in right of payment to
any Senior Indebtedness or subject to the restrictions described herein.
CERTAIN DEFINITIONS
"Additional Assets" means (i) any property or assets (other than
Indebtedness and Capital Stock) in the Oil and Gas Business; (ii) the Capital
Stock of a Person that becomes a Restricted Subsidiary as a result of the
acquisition of such Capital Stock by the Company or another Restricted
Subsidiary or (iii) Capital Stock constituting a minority interest in any Person
that at such time is a Restricted Subsidiary; provided, however, that any such
Restricted Subsidiary described in clauses (ii) or (iii) above is primarily
engaged in the Oil and Gas Business.
"Adjusted Consolidated Assets" means at any time the total amount of assets
of the Company and its consolidated Restricted Subsidiaries (less applicable
depreciation, amortization and other valuation reserves), after deducting
therefrom all current liabilities of the Company and its consolidated Restricted
Subsidiaries (excluding intercompany items), all as set forth on the
consolidated balance sheet of the Company and its
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consolidated Restricted Subsidiaries as of the end of the most recent fiscal
quarter ended at least 45 days prior to the date of determination.
"Affiliate" of any specified Person means any other Person, directly or
indirectly, controlling or controlled by or under direct or indirect common
control with such specified Person. For the purposes of this definition,
"control" when used with respect to any Person means the power to direct the
management and policies of such Person, directly or indirectly, whether through
the ownership of voting securities, by contract or otherwise; and the terms
"controlling" and "controlled" have meanings correlative to the foregoing. For
purposes of the provisions described under "-- Certain Covenants -- Limitation
on Restricted Payments", "-- Certain Covenants -- Limitation on Affiliate
Transactions" and "-- Certain Covenants -- Limitation on Sales of Assets and
Subsidiary Stock" only, "Affiliate" shall also mean any beneficial owner of
Capital Stock representing 5% or more of the total voting power of the Voting
Stock (on a fully diluted basis) of the Company or of rights or warrants to
purchase such Capital Stock (whether or not currently exercisable) and any
Person who would be an Affiliate of any such beneficial owner pursuant to the
first sentence hereof.
"Asset Disposition" means any sale, lease, transfer or other disposition
(or series of related sales, leases, transfers or dispositions) by the Company
or any Restricted Subsidiary, including any disposition by means of a merger,
consolidation or similar transaction (each referred to for the purposes of this
definition as a "disposition"), of (i) any shares of Capital Stock of a
Restricted Subsidiary (other than directors' qualifying shares or shares
required by applicable law to be held by a Person other than the Company or a
Restricted Subsidiary), (ii) all or substantially all the assets of any division
or line of business of the Company or any Restricted Subsidiary or (iii) any
other assets of the Company or any Restricted Subsidiary outside of the ordinary
course of business of the Company or such Restricted Subsidiary. Notwithstanding
the foregoing, none of the following shall be deemed to be an Asset Disposition:
(1) a disposition by a Restricted Subsidiary to the Company or by the Company or
a Restricted Subsidiary to a Wholly Owned Subsidiary, (2) for purposes of the
covenant described under "-- Certain Covenants -- Limitation on Sales of Assets
and Subsidiary Stock" only, a disposition that constitutes a Restricted Payment
permitted by the covenant described under "-- Certain Covenants -- Limitation on
Restricted Payments", (3) the sale or transfer (whether or not in the ordinary
course of business) of oil and gas properties or direct or indirect interests in
real property; provided, however, that at the time of such sale or transfer such
properties do not have associated with them any proved reserves, (4) the
abandonment, farm-out, lease or sublease of developed or undeveloped oil and gas
properties in the ordinary course of business, (5) the trade or exchange by the
Company or any Subsidiary of the Company of any oil and gas property owned or
held by the Company or such Subsidiary for any oil and gas property owned or
held by another Person or (6) the sale or transfer of hydrocarbons or other
mineral products or surplus or obsolete equipment in the ordinary course of
business.
"Attributable Debt" in respect of a Sale/Leaseback Transaction means, as at
the time of determination, the present value (discounted at the interest rate
implicit in the Sale/Leaseback Transaction) of the total obligations of the
lessee for rental payments during the remaining term of the lease included in
such Sale/Leaseback Transaction (including any period for which such lease has
been extended).
"Average Life" means, as of the date of determination, with respect to any
Indebtedness or Preferred Stock, the quotient obtained by dividing (i) the sum
of the products of numbers of years from the date of determination to the dates
of each successive scheduled principal payment of such Indebtedness or
redemption or similar payment with respect to such Preferred Stock multiplied by
the amount of such payment by (ii) the sum of all such payments.
"Banks" has the meaning specified in the Credit Agreement.
"Board of Directors" means the Board of Directors of the Company or any
committee thereof duly authorized to act on behalf of such Board.
"Borrowing Base" means, as of any date, the aggregate amount of borrowing
availability as of such date under all Credit Facilities that determine
availability on the basis of a borrowing base or other asset-based calculation;
provided, however, that in no event shall the Borrowing Base exceed $250.0
million.
"Business Day" means each day which is not a Legal Holiday (as defined in
the Indenture).
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"Capital Lease Obligations" means an obligation that is required to be
classified and accounted for as a capital lease for financial reporting purposes
in accordance with GAAP, and the amount of Indebtedness represented by such
obligation shall be the capitalized amount of such obligation determined in
accordance with GAAP; and the Stated Maturity thereof shall be the date of the
last payment of rent or any other amount due under such lease prior to the first
date upon which such lease may be terminated by the lessee without payment of a
penalty.
"Capital Stock" of any Person means any and all shares, interests, rights
to purchase, warrants, options, participations or other equivalents of or
interests in (however designated) equity of such Person, including any Preferred
Stock, but excluding any debt securities convertible into such equity.
"Change of Control" means the occurrence of any of the following events:
(i) any "person" (as such term is used in Sections 13(d) and 14(d) of
the Exchange Act), other than one or more Permitted Holders, is or becomes
the beneficial owner (as defined in Rules 13d-3 and 13d-5 under the
Exchange Act, except that for purposes of this clause (i) such person shall
be deemed to have "beneficial ownership" of all shares that such person has
the right to acquire, whether such right is exercisable immediately or only
after the passage of time), directly or indirectly, of more than 35% of the
total voting power of the Voting Stock of the Company; provided, however,
that the Permitted Holders beneficially own (as defined in Rules 13d-3 and
13d-5 under the Exchange Act), directly or indirectly, in the aggregate a
lesser percentage of the total voting power of the Voting Stock of the
Company than such other person and do not have the right or ability by
voting power, contract or otherwise to elect or designate for election a
majority of the Board of Directors (for the purposes of this clause (i),
such other person shall be deemed to beneficially own any Voting Stock of a
specified corporation held by a parent corporation, if such other person is
the beneficial owner (as defined in this clause (i)), directly or
indirectly, of more than 35% of the voting power of the Voting Stock of
such parent corporation and the Permitted Holders beneficially own (as
defined in this proviso), directly or indirectly, in the aggregate a lesser
percentage of the voting power of the Voting Stock of such parent
corporation and do not have the right or ability by voting power, contract
or otherwise to elect or designate for election a majority of the board of
directors of such parent corporation);
(ii) during any period of two consecutive years from and after the
Issue Date, individuals who at the beginning of such period constituted the
Board of Directors (together with any new directors whose election by such
Board of Directors or whose nomination for election by the shareholders of
the Company was approved by a vote of a majority of the directors of the
Company then still in office who were either directors at the beginning of
such period or whose election or nomination for election was previously so
approved) cease for any reason to constitute a majority of the Board of
Directors then in office; or
(iii) the merger or consolidation of the Company with or into another
Person or the merger of another Person with or into the Company, or the
sale of all or substantially all the assets of the Company to another
Person (other than a Person that is controlled by the Permitted Holders),
and, in the case of any such merger or consolidation, the securities of the
Company that are outstanding immediately prior to such transaction and
which represent 100% of the aggregate voting power of the Voting Stock of
the Company are changed into or exchanged for cash, securities or property,
unless pursuant to such transaction such securities are changed into or
exchanged for, in addition to any other consideration, securities of the
surviving corporation that represent, immediately after such transaction,
at least a majority of the aggregate voting power of the Voting Stock of
the surviving corporation.
"Code" means the Internal Revenue Code of 1986, as amended.
"Consolidated Coverage Ratio" as of any date of determination means the
ratio of (i) the aggregate amount of EBITDA for the period of the most recent
four consecutive fiscal quarters ending at least 45 days prior to the date of
such determination to (ii) Consolidated Interest Expense for such four fiscal
quarters; provided, however, that (1) if the Company or any Restricted
Subsidiary has Incurred any Indebtedness since the beginning of such period that
remains outstanding or if the transaction giving rise to the need to calculate
the Consolidated Coverage Ratio is an Incurrence of Indebtedness, or both,
EBITDA and Consolidated
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Interest Expense for such period shall be calculated after giving effect on a
pro forma basis to such Indebtedness as if such Indebtedness had been Incurred
on the first day of such period and the discharge of any other Indebtedness
repaid, repurchased, defeased or otherwise discharged with the proceeds of such
new Indebtedness as if such discharge had occurred on the first day of such
period, (2) if the Company or any Restricted Subsidiary has repaid, repurchased,
defeased or otherwise discharged any Indebtedness since the beginning of such
period or if any indebtedness is to be repaid, repurchased, defeased or
otherwise discharged on the date of the transaction giving rise to the need to
calculate the Consolidated Coverage Ratio, EBITDA and Consolidated Interest
Expense for such period shall be calculated on a pro forma basis as if such
discharge had occurred on the first day of such period and as if the Company or
such Restricted Subsidiary has not earned the interest income actually earned
during such period in respect of cash or Temporary Cash Investments used to
repay, repurchase, defease or otherwise discharge such Indebtedness, (3) if
since the beginning of such period the Company or any Restricted Subsidiary
shall have made any Asset Disposition (other than an Asset Disposition involving
assets having a fair market value of less than $2.0 million), the EBITDA for
such period shall be reduced by an amount equal to the EBITDA (if positive)
directly attributable to the assets which are the subject of such Asset
Disposition for such period, or increased by an amount equal to the EBITDA (if
negative), directly attributable thereto for such period and Consolidated
Interest Expense for such period shall be reduced by an amount equal to the
Consolidated Interest Expense directly attributable to any Indebtedness of the
Company or any Restricted Subsidiary repaid, repurchased, defeased or otherwise
discharged with respect to the Company and its continuing Restricted
Subsidiaries in connection with such Asset Disposition for such period (or, if
the Capital Stock of any Restricted Subsidiary is sold, the Consolidated
Interest Expense for such period directly attributable to the Indebtedness of
such Restricted Subsidiary to the extent the Company and its continuing
Restricted Subsidiaries are no longer liable for such Indebtedness after such
sale), (4) if since the beginning of such period the Company or any Restricted
Subsidiary (by merger or otherwise) shall have made an Investment in any
Restricted Subsidiary (or any person which becomes a Restricted Subsidiary) or
an acquisition (including by way of lease) of assets, including any acquisition
of assets occurring in connection with a transaction requiring a calculation to
be made hereunder, EBITDA and Consolidated Interest Expense for such period
shall be calculated after giving pro forma effect thereto (including the
Incurrence of any Indebtedness) as if such Investment or acquisition occurred on
the first day of such period and (5) if since the beginning of such period any
Person (that subsequently became a Restricted Subsidiary or was merged with or
into the Company or any Restricted Subsidiary since the beginning of such
period) shall have made any Asset Disposition, any Investment or acquisition of
assets that would have required an adjustment pursuant to clause (3) or (4)
above if made by the Company or a Restricted Subsidiary during such period,
EBITDA and Consolidated Interest Expense for such period shall be calculated
after giving pro forma effect thereto as if such Asset Disposition, Investment
or acquisition occurred on the first day of such period. For purposes of this
definition, whenever pro forma effect is to be given to an acquisition of
assets, the amount of income or earnings relating thereto and the amount of
Consolidated Interest Expense associated with any Indebtedness Incurred in
connection therewith, the pro forma calculations shall be determined in good
faith by a responsible financial or accounting Officer of the Company. If any
Indebtedness bears a floating rate of interest and is being given pro forma
effect, the interest on such Indebtedness shall be calculated as if the rate in
effect on the date of determination had been the applicable rate for the entire
period (taking into account any Interest Rate Agreement applicable to such
Indebtedness if such Interest Rate Agreement has a remaining term in excess of
12 months).
"Consolidated Current Liabilities" as of the date of determination means
the aggregate amount of liabilities of the Company and its consolidated
Restricted Subsidiaries which may properly be classified as current liabilities
(including taxes accrued as estimated), on a consolidated basis, after
eliminating (i) all intercompany items between the Company and any Restricted
Subsidiary and (ii) all current maturities of long-term Indebtedness, all as
determined in accordance with GAAP consistently applied.
"Consolidated Interest Expense" means, for any period, the total interest
expense of the Company and its consolidated Restricted Subsidiaries, plus, to
the extent not included in such total interest expense, and to the extent
incurred by the Company or its Restricted Subsidiaries, without duplication, (i)
interest expense attributable to capital leases and imputed interest with
respect to Attributable Debt, (ii) amortization of debt discount and debt
issuance cost, (iii) capitalized interest, (iv) non-cash interest expenses, (v)
commissions,
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discounts and other fees and charges owed with respect to letters of credit and
bankers' acceptance financing, (vi) net costs associated with Hedging
Obligations (including amortization of fees), (vii) Preferred Stock dividends in
respect of all Preferred Stock held by Persons other than the Company or a
Wholly Owned Subsidiary, excluding however any dividends on Preferred Stock of
the Company unless such Preferred Stock is Disqualified Stock, (viii) interest
incurred in connection with Investments in discontinued operations, and (ix)
interest accruing on any Indebtedness of any other Person to the extent such
Indebtedness is Guaranteed by the Company or any Restricted Subsidiary or
secured by a Lien on assets of the Company or any Restricted Subsidiary to the
extent such Indebtedness constitutes Indebtedness of the Company or any
Restricted Subsidiary (whether or not such Guarantee or Lien is called upon);
provided, however, "Consolidated Interest Expense" shall not include any
Consolidated Interest Expense with respect to any Indebtedness Incurred pursuant
to clause (b)(8) of the covenant described under "-- Certain
Covenants -- Limitation on Indebtedness".
"Consolidated Net Income" means, for any period, the net income of the
Company and its consolidated Subsidiaries; provided, however, that there shall
not be included in such Consolidated Net Income: (i) any net income of any
Person (other than the Company) if such Person is not a Restricted Subsidiary,
except that (A) subject to the exclusion contained in clause (iv) below, the
Company's equity in the net income of any such Person for such period shall be
included in such Consolidated Net Income up to the aggregate amount of cash
actually distributed by such Person during such period to the Company or a
Restricted Subsidiary as a dividend or other distribution (subject, in the case
of a dividend or other distribution paid to a Restricted Subsidiary, to the
limitations contained in clause (iii) below) and (B) the Company's equity in a
net loss of any such Person for such period shall be included in determining
such Consolidated Net Income; (ii) any net income (or loss) of any Person
acquired by the Company or a Subsidiary in a pooling of interests transaction
for any period prior to the date of such acquisition; (iii) any net income of
any Restricted Subsidiary if such Restricted Subsidiary is subject to
restrictions, directly or indirectly, on the payment of dividends or the making
of distributions by such Restricted Subsidiary, directly or indirectly, to the
Company, except that (A) subject to the exclusion contained in clause (iv)
below, the Company's equity in the net income of any such Restricted Subsidiary
for such period shall be included in such Consolidated Net Income up to the
aggregate amount of cash actually distributed by such Restricted Subsidiary
during such period to the Company or another Restricted Subsidiary as a dividend
or other distribution (subject, in the case of a dividend or other distribution
paid to another Restricted Subsidiary, to the limitation contained in this
clause) and (B) the Company's equity in a net loss of any such Restricted
Subsidiary for such period shall be included in determining such Consolidated
Net Income; (iv) any gain or loss realized upon the sale or other disposition of
any assets of the Company or its consolidated Subsidiaries (including pursuant
to any sale-and-leaseback arrangement) which is not sold or otherwise disposed
of in the ordinary course of business and any gain or loss realized upon the
sale or other disposition of any Capital Stock of any Person; (v) extraordinary
gains or losses; and (vi) the cumulative effect of a change in accounting
principles. Notwithstanding the foregoing, for the purposes of the covenant
described under "Certain Covenants -- Limitation on Restricted Payments" only,
there shall be excluded from Consolidated Net Income any dividends, repayments
of loans or advances or other transfers of assets from Unrestricted Subsidiaries
to the Company or a Restricted Subsidiary to the extent such dividends,
repayments or transfers increase the amount of Restricted Payments permitted
under such covenant pursuant to clause (a)(3)(E) thereof.
"Consolidated Net Tangible Assets", as of any date of determination, means
the total amount of assets (less accumulated depreciation and amortization,
allowances for doubtful receivables, other applicable reserves and other
properly deductible items) which would appear on a consolidated balance sheet of
the Company and its consolidated Restricted Subsidiaries, determined on a
consolidated basis in accordance with GAAP, and after giving effect to purchase
accounting and after deducting therefrom Consolidated Current Liabilities and,
to the extent otherwise included, the amounts of: (i) minority interests in
consolidated Subsidiaries held by Persons other than the Company or a Restricted
Subsidiary; (ii) excess of cost over fair value of assets of businesses
acquired, as determined in good faith by the Board of Directors; (iii) any
revaluation or other write-up in book value of assets subsequent to the Issue
Date as a result of a change in the method of valuation in accordance with GAAP
consistently applied; (iv) unamortized debt discount and expenses and other
unamortized deferred charges, goodwill, patents, trademarks, service marks,
trade names,
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copyrights, licenses, organization or developmental expenses and other
intangible items; (v) treasury stock; (vi) cash set apart and held in a sinking
or other analogous fund established for the purpose of redemption or other
retirement of Capital Stock to the extent such obligation is not reflected in
Consolidated Current Liabilities; and (vii) Investments in and assets of
Unrestricted Subsidiaries.
"Consolidated Net Worth" means the total of the amounts shown on the
balance sheet of the Company and its consolidated Subsidiaries, determined on a
consolidated basis in accordance with GAAP, as of the end of the most recent
fiscal quarter of the Company ending at least 45 days prior to the taking of any
action for the purpose of which the determination is being made, as (i) the par
or stated value of all outstanding Capital Stock of the Company plus (ii)
paid-in capital or capital surplus relating to such Capital Stock plus (iii) any
retained earnings or earned surplus less (A) any accumulated deficit and (B) any
amounts attributable to Disqualified Stock.
"Credit Agreement" means that certain Credit Agreement, dated as of June
28, 1996, by and among the Company and NationsBank of Texas, N.A., as agent and
as a lender, and certain other institutions, as lenders, providing for up to
$150.0 million of Indebtedness, including any related notes, guarantees,
collateral documents, instruments and agreements executed in connection
therewith, and in each case as amended, restated, modified, renewed, refunded,
replaced or refinanced, in whole or in part, from time to time.
"Credit Facilities" means, with respect to the Company or any Restricted
Subsidiary, one or more debt facilities (including the Credit Agreement) or
commercial paper facilities with banks or other institutional lenders providing
for revolving credit loans, term loans, production payments, receivables
financing (including through the sale of receivables to such lenders or to
special purpose entities formed to borrow from such lenders against such
receivables) or letters of credit, in each case, as amended, restated, modified,
renewed, refunded, replaced or refinanced in whole or in part from time to time.
"Currency Agreement" means in respect of a Person any foreign exchange
contract, currency swap agreement or other similar agreement to which such
Person is a party or a beneficiary.
"Default" means any event which is, or after notice or passage of time or
both would be, an Event of Default.
"Designated Senior Indebtedness" means (i) all obligations of the Company
or any Restricted Subsidiary under any Credit Facility and (ii) any other Senior
Indebtedness of the Company which, at the date of determination, has an
aggregate principal amount outstanding of, or under which, at the date of
determination, the holders thereof are committed to lend up to, at least $25.0
million and is specifically designated by the Company in the instrument
evidencing or governing such Senior Indebtedness as "Designated Senior
Indebtedness" for purposes of the Indenture.
"Disqualified Stock" means, with respect to any Person, any Capital Stock
which by its terms (or by the terms of any security into which it is convertible
or for which it is exchangeable) or upon the happening of any event (i) matures
or is mandatorily redeemable pursuant to a sinking fund obligation or otherwise,
(ii) is convertible or exchangeable for Indebtedness or Disqualified Stock or
(iii) is redeemable at the option of the holder thereof, in whole or in part, in
each case on or prior to the first anniversary of the Stated Maturity of the
Notes; provided, however, that any Capital Stock that would not constitute
Disqualified Stock but for provisions thereof giving holders thereof the right
to require such Person to repurchase or redeem such Capital Stock upon the
occurrence of an "asset sale" or "change of control" occurring prior to the
first anniversary of the Stated Maturity of the Notes shall not constitute
Disqualified Stock if the "asset sale" or "change of control" provisions
applicable to such Capital Stock are not more favorable to the holders of such
Capital Stock than the provisions described under "-- Certain
Covenants -- Limitation on Sales of Assets and Subsidiary Stock" and "-- Certain
Covenants -- Change of Control".
"Dollar-Denominated Production Payments" means production payment
obligations recorded as liabilities in accordance with GAAP, together with all
undertakings and obligations in connection therewith.
"EBITDA" for any period means the sum of Consolidated Net Income, plus
Consolidated Interest Expense plus the following to the extent deducted in
calculating such Consolidated Net Income: (a) provision
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for taxes based on income or profits, (b) depletion and depreciation expense,
(c) amortization expense and (d) all other non-cash charges (excluding any such
non-cash charge to the extent that it represents an accrual of or reserve for
cash charges in any future period or amortization of a prepaid cash expense that
was paid in a prior period) and less, to the extent included in calculating such
Consolidated Net Income, the sum of (x) the amount of deferred revenues that are
amortized during such period and are attributable to reserves that are subject
to Volumetric Production Payments and (y) amounts recorded in accordance with
GAAP as repayments of principal and interest pursuant to Dollar-Denominated
Production Payments. Notwithstanding the foregoing, the provision for taxes
based on the income or profits of, and the depreciation and amortization and
other non-cash charges of, a Subsidiary of the Company shall be added to
Consolidated Net Income to compute EBITDA only to the extent (and in the same
proportion) that the net income of such Subsidiary was included in calculating
Consolidated Net Income and only if a corresponding amount would be permitted at
the date of determination to be dividended to the Company by such Subsidiary
without prior approval (that has not been obtained), pursuant to the terms of
its charter and all agreements, instruments, judgments, decrees, orders,
statutes, rules and governmental regulations applicable to such Subsidiary or
its stockholders.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"GAAP" means generally accepted accounting principles in the United States
of America as in effect on the Issue Date, including those set forth in (i) the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants, (ii) statements and pronouncements of
the Financial Accounting Standards Board, (iii) such other statements by such
other entity as approved by a significant segment of the accounting profession,
and (iv) the rules and regulations of the SEC governing the inclusion of
financial statements (including pro forma financial statements) in periodic
reports required to be filed pursuant to Section 13 of the Exchange Act,
including opinions and pronouncements in staff accounting bulletins and similar
written statements from the accounting staff of the SEC.
"Guarantee" means, without duplication, any obligation, contingent or
otherwise, of any Person directly or indirectly guaranteeing any Indebtedness of
any Person and any obligation, direct or indirect, contingent or otherwise, of
such Person (i) to purchase or pay (or advance or supply funds for the purchase
or payment of) such Indebtedness of such Person (whether arising by virtue of
partnership arrangements, or by agreements to keep-well, to purchase assets,
goods, securities or services, to take-or-pay or to maintain financial statement
conditions or otherwise) or (ii) entered into for the purpose of assuring in any
other manner the obligee of such Indebtedness of the payment thereof or to
protect such obligee against loss in respect thereof (in whole or in part);
provided, however, that the term "Guarantee" shall not include endorsements for
collection or deposit in the ordinary course of business. The term "Guarantee"
used as a verb has a corresponding meaning. The term "Guarantor" shall mean any
Person Guaranteeing any obligation.
"Hedging Obligations" of any Person means the obligations of such Person
pursuant to any Oil and Gas Hedging Contract, Interest Rate Agreement or
Currency Agreement.
"Holder" or "Noteholder" means the Person in whose name a Note is
registered on the Registrar's books.
"Incur" means issue, assume, Guarantee, incur or otherwise become liable
for; provided, however, that any Indebtedness or Capital Stock of a Person
existing at the time such Person becomes a Subsidiary (whether by merger,
consolidation, acquisition or otherwise) shall be deemed to be Incurred by such
Subsidiary at the time it becomes a Subsidiary. The term "Incurrence" when used
as a noun shall have a correlative meaning. The accretion of principal of a
non-interest bearing or other discount security shall be deemed the Incurrence
of Indebtedness.
"Indebtedness" means, with respect to any Person on any date of
determination (without duplication), (i) the principal of and premium (if any)
in respect of (A) indebtedness of such Person for money borrowed and (B)
indebtedness evidenced by notes, debentures, bonds or other similar instruments
for the payment of which such Person is responsible or liable; (ii) all Capital
Lease Obligations of such Person and all Attributable Debt in respect of
Sale/Leaseback Transactions entered into by such Person; (iii) all obligations
of such Person issued or assumed as the deferred purchase price of property, all
conditional sale obligations of such Person and all obligations of such Person
under any title retention agreement (but excluding trade
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accounts payable arising in the ordinary course of business); (iv) all
obligations of such Person for the reimbursement of any obligor on any letter of
credit, banker's acceptance or similar credit transaction (other than
obligations with respect to letters of credit securing obligations (other than
obligations described in (i) through (iii) above) entered into in the ordinary
course of business of such Person to the extent such letters of credit are not
drawn upon or, if and to the extent drawn upon, such drawing is reimbursed no
later than the tenth Business Day following receipt by such Person of a demand
for reimbursement following payment on the letter of credit); (v) the amount of
all obligations of such Person with respect to the redemption, repayment or
other repurchase of any Disqualified Stock or, with respect to any Subsidiary of
such Person the liquidation preference with respect to, any Preferred Stock (but
excluding, in each case, any accrued dividends); (vi) all obligations of such
Person relating to any Production Payment or in respect of production imbalances
(but excluding production imbalances arising in the ordinary course of
business); (vii) all obligations of the type referred to in clauses (i) through
(vi) of other Persons and all dividends of other Persons for the payment of
which, in either case, such Person is responsible or liable, directly or
indirectly, as obligor, guarantor or otherwise, including by means of any
Guarantee (including, with respect to any Production Payment, any warranties or
guarantees of production or payment by such Person with respect to such
Production Payment but excluding other contractual obligations of such Person
with respect to such Production Payment); (viii) all obligations of the type
referred to in clauses (i) through (vii) of other Persons secured by any Lien on
any property or asset of such first-mentioned Person (whether or not such
obligation is assumed by such first-mentioned Person), the amount of such
obligation being deemed to be the lesser of the value of such property or assets
or the amount of the obligation so secured and (ix) to the extent not otherwise
included in this definition, Hedging Obligations of such Person. The amount of
Indebtedness of any Person at any date shall be the outstanding balance at such
date of all unconditional obligations as described above and the maximum
liability, upon the occurrence of the contingency giving rise to the obligation,
of any contingent obligations at such date.
"Interest Rate Agreement" means any interest rate swap agreement, interest
rate cap agreement or other financial agreement or arrangement designed to
protect the Company or any Restricted Subsidiary against fluctuations in
interest rates.
"Investment" in any Person means any direct or indirect advance, loan
(other than advances to customers in the ordinary course of business that are
recorded as accounts receivable on the balance sheet of the lender) or other
extensions of credit (including by way of Guarantee or similar arrangement) or
capital contribution to (by means of any transfer of cash or other property to
others or any payment for property or services for the account or use of
others), or any purchase or acquisition of Capital Stock, Indebtedness or other
similar instruments issued by such Person. For purposes of the definition of
"Unrestricted Subsidiary", the definition of "Restricted Payment" and the
covenant described under "-- Certain Covenants -- Limitation on Restricted
Payments", (i) "Investment" shall include the portion (proportionate to the
Company's equity interest in such Subsidiary) of the fair market value of the
net assets of any Subsidiary of the Company at the time that such Subsidiary is
designated an Unrestricted Subsidiary; provided, however, that upon a
redesignation of such Subsidiary as a Restricted Subsidiary, the Company shall
be deemed to continue to have a permanent "Investment" in an Unrestricted
Subsidiary equal to an amount (if positive) equal to (x) the Company's
"Investment" in such Subsidiary at the time of such redesignation less (y) the
portion (proportionate to the Company's equity interest in such Subsidiary) of
the fair market value of the net assets of such Subsidiary at the time of such
redesignation; and (ii) any property transferred to or from an Unrestricted
Subsidiary shall be valued at its fair market value at the time of such
transfer, in each case as determined in good faith by the Board of Directors.
"Issue Date" means August 14, 1996, the date on which the Outstanding Notes
were originally issued.
"Lien" means any mortgage, pledge, security interest, encumbrance, lien or
charge of any kind (including any conditional sale or other title retention
agreement or lease in the nature thereof).
"Limited Recourse Indebtedness" means, with respect to any Production
Payments, Indebtedness, the terms of which limit the liability of the Company
and its Restricted Subsidiaries solely to the hydrocarbons covered by such
Production Payments; provided, however, that no default with respect to such
Indebtedness
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would permit any holder of any other Indebtedness of the Company or any
Restricted Subsidiary to declare a default on such other Indebtedness or cause
the payment thereof to be accelerated or payable prior to its stated maturity.
"Net Available Cash" from an Asset Disposition means cash payments received
therefrom (including any cash payments received by way of deferred payment of
principal pursuant to a note or installment receivable or otherwise, but only as
and when received, but excluding any other consideration received in the form of
assumption by the acquiring Person of Indebtedness or other obligations relating
to such properties or assets or received in any other noncash form) in each case
net of (i) all legal, title and recording tax expenses, commissions and other
fees and expenses incurred, and all Federal, state, provincial, foreign and
local taxes required to be accrued as a liability under GAAP, as a consequence
of such Asset Disposition, (ii) all payments made on any Indebtedness which is
secured by any assets subject to such Asset Disposition, in accordance with the
terms of any Lien upon or other security agreement of any kind with respect to
such assets, or which must by its terms, or in order to obtain a necessary
consent to such Asset Disposition, or by applicable law, be repaid out of the
proceeds from such Asset Disposition, (iii) all distributions and other payments
required to be made to minority interest holders in Subsidiaries or joint
ventures as a result of such Asset Disposition and (iv) the deduction of
appropriate amounts provided by the seller as a reserve, in accordance with
GAAP, against any liabilities associated with the property or other assets
disposed in such Asset Disposition and retained by the Company or any Restricted
Subsidiary after such Asset Disposition.
"Net Cash Proceeds", with respect to any issuance or sale of Capital Stock,
means the cash proceeds of such issuance or sale net of attorneys' fees,
accountants' fees, underwriters' or placement agents' fees, discounts or
commissions and brokerage, consultant and other fees actually incurred in
connection with such issuance or sale and net of taxes paid or payable as a
result thereof.
"Net Present Value" means, with respect to any proved hydrocarbon reserves,
the discounted future net cash flows associated with such reserves, determined
in accordance with the rules and regulations of the SEC in effect on the Issue
Date.
"Oil and Gas Business" means the business of the exploration for, and
exploitation, development, acquisition, production, processing (but not
refining), marketing, storage and transportation of, hydrocarbons, and other
related energy and natural resource businesses (including oil and gas services
businesses related to the foregoing).
"Oil and Gas Hedging Contract" means any oil and gas purchase or hedging
agreement, and other agreement or arrangement, in each case, that is designed to
provide protection against oil and gas price fluctuations.
"Parent" means Mariner Holdings, Inc., a Delaware corporation, and its
successors.
"Permitted Business Investment" means any investment made in the ordinary
course of, and of a nature that is or shall have become customary in, the Oil
and Gas Business as a means of actively exploiting, exploring for, acquiring,
developing, producing, processing, gathering, marketing or transporting oil and
gas through agreements, transactions, interests or arrangements which permit one
to share risks or costs, comply with regulatory requirements regarding local
ownership or satisfy other objectives customarily achieved through the conduct
of Oil and Gas Business jointly with third parties, including, without
limitation, (i) ownership interests in oil and gas properties, processing
facilities, gathering systems or ancillary real property interests and (ii)
Investments in the form of or pursuant to operating agreements, processing
agreements, farm-in agreements, farm-out agreements, development agreements,
area of mutual interest agreements, unitization agreements, pooling agreements,
joint bidding agreements, service contracts, joint venture agreements,
partnership agreements (whether general or limited), subscription agreements,
stock purchase agreements and other similar agreements with third parties.
"Permitted Holders" means (a) Enron Corp., (b) the California Public
Employees' Retirement System or (c) Joint Energy Development Investments Limited
Partnership ("JEDI") or another entity or entities, as long as JEDI or such
other entity or entities is controlled, directly or indirectly, by (i) Enron
Corp., (ii) the California Public Employees' Retirement System or (iii) any
combination of any of the foregoing entities.
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"Permitted Investment" means an Investment by the Company or any Restricted
Subsidiary in (i) a Restricted Subsidiary or a Person that will, upon the making
of such Investment, become a Restricted Subsidiary; provided, however, that the
primary business of such Restricted Subsidiary is an Oil and Gas Business; (ii)
another Person if as a result of such Investment such other Person is merged or
consolidated with or into, or transfers or conveys all or substantially all its
assets to, the Company or a Restricted Subsidiary; provided, however, that such
Person's primary business is an Oil and Gas Business; (iii) Temporary Cash
Investments; (iv) receivables owing to the Company or any Restricted Subsidiary
if created or acquired in the ordinary course of business and payable or
dischargeable in accordance with customary trade terms; provided, however, that
such trade terms may include such concessionary trade terms as the Company or
any such Restricted Subsidiary deems reasonable under the circumstances; (v)
payroll, travel and similar advances to cover matters that are expected at the
time of such advances ultimately to be treated as expenses for accounting
purposes and that are made in the ordinary course of business; (vi) loans or
advances to employees made in the ordinary course of business; (vii) stock,
obligations or securities received in settlement of debts created in the
ordinary course of business and owing to the Company or any Restricted
Subsidiary or in satisfaction of judgments; (viii) any Person to the extent such
Investment represents the non-cash portion of the consideration received for an
Asset Disposition as permitted pursuant to the covenant described under
"-- Certain Covenants -- Limitation on Sales of Assets and Subsidiary Stock" and
(ix) Permitted Business Investments.
"Permitted Liens" means, with respect to any Person, (a) pledges or
deposits by such Person under worker's compensation laws, unemployment insurance
laws or similar legislation, or good faith deposits in connection with bids,
tenders, contracts (other than for the payment of Indebtedness) or leases to
which such Person is a party, or deposits to secure public or statutory
obligations of such Person or deposits of cash or United States government bonds
to secure surety or appeal bonds to which such Person is a party, or deposits as
security for contested taxes or import duties or for the payment of rent, in
each case Incurred in the ordinary course of business; (b) Liens imposed by law,
such as carriers', warehousemen's and mechanics' Liens, in each case for sums
not yet due or being contested in good faith by appropriate proceedings or other
Liens arising out of judgments or awards against such Person with respect to
which such Person shall then be proceeding with an appeal or other proceedings
for review; (c) Liens for property taxes not yet subject to penalties for
non-payment or which are being contested in good faith and by appropriate
proceedings; (d) Liens in favor of issuers of surety bonds or letters of credit
issued pursuant to the request of and for the account of such Person in the
ordinary course of its business; provided, however, that such letters of credit
do not constitute Indebtedness; (e) minor survey exceptions, minor encumbrances,
easements or reservations of, or rights of others for, licenses, rights of way,
sewers, electric lines, telegraph and telephone lines and other similar
purposes, or zoning or other restrictions as to the use of real property or
Liens incidental to the conduct of the business of such Person or to the
ownership of its properties which were not Incurred in connection with
Indebtedness and which do not in the aggregate materially impair their use in
the operation of the business of such Person; (f) Liens securing Indebtedness
Incurred to finance the construction, purchase or lease of, or repairs,
improvements or additions to, property of such Person; provided, however, that
the Lien may not extend to any other property owned by such Person or any of its
Subsidiaries at the time the Lien is Incurred, and the Indebtedness secured by
the Lien may not be Incurred more than 180 days after the later of the
acquisition, completion of construction, repair, improvement, addition or
commencement of full operation of the property subject to the Lien; (g) Liens
securing Indebtedness permitted under the provisions described in clause (b)(1)
or (b)(8) under "-- Certain Covenants -- Limitation on Indebtedness"; provided,
however, that any such Lien securing Indebtedness described in such clause
(b)(8) shall be limited to the hydrocarbons related thereto; (h) Liens existing
on the Issue Date; (i) Liens on property or shares of Capital Stock of another
Person at the time such other Person becomes a Subsidiary of such Person;
provided, however, that such Liens are not created, incurred or assumed in
connection with, or in contemplation of, such other Person becoming such a
Subsidiary; provided further, however, that such Lien may not extend to any
other property owned by such Person or any of its Subsidiaries; (j) Liens on
property at the time such Person or any of its Subsidiaries acquires the
property, including any acquisition by means of a merger or consolidation with
or into such Person or a Subsidiary of such Person; provided, however, that such
Liens are not created, incurred or assumed in connection with, or in
contemplation of, such acquisition; provided further,
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however, that the Liens may not extend to any other property owned by such
Person or any of its Subsidiaries; (k) Liens securing Indebtedness or other
obligations of a Subsidiary of such Person owing to such Person or a wholly
owned Subsidiary of such Person (or, in the case of the Company, to a Wholly
Owned Subsidiary); (l) Liens securing Hedging Obligations so long as such
Hedging Obligations relate to Indebtedness that is, and is permitted to be under
the Indenture, secured by a Lien on the same property securing such Hedging
Obligations; (m) Liens to secure any Refinancing (or successive Refinancings) as
a whole, or in part, of any Indebtedness secured by any Lien referred to in the
foregoing clauses (f), (h), (i) and (j); provided, however, that (x) such new
Lien shall be limited to all or part of the same property that secured the
original Lien (plus improvements to or on such property) and (y) the
Indebtedness secured by such Lien at such time is not increased to any amount
greater than the sum of (A) the outstanding principal amount or, if greater,
committed amount of the Indebtedness described under clause (f), (h), (i) or (j)
at the time the original Lien became a Permitted Lien and (B) an amount
necessary to pay any fees and expenses, including premiums, related to such
refinancing, refunding, extension, renewal or replacement; (n) Liens on, or
related to, properties to secure all or part of the costs incurred in the
ordinary course of business of exploration, drilling, development or operation
thereof; (o) Liens on pipeline or pipeline facilities which arise out of
operation of law; (p) Liens reserved in oil and gas mineral leases for bonus or
rental payments and for compliance with the terms of such leases; and (q) Liens
arising under partnership agreements, oil and gas leases, farm-out agreements,
division orders, contracts for the sale, purchase, exchange, transportation or
processing (but not the refining) of oil, gas or other hydrocarbons, unitization
and pooling declarations and agreements, development agreements, operating
agreements, area of mutual interest agreements, and other similar agreements
which are customary in the Oil and Gas Business. Notwithstanding the foregoing,
"Permitted Liens" will not include any Lien described in clauses (f), (i) or (j)
above to the extent (A) such Lien applies to any Additional Assets or Permitted
Business Investment acquired directly or indirectly from Net Available Cash
pursuant to clause (a)(i)(B) or paragraph (c) of the covenant described under
"-- Certain Covenants -- Limitation on Sale of Assets and Subsidiary Stock" and
(B) the fair value of such Additional Assets or Permitted Business Investment is
less than the sum of (x) the amount of Indebtedness secured by such Lien plus
(y) the amount of Net Available Cash so invested in such Additional Assets or
Permitted Business Investment.
"Person" means any individual, corporation, partnership, joint venture,
association, joint-stock company, trust, unincorporated organization, government
or any agency or political subdivision thereof or any other entity.
"Preferred Stock", as applied to the Capital Stock of any corporation,
means Capital Stock of any class or classes (however designated) which is
preferred as to the payment of dividends, or as to the distribution of assets
upon any voluntary or involuntary liquidation or dissolution of such
corporation, over shares of Capital Stock of any other class of such
corporation.
"principal" of a Note means the principal of the Note plus the premium, if
any, payable on the Note which is due or overdue or is to become due at the
relevant time.
"Production Payments" means, collectively, Dollar-Denominated Production
Payments and Volumetric Production Payments.
"Public Equity Offering" means an underwritten primary public offering of
common stock of the Company pursuant to an effective registration statement
under the Securities Act.
"Public Market" means any time after (x) a Public Equity Offering has been
consummated and (y) at least 15% of the total issued and outstanding common
stock of the Company has been distributed by means of an effective registration
statement under the Securities Act or sales pursuant to Rule 144 under the
Securities Act.
"Refinance" means, in respect of any Indebtedness, to refinance, extend,
renew, refund, repay, prepay, redeem, defease or retire, or to issue other
Indebtedness in exchange or replacement for, such Indebtedness. "Refinanced" and
"Refinancing" shall have correlative meanings.
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"Refinancing Indebtedness" means Indebtedness that Refinances any
Indebtedness of the Company or any Restricted Subsidiary existing on the Issue
Date or Incurred in compliance with the Indenture including Indebtedness that
Refinances Refinancing Indebtedness; provided, however, that (i) such
Refinancing Indebtedness has a Stated Maturity no earlier than the Stated
Maturity of the Indebtedness being Refinanced, (ii) such Refinancing
Indebtedness has an Average Life at the time such Refinancing Indebtedness is
Incurred that is equal to or greater than the Average Life of the Indebtedness
being Refinanced and (iii) such Refinancing Indebtedness has an aggregate
principal amount (or if Incurred with original issue discount, an aggregate
issue price) that is equal to or less than the aggregate principal amount (or if
Incurred with original issue discount, the aggregate accreted value) then
outstanding or committed (plus fees and expenses, including any premium and
defeasance costs) under the Indebtedness being Refinanced; provided further,
however, that Refinancing Indebtedness shall not include (x) Indebtedness of a
Subsidiary that Refinances Indebtedness of the Company or (y) Indebtedness of
the Company or a Restricted Subsidiary that Refinances Indebtedness of an
Unrestricted Subsidiary.
"Representative" means any trustee, agent or representative (if any) for an
issue of Senior Indebtedness of the Company.
"Restricted Payment" with respect to any Person means (i) the declaration
or payment of any dividends or any other distributions of any sort in respect of
its Capital Stock (including any payment in connection with any merger or
consolidation involving such Person) or similar payment to the direct or
indirect holders of its Capital Stock (other than dividends or distributions
payable solely in its Capital Stock (other than Disqualified Stock)) and
dividends or distributions payable solely to the Company or a Restricted
Subsidiary, and other than pro rata dividends or other distributions made by a
Subsidiary that is not a Wholly Owned Subsidiary to minority stockholders (or
owners of an equivalent interest in the case of a Subsidiary that is an entity
other than a corporation), (ii) the purchase, redemption or other acquisition or
retirement for value of any Capital Stock of the Company held by any Person or
of any Capital Stock of a Restricted Subsidiary held by any Affiliate of the
Company (other than a Restricted Subsidiary), including the exercise of any
option to exchange any Capital Stock (other than into Capital Stock of the
Company that is not Disqualified Stock), (iii) the purchase, repurchase,
redemption, defeasance or other acquisition or retirement for value, prior to
scheduled maturity, scheduled repayment or scheduled sinking fund payment of any
Subordinated Obligations (other than the purchase, repurchase or other
acquisition of Subordinated Obligations purchased in anticipation of satisfying
a sinking fund obligation, principal installment or final maturity, in each case
due within one year of the date of acquisition) or (iv) the making of any
Investment in any Person (other than a Permitted Investment).
"Restricted Subsidiary" means any Subsidiary of the Company that is not an
Unrestricted Subsidiary.
"Sale/Leaseback Transaction" means an arrangement relating to property now
owned or hereafter acquired whereby the Company or a Restricted Subsidiary
transfers such property to a Person and the Company or a Restricted Subsidiary
leases it from such Person.
"SEC" means the Securities and Exchange Commission.
"Secured Indebtedness" means any Indebtedness of the Company secured by a
Lien.
"Senior Indebtedness" means with respect to any Person (i) Indebtedness of
such Person, and all obligations of such Person under any Credit Facility,
whether outstanding on the Issue Date or thereafter Incurred, and (ii) accrued
and unpaid interest (including interest accruing on or after the filing of any
petition in bankruptcy or for reorganization relating to such Person to the
extent post-filing interest is allowed in such proceeding) in respect of (A)
indebtedness of such Person for money borrowed and (B) indebtedness evidenced by
notes, debentures, bonds or other similar instruments for the payment of which
such Person is responsible or liable unless, with respect to obligations
described in the immediately preceding clause (i) or (ii), in the instrument
creating or evidencing the same or pursuant to which the same is outstanding, it
is provided that such obligations are subordinate in right of payment to the
Notes or the applicable Subsidiary Guaranty, as the case may be; provided,
however, that Senior Indebtedness shall not include (1) any obligation of such
Person to any Subsidiary of such Person, (2) any liability for Federal, state,
local or other
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taxes owed or owing by such Person, (3) any accounts payable or other liability
to trade creditors arising in the ordinary course of business (including
guarantees thereof or instruments evidencing such liabilities), (4) any
Indebtedness of such Person (and any accrued and unpaid interest in respect
thereof) which is subordinate or junior in any respect to any other Indebtedness
or other obligation of such Person or (5) that portion of any Indebtedness which
at the time of Incurrence is Incurred in violation of the Indenture (other than
Indebtedness under any Credit Facility that is Incurred on the basis of a
representation by the Company to the applicable lenders that such Person is
permitted to Incur such Indebtedness under the Indenture).
"Senior Subordinated Indebtedness" means (i) with respect to the Company,
the Notes and any other Indebtedness of the Company that specifically provides
that such Indebtedness is to rank pari passu with the Notes in right of payment
and is not subordinated by its terms in right of payment to any Indebtedness or
other obligation of the Company which is not Senior Indebtedness and (ii) with
respect to any Subsidiary Guarantor, the Subsidiary Guaranty of such Subsidiary
Guarantor and any other Indebtedness of such Subsidiary Guarantor that
specifically provides that such Indebtedness is to rank pari passu with such
Subsidiary Guaranty in right of payment and is not subordinated by its terms in
right of payment to any Indebtedness or other obligation of such Subsidiary
Guarantor which is not Senior Indebtedness.
"Significant Subsidiary" means any Restricted Subsidiary that would be a
"Significant Subsidiary" of the Company within the meaning of Rule 1-02 under
Regulation S-X promulgated by the SEC.
"Stated Maturity" means, with respect to any security, the date specified
in such security as the fixed date on which the final payment of principal of
such security is due and payable, including pursuant to any mandatory redemption
provision (but excluding any provision providing for the repurchase of such
security at the option of the holder thereof upon the happening of any
contingency unless such contingency has occurred).
"Subordinated Obligation" means any Indebtedness of the Company (whether
outstanding on the Issue Date or thereafter Incurred) which is subordinate or
junior in right of payment to the Notes pursuant to a written agreement to that
effect.
"Subsidiary" means, in respect of any Person, any corporation, association,
partnership or other business entity of which more than 50% of the total voting
power of shares of Capital Stock or other interests (including partnership
interests) entitled (without regard to the occurrence of any contingency) to
vote in the election of directors, managers or trustees thereof is at the time
owned or controlled, directly or indirectly, by (i) such Person, (ii) such
Person and one or more Subsidiaries of such Person or (iii) one or more
Subsidiaries of such Person.
"Subsidiary Guarantor" means each Restricted Subsidiary of the Company that
delivers a Subsidiary Guaranty.
"Subsidiary Guaranty" means a Guarantee by a Subsidiary Guarantor of the
Company's obligations with respect to the Notes, which Guarantee will be
subordinated to Senior Indebtedness of such Subsidiary Guarantor on
substantially the same terms as the Notes are subordinated to Senior
Indebtedness of the Company. Any such Subsidiary Guaranty (i) will be in the
form prescribed by the Indenture, (ii) will be limited in amount to an amount
not to exceed the maximum amount that can be guaranteed by the applicable
Subsidiary Guarantor without rendering such Subsidiary Guaranty, as it relates
to such Subsidiary Guarantor, voidable under applicable law relating to
fraudulent conveyance or fraudulent transfer or similar laws affecting the
rights of creditors generally and (iii) will provide that, upon the sale or
other disposition (including by way of consolidation or merger) of a Subsidiary
Guarantor or the sale or disposition of all or substantially all the assets of a
Subsidiary Guarantor (in each case other than to the Company or an Affiliate of
the Company) permitted by the Indenture, such Subsidiary Guarantor shall be
released from all its obligations under its Subsidiary Guaranty.
"Temporary Cash Investments" means any of the following: (i) any investment
in direct obligations of the United States of America or any agency thereof or
obligations guaranteed by the United States of America or any agency thereof,
(ii) investments in time deposit accounts, certificates of deposit and money
market deposits maturing within 180 days of the date of acquisition thereof
issued by a bank or trust company which is
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organized under the laws of the United States of America, any state thereof or
any foreign country recognized by the United States, and which bank or trust
company has capital, surplus and undivided profits aggregating in excess of
$50.0 million (or the foreign currency equivalent thereof) and has outstanding
debt which is rated "A" (or such similar equivalent rating) or higher by at
least one nationally recognized statistical rating organization (as defined in
Rule 436 under the Securities Act) or any money-market fund sponsored by an
registered broker dealer or mutual fund distributor, (iii) repurchase
obligations with a term of not more than 30 days for underlying securities of
the types described in clause (i) above entered into with a bank meeting the
qualifications described in clause (ii) above, (iv) investments in commercial
paper, maturing not more than 90 days after the date of acquisition, issued by a
corporation (other than an Affiliate of the Company) organized and in existence
under the laws of the United States of America or any foreign country recognized
by the United States of America with a rating at the time as of which any
investment therein is made of "P-1" (or higher) according to Moody's Investors
Service, Inc. or "A-1" (or higher) according to Standard and Poor's Ratings
Group, and (v) investments in securities with maturities of six months or less
from the date of acquisition issued or fully guaranteed by any state,
commonwealth or territory of the United States of America, or by any political
subdivision or taxing authority thereof, and rated at least "A" by Standard &
Poor's Ratings Group or "A" by Moody's Investors Service, Inc.
"Total Assets" of the Company means the total consolidated assets of the
Company and its Restricted Subsidiaries, as shown on the most recent balance
sheet of the Company.
"Unrestricted Subsidiary" means (i) any Subsidiary of the Company that at
the time of determination shall be designated an Unrestricted Subsidiary by the
Board of Directors in the manner provided below and (ii) any Subsidiary of an
Unrestricted Subsidiary. The Board of Directors may designate any Subsidiary of
the Company (including any newly acquired or newly formed Subsidiary) to be an
Unrestricted Subsidiary unless such Subsidiary or any of its Subsidiaries owns
any Capital Stock or Indebtedness of, or holds any Lien on any property of, the
Company or any other Subsidiary of the Company that is not a Subsidiary of the
Subsidiary to be so designated; provided, however, that either (A) the
Subsidiary to be so designated has total assets of $1,000 or less or (B) if such
Subsidiary has assets greater than $1,000, such designation would be permitted
under the covenant described under "-- Certain Covenants -- Limitation on
Restricted Payments". The Board of Directors may designate any Unrestricted
Subsidiary to be a Restricted Subsidiary; provided, however, that immediately
after giving effect to such designation (x) the Company could Incur $1.00 of
additional Indebtedness under paragraph (a) of the covenant described under
"-- Certain Covenants -- Limitation on Indebtedness" and (y) no Default shall
have occurred and be continuing. Any such designation by the Board of Directors
shall be by the Company to the Trustee by promptly filing with the Trustee a
copy of the board resolution giving effect to such designation and an Officers'
Certificate certifying that such designation complied with the foregoing
provisions.
"U.S. Government Obligations" means direct obligations (or certificates
representing an ownership interest in such obligations) of the United States of
America (including any agency or instrumentality thereof) for the payment of
which the full faith and credit of the United States of America is pledged and
which are not callable at the issuer's option.
"Volumetric Production Payments" mean production payment obligations
recorded as deferred revenue in accordance with GAAP, together with all
undertakings and obligations in connection therewith.
"Voting Stock" of a Person means all classes of Capital Stock or other
interests (including partnership interests) of such Person then outstanding and
normally entitled (without regard to the occurrence of any contingency) to vote
in the election of directors, managers or trustees thereof.
"Wholly Owned Subsidiary" means a Restricted Subsidiary all the Capital
Stock of which (other than directors' qualifying shares and shares held by other
Persons to the extent such shares are required by applicable law to be held by a
Person other than the Company or a Restricted Subsidiary) is owned by the
Company or one or more Wholly Owned Subsidiaries.
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CERTAIN COVENANTS
The Indenture contains covenants including, among others, the following:
Limitation on Indebtedness. (a) The Company shall not, and shall not permit
any Restricted Subsidiary to, Incur, directly or indirectly, any Indebtedness;
provided, however, that the Company or a Subsidiary Guarantor may Incur
Indebtedness if, on the date of such Incurrence and after giving effect thereto,
the Consolidated Coverage Ratio exceeds 2.5 to 1.
(b) Notwithstanding the foregoing paragraph (a), the Company and its
Restricted Subsidiaries may Incur any or all of the following Indebtedness:
(1) Indebtedness of the Company or a Subsidiary Guarantor Incurred
pursuant to any Credit Facility, so long as the aggregate principal amount
of all Indebtedness outstanding under all Credit Facilities does not, at
any one time, exceed the Borrowing Base; provided, however, that if the
Company or a Subsidiary Guarantor Incurs any Indebtedness pursuant to this
clause (1) that would cause the total principal amount of Indebtedness
outstanding under this clause (1) to exceed an amount equal to $150.0
million (less the aggregate amount of all Net Available Cash of Asset
Dispositions applied to reduce Senior Indebtedness pursuant to clause
(a)(i)(A) of the covenant described under the caption "-- Limitation on
Sales of Assets and Subsidiary Stock"), the Consolidated Coverage Ratio on
the date of such Incurrence must be at least 2.0 to 1;
(2) Indebtedness owed to and held by the Company or a Wholly Owned
Subsidiary; provided, however, that any subsequent issuance or transfer of
any Capital Stock which results in any such Wholly Owned Subsidiary ceasing
to be a Wholly Owned Subsidiary or any subsequent transfer of such
Indebtedness (other than to the Company or another Wholly Owned Subsidiary)
shall be deemed, in each case, to constitute the Incurrence of such
Indebtedness by the issuer thereof;
(3) the Notes and any Guarantee of the Notes;
(4) Indebtedness outstanding on the Issue Date (other than
Indebtedness described in clause (1), (2) or (3) of this covenant);
(5) Indebtedness or Preferred Stock of a Subsidiary Incurred and
outstanding on or prior to the date on which such Subsidiary was acquired
by the Company (other than Indebtedness or Preferred Stock Incurred in
connection with, or to provide all or any portion of the funds or credit
support utilized to consummate, the transaction or series of related
transactions pursuant to which such Subsidiary became a Subsidiary or was
acquired by the Company); provided, however, that on the date of such
acquisition and after giving effect thereto, the Company would have been
able to Incur at least $1.00 of additional Indebtedness pursuant to clause
(a) above;
(6) Refinancing Indebtedness in respect of Indebtedness Incurred
pursuant to paragraph (a) or pursuant to clause (1), (3), (4) or (5) or
this paragraph (6); provided, however, that to the extent such Refinancing
Indebtedness directly or indirectly Refinances Indebtedness or Preferred
Stock of a Subsidiary described in clause (5), such Refinancing
Indebtedness shall be Incurred only by such Subsidiary or the Company;
(7) Indebtedness of the Company or a Subsidiary Guarantor represented
by Capital Lease Obligations, mortgage financings or purchase money
obligations, in each case Incurred for this purpose of financing all or any
part of the purchase price or cost of construction or improvement of
property used in an Oil and Gas Business or Incurred to Refinance any such
purchase price or cost of construction or improvement, in each case
Incurred no later than 365 days after the date of such acquisition or the
date of completion of such construction or improvement; provided, however,
that the principal amount of any Indebtedness Incurred pursuant to this
clause (7) in any calendar year shall not exceed $10.0 million;
(8) Indebtedness with respect to Production Payments; provided,
however, that any such Indebtedness shall be Limited Recourse Indebtedness;
provided further, however, that the Net Present Value of
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the reserves related to such Production Payments shall not exceed 30% of
the Total Assets of the Company at any time;
(9) Indebtedness consisting of Interest Rate Agreements directly
related to Indebtedness permitted to be Incurred by the Company and its
Restricted Subsidiaries pursuant to the Indenture;
(10) Indebtedness under Oil and Gas Hedging Contracts and Currency
Agreements entered into in the ordinary course of business for the purpose
of limiting risks that arise in the ordinary course of business of the
Company; and
(11) Indebtedness in an aggregate principal amount which, together
with all other Indebtedness of the Company and its Restricted Subsidiaries
outstanding on the date of such Incurrence (other than Indebtedness
permitted by clauses (1) through (10) above or paragraph (a)) does not
exceed $15.0 million; provided, however, that the aggregate principal
amount of the Indebtedness Incurred pursuant to this clause (11) by
Restricted Subsidiaries and outstanding at any time does not exceed $10.0
million.
(c) Notwithstanding the foregoing, the Company shall not Incur any
Indebtedness pursuant to the foregoing paragraph (b) if the proceeds thereof are
used, directly or indirectly, to Refinance any Subordinated Obligations unless
such Indebtedness shall be subordinated to the Notes to at least the same extent
as such Subordinated Obligations.
(d) For purposes of determining compliance with the foregoing covenant, (i)
in the event that an item of Indebtedness meets the criteria of more than one of
the types of Indebtedness described above, the Company, in its sole discretion,
will classify such item of Indebtedness and only be required to include the
amount and type of such Indebtedness in one of the above clauses and (ii) an
item of Indebtedness may be divided and classified in more than one of the types
of Indebtedness described above.
(e) Notwithstanding paragraphs (a) and (b) above, the Company shall not
Incur (i) any Indebtedness if such Indebtedness is subordinate or junior in
ranking in any respect to any Senior Indebtedness, unless such Indebtedness is
Senior Subordinated Indebtedness or is expressly subordinated in right of
payment to Senior Subordinated Indebtedness or (ii) any Secured Indebtedness
that is not Senior Indebtedness unless contemporaneously therewith effective
provision is made to secure the Notes equally and ratably with such Secured
Indebtedness for so long as such Secured Indebtedness is secured by a Lien.
Limitation on Restricted Payments. (a) The Company shall not, and shall not
permit any Restricted Subsidiary, directly or indirectly, to make a Restricted
Payment if at the time the Company or such Restricted Subsidiary makes such
Restricted Payment: (1) a Default shall have occurred and be continuing (or
would result therefrom); (2) the Company is not able to Incur an additional
$1.00 of Indebtedness pursuant to paragraph (a) of the covenant described under
"-- Limitation on Indebtedness"; or (3) the aggregate amount of such Restricted
Payment and all other Restricted Payments since the Issue Date would exceed the
sum of: (A) 50% of the Consolidated Net Income accrued during the period
(treated as one accounting period) from the beginning of the fiscal quarter
immediately following the fiscal quarter during which the Notes are originally
issued to the end of the most recent fiscal quarter ending at least 45 days
prior to the date of such Restricted Payment (or, in case such Consolidated Net
Income shall be a deficit, minus 100% of such deficit); (B) the aggregate Net
Cash Proceeds received by the Company from the issuance or sale of its Capital
Stock (other than Disqualified Stock) subsequent to the Issue Date (other than
an issuance or sale to a Restricted Subsidiary of the Company and other than an
issuance or sale to an employee stock ownership plan or to a trust established
by the Company or any of its Subsidiaries for the benefit of their employees);
(C) the aggregate Net Cash Proceeds received by the Company from the issue or
sale subsequent to the Issue Date of its Capital Stock (other than Disqualified
Stock) to an employee stock ownership plan; provided, however, that if such
employee stock ownership plan incurs any Indebtedness with respect thereto, such
aggregate amount shall be limited to an amount equal to any increase in the
Consolidated Net Worth of the Company resulting from principal repayments made
by such employee stock ownership plan with respect to such Indebtedness; (D) the
amount by which Indebtedness of the Company is reduced on the Company's balance
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sheet upon the conversion or exchange (other than by a Subsidiary of the
Company) subsequent to the Issue Date, of any Indebtedness of the Company
convertible or exchangeable for Capital Stock (other than Disqualified Stock) of
the Company (less the amount of any cash, or the fair value of any other
property, distributed by the Company upon such conversion or exchange); and (E)
an amount equal to the sum of (i) the net reduction in Investments in
Unrestricted Subsidiaries resulting from dividends, repayments of loans or
advances or other transfers of assets, in each case to the Company or any
Restricted Subsidiary from Unrestricted Subsidiaries, and (ii) the portion
(proportionate to the Company's equity interest in such Subsidiary) of the fair
market value of the net assets of an Unrestricted Subsidiary at the time such
Unrestricted Subsidiary is designated a Restricted Subsidiary; provided,
however, that the foregoing sum shall not exceed, in the case of any
Unrestricted Subsidiary, the amount of Investments previously made (and treated
as a Restricted Payment) by the Company or any Restricted Subsidiary in such
Unrestricted Subsidiary.
(b) The provisions of the foregoing paragraph (a) shall not prohibit: (i)
any purchase or redemption of Capital Stock or Subordinated Obligations of the
Company made by exchange for, or out of the proceeds of the substantially
concurrent sale of, Capital Stock of the Company (other than Disqualified Stock
and other than Capital Stock issued or sold to a Subsidiary of the Company or an
employee stock ownership plan or to a trust established by the Company or any of
its Subsidiaries for the benefit of their employees); provided, however, that
(A) such purchase or redemption shall be excluded in the calculation of the
amount of Restricted Payments and (B) the Net Cash Proceeds from such sale shall
be excluded from the calculation of amounts under clause (3)(B) or (3)(C), as
applicable, of paragraph (a) above; (ii) any purchase, repurchase, redemption,
defeasance or other acquisition or retirement for value of Subordinated
Obligations made by exchange for, or out of the proceeds of the substantially
concurrent sale of, Indebtedness of the Company which is permitted to be
Incurred pursuant to the covenant described under "-- Limitation on
Indebtedness"; provided, however, that such purchase, repurchase, redemption,
defeasance or other acquisition or retirement for value shall be excluded in the
calculation of the amount of Restricted Payments; (iii) dividends paid within 60
days after the date of declaration thereof if at such date of declaration such
dividend would have complied with this covenant; provided, however, that at the
time of payment of such dividend, no other Default shall have occurred and be
continuing (or result therefrom); provided further, however, that such dividend
shall be included in the calculation of the amount of Restricted Payments; (iv)
the repurchase of shares of, or options to purchase shares of, common stock of
the Company or any of its Subsidiaries from employees, former employees,
directors or former directors of the Company or any of its Subsidiaries (or
permitted transferees of such employees, former employees, directors or former
directors), pursuant to the terms of the agreements (including employment
agreements) or plans (or amendments thereto) approved by the Board of Directors
under which such individuals purchase or sell or are granted the option to
purchase or sell, shares of such common stock; provided, however, that the
aggregate amount of such repurchases shall not exceed $1.0 million in any
calendar year; provided further, however, that such repurchases shall be
excluded in the calculation of the amount of Restricted Payments; (v) Restricted
Payments to Parent to the extent required (x) to pay for general corporate and
overhead expenses incurred by Parent; provided, however, that such Restricted
Payments shall not exceed $200,000 in any calendar year or (y) to pay amounts
owing by Parent pursuant to or in connection with the transactions contemplated
by the agreements existing on the date of, and as described under the caption
"Certain Transactions" in, the Offering Memorandum dated August 9, 1996, related
to the sale of the Outstanding Notes (the "Offering Memorandum"), a copy of
which has been provided to the Trustee; provided further, however, that such
Restricted Payments shall be excluded in the calculation of the amount of
Restricted Payments; (vi) a cash dividend on or about the Issue Date in an
amount not to exceed $42.5 million; provided, however, that such dividend shall
be excluded in the calculation of the amount of Restricted Payments; or (vii)
other Restricted Payments in an aggregate amount not to exceed $10.0 million;
provided, however, that such Restricted Payments shall be excluded in the
calculation of the amount of Restricted Payments.
Limitation on Restrictions on Distributions from Restricted
Subsidiaries. The Company shall not, and shall not permit any Restricted
Subsidiary to, create or otherwise cause or permit to exist or become effective
any consensual encumbrance or restriction on the ability of any Restricted
Subsidiary (a) to pay dividends or make any other distributions on its Capital
Stock or pay any Indebtedness owed to the Company or a
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Restricted Subsidiary, (b) to make any loans or advances to the Company or a
Restricted Subsidiary or (c) to
transfer any of its property or assets to the Company or a Restricted
Subsidiary, except: (i) any encumbrance or restriction pursuant to an agreement
in effect at or entered into on the Issue Date; (ii) any encumbrance or
restriction with respect to a Restricted Subsidiary pursuant to an agreement
relating to any Indebtedness Incurred by such Restricted Subsidiary on or prior
to the date on which such Restricted Subsidiary was acquired by the Company
(other than Indebtedness Incurred as consideration in, or to provide all or any
portion of the funds or credit support utilized to consummate, the transaction
or series of related transactions pursuant to which such Restricted Subsidiary
became a Restricted Subsidiary or was acquired by the Company) and outstanding
on such date; (iii) any encumbrance or restriction pursuant to an agreement
effecting a Refinancing of Indebtedness Incurred pursuant to an agreement
referred to in clause (i) or (ii) of this covenant or this clause (iii) or
contained in any amendment to an agreement referred to in clause (i) or (ii) of
this covenant or this clause (iii); provided, however, that the encumbrances and
restrictions with respect to such Restricted Subsidiary contained in any such
refinancing agreement or amendment are no less favorable to the Noteholders than
encumbrances and restrictions with respect to such Restricted Subsidiary
contained in such agreements; (iv) any such encumbrance or restriction
consisting of customary non assignment provisions in leases governing leasehold
interests to the extent such provisions restrict the transfer of the lease or
the property leased thereunder; (v) in the case of clause (c) above,
restrictions contained in security agreements or mortgages securing Indebtedness
of a Restricted Subsidiary to the extent such restrictions restrict the transfer
of the property subject to such security agreements or mortgages; and (vi) any
restriction with respect to a Restricted Subsidiary imposed pursuant to an
agreement entered into for the sale or disposition of all or substantially all
the Capital Stock or assets of such Restricted Subsidiary pending the closing of
such sale or disposition.
Limitation on Sales of Assets and Subsidiary Stock. (a) In the event and to
the extent that the Net Available Cash received by the Company or any Restricted
Subsidiary from one or more Asset Dispositions occurring on or after the Issue
Date in any period of 12 consecutive months exceeds 10% of Adjusted Consolidated
Assets as of the beginning of such 12-month period, then the Company shall (i)
within 180 days (in the case of (A) below) or 360 days (in the case of (B)
below) after the date such Net Available Cash so received exceeds such 10% of
Adjusted Consolidated Assets (A) apply an amount equal to such excess Net
Available Cash to repay Senior Indebtedness of the Company or Indebtedness of a
Restricted Subsidiary, in each case owing to a Person other than the Company or
any Affiliate of the Company or (B) invest an equal amount, or the amount not so
applied pursuant to clause (A), in Additional Assets or a Permitted Business
Investment or (ii) apply such excess Net Available Cash (to the extent not
applied pursuant to clause (i)) as provided in the following paragraphs of the
covenant described hereunder. The amount of such excess Net Available Cash
required to be applied during the applicable period and not applied as so
required by the end of such period shall constitute "Excess Proceeds".
If, as of the first day of any calendar month, the aggregate amount of
Excess Proceeds not theretofore subject to an Excess Proceeds Offer (as defined
below) totals at least $5.0 million, the Company must, not later than the
fifteenth Business Day of such month, make an offer (an "Excess Proceeds Offer")
to purchase from the Holders on a pro rata basis an aggregate principal amount
of Notes equal to the Excess Proceeds (rounded down to the nearest multiple of
$1,000) on such date, at a purchase price equal to 100% of the principal amount
of such Notes, plus, in each case, accrued interest (if any) to the date of
purchase (the "Excess Proceeds Payment").
The Company will comply, to the extent applicable, with the requirements of
Section 14(e) of the Exchange Act and any other securities laws or regulations
thereunder in the event that such Excess Proceeds are received by the Company
under the covenant described hereunder and the Company is required to repurchase
Notes as described above. To the extent that the provisions of any securities
laws or regulations conflict with the provisions of the covenant described
hereunder, the Company shall comply with the applicable securities laws and
regulations and shall not be deemed to have breached its obligations under the
covenant described hereunder by virtue thereof.
(b) In the event of the transfer of substantially all (but not all) the
property and assets of the Company as an entirety to a Person in a transaction
permitted by the covenant described under "-- Merger and
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Consolidation", the Successor Company (as defined therein) shall be deemed to
have sold the properties and assets of the Company not so transferred for
purposes of the covenant described hereunder, and shall comply with the
provisions of the covenant described hereunder with respect to such deemed sale
as if it were an Asset Disposition and the Successor Company shall be deemed to
have received Net Available Cash in an amount equal to the fair market value (as
determined in good faith by the Board of Directors) of the properties and assets
not so transferred or sold.
(c) In the event of an Asset Disposition by the Company or any Restricted
Subsidiary that consists of a sale of hydrocarbons and results in Production
Payments, the Company or such Restricted Subsidiary shall apply an amount equal
to the Net Available Cash received by the Company or such Restricted Subsidiary
to (i) reduce Senior Indebtedness of the Company or Indebtedness of a Restricted
Subsidiary, in each case owing to a Person other than the Company or any
Affiliate of the Company, within 180 days after the date such Net Available Cash
is so received or (ii) invest in Additional Assets or a Permitted Business
Investment within 360 days after the date such Net Available Cash is so
received.
(d) The Company shall not sell, lease, transfer or otherwise dispose of any
assets owned by the Company on the Issue Date to any Subsidiary which is or
thereafter becomes a Subsidiary Guarantor unless the book value of all such
assets sold, leased, transferred or otherwise disposed of to such Subsidiaries
is less than 15% of the Total Assets of the Company on the Issue Date.
Limitation on Affiliate Transactions. (a) The Company shall not, and shall
not permit any Restricted Subsidiary to, enter into or permit to exist any
transaction (including the purchase, sale, lease or exchange of any property,
employee compensation arrangements or the rendering of any service) with any
Affiliate of the Company (an "Affiliate Transaction") unless the terms thereof
(1) are no less favorable to the Company or such Restricted Subsidiary than
those that could be obtained at the time of such transaction in arm's-length
dealings with a Person who is not such an Affiliate, (2) if such Affiliate
Transaction involves an amount in excess of $1.0 million, is set forth in
writing and has been approved by a majority of the members of the Board of
Directors having no personal stake in such Affiliate Transaction or (3) if such
Affiliate Transaction involves an amount in excess of $5.0 million, has been
determined by a nationally recognized investment banking firm to be fair, from a
financial standpoint, to the Company and its Restricted Subsidiaries.
(b) The provisions of the foregoing paragraph (a) shall not prohibit (i)
any sale of hydrocarbons or other mineral products or the entering into or
performance of Oil and Gas Hedging Contracts, gas gathering, transportation or
processing contracts or oil or natural gas marketing or exchange contracts, in
each case, in the ordinary course of business, so long as the terms of any such
transaction are approved by a majority of the members of the Board of Directors
who are disinterested with respect to such transaction as being the most
favorable of at least (x) two bids, quotes or proposals, at least one of which
is from a Person that is not an Affiliate of the Company (in the event that the
Company determines in good faith that it is able to obtain only two bids, quotes
or proposals with respect to such transaction) or (y) three bids, quotes or
proposals, at least two of which are from Persons that are not Affiliates of the
Company (in all other circumstances), (ii) the sale to an Affiliate of the
Company of Capital Stock of the Company that does not constitute Disqualified
Stock, (iii) transactions contemplated by any employment agreement or other
compensation plan or arrangement entered into by the Company or any of its
Restricted Subsidiaries in the ordinary course of business and consistent with
industry practice, (iv) transactions between or among the Company and its
Restricted Subsidiaries, (v) Restricted Payments and Permitted Investments that
are permitted by the provisions of the Indenture described above under the
caption "-- Limitation on Restricted Payments" and (vi) the transactions
described in the Offering Memorandum under the caption "Certain Transactions".
Change of Control. (a) Upon the occurrence of a Change of Control, each
Holder shall have the right to require that the Company repurchase such Holder's
Notes at a purchase price in cash equal to 101% of the principal amount thereof
plus accrued and unpaid interest, if any, to the date of purchase (subject to
the right of Holders of record on the relevant record date to receive interest
on the relevant interest payment date), in accordance with the terms
contemplated in paragraph (b) below.
(b) Within 30 days following any Change of Control, the Company shall mail
a notice to each Holder with a copy to the Trustee stating: (1) that a Change of
Control has occurred and that such Holder has the
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right to require the Company to purchase such Holder's Notes at a purchase price
in cash equal to 101% of the principal amount thereof plus accrued and unpaid
interest, if any, to the date of purchase (subject to the right of Holders of
record on the relevant record date to receive interest on the relevant interest
payment date); (2) the circumstances and relevant facts regarding such Change of
Control (including information with respect to pro forma historical income, cash
flow and capitalization after giving effect to such Change of Control); (3) the
repurchase date (which shall be no earlier than 30 days nor later than 60 days
from the date such notice is mailed); and (4) the instructions determined by the
Company, consistent with the covenant described hereunder, that a Holder must
follow in order to have its Notes purchased.
(c) The Company shall comply, to the extent applicable, with the
requirements of Section 14(e) of the Exchange Act and any other securities laws
or regulations in connection with the repurchase of Notes pursuant to this
covenant described hereunder. To the extent that the provisions of any
securities laws or regulations conflict with the provisions of the covenant
described hereunder, the Company shall comply with the applicable securities
laws and regulations and shall not be deemed to have breached its obligations
under the covenant described hereunder by virtue thereof.
For purposes of clause (iii) of the definition of "Change of Control"
included in "Certain Definitions" and in the Indenture, under New York law, the
governing law of the Indenture, there is no consistently predictable measure of
what constitutes the sale of "all or substantially all" of the property of the
Company. As a result, the Holders and the Company may not agree that a
particular sale of property constitutes the sale of "all or substantially all"
of the property of the Company in order to force the Company to make an offer to
purchase the Notes, in which case the Holders may have the burden of proving
that such sale constitutes the sale of "all or substantially all" of the
property of the Company.
The Change of Control purchase feature is a result of negotiations between
the Company and the Placement Agents. Management has no present intention to
engage in a transaction involving a Change of Control, although it is possible
that the Company would decide to do so in the future. Subject to the limitations
discussed below, the Company could, in the future, enter into certain
transactions, including acquisitions, refinancings or other recapitalizations,
that would not constitute a Change of Control under the Indenture, but that
could increase the amount of indebtedness outstanding at such time or otherwise
affect the Company's capital structure or credit ratings. Restrictions on the
ability of the Company to incur additional Indebtedness are contained in the
covenants described under "-- Limitation on Indebtedness", "-- Limitation on
Liens" and "-- Limitation on Sale/Leaseback Transactions". Such restrictions can
only be waived with the consent of the holders of a majority in principal amount
of the Notes then outstanding. Except for the limitations contained in such
covenants, however, the Indenture will not contain any covenants or provisions
that may afford holders of the Notes protection in the event of a highly
leveraged transaction.
The Credit Agreement prohibits the Company from purchasing any Notes and
also provides that the occurrence of certain change of control events with
respect to the Company would constitute a default thereunder. In the event a
Change of Control occurs at a time when the Company is prohibited from
purchasing Notes, the Company could seek the consent of its lenders to the
purchase of Notes or could attempt to refinance the borrowings that contain such
prohibition. If the Company does not obtain such a consent or repay such
borrowings, the Company will remain prohibited from purchasing Notes. In such
case, the Company's failure to purchase tendered Notes would constitute an Event
of Default under the Indenture which would, in turn, constitute a default under
the Credit Agreement. In such circumstances, the subordination provisions in the
Indenture would likely restrict payment to the Holders of Notes.
Future indebtedness of the Company may contain prohibitions on the
occurrence of certain events that would constitute a Change of Control or
require such indebtedness to be repurchased upon a Change of Control. Moreover,
the exercise by the holders of their right to require the Company to repurchase
the Notes could cause a default under such indebtedness, even if the Change of
Control itself does not, due to the financial effect of such repurchase on the
Company. Finally, the Company's ability to pay cash to the holders of Notes
following the occurrence of a Change of Control may be limited by the Company's
then existing financial resources. There can be no assurance that sufficient
funds will be available when necessary to make any required repurchases.
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The provisions under the Indenture relating to the Company's obligation to
make an offer to repurchase the Notes as a result of a Change of Control may be
waived or modified with the written consent of the holders of a majority in
principal amount of the Notes.
The Company will not be required to make an offer to purchase the Notes as
a result of a Change of Control if a third party (i) makes such an offer in the
manner, at the times and otherwise in compliance with the requirements set forth
in the Indenture relating to the Company's obligation to make such an offer and
(ii) purchases all Notes validly tendered and not withdrawn under such an offer.
Limitation on the Sale or Issuance of Capital Stock of Restricted
Subsidiaries. The Company shall not sell or otherwise dispose of any shares of
Capital Stock of a Restricted Subsidiary, and shall not permit any Restricted
Subsidiary, directly or indirectly, to issue or sell or otherwise dispose of any
shares of its Capital Stock except (i) to the Company or a Wholly Owned
Subsidiary, (ii) if, immediately after giving effect to such issuance, sale or
other disposition, the Company and its Restricted Subsidiaries would own less
than 20% of the Voting Stock of such Restricted Subsidiary and have no greater
economic interest in such Restricted Subsidiary or (iii) to the extent such
shares represent directors' qualifying shares or shares required by applicable
law to be held by a Person other than the Company or a Restricted Subsidiary.
Limitation on Liens. The Company shall not, and shall not permit any
Restricted Subsidiary to, directly or indirectly, Incur or permit to exist any
Lien of any nature whatsoever on any of its properties (including Capital Stock
of a Restricted Subsidiary), whether owned at the Issue Date or thereafter
acquired, other than Permitted Liens, without effectively providing that the
Notes shall be secured equally and ratably with (or prior to) the obligations so
secured for so long as such obligations are so secured.
Promptly after completion of the Exchange Offer, the Company intends to
amend the foregoing covenant to exclude its application to Liens securing Senior
Indebtedness. See "-- Corrective Amendment to the Indenture" and "The Exchange
Offer -- Corrective Amendment to the Indenture".
Limitation on Sale/Leaseback Transactions. The Company shall not, and shall
not permit any Restricted Subsidiary to, enter into any Sale/Leaseback
Transaction with respect to any property unless (i) the Company or such
Restricted Subsidiary would be entitled to (A) Incur Indebtedness in an amount
equal to the Attributable Debt with respect to such Sale/Leaseback Transaction
pursuant to the covenant described under "-- Limitation on Indebtedness" and (B)
create a Lien on such property securing such Attributable Debt without equally
and ratably securing the Notes pursuant to the covenant described under
"-- Limitation on Liens", (ii) the net proceeds received by the Company or any
Restricted Subsidiary in connection with such Sale/Leaseback Transaction are at
least equal to the fair value (as determined by the Board of Directors) of such
property and (iii) the Company applies the proceeds of such transaction in
compliance with the covenant described under "-- Limitation on Sale of Assets
and Subsidiary Stock".
Future Guarantors. Prior to the time that any Restricted Subsidiary Incurs
any Indebtedness permitted under "-- Limitation on Indebtedness", the Company
shall cause such Restricted Subsidiary to Guarantee the Notes pursuant to a
Subsidiary Guaranty on the terms and conditions set forth in the Indenture.
Merger and Consolidation. The Company shall not consolidate with or merge
with or into, or convey, transfer or lease, in one transaction or a series of
transactions, all or substantially all its assets to, any Person, unless: (i)
the resulting, surviving or transferee Person (the "Successor Company") shall be
a Person organized and existing under the laws of the United States of America,
any State thereof or the District of Columbia and the Successor Company (if not
the Company) shall expressly assume, by an indenture supplemental thereto,
executed and delivered to the Trustee, in form satisfactory to the Trustee, all
the obligations of the Company under the Notes and the Indenture; (ii)
immediately after giving effect to such transaction (and treating any
Indebtedness which becomes an obligation of the Successor Company or any
Subsidiary as a result of such transaction as having been Incurred by such
Successor Company or such Subsidiary at the time of such transaction), no
Default shall have occurred and be continuing, (iii) immediately after giving
effect to such transaction, the Successor Company would be able to Incur an
additional $1.00 of Indebtedness pursuant to paragraph (a) of the covenant
described under "-- Limitation on Indebtedness", (iv) immediately after giving
effect to such transaction, the Successor Company shall have
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Consolidated Net Worth in an amount that is not less than the Consolidated Net
Worth of the Company prior to such transaction; and (v) the Company shall have
delivered to the Trustee an officers' certificate and an opinion of counsel,
each stating that such consolidation, merger or transfer and such supplemental
indenture (if any) comply with the Indenture; provided, however, that clauses
(iii) and (iv) shall not be applicable to any such transaction solely between
the Company and any Wholly Owned Subsidiary.
The Successor Company shall be the successor to the Company and shall
succeed to, and be substituted for, and may exercise every right and power of,
the Company under the Indenture, but the predecessor Company in the case of a
conveyance, transfer or lease shall not be released from the obligation to pay
the principal of and interest on the Notes.
The Company will not permit any Subsidiary Guarantor to consolidate with or
merge with or into, or convey, transfer or lease, in one transaction or series
of transactions, all or substantially all of its assets to any Person unless:
(i) the resulting, surviving or transferee Person shall expressly assume by a
guaranty agreement, in a form acceptable to the Trustee, all the obligations of
such Subsidiary Guarantor, if any, under its Subsidiary Guaranty; (ii)
immediately after giving effect to such transaction or transactions on a pro
forma basis (and treating any Indebtedness which becomes an obligation of the
resulting, surviving or transferee Person as a result of such transaction as
having been issued by such Person at the time of such transaction), no Default
shall have occurred and be continuing; and (iii) the Company delivers to the
Trustee an Officer's Certificate and an Opinion of Counsel, each stating that
such consolidation, merger or transfer and such guaranty agreement, if any,
complies with the Indenture. Notwithstanding the foregoing, upon certain
consolidations, mergers, conveyances, transfers and leases, the Subsidiary
Guarantor and its successor or transferee shall be released from all of such
Subsidiary Guarantor's obligations under its Subsidiary Guarantee as described
in the definition of "Subsidiary Guaranty".
SEC Reports. Notwithstanding that the Company may not be required to remain
subject to the reporting requirements of Section 13 or 15(d) of the Exchange
Act, the Company shall file with the SEC and provide the Trustee and Noteholders
with such annual reports and such information, documents and other reports as
are specified in Sections 13 and 15(d) of the Exchange Act (excluding however
information with respect to benefit plans and long-term compensation
arrangements) and applicable to a U.S. corporation subject to such Sections,
such information, documents and other reports to be so filed and provided at the
times specified for the filing of such information, documents and reports under
such Sections.
CORRECTIVE AMENDMENT TO THE INDENTURE
The Amendment will revise the covenant described under "-- Certain
Covenants -- Limitation on Liens" to read in its entirety as follows.
"Limitation on Liens. The Company shall not, and shall not
permit any Restricted Subsidiary to, directly or indirectly,
Incur or permit to exist any Lien of any nature whatsoever on
any of its properties (including Capital Stock of a Restricted
Subsidiary), whether owned at the Issue Date or thereafter
acquired, other than Permitted Liens or Liens securing Senior
Indebtedness of the Company or any Restricted Subsidiary,
without effectively providing that the Securities [i.e., the
Notes] shall be secured equally and ratably with (or prior to)
the obligations so secured for so long as such obligations are
so secured."
See "The Exchange Offer -- Corrective Amendment to the Indenture".
DEFAULTS
An Event of Default is defined in the Indenture as (i) a default in the
payment of interest on the Notes when due, continued for 30 days, (ii) a default
in the payment of principal of any Note when due at its Stated Maturity, upon
optional redemption, upon required repurchase, upon declaration or otherwise,
(iii) the failure by the Company to comply with its obligations under
"-- Certain Covenants -- Merger and Consolidation" above, (iv) the failure by
the Company to comply for 30 days after notice with any of its obligations in
the
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covenants described above under "-- Certain Covenants", "-- Limitation on
Indebtedness", "-- Limitation on Restricted Payments", "-- Limitation on
Restrictions on Distributions from Restricted Subsidiaries", "-- Limitation on
Sales of Assets and Subsidiary Stock" (other than a failure to purchase Notes),
"-- Limitation on Affiliate Transactions", "-- Limitation on the Sale or
Issuance of Capital Stock of Restricted Subsidiaries", "-- Change of Control"
(other than a failure to purchase Notes), "-- Limitation on Liens",
"-- Limitation on Sale/Leaseback Transactions", "-- Future Guarantors", or
"-- SEC Reports", (v) the failure by the Company to comply for 60 days after
notice with its other agreements contained in the Indenture, (vi) Indebtedness
of the Company or any Significant Subsidiary (other than Limited Recourse
Indebtedness) is not paid within any applicable grace period after final
maturity or is accelerated by the holders thereof because of a default and the
total amount of such Indebtedness unpaid or accelerated exceeds $10.0 million
(the "cross acceleration provision"), (vii) certain events of bankruptcy,
insolvency or reorganization of the Company or a Significant Subsidiary (the
"bankruptcy provisions"), (viii) any judgment or decree for the payment of money
in excess of $10.0 million is rendered against the Company or a Significant
Subsidiary, remains outstanding for a period of 60 days following such judgment
and is not discharged, waived or stayed within 10 days after notice (the
"judgment default provision") or (ix) a Subsidiary Guaranty ceases to be in full
force and effect (other than in accordance with the terms of such Subsidiary
Guaranty) or a Subsidiary Guarantor denies or disaffirms its obligations under
its Subsidiary Guaranty. However, a default under clauses (iv), (v) and (viii)
will not constitute an Event of Default until the Trustee or the holders of 25%
in principal amount of the outstanding Notes notify the Company of the default
and the Company does not cure such default within the time specified after
receipt of such notice.
If an Event of Default occurs and is continuing, the Trustee or the holders
of at least 25% in principal amount of the outstanding Notes may declare the
principal of and accrued but unpaid interest on all the Notes to be due and
payable. Upon such a declaration, such principal and interest shall be due and
payable immediately. If an Event of Default relating to certain events of
bankruptcy, insolvency or reorganization of the Company occurs and is
continuing, the principal of and interest on all the Notes will ipso facto
become and be immediately due and payable without any declaration or other act
on the part of the Trustee or any holders of the Notes. Under certain
circumstances, the holders of a majority in principal amount of the outstanding
Notes may rescind any such acceleration with respect to the Notes and its
consequences.
Subject to the provisions of the Indenture relating to the duties of the
Trustee, in case an Event of Default occurs and is continuing, the Trustee will
be under no obligation to exercise any of the rights or powers under the
Indenture at the request or direction of any of the holders of the Notes unless
such holders have offered to the Trustee reasonable indemnity or security
against any loss, liability or expense. Except to enforce the right to receive
payment of principal, premium (if any) or interest when due, no holder of a Note
may pursue any remedy with respect to the Indenture or the Notes unless (i) such
holder has previously given the Trustee notice that an Event of Default is
continuing, (ii) holders of at least 25% in principal amount of the outstanding
Notes have requested the Trustee to pursue the remedy, (iii) such holders have
offered the Trustee reasonable security or indemnity against any loss, liability
or expense, (iv) the Trustee has not complied with such request within 60 days
after the receipt thereof and of the offer of security or indemnity and (v) the
holders of a majority in principal amount of the outstanding Notes have not
given the Trustee a direction inconsistent with such request within such 60-day
period. Subject to certain restrictions, the holders of a majority in principal
amount of the outstanding Notes are given the right to direct the time, method
and place of conducting any proceeding for any remedy available to the Trustee
or of exercising any trust or power conferred on the Trustee. The Trustee,
however, may refuse to follow any direction that conflicts with law or the
Indenture or that the Trustee determines is unduly prejudicial to the rights of
any other holder of a Note or that would involve the Trustee in personal
liability.
The Indenture provides that if a Default occurs and is continuing and is
known to the Trustee, the Trustee must mail to each holder of the Notes notice
of the Default within 90 days after it occurs. Except in the case of a Default
in the payment of principal of or interest on any Note, the Trustee may withhold
notice if and so long as a committee of its trust officers determines that
withholding notice is not opposed to the interest of the holders of the Notes.
In addition, the Company is required to deliver to the Trustee, within 120 days
after the end of each fiscal year, a certificate indicating whether the signers
thereof know of any Default that
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occurred during the previous year. The Company also is required to deliver to
the Trustee, within 30 days after the occurrence thereof, written notice of any
event which would constitute certain Defaults, their status and what action the
Company is taking or proposes to take in respect thereof.
AMENDMENTS AND WAIVERS
Subject to certain exceptions, the Indenture may be amended with the
consent of the holders of a majority in principal amount of the Notes then
outstanding (including consents obtained in connection with a tender offer or
exchange for the Notes) and any past default or compliance with any provisions
may also be waived with the consent of the holders of a majority in principal
amount of the Notes then outstanding. However, without the consent of each
holder of an outstanding Note affected thereby, no amendment may, among other
things, (i) reduce the amount of Notes whose holders must consent to an
amendment, (ii) reduce the rate of or extend the time for payment of interest on
any Note, (iii) reduce the principal of or extend the Stated Maturity of any
Note, (iv) reduce the premium payable upon the redemption of any Note or change
the time at which any Note may be redeemed as described under "-- Optional
Redemption", (v) make any Note payable in money other than that stated in the
Note, (vi) impair the right of any holder of the Notes to receive payment of
principal of and interest on such holder's Notes on or after the due dates
therefor or to institute suit for the enforcement of any payment on or with
respect to such holder's Notes, (vii) make any change in the amendment
provisions which require each holder's consent or make any change in the waiver
provisions, (viii) make any change to the subordination provisions of the
Indenture that would adversely affect the Noteholders or (ix) make any change in
any Subsidiary Guaranty that could adversely affect such holder.
Without the consent of any holder of the Notes, the Company and Trustee may
amend the Indenture to cure any ambiguity, omission, defect or inconsistency, to
provide for the assumption by a successor corporation of the obligations of the
Company under the Indenture, to provide for uncertificated Notes in addition to
or in place of certificated Notes (provided that the uncertificated Notes are
issued in registered form for purposes of Section 163(f) of the Code, or in a
manner such that the uncertificated Notes are described in Section 163(f)(2)(B)
of the Code), to add guarantees with respect to the Notes, to secure the Notes,
to add to the covenants of the Company for the benefit of the holders of the
Notes or to surrender any right or power conferred upon the Company, to make any
change that does not adversely affect the rights of any holder of the Notes or
to comply with any requirement of the SEC in connection with the qualification
of the Indenture under the Trust Indenture Act. However, no amendment may be
made to the subordination provisions of the Indenture that adversely affects the
rights of any holder of Senior Indebtedness then outstanding unless the holders
of such Senior Indebtedness (or their Representative) consents to such change.
The consent of the holders of the Notes is not necessary under the
Indenture to approve the particular form of any proposed amendment. It is
sufficient if such consent approves the substance of the proposed amendment.
After an amendment under the Indenture becomes effective, the Company is
required to mail to holders of the Notes a notice briefly describing such
amendment. However, the failure to give such notice to all holders of the Notes,
or any defect therein, will not impair or affect the validity of the amendment.
TRANSFER
The Exchange Notes, like the Outstanding Notes, will be issued in
registered form and will be transferable only upon the surrender of the Notes
being transferred for registration of transfer. The Company may require payment
of a sum sufficient to cover any tax, assessment or other governmental charge
payable in connection with certain transfers and exchanges.
DEFEASANCE
The Company at any time may terminate all its obligations under the Notes
and the Indenture ("legal defeasance"), except for certain obligations,
including those respecting the defeasance trust and obligations to register the
transfer or exchange of the Notes, to replace mutilated, destroyed, lost or
stolen Notes and to
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maintain a registrar and paying agent in respect of the Notes. The Company at
any time may terminate its obligations under the covenants described under
"-- Certain Covenants" (other than the covenant described under "-- Merger and
Consolidation"), the operation of the cross acceleration provision, the
bankruptcy provisions with respect to Significant Subsidiaries and the judgment
default provision described under "-- Defaults" above and the limitations
contained in clauses (iii) and (iv) under "-- Certain Covenants -- Merger and
Consolidation" above ("covenant defeasance").
The Company may exercise its legal defeasance option notwithstanding its
prior exercise of its covenant defeasance option. If the Company exercises its
legal defeasance option, payment of the Notes may not be accelerated because of
an Event of Default with respect thereto. If the Company exercises its covenant
defeasance option, payment of the Notes may not be accelerated because of an
Event of Default specified in clause (iv), (vi), (vii) (with respect only to
Significant Subsidiaries) or (viii) under "-- Defaults" above or because of the
failure of the Company to comply with clause (iii) or (iv) under the first
paragraph of "-- Certain Covenants -- Merger and Consolidation" above. If the
Company exercises its legal defeasance option or its covenant defeasance option,
each Subsidiary Guarantor, if any, will be released from all of its obligations
with respect to its Subsidiary Guaranty.
In order to exercise either defeasance option, the Company must irrevocably
deposit in trust (the "defeasance trust") with the Trustee money or U.S.
Government Obligations for the payment of principal and interest on the Notes to
redemption or maturity, as the case may be, and must comply with certain other
conditions, including delivery to the Trustee of an Opinion of Counsel to the
effect that holders of the Notes will not recognize income, gain or loss for
Federal income tax purposes as a result of such deposit and defeasance and will
be subject to Federal income tax on the same amount and in the same manner and
at the same times as would have been the case if such deposit and defeasance had
not occurred (and, in the case of legal defeasance only, such Opinion of Counsel
must be based on a ruling of the Internal Revenue Service or other change in
applicable Federal income tax law).
CONCERNING THE TRUSTEE
United States Trust Company of New York is the Trustee under the Indenture
and has been appointed by the Company as Registrar and Paying Agent with regard
to the Notes.
The Holders of a majority in principal amount of the outstanding Notes will
have the right to direct the time, method and place of conducting any proceeding
for exercising any remedy available to the Trustee, subject to the right of the
Trustee to refuse to follow any direction that conflicts with law or the
Indenture or that the Trustee determines is unduly prejudicial to the rights of
other Holders of Notes or would involve the Trustee in personal liability. The
Indenture provides that if an Event of Default occurs (and is not cured), the
Trustee will be required, in the exercise of its power, to use the degree of
care of a prudent man in the conduct of his own affairs. Subject to such
provisions, the Trustee will be under no obligation to exercise any of its
rights or powers under the Indenture at the request of any Holder of Notes,
unless such Holder shall have offered to the Trustee security and indemnity
satisfactory to it against any loss, liability or expense and then only to the
extent required by the terms of the Indenture.
BOOK-ENTRY; DELIVERY AND FORM
The Exchange Notes initially will be represented by one permanent Global
Exchange Note in definitive, fully registered form without interest coupons (the
"Global Exchange Note") and will be deposited with the Trustee as custodian for,
and registered in the name of, a nominee of DTC.
Ownership of beneficial interests in the Global Exchange Note will be
limited to persons who have accounts with DTC ("participants") or persons who
hold interests through participants. Ownership of beneficial interests in a
Global Exchange Note will be shown on, and the transfer of that ownership will
be effected only through, records maintained by DTC or its nominee (with respect
to interests of participants) and the records of participants (with respect to
interests of persons other than participants).
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So long as DTC, or its nominee, is the registered owner or holder of the
Global Exchange Note, DTC or such nominee, as the case may be, will be
considered the sole owner or holder of the Exchange Notes represented by such
Global Exchange Note for all purposes under the Indenture and the Exchange
Notes. No beneficial owner of an interest in the Global Exchange Note will be
able to transfer that interest except in accordance with DTC's applicable
procedures, in addition to those provided for under the Indenture and, if
applicable, those of a participant through which the Exchange Note is held.
Payments of the principal of, and interest on, the Global Exchange Note
will be made to DTC or its nominee, as the case may be, as the registered owner
thereof. Neither the Company, the Trustee nor any Paying Agent will have any
responsibility or liability for any aspect of the records relating to or
payments made on account of beneficial ownership interests in the Global
Exchange Note or for maintaining, supervising or reviewing any records relating
to such beneficial ownership interests.
The Company expects that DTC or its nominee, upon receipt of any payment of
principal or interest in respect of the Global Exchange Note, will credit
participants' accounts with payments in amounts proportionate to their
respective beneficial interests in the principal amount of such Global Exchange
Note as shown on the records of DTC or its nominee. The Company also expects
that payments by participants to owners of beneficial interests in such Global
Exchange Note held through such participants will be governed by standing
instructions and customary practices, as is now the case with securities held
for the accounts of customers registered in the names of nominees for such
customers. Such payments will be the responsibility of such participants.
Transfers between participants in DTC will be effected in the ordinary way
in accordance with DTC rules and will be settled in same-day funds.
The Company expects that DTC will take any action permitted to be taken by
a holder of Exchange Notes (including the presentation of Exchange Notes for
exchange as described below) only at the direction of one or more participants
to whose account the DTC interests in the Global Exchange Note is credited and
only in respect of such portion of the aggregate principal amount of an Exchange
Note as to which such participant or participants has or have given such
direction. However, if there is an Event of Default under the Notes, DTC will
exchange the Global Exchange Note for Certificated Notes, which it will
distribute to its participants.
The Company understands that: DTC is a limited purpose trust company
organized under the laws of the State of New York, a "banking organization"
within the meaning of New York Banking Law, a member of the Federal Reserve
System, a "clearing corporation" within the meaning of the Uniform Commercial
Code and a "Clearing Agency" registered pursuant to the provisions of Section
17A of the Exchange Act. DTC was created to hold securities for its participants
and facilitate the clearance and settlement of securities transactions between
participants through electronic book-entry changes in accounts of its
participants, thereby eliminating the need for physical movement of certificates
and certain other organizations. Indirect access to the DTC system is available
to others such as banks, brokers, dealers and trust companies that clear through
or maintain a custodial relationship with a participant, either directly or
indirectly ("indirect participants").
Although DTC is expected to follow the foregoing procedures in order to
facilitate transfers of interests in the Global Exchange Note among participants
of DTC, it is under no obligation to perform or continue to perform such
procedures, and such procedures may be discontinued at any time. Neither the
Company nor the Trustee will have any responsibility for the performance by DTC
or its participants or indirect participants of its obligations under the rules
and procedures governing their operations.
CERTIFICATED NOTES
The Indenture requires that payments in respect of Notes (including
principal, premium and interest) be made by wire transfer of immediately
available funds to the accounts specified by the holders thereof or, if no such
account is specified, by mailing a check to each such holder's registered
address.
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If DTC is at any time unwilling or unable to continue as a depositary for
the Global Exchange Note and a successor depositary is not appointed by the
Company within 90 days, the Company will issue Certificated Notes in exchange
for the Global Exchange Note. Holders of an interest in the Global Exchange Note
may receive Certificated Notes in accordance with the DTC's rules and procedures
in addition to those provided for under the Indenture.
GOVERNING LAW
The Indenture provides that it and the Notes will be governed by, and
construed in accordance with, the laws of the State of New York without giving
effect to applicable principles of conflicts of law to the extent that the
application of the law of another jurisdiction would be required thereby.
CERTAIN U.S. FEDERAL TAX CONSIDERATIONS
The following is a general discussion of the principal United States
federal income tax consequences of the purchase, ownership, exchange and
disposition of the Notes to initial purchasers of Outstanding Notes who are
United States Holders (as defined below) and the principal United States federal
income and estate tax consequences of the purchase, ownership, exchange and
disposition of the Notes to initial purchasers of Outstanding Notes who are
Foreign Holders (as defined below). This discussion is based on currently
existing provisions of the Code, existing, temporary and proposed Treasury
regulations promulgated thereunder, and administrative and judicial
interpretations thereof, all as in effect or proposed on the date hereof and all
of which are subject to change, possibly with retroactive effect, or different
interpretations. This discussion does not address the tax consequences to
subsequent purchasers of Notes and is limited to purchasers of Outstanding Notes
who hold the Notes as capital assets, within the meaning of section 1221 of the
Code. This discussion also does not address the tax consequences to Foreign
Holders that are subject to United States federal income tax on a net basis on
income realized with respect to a Note because such income is effectively
connected with the conduct of a U.S. trade or business. Such Foreign Holders are
generally taxed in a similar manner to United States Holders, but certain
special rules do apply. Moreover, this discussion is for general information
only and does not address all of the tax consequences that may be relevant to
particular initial purchasers of Outstanding Notes in light of their personal
circumstances or to certain types of initial purchasers of Outstanding Notes
(such as certain financial institutions, insurance companies, tax-exempt
entities, dealers in securities or persons who have hedged the risk of owning a
Note).
PROSPECTIVE PURCHASERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS AS TO
THE PARTICULAR TAX CONSEQUENCES TO THEM OF THE PURCHASE, OWNERSHIP AND
DISPOSITION OF THE NOTES, INCLUDING THE APPLICABILITY OF ANY FEDERAL TAX LAWS OR
ANY STATE, LOCAL OR FOREIGN TAX LAWS, AND ANY CHANGES (OR PROPOSED CHANGES) IN
APPLICABLE TAX LAWS OR INTERPRETATIONS THEREOF.
UNITED STATES FEDERAL INCOME TAXATION OF UNITED STATES HOLDERS
As used herein, the term "United States Holder" means a holder of a Note
that is, for United States federal income tax purposes, (a) a citizen or
resident of the United States, (b) a corporation, partnership or other entity
created or organized in or under the laws of the United States or any political
subdivision thereof or (c) an estate or trust the income of which is subject to
United States federal income taxation regardless of source.
Payment of Interest on Notes
Interest paid or payable on a Note will be taxable to a United States
Holder as ordinary interest income, generally at the time it is received or
accrued, in accordance with such holder's regular method of accounting for
United States federal income tax purposes.
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Sale, Exchange or Retirement of the Notes
The exchange of an Outstanding Note by a United States Holder for an
Exchange Note should not constitute a taxable exchange. For purposes of
determining gain or loss upon the subsequent sale or exchange of the Exchange
Notes, a Holder's basis in the Exchange Notes should be the same as such
Holder's basis in the Outstanding Notes exchanged therefor. Holders should be
considered to have held the Exchange Notes from the time of their original
acquisition of the Outstanding Notes.
Upon the sale, exchange, redemption, retirement at maturity or other
disposition of a Note, a United States Holder generally will recognize taxable
gain or loss equal to the difference between the sum of cash plus the fair
market value of all other property received on such disposition (except to the
extent such cash or property is attributable to accrued but unpaid interest,
which will be taxable as ordinary income) and such United States Holder's
adjusted tax basis in the Note. A United States Holder's adjusted tax basis in a
Note generally will equal the cost of the Note to such United States Holder,
less any principal payments received by such United States Holder.
Gain or loss recognized on the disposition of a Note generally will be
capital gain or loss and will be long-term capital gain or loss if, at the time
of such disposition, the United States Holder's holding period for the Note is
more than one year.
Backup Withholding and Information Reporting
Backup withholding and information reporting requirements may apply to
certain payments of principal, premium, if any, and interest on a Note, and to
proceeds of the sale or redemption of a Note before maturity. The Company, its
agent, a broker, the Trustee or any paying agent, as the case may be, will be
required to withhold from any payment that is subject to backup withholding a
tax equal to 31% of such payment if a United States Holder fails to furnish his
taxpayer identification number (social security or employer identification
number), certify that such number is correct, certify that such holder is not
subject to backup withholding or otherwise comply with the applicable
requirements of the backup withholding rules. Certain United States Holders,
including all corporations, are not subject to backup withholding and
information reporting requirements. Any amounts withheld under the backup
withholding rules from a payment to a United States Holder will be allowed as a
credit against such United States Holder's United States federal income tax and
may entitle the holder to a refund, provided that the required information is
furnished to the Internal Revenue Service ("IRS").
UNITED STATES FEDERAL INCOME TAXATION OF FOREIGN HOLDERS
As used herein, the term "Foreign Holder" means a holder of a Note that is,
for United States federal income tax purposes, (a) a nonresident alien
individual, (b) a foreign corporation, (c) a nonresident alien fiduciary of a
foreign estate or trust or (d) a foreign partnership.
Payment of Interest on Notes
In general, payments of interest received by a Foreign Holder will not be
subject to a United States federal withholding tax, provided that (i)(a) the
Foreign Holder does not actually or constructively own 10% or more of the total
combined voting power of all classes of stock of the Company entitled to vote,
(b) the Foreign Holder is not a controlled foreign corporation that is related
to the Company actually or constructively through stock ownership, (c) the
Foreign Holder is not a bank receiving interest described in Section
881(c)(3)(A) of the Code, and (d) either (I) the beneficial owner of the Note,
under penalties of perjury, provides the Company or its agent with such
beneficial owner's name and address and certifies on IRS Form W-8 (or a suitable
substitute form) that it is not a United States Holder or (II) a securities
clearing organization, bank or other financial institution that holds customers'
securities in the ordinary course of its trade or business (a "financial
institution") holds the Note and provides a statement to the Company or its
agent under penalties of perjury in which it certifies that such an IRS Form W-8
(or a suitable substitute) has been received by it from the beneficial owner of
the Notes or qualifying intermediary and furnishes the Company or its agent a
copy thereof or (ii) the Foreign Holder is entitled to the benefits of an income
tax
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treaty under which interest on the Notes is exempt from United States
withholding tax and the Foreign Holder or such Foreign Holder's agent provides a
properly executed IRS Form 1001 claiming the exemption. Payments of interest not
exempt from United States federal withholding tax as described above will be
subject to such withholding tax at the rate of 30% (subject to reduction under
an applicable income tax treaty).
Sale, Exchange or Retirement of the Notes
The exchange of an Outstanding Note by a Foreign Holder for an Exchange
Note should not constitute a taxable exchange. Consequently, no gain or loss
should be recognized by Holders of the Outstanding Notes upon receipt of the
Exchange Notes. For purposes of determining gain or loss upon the subsequent
sale or exchange of the Exchange Notes, a Holder's basis in the Exchange Notes
should be the same as such Holder's basis in the Outstanding Notes exchanged
therefor. Holders should be considered to have held the Exchange Notes from the
time of their original acquisition of the Outstanding Notes. Moreover, a Foreign
Holder generally will not be subject to United States federal income tax (and
generally no tax will be withheld) with respect to gain realized on the sale,
exchange, redemption, retirement at maturity or other disposition of a Note
unless the Foreign Holder is an individual who is present in the United States
for a period or periods aggregating 183 or more days in the taxable year of the
disposition and, generally, either has a "tax home" or an "office or other fixed
place of business" in the United States.
Backup Withholding and Information Reporting
Backup withholding and information reporting requirements do not apply to
payments of interest made by the Company or a paying agent to Foreign Holders if
the certification described above under "United States Federal Income Taxation
of Foreign Holders -- Payment of Interest on Notes" is received, provided that
the payor does not have actual knowledge that the holder is a United States
Holder. If any payments of principal and interest are made to the beneficial
owner of a Note by or through the foreign office of a foreign custodian, foreign
nominee or other foreign agent of such beneficial owner, or if the foreign
office of a foreign "broker" (as defined in applicable Treasury regulations)
pays the proceeds of the sale of a Note or a coupon to the seller thereof,
backup withholding and information reporting will not apply. Information
reporting requirements (but not backup withholding) will apply, however, to a
payment by a foreign office of a broker that is a United States person, that
derives 50% or more of its gross income for certain periods from the conduct of
a trade or business in the United States, or that is a "controlled foreign
corporation" (generally, a foreign corporation controlled by certain United
States shareholders) with respect to the United States unless the broker has
documentary evidence in its records that the holder is a Foreign Holder and
certain other conditions are met or the holder otherwise establishes an
exemption. Payment by a United States office of a broker is subject to both
backup withholding at a rate of 31% and information reporting unless the holder
certifies under penalties of perjury that it is a Foreign Holder or otherwise
establishes an exemption.
The procedures described above for withholding tax on interest payments,
and some of the associated backup withholding and information reporting rules,
are currently the subject of new proposed regulations, which are proposed to be
effective for payments made after December 31, 1997, subject to certain
transition rules. The proposed regulations, if adopted in their current form,
would not substantially change the treatment of Foreign Holders described above,
except that a Form W-8 generally would be required for certification purposes.
Federal Estate Taxes
Subject to applicable estate tax treaty provisions, Notes held at the time
of death (or theretofore transferred subject to certain retained rights or
powers) by an individual who at the time of death is a Foreign Holder will not
be included in such Foreign Holder's gross estate for United States federal
estate tax purposes provided that the individual does not actually or
constructively own 10% or more of the total combined voting power of all classes
of stock of the Company entitled to vote or hold the Notes in connection with a
U.S. trade or business.
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PLAN OF DISTRIBUTION
Each broker-dealer that receives Exchange Notes for its own account
pursuant to the Exchange Offer (a "Participating Broker-Dealer") must
acknowledge that it will deliver a prospectus in connection with any resale of
such Exchange Notes. This Prospectus, as it may be amended or supplemented from
time to time, may be used by a broker-dealer in connection with resales of
Exchange Notes received in exchange for Outstanding Notes where such Outstanding
Notes were acquired by the broker-dealer as a result of market-making activities
or other trading activities. The Company has agreed that, for a period of 90
days after the Expiration Date, it will make this Prospectus available to any
broker-dealer for use in connection with any such resale. In addition, until
, 1997, all dealers effecting transactions in the Exchange Notes
may be required to deliver a prospectus.
The Company will not receive any proceeds from any sales of the Exchange
Notes by broker-dealers. Exchange Notes received by broker-dealers for their own
account pursuant to the Exchange Offer may be sold from time to time in one or
more transactions in the over-the-counter market, in negotiated transactions,
through the writing of options on the Exchange Notes or a combination of such
methods of resale, at market prices prevailing at the time of resale, at prices
related to such prevailing market prices or negotiated prices. Any such resale
may be made directly to the purchaser or to or through brokers or dealers who
may receive compensation in the form of commissions or concessions from any such
broker-dealer or the purchasers of any such Exchange Notes. Any broker-dealer
that resells the Exchange Notes that were received by it for its own account
pursuant to the Exchange Offer and any broker or dealer that participates in a
distribution of such Exchange Notes may be deemed to be an "underwriter" within
the meaning of the Securities Act, and any profit on any such resale of Exchange
Notes and any commissions or concessions received by any such persons may be
deemed to be underwriting compensation under the Securities Act. The Letter of
Transmittal states that, by acknowledging that it will deliver and by delivering
a Prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act.
For a period of 90 days after the Expiration Date, the Company will
promptly send additional copies of this Prospectus and any amendment or
supplement to this Prospectus to any broker-dealer that requests such documents
in the Letter of Transmittal. The Company has agreed to pay all expenses
incident to the Exchange Offer (including the expenses of one counsel for the
Holders of the Notes) other than commissions or concessions of any brokers or
dealers, and will indemnify the holders of the Notes (including any broker-
dealers) against certain liabilities, including liabilities under the Securities
Act.
By acceptance of this Exchange Offer, each broker-dealer that receives
Exchange Notes for its own account pursuant to the Exchange Offer agrees that,
upon receipt of notice from the Company of the happening of any event which
makes any statement in the Prospectus untrue in any material respect or which
requests the making of any changes in the Prospectus in order to make the
statements therein not misleading (which notice the Company agrees to deliver
promptly to such broker-dealer), such broker-dealer will suspend use of the
Prospectus until the Company has amended or supplemented the Prospectus to
correct such misstatement or omission and has furnished copies of the amended or
supplemental Prospectus to such broker-dealer. If the Company shall give any
such notice to suspend the use of the Prospectus, it shall extend the time
period referred to above by the number of days during the period from and
including the date of the giving of such notice to and including when
broker-dealers shall have received copies of the supplemented or amended
Prospectus necessary to permit resales of the Exchange Notes.
LEGAL MATTERS
Certain matters with respect to the legality of the Exchange Notes are
being passed upon for the Company by Fulbright & Jaworski L.L.P.
INDEPENDENT AUDITORS
The Financial Statements of Mariner Energy, Inc. 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 Deloitte
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& Touche LLP, independent auditors, as stated in their report appearing herein,
and are included in reliance on the report of such firm given upon its authority
as an expert in accounting and auditing.
INDEPENDENT PETROLEUM ENGINEERS
Information relating to the estimated proved reserves of oil and natural
gas and the related estimates of future net revenues and present values thereof
as of March 31, 1996, has been prepared by Ryder Scott Company, independent
petroleum engineers, and is included herein in reliance on the authority of such
firm as an expert in petroleum engineering.
AVAILABLE INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-4 (the "Registration Statement") under the Securities Act with respect to the
securities offered by this Prospectus. Certain of the information contained in
the Registration Statement is omitted from this Prospectus, and reference is
hereby made to the Registration Statement and exhibits and schedules relating
thereto for further information with respect to the Company and the securities
offered by this Prospectus. Subsequent to the Exchange Offer, the Company will
be subject to certain periodic reporting and other informational requirements of
the Exchange Act, and, in accordance therewith, will file certain reports, proxy
statements and other information with the Commission. Such reports, proxy
statements and other information will be available for inspection, and copies of
such materials may be obtained upon payment of the fees prescribed therefor by
the rules and regulations of the Commission from the Commission, at its
principal offices located at Judiciary Plaza, 450 Fifth Street, Room 1024,
Washington, D.C. 20549, and at the Regional Offices of the Commission located at
Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661-2511, and at 7 World Trade Center, Suite 1300, New York, New York
10048. The Commission maintains a World Wide Web site on the Internet at
http://www.sec.gov that contains reports, proxy and information statements and
other information regarding registrants, including the Company, that file
electronically with the Commission.
So long as the Company is subject to the periodic reporting requirements of
the Exchange Act, it is required to furnish the information required to be filed
with the Commission to the Trustee and the holders of the Outstanding Notes and
the Exchange Notes. The Company has agreed that, notwithstanding that it may not
be required to remain subject to the reporting requirements of Section 13 or
15(d) of the Exchange Act, the Company will file with the Commission and provide
the Trustee and Noteholders with such annual reports and such information,
documents and other reports as are specified in Sections 13 and 15(d) of the
Exchange Act (excluding however information with respect to benefit plans and
long-term compensation arrangements) and applicable to a U.S. corporation
subject to such Sections, such information, documents and other reports to be so
filed and provided at the times specified for the filing of such information,
documents and reports under such Sections.
In addition, the Company has agreed that for so long as any of the
Outstanding Notes are outstanding and are "restricted securities" within the
meaning of Rule 144(a)(3) under the Securities Act, it will make available to
any prospective purchaser of the Outstanding Notes or beneficial owner of the
Outstanding Notes in connection with any sale thereof the information required
by Rule 144A(d)(4) under the Securities Act until such time as the Company has
either exchanged the Outstanding Notes for the Exchange Notes or until such time
as the holders thereof have disposed of such Outstanding Notes pursuant to an
effective registration statement filed by the Company.
INCORPORATION OF CERTAIN DOCUMENTS
All documents filed by the Company pursuant to the Exchange Act, after the
date of this Prospectus and prior to the termination of the Registration
Statement of which this Prospectus is a part with respect to registration of the
Exchange Notes, shall be deemed to be incorporated by reference in this
Prospectus and be a part hereof from the date of filing of such documents. Any
statement contained in a document incorporated or deemed to be incorporated by
reference in this Prospectus shall be deemed to be modified or superseded for
120
<PAGE> 123
purposes of this Prospectus to the extent that a statement contained in this
Prospectus, or in any other subsequently filed document that also is or is
deemed to be incorporated by reference, modifies or replaces such statement.
The Company undertakes to provide without charge to each person, including
any beneficial owner, to whom a copy of this Prospectus has been delivered, upon
written or oral request of any such person, a copy of any or all of the
documents incorporated by reference herein, other than exhibits to such
documents, unless such exhibits are specifically incorporated by reference into
the information that this Prospectus incorporates. Written or oral requests for
such copies should be directed to: Mariner Energy, Inc., 580 WestLake Park
Blvd., Suite 1300, Houston, Texas 77079, Attention: James M. Fitzpatrick,
Corporate Secretary, telephone (713) 584-5500.
121
<PAGE> 124
GLOSSARY
The terms defined in this glossary are used throughout this Prospectus.
BBL. One stock tank barrel, or 42 U.S. Gallons liquid volume, used herein
in reference to crude oil, condensate or other liquid hydrocarbons.
BCF. One billion cubic feet of natural gas.
BCFE. One billion cubic feet of natural gas equivalent (see Mcfe for
equivalency).
"BEHIND THE PIPE" Hydrocarbons in a potentially producing horizon
penetrated by a well bore the production of which has been postponed pending the
production of hydrocarbons from another formation penetrated by the well bore.
These hydrocarbons are classified as proved but non-producing reserves.
2-D. (Two-Dimensional Seismic) -- seismic reflections from the subsurface
used to map strata in two dimensions.
3-D. (Three-Dimensional Seismic) -- seismic reflections from the
subsurface used to map strata in three dimensions.
"DEVELOPMENT WELL" A well drilled within the proved boundaries of an oil
or natural gas reservoir with the intention of completing the stratigraphic
horizon known to be productive.
"EXPLOITATION WELL" Ordinarily considered to be a development well drilled
within a known reservoir. The Company uses the word to refer to deepwater wells
which are drilled on offshore leaseholds held (usually under farmout agreements)
where a previous exploratory well showing the existence of potentially
productive reservoirs was drilled, but the reservoir was by-passed for
development by the owner who drilled the exploratory well; thus the Company
distinguishes its development wells on its own properties from such exploitation
wells.
"EXPLORATORY WELL" A well drilled in unproven or semi-proven territory for
the purpose of ascertaining the presence underground of a commercial petroleum
deposit and which can be contrasted with a "development well".
"FARM-IN" A term used to describe the action taken by the person to whom a
transfer of an interest in a leasehold in an oil and gas property is made
pursuant to a farmout agreement.
"FARMOUT" The term used to describe the action taken by the person making
a transfer of a leasehold interest in an oil and gas property pursuant to a
farmout agreement.
"FARMOUT AGREEMENT" A common form of agreement between oil and gas
operators pursuant to which an owner of an oil and gas leasehold interest who is
not desirous of drilling at the time agrees to assign the leasehold interest, or
some portion of it, to another operator who is desirous of drilling the tract.
The assignor in such a transaction may retain some interest in the property such
as an overriding royalty interest or a production payment and, typically, the
assignee of the leasehold interest has an obligation to drill one or more wells
on the assigned acreage as a prerequisite to completion of the transfer to it.
"FINDING AND DEVELOPMENT COST" Generally, the cost of finding and
developing commercial oil and gas including all costs involved in acquiring
acreage, seismic survey costs and the cost of drilling, completion and other
development activities.
"GENERATE" or "GENERATOR" Generally refers to the creation of an
exploration or exploitation idea after evaluation of seismic and other available
data.
"GROSS WELLS" The total number of wells in which a working interest is
owned.
"INFILL WELL" A well drilled between known producing wells to better
exploit the reservoir.
"LEASE OPERATING EXPENSES" The expenses of lifting oil or gas from a
producing formation to the surface, and the transportation and marketing
thereof, constituting part of the current operating expenses of a working
interest, and also including labor, superintendence, supplies, repairs,
short-lived assets, maintenance, allocated
122
<PAGE> 125
overhead costs, ad valorem taxes and other expenses incidental to production,
but not including lease acquisition, drilling or completion expenses or other
"finding costs".
"LITHOLOGY" The character of a rock formation or a geological strata.
MBBLS. One thousand barrels of crude oil or other liquid hydrocarbons.
MCF. One thousand cubic feet of natural gas.
MCFE. One thousand cubic feet of natural gas equivalent (converting one
barrel of oil to six Mcf of natural gas based on commonly accepted rough
equivalency of energy content).
MMBBLS. One million barrels of crude oil or other liquid hydrocarbons.
MMBTU. One million British thermal units.
MMCF. One million cubic feet of natural gas.
MMCFE. One million cubic feet of natural gas equivalent (see Mcfe for
equivalency).
"NET WELLS" The sum of the fractional working interests owned in gross
wells.
NYMEX. New York Mercantile Exchange.
"PAYOUT" Generally refers to the recovery by the incurring party to an
agreement of its costs of drilling, completing, equipping and operating a well
before another party's participation in the benefits of the well commences or is
increased to a new level.
"PRESENT VALUE OF ESTIMATED FUTURE NET REVENUES" An estimate of the present
value of the estimated future net revenues from proved oil and gas reserves at a
date indicated after deducting estimated production and ad valorem taxes, future
capital costs and operating expenses, but before deducting any estimates of
federal income taxes. The estimated future net revenues are discounted at an
annual rate of 10%, in accordance with Commission practice, to determine their
"present value". The present value is shown to indicate the effect of time on
the value of the revenue stream and should not be construed as being the fair
market value of the properties. Estimates of future net revenues are made using
oil and natural gas prices and operating costs at the date indicated and held
constant for the life of the reserves.
"PRODUCING WELL" or "PRODUCTIVE WELL" A well that is producing oil or
natural gas or that is capable of production without further capital
expenditure.
"PROVED DEVELOPED RESERVES" Proved developed reserves are those quantities
of crude oil, natural gas and natural gas liquids that, upon analysis of
geological and engineering data, are expected with reasonable certainty to be
recoverable in the future from known oil and natural gas reservoirs under
existing economic and operating conditions. This classification includes: (a)
proved developed producing reserves, which are those expected to be recovered
from currently producing zones under continuation of present operating methods;
and (b) proved developed non-producing reserves, which consist of (i) reserves
from wells that have been completed and tested but are not yet producing due to
lack of market or minor completion problems that are expected to be corrected,
and (ii) reserves currently behind the pipe in existing wells which are expected
to be productive due to both the well log characteristics and analogous
production in the immediate vicinity of the well.
"PROVED RESERVES" The estimated quantities of crude oil, natural gas and
other hydrocarbon liquids which geological and engineering data demonstrate with
reasonable certainty to be recoverable in future years from known reservoirs
under existing economic and operating conditions.
"PROVED UNDEVELOPED RESERVES" Proved reserves that may be expected to be
recovered from existing wells that will require a relatively major expenditure
to develop or from undrilled acreage adjacent to productive units that are
reasonably certain of production when drilled.
"ROYALTY INTEREST" An interest in an oil and gas lease that gives the owner
of the interest the right to receive a portion of the production from the leased
acreage for the proceeds of the sale thereof, but generally
123
<PAGE> 126
does not require the owner to pay any portion of the costs of drilling or
operating the wells on the leased acreage. Royalty interests may be either
landowner's royalty interests, which are reserved by the owner of the leased
acreage at the time the lease is granted, or overriding royalty interests, which
are usually carved from the leasehold interest pursuant to an assignment to a
third party or reserved by an owner of the leasehold in connection with a
transfer of the leasehold to a subsequent owner.
"SUBSEA TIEBACK" A productive well that has its wellhead equipment located
on the sea floor and is connected by control and flow lines to an existing
production platform located in the nearby vicinity.
"UNITIZE" or "UNITIZATION" Terms used to denominate the joint operation of
all or some portion of a producing reservoir, particularly where there is
separate ownership of portions of the rights in a common producing pool in order
that it may be economically feasible to carry on certain production techniques,
maximize reservoir production and serve conservation interests.
"WORKING INTEREST" The interest in an oil and gas property (normally a
leasehold interest) that gives the owner the right to drill, produce and conduct
oil and gas operations on the property and to a share of production, subject to
all royalties, overriding royalties and other burdens and to all costs of
exploration, development and operations and all risks in connection therewith.
124
<PAGE> 127
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Historical Financial Statements:
Report of Deloitte & Touche LLP, Independent Auditors............................... F-2
Balance Sheets as of December 31, 1994 and 1995 and September 30, 1996.............. F-3
Statements of Operations for the years ended December 31, 1993, 1994 and 1995, the
nine months ended September 30, 1995, the three months ended March 31, 1996 and
the six months ended September 30, 1996.......................................... F-4
Statements of Stockholder's Equity for the years ended December 31, 1993, 1994 and
1995, the three months ended March 31, 1996 and the six months ended September
30, 1996......................................................................... F-5
Statements of Cash Flows for the years ended December 31, 1993, 1994 and 1995, the
nine months ended September 30, 1995, the three months ended March 31, 1996 and
the six months ended September 30, 1996.......................................... F-6
Notes to Financial Statements....................................................... F-7
</TABLE>
F-1
<PAGE> 128
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholder
Mariner Energy, Inc.
Houston, Texas
We have audited the accompanying balance sheets of Mariner Energy, Inc.,
formerly Hardy Oil and Gas USA, Inc. (the "Company"), as of December 31, 1994
and 1995, and the related statements of operations, stockholder's equity and
cash flows for each of the three years in the period ended December 31, 1995.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Mariner Energy, Inc. as of
December 31, 1994 and 1995, and the results of its operations and cash flows for
each of the three years in the period ended December 31, 1995, in conformity
with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Houston, Texas
July 12, 1996 (August 14, 1996 with respect to Note 10)
F-2
<PAGE> 129
MARINER ENERGY, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND NUMBER OF SHARES)
ASSETS
<TABLE>
<CAPTION>
PREDECESSOR COMPANY
-------------------
DECEMBER 31,
------------------- SEPTEMBER 30,
1994 1995 1996
-------- -------- --------------
(UNAUDITED)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents........................................... $ 4,335 $ 5,456 $ 14,829
Receivables:
Trade............................................................. 5,116 6,121 6,502
Joint owner and other............................................. 3,026 4,768 1,914
Affiliates........................................................ 27 745
Prepaid expenses.................................................... 117 119 685
Lease and well equipment inventory.................................. 37 36 36
-------- -------- --------
Total current assets......................................... 12,658 17,245 23,966
-------- -------- --------
Property and equipment:
Oil and gas properties, at full cost:
Proved............................................................ 314,109 334,120 157,618
Unproved, not subject to amortization............................. 8,486 9,559 23,141
-------- -------- --------
Total........................................................ 322,595 343,679 180,759
Accumulated depletion, depreciation and amortization................ (202,460) (217,862) (17,463)
-------- -------- --------
Total oil and gas properties, net............................ 120,135 125,817 163,296
-------- -------- --------
Other property and equipment........................................ 1,743 1,954 1,549
Accumulated depreciation............................................ (894) (1,121) (110)
-------- -------- --------
Total other property and equipment, net...................... 849 833 1,439
-------- -------- --------
Total property and equipment, net............................ 120,984 126,650 164,735
-------- -------- --------
Long-term receivable from affiliates.................................. 4,000 106,000
Other assets.......................................................... 560 831 3,693
-------- -------- --------
$138,202 $250,726 $192,394
======== ======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable.................................................... $ 1,542 $ 1,604 $ 2,370
Accrued liabilities................................................. 7,979 12,607 13,911
Accrued interest.................................................... 641 1,011 1,371
Payable to affiliates............................................... 358 129
Current portion of long-term debt................................... 3,000 3,000
-------- -------- --------
Total current liabilities.................................... 13,520 18,351 17,652
-------- -------- --------
Accrual for future abandonment costs.................................. 384 617 840
-------- -------- --------
Long-term debt:
Affiliate........................................................... 23,500 23,500
Subordinated Notes.................................................. 99,512
Guaranteed Senior Notes............................................. 82,000 139,000
-------- -------- --------
Total long-term debt......................................... 105,500 162,500 99,512
-------- -------- --------
Commitments and contingencies
Stockholder's equity:
Common stock, $1 par value; 10,000 shares authorized and 1,000
shares issued and outstanding..................................... 1 1 1
Additional paid-in capital.......................................... 35,094 81,094 95,744
Accumulated deficit................................................. (16,297) (11,837) (21,355)
-------- -------- --------
Total stockholder's equity................................... 18,798 69,258 74,390
-------- -------- --------
$138,202 $250,726 $192,394
======== ======== ========
</TABLE>
See notes to financial statements.
F-3
<PAGE> 130
MARINER ENERGY, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
PREDECESSOR COMPANY
-----------------------------------------------------------
NINE THREE SIX
MONTHS MONTHS MONTHS
YEAR ENDED DECEMBER 31, ENDED ENDED ENDED
----------------------------- SEPTEMBER 30, MARCH 31, SEPTEMBER 30,
1993 1994 1995 1995 1996 1996
------- ------- ------- ------------- --------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Oil sales...................... $ 8,021 $ 7,281 $ 7,288 $ 5,226 $ 3,644 $ 6,839
Gas sales...................... 26,274 28,575 26,021 17,319 10,134 25,912
------- ------- ------- ------- ------- -------
Total revenues......... 34,295 35,856 33,309 22,545 13,778 32,751
------- ------- ------- ------- ------- -------
Costs and expenses:
Lease operating expenses....... 7,746 7,118 7,331 5,279 2,872 5,211
Depreciation, depletion and
amortization................ 15,607 16,221 15,635 11,915 6,309 17,674
Impairment of oil and gas
properties.................. 6,296 6,257 22,500
General and administrative
expenses.................... 2,242 1,830 2,028 1,535 712 1,537
------- ------- ------- ------- ------- -------
Total costs and expenses... 31,891 31,426 24,994 18,729 9,893 46,922
------- ------- ------- ------- ------- -------
Operating income (loss).......... 2,404 4,430 8,315 3,816 3,885 (14,171)
Interest:
Related party income........... 1,456 989 8,472 6,235 57
Other income................... 57 95 783 713 2,110 310
Related party expense.......... (1,371) (1,241) (1,610) (1,213) (381)
Other expense.................. (5,987) (6,884) (11,162) (8,337) (3,010) (5,102)
Write-off bridge loan fees..... (2,392)
------- ------- ------- ------- ------- -------
Income (loss) before income
taxes.......................... (3,441) (2,611) 4,798 1,214 2,661 (21,355)
Provision for income taxes....... 338 362
------- ------- ------- ------- ------- -------
Net income (loss)................ $(3,441) $(2,611) $ 4,460 $ 852 $ 2,661 $ (21,355)
======= ======= ======= ======= ======= =======
</TABLE>
See notes to financial statements.
F-4
<PAGE> 131
MARINER ENERGY, INC.
STATEMENTS OF STOCKHOLDER'S EQUITY
(IN THOUSANDS, EXCEPT NUMBER OF SHARES)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
--------------- PAID-IN ACCUMULATED STOCKHOLDER'S
SHARES AMOUNT CAPITAL DEFICIT EQUITY
------ ------ ---------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Predecessor Company:
Balance at January 1, 1993.................. 1,000 $1 $ 18,594 $ (10,245) $ 8,350
Capital contribution..................... 16,000 16,000
Net loss................................. (3,441) (3,441)
--
---- ------- --------- -------
Balance at December 31, 1993................ 1,000 1 34,594 (13,686) 20,909
Capital contribution..................... 500 500
Net loss................................. (2,611) (2,611)
--
---- ------- --------- -------
Balance at December 31, 1994................ 1,000 1 35,094 (16,297) 18,798
Capital contribution..................... 46,000 46,000
Net income............................... 4,460 4,460
--
---- ------- --------- -------
Balance at December 31, 1995................ 1,000 1 81,094 (11,837) 69,258
Net income (unaudited)................... 2,661 2,661
--
---- ------- --------- -------
Balance at March 31, 1996 (unaudited)....... 1,000 1 81,094 (9,176) 71,919
Post Acquisition (unaudited):
Adjustments due to Acquisition.............. 14,650 9,176 23,826
Net loss.................................... (21,355) (21,355)
--
---- ------- --------- -------
Balance, September 30, 1996................. 1,000 $1 $ 95,744 $ (21,355) $ 74,390
==== == ======= ========= =======
</TABLE>
See notes to financial statements.
F-5
<PAGE> 132
MARINER ENERGY, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
PREDECESSOR COMPANY
---------------------------------------------------------------
NINE THREE
MONTHS MONTHS SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED ENDED ENDED
--------------------------------- SEPTEMBER 30, MARCH 31, SEPTEMBER 30,
1993 1994 1995 1995 1996 1996
-------- -------- --------- ------------- --------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss).......................... $ (3,441) $ (2,611) $ 4,460 $ 852 $ 2,661 $ (21,355)
Adjustments to reconcile net income (loss)
to net cash provided by operating
activities:
Depreciation, depletion and
amortization........................... 16,022 16,637 16,183 12,337 6,437 20,441
Impairment of oil and gas properties..... 6,296 6,257 22,500
Imputed Interest......................... 1,322
Changes in operating assets and
liabilities:
Trade receivables........................ (3,351) 1,469 (1,005) 1,094 (2,348) 1,967
Joint owner receivables.................. (55) (1,724) (1,742) (5,068) 475 2,419
Affiliates receivable.................... (7) 99 (718) (2,930) (2,109)
Prepaid expenses and lease and well
equipment inventory.................... (78) 260 (1) 79 (307) (620)
Other assets............................. (246) (43) (592) (635) (3,715)
Accounts payable and accrued
liabilities............................ (3,798) 1,969 5,060 8,343 832 5,392
Payable to affiliates.................... (74) 241 (229) (152) (11)
-------- -------- --------- --------- -------- ---------
Net cash provided by operating
activities......................... 11,268 22,554 21,416 13,920 5,630 28,351
-------- -------- --------- --------- -------- ---------
Cash flows from investing activities:
Purchase of Predecessor Company, net of
cash purchased of $5,438................. (184,742)
Additions to oil and gas properties........ (27,966) (36,923) (41,772) (32,099) (7,495) (27,955)
Additions to other property and
equipment................................ (308) (205) (211) (192) (153) (619)
Proceeds from sale of oil and gas
properties............................... 216 3,480 20,688 20,688 7,528
Issuance of long-term receivable to
affiliates............................... (18,500) (107,000) (117,000) (1,000)
Repayment of long-term receivable from
affiliates............................... 15,500 14,000 5,000 10,000 3,000
-------- -------- --------- --------- -------- ---------
Net cash provided by (used in)
investing activities............... (31,058) (19,648) (123,295) (118,603) (5,648) (205,788)
-------- -------- --------- --------- -------- ---------
Cash flows from financing activities:
Principal payments of long-term debt....... (3,000) (3,000) (92,000)
Principal payments on debt to affiliate.... (21,000) (500)
Principal payments on Revolving Credit
Facility................................ (50,000)
Issuance of guaranteed senior notes........ 25,000 60,000 60,000
Proceeds from Subordinated Notes........... 99,506
Proceeds from long-term debt............... 92,000
Proceeds from Revolving Credit Facility.... 50,000
Capital contributed........................ 16,000 500 46,000 46,000 92,150
Sale of common stock....................... 610
-------- -------- --------- --------- -------- ---------
Net cash provided by financing activities... 20,000 0 103,000 103,000 0 192,266
-------- -------- --------- --------- -------- ---------
Increase (decrease) in cash and cash
equivalents................................ 210 2,906 1,121 (1,683) (18) 14,829
Cash and cash equivalents at beginning of
period..................................... 1,219 1,429 4,335 4,335 5,456
-------- -------- --------- --------- -------- ---------
Cash and cash equivalents at end of period... $ 1,429 $ 4,335 $ 5,456 $ 2,652 $ 5,438 $ 14,829
======== ======== ========= ========= ======== =========
</TABLE>
See notes to financial statements.
F-6
<PAGE> 133
MARINER ENERGY, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION -- For the years ended December 31, 1993, 1994, and 1995, and
for the three months ended March 31, 1996, Hardy Oil & Gas USA Inc., (the
"Company"), was a wholly owned subsidiary of Hardy Holdings Inc. (the "Parent"),
which is a wholly owned subsidiary of Hardy Oil & Gas plc ("Hardy plc"), a
public company incorporated in the United Kingdom. As a result of the sale of
Hardy Oil & Gas USA Inc.'s common stock (See Note 10 to the Financial
Statements), the Company changed its name to Mariner Energy, Inc. The Company is
primarily engaged in the exploration and exploitation for and development and
production of oil and gas reserves, with principal operations both onshore and
offshore in Texas and Louisiana.
INTERIM FINANCIAL INFORMATION -- The financial statements and related
information as of September 30, 1996 and for the six months ended September 30,
1996, for the three months ended March 31, 1996 and for the nine months ended
September 30, 1995 included herein are unaudited and, in the opinion of
management, reflect all adjustments of a normal nature and those considered
necessary for fair presentation of financial position, results of operations and
cash flows. The results of operations for the six months ended September 30,
1996, three months ended March 31, 1996 and nine months ended September 30, 1995
are not necessarily indicative of operating results for a full year.
Additionally, all other financial statement information contained in the Notes
to the Financial Statements (excluding Note 10) which occurred subsequent to
December 31, 1995 and for any interim period is unaudited.
CASH AND CASH EQUIVALENTS -- All short-term, highly liquid investments that
have an original maturity date of three months or less are considered cash
equivalents.
ACCOUNTS RECEIVABLE -- Substantially all of the Company's accounts
receivable arise from sales of oil or natural gas, or from reimbursable expenses
billed to the other participants in oil and gas wells for which the Company
serves as operator.
OIL AND GAS PROPERTIES -- Oil and gas properties are accounted for using
the full-cost method of accounting. All direct costs and certain indirect costs
associated with the acquisition, exploration and development of oil and gas
properties are capitalized. Amortization of oil and gas properties is provided
using the unit-of-production method based on estimated proved oil and gas
reserves. No gains or losses are recognized upon the sale or disposition of oil
and gas properties unless the sale or disposition represents a significant
quantity of oil and gas reserves. The net carrying value of proved oil and gas
properties is limited to an estimate of the future net revenues (discounted at
10%) from proved oil and gas reserves based on period-end prices and costs plus
the lower of cost or estimated fair value of unproved properties. As a result of
this limitation, a permanent impairment of oil and gas properties of
approximately $6,296,000 and $6,257,000 was recorded during fiscal years 1993
and 1994, respectively. Unproved properties are reviewed for impairment
annually.
NON OIL AND GAS PROPERTY AND EQUIPMENT -- Depreciation of non oil and gas
property and equipment is provided on a straight-line basis over their estimated
useful lives which range from five to seven years.
DEFERRED LOAN COSTS -- Deferred loan costs, which are included in other
assets, are stated at cost and amortized straight-line over their estimated
useful lives, not to exceed the life of the related debt.
INCOME TAXES -- The Company's taxable income is included in a consolidated
United States income tax return with the Parent. The intercompany tax allocation
policy provides that each member of the consolidated group compute a provision
for income taxes on a separate return basis. The Company records its income
taxes in accordance with Statement of Financial Accounting Standards ("SFAS")
No. 109, "Accounting for Income Taxes." Under SFAS No. 109, an asset and
liability approach is required which results in the recognition of deferred tax
assets and liabilities for the expected future tax consequences of temporary
differences between the book carrying amounts and the tax basis of assets and
liabilities (see Note 7 to the Financial Statements).
F-7
<PAGE> 134
MARINER ENERGY, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
CAPITALIZED INTEREST COSTS -- The Company capitalizes interest based on the
cost of major development projects which are excluded from current depreciation,
depletion, and amortization calculations. Capitalized interest costs
approximated $916,000, $558,000 and $1,265,000 for the years ended December 31,
1993, 1994 and 1995, respectively.
ACCRUAL FOR FUTURE ABANDONMENT COSTS -- Provision is made for abandonment
costs calculated on a unit-of-production basis, representing the Company's
estimated liability at current prices for costs which may be incurred in the
removal and abandonment of production facilities at the end of the producing
life of each property.
NATURAL GAS HEDGING PROGRAM -- The Company enters into swap agreements to
reduce the effects of the volatility of the price of natural gas on the
Company's operations. These agreements involve the receipt of fixed price
amounts in exchange for variable payments based on NYMEX prices and specific
volumes. The differential to be paid or received is accrued in the month of the
related production and recognized as a component of gas revenues. Subsequent to
December 31, 1995, the Company extended its natural gas hedging program to
include its production of crude oil.
REVENUE RECOGNITION -- The Company recognizes oil and gas revenue from its
interests in producing wells as oil and gas from those wells is produced and
sold. Oil and gas sold is not significantly different from the Company's share
of production.
FINANCIAL INSTRUMENTS -- The Company's financial instruments consist of
cash and cash equivalents, receivables, payables, and debt. As of December 31,
1995, the estimated fair value of the Company's Guaranteed Senior Notes was
approximately $142,366,000. This estimated fair value was determined based on
borrowing rates available at December 31, 1995 for debt with similar terms and
maturities. The notes receivable and payable to affiliates are of a
related-party nature and the fair value is not practicable to estimate. The
carrying amount of the Company's other financial instruments approximates fair
value.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS -- The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amount of revenues and expenses during the reporting period. Actual
results could differ from these estimates.
NEW ACCOUNTING PRONOUNCEMENTS -- In October 1995, the Financial Accounting
Standards Board issued its Statement No. 123, "Accounting for Stock Based
Compensation" ("FAS 123") which establishes an alternative method of accounting
for stock based compensation to the method set forth in Accounting Principles
Board Opinion No. 25 ("APB 25"). FAS 123 encourages, but does not require,
adoption of a fair value based method of accounting for stock options and
similar equity instruments granted to employees. The Company will continue to
account for such grants under the provisions of APB 25 and will adopt the
disclosure provisions of FAS 123 in the first quarter of 1996. Accordingly,
adoption of FAS 123 does not affect the amounts recorded in the financial
statements for periods through December 31, 1995.
2. RELATED-PARTY TRANSACTIONS
RECEIVABLES FROM AFFILIATES -- Effective July 1, 1992, the Company entered
into a $25 million lending facility with Hardy Petroleum Limited, a subsidiary
of Hardy plc. Advances under this facility bore interest at 8.9%. During the
year ended 1993, the outstanding balance of $15 million was repaid. The Company
earned interest income of approximately $561,000 on the receivable for the year
ended December 31, 1993.
Effective May 26, 1993, the Company entered into a $20 million lending
facility with Hardy Petroleum Limited. At December 31, 1994 and 1995, $4 million
and $1 million, respectively, was outstanding under this lending facility.
Advances bore interest at 7.88% and the Company earned interest income of
approximately
F-8
<PAGE> 135
MARINER ENERGY, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
$895,000, $989,000 and $314,000 on the receivable for the years ended December
31, 1993, 1994 and 1995, respectively (See Note 10 to the Financial Statements).
Effective January 10, 1995, the Company entered into a $23 million lending
facility with Hardy plc. At December 31, 1995, $23 million was outstanding under
this lending facility. The maturity date of May 31, 2001 may be extended to May
31, 2003 at the election of either party, and advances bear interest at 7.77%.
The Company earned interest income of approximately $1,762,000 on the receivable
for the year ended December 31, 1995 (See Note 10 to the Financial Statements).
Effective January 11, 1995, the Company entered into a $23 million lending
facility with Hardy plc which bears interest on advances at 7.07% and matures on
November 30, 1997. At December 31, 1995, $23 million was outstanding under this
lending facility. The Company earned interest income of approximately $1,599,000
on the receivable for the year ended December 31, 1995 (See Note 10 to the
Financial Statements).
Effective January 12, 1995, the Company entered into a $59 million lending
facility with Hardy plc. At December 31, 1995, $59 million was outstanding under
this lending facility. The maturity date of November 30, 2000 may be extended to
November 30, 2004 at the election of either party, and advances bear interest at
8.46%. The Company earned interest income of approximately $4,780,000 on the
receivable for the year ended December 31, 1995 (See Note 10 to the Financial
Statements).
The current receivable from affiliates represents accrued interest related
to the lending facilities (See Note 10 to the Financial Statements).
DEBT TO AFFILIATE -- At December 31, 1994 and 1995, the Company had
$23,500,000 outstanding under a $45 million loan facility with Hardy plc. The
borrowed amount bears interest at the London Interbank Offered Rate ("LIBOR")
plus 0.75%. The agreement, as modified, contains certain restrictive covenants
relating to the maintenance of certain measures of financial position during the
term of the loan. As of December 31, 1995, the Company was in compliance with
all such covenants. The loan will mature on June 1, 1998. (See Note 10 to the
Financial Statements).
The Company incurred interest expense of approximately $1,371,000,
$1,241,000 and $1,610,000 on the debt during the years ended December 31, 1993,
1994 and 1995, respectively.
The current payable to affiliates at December 31, 1994 and 1995 included
approximately $131,000 and $129,000, respectively, for accrued interest related
to affiliated debt. (See Note 10 to the Financial Statements).
GENERAL AND ADMINISTRATIVE EXPENSES -- The Company pays an affiliate for
various administrative support services. Included in general and administrative
expenses was approximately $254,000, $283,000 and $230,000 for the years ended
December 31, 1993, 1994 and 1995, respectively, for such services. In
management's opinion, such allocated expenses reasonably represent expenses
incurred by the affiliate on behalf of the Company.
F-9
<PAGE> 136
MARINER ENERGY, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
3. LONG-TERM DEBT
REVOLVING CREDIT FACILITY -- Effective January 21, 1991, Hardy plc entered
into an $80,000,000 Revolving Credit Facility (the "Facility") with an
international bank. The Company is an original borrower on the Facility and may
draw down funds as long as the aggregate amount borrowed by the original
borrowers, which include Hardy plc and its affiliates (the "group"), does not
exceed the following amounts (in thousands):
<TABLE>
<CAPTION>
PERIOD AMOUNT
--------------------------------------------------------------------------- -------
<S> <C>
January 21, 1991 -- June 30, 1995.......................................... $80,000
July 1, 1995 -- December 31, 1995.......................................... 67,000
January 1, 1996 -- June 30, 1996........................................... 54,000
July 1, 1996 -- December 31, 1996.......................................... 41,000
January 1, 1997 -- June 30, 1997........................................... 28,000
July 1, 1997 -- December 31, 1997.......................................... 15,000
</TABLE>
The maturity date of the Facility is December 31, 1997, and borrowings bear
interest at the rate of LIBOR plus 0.725%. The Company had no borrowings
outstanding under the Facility at December 31, 1995, 1994 or 1993. The total
amount outstanding under the Facility, representing borrowings by the group, at
December 31, 1995 was approximately $1,000,000.
GUARANTEED SENIOR NOTES -- Effective June 1, 1992, the Company issued to
institutional investors 9.05% Guaranteed Senior Notes, Series A ("Series A"),
and 8.45% Guaranteed Senior Notes, Series B ("Series B"), in the aggregate
amounts of $45,000,000 and $15,000,000 due June 1, 2002 and 1999, respectively.
The Series A and Series B notes are guaranteed by the Parent and Hardy plc. In
addition to paying the entire outstanding principal amount and the interest due
on the maturity dates of the Series A and Series B notes, the Company is
required to prepay the lesser of (a) $9,000,000 and $3,000,000, respectively, or
(b) the principal amount of the notes then outstanding on June 1 of each year,
commencing June 1, 1998 and 1995, respectively.
Effective May 1, 1993, the Company issued to institutional investors 7.88%
Guaranteed Senior Notes in the aggregate principal amount of $25,000,000 due
June 1, 2003. The notes are guaranteed by the Parent and Hardy plc. In addition
to paying the entire outstanding principal amount and the interest due on the
notes on the respective maturity date, the Company is required to prepay the
lesser of (a) $5,000,000 or (b) the principal amount of the notes then
outstanding on June 1 of each year, commencing June 1, 1999.
Effective January 11, 1995, the Company issued to institutional investors
8.46% Guaranteed Senior Notes in the aggregate principal amount of $60,000,000
due June 1, 2004. The notes are guaranteed by the Parent and Hardy plc. In
addition to paying the entire principal amount and the interest due on the notes
on the respective maturity date, the Company is required to prepay the lesser of
(a) $12,000,000 or (b) the principal amount of the notes then outstanding on
December 1 of each year, commencing December 1, 2000. The entire remaining
principal amount of the notes shall become due and payable on December 1, 2004.
The guaranteed senior notes require, among other things, that the Company
meet certain financial ratios and maintain a minimum tangible net worth. As of
December 31, 1995, the Company was in compliance with all such requirements.
F-10
<PAGE> 137
MARINER ENERGY, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The annual aggregate maturities of the long-term debt are as follows (See Note
10 to the Financial Statements, in thousands):
<TABLE>
<S> <C>
1996...................................................................... $ 3,000
1997...................................................................... 3,000
1998...................................................................... 35,500
1999...................................................................... 17,000
2000...................................................................... 26,000
Thereafter................................................................ 81,000
----------
--
Total........................................................... $165,500
============
</TABLE>
The Company paid interest on all outstanding indebtedness of $8,075,000,
$8,734,000 and $13,670,000 as of December 31, 1993, 1994 and 1995, respectively.
As a result of the Acquisition, which occurred subsequent to year end (see
Note 10), all long-term debt outstanding at December 31, 1995 was satisfied.
4. STOCKHOLDER'S EQUITY
The Company received capital contributions of $16,000,000, $500,000 and
$46,000,000, from the Parent, which was ultimately contributed from Hardy plc,
during the years ended December 31, 1993, 1994 and 1995, respectively.
5. EMPLOYEE CAPITAL ACCUMULATION PLAN
The Company provides all full-time employees participation in the Employee
Capital Accumulation Plan (the "Plan") which is comprised of a contributory
401(k) savings plan and a discretionary profit sharing plan. Under the 401(k)
feature, the Company, at its sole discretion, may contribute an
employer-matching contribution equal to a percentage not to exceed 50% of each
eligible participant's matched salary reduction contribution as defined by the
Plan. Under the discretionary profit sharing contribution feature of the Plan,
the Company's contribution, if any, shall be determined annually and shall be 4%
of the lesser of the Company's operating income or total employee compensation
and shall be allocated to each eligible participant pro rata to his or her
compensation. During 1993, 1994 and 1995, the Company contributed $145,000,
$158,500 and $163,000, respectively, to the Plan. This plan is a continuation of
a plan provided by the Predecessor Company.
6. COMMITMENTS AND CONTINGENCIES
MINIMUM FUTURE LEASE PAYMENTS -- The Company leases certain office
facilities and other equipment under long-term operating lease arrangements.
Minimum rental obligations under the Company's operating leases in effect at
December 31, 1995 are as follows (in thousands):
<TABLE>
<S> <C>
1996........................................................................ $ 378
1997........................................................................ 443
1998........................................................................ 443
1999........................................................................ 442
2000........................................................................ 442
Thereafter.................................................................. 221
------
Total............................................................. $2,369
======
</TABLE>
Rental expense, before capitalization, was approximately $330,500, $356,000
and $373,000 for the years ended December 31, 1993, 1994 and 1995, respectively.
F-11
<PAGE> 138
MARINER ENERGY, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NATURAL GAS HEDGING PROGRAM -- The Company conducts a hedging program with
respect to its sales of natural gas using various instruments whereby monthly
settlements are based on the differences between the price or range of prices
specified in the instruments and the settlement price of certain natural gas
futures contracts quoted on the open market. The instruments utilized by the
Company differ from futures contracts in that there is no contractual obligation
which requires or allows for the future delivery of the product.
During 1993, hedges on 3,070,000 MMBTU of natural gas resulted in a
decrease of natural gas revenues of $881,610. During 1994, hedges on 7,407,000
MMBTU of natural gas resulted in an increase of natural gas revenues of
$876,863. During 1995, hedges on 5,890,000 MMBTU of natural gas resulted in an
increase of natural gas revenues of $1,020,297.
At December 31, 1995 the Company had open contracts on approximately
2,883,000 MMBTU which expire at varying times through March 31, 1996. The
"approximate break-even price" (the weighted average of the monthly settlement
prices of the applicable futures contracts which would result in no settlement
being due to or from the Company) with respect to such contracts is
approximately $1.98 per MMBTU.
7. INCOME TAXES
The following table sets forth a reconciliation of the statutory federal
income tax with the income tax provision (in thousands):
<TABLE>
<CAPTION>
1993 1994 1995
------- ------- -------
<S> <C> <C> <C>
Income (loss) before income taxes..................... $(3,441) $(2,611) $ 4,798
======= ======= =======
Income tax expense (benefit) computed at statutory
rates............................................... $(1,204) $ (914) $ 1,679
Change in valuation allowance......................... 1,197 898 (1,261)
Other................................................. 7 16 (80)
------- ------- -------
Tax expense........................................... $ -- $ -- $ 338
======= ======= =======
</TABLE>
Federal income tax paid during the year ended December 31, 1995 was
$338,000. No federal income taxes were paid during the years ended December 31,
1993 and 1994.
The Company's deferred tax position reflects the net tax effects of the
temporary differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax reporting.
Significant components of the deferred tax assets and liabilities are as follows
(in thousands):
<TABLE>
<CAPTION>
1994 1995
-------- --------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards............................. $ 26,668 $ 28,157
Alternative minimum tax credit carryforward.................. 321
Other........................................................ 964 959
-------- --------
27,632 29,437
Valuation allowance............................................ (10,644) (9,383)
-------- --------
Total net deferred tax assets.................................. 16,988 20,054
-------- --------
Deferred tax liabilities --
Differences between book and tax basis of properties......... (16,988) (20,054)
-------- --------
Total net deferred taxes............................. $ -- $ --
======== ========
</TABLE>
As of December 31, 1995, the Company had cumulative net operating loss
carryforwards ("NOL") for federal income tax purposes of approximately $80
million, which expire in years ranging from 2005 to 2011. In
F-12
<PAGE> 139
MARINER ENERGY, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
addition, the Company has approximately $0.3 million of alternative minimum tax
credit carryforwards. SFAS No. 109 requires that a valuation allowance be
recorded against tax assets which are not likely to be realized. Because of the
uncertain nature of their ultimate realization, based on past performance and
expiration dates, the Company has established a valuation allowance against
these carryforward benefits for all net deferred tax assets in excess of net
deferred tax liabilities. Because of the change in ownership of the Company as
described in Note 10 to the Financial Statements, the NOL will not be available
to the ongoing entity.
8. OIL AND GAS PRODUCING ACTIVITIES
The results of operations from the Company's oil and gas producing
activities are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1993 1994 1995
-------- -------- --------
<S> <C> <C> <C>
Oil and gas sales.................................... $ 34,295 $ 35,856 $ 33,309
Production costs..................................... (7,746) (7,118) (7,331)
Depletion, depreciation, and amortization............ (15,607) (16,221) (15,635)
Income tax expense................................... (338)
-------- -------- --------
$ 10,942 $ 12,517 $ 10,005
======== ======== ========
</TABLE>
Costs incurred in oil and gas producing activities are as follows (in
thousands, except per equivalent mcf amounts):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1993 1994 1995
-------- -------- --------
<S> <C> <C> <C>
Property acquisition costs........................... $ 590 $ 2,521 $ 4,594
Development costs.................................... 15,681 17,907 24,312
Exploration costs.................................... 11,695 16,495 12,866
Production costs..................................... 7,746 7,118 7,331
Depletion, depreciation, and amortization rate per
equivalent mcf..................................... 1.02 .95 .96
</TABLE>
All of the Company's oil and gas revenues are from proved developed
properties located in the United States.
The Company capitalizes internal costs, associated with exploration
activities. These capitalized costs approximated $3,965,000, $3,479,000 and
$4,264,000, for the years ended December 31, 1993, 1994 and 1995, respectively.
During the year ended December 31, 1993, sales of oil and gas to four
purchasers accounted for 14%, 14%, 12% and 12% of total revenues. During the
year ended December 31, 1994, sales of oil and gas to three purchasers accounted
for 25%, 13% and 11% of total revenues. During the year ended December 31, 1995,
sales of oil and gas to three purchasers accounted for 20%, 20% and 12% of total
revenues. Management believes that the loss of these purchasers would not have a
material impact on the Company's financial condition or results of operations.
9. SUPPLEMENTAL OIL AND GAS RESERVE AND STANDARDIZED MEASURE
INFORMATION (UNAUDITED)
Estimated proved net recoverable reserves as shown below include only those
quantities that can be expected to be commercially recoverable at prices and
costs in effect at the balance sheet dates under existing
F-13
<PAGE> 140
MARINER ENERGY, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
regulatory practices and with conventional equipment and operating methods.
Proved developed reserves represent only those reserves expected to be recovered
through existing wells. Proved undeveloped reserves include those reserves
expected to be recovered from new wells on undrilled acreage or from existing
wells on which a relatively major expenditure is required for recompletion.
Reserve estimates are inherently imprecise and may be expected to change as
additional information becomes available. Furthermore, estimates of oil and gas
reserves, of necessity, are projections based on engineering data, and there are
uncertainties inherent in the interpretation of such data as well as the
projection of future rates of production and the timing of development
expenditures. Reserve engineering is a subjective process of estimating
underground accumulations of oil and natural gas that cannot be measured
exactly, and the accuracy of any reserve estimate is a function of the quality
of available data and of engineering and geological interpretation and judgment.
Accordingly, estimates of the economically recoverable quantities of oil and
natural gas attributable to any 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. There also can be no
assurance that the reserves set forth herein will ultimately be produced or that
the proved undeveloped reserves set forth herein will be developed within the
periods anticipated. It is likely that variances from the estimates will be
material. In addition, the estimates of future net revenues from proved reserves
of the Company and the present value thereof are based upon certain assumptions
about future production levels, prices and costs that may not be correct when
judged against actual subsequent experience. The Company emphasizes with respect
to the estimates prepared by independent petroleum engineers that the discounted
future net cash flows should not be construed as representative of the fair
market value of the proved reserves owned by the Company since discounted future
net cash flows are based upon projected cash flows which do not provide for
changes in oil and natural gas prices from those in effect on the date indicated
or for escalation of expenses and capital costs subsequent to such date. The
meaningfulness of such estimates is highly dependent upon the accuracy of the
assumptions upon which they were based. Actual results will differ, and are
likely to differ materially, from the results estimated.
ESTIMATED QUANTITIES OF PROVED RESERVES
(IN THOUSANDS)
<TABLE>
<CAPTION>
OIL (BBL) GAS (MCF)
--------- ---------
<S> <C> <C>
December 31, 1992...................................................... 6,190 80,837
Extensions........................................................... 61 15,483
Revisions of previous estimates...................................... 353 7,266
Production........................................................... (470) (12,507)
Sales of reserves in place........................................... (6) (19)
----- ------
December 31, 1993...................................................... 6,128 91,060
Extensions........................................................... 829 21,842
Revisions of previous estimates...................................... 423 4,241
Production........................................................... (459) (14,362)
Sales of reserves in place........................................... (21) (2,136)
----- ------
December 31, 1994...................................................... 6,900 100,645
Extensions........................................................... 46 2,476
Revisions of previous estimates...................................... 307 14,113
Production........................................................... (424) (13,770)
Sales of reserves in place........................................... (160) (5,134)
----- ------
December 31, 1995...................................................... 6,669 98,330
===== ======
</TABLE>
F-14
<PAGE> 141
MARINER ENERGY, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
ESTIMATED QUANTITIES OF PROVED DEVELOPED RESERVES
(IN THOUSANDS)
<TABLE>
<CAPTION>
OIL (BBL) GAS (MCF)
--------- ---------
<S> <C> <C>
December 31, 1992...................................................... 3,641 62,329
December 31, 1993...................................................... 3,653 67,263
December 31, 1994...................................................... 4,037 83,192
December 31, 1995...................................................... 4,357 87,843
</TABLE>
The following is a summary of a standardized measure of discounted net cash
flows related to the Company's proved oil and gas reserves. The information
presented is based on a valuation of proved reserves using discounted cash flows
based on year-end prices, costs and economic conditions and a 10% discount rate.
The additions to proved reserves from new discoveries and extensions could vary
significantly from year to year; additionally, the impact of changes to reflect
current prices and costs of reserves proved in prior years could also be
significant. Accordingly, the information presented below should not be viewed
as an estimate of the fair value of the Company's oil and gas properties, nor
should it be considered indicative of any trends.
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------
1993 1994 1995
-------- -------- --------
<S> <C> <C> <C>
Future cash inflows.......................................... $270,376 $285,823 $370,471
Future production and development costs...................... (124,942) (138,185) (125,936)
Future income taxes.......................................... (5,776) (8,819) (37,518)
-------- -------- --------
Future net cash flows........................................ 139,658 138,819 207,017
Discount of future net cash flows at 10% per annum........... (49,001) (49,215) (46,502)
-------- -------- --------
Standardized measure of discounted future net cash flows..... $ 90,657 $ 89,604 $160,515
======== ======== ========
</TABLE>
During recent years, there have been significant fluctuations in the prices
paid for crude oil in the world markets. This situation has had a destabilizing
effect on crude oil's posted prices in the United States, including the posted
prices paid by purchasers of the Company's crude oil. The weighted average
prices of oil and gas at December 31, 1994 and 1995, used in the above table,
were $16.28 and $17.78 per Bbl, respectively, and $1.67 and $2.72 per Mcf,
respectively.
F-15
<PAGE> 142
MARINER ENERGY, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The following are the principal sources of change in the standardized
measure of discounted future net cash flows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1993 1994 1995
-------- -------- --------
<S> <C> <C> <C>
Sales and transfers of oil and gas produced,
net of production costs.......................... $(26,549) $(28,738) $(25,978)
Net changes in prices and production costs......... 4,090 (5,655) 64,319
Extensions and discoveries, net of future
development and production costs................. 5,246 27,509 5,712
Revisions of previous quantity estimates........... 7,057 4,324 18,090
Sales of reserves in place......................... (9,127) (475) (6,141)
Net change in income taxes......................... 4,255 (2,130) (7,191)
Accretion of discount before income taxes.......... 10,006 9,424 9,532
Changes in production rates (timing) and other..... 3,456 (5,312) 12,568
-------- -------- --------
Net change......................................... $ (1,566) $ (1,053) $ 70,911
======== ======== ========
</TABLE>
10. SUBSEQUENT EVENTS
THE ACQUISITION -- Pursuant to a stock purchase agreement dated April 1,
1996, Joint Energy Development Investments Limited Partnership ("JEDI"), which
is an affiliate of Enron Capital & Trade Resources Corp. ("ECT"), purchased from
Hardy Holdings Inc. all of the issued and outstanding stock of the Company for a
purchase price of approximately $185.5 million effective April 1, 1996 for
financial accounting purposes (the "Acquisition"). In connection with the
Acquisition, ECT and Mariner Holdings entered into agreements with certain
members of the Company's management providing for a continued role of management
in the Company after the Acquisition.
The sources and uses of funds related to financing the Acquisition were as
follows:
SOURCES OF FUNDS
(IN MILLIONS)
<TABLE>
<S> <C>
JEDI Bridge Loan(1)................................................. $ 92.0
Common stock purchased by JEDI(2)................................... 95.0
Working capital provided by the Company............................. 6.0
------
Total..................................................... $193.0
======
</TABLE>
USES OF FUNDS
(IN MILLIONS)
<TABLE>
<S> <C>
Acquisition purchase price.......................................... $185.5
Acquisition costs and other expenses(3)............................. 7.5
------
Total..................................................... $193.0
======
</TABLE>
- ---------------
(1) The JEDI Bridge Loan was incurred by Mariner Holdings to fund a portion of
the consideration paid in the Acquisition, which has been pushed down for
accounting purposes to the Company.
(2) As contemplated in connection with the Acquisition and shortly after the
consummation thereof, certain members of the Company's management purchased
approximately 4% of the capital stock of Mariner Holdings (and thereby
acquired beneficial ownership of approximately 4% of the capital stock of
the Company) for an aggregated consideration valued at approximately $3.6
million. Such consideration consisted of approximately $0.6 million in cash
and approximately $3.0 million of overriding royalty
F-16
<PAGE> 143
MARINER ENERGY, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
interests, which amounts are not included in the above sources and uses of
funds related to the Acquisition.
(3) Includes $2.9 million of fees and expenses paid to JEDI associated with the
purchase of the common stock by JEDI, $2.6 million of expenses paid to JEDI
associated with the implementation of the JEDI Bridge Loan and $2.0 million
of other transaction fees and expenses.
Pursuant to a Participation Agreement dated as of May 16, 1996 (the
"Participation Agreement"), by and between Hardy plc and Mariner Holdings, Hardy
plc has an option to purchase participation rights in certain prospects
generated by the Company until May 16, 1999. This option entitles Hardy plc to
acquire up to 25% of any leasehold or working interest the Company holds in any
exploitation prospect that (i) is located in the Gulf, (ii) the Company, in its
reasonable judgment, plans to develop, (iii) the Company reasonably expects to
exploit using a floating production facility or a subsea tieback system that
will require estimated gross capital expenditures in excess of $150.0 million
and (iv) is generated by the Company and is expected to be operated by the
Company. The Company is required to provide notice to Hardy plc within ten days
of acquiring an interest, or a contractual right to acquire an interest, in such
a prospect. Hardy plc must exercise its option with respect to such prospect
within ten days of receiving such notice from the Company. If Hardy plc
exercises its participation right as to any prospect, it must pay the Company a
ratable portion of the Company's costs and expenses in generating and acquiring
the prospect, including a ratable portion of a $250,000 prospect fee. In
addition to the interest in the prospect it acquires from the Company, Hardy plc
would then have the right to copy any geological and geophysical data owned by
the Company and pertaining to the prospect in which it is participating, unless
the Company is restricted from doing so by another agreement.
The Acquisition has been accounted for using the purchase method of
accounting. As such, JEDI's cost to acquire the Company, including transaction
costs, have been allocated to the assets and liabilities acquired based on
estimated fair values. As a result, the Company's financial position and
operating results subsequent to the date of the Acquisition reflect a new basis
of accounting and are not comparable to prior periods. In addition, $1.3 million
of interest was imputed for the period from April 1, 1996 to the date of
closing.
The allocation of JEDI's purchase price to the assets and liabilities of
the Company resulted in a significant increase in the carrying value of the
Company's oil and gas properties. Under the full cost method of accounting, the
carrying value of oil and gas properties is generally not permitted to exceed
the sum of the present value (10% discount rate) of estimated future net cash
flows from proved reserves, based on current prices and costs, plus the lower of
cost or estimated fair value of unproved properties (the "cost center ceiling").
Based upon the allocation of JEDI's purchase price, estimated proved reserves
and product prices in effect at the date of the Acquisition, the purchase price
allocated to oil and gas properties was in excess of the cost center ceiling by
approximately $22.5 million. The resulting writedown is a non-cash charge and
has been included in the results of operations for the period ended September
30, 1996.
The allocation of the purchase price (including fees and expenses) is
summarized as follows in millions of dollars:
<TABLE>
<S> <C>
Current assets...................................................... $ 18.3
Property and equipment.............................................. 181.4
Other noncurrent assets............................................. 2.6
Liabilities assumed................................................. (12.2)
------
Total..................................................... $190.1
======
</TABLE>
F-17
<PAGE> 144
MARINER ENERGY, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The following unaudited pro forma financial data have been prepared
assuming that the Acquisition and the related financing were consummated on
January 1, 1995. Amounts are in thousands, except number of shares and per share
amounts.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED SEPTEMBER
DECEMBER 31, 1995 30, 1996
----------------- ------------
<S> <C> <C>
Revenues............................................... $33,309 $ 46,529
======= =======
Net income (loss)...................................... $(1,956) $ 3,848
======= =======
Weighted average number of common shares outstanding... 1,000 1,000
</TABLE>
JEDI BRIDGE LOAN -- In connection with the acquisition, JEDI and Mariner
Holdings entered into a Credit, Subordination and Further Assurances Agreement
dated May 16, 1996, pursuant to which JEDI provided a loan commitment to Mariner
Holdings of $105 million. Under this commitment Mariner Holdings borrowed $92
million (the "JEDI Bridge Loan") to partially fund the Acquisition. The JEDI
Bridge Loan bore interest at 6% above LIBOR (11.5% at June 30, 1996). The JEDI
Bridge Loan was repaid with proceeds from dividends paid by the Company to
Mariner Holdings; the Company used proceeds of $50 million from borrowings under
the Revolving Credit Facility and $42 million from the issuance of the 10 1/2%
Senior Subordinated Notes to pay such dividends. As a result of the repayments,
the JEDI Bridge Loan was terminated. In connection with the $92 million
repayment, $2.4 million of the JEDI Bridge Loan debt fees were written off
during the period ended September 30, 1996.
REVOLVING CREDIT FACILITY -- On June 28, 1996, the Company entered into a
revolving credit facility (the "Revolving Credit Facility") with NationsBank of
Texas, N.A. as agent for a group of lenders (the "Lenders"). The Revolving
Credit Facility provides for a maximum $150 million revolving credit loan and
matures on June 28, 1999. The borrowing base under the Revolving Credit Facility
is currently $50 million and is subject to periodic redetermination. The
Revolving Credit Facility is unsecured. On June 28, 1996, the Company borrowed
$50 million under the Revolving Credit Facility and used the proceeds to pay a
dividend to Mariner Holdings, which was used by Mariner Holdings to partially
repay the JEDI Bridge Loan. During August 1996, the outstanding balances of both
the Revolving Credit Facility and the JEDI Bridge Loan were repaid with the
proceeds from the issuance of the 10 1/2% Senior Subordinated Notes.
Borrowings under the Revolving Credit Facility bear interest, at the option
of the Company, at either (i) LIBOR plus 0.75% to 1.25% (depending upon the
level of utilization of the Borrowing Base) or (ii) the higher of (a) the
agent's prime rate and (b) the federal funds rate plus 0.5%. The Company incurs
a quarterly commitment fee ranging from 0.25% to 0.375% per annum on the average
unused portion of the Borrowing Base, depending upon the level of utilization.
The Revolving Credit Facility contains various restrictive covenants which,
among other things, restrict the payment of dividends, limit the amount of debt
the Company may incur, limit the Company's ability to make certain loans and
investments, limit the Company's ability to enter into certain hedge
transactions and provide that the Company must maintain a specified relationship
between cash flow and fixed charges and cash flow and interest on indebtedness.
10 1/2% SENIOR SUBORDINATED NOTES -- On August 14, 1996 the Company
completed the sale of $100 million principal amount of 10 1/2% Senior
Subordinated Notes Due 2006, Series A (the "Outstanding Notes"). The proceeds of
the notes were used by the Company to (i) pay a dividend to Mariner Holdings,
which used the dividend to fully repay the JEDI Bridge Loan assumed in the
Acquisition, and (ii) to repay the Revolving Credit Facility. The Outstanding
Notes bear interest at 10 1/2% payable semiannually in arrears on February 1 and
August 1 of each year. The Outstanding Notes are unsecured obligations of the
Company, and
F-18
<PAGE> 145
MARINER ENERGY, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
are subordinated in right of payment to all senior debt (as defined in the
indenture governing the Outstanding Notes) of the Company, including
indebtedness under the Revolving Credit Facility.
The indenture pursuant to which the Outstanding Notes are issued contains
certain covenants that, among other things, limit the ability of the Company to
incur additional indebtedness, pay dividends, redeem capital stock, make
investments, enter into transactions with affiliates, sell assets and engage in
mergers and consolidations.
The Outstanding Notes are redeemable at the option of the Company, in whole
or in part, at any time on or after August 1, 2001, initially at 105.25% of
their principal amount, plus accrued interest, declining ratably to 100% of
their principal amount, plus accrued interest, on or after August 1, 2003. In
addition, at the option of the Company, at any time prior to August 1, 1999, up
to an aggregate of 35% of the original principal amount of the Outstanding Notes
will be redeemable from the net proceeds of one or more public equity offerings,
at 110.5% of their principal amount, plus accrued interest, provided that any
such redemption shall occur within 60 days of the date of the closing of such
public equity offering.
In the event of a change of control of the Company (as defined in the
indenture pursuant to which the Outstanding Notes are issued), each holder of
the Outstanding Notes (the "Holder") will have the right to require the Company
to repurchase all or any portion of such Holder's Notes at a purchase price
equal to 101% of the principal amount thereof, plus accrued interest.
The Company is obligated to consummate an exchange offer pursuant to an
effective registration statement or to cause resales of the Notes to be
registered under the Securities Act and, if one of such events does not occur
prior to the date that is six months after the date of the initial sale of the
Outstanding Notes, interest on the Notes will increase permanently by 0.5% per
annum.
STOCK OPTION PLAN -- During June 1996, Mariner Holdings established the
Mariner Holdings, Inc. 1996 Stock Option Plan (the "Plan") providing for the
granting of stock options to key employees and consultants. Options granted
under the Plan will not be less than the fair market value of the shares at the
date of grant. The maximum number of shares of Mariner Holdings common stock
that may be issued under the Plan is 142,800.
On June 27, 1996, options (the "Options") to purchase 128,331 shares were
granted at an exercise price of $100 per share. The Options generally become
exercisable as to one-fifth on each of the first five anniversaries of the date
of grant. The Options expire seven years after the date of grant.
OVERRIDING ROYALTY INTERESTS -- Pursuant to agreements, certain employees
and consultants are entitled to receive, as incentive compensation, overriding
royalty interests ("Overriding Royalty Interests") in certain oil and gas
prospects acquired by the Company. Such Overriding Royalty Interests entitle the
holder to receive a specified percentage of the gross proceeds from the future
sale of oil and gas (less production taxes), if any, applicable to the
prospects.
HEDGING TRANSACTIONS -- The following table sets forth the Company's open
hedging contracts for oil and natural gas and the weighted average of NYMEX
prices hedged under various swap agreements entered into as of September 30,
1996.
<TABLE>
<CAPTION>
CRUDE OIL NATURAL GAS
-------------------- ----------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
BBLS PRICE MMBTU PRICE
-------- -------- --------- --------
<S> <C> <C> <C> <C>
Three months ended December 31, 1996.............. 184,000 $18.55 4,304,200 $ 2.34
January-February 1997............................. 118,000 18.55 2,184,000 2.36
</TABLE>
During the six months ended September 30, 1996 the Company's crude oil
revenues were decreased $811,000 and natural gas revenues were increased
$176,000, as a result of hedging transactions. During the
F-19
<PAGE> 146
MARINER ENERGY, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
three months ended March 31, 1996 the Company's natural gas revenues were
decreased $2,347,000 as a result of hedging transactions. During the nine months
ended September 30, 1995, the Company's gas revenues were increased $1,209,000
as a result of hedging transactions.
RELATED PARTY TRANSACTIONS -- Enron Corp. is the parent of ECT, and an
affiliate of Enron and ECT is the general partner of JEDI. Accordingly, Enron
may be deemed to control JEDI, Mariner Holdings and the Company. In addition,
five of the Company's directors are officers of Enron or affiliates of Enron.
Enron and certain of its subsidiaries and other affiliates collectively
participate in many phases of the oil and natural gas industry and are,
therefore, competitors of the Company. In addition, ECT and JEDI have provided,
and may in the future provide, and ECT Securities Corp. has assisted, and may in
the future assist, in arranging financing to non-affiliated participants in the
oil and natural gas industry who are or may become competitors of the Company.
Because of these various conflicting interests, ECT, the Company, JEDI and the
members of the Company's management who are also stockholders of Mariner
Holdings have entered into an agreement that is intended to make clear that
Enron and its affiliates have no duty to make business opportunities available
to the Company.
The Company expects that from time to time it will engage in various
commercial transactions and have various commercial relationships with Enron and
certain affiliates of Enron, such as holding and exploring, exploiting and
developing joint working interests in particular prospects and properties,
engaging in hydrocarbon price hedging arrangements and entering into other oil
and gas related or financial transactions. For example, there are several
prospects in which both an affiliate of Enron and the Company have working
interests. Such interests were acquired in the ordinary course of business
pursuant to bids, joint or otherwise. Any wells drilled will be subject to joint
operating agreements relating to exploration and possible production and will be
subject to customary business terms. Furthermore, the Company has entered into
several agreements with Enron or affiliates of Enron for the purpose of hedging
oil and natural gas prices on the Company's future production. The Company
believes that its current agreements with Enron and its affiliates are, and
anticipates that, but can provide no assurance that, any future agreements with
Enron and its affiliates will be, on terms no less favorable to the Company than
would be contained in an agreement with a third party.
F-20
<PAGE> 147
[MARINER ENERGY, INC. LOGO]
<PAGE> 148
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 20. Indemnification of Directors and Officers
Mariner's Amended and Restated Certificate of Incorporation contains a
provision that eliminates the personal monetary liability of a director to
Mariner and its stockholders for breach of his fiduciary duty as a director to
the extent currently allowed under the General Corporation Law of the State of
Delaware (the "GCLD"). If a director were to breach the duty of care in
performing his duties as a director, neither Mariner nor its stockholders could
recover monetary damages from the director, and the only course of action
available to Mariner's stockholders would be equitable remedies, such as an
action to enjoin or rescind a transaction involving a breach of the fiduciary
duty of care. To the extent certain claims against directors are limited to
equitable remedies, this provision of Mariner's Amended and Restated Certificate
of Incorporation may reduce the likelihood of derivative litigation and may
discourage stockholders or management from initiating litigation against
directors for breach of their duty of care. Additionally, equitable remedies may
not be effective in many situations. If a stockholder's only remedy is to enjoin
the completion of the Board of Directors' action, this remedy would be
ineffective if the stockholder does not become aware of a transaction or event
until after it has been completed. In such a situation, it is possible that the
stockholders and Mariner would have no effective remedy against the directors.
The directors do not have liability for monetary damages for grossly negligent
business decisions (in violation of their duty of care), including decisions
made in connection with attempts to acquire Mariner. Liability for monetary
damages remains for (i) any breach of the duty of loyalty to Mariner or its
stockholders, (ii) acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) payment of an
improper dividend or improper repurchase of Mariner's stock under Section 174 of
the GCLD or (iv) any transaction from which the director derived an improper
personal benefit. Mariner's Amended and Restated Certificate of Incorporation
further provides that in the event the GCLD is amended to allow the further
elimination or limitation of the liability of directors, then the liability of
Mariner's directors shall be limited to the fullest extent permitted by the
amended GCLD. The GCLD permits a corporation to indemnify certain persons,
including officers and directors, who are (or are threatened to be made) parties
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 their being officers or directors of
the corporation. The indemnity may include expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement actually and reasonably incurred
by an indemnified officer or director, provided he acted in good faith and in a
manner he reasonably believed to be in or not opposed to the corporation's best
interests and, in the case of criminal proceedings, provided he had no
reasonable cause to believe that his conduct was unlawful.
The GCLD further permits a corporation to indemnify certain persons,
including officers and directors, who are (or are threatened to be made) parties
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 of their being officers
or directors of the corporation. The indemnity may include expenses (including
attorneys' fees) actually and reasonably incurred by the indemnified officer or
director, provided he acted in good faith and in a manner he reasonably believed
to be in, or not opposed to, the corporation's best interests. However, no such
person will be indemnified as to matters for which he is found to be liable for
negligence or misconduct in the performance of his duty to the corporation
unless, and only to the extent that, indemnification is ordered by a court. The
Bylaws of Mariner require Mariner to indemnify each such person in substantially
the same circumstances and on substantially the same terms as those in which the
GCLD permits indemnification. Further, the Stockholders' Agreement provides that
these indemnification provisions, which are to be included in the charter and
bylaws (or analogous documents) of each subsidiary of Mariner Holdings, shall
not be amended without the written consent of a majority of the Management
Directors (as defined therein).
Delaware corporations also are authorized to obtain insurance to protect
officers and directors from certain liabilities, including liabilities against
which the corporation cannot indemnify its directors and officers. Mariner
currently has in effect a directors' and officers' liability insurance policy
providing aggregate coverage in the amount of $10,000,000.
II-1
<PAGE> 149
ITEM 21. Exhibits and Financial Statement Schedules
(A) Exhibits.
The following exhibits are filed herewith unless otherwise indicated:
<TABLE>
<C> <S>
3.1* Amended and Restated Certificate of Incorporation of the Registrant, as amended.
3.2* Bylaws of the Registrant, as amended.
4.1* Indenture, dated as of August 1, 1996, between the Registrant and United States
Trust Company of New York, as Trustee.
4.2* Registration Agreement, dated August 9, 1996, between the Registrant and Morgan
Stanley & Co. Incorporated, for itself and the other several Purchasers named
therein.
4.3* Credit Agreement, dated as of June 28, 1996, among the Registrant, NationsBank of
Texas, N.A., as Agent, and the financial institutions listed on Schedule 1
thereto, as amended by First Amendment to Credit Agreement, dated as of August 12,
1996, among the Registrant, NationsBank of Texas, N.A., as Agent, Toronto Dominion
(Texas), Inc., as Co-agent, and the financial institutions listed on Schedule 1
thereto.
4.4* Note, dated August 12, 1996, in the principal amount of up to $45,000,000, made by
the Registrant in favor of NationsBank of Texas, N.A.
4.5* Note, dated August 12, 1996, in the principal amount of up to $45,000,000, made by
the Registrant in favor of Toronto Dominion (Texas), Inc.
4.6* Note, dated August 12, 1996, in the principal amount of up to $30,000,000, made by
the Registrant in favor of The Bank of Nova Scotia.
4.7* Note, dated August 12, 1996, in the principal amount of up to $30,000,000, made by
the Registrant in favor of ABN AMRO Bank, N.V., Houston Agency.
4.8* Form of the Registrant's 10 1/2% Senior Subordinated Note Due 2006, Series A.
4.9 Form of the Registrant's 10 1/2% Senior Subordinated Note Due 2006, Series B.
5.1** Opinion of Fulbright & Jaworski L.L.P. regarding the legality of the Exchange
Notes.
10.1* Stock Purchase Agreement, effective as of April 1, 1996, among Hardy Oil & Gas
plc, Hardy Holdings Inc., Millennium Oil & Gas, Inc. (the Registrant) and Enron
Capital & Trade Resources Corp.
10.2* Participation Agreement, dated as of May 16, 1996, between Hardy Oil & Gas plc and
Mariner Holdings, Inc.
10.3** Amended and Restated Stockholders' Agreement, dated December , 1996, among
Mariner Holdings, Inc., Joint Energy Development Investments Limited Partnership
and the other stockholders of Mariner Holdings, Inc.
10.4* Amended and Restated Employment Agreement, dated June 27, 1996, between the
Registrant and Robert E. Henderson.
10.5* Amended and Restated Employment Agreement, dated June 27, 1996, between the
Registrant and Richard R. Clark.
10.6* Amended and Restated Employment Agreement, dated June 27, 1996, between the
Registrant and Michael W. Strickler.
10.7* Amended and Restated Employment Agreement, dated June 27, 1996, between the
Registrant and James M. Fitzpatrick.
10.8* Amended and Restated Employment Agreement, dated June 27, 1996, between the
Registrant and Gregory K. Harless.
10.9 Amended and Restated Employment Agreement, dated June 27, 1996, between the
Registrant and W. Hunt Hodge.
</TABLE>
II-2
<PAGE> 150
<TABLE>
<C> <S>
10.10* Amended and Restated Employment Agreement, dated June 27, 1996, between the
Registrant and Clinton D. Smith.
10.11* Amended and Restated Consulting Services Agreement, dated June 27, 1996, between
the Registrant and David S. Huber.
10.12* Mariner Holdings, Inc. 1996 Stock Option Plan.
10.13* Form of Incentive Stock Option Agreement (pursuant to the Mariner Holdings, Inc.
1996 Stock Option Plan).
10.14* List of executive officers who are parties to an Incentive Stock Option Agreement.
10.15* Form of Nonstatutory Stock Option Agreement (pursuant to the Mariner Holdings,
Inc. 1996 Stock Option Plan).
10.16* List of executive officers who are parties to a Nonstatutory Stock Option
Agreement.
10.17* Nonstatutory Stock Option Agreement, dated June 27, 1996, between the Registrant
and David S. Huber.
10.18 Letter Agreement, dated September 26, 1996, between the Registrant and Gary M.
Pedlar.
10.19** Employment Agreement, dated December , 1996, between the Registrant and Frank A.
Pici.
12.1* Statement of Computation of Ratio of Earnings to Fixed Charges.
23.1 Consent of Deloitte & Touche LLP.
23.2** Consent of Fulbright & Jaworski L.L.P. (included in Exhibit 5.1).
23.3* Consent of Ryder Scott Company.
24.1* Powers of Attorney.
25.1* Statement of Eligibility Under Trust Indenture Act of 1939 of a Corporation
Designated to Act as Trustee on Form T-1.
27.1* Financial Data Schedule.
99.1 Form of Letter of Transmittal and related documents.
</TABLE>
- ---------------
* Previously filed.
** To be filed by amendment.
(B) Financial Statement Schedules.
ITEM 22. Undertakings
The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act, each filing of the
registrant's annual report pursuant to section 13(a) or section 15(d) of the
Exchange Act (and, where applicable, each filing of an employee benefit plan's
annual report pursuant to section 15(d) of the Exchange Act) that is
incorporated by reference in the registration statement 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.
Insofar as indemnification for liabilities arising under the Securities Act
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 Securities 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 Securities Act and will be governed by the final
adjudication of such issue.
II-3
<PAGE> 151
The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Items 4, 10(b), 11, or 13 of this Form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through the
date of responding to the request.
The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
II-4
<PAGE> 152
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has duly
caused this Amendment No. 1 to registration statement to be signed on its behalf
by the undersigned, thereunto duly authorized, in the City of Houston, State of
Texas, on December 5, 1996.
MARINER ENERGY, INC.
By /s/ ROBERT E. HENDERSON
---------------------------------
Robert E. Henderson
Chairman of the Board, President
and Chief Executive Officer
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
- --------------------------------------------- --------------------------------------------
<S> <C>
/s/ ROBERT E. HENDERSON Chairman of the Board, President, Chief
- --------------------------------------------- Executive Officer and Director (Principal
Robert E. Henderson Executive Officer, Principal Financial
Officer and Principal Accounting Officer)
* Senior Vice President of Production and
- --------------------------------------------- Director
Richard R. Clark
* Director
- ---------------------------------------------
James V. Derrick, Jr.
* Director
- ---------------------------------------------
Andrew S. Fastow
* Director
- ---------------------------------------------
Gene E. Humphrey
* Director
- ---------------------------------------------
Jere C. Overdyke, Jr.
* Director
- ---------------------------------------------
Frank Stabler
* Senior Vice President of Exploration and
- --------------------------------------------- Director
Michael W. Strickler
*By /s/ ROBERT E. HENDERSON
--------------------------
Robert E. Henderson
Attorney-in-fact
December 5, 1996
</TABLE>
II-5
<PAGE> 153
INDEX TO EXHIBITS
<TABLE>
<C> <S>
3.1* Amended and Restated Certificate of Incorporation of the Registrant, as amended.
3.2* Bylaws of the Registrant, as amended.
4.1* Indenture, dated as of August 1, 1996, between the Registrant and United States
Trust Company of New York, as Trustee.
4.2* Registration Agreement, dated August 9, 1996, between the Registrant and Morgan
Stanley & Co. Incorporated, for itself and the other several Purchasers named
therein.
4.3* Credit Agreement, dated as of June 28, 1996, among the Registrant, NationsBank of
Texas, N.A., as Agent, and the financial institutions listed on Schedule 1
thereto, as amended by First Amendment to Credit Agreement, dated as of August 12,
1996, among the Registrant, NationsBank of Texas, N.A., as Agent, Toronto Dominion
(Texas), Inc., as Co-agent, and the financial institutions listed on Schedule 1
thereto.
4.4* Note, dated August 12, 1996, in the principal amount of up to $45,000,000, made by
the Registrant in favor of NationsBank of Texas, N.A.
4.5* Note, dated August 12, 1996, in the principal amount of up to $45,000,000, made by
the Registrant in favor of Toronto Dominion (Texas), Inc.
4.6* Note, dated August 12, 1996, in the principal amount of up to $30,000,000, made by
the Registrant in favor of The Bank of Nova Scotia.
4.7* Note, dated August 12, 1996, in the principal amount of up to $30,000,000, made by
the Registrant in favor of ABN AMRO Bank, N.V., Houston Agency.
4.8* Form of the Registrant's 10 1/2% Senior Subordinated Note Due 2006, Series A.
4.9 Form of the Registrant's 10 1/2% Senior Subordinated Note Due 2006, Series B.
5.1** Opinion of Fulbright & Jaworski L.L.P. regarding the legality of the Exchange
Notes.
10.1* Stock Purchase Agreement, effective as of April 1, 1996, among Hardy Oil & Gas
plc, Hardy Holdings Inc., Millennium Oil & Gas, Inc. (the Registrant) and Enron
Capital & Trade Resources Corp.
10.2* Participation Agreement, dated as of May 16, 1996, between Hardy Oil & Gas plc and
Mariner Holdings, Inc.
10.3** Amended and Restated Stockholders' Agreement, dated December , 1996, among
Mariner Holdings, Inc., Joint Energy Development Investments Limited Partnership
and the other stockholders of Mariner Holdings, Inc.
10.4* Amended and Restated Employment Agreement, dated June 27, 1996, between the
Registrant and Robert E. Henderson.
10.5* Amended and Restated Employment Agreement, dated June 27, 1996, between the
Registrant and Richard R. Clark.
10.6* Amended and Restated Employment Agreement, dated June 27, 1996, between the
Registrant and Michael W. Strickler.
10.7* Amended and Restated Employment Agreement, dated June 27, 1996, between the
Registrant and James M. Fitzpatrick.
10.8* Amended and Restated Employment Agreement, dated June 27, 1996, between the
Registrant and Gregory K. Harless.
10.9 Amended and Restated Employment Agreement, dated June 27, 1996, between the
Registrant and W. Hunt Hodge.
10.10* Amended and Restated Employment Agreement, dated June 27, 1996, between the
Registrant and Clinton D. Smith.
</TABLE>
<PAGE> 154
<TABLE>
<C> <S>
10.11* Amended and Restated Consulting Services Agreement, dated June 27, 1996, between
the Registrant and David S. Huber.
10.12* Mariner Holdings, Inc. 1996 Stock Option Plan.
10.13* Form of Incentive Stock Option Agreement (pursuant to the Mariner Holdings, Inc.
1996 Stock Option Plan).
10.14* List of executive officers who are parties to an Incentive Stock Option Agreement.
10.15* Form of Nonstatutory Stock Option Agreement (pursuant to the Mariner Holdings,
Inc. 1996 Stock Option Plan).
10.16* List of executive officers who are parties to a Nonstatutory Stock Option
Agreement.
10.17* Nonstatutory Stock Option Agreement, dated June 27, 1996, between the Registrant
and David S. Huber.
10.18 Letter Agreement, dated September 26, 1996, between the Registrant and Gary M.
Pedlar.
10.19** Employment Agreement, dated December , 1996, between the Registrant and Frank A.
Pici.
12.1* Statement of Computation of Ratio of Earnings to Fixed Charges.
23.1 Consent of Deloitte & Touche LLP.
23.2** Consent of Fulbright & Jaworski L.L.P. (included in Exhibit 5.1).
23.3* Consent of Ryder Scott Company.
24.1* Powers of Attorney.
25.1* Statement of Eligibility Under Trust Indenture Act of 1939 of a Corporation
Designated to Act as Trustee on Form T-1.
27.1* Financial Data Schedule.
99.1 Form of Letter of Transmittal and related documents.
</TABLE>
- ---------------
* Previously filed.
** To be filed by amendment.
<PAGE> 1
EXHIBIT 4.9
[LEGEND FOR GLOBAL SECURITIES]
UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF
THE DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION ("DTC"), NEW YORK, NEW
YORK, TO THE COMPANY OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE OR
PAYMENT, AND ANY CERTIFICATE ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR
SUCH OTHER NAME AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY
PAYMENT IS MADE TO CEDE & CO., OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN
AUTHORIZED REPRESENTATIVE OF DTC) ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR
VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE REGISTERED
OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN.
TRANSFERS OF THIS GLOBAL SECURITY SHALL BE LIMITED TO TRANSFERS IN
WHOLE, BUT NOT IN PART, TO NOMINEES OF DTC OR TO A SUCCESSOR THEREOF OR SUCH
SUCCESSOR'S NOMINEE AND TRANSFERS OF PORTIONS OF THIS GLOBAL SECURITY SHALL BE
LIMITED TO TRANSFERS MADE IN ACCORDANCE WITH THE RESTRICTIONS SET FORTH IN THE
INDENTURE REFERRED TO ON THE REVERSE HEREOF.
<PAGE> 2
2
No. C- $
CUSIP:
ISIN:
10 1/2% Senior Subordinated Note Due 2006, Series B
MARINER ENERGY, INC., a Delaware corporation, promises to pay to
________________________, or registered assigns, the principal sum of
_____________________________ Dollars on August 1, 2006.
Interest Payment Dates: February 1 and August 1.
Record Dates: January 15 and July 15.
Additional provisions of this Security are set forth on the following pages of
this Security.
Dated: _________________, 1997
MARINER ENERGY, INC.,
by
----------------------------------
President
----------------------------------
Secretary
TRUSTEE'S CERTIFICATE OF
AUTHENTICATION
UNITED STATES [Seal]
TRUST COMPANY OF NEW YORK,
as Trustee, certifies
that this is one of
the Securities referred
to in the Indenture.
by
-----------------------------
Authorized Signatory
<PAGE> 3
3
10 1/2% Senior Subordinated Note Due 2006, Series B
1. Interest
Mariner Energy, Inc., a Delaware corporation (such corporation, and its
successors and assigns under the Indenture hereinafter referred to, being
herein called the "Company"), promises to pay interest on the principal amount
of this Security at the rate per annum shown above. The Company will pay
interest semiannually on February 1 and August 1 of each year. Interest on the
Securities will accrue from the most recent date to which interest has been
paid or, if no interest has been paid, from the date hereof. Interest will be
computed on the basis of a 360-day year of twelve 30-day months. The Company
shall pay interest on overdue principal at the rate borne by the Securities
plus 1% per annum, and it shall pay interest on overdue installments of
interest at the same rate to the extent lawful.
2. Method of Payment
The Company will pay interest on the Securities (except defaulted
interest) to the Persons who are registered holders of Securities at the close
of business on the January 15 or July 15 next preceding the interest payment
date even if Securities are canceled after the record date and on or before the
interest payment date. Holders must surrender Securities to a Paying Agent to
collect principal payments. The Company will pay principal and interest in
money of the United States that at the time of payment is legal tender for
payment of public and private debts. Payments in respect of Securities
(including principal, premium and interest) will be made by wire transfer of
immediately available funds to the accounts specified by the holders thereof
or, if no U.S. dollar account maintained by the payee with a bank in the United
States is designated by any holder to the Trustee or the Paying Agent at least
30 days prior to the relevant due date for payment (or such other date as the
Trustee may accept in its discretion), by mailing a check to the registered
address of such holder.
3. Paying Agent and Registrar
Initially, Unites States Trust Company of New York, a New York banking
corporation ("Trustee"), will act as Paying Agent and Registrar. The Company
may appoint and change any Paying Agent, Registrar or co-registrar without
notice. The Company or any of its domestically incorporated Wholly Owned
Subsidiaries may act as Paying Agent, Registrar or co-registrar.
<PAGE> 4
4
4. Indenture
The Company issued the Securities under an Indenture dated as of August
1, 1996 ("Indenture"), between the Company and the Trustee. The terms of the
Securities include those stated in the Indenture and those made part of the
Indenture by reference to the Trust Indenture Act of 1939 (15 U.S.C. Sections
77aaa-77bbbb) as in effect on the date of the Indenture (the "Act"). Terms
defined in the Indenture and not defined herein have the meanings ascribed
thereto in the Indenture. The Securities are subject to all such terms, and
Securityholders are referred to the Indenture and the Act for a statement of
those terms.
The Securities are general unsecured obligations of the Company limited
to $100,000,000 aggregate principal amount (subject to Section 2.06 of the
Indenture). The Indenture imposes certain limitations on the Incurrence of
Indebtedness by the Company and certain of its Subsidiaries, the payment of
dividends and other distributions on the Capital Stock of the Company and
certain of its Subsidiaries, the purchase or redemption of Capital Stock of the
Company and of certain Capital Stock of such Subsidiaries, the sale or transfer
of assets and Subsidiary stock, the creation of Liens, the entering into of
Sale/Leaseback Transactions and transactions with Affiliates. In addition, the
Indenture limits the ability of the Company and certain of its Subsidiaries to
restrict distributions and dividends from Subsidiaries. The Indenture also
restricts the ability of the Company and any Subsidiary Guarantor to
consolidate or merge with or into, or to transfer all or substantially all
their assets to, another person.
The Indenture also provides that, prior to any Subsidiary Guarantor
Incurring any Indebtedness pursuant to Section 4.03 thereof, the Company shall
cause such Subsidiary to Guarantee the Notes pursuant to a Subsidiary Guaranty.
Any such Subsidiary Guaranty will secure the due and punctual payment of the
principal of and interest, if any, on the Securities and all other amounts
payable by the Company under the Indenture and the Securities when and as the
same shall be due and payable, whether at maturity, by acceleration or
otherwise. Any Subsidiary Guaranty will unconditionally guarantee the
Obligations on a senior subordinated basis pursuant to the terms of the
Indenture.
<PAGE> 5
5
5. Optional Redemption
Except as set forth in the next paragraph, the Securities may not be
redeemed prior to August 1, 2001. On and after that date, the Company may
redeem the Securities in whole at any time or in part from time to time at the
following redemption prices (expressed in percentages of principal amount),
plus accrued interest to the redemption date (subject to the right of Holders
of record on the relevant record date to receive interest due on the related
interest payment date), if redeemed during the 12-month period beginning on or
after August 1 of the years set forth below:
<TABLE>
<CAPTION>
Period Percentage
------ ----------
<S> <C>
2001 . . . . . . . . . . . . . . . . . . . . . . . . . 105.250%
2002 . . . . . . . . . . . . . . . . . . . . . . . . . 102.625
2003 and thereafter . . . . . . . . . . . . . . . . . . 100.000
</TABLE>
In addition, at any time prior to August 1, 1999, the Company may redeem
up to 35% of the aggregate principal amount of Securities with the proceeds of
a Public Equity Offering following which there is a Public Market, at any time
or from time to time, at a redemption price (expressed as a percentage of
principal amount) of 110.5% plus accrued interest (if any) to redemption date
(subject to the right of Holders of record on the relevant record date to
receive interest due on the related interest payment date); provided, however,
that at least $65,000,000 aggregate principal amount of Securities must remain
outstanding after each such redemption; provided further, however, that any
such redemption shall occur within 60 days of the date of the closing of such
Public Equity Offering.
6. Notice of Redemption
Notice of redemption will be mailed at least 30 days but not more than
60 days before the redemption date to each Holder of Securities to be redeemed
at his registered address. Securities in denominations larger than $1,000 may
be redeemed in part but only in whole multiples of $1,000. If money sufficient
to pay the redemption price of and accrued interest on all Securities (or
portions thereof) to be redeemed on the redemption date is deposited with the
Paying Agent on or before the redemption date and certain other conditions are
satisfied, on and after such date interest ceases to accrue on such Securities
(or such portions thereof) called for redemption.
<PAGE> 6
6
7. Put Provisions
Upon a Change of Control, any Holder of Securities will have the right,
subject to certain conditions, to cause the Company to repurchase all or any
part of the Securities of such Holder at a repurchase price equal to 101% of
the principal amount of the Securities to be repurchased plus accrued interest
to the date of repurchase (subject to the right of holders of record on the
relevant record date to receive interest due on the related interest payment
date) as provided in, and subject to the terms of, the Indenture.
8. Subordination
The Securities are subordinated to Senior Indebtedness, as defined in
the Indenture. To the extent provided in the Indenture, Senior Indebtedness
must be paid before the Securities may be paid. The Company agrees, and each
Securityholder by accepting a Security agrees, to the subordination provisions
contained in the Indenture and authorizes the Trustee to give it effect and
appoints the Trustee as attorney-in-fact for such purpose.
9. Denominations; Transfer; Exchange
The Securities are in registered form without coupons in denominations
of $1,000 (or in the case of Definitive Securities sold to institutional
accredited investors as described in Rule 501(a)(1), (2), (3) or (7) under the
Securities Act, minimum denominations of $100,000) and whole multiples of
$1,000. A Holder may transfer or exchange Securities in accordance with the
Indenture. The Registrar may require a Holder, among other things, to furnish
appropriate endorsements or transfer documents and to pay any taxes and fees
required by law or permitted by the Indenture. The Registrar need not register
the transfer of or exchange any Securities selected for redemption (except, in
the case of a Security to be redeemed in part, the portion of the Security not
to be redeemed) or any Securities for a period of 15 days before a selection of
Securities to be redeemed or 15 days before an interest payment date.
10. Persons Deemed Owners
The registered Holder of this Security may be treated as the owner of it
for all purposes.
11. Unclaimed Money
If money for the payment of principal or interest remains unclaimed for
two years, the Trustee or Paying Agent shall pay the money back to the Company
at its request unless an abandoned property law designates another Person.
After any such payment, Holders entitled to the money must look only to the
Company and not to the Trustee for payment.
<PAGE> 7
7
12. Discharge and Defeasance
Subject to certain conditions, the Company at any time may terminate
some or all of its obligations under the Securities and the Indenture if the
Company deposits with the Trustee money or U.S. Government Obligations for the
payment of principal and interest on the Securities to redemption or maturity,
as the case may be.
13. Amendment, Waiver
Subject to certain exceptions set forth in the Indenture, (i) the
Indenture or the Securities may be amended with the written consent of the
Holders of at least a majority in principal amount outstanding of the
Securities and (ii) any default or noncompliance with any provision may be
waived with the written consent of the Holders of a majority in principal
amount outstanding of the Securities. Subject to certain exceptions set forth
in the Indenture, without the consent of any Securityholder, the Company and
the Trustee may amend the Indenture or the Securities to cure any ambiguity,
omission, defect or inconsistency, or to comply with Article 5 of the
Indenture, or to provide for uncertificated Securities in addition to or in
place of certificated Securities, or to add guarantees with respect to the
Securities or to secure the Securities, or to add additional covenants or
surrender rights and powers conferred on the Company, or to comply with any
request of the SEC in connection with qualifying the Indenture under the Act,
or to make certain changes in the subordination provisions, or to make any
change that does not adversely affect the rights of any Securityholder.
14. Defaults and Remedies
Under the Indenture, Events of Default include (i) default for 30 days
in payment of interest on the Securities; (ii) default in payment of principal
on the Securities at maturity, upon redemption pursuant to paragraph 5 or 6 of
the Securities, upon acceleration or otherwise, or failure by the Company to
redeem or purchase Securities when required; (iii) failure by the Company to
comply with other agreements in the Indenture or the Securities, in certain
cases subject to notice and lapse of time; (iv) certain accelerations
(including failure to pay within any grace period after final maturity) of
other Indebtedness of the Company if the amount accelerated (or so unpaid)
exceeds $10,000,000; (v) certain events of bankruptcy or insolvency with
respect to the Company and the Significant Subsidiaries; and (vi) certain
judgments or decrees for the payment of money in excess of $10,000,000. If an
Event of Default occurs and is continuing, the Trustee or the Holders of at
least 25% in principal amount of the Securities may declare all the Securities
to be due and payable immediately. Certain events of bankruptcy or insolvency
are Events of Default which will result in the
<PAGE> 8
8
Securities being due and payable immediately upon the occurrence of such Events
of Default.
Securityholders may not enforce the Indenture or the Securities except
as provided in the Indenture. The Trustee may refuse to enforce the Indenture
or the Securities unless it receives reasonable indemnity or security. Subject
to certain limitations, Holders of a majority in principal amount of the
Securities may direct the Trustee in its exercise of any trust or power. The
Trustee may withhold from Securityholders notice of any continuing Default
(except a Default in payment of principal or interest) if it determines that
withholding notice is in the interest of the Holders.
15. Trustee Dealings with the Company
Subject to certain limitations imposed by the Act, the Trustee under
the Indenture, in its individual or any other capacity, may become the owner or
pledgee of Securities and may otherwise deal with and collect obligations owed
to it by the Company or its Affiliates and may otherwise deal with the Company
or its Affiliates with the same rights it would have if it were not Trustee.
16. No Recourse Against Others
A director, officer, employee or stockholder, as such, of the Company or
the Trustee shall not have any liability for any obligations of the Company
under the Securities or the Indenture or for any claim based on, in respect of
or by reason of such obligations or their creation. By accepting a Security,
each Securityholder waives and releases all such liability. The waiver and
release are part of the consideration for the issue of the Securities.
17. Authentication
This Security shall not be valid until an authorized signatory of the
Trustee (or an authenticating agent) manually signs the certificate of
authentication on the facing page of this Security.
18. Abbreviations
Customary abbreviations may be used in the name of a Securityholder or
an assignee, such as TEN COM (=tenants in common), TEN ENT (=tenants by the
entireties), JT TEN (=joint tenants with rights of survivorship and not as
tenants in common), CUST (=custodian), and U/G/M/A (=Uniform Gift to Minors
Act).
<PAGE> 9
9
19. CUSIP Numbers
Pursuant to a recommendation promulgated by the Committee on Uniform
Security Identification Procedures the Company has caused CUSIP numbers to be
printed on the Securities and has directed the Trustee to use CUSIP numbers in
notices of redemption as a convenience to Securityholders. No representation
is made as to the accuracy of such numbers either as printed on the Securities
or as contained in any notice of redemption and reliance may be placed only on
the other identification numbers placed thereon.
20. Holders' Compliance with Registration Agreement
Each Holder of a Security, by acceptance hereof, acknowledges and agrees
to the provisions of the Registration Agreement, including, without limitation,
the obligations of the Holders with respect to a registration and the
indemnification of the Company to the extent provided therein.
21. Governing Law
THIS SECURITY SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH,
THE LAWS OF THE STATE OF NEW YORK BUT WITHOUT GIVING EFFECT TO APPLICABLE
PRINCIPLES OF CONFLICTS OF LAW TO THE EXTENT THAT THE APPLICATION OF THE LAWS
OF ANOTHER JURISDICTION WOULD BE REQUIRED THEREBY.
THE COMPANY WILL FURNISH TO ANY SECURITYHOLDER UPON WRITTEN REQUEST AND
WITHOUT CHARGE TO THE SECURITYHOLDER A COPY OF THE INDENTURE. REQUESTS MAY BE
MADE TO MARINER ENERGY, INC., 580 WESTLAKE PARK BLVD., SUITE 1300, HOUSTON,
TEXAS 77079, ATTENTION: JAMES M. FITZPATRICK.
<PAGE> 10
ASSIGNMENT FORM
To assign this Security, fill in the form below.
I or we assign and transfer this Security to
- --------------------------------------------------------------------------------
(Print or type assignee's name, address and zip code)
- --------------------------------------------------------------------------------
(Assignee's social security or tax identification number)
and irrevocably appoint ___________________________________ agent to transfer
this Security on the books of the Company. The agent may substitute another to
act for him.
Date:
----------------------------
Your Signature:
- --------------------------------------------------------------------------------
Sign exactly as your name appears on the facing page of this Security.
<PAGE> 11
OPTION OF HOLDER TO ELECT PURCHASE
IF YOU ELECT TO HAVE THIS SECURITY PURCHASED BY THE COMPANY PURSUANT TO
SECTION 4.06 OR 4.08 OF THE INDENTURE, CHECK THIS BOX:
[ ]
IF YOU ELECT TO HAVE ONLY PART OF THIS SECURITY PURCHASED BY THE COMPANY
PURSUANT TO SECTION 4.06 OR 4.08 OF THE INDENTURE, STATE THE AMOUNT:
$
-----------------------------------
DATE: YOUR SIGNATURE:
--------------------- -------------------------------------
(SIGN EXACTLY AS YOUR NAME APPEARS
ON THE OTHER SIDE OF THE SECURITY)
SIGNATURE GUARANTEE:
-----------------------------------------------------------
(SIGNATURE MUST BE GUARANTEED BY A
MEMBER FIRM OF THE NEW YORK STOCK
EXCHANGE OR A COMMERCIAL BANK OR TRUST
COMPANY)
<PAGE> 12
SCHEDULE OF INCREASES OR DECREASES IN GLOBAL SECURITY
The following increases or decreases in this Global Security have been
made:
<TABLE>
<CAPTION>
============================================================================================================
Date of Amount of decrease Amount of increase Principal amount of Signature of authorized
Exchange in Principal in Principal this Global Security officer of Trustee or
Amount of this Amount of this following decrease Securities Custodian
Global Security Global Security or increase
============================================================================================================
<S> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
============================================================================================================
</TABLE>
<PAGE> 1
EXHIBIT 10.9
AMENDED AND RESTATED
EMPLOYMENT AGREEMENT
THIS AMENDED AND RESTATED EMPLOYMENT AGREEMENT (hereinafter called
this "Agreement") is entered into effective as of June 27, 1996 (the "Effective
Date"), by and between MARINER ENERGY, INC. (formerly known as Hardy Oil & Gas
USA Inc.) (hereinafter called "Company") and William Hunt Hodge (hereinafter
called "Employee").
WHEREAS, Company and Employee entered into that certain Employment
Agreement dated March 31, 1987, which was thereafter amended on a number of
occasions (such Employment Agreement, as heretofore amended, being referred to
herein as the "Employment Agreement"); and
WHEREAS, Enron Capital & Trade Resources Corp., a Delaware
corporation, Mystery Acquisition, Inc., a Delaware corporation ("Parent"),
Robert E. Henderson, Richard R. Clark, Michael W. Strickler, and D. S. Huber,
have entered into that certain Stockholders' Agreement dated April 2, 1996 (the
"Stockholders Agreement"); and
WHEREAS, Section C.2(a) of the Stockholders Agreement provides that
the Employment Agreement will be amended and restated as set forth herein and
Company and Employee desire to so amend and restate the Employment Agreement;
NOW, THEREFORE, in consideration of the promises and the mutual
covenants and agreements herein contained, the parties hereto agree as follows:
1. Employment.
Company hereby employs Employee to serve as Vice President -
Administration of Company. The permanent place of Employee's
employment shall be at a location within a 50-mile radius of
the central business district of the City of Houston, Texas;
provided, however, Employee shall be required to undertake
such ordinary and usual travel as is necessary to properly
discharge his duties and responsibilities hereunder. Employee
hereby accepts such employment, and agrees to serve Company
faithfully, diligently and in a good and workmanlike manner.
2. Term.
The term of employment shall be for a term of three (3) years
beginning on the Effective Date, subject, however, to the
provisions of paragraph 3.
Employment Agreement -- William Hunt Hodge
-1-
<PAGE> 2
3. Extension and Termination.
3.1 If either Employee or Company elects to terminate
this Agreement at the end of the term stated in
paragraph 2, or at the end of any extended term
hereof as hereinafter provided, notice of the
election to terminate shall be given to the other
party no later than six (6) months before the end of
this Agreement. If no notice is given by either
party, the term, or extended term, of this Agreement
shall be deemed to have been extended for an
additional three (3) months.
3.2 In the event Company elects to terminate this
Agreement as provided in paragraph 3.1 above:
3.2.1 Company shall pay to Employee his salary and
other benefits provided elsewhere in this
Agreement for Employee's services rendered to
Company hereunder through the end of such
term or extended term.
3.2.2 Company shall pay to Employee, on or before
the last day of his employment hereunder, a
lump sum cash payment equal to six (6)
months' salary at Employee's monthly rate for
the month immediately preceding the month in
which Company elects to terminate this
Agreement.
3.2.3 Company shall pay to Employee, on or before
the last day of his employment hereunder, a
lump sum cash payment for all (a) vacation
time carried forward from a previous year in
accordance with paragraph 8, and (b) all
earned and unused vacation time for the then
current year. Earned vacation time shall,
for the purpose of this paragraph, be
calculated by dividing the number of days in
the calendar year which have transpired by
365, and then multiplying the result by the
number of vacation days to which Employee is
entitled for that year pursuant to paragraph
8.
3.2.4 If Employee has a leased automobile, the
lease payments on which are guaranteed by
Company, Employee shall have the option, to
be exercised on or before the last day of his
employment hereunder, of assuming the
remaining lease payments and retaining the
automobile, or assigning the lease agreement
to Company in return for Company's agreement
to assume the remaining lease payments.
3.2.5 Interests vested in Employee under paragraph
9 of this Agreement shall be assigned in due
course in compliance with paragraph 9.4.
Company and Employee agree that the
Employment Agreement -- William Hunt Hodge
-2-
<PAGE> 3
promises, covenants and undertakings of
paragraph 9 shall survive the termination of
employment of Employee and shall be binding
on all assigns of Company.
3.3 In the event Employee elects to terminate this
Agreement as provided in paragraph 3.1 above:
3.3.1 Employee agrees to serve to the end of the
term, or extended term hereof, unless waived
by Company.
3.3.2 The provisions of paragraphs 3.2.1, 3.2.3,
3.2.4, and 3.2.5 shall be applicable, but
Employee shall not be entitled to the payment
provided for in paragraph 3.2.2.
3.4 Company may at its option consent to a request by
Employee to terminate this Agreement at a time other
than that stated in paragraph 2, as extended, in
which case the date requested by Employee and agreed
to by Company will be the end of the term of this
Agreement and the provisions of paragraph 3.3 shall
be applicable.
3.5 Company may terminate this Agreement for "Cause" (as
hereinafter defined in this paragraph 3.5) upon
written notice of such termination to Employee by
Company. Any termination of this Agreement by
Company for Cause shall be effective thirty (30) days
after written notice of termination for Cause is
given by Company to Employee. If Company terminates
this Agreement for Cause, Company shall have no
liability or obligation to Employee thereafter under
this Agreement except (i) for the payment of his
salary and other benefits through the month of
discharge, prorated in the case of salary for the
month of discharge on a daily basis to the date of
termination, and (ii) that the provisions of
paragraph 3.2.5 shall be applicable. As used in this
Agreement, the term "Cause" means (a) Employee is
found guilty of, admits in writing facts amounting
to, or is held civilly liable for fraud, embezzlement
or dishonesty, (b) Employee is convicted of a felony
involving a crime of moral turpitude or any other
felony if the Board of Directors of the Company in
good faith determines that the continued employment
of the Employee would be materially detrimental to
the Company (in any case which felony through lapse
of time or otherwise is not subject to appeal), (c)
Employee knowingly discloses trade secrets or
confidential Company matters to unauthorized persons,
(d) Employee willfully breaches or habitually
neglects any duties he is required to perform under
the terms of this Agreement and any such breach or
neglect is not cured within thirty (30) days after
Company has provided Employee with written notice of
such breach or neglect, (e)
Employment Agreement -- William Hunt Hodge
-3-
<PAGE> 4
Employee materially breaches any of the other
material terms of this Agreement and any such breach
is not cured within thirty (30) days after the
Company has provided Employee with written notice of
such breach, and (f) the occurrence of an action or
finding described in paragraph 17, except as
otherwise provided in paragraph 17. The waiver by
Company of a breach of any provision of this
Agreement by Employee shall not operate or be
construed as a waiver of any subsequent breach by
Employee.
3.6 In the event Company terminates this Agreement or
discharges Employee other than as provided in
paragraphs 3.1, 3.4 or 3.5 above, Employee shall be
entitled to receive on the date of such termination
or discharge:
3.6.1 A lump sum cash payment equal to Employee's
salary, at Employee's monthly rate for the
month immediately preceding the month in
which such termination or discharge occurs,
for the unexpired portion of the term or
extended term hereof then in effect.
3.6.2 The payments and other benefits provided for
in paragraphs 3.2.2, 3.2.3, 3.2.4 and 3.2.5
hereof.
3.7 In the event Employee terminates this Agreement for
"Good Reason" (as defined in paragraph 3.9), and
prior to such termination Employee has not terminated
this Agreement under paragraph 3.1 hereof, Employee
shall be entitled to receive from Company on the date
of such termination:
3.7.1 A lump sum cash payment equal to Employee's
salary, at Employee's monthly rate in effect
at the effective time of such termination
(but prior to giving effect to any reduction
therein which precipitated such termination),
for the unexpired portion of the term or
extended term hereof then in effect.
3.7.2 A lump sum cash payment equal to six (6)
months' salary, at Employee's rate in effect
at the time of such termination (but prior to
giving effect to any reduction therein which
precipitated such termination).
3.7.3 The payments and other benefits provided for
in paragraphs 3.2.3, 3.2.4 and 3.2.5.
3.8 Any termination of this Agreement by Employee for
Good Reason shall be effective thirty (30) days after
written notice of termination for Good Reason is
given by Employee to Company
Employment Agreement -- William Hunt Hodge
-4-
<PAGE> 5
3.9 As used in this Agreement, the term "Good Reason"
means any one or more of the following events has
occurred:
3.9.1 The assignment to Employee of any duties
materially inconsistent with Employee's
position (including office, title and
reporting requirements), authority, duties or
responsibilities with Company or any other
action that results in a material diminution
in, or interference with, such position,
authority, duties or responsibilities, and
any such assignment or action is not cured
within thirty (30) days after Employee has
provided Company with written notice of such
assignment or action;
3.9.2 The failure to continue to provide Employee
with office space, related facilities and
support personnel (including, but not limited
to, administrative and secretarial
assistance) (a) that are both commensurate
with Employee's responsibilities to and
position with Company and not materially
dissimilar to the office space, related
facilities and support personnel provided to
other employees of Company having comparable
responsibility to that of Employee or (b)
that are physically located at Company's
principal executive offices, and any such
failure is not cured within thirty (30) days
after Employee has provided Company with
written notice of such failure;
3.9.3 Any (a) reduction in Employee's monthly
salary as established in paragraph 5
(including subsequent increases), (b)
reduction in, discontinuance of, or failure
to allow or continue to allow Employee's
participation in, the incentive compensation
program provided under paragraph 9 hereof, or
(c) reduction in, or failure to allow or
continue Employee's participation in, any
employee benefit plan or program (except when
such benefit plan or program is replaced with
another benefit plan, program or arrangement
that provides Employee, in the aggregate,
with reasonably comparable benefits) in which
Employee is participating or is eligible to
participate prior to such reduction or
failure (other than as a result of the
expiration of such plan or program), and any
such reduction, discontinuance or failure is
not cured within thirty (30) days after
Employee has provided Company with written
notice of such reduction or failure;
3.9.4 The relocation of Employee's or Company's
principal office and principal place of
Employee's performance of his duties and
responsibilities to a location more than 50
miles outside
Employment Agreement -- William Hunt Hodge
-5-
<PAGE> 6
of the central business district of the City
of Houston, Texas; or
3.9.5 A breach of any material provision of this
Agreement by Company (other than any breach
described in paragraphs 3.9.1, 3.9.2, 3.9.3,
and 3.9.4) which is not cured within thirty
(30) days after Employee has provided Company
with written notice of such breach.
4. Confidential Information.
4.1 Employee agrees that he will, during the term of this
Agreement, and for a period of four (4) years from
the date of termination of his employment hereunder,
keep secret and confidential and not disclose to any
party not a party to this Agreement, land or lease
data, geological or geophysical data, well data or
any other information which he may receive as a
result of the performance of his duties hereunder,
except when disclosure is necessary for the
performance of his duties to Company hereunder. This
paragraph shall not apply to information that is in
the public domain through no action of Employee.
4.2 Upon termination of this employment hereunder,
Employee shall promptly deliver to Company all
written information and documents (whether
confidential or not), and all copies thereof,
relating to Company's business and activities and
which are in the possession of or under the control
of Employee.
5. Salary.
As compensation for his services rendered to Company
hereunder, Company shall pay to Employee a salary at the rate
of $9,083.33 per month. Employee's salary may be reviewed at
such times as may be determined by Company, and Company may at
its discretion increase this salary. Employee's salary shall
be paid in two equal monthly installments, payable on the
fifteenth and last days of each month (or on the first
business day of Company thereafter if any such payment date is
not a business day of Company), subject to any and all
necessary withholdings and deductions.
6. Automobile Allowance.
Company agrees to pay an automobile allowance of $250.00
dollars per month to Employee. In addition to such monthly
allowance, Company shall pay, in accordance with Company
policy, for all gasoline, insurance and maintenance required
for use of the automobile.
Employment Agreement -- William Hunt Hodge
-6-
<PAGE> 7
7. Business Expenses.
Employee is authorized to incur reasonable business expenses
in accordance with Company's policies as may be established
from time to time for promoting the business of Company,
including expenditures for entertainment and travel. Company
shall reimburse Employee from time to time for all such
business expenses in accordance with those policies adopted by
Company which include, but are not limited to, the requirement
that Employee timely present to Company:
7.1 The amount of the expenditure;
7.2 The time, place and description of the expense;
7.3 The business reason for the expenditure and business
benefit derived or expected to be derived therefrom;
and
7.4 The name and occupation of the person or persons
entertained to establish the business relationship
with Company.
With respect to any reimbursable business expense contemplated
above exceeding twenty-five dollars ($25.00), Employee will
furnish documentary evidence of such expense to Company.
8. Vacation.
Employee shall be entitled to an annual vacation leave of
twenty (20) days per calendar year at full pay. The timing
and use of such vacation days shall be requested by Employee
and approved by Company in accordance with its policy. Up to
one week may be carried over from year to year. Employee
shall not be entitled to receive payment in lieu of unused
vacation time except as otherwise provided herein. With prior
approval, vacation may be deferred if business matters keep
Employee from taking his normal vacation.
9. Incentive Compensation.
9.1 Definitions.
An "AFFILIATE" of a specified person is any person that,
directly or indirectly through one or more intermediaries,
controls, is controlled by or is under common control with
that specified person.
"BENEFICIAL OWNERSHIP" of a security shall be determined in
accordance with Rule 13d-3 promulgated under the Securities
Exchange Act of 1934.
Employment Agreement -- William Hunt Hodge
-7-
<PAGE> 8
A "CHANGE IN CONTROL" shall have occurred if, after the
Effective Date:
(i) Any person or group of affiliated
persons (other than Joint Energy Development
Investments Limited Partnership ("JEDI") or an
affiliate of Enron Corp.) shall become the beneficial
owner, directly or indirectly, of 66-2/3 percent or
more of the outstanding Voting Stock of Newco unless
Newco becomes a subsidiary of an entity which does
not have a beneficial owner, directly or indirectly,
of 66 2/3 percent or more of the outstanding Voting
Stock of such entity (other than JEDI or an affiliate
of Enron Corp.); or
(ii) Newco shall approve (x) a merger or
consolidation of Newco with or into any other person,
if as a result any person (other than JEDI or an
affiliate of Enron Corp.) shall become the beneficial
owner, directly or indirectly, of 66-2/3 percent or
more of the outstanding Voting Stock of Newco unless
Newco becomes a subsidiary of an entity which does
not have a beneficial owner, directly or indirectly,
of 66-2/3 percent or more of the outstanding Voting
Stock of such entity (other than JEDI or an affiliate
of Enron Corp.), (y) any sale, lease, exchange or
other transfer of two-thirds or more of the
consolidated assets of Newco and its subsidiaries
taken as a whole in one transaction or a series of
related transactions whether by direct sale of
assets, sale of stock of a subsidiary or a merger
involving any subsidiary, or (z) the dissolution of
Newco; or
(iii) Recognizing that the events
described in this clause and the events described in
clause (ii) above may not necessarily be mutually
exclusive, any sale, exchange or other transfer of
two-thirds or more of the outstanding Voting Stock of
the Company or any sale, lease, exchange or other
transfer of two-thirds or more of the consolidated
assets of the Company and its subsidiaries (if any)
taken as a whole in one transaction or a series of
related transactions.
"COMPANY" means Mariner Energy, Inc., a Delaware corporation.
"COMPANY GROUP" means any or all of Company or any of its
affiliates, Hardy Oil & Gas plc or any of its affiliates,
Joint Energy Development Investments Limited Partnership or
any of its affiliates, Enron Capital & Trade Resources Corp.
or any of its affiliates, and any and all other persons paying
introduction/placement fees to Joint Energy Development
Investments Limited Partnership or any of its affiliates or
Enron Capital
Employment Agreement -- William Hunt Hodge
-8-
<PAGE> 9
& Trade Resources Corp. or any of its affiliates for access to
one or more Working Interests of Company.
"COMPANY'S WORKING INTEREST" and "WORKING INTEREST OF COMPANY"
mean, with respect to any Prospect, the Working Interest in
such Prospect acquired by Company and, for purposes of this
paragraph 9, shall include each portion thereof that Company
may subsequently transfer to another member of Company Group
or to any other person.
"CONTROL" means (a) holding, directly or indirectly, more than
50 percent of the outstanding voting securities of a
non-individual person, (b) having the right, directly or
indirectly, to more than 50 percent of the profits of a
non-individual person, (c) having the right, directly or
indirectly, to more than 50 percent of the assets of a
non-individual person if it is dissolved or (d) having the
contractual power to designate more than 50 percent of the
directors (or individuals exercising similar functions) of a
non-individual person.
"DEVELOPMENT ACREAGE" means the acreage within a Prospect
covering a known or inferred geologic structure upon which
Company and/or its joint working interest owners or a farmee
of Company's Working Interest in a Prospect have drilled a
well capable of commercial oil and/or gas production. Such
acreage shall be deemed to be Development Acreage from the
surface of the earth down through the deepest known productive
horizon. The committee described in paragraph 9.5.1(a),
below, shall designate acreage within a Prospect as
Development Acreage based upon the most current interpretation
available at the time of designation.
"EFFECTIVE DATE" means the effective date of this amended and
restated Employment Agreement.
"EXPLORATION AND DEVELOPMENT COSTS" means, with respect to any
Prospect or Prospects, and without duplication, all direct,
capital costs actually incurred by Company Group in connection
with exploration and development of such Prospect or
Prospects, including, without limitation, all costs incurred
in preparing for drilling, drilling, testing, completing,
equipping (including, without limitation, installation of
platforms, facilities and pipelines and dry hole costs) and
recompleting wells, all geological and geophysical costs, and
all leasehold costs (including bonus, delay rentals and all
other costs of acquiring and maintaining in force the leases,
or portions thereof or undivided interests therein, included
in such Prospects). Exploration and Development Costs shall
not include lease operating expenses or general and
administrative expenses of the Company Group.
"EXPLORATORY ACREAGE" means the acreage comprising a Prospect
which has not been designated by the committee described in
paragraph 9.5.1(a),
Employment Agreement -- William Hunt Hodge
-9-
<PAGE> 10
below, as either Development Acreage or a Producing Property
Acquisition. Exploratory Acreage shall not be limited as to
depth (except to the extent, if any, to which Company's
Working Interest therein is limited as to depth).
"FPF/TLP EXPLOITATION PROSPECT" means any Prospect containing
a hydrocarbon reservoir which (a) exhibits a sufficient
likelihood of such hydrocarbon reservoir being economic, based
on commercially producible shows of hydrocarbons in a well
drilled within such reservoir, together with other geological
and geophysical data and interpretations, such that Company in
its reasonable judgment plans to develop such reservoir, and
(b) is reasonably expected by Company to be exploited and/or
developed by utilizing a floating production facility and/or a
tension leg platform.
"FPF/TLP EXPLORATION PROSPECT" means any Prospect (other than
an FPF/TLP Exploitation Prospect) with respect to which
Company reasonably expects to utilize a floating production
facility and/or a tension leg platform in connection with
operations to be conducted on such Prospect.
"INITIAL WELL" means, with respect to a Prospect, the first
well drilled on such Prospect in which Company participates as
a Working Interest owner or with respect to which Company
retains an overriding royalty or other interest in oil and gas
production from such well.
"MAJOR PROSPECT" means any FPF/TLP Exploration Prospect,
FPF/TLP Exploitation Prospect, Subsea Tieback Exploration
Prospect or Subsea Tieback Exploitation Prospect with respect
to which the total amount estimated by Company for Exploration
and Development Costs to be incurred by Company Group (i.e.,
net to Company Group's interest) through the end of the
primary development period for the field comprising such
Prospect exceeds $30 million.
"NET PROFIT SHARE LEASE" means an oil and gas lease which
provides for sharing between lessor and lessee of the net
profits or net proceeds, as defined in said lease, from the
sale of oil and/or gas produced therefrom.
"NEWCO" means Mariner Holdings, Inc., a Delaware corporation,
or its successors.
"OVERRIDING ROYALTY INTEREST" means an interest in gross
production of oil and gas under each oil and gas lease (or
portion thereof) included within a Prospect, which interest
(except as herein otherwise provided) shall be free of all
costs of acquisition, exploration, drilling, completing,
equipping, operating and developing any oil and gas produced
from such lease.
Employment Agreement -- William Hunt Hodge
-10-
<PAGE> 11
A "PARENT" of a specified person is another person that
controls such specified person directly or indirectly through
one or more intermediaries.
"PAYOUT" means, for each Initial Well and each subsequent well
drilled on a Prospect, the point in time at which the revenue
to Company or its assigns from its interest in oil and gas
production from such well (after deduction of Company's or its
assigns' prorata part of the burden of (i) all landowners'
royalties, overriding royalties, net profits interests,
production payments or other burdens upon, measured by or
payable out of such production and (ii) all applicable ad
valorem, production, severance, sales, gathering, windfall
profits excise and similar taxes) equals the sum incurred by
or for the account of Company or its assigns (x) in preparing
for drilling, drilling, testing, completing, equipping
(including, without limitation, installation of platforms,
facilities and pipelines), operating, reworking and
recompleting the well, and marketing the production therefrom,
and (y) for such well's allocable share of geological and
geophysical costs, leasehold costs and other common costs.
"Leasehold costs" shall mean payments for bonus, delay
rentals, and all other costs of acquiring from the landowners
(or, in the case of an acquisition by Company (but not any
assignee of Company), from predecessors in title to such
leases) and maintaining in force the leases allocated to the
well. Leases "allocated" to a well shall mean the leases or
portions thereof or undivided interests therein to which
production from a well is attributed, whether on a lease or
unit basis. With respect to each such well, "common costs"
shall mean capital costs that are attributable to (a) such
Prospect as a whole or (b) such well and one or more other
wells (but not all wells) on such Prospect and shall include,
without limitation, costs of drilling, plugging and abandoning
non- productive wells on such Prospect. Each such well's
allocable share of common costs shall be determined by Company
in any manner it deems appropriate from time to time.
The expression "2.5 TIMES PAYOUT" means, for each Initial Well
and each subsequent well drilled on a Prospect, the point in
time at which such revenue to Company or its assigns from its
interest in oil and gas production from such well, after such
deductions mentioned above, equals the product of 2.5 times
the sum incurred by or for the account of Company or its
assigns (x) in preparing for drilling, drilling, testing,
completing, equipping, operating, reworking and recompleting
the well, and marketing the production therefrom, and (y) for
such well's allocable share of geological and geophysical
costs, leasehold costs and other common costs as mentioned
above.
A "PERSON" is an individual, a corporation, a trust, a
partnership, a limited liability company, an association or
any other entity.
Employment Agreement -- William Hunt Hodge
-11-
<PAGE> 12
"PRODUCING PROPERTY ACQUISITION" means a lease or leases, or
portions thereof or undivided interests therein, acquired by
Company during the term or extended term of this Agreement
principally for the value of existing oil and gas production
thereon and further development of oil and gas reserves
considered proved under such lease or leases at the time of
acquisition. A Producing Property Acquisition shall include
acquisition of such leasehold interests even though Company
may have previously acquired interests in some or all of the
same leases as a Prospect acquisition (i.e., prior to the time
such leases were considered to contain proved oil and gas
reserves). Company may in its sole discretion designate a
Producing Property Acquisition in whole or in part as a
Prospect.
"PROSPECT" means the lease or leases, or portions thereof or
undivided interests therein, acquired by Company within the
United States and its coastal waters while Employee is
employed by Company and during the term or extended term of
this Agreement covering lands which in the sole opinion of
Company may contain one or more hydrocarbon accumulations
capable of being commercially produced. For purposes of this
definition of Prospect, the acquisition of a lease or leases
shall mean the acquisition by Company of legal or beneficial
rights or interests in a lease or leases, including (without
limitation) contractual rights to acquire or earn a lease or
leases (whether by farmout agreement or otherwise, and whether
such contractual rights are subject to certain conditions such
as the drilling or completion of a commercial well, and
without regard to the results of the drilling or completion of
any such well under such contract). A Prospect shall not
include a prospect acquired by Company by merger or
consolidation of Company with or into another entity unless
such prospect is so designated by Company. A Prospect shall
not include a Producing Property Acquisition unless such
Prospect is so designated by Company, and shall not include
leases included in a Prospect under previous Employee
Incentive Compensation Plans. All Prospects shall be deemed
to be without depth limitation unless the Company designates
specified depths only at the time said Prospect is initially
acquired by Company. Notwithstanding the date or dates on
which leases in a Prospect are actually acquired by Company,
solely for purposes of determining the employees of Company
who are entitled to receive an Overriding Royalty Interest
therein, such leases, or portions thereof or undivided
interests therein, shall be deemed to have been acquired by
Company as of the date on which Company's management approved
such Prospect acquisition. In furtherance of the foregoing,
if any lease or leases, or portions thereof or undivided
interests therein, acquired by Company on or after April 18,
1996, but prior to the commencement of the term of this
Agreement, would constitute a "Prospect" under the foregoing
definition but for the fact that such lease or leases, or
portions thereof or undivided interests therein, were not
acquired by Company during the term of this Agreement, the
same shall, nevertheless, be
Employment Agreement -- William Hunt Hodge
-12-
<PAGE> 13
deemed to have been acquired by Company as of the commencement
of the term of this Agreement and shall constitute a Prospect
for purposes of this paragraph 9.
"SUBSEA TIEBACK EXPLOITATION PROSPECT" means any Prospect
containing a hydrocarbon reservoir which (a) exhibits a
sufficient likelihood of such hydrocarbon reservoir being
economic, based on commercially producible shows of
hydrocarbons in a well drilled within such reservoir, together
with other geological and geophysical data and
interpretations, such that Company in its reasonable judgment
plans to develop such reservoir, and (b) is reasonably
expected by Company to be exploited and/or developed by
utilizing a subsea tieback system.
"SUBSEA TIEBACK EXPLORATION PROSPECT" means any Prospect
(other than a Subsea Tieback Exploitation Prospect) with
respect to which Company reasonably expects to utilize a
subsea tieback system in connection with operations to be
conducted on such Prospect.
A "SUBSIDIARY" of a specified person is an entity controlled
by such person directly or indirectly through one or more
intermediaries.
"VOTING STOCK" means shares of capital stock of the specified
entity the holders of which are entitled to vote for election
of directors thereof.
"WORKING INTEREST" means the leasehold working interest, or
undivided interest therein, under an oil and gas lease which
obligates the owner thereof to bear his percentage of the
costs and expenses relating to the maintenance and development
of, and operations relating to, such lease and the well or
wells associated therewith.
9.2 Employee's Property Interest.
9.2.1 Subject to the other provisions of this paragraph 9,
Employee shall own, be immediately vested with, and
be entitled to receive the benefits of an Overriding
Royalty Interest equal to an undivided percentage of
Company's Working Interest, more specifically
described below, in each well on a Prospect and the
lease or leases allocated thereto, as follows:
Employment Agreement -- William Hunt Hodge
-13-
<PAGE> 14
EMPLOYEE: William Hunt Hodge
OVERRIDING ROYALTY INTEREST
IN
FPF/TLP EXPLORATION PROSPECTS,
FPF/TLP EXPLOITATION PROSPECTS,
SUBSEA TIEBACK EXPLORATION PROSPECTS
AND
SUBSEA TIEBACK EXPLOITATION PROSPECTS
<TABLE>
<CAPTION>
GROUP TIME PERIOD BEFORE PAYOUT AFTER PAYOUT
----- ----------- ------------- ------------
<S> <C> <C> <C>
Group XIV 4/18/96-5/15/96 0.063020 0.252083
Group XV 5/16/96 and Thereafter 0.063020 0.252083
</TABLE>
<TABLE>
<CAPTION>
OVERRIDING ROYALTY INTEREST
IN
ALL OTHER PROSPECTS
<S> <C> <C> <C>
GROUP TIME PERIOD BEFORE PAYOUT AFTER PAYOUT
----- ----------- ------------- ------------
Group XIV 4/18/96-5/15/96 0.06875 0.27500
Group XV 5/16/96 and Thereafter 0.06875 0.27500
</TABLE>
At 7:00 a.m. on the first day of the month following the month
in which Payout of such well occurs, the Overriding Royalty
Interest shall increase from the applicable before-Payout
percentage to the applicable after-Payout percentage. Except
as herein otherwise expressly provided, references in this
paragraph 9 to Employee's "Overriding Royalty Interest" with
respect to any Prospect shall mean the applicable
before-Payout and after-Payout percentages of Company's
Working Interest in such Prospect as set forth above.
9.2.2 Under previous Employee Incentive Compensation Plans, Employee
has received or is entitled to receive overriding royalty
interests ("Existing ORIs") in certain prospects (the
"Existing Prospects"). The Existing ORIs are equal to an
undivided percentage of Company's Working Interest, more
specifically described below by Group and Time Period during
which Company acquired such Existing Prospects, in each well
on an Existing Prospect and the lease or leases allocated
thereto, as follows:
Employment Agreement -- William Hunt Hodge
-14-
<PAGE> 15
EMPLOYEE: William Hunt Hodge
<TABLE>
<CAPTION>
EXISTING ORI
------------
GROUP DATES BEFORE PAYOUT After Payout
----- ----- ------------- ------------
<S> <C> <C> <C>
GROUP I 4/1/87-9/3/87 0.03750% 0.1500%
GROUP II 9/4/87-10/31/87 0.07500% 0.3000%
GROUP III 11/1/87-7/16/88 0.07500% 0.3000%
GROUP IV 7/17/88-12/15/88 0.07500% 0.3000%
GROUP V 12/16/88-3/31/89 0.07500% 0.3000%
GROUP VI 4/1/89-9/24/90 0.07500% 0.3000%
GROUP VII 9/25/90-6/30/91 0.07500% 0.3000%
GROUP VIII 7/1/91-9/30/91 0.06250% 0.2500%
GROUP IX 10/1/91-2/14/93 0.06250% 0.2500%
GROUP X 2/15/93-6/30/93 0.06250% 0.2500%
GROUP XI 7/1/93-4/29/94 0.06250% 0.2500%
GROUP XII 4/30/94-3/31/95 0.06250% 0.2500%
GROUP XIII 4/1/95-4/17/96 0.06250% 0.2500%
</TABLE>
The provisions of paragraphs 9.4, 9.5, 9.6 and 9.7 shall apply
to the Existing ORIs in the Existing Prospects as fully as
such provisions apply to any Overriding Royalty Interest in a
Prospect to which Employee is entitled under this Agreement.
Mention is made that, effective June 1, 1996, the Company has
repurchased certain of the Existing ORIs from Employee as
contemplated by the Stockholders' Agreement referred to in
paragraph 9.5.1(a).
9.3 Governmental Filings.
Company will assist Employee in Filing an 83b Election with
the Internal Revenue Service on each Prospect, on a prospect
by prospect or lease by lease basis, as the case may be,
denoting the transfer to Employee of the Overriding Royalty
Interest and stating the value of such interest for the
purposes at the time the interest is acquired.
Employment Agreement -- William Hunt Hodge
-15-
<PAGE> 16
9.4 Assignment of Overriding Royalty Interest.
Except as otherwise expressly provided in paragraphs 9.4.8 and
9.4.9, Employee shall not be entitled to obtain recordable
assignments of his interest under this paragraph 9 until his
completion of three years of employment by Company and, except
as otherwise expressly provided herein, Employee shall forfeit
ownership of such interest if Employee's employment is
terminated by Company pursuant to paragraph 3.5 or by Employee
without Good Reason as defined in paragraph 3.9, prior to the
completion of such three years of employment. Upon completion
of three years of employment of Employee by Company,
Employee's ownership of interests theretofore or thereafter
transferred to him pursuant to this Agreement will no longer
be subject to forfeiture, and assignments will be made in
accordance with this paragraph 9.4. Subject to the other
provisions of this paragraph 9, Employee shall be entitled to
the revenue arising from his Overriding Royalty Interest
whether or not he is entitled to a recordable assignment.
Subject to the foregoing provisions of this paragraph 9.4 and
to the provisions of paragraph 9.5, as soon as practicable
after the end of each calendar quarter during the term or
extended term of this Agreement, Employee shall be entitled to
receive recordable assignments of his Overriding Royalty
Interest in a lease or leases (or portions thereof) acquired
by Company in a Prospect during such calendar quarter. If
Employee's employment is terminated by Company pursuant to
paragraph 3.5 or by Employee without Good Reason as defined in
paragraph 3.9, during any such calendar quarter, Employee
shall not be entitled to receive recordable assignments that
would otherwise have been due under this paragraph in respect
of any lease or leases (or portions thereof) acquired by
Company in a Prospect during such calendar quarter or
thereafter (and Employee shall not own, be vested with or be
entitled to receive the benefits of any Overriding Royalty
Interest that would have been granted by such recordable
assignments) unless the termination is at the end of the term
or extended term of this Agreement. As soon as practicable
after the end of each such calendar quarter, Company shall
provide Employee with the following:
(a) A recordable assignment of his Overriding
Royalty Interest in the leases (or portions
thereof) acquired by Company in each Prospect
during such calendar quarter.
(b) A plat outlining the geographical limits of
each such Prospect. Company shall review
each Prospect plat each calendar quarter in
light of drilling activity on or near the
Prospect, and expand the plat boundary if new
leases are acquired which Company believes to
contain a prospective hydrocarbon
accumulation that is located on the same
geological feature as such Prospect.
Employee shall be entitled to his Overriding
Royalty Interest in any lease
Employment Agreement -- William Hunt Hodge
-16-
<PAGE> 17
acquired by Company within the Prospect plat
boundary (and, to the extent provided in
paragraph 9.7.2, in any renewal, extension or
new lease within the Prospect plat boundary)
for as long as such lease within the boundary
remains in effect.
9.4.1 Upon execution and delivery of such recordable
assignment to Employee, Company shall record the
assignment.
9.4.2 If, prior to the drilling of the Initial Well on a
Prospect or thereafter, Company believes in good
faith that there is a substantial likelihood that it
may be necessary to exercise its discretion under
paragraph 9.5 with respect to adjustment of
Employee's Overriding Royalty Interest in leases
included within such Prospect, Company may defer
delivery of a recordable assignment of Employee's
Overriding Royalty Interest pending a determination
under paragraph 9.5.
9.4.3 Upon request by Company, Employee agrees to execute
and deliver any and all transfer orders, division
orders and other documents as may be necessary or
appropriate to cause all revenue attributable to his
interest in a well to be paid to Company on his
behalf until delivery by Company to Employee of a
recordable assignment of his interest in such well
pursuant to this paragraph 9. In such event, Company
agrees promptly to process such funds and pay all
funds due Employee at the same time third parties are
paid revenue distributions from such well by Company.
After an assignment is delivered to Employee, Company
shall promptly give appropriate notice to the
disbursing entities in order to facilitate direct
payment to Employee of all revenue attributable to
his interest in such well.
9.4.4. Subject to the last sentence of this paragraph 9.4.4,
Company or its assigns shall quarterly perform Payout
calculations on each well which has not reached
Payout in every Prospect so that payments to Employee
may be made on a proper before payout/after payout
basis on each well in every Prospect. Company or its
assigns shall prepare a quarterly Payout statement
for each well within each Prospect and shall provide
Employee a copy of said quarterly Payout statements
within ninety (90) days following the end of the
quarter. If Company or its assigns fails to provide
said quarterly Payout statements for any such well(s)
to at least five (5) employees (whether or not such
employees include the Employee) who are entitled to
receive an Overriding Royalty Interest in such
well(s) pursuant to this Agreement and/or other
employment agreements with Company for a period of
four (4) consecutive quarters, any such employee
(including without limitation, the
Employment Agreement -- William Hunt Hodge
-17-
<PAGE> 18
Employee) may give Company written notice of said
failure. If Company or its assigns does not provide
the overdue quarterly Payout statements to each
employee entitled to same within thirty (30) days
following receipt of such notice, all wells within
such Prospect which had previously been considered
before Payout pursuant to paragraph 9.2 shall be
deemed to be after Payout pursuant to paragraph 9.2
as of the first day of the month following the month
in which the earliest delinquent quarterly Payout
statement should have been provided. When Payout
status is reached on a well, Company or its assigns
shall deliver notice of such event to Employee, the
operator of such well and each purchaser of
production from such well and Company or its assigns
shall direct such operator or purchaser of production
(as appropriate) to disburse future revenues
attributable to Employee's and Company's respective
interests in such well on an after-Payout basis.
Notwithstanding the foregoing, if Employee's
Overriding Royalty Interest in any such well is
adjusted pursuant to any provisions of this paragraph
9 so as to be the same percentage before and after
Payout of such well, then the provisions of this
paragraph 9.4.4 shall no longer apply from and after
the date of such adjustment.
9.4.5 Should Employee be married or divorced at such time
as Employee earns the right to have an Overriding
Royalty Interest assigned to him hereunder, Company
shall have no obligation to make assignments to
Employee's spouse/or former spouse. Any division of
community property shall be the responsibility of
Employee.
9.4.6 All interests assigned by Company to Employee shall
be subject to the terms, conditions and provisions of
(a) any joint operating agreement at any time
theretofore or thereafter entered into by Company or
its assigns with other Working Interest owners
covering any of the leases affected by the Overriding
Royalty Interest herein provided for, and (b) any
farm-out or other agreements under which Company
acquires or may acquire its interest in the leases;
including, particularly, by way of illustration and
not by way of limitation, (i) any provision of an
applicable farm-out agreement requiring reduction of
Company's interest in the leases after "payout" of an
earning well or wells thereunder, in which event
Employee's Overriding Royalty in such leases shall be
proportionately reduced, and (ii) any provision
requiring forfeiture of interest for
nonparticipation, recoupment of multiple recovery
costs and the like to the extent that Company would
forfeit its Working Interest for nonparticipation
either forever or until recoupment of drilling and/or
operating costs by the third parties electing to
participate, or such other like reason; and in the
event any such provisions come into effect,
Employee's Overriding
Employment Agreement -- William Hunt Hodge
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<PAGE> 19
Royalty in such leases shall be suspended until such
time, if ever, as such multiple recovery of costs by
the participating leasehold owners has been recovered
or such other cause for suspension is removed and
such Working Interest of Company is reinstated, at
which time Employee's Overriding Royalty shall be so
reinstated.
All interests assigned by Company to Employee shall
be subject to the terms, conditions and provisions of
the leases, any assignments and/or subleases thereof
theretofore made or agreed to be made by Company, and
any amendments or modifications of the leases,
theretofore or thereafter made, and Employee agrees
that any such amendments or modifications may be made
without the consent or joinder of Employee.
9.4.7 Company or its assigns shall not have the right to
sell, assign, farmout, convey or otherwise encumber
Employee's Overriding Royalty Interest, except as
otherwise provided in this paragraph 9.
9.4.8(a) Except as otherwise provided in the
fifth sentence of paragraph 9.4, and
notwithstanding anything (other than
such fifth sentence of paragraph
9.4) contained herein to the
contrary, if, after the Effective
Date and during the term or extended
term hereof, there shall have been a
Change in Control, then Employee
shall be entitled to receive
recordable assignments of his
Overriding Royalty Interest,
adjusted in the manner described
hereinbelow, in any lease or leases
(or portions thereof or undivided
interests therein) theretofore
acquired by Company and not yet
assigned during the term or extended
term hereof and, upon subsequent
acquisition by Company, in any lease
or leases (or portions thereof or
undivided interests therein)
thereafter acquired by Company, in
all Prospects acquired by Company
prior to such Change in Control
(without regard to whether or not
Employee has then completed three
years of employment by Company).
Said Overriding Royalty Interest
shall be assigned in the following
manner:
Employee's after-Payout interest shall
be reduced to one-half of Employee's
after-Payout interest stated in
paragraph 9.2 (as such after-Payout
interest stated in paragraph 9.2 may
have previously been reduced
pursuant to other provisions of this
paragraph 9) and Employee's
before-Payout interest shall be
increased to twice Employee's
before-Payout
Employment Agreement -- William Hunt Hodge
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<PAGE> 20
interest stated in paragraph 9.2 (as
such before-Payout interest stated
in paragraph 9.2 may have previously
been reduced pursuant to other
provisions of this paragraph 9) with
the result that Employee's interests
before and after Payout shall be
equal.
9.4.8(b) Except as otherwise provided in the
fifth sentence of paragraph 9.4, and
notwithstanding anything (other than
such fifth sentence of paragraph
9.4) contained herein to the
contrary, if, after the Effective
Date and during the term or extended
term hereof, the Company's Working
Interest in any Prospect is sold,
transferred or conveyed to the
holder of any indebtedness of the
Company or of Newco or of any parent
or subsidiary of the Company or
Newco, or to any unaffiliated third
party, by or pursuant to a
foreclosure of any mortgage or other
security interest therein securing
such indebtedness or any part
thereof or by transfer or conveyance
in lieu of such foreclosure, then
Employee shall be entitled to
receive, prior to the consummation
of such sale, transfer or
conveyance, a recordable assignment
of his Overriding Royalty Interest,
adjusted in the manner described in
paragraph 9.4.8(a), in any lease or
leases (or portions thereof or
undivided interests therein)
theretofore acquired by Company and
not yet assigned during the term or
extended term hereof and, upon
subsequent acquisition by Company,
in any lease or leases (or portions
thereof or undivided interests
therein) thereafter acquired by
Company, in all Prospects acquired
by Company prior to such sale,
transfer or conveyance (without
regard to whether or not Employee
has then completed three years of
employment by Company).
9.4.9 Except as otherwise provided in the fifth sentence of
paragraph 9.4, and notwithstanding anything (other
than such fifth sentence of paragraph 9.4) contained
herein to the contrary, if, during the term or
extended term hereof, all or substantially all of the
Company's Working Interests in all or substantially
all Exploratory Acreage then owned by the Company are
sold, transferred or conveyed to an unaffiliated
third party, then Employee shall be entitled to
receive, prior to the consummation of such sale,
transfer or conveyance, recordable assignments of his
Overriding Royalty Interest, adjusted in the manner
described in paragraph 9.4.8(a), in all leases (or
portions thereof or undivided interests therein) that
Employment Agreement -- William Hunt Hodge
-20-
<PAGE> 21
cover and include such Exploratory Acreage not yet
assigned during the term or extended term hereof
(without regard to whether or not Employee has then
completed three years of employment by Company).
9.5 Retained Company Discretion
9.5.1 Employee and Company recognize that in instances
where all or a portion of Company's Working Interest
in a lease or leases will be sold or farmed out to
unaffiliated third parties, Employee's Overriding
Royalty Interest might in some circumstances have a
negative effect on the marketability of Company's
Working Interest to third parties. In such cases,
Company will in good faith attempt to transfer
Company's Working Interest subject to Employee's
Overriding Royalty Interest provided for in this
paragraph 9; provided, however, if, in Company's good
faith judgment, Company's Working Interest cannot be
sold or farmed out subject to Employee's Overriding
Royalty Interest, Company may elect to adjust
Employee's Overriding Royalty Interest as hereinafter
provided.
9.5.1(a) The Board of Directors of Company
shall designate a committee of not
less than three individual persons
employed by Company, at least half
of whom has been granted an employee
Overriding Royalty Interest by
Company, to exercise discretion on
behalf of Company in reducing or
modifying, pursuant to this
paragraph 9.5.1 only, the Overriding
Royalty Interests provided for in
this paragraph 9; provided, however,
that the Board of Directors of the
Company shall have the right to
designate a non-voting member of
such committee, who may be a
director of the Company or
otherwise, and such member shall
have the right to participate in all
meetings of such committee (and
shall receive reasonable advance
notice of any such meetings) and
shall be entitled to the same
information as is available to the
other members of the committee.
Such committee shall make all
decisions under this paragraph 9.5.1
subject to obtaining the approval of
the Board of Directors of Company
where such approval is required
under the provisions of this
paragraph 9.5.1. Any decision made
by the committee shall require the
approval of a majority of the
members of the committee. Any
change to this paragraph 9.5.1(a)
shall require the approval of the
Board of Directors of the Company
and a majority of the Management
Directors (as that
Employment Agreement -- William Hunt Hodge
-21-
<PAGE> 22
term is defined in the Stockholders'
Agreement dated April 2, 1996,
between Enron Capital & Trade
Resources Corp., Newco and certain
employees of and consultants to the
Company, as it may be amended from
time to time) who became
stockholders pursuant to Section B.1
of that agreement.
9.5.1(b) With respect to any Prospect on
which no initial Well has been
drilled and no assignments of
Overriding Royalty Interests have
been made to Employee, the committee
may modify or reduce the Overriding
Royalty Interest of Employee in
leases included within such Prospect
in any manner necessary in the good
faith judgment of the committee to
make an interest in such Prospect
saleable to any person not in
Company Group; provided, however, in
connection with any sale by Company
of an interest in such Prospect to
any such person, Employee's
Overriding Royalty Interest shall be
reduced to zero unless the committee
recommends a lesser reduction and
such recommendation is approved by
the Board of Directors of Company.
Such modification or reduction shall
apply only to the interest sold to
such a person, and shall not affect
the interest retained by the
Company. Any reduction or exercise
of discretion by Company under this
paragraph shall be applied
proportionately to all participants
who are entitled to receive from
Company an Overriding Royalty
Interest in leases included within
such Prospect.
9.5.1(c) With respect to any Prospect on
which the Initial Well has been
drilled and which Prospect has not
been determined by Company to be
capable of producing oil and/or gas,
should Company desire to sell all or
any portion of its Working Interest
in such Prospect to unaffiliated
third parties, the committee may
adjust the Overriding Royalty
Interest of Employee in leases
included within such Prospect in the
following manner:
Employee's after-Payout interest shall
be reduced to one-half of Employee's
after-Payout interest stated in
paragraph 9.2 (as such after-Payout
interest stated in paragraph 9.2 may
have previously been reduced
pursuant to other provisions of this
paragraph 9) and Employee's
before-Payout interest shall be
Employment Agreement -- William Hunt Hodge
-22-
<PAGE> 23
increased to twice Employee's
before-Payout interest stated in
paragraph 9.2 (as such before- Payout
interest stated in paragraph 9.2 may
have previously been reduced pursuant
to other provisions of this paragraph
9), with the result that Employee's
interests before and after Payout
shall be equal.
Such adjustment shall apply only to the
interest sold to unaffiliated third
parties, and shall not affect the
interest retained by Company. Any
exercise of discretion by Company
under this paragraph shall be
applied in like manner to all
participants who are entitled to
receive from Company an Overriding
Royalty Interest in leases included
within such Prospect.
Notwithstanding anything contained
herein to the contrary, if, after
the Effective Date and during the
term or extended term hereof, there
shall have been a Change in Control,
then neither Company nor the person
acquiring the control shall have any
right to make the adjustment
described above in this paragraph
9.5.1(c).
Notwithstanding anything contained
herein to the contrary, if, after
the Effective Date and during the
term or extended term hereof, the
Company's Working Interest in any
Prospect is sold, transferred or
conveyed to the holder of any
indebtedness of the Company or of
Newco or of any parent or subsidiary
of the Company or Newco, or to any
unaffiliated third party, by or
pursuant to a foreclosure of any
mortgage or other security interest
therein securing such indebtedness
or any part thereof or by transfer
or conveyance in lieu of such
foreclosure, then such holder or
other third party shall not have any
right to make the adjustment
described above in this paragraph
9.5.1.(c).
9.5.1(d) With respect to any Prospect which
has not been determined by Company
to be capable of producing oil
and/or gas, and regardless of
whether or not the Initial Well has
been drilled thereon, should Company
desire to farmout all or any portion
of its Working Interest in such
Prospect to unaffiliated third
parties, the committee shall (unless
the committee
Employment Agreement -- William Hunt Hodge
-23-
<PAGE> 24
recommends otherwise and the Board of
Directors approves such
recommendation) adjust the
Overriding Royalty Interest of
Employee in leases included within
such Prospect in the following
manner:
Employee's Overriding Royalty Interest
shall be calculated by multiplying
Employee's percentage interests
stated in paragraph 9.2 above (as
such interests may have previously
been reduced pursuant to other
provisions of this paragraph 9) by
Company's overriding royalty
interest set forth in the particular
farmout agreement for said Prospect,
for and during the period of time in
which Company receives such
overriding royalty interest.
To the extent, if any, that Company's
overriding royalty interest set
forth in such farmout agreement
converts to a Working Interest in
such Prospect (whether by election
of Company or otherwise), then, from
and after such conversion,
Employee's Overriding Royalty
Interest shall be based upon such
Working Interest of Company pursuant
to paragraph 9.2 above; provided,
however, if pursuant to such farmout
agreement, only a portion of
Company's overriding royalty
interest converts to a Working
Interest and Company retains,
following such conversion, some
overriding royalty interest in
addition to such Working Interest,
Employee shall be entitled to
receive, as part of Employee's
Overriding Royalty Interest based
upon Company's Working Interest, an
interest equal to the percentage
stated in paragraph 9.2 above (as
such interest may have previously
been reduced pursuant to other
provisions of this paragraph 9)
multiplied by Company's retained
overriding royalty interest.
Such adjustment shall apply only to the
interest farmed out to unaffiliated
third parties, and shall not affect
the interest retained by Company.
Any exercise of discretion by
Company under this paragraph shall
be applied in like manner to all
participants who are entitled to
receive from Company an Overriding
Royalty Interest in leases included
within such Prospect.
Employment Agreement -- William Hunt Hodge
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<PAGE> 25
With respect to each well drilled on
the Prospect by a farmee of
Company's Working Interest and
solely for the purpose of this
paragraph 9.5.1 (d), Payout shall be
defined as the point in time at
which the revenue to Company from
its interest in oil and gas
production from such well (after
deduction of Company's prorata part
of the burden of (i) all landowners'
royalties, overriding royalties, net
profits interests, production
payments or other burdens upon,
measured by or payable out of such
production and (ii) all applicable
ad valorem, production, severance,
sales, gathering, windfall profits
excise and similar taxes) equals the
sum incurred by or for the account
of Company (x) in preparing for
drilling, drilling, testing,
completing, equipping (including,
without limitation, installation of
platforms, facilities and
pipelines), operating, reworking and
recompleting the well, and marketing
the production therefrom, and (y)
for such well's allocable share of
geological and geophysical costs,
leasehold costs, all other costs of
acquiring and maintaining in force
the leases allocated to the well and
other common costs. Leases
"allocated" to a well and "common
costs" shall have the respective
meanings ascribed thereto in the
definition of "Payout" set forth in
paragraph 9.1.
Notwithstanding anything contained
herein to the contrary, if, after
the Effective Date and during the
term or extended term hereof, there
has been a Change in Control, then
neither Company nor the person
acquiring the control shall have any
right to make the adjustment
described above in this paragraph
9.5.1(d).
Notwithstanding anything contained
herein to the contrary, if, after
the Effective Date and during the
term or extended term hereof, the
Company's Working Interest in any
Prospect is sold, transferred or
conveyed to the holder of any
indebtedness of the Company or of
Newco or of any parent or subsidiary
of the Company or Newco, or to any
unaffiliated third party, by or
pursuant to a foreclosure of any
mortgage or other security interest
therein securing such indebtedness
or any part thereof or by transfer
or conveyance in lieu of such
foreclosure, then such holder or
other third party shall not have any
right to
Employment Agreement -- William Hunt Hodge
-25-
<PAGE> 26
make the adjustment described above in
this paragraph 9.5.1.(d).
9.5.1(e) With respect to any Prospect on
which the Initial Well has been
drilled and which Prospect has been
determined by Company to be capable
of producing oil and/or gas, should
Company desire to sell or farmout
all or any portion of its Working
Interest in such Prospect to
unaffiliated third parties, the
committee shall categorize
geographical areas of the leases
comprising the Prospect into
Development Acreage and Exploratory
Acreage.
Any sale or farmout of the Company's
Working Interest in any such
Development Acreage will be made
subject to Employee's Overriding
Royalty Interest provided for in
paragraph 9.2 hereinabove (as such
interest may have previously been
adjusted pursuant to other
provisions of this paragraph 9);
provided, however, with respect to
each well drilled on the Prospect by
a purchaser or farmee or their
assigns of Company's Working
Interest, and solely for the purpose
of this paragraph 9.5.1(e), Payout
shall be defined as the point in
time at which the revenue to
purchaser or farmee or their assigns
from its or their interest purchased
or farmed in from Company in oil
and/or gas production from such well
(after deduction of purchaser's or
farmee's prorata part of the burden
of (i) all landowners' royalties,
overriding royalties, net profits
interests, production payments or
other burdens upon, measured by or
payable out of such production and
(ii) all applicable ad valorem,
production, severance, sales,
gathering, windfall profits excise
and similar taxes) equals the sum
incurred by or for the account of
purchaser or farmee or their assigns
in preparing for drilling, drilling,
testing, completing, equipping,
operating, reworking and
recompleting the well, and marketing
the production therefrom.
With respect to the Company's Working
Interest in Exploratory Acreage to
be sold by Company, the committee
may adjust the Overriding Royalty
Interest of Employee in the
following manner:
Employee's after-Payout interest shall
be reduced to one-half of Employee's
after-Payout
Employment Agreement -- William Hunt Hodge
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<PAGE> 27
interest stated in paragraph 9.2 (as
such after-Payout interest stated in
paragraph 9.2 may have previously
been reduced pursuant to other
provisions of this paragraph 9) and
Employee's before-Payout interest
shall be increased to twice
Employee's before-Payout interest
stated in paragraph 9.2 (as such
before-Payout interest stated in
paragraph 9.2 may have previously
been reduced pursuant to other
provisions of this paragraph 9),
with the result that Employee's
interests before and after Payout
shall be equal.
With respect to the Company's Working
Interest in Exploratory Acreage to
be farmed out by Company, the
committee shall (unless the
committee recommends otherwise and
the Board of Directors approves such
recommendation) adjust the
Overriding Royalty Interest of
Employee in the following manner:
Employee's Overriding Royalty Interest
shall be calculated by multiplying
Employee's percentage interests
stated in paragraph 9.2 above (as
such interests stated in paragraph
9.2 may have previously been reduced
pursuant to other provisions of this
paragraph 9) by Company's overriding
royalty interest set forth in the
particular farmout agreement for
said Prospect, for and during the
period of time in which Company
receives such overriding royalty
interest.
To the extent, if any, that Company's
overriding royalty interest set
forth in such farmout agreement
converts to a Working Interest in
such Prospect (whether by election
of Company or otherwise), then, from
and after such conversion,
Employee's Overriding Royalty
Interest shall be based upon such
Working Interest of Company pursuant
to paragraph 9.2 above; provided,
however, if pursuant to such farmout
agreement, only a portion of
Company's overriding royalty
interest converts to a Working
Interest and Company retains,
following such conversion, some
overriding royalty interest in
addition to such Working Interest,
Employee shall be entitled to
receive, as part of Employee's
Overriding
Employment Agreement -- William Hunt Hodge
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<PAGE> 28
Royalty Interest and in addition to
such Overriding Royalty Interest
based upon Company's Working
Interest, an interest equal to the
percentage stated in paragraph 9.2
above (as such interest may have
previously been reduced pursuant to
other provisions of this paragraph
9) multiplied by Company's retained
overriding royalty interest.
Such adjustment shall apply only to the
interest sold or farmed out to
unaffiliated third parties, and
shall not affect the interest
retained by Company. Any exercise
of discretion by Company under this
paragraph shall be applied in like
manner to all participants who are
entitled to receive from Company an
Overriding Royalty Interest in
leases included within such
Prospect.
Notwithstanding anything contained
herein to the contrary, if, after
the Effective Date and during the
term or extended term hereof, there
shall have been a Change in Control,
then neither Company nor the person
acquiring the control shall have any
right to make the adjustment
described above in this paragraph
9.5.1(e).
Notwithstanding anything contained
herein to the contrary, if, after
the Effective Date and during the
term or extended term hereof, the
Company's Working Interest in any
Prospect is sold, transferred or
conveyed to the holder of any
indebtedness of the Company or of
Newco or of any parent or subsidiary
of the Company or Newco, or to any
unaffiliated third party, by or
pursuant to a foreclosure of any
mortgage or other security interest
therein securing such indebtedness
or any part thereof or by transfer
or conveyance in lieu of such
foreclosure, then such holder or
other third party shall not have any
right to make the adjustment
described above in this paragraph
9.5.1.(e).
If any of the events set forth in the
two immediately preceding sentences
hereof should occur, such that the
adjustment described above in this
paragraph 9.5.1(e) with respect to
the Overriding Royalty Interest of
Employee in leases in such
Exploratory Acreage is precluded
from occurring as provided above,
then, with respect to each well
drilled on such
Employment Agreement -- William Hunt Hodge
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<PAGE> 29
Exploratory Acreage by a purchaser or
farmee or their assigns of Company's
Working Interest, and solely for
purposes of this paragraph 9.5.1(e),
Payout shall be defined as set forth
above in this paragraph 9.5.1(e).
9.5.2 Within sixty (60) days after the end of each fiscal
year of Company, Company may in its sole discretion
elect to reduce the Overriding Royalty Interest set
forth in paragraph 9.2 with respect to Prospects
subject to this Agreement that were acquired by
Company during such fiscal year (which election, if
timely made as above provided, shall be effective as
of the beginning of such fiscal year) based on actual
Exploration and Development Costs incurred by Company
Group during such fiscal year in respect of all
Prospects subject to this Agreement, as follows (with
linear interpolation between indicated levels of
costs):
<TABLE>
<CAPTION>
Total E & D
Costs Level Permitted Reduction
----------- -------------------
<S> <C>
under $35 million no reduction
$70 million 25.00%
$105 million 33.33%
$140 million 38.33%
$175 million 41.67%
over $175 million **
</TABLE>
**Permitted Reduction shall be determined in the sole discretion of
Company.
The total Exploration and Development Costs levels
and resultant ranges and escalation increments
provided for above are "Base Year" figures for fiscal
year 1996-1997, and shall be adjusted annually on a
compound basis beginning with the fiscal year
commencing April 1, 1997, according to the then
current Council of Petroleum Accountants Societies'
(COPAS) adjustment rate (based upon the percentage
increase or decrease in the average weekly earnings
of Crude Petroleum and Gas Production Workers as of
April 1 as published by the United States Department
of Labor, Bureau of Labor Statistics).
The "Permitted Reduction" shall mean the percentage
by which Employee's Overriding Royalty Interest (both
before and after Payout) may be adjusted downward.
Each such adjustment shall determine Employee's
Overriding Royalty Interest for the fiscal year in
question, and shall be uniform on Prospects acquired
during that period (subject to paragraphs 9.5.1 and
9.5.3). Without limiting the foregoing, a Permitted
Reduction shall apply to any
Employment Agreement -- William Hunt Hodge
-29-
<PAGE> 30
Major Prospect subject to this Agreement that was
acquired by Company during such fiscal year, whether
or not an adjustment of Employee's Overriding Royalty
Interest in such Major Prospect shall have been made
pursuant to paragraph 9.5.3.
All leases acquired in those Prospects, whether
during the same fiscal year or thereafter, shall be
subject to the same Employee's Overriding Royalty
Interest established at the time the Prospect was
acquired, subject, however, to adjustment as provided
for in this paragraph 9. A Permitted Reduction in
Employee's Overriding Royalty Interest for a
particular fiscal year, however, shall not operate to
reduce Employee's Overriding Royalty Interest stated
in paragraph 9.2 in respect of any Prospects acquired
by Company in any subsequent fiscal year during the
term or extended term hereof.
9.5.2(a) Notwithstanding the foregoing
provisions of this paragraph 9.5.2,
with respect to any FPF/TLP
Exploitation Prospects acquired by
Company during a fiscal year of
Company for which Company's estimate
of Exploration and Development Costs
incurred or to be incurred by
Company Group in respect of all
FPF/TLP Exploitation Prospects
acquired in such fiscal year exceeds
$30 million through the end of the
respective primary development
periods for the fields comprising
such FPF/TLP Exploitation Prospects
(which periods, solely for purposes
of the adjustment provided for in
this paragraph, shall not exceed
five (5) years), an alternative
calculation will be made prior to
determining the applicable
"Permitted Reduction" of Employee's
Overriding Royalty Interest with
respect to such FPF/TLP Exploitation
Prospects. Such alternative
calculation shall be based upon the
assumptions that the total
Exploration and Development Costs to
be incurred by Company Group in
respect of all such FPF/TLP
Exploitation Prospects will be
incurred over a two (2) year period
and that such Exploration and
Development Costs will be in
addition to a "base level" of $70
million in Exploration and
Development Costs to be incurred by
Company Group exclusive of the
identified FPF/TLP Exploitation
Prospects. Such alternative
Exploration and Development Costs
level (the "alternative E & D Costs
level") shall be determined as
follows:
The alternative E & D Costs level shall
be the sum of:
Employment Agreement -- William Hunt Hodge
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<PAGE> 31
(i) One-half of Company's estimate
of Exploration and
Development Costs incurred or
to be incurred by Company
Group through the end of the
respective primary
development periods in
respect of all FPF/TLP
Exploitation Prospects
acquired in such fiscal year,
plus
(ii) $70 million.
The Overriding Royalty Interest set
forth in paragraph 9.2 with respect
to such FPF/TLP Exploitation
Prospects (both before and after
Payout) may, in Company's sole
discretion, be reduced by the
greater of (x) the "Permitted
Reduction" percentage set forth in
the table above in this paragraph
for the actual "Total E & D Costs
Level" for such fiscal year and (y)
the "Permitted Reduction" percentage
set forth in the table above that
would be applicable if the "Total E
& D Costs Level" for such fiscal
year were equal to such "alternative
E & D Costs level".
If the Overriding Royalty Interest set
forth in paragraph 9.2 with respect
to such FPF/TLP Exploitation
Prospects, when reduced pursuant to
the foregoing provisions of this
paragraph, exceeds two-thirds of the
Overriding Royalty Interest set
forth in paragraph 9.2, Company may,
in its sole discretion, further
reduce such Overriding Royalty
Interest to an interest equal to
two- thirds (before and after
Payout, respectively) of such
Overriding Royalty Interest set
forth in paragraph 9.2. Further, if
the Overriding Royalty Interest set
forth in paragraph 9.2 with respect
to any such FPF/TLP Exploitation
Prospect, when reduced to such
two-thirds level pursuant to the
foregoing provisions of this
paragraph, exceeds the Overriding
Royalty Interest in such Prospect
that would result from multiplying
the Overriding Royalty Interest
percentage set forth in paragraph
9.2 times a Working Interest
percentage of 50% of 8/8ths, Company
may, in its sole discretion, further
reduce such Overriding Royalty
Interest set forth in paragraph 9.2
with respect to such FPF/TLP
Exploitation Prospect to a
percentage (before and after Payout,
respectively) that, when multiplied
times Company's Working Interest in
such FPF/TLP Exploitation Prospect,
would equal the Overriding Royalty
Interest percentage (before and
after Payout,
Employment Agreement -- William Hunt Hodge
-31-
<PAGE> 32
respectively) set forth in paragraph
9.2 times a Working Interest
percentage of 50% of 8/8ths.
9.5.2(b) Notwithstanding the foregoing
provisions of this paragraph 9.5.2,
with respect to any Subsea Tieback
Exploitation Prospects acquired by
Company during such fiscal year, if
the Overriding Royalty Interest set
forth in paragraph 9.2 with respect
to such Subsea Tieback Exploitation
Prospects, when reduced pursuant to
the foregoing provisions of this
paragraph, exceeds the Overriding
Royalty Interest in such Prospect
that would result from multiplying
the Overriding Royalty Interest
percentage set forth in paragraph
9.2 times a Working Interest
percentage of 50% of 8/8ths, Company
may, in its sole discretion, further
reduce such Overriding Royalty
Interest set forth in paragraph 9.2
with respect to such Subsea Tieback
Exploitation Prospect to a
percentage (before and after Payout,
respectively) that, when multiplied
times Company's Working Interest in
such Subsea Tieback Exploitation
Prospect, would equal the Overriding
Royalty Interest percentage (before
and after Payout, respectively) set
forth in paragraph 9.2 times a
Working Interest percentage of 50%
of 8/8ths.
9.5.2(c) Notwithstanding the foregoing
provisions of this paragraph 9.5.2,
with respect to any FPF/TLP
Exploration Prospects acquired by
Company during such fiscal year, if
the Overriding Royalty Interest set
forth in paragraph 9.2 with respect
to any such FPF/TLP Exploration
Prospects, when reduced pursuant to
the foregoing provisions of this
paragraph, exceeds two-thirds of the
Overriding Royalty Interest set
forth in paragraph 9.2, Company may,
in its sole discretion, further
reduce such Overriding Royalty
Interest to an interest equal to
two-thirds (before and after Payout,
respectively) of such Overriding
Royalty Interest set forth in
paragraph 9.2. Further, if the
Overriding Royalty Interest set
forth in paragraph 9.2 with respect
to any such FPF/TLP Exploration
Prospect, when reduced to such
two-thirds level pursuant to the
foregoing provisions of this
paragraph, exceeds the Overriding
Royalty Interest in such Prospect
that would result from multiplying
the Overriding Royalty Interest
percentage set forth in paragraph
9.2 times a Working Interest
percentage of 50% of 8/8ths,
Employment Agreement -- William Hunt Hodge
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<PAGE> 33
Company may, in its sole discretion,
further reduce such Overriding
Royalty Interest set forth in
paragraph 9.2 with respect to such
FPF/TLP Exploration Prospect to a
percentage (before and after Payout,
respectively) that, when multiplied
times Company's Working Interest in
such FPF/TLP Exploration Prospect,
would equal the Overriding Royalty
Interest percentage (before and
after Payout, respectively) set
forth in paragraph 9.2 times a
Working Interest percentage of 50%
of 8/8ths.
9.5.2(d) Notwithstanding the foregoing
provisions of this paragraph 9.5.2,
with respect to any Subsea Tieback
Exploration Prospects acquired by
Company during such fiscal year, if
the Overriding Royalty Interest set
forth in paragraph 9.2 with respect
to any such Subsea Tieback
Exploration Prospects, when reduced
pursuant to the foregoing provisions
of this paragraph, exceeds the
Overriding Royalty Interest in such
Prospect that would result from
multiplying the Overriding Royalty
Interest percentage set forth in
paragraph 9.2 times a Working
Interest percentage of 50% of
8/8ths, Company may, in its sole
discretion, further reduce such
Overriding Royalty Interest set
forth in paragraph 9.2 with respect
to such Subsea Tieback Exploration
Prospect to a percentage (before and
after Payout, respectively) that,
when multiplied times Company's
Working Interest in such Subsea
Tieback Exploration Prospect, would
equal the Overriding Royalty
Interest percentage (before and
after Payout, respectively) set
forth in paragraph 9.2 times a
Working Interest percentage of 50%
of 8/8ths.
9.5.3 With respect to any Major Prospect, Company may in
its sole discretion elect to adjust the Overriding
Royalty Interest set forth in paragraph 9.2,
effective as of the date of Company's acquisition of
such Major Prospect, as follows:
Employee's before-Payout interest shall be reduced
by the following formula:
<TABLE>
<S> <C>
original before--Payout interest
________________________________ = reduced before-Payoutinterest
X
-
Y
</TABLE>
Employment Agreement -- William Hunt Hodge
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<PAGE> 34
where "X" equals the total amount estimated by
Company for Exploration and Development Costs to be
incurred by Company Group in respect of such Major
Prospect through the end of the primary development
period for the field comprising such Major Prospect
(which period, solely for purposes of such adjustment
calculation, shall not exceed five (5) years), and
where "Y" equals $30 million.
Employee's after-Payout interest shall be increased
by adding thereto the full amount of the percentage
interest so deducted from Employee's before-Payout
interest until 2.5 times Payout is reached, at which
time Employee's after-Payout interest shall be
reduced by subtracting therefrom the same percentage
interest that was previously added thereto pursuant
to this sentence.
Such election may be made by Company whether or not
Employee's Overriding Royalty Interest in such Major
Prospect shall have been reduced pursuant to
paragraph 9.5.2. In the case of any such prior
reduction pursuant to paragraph 9.5.2, the term
"original before-Payout interest" as used above in
this paragraph shall refer to Employee's
before-Payout interest as previously reduced pursuant
to paragraph 9.5.2.
9.5.4 Notwithstanding anything contained herein to the
contrary, after an assignment is delivered to
Employee with respect to a Prospect pursuant to
paragraph 9.4, Company or its assigns may no longer
reduce or modify Employee's Overriding Royalty
Interest on any well in such Prospect without written
consent of Employee, except pursuant to paragraphs
9.5.1(c), 9.5.1(d), 9.5.1(e), 9.5.2 and 9.5.3 in the
case only of assignments other than those delivered
pursuant to paragraphs 9.4.8(a), 9.4.8(b) and 9.4.9.
9.5.5 In no event may any party other than Company reduce
or modify Employee's Overriding Royalty Interest
without written consent of Employee.
9.5.6 Company shall give Employee written notice of any
adjustment made to Employee's Overriding Royalty
Interest pursuant to the provisions of paragraphs
9.5.1(b), 9.5.1(c), 9.5.1(d), 9.5.1(e), 9.5.2 and
9.5.3 within one hundred twenty (120) days following
such adjustment.
Employment Agreement -- William Hunt Hodge
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9.5.7 Upon request by Company, Employee shall execute and
deliver to Company such reassignments, transfer
orders, division orders, releases and other documents
deemed by Company to be necessary or appropriate to
evidence any modification, reduction or other
adjustment pursuant to this paragraph 9.5.
9.6 Company's Preferential Right to Purchase.
If at any time during the term or extended term of this
Agreement, or if within one (1) year from the expiration of
this Agreement, Employee receives and desires to accept an
offer for the purchase of a part or all of Employee's
Overriding Royalty Interest assigned pursuant to this
paragraph 9 (the portion or all of such Overriding Royalty
Interest covered by such offer to purchase being herein
sometimes called the "Offered Interest"), from a prospective
third party purchaser who is ready, willing and able to
purchase the same, then Employee shall have the right to sell
such Offered Interest, but only after complying with the
following terms and provisions:
9.6.1 The offer shall first be reduced to writing and
signed by Employee and the offeror. Employee shall
give Company written notice of his receipt of, and
his desire to accept, such written offer, together
with a copy of such written offer signed by the
prospective third party purchaser and containing all
of the terms and conditions of such offer. The date
such written notice is given to Company is herein
sometimes called the "Original Date."
9.6.2 Company shall thereafter have an option to purchase
the Offered Interest upon the same terms set forth in
said offer, which option may be exercised by written
notice thereof given to Employee within ten (10) days
after the Original Date.
9.6.3 If the Offered Interest is not purchased by Company
pursuant to the foregoing provisions of this
paragraph, then Employee shall have the right to sell
the Offered Interest to the prospective third party
purchaser named in such offer, provided that such
sale is consummated within thirty (30) days from the
expiration date of the option of Company created
hereby and provided that such sale is made in strict
conformity with the terms of such offer.
9.6.4 If, however, such sale of the Offered Interest does
not occur within such thirty-day period for the price
and upon the terms set forth in such offer, then any
sale of part or all of such Offered Interest
thereafter shall again be subject to the option to
purchase granted to Company under this paragraph 9.6.
Employment Agreement -- William Hunt Hodge
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<PAGE> 36
9.6.5 If Employee elects to take title to an Overriding
Royalty Interest in a legal entity other than himself
(which he may do only with Company's consent), such
entity shall take title subject to all of the terms
and conditions of this Agreement.
9.7 Additional Provisions Affecting Overriding Royalty Interest.
In addition to the other provisions of this paragraph 9,
Employee's Overriding Royalty Interest shall be subject to the
following:
9.7.1 Notwithstanding anything to the contrary contained
herein, Employee shall not have the right to take in
kind or separately dispose of the production of oil
and gas attributable to his Overriding Royalty
Interest.
9.7.2 Employee's Overriding Royalty Interest shall also
apply to the production of oil and gas under the
terms and provisions of any renewal, extension or new
lease, to the extent such renewal, extension or new
lease covers all or any portion of any lands covered
by the expired lease which was subject to Employee's
Overriding Royalty Interest or is within the Prospect
plat, and provided, however, that any such renewal,
extension or new lease shall have been acquired by or
for the benefit of Company, either prior to or within
one (1) year after the expiration of the expired
lease.
9.7.3 Except as otherwise provided in this paragraph 9, in
no event shall Employee ever be liable or responsible
in any way for payment of any part of any
exploration, drilling or production costs or
liabilities incurred by Company or its assigns or
other lessees attributable to the lease or leases in
a Prospect or to the production therefrom, it being
the intent of the parties that Employee's Overriding
Royalty Interest shall constitute a non-participating
royalty interest for all purposes.
9.7.4 Company will conduct and carry on the development,
maintenance and operation of any lease subject to
Employee's Overriding Royalty Interest in a manner
which it deems in its sole judgment to be reasonable
and prudent and in accordance with good oil and gas
field practices, and it will drill such wells as it
deems proper in its sole judgment from time to time
in order to protect such lease from drainage;
provided, however, (a) nothing herein contained
shall obligate Company to conduct any drilling
operations whatsoever upon such lease, or to continue
to operate any well or to operate or maintain in
force or attempt to maintain in force such lease by
payment of delay rentals, compensatory royalties or
other payments or by the drilling of any wells upon
said lease, or in any
Employment Agreement -- William Hunt Hodge
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<PAGE> 37
other manner, and the extent and duration of all
operations, as well as the preservation of each of
such leases by delay rental payments or otherwise,
shall be solely at the will of Company, and (b)
Company shall have the right at any time to
surrender, abandon or otherwise terminate any such
lease in whole or in part without liability to
Employee.
9.7.5 Company shall have the right to sell all production
attributable to Employee's Overriding Royalty
Interest on the same basis upon which the production
attributable to Company's interest in the same
production is sold, and shall account to Employee on
that basis. In no event shall Employee be entitled
to receive payments for production attributable to
his Overriding Royalty Interest calculated on a basis
higher than that upon which Company's interest in the
same production is calculated or computed on a higher
price than that payable to Company on account of
production attributable to its interest, and in no
event shall Employee be entitled to receive payments
on amounts suspended by purchasers of the production
pending determination of the authorized price by
governmental entities. However, if Company sells any
such production to an affiliate of Company, the price
therefor shall not be less than would have been
reasonably obtainable in a sale to a non-affiliated
purchaser.
9.7.6 There shall be deducted from the production, before
Employee's Overriding Royalty Interest is computed,
any production lost in the production from the
leases, or any lands pooled therewith, or used for
drilling, operating, development or production or in
plant operations (including gas injection, secondary
recovery, pressure maintenance, repressuring, cycling
operations, plant fuel or shrinkage) conducted for
the purpose of producing or processing production
from lands covered by the leases or from any lands
pooled with the leases.
9.7.7 Company shall have the right and option, but not the
obligation, to process gas produced and saved from
the leases. If Company elects to process or have
processed, such gas in a gas processing plant or
other facility, whether or not owned by Company, then
in such event Employee shall be paid his percentage
share provided for herein of the proceeds of sale of
all gasoline or other liquid hydrocarbons or other
products manufactured or extracted from such gas as a
result of such processing (collectively, the
"Products"), less the costs of extraction or
manufacture (which may consist of a portion of the
Products). Company shall also pay to Employee the
same percentage share of the proceeds of sale of all
residue gas sold by Company, less expenses incurred
by Company in transporting any such gas to point of
delivery and for dehydration
Employment Agreement -- William Hunt Hodge
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<PAGE> 38
and/or compression of gas at or prior to such
delivery and other expenses and fees typically borne
by royalty owners (excluding expenses or fees for
capital projects funded by Company to the extent such
expenses or fees have been included in the Payout
calculation for the well from which such gas is
produced).
9.7.8 Employee's Overriding Royalty Interest shall bear its
proportionate share of all other costs of marketing
and transporting production from the leases or from
any lands pooled therewith which are typically borne
by royalty owners (excluding expenses or fees for
capital projects funded by Company to the extent such
expenses or fees have been included in the Payout
calculation for the well from which such production
is produced).
9.7.9 Employee's Overriding Royalty Interest shall also
bear its share of all ad valorem, production,
severance, sales, gathering and other taxes typically
borne by royalty owners (whether state, federal or
otherwise) assessed or levied on or in connection
with the Overriding Royalty Interest or the
production from the leases.
9.7.10 Company or its assigns shall have the right and
power, without any approval by Employee, to pool or
unitize any lease which is subject to Employee's
Overriding Royalty Interest, and to alter, change,
amend or terminate any pooling or unitization
agreements heretofore or hereafter entered into, as
to all or any part of a Prospect, as to any one or
more of the formations or horizons thereunder, upon
such terms and provisions as Company shall in its
sole discretion determine. If and whenever through
the exercise of such right and power, or pursuant to
any law now existing or hereafter enacted, or any
rule, regulation or order of any governmental body
now or hereafter promulgated, any of the leases of
Company are pooled or unitized in any manner,
Employee's Overriding Royalty Interest shall also be
pooled and unitized, and in such event Employee's
Overriding Royalty shall only be paid on that portion
of the production from the unit or units so pooled,
which is attributable to said leases under and by
virtue of the pooling and unitization.
9.7.11 Company may withhold payment to Employee of any funds
attributable to Employee's Overriding Royalty
Interest which Company, in its sole discretion, deems
to be subject to a risk of refund or recoupment
pursuant to any rule, regulation or order of any
governmental authority or any adverse claims by third
parties. During such suspense period, Employee shall
not be entitled to interest on sums so withheld.
Employment Agreement -- William Hunt Hodge
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<PAGE> 39
9.7.12 In the event Company's Working Interest in any lease
in which Employee is entitled to an Overriding
Royalty Interest covers less than all of the full and
entire undivided interest in and to the land
described therein, and in and to all the oil and gas
rights relating thereto, then in that event the
Overriding Royalty Interest as to that portion of the
leased premises in which Company's Working Interest
in such lease does not cover such full and entire
undivided interest shall be reduced proportionately
(i.e., in the proportion that the undivided interest
in and to said land and oil and gas rights covered by
such lease bears to such full and entire undivided
interest).
9.7.13 Notwithstanding anything contained in this paragraph
9 to the contrary, Employee's Overriding Royalty
Interest in any Net Profit Share Lease ("NPSL") shall
be reduced at the same time and in the same
percentage as Company's net revenue interest in said
NPSL is reduced pursuant to the provisions of said
NPSL.
9.7.14 Company and Employee further undertake and agree
promptly to execute and deliver, upon request of
either party, all assignments, reassignments,
transfer orders, division orders, releases and any
other documents as may be necessary to implement this
paragraph 9 or otherwise to more fully assure to each
party the rights and interests of such party provided
for in this paragraph 9.
10. Insurance.
10.1 Employee shall be eligible for participation in such
insurance programs as Company shall institute from
time to time covering medical and dental expenses and
such life and accidental death and dismemberment
insurance programs as Company shall institute from
time to time. Payment of premiums for such coverages
shall be in accordance with Company policy covering
all employees as may be established from time to time
by Company. Employee shall also be eligible for
participation in such retirement, pension, deferred
compensation and other benefit programs the Company
shall initiate from time to time.
11. Outside Activities.
During the term or extended term of this Agreement, Employee
shall devote all of his working time, energy and talents to
the due discharge and performance of his duties hereunder, at
the direction and subject to the control of Company, and shall
perform such services and duties as shall reasonably be
required from him from time to time by Company. Employee
agrees that he will not knowingly become involved in a
conflict of interest with Company or its subsidiaries, or upon
discovery thereof,
Employment Agreement -- William Hunt Hodge
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<PAGE> 40
allow such a conflict to continue. Moreover, Employee agrees
to provide Company a statement of all other directorships
Employee holds, with a brief description of the business
activities of each organization. This statement shall be
provided on or before December 31 of each year. If, in the
opinion of Company, a conflict of interest exists between
Company (and its affiliates) and the organization in which the
Employee holds a directorship, Company can require Employee to
resign the outside directorship.
12. Right to Invest.
Nothing in this Agreement is intended or shall be construed to
limit Employee's right (i) to engage in passive personal
investments, including, but not limited to, holding as an
investment not more than five percent (5%) of any class of the
issued and outstanding and publicly traded (on a recognized
national or regional securities exchange or in the
over-the-counter market) capital stock or other securities of
any corporation or other entity that conducts activities that
compete with the business of Company or any affiliate of
Company; or (ii) to invest, individually or with others, in
oil and gas prospects, subject, however, in the case of oil
and gas prospects to the following conditions:
12.1 Company must have first had the right and opportunity
to purchase all of the interest in any prospect made
available to Employee, even if this would preclude
Employee's participation.
12.2 Company must have made known its election either to
participate in less than the full interest made
available to Employee and have no desire to acquire
an additional interest, or declined to participate at
all in the prospect. If Company elects to
participate in less than the full interest made
available to Employee, Employee may invest in the
portion of such interest not acquired by Company.
12.3 Employee must purchase his interest in the oil and
gas prospect on terms which are no more favorable
than those made available to Company.
13. Disability During Employment.
If Employee shall become unable to perform his duties by
reason of disability, he shall be entitled to receive, in
addition to any insurance benefits he may receive, all of his
salary for the first one (1) month of his disability, and
one-half (1/2) of his salary for the next three (3) months of
disability. Periods of disability shall not be cumulative so
long as they are separated by at least ninety (90) days of
continuous service.
Employment Agreement -- William Hunt Hodge
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<PAGE> 41
The term "disability" shall mean disability which, in the
opinion of a doctor satisfactory to Company, renders Employee
unable to perform his duties hereunder as evidenced by such
doctor's certificate. The date disability commences shall be
the date Employee first absents himself from work during a
continuous period of disability.
14. Merger or Acquisition.
In the event Company should be acquired by or merged into
another company, by signature of Company's authorized
representatives, Company hereby agrees that this Employment
Agreement shall be binding upon Company, its successors and
assigns, and shall be disclosed to any party considering
merger with, or acquisition of, Company.
15. Arbitration.
15.1 If a dispute arises out of or related to this
Agreement and the dispute cannot be settled through
direct discussions, Company and Employee agree that
they shall first endeavor to settle the dispute in an
amicable fashion. If such efforts fail to resolve
the dispute, the dispute shall, except as otherwise
provided in paragraph 19, be resolved as follows:
15.1.1 Except as provided in paragraph 15.1.2 below,
any and all claims, demands, cause of action,
disputes, controversies, and other matters in
question arising out of or relating to this
Agreement, any provision hereof, the alleged
breach thereof, or in any way relating to the
subject matter of this Agreement, involving
Company, Employee, and/or their respective
representatives, even though some or all of
such claims allegedly are extracontractual in
nature, whether such claims sound in
contract, tort, or otherwise, at law or in
equity, under state or federal law, whether
provided by statute or the common law, for
damages or any other relief, shall be
resolved by binding arbitration pursuant to
the Federal Arbitration Act in accordance
with the Commercial Arbitration Rules then in
effect with the American Arbitration
Association (the "AAA"). The arbitration
proceeding shall be conducted in Houston,
Texas. The arbitration may be initiated by
either party by providing to the other a
written notice of arbitration specifying the
claims, and the parties shall thereafter
endeavor to agree on an arbitrator. If
within thirty (30) days of the notice of
initiation of the arbitration procedure, the
parties are unable to agree on an
Employment Agreement -- William Hunt Hodge
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<PAGE> 42
arbitrator, the party requesting arbitration
shall file a request with the AAA that the
Houston, Texas office of the AAA provide a
list of potential arbitrators to both
parties. The parties shall thereafter have
sixty (60) days to select an arbitrator from
such list, with such selection to be by
mutual agreement. If the parties fail to
select an arbitrator within such time by
mutual agreement, then either party may
request that the Chief Judge of the U.S.
District Court for the Southern District of
Texas appoint an arbitrator, and any such
appointment shall be binding. The
arbitrator, utilizing the Commercial
Arbitration Rules of the American Arbitration
Association, shall within 120 days of his or
her selection, resolve all disputes between
the parties. There shall be no transcript of
the hearings before the arbitrator. The
arbitrator's decision shall be in writing,
but shall be as brief as possible. The
arbitrator shall not assign the reasons for
his or her decision. The arbitrator's
decision shall be final and non-appealable to
the maximum extent permitted by law.
Judgment upon any award rendered in any such
arbitration proceeding may be entered by any
federal or state court having jurisdiction.
This agreement to arbitrate shall be
enforceable in either federal or state court.
The enforcement of this agreement to
arbitrate and all procedural aspects of this
agreement to arbitrate, including but not
limited to, the construction and
interpretation of this agreement to
arbitrate, the issues subject to arbitration
(i.e., arbitrability), the scope of the
arbitrable issues, allegations of waiver,
delay or defenses to arbitrability, and the
rules governing the conduct of the
arbitration, shall be governed by and
construed pursuant to the Federal Arbitration
Act and shall be decided by the arbitrator.
In deciding the substance of any such claims,
the arbitrator shall apply the substantive
laws of the State of Texas (excluding Texas
choice-of-law principles that might call for
the application of some other State's law);
provided, however, it is expressly agreed
that the arbitrator shall have no authority
to award treble, exemplary, or punitive
damages under any circumstances regardless of
whether such damages may be available under
Texas law, the parties hereby waiving their
right, if any, to recover treble, exemplary,
or punitive damages in connection with any
such claims.
Employment Agreement -- William Hunt Hodge
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<PAGE> 43
15.1.2 Notwithstanding the agreement to arbitrate
contained in paragraph 15.1.1 above, in the
event that either party wishes to seek a
temporary restraining order, a preliminary or
temporary injunction, or other injunctive
relief in connection with any or all such
claims, demands, cause of action, disputes,
controversies, and other matters in question
arising out of or relating to this Agreement,
any provision hereof, the alleged breach
thereof, or in any way relating to the
subject matter of this Agreement, involving
Company, Employee, and/or their respective
representatives, including disputes arising
out of a breach or alleged breach of
paragraph 4 or 16, even though some or all of
such claims allegedly are extra-contractual
in nature, whether such claims sound in
contract, tort, or otherwise, at law or in
equity, under state or federal law, whether
provided by statute or the common law, for
damages or any other relief, each party shall
have the right to pursue such injunctive
relief in court, rather than by arbitration.
The parties agree that such action for a
temporary restraining order, a preliminary or
temporary injunction, or other injunctive
relief will be brought in the State or
federal courts residing in Houston, Harris
County, Texas.
15.2 The Company shall pay all costs and expenses of
Company and Employee (including, but not limited to,
attorneys' fees, the fees of the arbitrator and the
AAA and any other related costs) for any arbitration
proceeding or legal action; provided, however, that
if in any such arbitration proceeding or legal
action, the arbitrator or court, respectively,
determines that Employee has prosecuted or defended
any issue in such proceeding or action in bad faith,
the arbitrator or court, respectively, may allocate
the portion of such costs and expenses relating to
such issue between the parties in any other manner
deemed fair, equitable and reasonable by the
arbitrator or court, respectively.
16. Noncompetition Obligations.
16.1 As part of the consideration for the compensation and
benefits to be paid to Employee hereunder, and as an
additional incentive for Company to enter into this
Agreement, Company and Employee agree to the
non-competition obligations hereunder. Employee will
not, directly or indirectly for Employee or for
others:
Employment Agreement -- William Hunt Hodge
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<PAGE> 44
16.1.1 in any geographic area or market where
Company or any of its subsidiaries are
conducting any business as of the date of
termination of the employment relationship or
have during the previous twelve months
conducted such business, engage in any
business competitive with any such business;
or
16.1.2 in any geographic area or market where
Employee knew Company contemplated entering
any business as of the date of termination of
the employment relationship, but only if
Company had, as of such date, invested
significant resources toward entering into
such business in such geographic area or
market, engage in any business competitive
with any such business;
16.1.3 render advice or services to, or otherwise
assist, any other person, association, or
entity who is engaged, directly or
indirectly, in any business competitive with
Company's business within the parameters
described in paragraphs 16.1.1 and 16.1.2
above with respect to such competitive
business; or
16.1.4 induce any employee of Company or any of its
subsidiaries to terminate his or her
employment with Company or its subsidiaries,
or hire or assist in the hiring of any such
employee by any person, association, or
entity not affiliated with Company.
These non-competition obligations shall commence upon
the date of execution of this Agreement and extend
until the earlier of (a) the expiration of the term
of this Agreement (or any extended term) or (b) six
(6) months after termination of the employment
relationship; provided, however, that notwithstanding
anything contained in this paragraph 16 to the
contrary, such obligations shall only apply after the
termination of employment if the termination of
employment results from termination for Cause by
Company under paragraph 3.5 or voluntary termination
without Good Reason by Employee (it being understood
and agreed that termination of this Agreement by
Employee under paragraph 3.1 shall not, for purposes
of this paragraph 16, constitute voluntary
termination without Good Reason by Employee).
16.2 Employee understands that the foregoing restrictions
may limit Employee's ability to engage in certain
businesses anywhere in the world during the period
provided for above, but acknowledges that Employee
will receive sufficiently high renumeration and other
Employment Agreement -- William Hunt Hodge
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<PAGE> 45
benefits under this Agreement to justify such
restriction. Employee acknowledges that money
damages would not be sufficient remedy for any breach
of this Article by Employee, and Company shall be
entitled to enforce the provisions of this Agreement
and/or to specific performances and injunctive relief
as remedies for such breach or any threatened breach.
Such remedies shall not be deemed the exclusive
remedies for a breach of this Article, but shall be
in addition to all remedies available at law or in
equity to Company, including, without limitation, the
recovery of damages from Employee and Employee's
agents involved in such breach and remedies available
to Company pursuant to other agreements with
Employee.
16.3 It is expressly understood and agreed that Company
and Employee consider the restrictions contained in
this paragraph 16 to be reasonable and necessary.
Nevertheless, if any of the aforesaid restrictions
are found by a court having jurisdiction to be
unreasonable, or overly broad as to geographic area
or time, or otherwise unenforceable, the parties
intend for the restrictions therein set forth to be
modified by such courts so as to be reasonable and
enforceable and, as so modified by the court, to be
fully enforced.
17. Foreign Corrupt Practices Act.
Employee shall at all times comply with the United States
Foreign Corrupt Practices Act, generally codified in 15 USC 78
(FCPA), as the FCPA may hereafter be amended, and/or its
successor statutes. If Employee pleads guilty to or nolo
contendere or admits civil or criminal liability under the
FCPA, or if a court finds that Employee committed an action
resulting in any Company entity having civil or criminal
liability or responsibility under the FCPA with knowledge of
the activities giving rise to such liability or knowledge of
facts from which Employee should have reasonably inferred the
activities giving rise to liability had occurred or were
likely to occur, such action or finding shall constitute Cause
for termination by Company under paragraph 3.5 of this
Agreement unless Company's Board of Directors determines that
the actions found to be in violation of the FCPA were taken in
good faith and in compliance with all applicable policies of
Company.
18. Survival.
The provisions of paragraphs 4 and 16 shall survive any
termination of the employment relationship and/or of this
Agreement for the periods stated therein. The provisions of
paragraph 15 relating to arbitration shall survive any
termination of the employment relationship between Employee
and Company and the termination of this Agreement.
Employment Agreement -- William Hunt Hodge
-45-
<PAGE> 46
Amounts, compensation, rights and benefits which Employee is
entitled to receive or have accrued to Employee under this
Agreement or under any plan, program, arrangement, agreement
or policy of or with Company or any of its affiliates before,
at or subsequent to the termination of the employment
relationship between Employee and Company or the termination
of this Agreement shall not be superseded and shall survive
any such termination.
19. Certain Additional Payments by Company.
19.1 Anything in this Agreement to the contrary
notwithstanding, in the event it shall be determined
that any payment or distribution by Company or any of
its affiliates to or for the benefit of Employee,
whether paid or payable or distributed or
distributable pursuant to the terms of this Agreement
or otherwise (any such payments or distributions
being individually referred to herein as a "Payment,"
and any two or more of such payments or distributions
being referred to herein as "Payments"), would be
subject to the excise tax imposed by Section 4999 of
the Internal Revenue Code of 1986, as amended (the
"Code") (such excise tax, together with any interest
thereon, any penalties, additions to tax, or
additional amounts with respect to such excise tax,
and any interest in respect of such penalties,
additions to tax or additional amounts, being
collectively referred herein to as the "Excise Tax"),
then Employee shall be entitled to receive an
additional payment or payments (individually referred
to herein as a "Gross-Up Payment" and any two or more
of such additional payments being referred to herein
as "Gross-Up Payments") in an amount such that after
payment by Employee of all taxes (as defined in
paragraph 19.11) imposed upon the Gross-Up Payment,
Employee retains an amount of such Gross-Up Payment
equal to the Excise Tax imposed upon the Payments.
19.2 Subject to the provisions of paragraph 19.3 through
19.11, any determination (individually, a
"Determination") required to be made under this
paragraph 19, including whether a Gross-Up Payment is
required and the amount of such Gross-Up Payment,
shall initially be made, at Company's expense, by
nationally recognized tax counsel mutually acceptable
to Company and Employee ("Tax Counsel"). Tax Counsel
shall provide detailed supporting legal authorities,
calculations, and documentation both to Company and
Employee within 15 business days of the termination
of Employee's employment, if applicable, or such
other time or times as is reasonably requested by
Company or Employee. If Tax Counsel makes the
initial Determination that no Excise Tax is payable
by Employee with respect to a Payment or Payments, it
shall furnish Employee with an opinion reasonably
acceptable to Employee that no Excise Tax will be
imposed with respect to any such Payment
Employment Agreement -- William Hunt Hodge
-46-
<PAGE> 47
or Payments. Employee shall have the right to
dispute any Determination (a "Dispute") within 15
business days after delivery of Tax Counsel's opinion
with respect to such Determination. The Gross-Up
Payment, if any, as determined pursuant to such
Determination shall be paid by Company to Employee
within five business days of Employee's receipt of
such Determination. The existence of a Dispute shall
not in any way affect Employee's right to receive the
Gross-Up Payment in accordance with such
Determination. If there is no Dispute, such
Determination shall be binding, final and conclusive
upon Company and Employee, subject in all respects,
however, to the provisions of paragraph 19.3 through
19.11 below. As a result of the uncertainty in the
application of Sections 4999 and 280G of the Code, it
is possible that Gross-Up Payments (or portions
thereof) which will not have been made by Company
should have been made ("Underpayment"), and if upon
any reasonable written request from Employee or
Company to Tax Counsel, or upon Tax Counsel's own
initiative, Tax Counsel, at Company's expense,
thereafter determines that Employee is required to
make a payment of any Excise Tax or any additional
Excise Tax, as the case may be, Tax Counsel shall, at
Company's expense, determine the amount of the
Underpayment that has occurred and any such
Underpayment shall be promptly paid by Company to
Employee.
19.3 Company shall defend, hold harmless, and indemnify
Employee on a fully grossed-up after tax basis from
and against any and all claims, losses, liabilities,
obligations, damages, impositions, assessments,
demands, judgements, settlements, costs and expenses
(including reasonable attorneys', accountants', and
experts' fees and expenses) with respect to any tax
liability of Employee resulting from any Final
Determination (as defined in paragraph 19.10) that
any Payment is subject to the Excise Tax.
19.4 If a party hereto receives any written or oral
communication with respect to any question,
adjustment, assessment or pending or threatened
audit, examination, investigation or administrative,
court or other proceeding which, if pursued
successfully, could result in or give rise to a claim
by Employee against Company under this paragraph 19
("Claim"), including, but not limited to, a claim for
indemnification of Employee by Company under
paragraph 19.3, then such party shall promptly notify
the other party hereto in writing of such Claim ("Tax
Claim Notice").
19.5 If a Claim is asserted against Employee ("Employee
Claim"), Employee shall take or cause to be taken
such action in connection with contesting such
Employee Claim as Company shall reasonably request in
writing from time to time, including the retention of
Employment Agreement -- William Hunt Hodge
-47-
<PAGE> 48
counsel and experts as are reasonably designated by
Company (it being understood and agreed by the
parties hereto that the terms of any such retention
shall expressly provide that Company shall be solely
responsible for the payment of any and all fees and
disbursements of such counsel and any experts) and
the execution of powers of attorney, provided that:
19.5.1 within 30 calendar days after Company
receives or delivers, as the case may be, the
Tax Claim Notice relating to such Employee
Claim (or such earlier date that any payment
of the taxes claimed is due from Employee,
but in no event sooner than five calendar
days after Company receives or delivers such
Tax Claim Notice), Company shall have
notified Employee in writing ("Election
Notice") that Company does not dispute its
obligations (including, but not limited to,
its indemnity obligations) under this
Agreement and that Company elects to contest,
and to control the defense or prosecution of,
such Employee Claim at Company's sole risk
and sole cost and expense; and
19.5.2 Company shall have advanced to Employee on an
interest-free basis, the total amount of the
tax claimed in order for Employee, at
Company's request, to pay or cause to be paid
the tax claimed, file a claim for refund of
such tax and, subject to the provisions of
the last sentence of paragraph 19.7, sue for
a refund of such tax if such claim for refund
is disallowed by the appropriate taxing
authority (it being understood and agreed by
the parties hereto that Company shall only be
entitled to sue for a refund and Company
shall not be entitled to initiate any
proceeding in, for example, United States Tax
Court) and shall indemnify and hold Employee
harmless, on a fully grossed-up after tax
basis, from any tax imposed with respect to
such advance or with respect to any imputed
income with respect to such advance; and
19.5.3 Company shall reimburse Employee for any and
all costs and expenses resulting from any
such request by Company and shall indemnify
and hold Employee harmless, on fully
grossed-up after-tax basis, from any tax
imposed as a result of such reimbursement.
19.6 Subject to the provisions of paragraph 19.5 hereof,
Company shall have the right to defend or prosecute,
at the sole cost, expense and
Employment Agreement -- William Hunt Hodge
-48-
<PAGE> 49
risk of Company, such Employee Claim by all
appropriate proceedings, which proceedings shall be
defended or prosecuted diligently by Company to a
Final Determination; provided, however, that (i)
Company shall not, without Employee's prior written
consent, enter into any compromise or settlement of
such Employee Claim that would adversely affect
Employee, (ii) any request from Company to Employee
regarding any extension of the statute of limitations
relating to assessment, payment, or collection of
taxes for the taxable year of Employee with respect
to which the contested issues involved in, and amount
of, the Employee Claim relate is limited solely to
such contested issues and amount, and (iii) Company's
control of any contest or proceeding shall be limited
to issues with respect to the Employee Claim and
Employee shall be entitled to settle or contest, in
his sole and absolute discretion, any other issue
raised by the Internal Revenue Service or any other
taxing authority. So long as Company is diligently
defending or prosecuting such Employee Claim,
Employee shall provide or cause to be provided to
Company any information reasonably requested by
Company that relates to such Employee Claim, and
shall otherwise cooperate with Company and its
representatives in good faith in order to contest
effectively such Employee Claim. Company shall keep
Employee informed of all developments and events
relating to any such Employee Claim (including,
without limitation, providing to Employee copies of
all written materials pertaining to any such Employee
Claim), and Employee or his authorized
representatives shall be entitled, at Employee's
expense, to participate in all conferences, meetings
and proceedings relating to any such Employee Claim.
19.7 If, after actual receipt by Employee of an amount of
a tax claimed (pursuant to an Employee Claim) that
has been advanced by Company pursuant to paragraph
19.5.2 hereof, the extent of the liability of Company
hereunder with respect to such tax claimed has been
established by a Final Determination, Employee shall
promptly pay or cause to be paid to Company any
refund actually received by, or actually credited to,
Employee with respect to such tax (together with any
interest paid or credited thereon by the taxing
authority and any recovery of legal fees from such
taxing authority related thereto), except to the
extent that any amounts are then due and payable by
Company to Employee, whether under the provisions of
this Agreement or otherwise. If, after the receipt
by Employee of an amount advanced by Company pursuant
to paragraph 19.5.2, a determination is made by the
Internal Revenue Service or other appropriate taxing
authority that Employee shall not be entitled to any
refund with respect to such tax claimed and Company
does not notify Employee in writing of its intent to
contest such denial of refund prior to the expiration
of 30 days
Employment Agreement -- William Hunt Hodge
-49-
<PAGE> 50
after such determination, then such advance shall be
forgiven and shall not be required to be repaid and
the amount of such advance shall offset, to the
extent thereof, the amount of any Gross-Up Payments
and other payments required to be paid hereunder.
19.8 With respect to any Employee Claim, if Company fails
to deliver an Election Notice to Employee within the
period provided in paragraph 19.5.1 hereof or, after
delivery of such Election Notice, Company fails to
comply with the provisions of paragraph 19.5.2,
19.5.3 or 19.6 hereof, then Employee shall at any
time thereafter have the right (but not the
obligation), at his election and in his sole and
absolute discretion, to defend or prosecute, at the
sole cost, expense and risk of Company, such Employee
Claim. Employee shall have full control of such
defense or prosecution and such proceedings,
including any settlement or compromise thereof. If
requested by Employee, Company shall cooperate, and
shall cause its affiliates to cooperate, in good
faith with Employee and his authorized
representatives in order to contest effectively such
Employee Claim. Company may attend, but not
participate in or control, any defense, prosecution,
settlement or compromise of any Employee Claim
controlled by Employee pursuant to this paragraph
19.8 and shall bear its own costs and expenses with
respect thereto. In the case of any Employee Claim
that is defended or prosecuted by Employee, Employee
shall, from time to time, be entitled to current
payment, on a fully grossed-up after tax basis, from
Company with respect to costs and expenses incurred
by Employee in connection with such defense or
prosecution.
19.9 In the case of any Employee Claim that is defended or
prosecuted to a Final Determination pursuant to the
terms of this paragraph 19.9, Company shall pay, on a
fully grossed-up after tax basis, to Employee in
immediately available funds the full amount of any
taxes arising or resulting from or incurred in
connection with such Employee Claim that have not
theretofore been paid by Company to Employee,
together with the costs and expenses, on a fully
grossed-up after tax basis, incurred in connection
therewith that have not theretofore been paid by
Company to Employee, within ten calendar days after
such Final Determination. In the case of any
Employee Claim not covered by the preceding sentence,
Company shall pay, on a fully grossed-up after tax
basis, to Employee in immediately available funds the
full amount of any taxes arising or resulting from or
incurred in connection with such Employee Claim at
least ten calendar days before the date payment of
such taxes is due from Employee, except where payment
of such taxes is sooner required under the provisions
of this paragraph 19.9, in which case payment of such
taxes (and payment, on a fully grossed-up after tax
basis, of any costs and expenses required to be
Employment Agreement -- William Hunt Hodge
-50-
<PAGE> 51
paid under this paragraph 19.9 shall be made within
the time and in the manner otherwise provided in this
paragraph 19.9.
19.10 For purposes of this Agreement, the term "Final
Determination" shall mean (A) a decision, judgment,
decree or other order by a court or other tribunal
with appropriate jurisdiction, which has become final
and non-appealable; (B) a final and binding
settlement or compromise with an administrative
agency with appropriate jurisdiction, including, but
not limited to, a closing agreement under Section
7121 of the Code; (C) any disallowance of a claim for
refund or credit in respect to an overpayment of tax
unless a suit is filed on a timely basis; or (D) any
final disposition by reason of the expiration of all
applicable statutes of limitations.
19.11 For purposes of this Agreement, the terms "tax" and
"taxes" mean any and all taxes of any kind whatsoever
(including, but not limited to, any and all Excise
Taxes, income taxes, and employment taxes), together
with any interest thereon, any penalties, additions
to tax, or additional amounts with respect to such
taxes and any interest in respect of such penalties,
additions to tax, or additional amounts.
20. No Obligation to Mitigate.
Employee shall not be required to mitigate the amount of any
payment or other benefit required to be paid to Employee
pursuant to this Agreement, whether by seeking other
employment or otherwise; nor shall the amount of any such
payment or other benefit be reduced on account of any
compensation earned by Employee as a result of employment by
another person or entity.
21. Miscellaneous.
21.1 This Agreement shall not be modified or amended
except in writing and signed by Company and Employee.
This Agreement shall be binding upon the heirs,
administrators, or executors and the successors and
assigns of each party to this Agreement.
21.2 The rights and benefits of Employee under the
Agreement are personal to him and shall not be
assigned or transferred without the prior written
consent of Company. Subject to the foregoing, this
Agreement shall be binding upon and inure to the
benefit of the parties hereto and their respective
heirs, personal representatives, successors and
assigns.
21.3 All titles or headings of sections or paragraphs or
other divisions of this Agreement are only for the
convenience of the parties and shall not be construed
to have any effect or meaning with respect
Employment Agreement -- William Hunt Hodge
-51-
<PAGE> 52
to the other content of such sections or paragraphs
or other divisions, such content being controlling as
to the agreement between the parties hereto.
21.4 This Agreement is made and will be performed under,
and shall be governed by and construed in accordance
with, the law of the State of Texas.
21.5 EMPLOYEE AFFIRMS AND ATTESTS BY HIS SIGNATURE TO THIS
AGREEMENT THAT HE HAS READ THIS AGREEMENT BEFORE
SIGNING IT AND THAT HE FULLY UNDERSTANDS ITS
PURPOSES, TERMS AND PROVISIONS, WHICH HE HEREBY
EXPRESSLY ACKNOWLEDGED TO BE REASONABLE IN ALL
RESPECTS. EMPLOYEE FURTHER ACKNOWLEDGES RECEIPT OF
ONE COPY OF THIS AGREEMENT.
21.6 Notices contemplated under this Agreement shall be
directed to the following address:
If to Company:
Mariner Energy, Inc.
580 Westlake Boulevard, Suite 1300
Houston, Texas 77079
Attention: President and Chief Executive Officer
If to Employee:
William Hunt Hodge
13906 Pebblebrook
Houston, Texas 77079
Company and Employee may change the above addresses
for notice purposes by notifying the other in
writing.
21.7 The Company may withhold from any amounts payable
under this Agreement such federal, state, or local
taxes as shall be required to be withheld pursuant to
any applicable law or regulation.
21.8 Except as otherwise expressly provided herein,
nothing contained in this Agreement shall limit or
otherwise affect any rights or benefits which are
vested in, accrued to, or earned by Employee, or for
which Employee is entitled to, prior to the Effective
Date whether under the Employment Agreement or
otherwise.
Employment Agreement -- William Hunt Hodge
-52-
<PAGE> 53
21.9 ON THE EFFECTIVE DATE, THAT CERTAIN CHANGE IN CONTROL
AGREEMENT DATED EFFECTIVE AS OF FEBRUARY 12, 1996,
BETWEEN COMPANY AND EMPLOYEE SHALL TERMINATE AND BE
FROM THE EFFECTIVE DATE NULL, VOID AND OF NO FURTHER
FORCE OR EFFECT WHATSOEVER.
Executed as of the Effective Date in duplicate originals at Houston,
Texas.
COMPANY:
MARINER ENERGY, INC. (formerly known
as Hardy Oil & Gas USA Inc.)
By: /s/ ROBERT E. HENDERSON
--------------------------------
Printed Name: Robert E. Henderson
------------------------
Printed Title: President and Chief
------------------------
Executive Officer
------------------------
EMPLOYEE:
/s/ WILLIAM HUNT HODGE
---------------------------------------
William Hunt Hodge
Employment Agreement -- William Hunt Hodge
-53-
<PAGE> 1
EXHIBIT 10.18
[LETTERHEAD OF MARINER ENERGY, INC.]
September 26, 1996
Re: (1) Termination of Employment
(2) Employment Agreement effective March 31, 1987, as amended (the
"Employment Agreement"), by and between Trafalgar House Oil and
Gas Inc. (heretofore also known as Hardy Oil & Gas USA Inc. and
now known as Mariner Energy, Inc.) ("Mariner") and Gary M. Pedlar
("you" or "Pedlar")
(3) Change in Control Agreement dated as of February 12, 1996 (the
"Change in Control Agreement"), between Mariner and Pedlar
Mr. Gary M. Pedlar
3109 Huntington Court
Katy, Texas 77493
Dear Gary:
This letter (this "letter agreement") sets forth our agreement with
respect to the termination of your employment with Mariner. Defined terms used
herein and not otherwise defined herein shall have the meaning assigned to such
terms in the Employment Agreement.
1. You and Mariner acknowledge and agree that (a) through September
30, 1996, you will hold the office/position of Vice President of
Finance of Mariner, but from August 19, 1996, through September
30, 1996, you will not hold the position of Chief Financial
Officer of Mariner, and (b) from and after October 1, 1996, you
will not be employed by, and will not hold any office or position
with, Mariner or any of its affiliates, whether as an officer,
employee, independent contractor, or otherwise.
2. You will be entitled to the following:
(a) Through September 30, 1996, (1) Mariner will pay to
you (i) a salary at the rate of $5,316.67 per semi-monthly
period, and (ii) an automobile allowance at the rate of $400.00
per month, and (2) subject to the other provisions of this letter
agreement, you will receive all benefits to which you are
entitled under the Employment Agreement and Mariner's plans,
programs and policies.
<PAGE> 2
Mr. Gary M. Pedlar
September 26, 1996
Page 2
(b) On September 30, 1996, Mariner will pay to you a
lump sum in the amount of $339,506.67.
(c) During the period beginning October 1, 1996, and
ending on the first to occur of (1) March 31, 1999, and (2) the
date on which you become a full-time employee of any person or
entity (it being understood and agreed that your becoming an
independent contractor of any other person or entity or otherwise
becoming self-employed shall not constitute becoming a full-time
employee of such person or entity), Mariner will, at its expense,
continue benefits to you under Mariner's medical, dental,
prescription drug service, life insurance, accidental death and
dismemberment insurance and disability plans, programs, and/or
policies; provided, however, that if your participation in any
such plan, program or policy is not permitted by the terms
thereof, Mariner will provide, at its expense, substantially
similar benefits as those provided thereunder.
(d) You will be entitled to any benefits or rights you
have earned under Mariner's Employee Capital Accumulation Plan
(401(k)) (the "401(k) Plan") in accordance with the terms
thereof.
(e) Except as otherwise provided in Section 2 (e)(1),
(2) and (3) of this letter agreement, and subject to the terms of
paragraph 9 of the Employment Agreement, you shall be entitled to
receive the benefits under paragraph 9 of the Employment
Agreement of an Overriding Royalty Interest equal to an undivided
percentage (as specified in paragraph 9.2 of the Employment
Agreement) of Mariner's Working Interest in each well in any
Prospect or Prospects acquired by Mariner on or before September
30, 1996, and the lease or leases allocated thereto. You shall
not be entitled to receive any Overriding Royalty Interest or
other interest in or benefits with respect to any Prospect or
Prospects acquired by Mariner after September 30, 1996.
(1) With respect to each well in any Prospect
resulting from the United States Department of
Interior Mineral Management Service's outer
continental shelf lease sale 161 held on September
25, 1996 (individually, a "161 Prospect", and
collectively, the "161 Prospects"), and the lease
or leases allocated thereto, your Overriding
Royalty Interest for purposes of paragraph 9.2 of
the Employment Agreement shall be as follows:
(i) The before Payout percentage of
Mariner's Working Interest shall be
0.053125%; and
(ii) The after Payout percentage of
Mariner's Working Interest shall be
0.212500%.
2
<PAGE> 3
Mr. Gary M. Pedlar
September 26, 1996
Page 3
(2) Your Overriding Royalty Interests shall not
be adjusted under paragraph 9.5.2 of the Employment
Agreement.
(3) You hereby expressly waive the provisions,
and protections contained therein, set forth in
paragraph 9.4.8(a) of the Employment Agreement
insofar and only insofar as same relate to the sale
of all of the common stock of Hardy Oil & Gas USA
Inc. by Hardy Holdings Inc. to Mariner Holdings,
Inc., and further insofar and only insofar as same
relate to the equalization of your before Payout
and after Payout Overriding Royalty Interest. You
do not waive your entitlement to recordable
assignments of your Overriding Royalty Interest
that have not previously been executed, delivered
and recorded; provided, however, that such
assignments of your Overriding Royalty Interest
shall be so executed, delivered and recorded at
such time or times as are provided in those
provisions of paragraph 9.4 of the Employment
Agreement that are not waived herein.
(f) After September 30, 1996, and commencing no later
than October 1, 1999, Mariner will, at its expense, provide you
with twelve (12) consecutive months of reasonable outplacement
services, such services to be commensurate with those provided a
Vice President of Finance/Chief Financial Officer position;
provided, however, that Mariner's obligation to provide you with
such services shall terminate at such time as you become a full-
time employee of any person or entity (it being understood and
agreed that your becoming an independent contractor of any other
person or entity or otherwise becoming self-employed shall not
constitute becoming a full-time employee of such person or
entity). Such services will be selected by you subject to
Mariner's prior approval, which approval shall not be
unreasonably withheld.
(g) On or before October 11, 1996, you will be provided
with a favorable letter of recommendation from Robert E.
Henderson, Mariner's Chairman, President and Chief Executive
Officer.
3. Subject to the provisions of Section 11 of the Change in Control
Agreement and Mariner's obligations to you thereunder, Mariner
may withhold from any amounts payable under this letter agreement
such federal, state, or local taxes as shall be required to be
withheld pursuant to any applicable law or regulation.
4. In the event of a conflict between the provisions of this letter
agreement, on the one hand, and any of the provisions of the
Employment Agreement, the Change in Control Agreement, that
certain withdrawal of offers letter from Mariner to you dated
June 13, 1996, that certain notice of termination letter from you
to Mariner dated August 2, 1996 (the
3
<PAGE> 4
Mr. Gary M. Pedlar
September 26, 1996
Page 4
"Pedlar Termination Letter"), or that certain notice of
termination letter from Mariner to you dated August 6, 1996 (the
"Mariner Termination Letter"), on the other hand, the provisions
of this letter agreement shall control, but only to the extent of
such conflict. In addition, and without limiting the generality of
the preceding sentence, Mariner and Pedlar expressly acknowledge
and agree that Pedlar's entitlements set forth in Section 2 above
are in lieu of any benefits to which Pedlar may otherwise be
entitled to under, and Pedlar shall not be entitled to any
benefits under, Section 7 of the Change in Control Agreement or
under paragraph 3 of the Employment Agreement. This letter
agreement is intended to resolve certain disputed issues arising
out of the Pedlar Termination Letter and the Mariner Termination
Letter, and is entered into for the purposes of clarifying the
agreements made by you and Mariner in settlement of those disputed
issues as the same are more particularly set out herein. Except
as expressly provided herein with respect to the resolution of
such disputed issues, nothing contained in this letter agreement
is intended as, nor shall this letter agreement be construed as,
modifying, changing, limiting, waiving, releasing or otherwise
affecting in any manner the rights, interests, duties, or
obligations of Pedlar or Mariner under the Employment Agreement
and/or the Change in Control Agreement. It is further understood
and agreed that all of the respective terms and provisions of the
Employment Agreement and the Change in Control Agreement that
state they survive the termination thereof and/or termination of
Pedlar's employment with Mariner, or are otherwise designed to
survive any such termination, shall so survive the Employment
Agreement and the Change in Control Agreement, respectively.
5. Written notices required or furnished under this letter agreement
shall be sent to the following addresses:
to Mariner: 580 WestLake Park Blvd., Suite 1300
Houston, Texas 77079
Attention: President and Chief
Executive Officer
to Pedlar: 3109 Huntington Court
Katy, Texas 77493
6. This letter agreement does not constitute an admission of
liability of any kind by Mariner or its affiliates or by Pedlar.
This letter agreement is personal to Pedlar and, without the prior
written consent of Mariner, shall not be assignable by Pedlar
otherwise than by will or the laws of descent and distribution.
The terms of this letter agreement shall be binding upon and inure
to the benefit of Mariner and its affiliates, successors and
assigns and upon Pedlar and his heirs, devisees and permitted
assigns. The terms of this letter agreement may be changed,
modified or discharged only by an instrument in writing signed by
the
4
<PAGE> 5
Mr. Gary M. Pedlar
September 26, 1996
Page 5
parties hereto. This letter agreement shall be construed,
enforced and interpreted in accordance with the laws of the State
of Texas without reference to its principles of conflicts of law.
This letter agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original, but
shall not be binding until signed by or on behalf of both Pedlar
and Mariner.
7. Before September 30, 1996, Pedlar shall submit an invoice to, and
request by Pedlar that, Mariner reimburse Pedlar for his
reasonable attorney's fees incurred in connection with the
termination of Pedlar's employment with Mariner. Upon such
submission, Mariner will, on September 30, 1996, reimburse Pedlar
for such fees in an amount equal to the lesser of (a) the amount
reflected on such invoice, and (b) $2,500.00.
Very truly yours,
MARINER ENERGY, INC.
/s/ JAMES M. FITZPATRICK
---------------------------------------------------
James M. Fitzpatrick
Vice President of Land and Legal
AGREED TO THIS 26 DAY OF
SEPTEMBER, 1996.
/s/ GARY M. PEDLAR
- -----------------------------
GARY M. PEDLAR
5
<PAGE> 1
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Amendment No. 1 to Registration Statement No.
333-12707 of Mariner Energy, Inc. on Form S-4 of our report dated July 12, 1996
(August 14, 1996 with respect to Note 10), appearing in the Prospectus, which is
part of this Registration Statement and to the reference to us under the
headings "Selected Financial Data" and "Independent Auditors" in such
Prospectus.
/s/ DELOITTE & TOUCHE LLP
DELOITTE & TOUCHE LLP
Houston, Texas
December 5, 1996
<PAGE> 1
LETTER OF TRANSMITTAL
MARINER ENERGY, INC.
Offer to Exchange all outstanding 10 1/2% Senior Subordinated Notes Due 2006,
Series A, for 10 1/2% Senior Subordinated Notes Due 2006, Series B
THE EXCHANGE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT
12:00 MIDNIGHT, NEW YORK CITY TIME, ON , 1997,
UNLESS EXTENDED
Deliver to United States Trust Company of New York
(the "Exchange Agent")
<TABLE>
<S> <C> <C>
BY HAND DELIVERY: BY OVERNIGHT COURIER: BY REGISTERED OR CERTIFIED
United States Trust Company United States Trust Company MAIL:
of New York of New York United States Trust Company
111 Broadway 770 Broadway of New York
Lower Level 13th Floor Box 843
New York, NY 10005 New York, NY 10003 Peter Cooper Station
Attn: Corporate Trust Attn: Corporate Trust Service New York, NY 10276
Window Attn: Corporate Trust
</TABLE>
BY FACSIMILE TRANSMISSION
(FOR ELIGIBLE INSTITUTIONS ONLY):
United States Trust Company of New York
(212) 420-6152
Confirm: (800) 548-6565
For Information:
(800) 548-6565
DELIVERY OF THIS INSTRUMENT TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE OR
TRANSMISSION OF INSTRUCTIONS VIA A FACSIMILE NUMBER OTHER THAN THE ONES LISTED
ABOVE WILL NOT CONSTITUTE A VALID DELIVERY. THE INSTRUCTIONS ACCOMPANYING THIS
LETTER OF TRANSMITTAL SHOULD BE READ CAREFULLY BEFORE THIS LETTER OF TRANSMITTAL
IS COMPLETED.
The undersigned hereby acknowledges receipt of the Prospectus dated
, 1996 (the "Prospectus") of Mariner Energy, Inc. (the "Company")
and this Letter of Transmittal, which together constitute the Company's offer
(the "Exchange Offer") to exchange an aggregate principal amount of $100,000,000
of its 10 1/2% Senior Subordinated Notes Due 2006, Series B (the "Exchange
Notes"), which have been registered under the Securities Act of 1933, as amended
(the "Securities Act"), pursuant to a Registration Statement of which the
Prospectus is a part, for an equal principal amount of its outstanding 10 1/2%
Senior Subordinated Notes Due 2006, Series A (the "Outstanding Notes"), in
integral multiples of $1,000. The term "Expiration Date" shall mean 12:00
midnight, New York City time, on , 1997, unless the Company, in its
sole discretion, extends the Exchange Offer, in which case the term shall mean
the latest date and time to which the Exchange Offer is extended. Capitalized
terms used but not defined herein have the meaning given to them in the
Prospectus.
YOUR BANK OR BROKER CAN ASSIST YOU IN COMPLETING THIS FORM. THE
INSTRUCTIONS INCLUDED WITH THIS LETTER OF TRANSMITTAL MUST BE FOLLOWED.
QUESTIONS RELATING TO THE PROCEDURE FOR TENDERING AND REQUESTS FOR ADDITIONAL
COPIES OF THE PROSPECTUS AND THIS LETTER OF TRANSMITTAL MAY BE DIRECTED TO THE
EXCHANGE AGENT. QUESTIONS RELATING TO THE EXCHANGE OFFER
<PAGE> 2
AND REQUESTS FOR ASSISTANCE OR FOR ADDITIONAL COPIES OF THE PROSPECTUS AND THIS
LETTER OF TRANSMITTAL MAY BE DIRECTED TO THE COMPANY.
List below the Outstanding Notes to which this Letter of Transmittal
relates. If the space indicated below is inadequate, additional information
should be listed on a separately signed schedule affixed hereto.
<TABLE>
<S> <C> <C> <C>
- -------------------------------------------------------
DESCRIPTION OF OUTSTANDING NOTES TENDERED HEREBY
- -------------------------------------------------------
AGGREGATE PRINCIPAL
NAME(S) AND ADDRESS(ES) OF REGISTERED HOLDER(S) AMOUNT PRINCIPAL
EXACTLY AS NAME(S) APPEAR(S) ON NOTE(S) NOTE REPRESENTED BY AMOUNT
(PLEASE FILL IN) NUMBERS* OUTSTANDING NOTES TENDERED**
- ------------------------------------------------------------------------------------------------------------
-----------------------------------------------------
-----------------------------------------------------
-----------------------------------------------------
-----------------------------------------------------
-----------------------------------------------------
TOTAL
- ------------------------------------------------------------------------------------------------------------
* Need not be completed by book-entry Holders.
** Unless otherwise indicated, the Holder will be deemed to have tendered the full aggregate principal
amount represented by such Outstanding Notes. All tenders must be in integral multiples of $1,000.
- ------------------------------------------------------------------------------------------------------------
</TABLE>
This Letter of Transmittal is to be used (i) if certificates of Outstanding
Notes are to be forwarded herewith, (ii) if delivery of Outstanding Notes is to
be made by book-entry transfer to an account maintained by the Exchange Agent at
The Depository Trust Company ("DTC"), pursuant to the procedures set forth in
"The Exchange Offer -- Procedures for Tendering" in the Prospectus or (iii)
tender of the Outstanding Notes is to be made according to the guaranteed
delivery procedures described in the Prospectus under the caption "The Exchange
Offer -- Guaranteed Delivery Procedures". See Instruction 2. Delivery of
documents to a book-entry transfer facility does not constitute delivery to the
Exchange Agent. It is understood that participants in DTC's book-entry system
(the "Book-Entry Transfer Facility") will, in accordance with DTC's Automated
Tender Offer Program procedures and in lieu of physical delivery to the Exchange
Agent of a Letter of Transmittal, electronically acknowledge receipt of, and
agree to be bound by, the terms of this Letter of Transmittal.
The term "Holder" with respect to the Exchange Offer means any person in
whose name Outstanding Notes are registered on the books of the Company or any
other person who has obtained a properly completed bond power from the
registered holder. The undersigned has completed, executed and delivered this
Letter of Transmittal to indicate the action the undersigned desires to take
with respect to the Exchange Offer. Holders who wish to tender their Outstanding
Notes must complete this letter in its entirety.
[ ] CHECK HERE IF TENDERED OUTSTANDING NOTES ARE BEING DELIVERED BY BOOK-ENTRY
TRANSFER MADE TO AN ACCOUNT MAINTAINED BY THE EXCHANGE AGENT WITH A
BOOK-ENTRY TRANSFER FACILITY AND COMPLETE THE FOLLOWING:
Name of Tendering Institution
- --------------------------------------------------------------------------------
[ ] The Depository Trust Company
Account Number
- --------------------------------------------------------------------------------
Transaction Code Number
- --------------------------------------------------------------------------------
Holders whose Outstanding Notes are not immediately available or who cannot
deliver their Outstanding Notes and all other documents required hereby to the
Exchange Agent on or prior to the Expiration Date must tender their Outstanding
Notes according to the guaranteed delivery procedure set forth in the Prospectus
under the caption "The Exchange Offer -- Guaranteed Delivery Procedures". See
Instruction 2.
<PAGE> 3
[ ] CHECK HERE IF TENDERED OUTSTANDING NOTES ARE BEING DELIVERED PURSUANT TO A
NOTICE OF GUARANTEED DELIVERY AND COMPLETE THE FOLLOWING:
Name(s) of Registered Holder(s)
- ----------------------------------------------------------------------------
Date of Execution of Notice of Guaranteed Delivery
- ---------------------------------------------------------
Name of Eligible Institution that Guaranteed Delivery
- -------------------------------------------------------
If delivered by book-entry transfer:
Account Number
- --------------------------------------------------------------------------------
Transaction Code Number
- --------------------------------------------------------------------------------
[ ] CHECK HERE IF YOU ARE A BROKER-DEALER AND WISH TO RECEIVE 10 ADDITIONAL
COPIES OF THE PROSPECTUS AND 10 COPIES OF ANY AMENDMENTS OR SUPPLEMENTS
THERETO.
Name
- --------------------------------------------------------------------------------
Address
- --------------------------------------------------------------------------------
<PAGE> 4
SIGNATURES MUST BE PROVIDED BELOW
PLEASE READ THE ACCOMPANYING INSTRUCTIONS CAREFULLY
Ladies and Gentlemen:
Upon the terms and subject to the conditions of the Exchange Offer, the
undersigned hereby tenders to the Company the principal amount of the
Outstanding Notes indicated above and agrees that the Company may effect the
Amendment to cure an unintended and inadvertent omission, defect and
inconsistency in the Indenture without further action or approval by holders of
the Notes. Subject to, and effective upon, the acceptance for exchange of such
Outstanding Notes tendered hereby, the undersigned hereby exchanges, assigns and
transfers to, or upon the order of, the Company all right, title and interest in
and to such Outstanding Notes as are being tendered hereby, including all rights
to accrual of interest thereon on and after the date of issuance of the Exchange
Notes. The undersigned hereby irrevocably constitutes and appoints the Exchange
Agent the true and lawful agent and attorney-in-fact of the undersigned (with
full knowledge that the Exchange Agent acts as the agent of the Company in
connection with the Exchange Offer) to cause the Outstanding Notes to be
assigned, transferred and exchanged. The undersigned represents and warrants
that it has full power and authority to tender, exchange, assign and transfer
the Outstanding Notes and to acquire Exchange Notes issuable upon the exchange
of such tendered Outstanding Notes, and that when the same are accepted for
exchange, the Company will acquire good and unencumbered title to the tendered
Outstanding Notes, free and clear of all liens, restrictions, charges and
encumbrances and not subject to any adverse claim.
The undersigned represents to the Company that (i) the Exchange Notes
acquired pursuant to the Exchange Offer are being obtained in the ordinary
course of business of the person receiving such Exchange Notes, whether or not
such person is the undersigned, and (ii) neither the undersigned nor any such
other person has an arrangement or understanding with any person to participate
in the distribution of such Exchange Notes. If the undersigned or the person
receiving the Exchange Notes covered hereby is not a broker-dealer, the
undersigned represents that it is not engaged in, and does not intend to engage
in, a distribution of the Exchange Notes. If the undersigned is a broker-dealer
that will receive Exchange Notes, it represents that the Outstanding Notes to be
exchanged for the Exchange Notes were acquired as a result of market-making
activities or other trading activities. If the undersigned or the person
receiving the Exchange Notes covered hereby is a broker-dealer that is receiving
the Exchange Notes for its own account in exchange for Outstanding Notes that
were acquired as a result of market-making activities or other trading
activities, the undersigned acknowledges that it or such other person will
deliver a prospectus in connection with any resale of such Exchange Notes;
however, by so acknowledging and by delivering a prospectus, the undersigned
will not be deemed to admit that it is an "underwriter" within the meaning of
the Securities Act. The undersigned and any such other person acknowledge that,
if they are participating in the Exchange Offer for the purpose of distributing
the Exchange Notes, (i) they cannot rely on the position of the staff of the
Securities and Exchange Commission enunciated in Exxon Capital Holdings
Corporation (available May 13, 1988), Morgan Stanley & Co. Incorporated
(available June 5, 1991) or similar no-action letters and, in the absence of an
exemption therefrom, must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with the resale transaction and
(ii) failure to comply with such requirements in such instance could result in
the undersigned or any such other person incurring liability under the
Securities Act for which such persons are not indemnified by the Company. If the
undersigned or the person receiving the Exchange Notes covered by this letter is
an affiliate (as defined under Rule 405 of the Securities Act) of the Company,
the undersigned represents to the Company that (i) the undersigned understands
and acknowledges that such Exchange Notes may not be offered for resale, resold
or otherwise transferred by the undersigned or such other person without
registration under the Securities Act or an exemption therefrom and (ii) the
undersigned or such other person will comply with the registration and
prospectus delivery requirements of the Securities Act to the extent applicable.
The undersigned also warrants that it will, upon request, execute and
deliver any additional documents deemed by the Exchange Agent or the Company to
be necessary or desirable to complete the exchange, assignment and transfer of
tendered Outstanding Notes or transfer ownership of such Outstanding Notes on
the account books maintained by the Book-Entry Transfer Facility. The
undersigned further agrees that
<PAGE> 5
acceptance of any tendered Outstanding Notes by the Company and the issuance of
Exchange Notes in exchange therefor shall constitute performance in full by the
Company of its obligations under the Registration Agreement and that the Company
shall have no further obligations or liabilities thereunder for the registration
of the Outstanding Notes or the Exchange Notes.
The Exchange Offer is subject to certain conditions set forth in the
Prospectus under the caption "The Exchange Offer -- Conditions". The undersigned
recognizes that as a result of these conditions (which may be waived, in whole
or in part, by the Company), as more particularly set forth in the Prospectus,
the Company may not be required to exchange any of the Outstanding Notes
tendered hereby and, in such event, the Outstanding Notes not exchanged will be
returned to the undersigned at the address shown below the signature of the
undersigned.
All authority herein conferred or agreed to be conferred shall survive the
death or incapacity of the undersigned and every obligation of the undersigned
hereunder shall be binding upon the heirs, personal representatives, successors
and assigns of the undersigned. Tendered Outstanding Notes may be withdrawn at
any time prior to the Expiration Date.
Unless otherwise indicated in the box entitled "Special Registration
Instructions" or the box entitled "Special Delivery Instructions" in this Letter
of Transmittal, certificates for all Exchange Notes delivered in exchange for
tendered Outstanding Notes, and any Outstanding Notes delivered herewith but not
exchanged, will be registered in the name of the undersigned and shall be
delivered to the undersigned at the address shown below the signature of the
undersigned. If an Exchange Note is to be issued to a person other than the
person(s) signing this Letter of Transmittal, or if the Exchange Note is to be
mailed to someone other than the person(s) signing this Letter of Transmittal or
to the person(s) signing this Letter of Transmittal at an address different than
the address shown on this Letter of Transmittal, the appropriate boxes of this
Letter of Transmittal should be completed. IF OUTSTANDING NOTES ARE SURRENDERED
BY HOLDER(S) THAT HAVE COMPLETED EITHER THE BOX ENTITLED "SPECIAL REGISTRATION
INSTRUCTIONS" OR THE BOX ENTITLED "SPECIAL DELIVERY INSTRUCTIONS" IN THIS LETTER
OF TRANSMITTAL, SIGNATURE(S) ON THIS LETTER OF TRANSMITTAL MUST BE GUARANTEED BY
AN ELIGIBLE INSTITUTION (SEE INSTRUCTION 4).
<PAGE> 6
- ----------------------------------------------------------
SPECIAL REGISTRATION INSTRUCTIONS
(SEE INSTRUCTION 5)
To be completed ONLY if the
Exchange Notes are to be issued in
the name of someone other than the
undersigned.
Issue Exchange Note to:
Name: ___________________________________________________
Address: ________________________________________________
__________________________________________________________
(PLEASE PRINT OR TYPE)
- ----------------------------------------------------------
- ----------------------------------------------------------
SPECIAL DELIVERY INSTRUCTIONS
(SEE INSTRUCTION 5)
To be completed ONLY if the
Exchange Notes are to be sent to
someone other than the undersigned,
or to the undersigned at an address
other than that shown under
"Description of Outstanding Notes
Tendered Hereby."
Mail Exchange Note to:
Name: ___________________________________________________
Address: ________________________________________________
(PLEASE PRINT OR TYPE)
- ----------------------------------------------------------
- -------------------------------------------------------------------------------
REGISTERED HOLDER(S) OF OUTSTANDING NOTES SIGN HERE
(In addition, complete Substitute Form W-9 Below)
X _____________________________________________________________________________
X _____________________________________________________________________________
(Signature(s) of Registered Holder(s))
(Must be signed by registered holder(s) exactly as name(s) appear(s) on
the Outstanding Notes or on a security position listing as the owner of the
Outstanding Notes or by person(s) authorized to become registered holder(s) by
properly completed bond powers transmitted herewith. If signature is by
attorney-in-fact, trustee, executor, administrator, guardian, officer of a
corporation or other person acting in a fiduciary capacity, please provide the
following information. (Please Print or Type):
Name and Capacity (full title): ______________________________________________
Address (including zip): _____________________________________________________
Area Code and Telephone Number: ______________________________________________
Dated: _______________________________________________________________________
SIGNATURE GUARANTY (If required -- See Instruction 4)
Authorized Signature: ________________________________________________________
(Signature of Representative of Signature Guarantor)
Name and Title: ______________________________________________________________
Name of Firm: ________________________________________________________________
Area Code and Telephone Number: ______________________________________________
(Please Print or Type)
Dated: ________________________________
- --------------------------------------------------------------------------------
<PAGE> 7
PAYOR'S NAME: UNITED STATES TRUST COMPANY OF NEW YORK
THIS SUBSTITUTE FORM W-9 MUST BE COMPLETED AND SIGNED
Please provide your social security number or other taxpayer identification
number on the following Substitute Form W-9 and certify therein that you are not
subject to backup withholding.
<TABLE>
<C> <S> <C>
- ----------------------------------------------------------------------------------------------------
SUBSTITUTE PART 1 -- Please provide your TIN in the
FORM W-9 box at right and certify by signing and
Department of the Treasury dating below.
Internal Revenue Service ----------------------
PART 2 -- CERTIFICATION: Under penalties Social Security
Payor's Request for Taxpayer of perjury, I certify (1) that the number Number or Employer
Identification Number ("TIN") shown on this form is my correct taxpayer Identification Number
identification number and (2) that I am ----------------------
not subject to backup withholding under
the provisions of Section 3406(a)(1)(C) of PART 3 --
the Internal Revenue Code either because
(a) I have not been notified that I am Exempt from backup
subject to backup withholding as a result withholding [ ]
of failure to report all interest or ----------------------
dividends or (b) the Internal Revenue
Service has notified me that I am no PART 4 --
longer subject to backup withholding. [ ]
Awaiting TIN [ ]
Signature: Dated:________
- ----------------------------------------------------------------------------------------------------
</TABLE>
NOTE: FAILURE TO COMPLETE AND RETURN THIS FORM MAY RESULT IN BACKUP
WITHHOLDING OF 31% OF ANY INTEREST OR OTHER REPORTABLE PAYMENTS.
YOU MUST COMPLETE THE FOLLOWING CERTIFICATE IF YOU CHECKED THE BOX IN
PART 4 OF SUBSTITUTE FORM W-9.
- --------------------------------------------------------------------------------
CERTIFICATE OF AWAITING TAX IDENTIFICATION NUMBER
I certify under penalties of perjury that a taxpayer identification
number has not been issued to me, and either (a) I have mailed or delivered an
application to receive a taxpayer identification number to the appropriate
Internal Revenue Service Center or Social Security Administration Office, or
(b) I intend to mail or deliver an application in the near future. I
understand that if I do not provide a taxpayer identification number within 60
days, 31% of all reportable payments made to me thereafter will be withheld
until I provide a number. Moreover, I understand that during this 60-day
period, 31% of all reportable interest payments made to me will be withheld
commencing 7 business days after the payor receives this Certificate of
Awaiting Tax Identification Number and terminating on the date I provide a
certified TIN to the payor.
<TABLE>
<S> <C>
- ---------------------------------------------------------- -----------------------------------
Signature Date
</TABLE>
- --------------------------------------------------------------------------------
<PAGE> 8
INSTRUCTIONS
FORMING PART OF THE TERMS AND
CONDITIONS OF THE EXCHANGE OFFER
1. DELIVERY OF THIS LETTER OF TRANSMITTAL AND CERTIFICATES.
All physically delivered Outstanding Notes or any confirmation of a
book-entry transfer to the Exchange Agent's account at the Book-Entry Transfer
Facility of Outstanding Notes tendered by book-entry transfer, as well as a
properly completed and duly executed copy of this Letter of Transmittal or
facsimile thereof, and any other documents required by this Letter of
Transmittal, must be received by the Exchange Agent at any of its addresses set
forth herein on or prior to the Expiration Date (as defined in the Prospectus).
THE METHOD OF DELIVERY OF THIS LETTER OF TRANSMITTAL, THE OUTSTANDING NOTES AND
ANY OTHER REQUIRED DOCUMENTS IS AT THE ELECTION AND RISK OF THE HOLDER, AND
EXCEPT AS OTHERWISE PROVIDED BELOW, THE DELIVERY WILL BE DEEMED MADE ONLY WHEN
ACTUALLY RECEIVED BY THE EXCHANGE AGENT. IF SUCH DELIVERY IS BY MAIL, IT IS
SUGGESTED THAT REGISTERED MAIL WITH RETURN RECEIPT REQUESTED, PROPERLY INSURED,
BE USED.
No alternative, conditional, irregular or contingent tenders will be
accepted. All tendering Holders, by execution of this Letter of Transmittal (or
facsimile thereof), shall waive any right to receive notice of the acceptance of
the Outstanding Notes for exchange.
DELIVERY TO AN ADDRESS OTHER THAN AS SET FORTH HEREIN, OR INSTRUCTIONS VIA
A FACSIMILE NUMBER OTHER THAN THE ONES SET FORTH HEREIN, WILL NOT CONSTITUTE A
VALID DELIVERY.
2. GUARANTEED DELIVERY PROCEDURES. Holders who wish to tender their Outstanding
Notes and (i) whose Outstanding Notes are not immediately available or (ii) who
cannot deliver their Outstanding Notes, this Letter of Transmittal or any other
required documents to the Exchange Agent (or complete the procedures for
book-entry transfer) prior to the Expiration Date, may effect a tender if:
(a) the tender is made through a member firm of a registered national
securities exchange or of the National Association of Securities Dealers,
Inc., a commercial bank or trust company having an office or correspondent
in the United States or an "eligible guarantor institution" within the
meaning of Rule 17Ad-15 under the Securities Exchange Act of 1934, as
amended (an "Eligible Institution");
(b) prior to the Expiration Date, the Exchange Agent receives from
such Eligible Institution a properly completed and duly executed Notice of
Guaranteed Delivery (by facsimile transmission, mail or hand delivery)
setting forth the name and address of the Holder, the registration
number(s) of such Outstanding Notes and the principal amount of Outstanding
Notes tendered, stating that the tender is being made thereby and
guaranteeing that, within five New York Stock Exchange trading days after
the Expiration Date, this Letter of Transmittal (or facsimile thereof),
together with the certificate(s) representing the Outstanding Notes (or a
confirmation of book-entry transfer of such Outstanding Notes into the
Exchange Agent's account at the Book-Entry Transfer Facility) and any other
documents required by this Letter of Transmittal, will be deposited by the
Eligible Institution with the Exchange Agent; and
(c) such properly completed and executed Letter of Transmittal (or
facsimile thereof), as well as all tendered Outstanding Notes in proper
form for transfer (or a confirmation of book-entry transfer of such
Outstanding Notes into the Exchange Agent's account at the Book-Entry
Transfer Facility) and all other documents required by this Letter of
Transmittal, are received by the Exchange Agent within five New York Stock
Exchange trading days after the Expiration Date.
Upon request to the Exchange Agent, a Notice of Guaranteed Delivery will be
sent to Holders who wish to tender their Outstanding Notes according to the
guaranteed delivery procedures set forth above. Any Holder who wishes to tender
Outstanding Notes pursuant to the guaranteed delivery procedures described above
must ensure that the Exchange Agent receives the Notice of Guaranteed Delivery
relating to such Outstanding Notes prior to the Expiration Date. Failure to
complete the guaranteed delivery procedures
<PAGE> 9
outlined above will not, of itself, affect the validity or effect a revocation
of any Letter of Transmittal form properly completed and executed by a Holder
who attempted to use the guaranteed delivery procedures.
3. PARTIAL TENDERS; WITHDRAWALS.
If less than the entire principal amount of Outstanding Notes evidenced by
a submitted certificate is tendered, the tendering Holder should fill in the
principal amount tendered in the column entitled "Principal Amount Tendered" of
the box entitled "Description of Outstanding Notes Tendered Hereby". A newly
issued Outstanding Note for the principal amount of Outstanding Notes submitted
but not tendered will be sent to such Holder as soon as practicable after the
Expiration Date. All Outstanding Notes delivered to the Exchange Agent will be
deemed to have been tendered in full unless otherwise indicated. Tenders of
Outstanding Notes will be accepted only in integral multiples of $1,000.
Outstanding Notes tendered pursuant to the Exchange Offer may be withdrawn
at any time prior to the Expiration Date, after which tenders of Outstanding
Notes are irrevocable. To be effective, a written, telegraphic or facsimile
transmission notice of withdrawal must be timely received by the Exchange Agent.
Any such notice of withdrawal must (i) specify the name of the person having
deposited the Outstanding Notes to be withdrawn (the "Depositor"), (ii) identify
the Outstanding Notes to be withdrawn (including the note number(s) and
principal amount of such Outstanding Notes, or, in the case of Outstanding Notes
transferred by book-entry transfer, the name and number of the account at the
Book-Entry Transfer Facility to be credited), (iii) be signed by the Holder in
the same manner as the original signature on this Letter of Transmittal
(including any required signature guaranties) or be accompanied by documents of
transfer sufficient to have the Trustee with respect to the Outstanding Notes
register the transfer of such Outstanding Notes into the name of the person
withdrawing the tender and (iv) specify the name in which any such Outstanding
Notes are to be registered, if different from that of the Depositor. All
questions as to the validity, form and eligibility (including time of receipt)
of such notices will be determined by the Company, whose determination shall be
final and binding on all parties. Any Outstanding Notes so withdrawn will be
deemed not to have been validly tendered for purposes of the Exchange Offer and
no Exchange Notes will be issued with respect thereto unless the Outstanding
Notes so withdrawn are validly retendered. Any Outstanding Notes that have been
tendered but not accepted for exchange, will be returned to the Holder thereof
without cost to such Holder as soon as practicable after withdrawal, rejection
of tender or termination of the Exchange Offer.
4. SIGNATURE ON THIS LETTER OF TRANSMITTAL; WRITTEN INSTRUMENTS AND
ENDORSEMENTS;
GUARANTY OF SIGNATURES.
If this Letter of Transmittal (or facsimile hereof) is signed by the
registered Holder(s) of the Outstanding Notes tendered hereby, the signature
must correspond with the name(s) as written on the face of the certificates
without alteration or enlargement or any change whatsoever. If this Letter of
Transmittal is signed by a participant in the Book-Entry Transfer Facility, the
signature must correspond with the name as it appears on the security position
listing as the holder of the Outstanding Notes.
If any of the Outstanding Notes tendered hereby are owned of record by two
or more joint owners, all such owners must sign this Letter of Transmittal.
If a number of Outstanding Notes registered in different names are
tendered, it will be necessary to complete, sign and submit as many separate
copies of this Letter of Transmittal as there are different registrations of
Outstanding Notes.
Signatures on this Letter of Transmittal or a notice of withdrawal, as the
case may be, must be guaranteed by an Eligible Institution unless the
Outstanding Notes tendered hereby are tendered (i) by a
<PAGE> 10
registered Holder who has not completed the box entitled "Special Registration
Instructions" or "Special Delivery Instructions" on the Letter of Transmittal or
(ii) for the account of an Eligible Institution.
If this Letter of Transmittal is signed by the registered Holder or Holders
of Outstanding Notes (which term, for the purposes described herein, shall
include a participant in the Book-Entry Transfer Facility whose name appears on
a security listing as the holder of the Outstanding Notes) listed and tendered
hereby, no endorsements of the tendered Outstanding Notes or separate written
instruments of transfer or exchange are required. In any other case, the
registered Holder (or acting Holder) must either properly endorse the
Outstanding Notes or transmit properly completed bond powers with this Letter of
Transmittal (in either case, executed exactly as the name(s) of the registered
Holder(s) appear(s) on the Outstanding Notes, and, with respect to a participant
in the Book-Entry Transfer Facility whose name appears on a security position
listing as the owner of Outstanding Notes, exactly as the name of the
participant appears on such security position listing), with the signature on
the Outstanding Notes or bond power guaranteed by an Eligible Institution
(except where the Outstanding Notes are tendered for the account of an Eligible
Institution).
If this Letter of Transmittal, any certificates or separate written
instruments of transfer or exchange are signed by trustees, executors,
administrators, guardians, attorneys-in-fact, officers of corporations or others
acting in a fiduciary or representative capacity, such persons should so
indicate when signing, and, unless waived by the Company, proper evidence
satisfactory to the Company of their authority so to act must be submitted.
5. SPECIAL REGISTRATION AND DELIVERY INSTRUCTIONS.
Tendering Holders should indicate, in the applicable box, the name and
address (or account at the Book-Entry Transfer Facility) in which the Exchange
Notes or substitute Outstanding Notes for principal amounts not tendered or not
accepted for exchange are to be issued (or deposited), if different from the
names and addresses or accounts of the person signing this Letter of
Transmittal. In the case of issuance in a different name, the employer
identification number or social security number of the person named must also be
indicated and the tendering Holder should complete the applicable box.
If no instructions are given, the Exchange Notes (and any Outstanding Notes
not tendered or not accepted) will be issued in the name of and sent to the
acting Holder of the Outstanding Notes or deposited at such Holder's account at
the Book-Entry Transfer Facility.
6. TRANSFER TAXES.
The Company will pay all transfer taxes, if any, applicable to the transfer
and exchange of Outstanding Notes to it or its order pursuant to the Exchange
Offer. If, however, certificates representing the Exchange Notes or the
Outstanding Notes for the principal amounts not tendered or accepted for
exchange are to be delivered to, or are to be issued in the name of, any person
other than the person signing this Letter of Transmittal, or if a transfer tax
is imposed for any other reason, other than the transfer and exchange of
Outstanding Notes to the Company or its order pursuant to the Exchange Offer,
the amount of any such transfer taxes (whether imposed on the registered Holder
or any other person) will be payable by the tendering Holder. If satisfactory
evidence of payment of such taxes or exception therefrom is not submitted
herewith, the amount of such transfer taxes will be billed directly to such
tendering Holder.
Except as provided in this Instruction 6, it will not be necessary for
transfer stamps to be affixed to the Outstanding Notes listed in this Letter of
Transmittal.
7. WAIVER OF CONDITIONS.
The Company reserves the absolute right to waive, in whole or in part, any
of the conditions to the Exchange Offer set forth in the Prospectus.
<PAGE> 11
8. MUTILATED, LOST, STOLEN OR DESTROYED OUTSTANDING NOTES.
Any Holder whose Outstanding Notes have been mutilated, lost, stolen or
destroyed should contact the Exchange Agent at the address indicated above for
further instructions.
9. REQUESTS FOR ASSISTANCE OR ADDITIONAL COPIES.
Questions relating to the procedure for tendering as well as requests for
additional copies of the Prospectus and this Letter of Transmittal, may be
directed to the Exchange Agent at the address and telephone number(s) set forth
above. In addition, all questions relating to the Exchange Offer, as well as
requests for assistance or additional copies of the Prospectus and this Letter
of Transmittal, may be directed to the Company at 580 WestLake Park Blvd., Suite
1300, Houston, Texas 77079, Attention: James M. Fitzpatrick (telephone: (713)
584-5500).
10. VALIDITY AND FORM.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance of tendered Outstanding Notes and withdrawal of tendered
Outstanding Notes will be determined by the Company in its sole discretion,
which determination will be final and binding. The Company reserves the absolute
right to reject any and all Outstanding Notes not properly tendered or any
Outstanding Notes the Company's acceptance of which would, in the opinion of
counsel for the Company, be unlawful. The Company also reserves the right to
waive any defects, irregularities or conditions of tender as to particular
Outstanding Notes. The Company's interpretation of the terms and conditions of
the Exchange Offer (including the instructions in this Letter of Transmittal)
will be final and binding on all parties. Unless waived, any defects or
irregularities in connection with tenders of Outstanding Notes must be cured
within such time as the Company shall determine. Although the Company intends to
notify Holders of defects or irregularities with respect to tenders of
Outstanding Notes, neither the Company, the Exchange Agent nor any other person
shall incur any liability for failure to give such notification. Tenders of
Outstanding Notes will not be deemed to have been made until such defects or
irregularities have been cured or waived. Any Outstanding Notes received by the
Exchange Agent that are not properly tendered and as to which the defects or
irregularities have not been cured or waived will be returned by the Exchange
Agent to the tendering Holders as soon as practicable following the Expiration
Date.
IMPORTANT TAX INFORMATION
Under federal income tax law, a holder receiving interest on Exchange Notes
is required to provide the payor of interest with such holder's correct TIN on
Substitute Form W-9 herein. If such holder is an individual, the TIN is the
holder's social security number. The Certificate of Awaiting Taxpayer
Identification Number should be completed if the holder has not been issued a
TIN and has applied for a number or intends to apply for a number in the near
future. The payor is required to report to the Internal Revenue Service the
amount of reportable interest paid to the holder on Exchange Notes. If the payor
is not provided with the correct TIN, the holder may be subject to a $50 penalty
imposed by the Internal Revenue Service. In addition, interest payments that are
made to such holder on Exchange Notes may be subject to backup withholding.
Certain holders (including, among others, all corporations and certain
foreign individuals and foreign entities) are not subject to these backup
withholding and reporting requirements. For a foreign holder to qualify as an
exempt recipient, that holder must submit to the payor of interest a properly
completed Internal Revenue Service Form W-8, signed under penalties of perjury,
attesting to that holder's exempt status. Such forms can be obtained from the
Exchange Agent.
If backup withholding applies, the payor is required to withhold 31% of any
amounts otherwise payable to the holder. Backup withholding is not an additional
tax. Rather, the tax liability of persons subject to backup withholding will be
reduced by the amount of tax withheld. If withholding results in an overpayment
of taxes, a refund may be applied for with the Internal Revenue Service.
<PAGE> 12
PURPOSE OF SUBSTITUTE FORM W-9
To prevent backup withholding on interest payments to be made to a holder
with respect to Exchange Notes, the holder is required to notify the payor of
his or her correct TIN by completing the form herein certifying that the TIN
provided on Substitute Form W-9 is correct (or that such holder is awaiting a
TIN) and that (i) such holder has not been notified by the Internal Revenue
Service that he or she is subject to backup withholding as a result of failure
to report all interest or dividends or (ii) the Internal Revenue Service has
notified such holder that he or she is no longer subject to backup withholding.
WHAT NUMBER TO GIVE THE PAYOR
Each holder is required to give the payor the social security number or
employer identification number of the record holder(s) of the Exchange Notes. If
Exchange Notes are in more than one name or are not in the name of the actual
holder, consult the attached Guidelines for Certifying TIN, for additional
guidance on which number to report.
CERTIFICATE OF AWAITING TAXPAYER IDENTIFICATION NUMBER
If the holder of Exchange Notes has not been issued a TIN and has applied
for a number or intends to apply for a number in the near future, write "Applied
For" in the space for the TIN on Substitute Form W-9, check the box in Part 4,
sign and date the form and the Certificate of Awaiting Taxpayer Identification
Number and return them to the Exchange Agent. If such certificate is completed
and the payor of interest on the Exchange Notes is not provided with the TIN
within 60 days, the payor will withhold 31% of all payments made thereafter
until a TIN is provided to the payor. Moreover, even if a TIN is provided within
such 60-day period, the payor is required to withhold 31% of any reportable
interest payments made to the payee 7 days following receipt by the payor of the
Certificate of Awaiting Tax Identification Number. The payor must refund these
amounts withheld if it receives the payee's certified TIN within the 60-day
period and the payee was not otherwise subject to backup withholding during the
period.
IMPORTANT: THIS LETTER OF TRANSMITTAL OR A MANUALLY SIGNED FACSIMILE
THEREOF (TOGETHER WITH OUTSTANDING NOTES OR CONFIRMATION OF BOOK-ENTRY TRANSFER
AND ALL OTHER REQUIRED DOCUMENTS) OR A NOTICE OF GUARANTEED DELIVERY MUST BE
RECEIVED BY THE EXCHANGE AGENT ON OR PRIOR TO THE EXPIRATION DATE.
<PAGE> 13
MARINER ENERGY, INC.
NOTICE OF GUARANTEED DELIVERY
(NOT TO BE USED FOR SIGNATURE GUARANTY)
As set forth in the Prospectus dated , 1996 (the "Prospectus")
of Mariner Energy, Inc. (the "Company") in the section entitled "The Exchange
Offer -- Procedures for Tendering" and in the accompanying Letter of Transmittal
(the "Letter of Transmittal") and Instruction 2 thereto, this form or one
substantially equivalent hereto must be used to accept the Exchange Offer if
certificates representing the Company's 10 1/2% Senior Subordinated Notes Due
2006, Series A, (the "Outstanding Notes") are not immediately available to the
Holder thereof or time will not permit such Holder to deliver its Outstanding
Notes or other required documents to the Exchange Agent, or to complete the
procedures for book-entry transfer, before the Expiration Date (as defined in
the Prospectus). Capitalized terms used but not defined herein have the meaning
given to them in the Prospectus. This form may be delivered by hand or sent by
overnight courier, facsimile transmission or registered or certified mail to the
Exchange Agent and must be received by the Exchange Agent before 12:00 midnight,
New York City time on , 1997.
To United States Trust Company of New York
(the "Exchange Agent")
BY HAND DELIVERY:
United States Trust Company
of New York
111 Broadway
Lower Level
New York, NY 10005
Attn: Corporate Trust
BY OVERNIGHT COURIER:
United States Trust Company
of New York
770 Broadway
13th Floor
New York, NY 10003
Attn: Corporate Trust Service Window
BY REGISTERED OR CERTIFIED MAIL:
United States Trust Company
of New York
Box 843
Peter Cooper Station
New York, NY 10276
Attn: Corporate Trust
BY FACSIMILE TRANSMISSION
(FOR ELIGIBLE INSTITUTIONS ONLY):
United States Trust Company of New York
(212) 420-6152
Confirm: (800) 548-6565
FOR INFORMATION:
(800) 548-6565
DELIVERY OF THIS INSTRUMENT TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE OR
TRANSMISSION VIA FACSIMILE OTHER THAN AS SET FORTH ABOVE WILL NOT CONSTITUTE A
VALID DELIVERY.
THIS NOTICE OF GUARANTEED DELIVERY IS NOT TO BE USED TO GUARANTEE
SIGNATURES. IF A SIGNATURE ON A LETTER OF TRANSMITTAL IS REQUIRED TO BE
GUARANTEED BY AN "ELIGIBLE INSTITUTION" UNDER THE INSTRUCTIONS THERETO, SUCH
SIGNATURE GUARANTY MUST APPEAR IN THE APPLICABLE SPACE PROVIDED ON THE LETTER OF
TRANSMITTAL FOR GUARANTY OF SIGNATURES.
<PAGE> 14
Ladies and Gentlemen:
The undersigned hereby tender(s) to Mariner Energy, Inc., the principal
amount of the Outstanding Notes listed below, upon the terms of and subject to
the conditions set forth in the Prospectus and the related Letter of Transmittal
and the instructions thereto (which together constitute the "Exchange Offer"),
receipt of which is hereby acknowledged, pursuant to the guaranteed delivery
procedures set forth in the Prospectus, as follows:
<TABLE>
<CAPTION>
AGGREGATE PRINCIPAL PRINCIPAL AMOUNT
AMOUNT OF TENDERED (MUST BE IN INTEGRAL
NOTE NOS. NOTE(S) MULTIPLES OF $1,000)
- ----------------------- ------------------------------ ------------------------------------
<S> <C> <C>
- ----------------------- ------------------------------ ------------------------------------
- ----------------------- ------------------------------ ------------------------------------
- ----------------------- ------------------------------ ------------------------------------
- ----------------------- ------------------------------ ------------------------------------
The Book-Entry Transfer Facility Sign Here
Account Number (if the Outstanding Notes will
be tendered by book-entry transfer)
X
---------------------------------------------
X
---------------------------------------------
Signature(s)
- ---------------------------------------------
Account Number
- --------------------------------------------- ---------------------------------------------
Principal Amount Tendered Number and Street
(must be in integral multiples of $1,000) or P.O. Box
---------------------------------------------
City, State, Zip Code
Dated: ____________________ , 1996
</TABLE>
<PAGE> 15
GUARANTY
(NOT TO BE USED FOR SIGNATURE GUARANTY)
The undersigned, a member firm of a registered national securities
exchange, a member of the National Association of Securities Dealers, Inc., or a
commercial bank or trust company having an office in the United States,
guarantees (a) that the above named person(s) "own(s)" the principal amount of
10 1/2% Senior Subordinated Notes due 2006, Series A, of Mariner Energy, Inc.
(the "Outstanding Notes") tendered hereby within the meaning of Rule 14e-4 under
the Securities Exchange Act of 1934, as amended, (b) that such tender of such
Outstanding Notes complies with Rule 14e-4 and (c) to deliver to the Exchange
Agent the certificates representing the Outstanding Notes tendered hereby or
confirmation of book-entry transfer of such Outstanding Notes into the Exchange
Agent's account at The Depository Trust Company, in proper form for transfer,
together with the Letter of Transmittal (or facsimile thereof), properly
completed and duly executed, with any required signature guaranties and any
other required documents, within five New York Stock Exchange trading days after
the Expiration Date.
Name of Firm ___________________________________________
Authorized Signature ___________________________________
Name ___________________________________________________
Please Type or Print
Title __________________________________________________
Address ________________________________________________
Zip Code
Area Code and Telephone No. ____________________________
Dated: _________________________________________ , 1996
NOTE: DO NOT SEND ORIGINAL NOTES WITH THIS FORM. ORIGINAL NOTES SHOULD BE SENT
ONLY WITH A LETTER OF TRANSMITTAL.
<PAGE> 16
GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION
NUMBER ON SUBSTITUTE FORM W-9
GUIDELINES FOR DETERMINING THE PROPER IDENTIFICATION NUMBER TO GIVE THE
PAYER. Social Security numbers have nine digits separated by two hyphens: i.e,
000-00-0000. Employer identification numbers have nine digits separated by only
one hyphen: i.e., 00-0000000. The table below will help determine the number to
give the Payer.
<TABLE>
<CAPTION>
- --------------------------------------------------------
GIVE THE
FOR THIS TYPE SOCIAL SECURITY
OF ACCOUNT: NUMBER OF --
- --------------------------------------------------------
<C> <S> <C>
1. An individual's account The individual
2. Two or more individuals The actual owner of the
(joint account) account or, if combined
funds, the first
individual on the
account(1)
3. Husband and wife (joint The actual owner of the
account) account or, if joint
funds, the first person
on the account(1)
4. Custodian account of a The minor(2)
minor (Uniform Gifts to
Minors Act)
5. Adult and minor (joint The adult or, if the
account) minor is the only
contributor, the minor(1)
6. Account in the name of The ward, minor, or
guardian or committee incompetent person(3)
for a designated ward,
minor, or incompetent
person
7. a. The usual revocable The grantor-trustee(1)
savings trust
account (grantor is
also trustee)
b. So-called trust The actual owner(1)
account that is not a
legal or valid trust
under State law
<CAPTION>
- --------------------------------------------------------
GIVE THE NAME AND
FOR THIS TYPE EMPLOYER IDENTIFICATION
OF ACCOUNT: NUMBER OF --
- --------------------------------------------------------
<C> <S> <C>
8. Sole proprietorship The owner(4)
account
9. A valid trust, estate, Legal entity (Do not
or pension trust furnish the identifying
number of the personal
representative or trustee
unless the legal entity
itself is not designated
in the account title.)(5)
10. Corporate account The corporation
11. Religious, charitable, The organization
or educational
organization account
12. Partnership account The partnership
13. Association, club, or The organization
other tax-exempt
organization
14. A broker or registered The broker or nominee
nominee
15. Account with the The public entity
Department of
Agriculture in the name
of a public entity
(such as a State or
local governmental,
school district, or
prison) that receives
agricultural program
payments
</TABLE>
- ----------------------------------------------------------
----------------------------------------------------------
(1) List first and circle the name of the person whose number you furnish.
(2) Circle the minor's name and furnish the minor's social security number.
(3) Circle the ward's, minor's or incompetent person's name and furnish such
person's social security number.
(4) Show the name of the owner. You may use either your SSN or EIN.
(5) List first and circle the name of the legal trust, estate, or pension trust.
NOTE: If no name is circled when there is more than one name, the number will be
considered to be that of the first name listed.
<PAGE> 17
OBTAINING A TAXPAYER IDENTIFICATION NUMBER
If you don't have a taxpayer identification number or you don't know your
number, obtain Form SS-5, Application for a Social Security Card, or Form SS-4,
Application for Employer Identification Number, at the local office of the
Social Security Administration or the Internal Revenue Service and apply for one
immediately.
PAYEES EXEMPT FROM BACKUP WITHHOLDING
For interest and dividends, payees listed below are exempt from backup
withholding and no information reporting is required:
- - A corporation
- - A financial institution
- - An organization exempt from the tax under section 501(a), an individual
retirement account or a custodial account under Section 403(b)(7).
- - The United States or any agency or instrumentality thereof.
- - A State, the District of Columbia, a possession of the United States, or any
subdivision or instrumentality thereof.
- - A foreign government, a political subdivision of a foreign government, or
agency or instrumentality thereof.
- - An international organization or any agency, or instrumentality thereof.
- - A registered dealer in securities or commodities registered in the U.S. or a
possession of the U.S.
- - A middleman known in the investment community as a nominee or listed in the
most recent publication of the American Society of Corporate Secretaries, Inc.
Nominee List.
- - A trust exempt from tax under Section 664 or described in Section 4947.
- - A real estate investment trust.
- - A common trust fund operated by a bank under section 584(a).
- - An entity registered at all times during the tax year under the Investment
Company Act of 1940.
- - A foreign central bank of issue.
Exempt payees described above should file Form W-9 with the Payer to avoid
possible erroneous backup withholding. TO FILE THIS FORM WITH THE PAYER: FURNISH
YOUR TAXPAYER IDENTIFICATION NUMBER, CHECK THE BOX IN PART 3 OF THE FORM, SIGN
AND DATE THE FORM, AND RETURN IT TO THE PAYER.
PRIVACY ACT NOTICE. -- Section 6109 requires most recipients of dividend,
interest or other payments to give taxpayer identification numbers to payers who
must report the payments to the IRS. The IRS uses the numbers for identification
purposes. Payers must be given the numbers whether or not recipients are
required to file tax returns. Payers must generally withhold 31% of taxable
interest, dividends and certain other payments to a payee who does not furnish a
taxpayer identification number to a payer. Certain penalties may also apply.
PENALTIES
(1) PENALTY FOR FAILURE TO FURNISH TAXPAYER IDENTIFICATION NUMBER. -- If you
fail to furnish your taxpayer identification number to a payer, you are
subject to a penalty of $50 for each such failure unless your failure is due
to reasonable cause and not willful neglect.
(2) CIVIL PENALTY FOR FALSE INFORMATION WITH RESPECT TO WITHHOLDING. -- If you
make a false statement with no reasonable basis that results in no backup
withholding, you are subject to a penalty of $500.
(3) CRIMINAL PENALTY FOR FALSIFYING INFORMATION. -- Willfully falsifying
certifications or affirmations may subject you to criminal penalties
including fines and/or imprisonment.
FOR ADDITIONAL INFORMATION CONTACT YOUR TAX CONSULTANT OR THE INTERNAL REVENUE
SERVICE.
