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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997
COMMISSION FILE NUMBER 333-12707
MARINER ENERGY, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 86-0460233
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
580 WESTLAKE PARK BLVD., SUITE 1300
HOUSTON, TEXAS 77079
(Address of principal executive offices including Zip Code)
(281) 584-5500
(Registrant's telephone number)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements* for the past 90 days. Yes X No
----- ------
*Although the registrant has no class of securities registered pursuant to
Section 12 of the Securities Exchange Act of 1934 (the "Exchange Act"), the
registrant is required pursuant to Section 314(a)(1) of the Trust Indenture
Act of 1939, and is contractually obligated to holders of certain debt, to
file with the Commission such of the supplementary and periodic
information, documents, and reports which may be required pursuant to
Section 13 of the Exchange Act in respect of a security listed and
registered on a national securities exchange.
As of November 13, 1997, there were 1,000 shares of the registrant's common
stock outstanding.
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MARINER ENERGY, INC.
FORM 10-Q
SEPTEMBER 30, 1997
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
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<S> <C>
PART I - FINANCIAL INFORMATION
Item 1. Balance Sheets at September 30, 1997 and December 31, 1996..................................... 1
Statements of Operations for the three months ended September 30, 1997
and September 30, 1996, for the nine months ended September 30,
1997, the six months ended September 30, 1996 (Mariner Energy,
Inc.) and the three months ended March 31, 1996 (Predecessor
Company.................................................................................... 2
Statements of Cash Flows for the nine months ended September 30, 1997,
for the six months ended September 30, 1996 (Mariner Energy, Inc.)
and the three months ended March 31, 1996 (Predecessor Company)............................ 3
Notes to Financial Statements.................................................................. 4
Independent Certified Public Accountants' Report on Review of Interim Financial Information.... 5
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.......... 6
Item 3. Quantitative and Qualitative Disclosures about Market Risk..................................... 11
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.............................................................................. 12
Item 2. Changes in Securities.......................................................................... 12
Item 3. Defaults Upon Senior Securities................................................................ 12
Item 4. Submission of Matters to a Vote of Security Holders............................................ 12
Item 5. Other Information............................................................................... 12
Item 6. Exhibits and Reports on Form 8-K............................................................... 12
SIGNATURE............................................................................................... 13
</TABLE>
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PART I, ITEM 1. MARINER ENERGY, INC.
BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
------------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 4,395 $ 10,819
Receivables 14,886 13,571
Prepaid expenses and other 674 418
------------- ------------
Total current assets 19,955 24,808
------------- ------------
PROPERTY AND EQUIPMENT:
Oil and gas properties, at full cost:
Proved 201,632 169,728
Unproved, not subject to amortization 29,664 21,310
------------- ------------
Total 231,296 191,038
Other property and equipment 2,159 1,671
Accumulated depreciation, depletion and amortization (75,476) (24,600)
------------- ------------
Total property and equipment, net 157,979 168,109
------------- ------------
OTHER ASSETS, NET OF AMORTIZATION 3,651 3,832
------------- ------------
TOTAL ASSETS $ 181,585 $ 196,749
============= ============
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Accounts payable $ 6,643 $ 2,930
Accrued liabilities 15,617 12,288
Accrued interest 1,758 3,996
------------- ------------
Total current liabilities 24,018 19,214
------------- ------------
ACCRUAL FOR FUTURE ABANDONMENT COSTS 1,300 957
LONG-TERM DEBT:
Subordinated notes 99,562 99,525
Revolving Credit Facility 2,500 --
------------- ------------
Total long-term debt 102,062 99,525
------------- ------------
STOCKHOLDER'S EQUITY:
Common stock, $1 par value; 1,000 shares authorized,
issued and outstanding 1 1
Additional paid-in-capital 95,914 95,744
Accumulated deficit (41,710) (18,692)
------------- ------------
Total stockholder's equity 54,205 77,053
------------- ------------
TOTAL LIABILITIES and STOCKHOLDER'S EQUITY $ 181,585 $ 196,749
============= ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
1
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MARINER ENERGY, INC.
STATEMENTS OF OPERATIONS (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
Predecessor
Company
----------------
Three Months Three Months Nine Months Six Months Three Months
Ended Ended Ended Ended Ended
September 30, September 30, September 30, September 30, March 31,
1997 1996 1997 1996 1996
--------------- --------------- --------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C>
REVENUES:
Oil sales $ 4,904 $ 3,334 $ 12,974 $ 6,839 $ 3,644
Gas sales 11,391 13,468 32,645 25,912 10,134
-------- -------- ---------- ---------- ---------
Total revenues 16,295 16,802 45,619 32,751 13,778
-------- -------- ---------- ---------- ---------
COSTS AND EXPENSES:
Lease operating expenses 2,762 2,582 7,918 5,211 2,872
Depreciation, depletion and
amortization 8,555 9,265 22,436 17,674 6,309
Impairment of oil and gas
properties - - 28,514 22,500 -
General and administrative
expenses 883 803 2,252 1,537 712
-------- -------- ---------- ---------- ---------
Total costs and expenses 12,200 12,650 61,120 46,922 9,893
-------- -------- ---------- ---------- ---------
OPERATING INCOME (LOSS) 4,095 4,152 (15,501) (14,171) 3,885
INTEREST:
Related party income - - - - 2,110
Other income 107 164 355 310 57
Related party expense - - - - (381)
Other expense (2,596) (2,421) (7,874) (5,102) (3,010)
Write-off bridge loan fees - (1,381) - (2,392) -
-------- -------- ---------- ---------- ---------
INCOME (LOSS) BEFORE INCOME TAXES 1,606 514 (23,020) (21,355) 2,661
PROVISION FOR INCOME TAXES - - - - -
-------- -------- ---------- ---------- ---------
NET INCOME (LOSS) $ 1,606 $ 514 $ (23,020) $ (21,355) $ 2,661
======== ======== ========== ========== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
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MARINER ENERGY, INC.
STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
Predecessor
Company
-----------
Nine Six Months Three Months
Months Ended Ended Ended
September 30, September 30, March 31,
1997 1996 1996
------------- ------------- ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $ (23,020) $ (21,355) $ 2,661
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation, depletion and amortization 23,083 20,441 6,437
Impairment of oil and gas properties 28,514 22,500 --
Imputed interest -- 1,322 --
Changes in operating assets and liabilities:
Receivables (1,315) 4,386 (1,873)
Receivable from affiliates -- -- (2,109)
Other current assets (256) (620) (307)
Other assets (125) -- --
Accounts payable and accrued liabilities 4,804 5,392 832
Payables to affiliates -- -- (11)
------------- -------------- ------------
Net cash provided by operating activities 31,685 32,066 5,630
------------- -------------- ------------
INVESTING ACTIVITIES:
Purchase of Predecessor Company, net of cash
purchased of $5,438 -- (184,742) --
Additions to oil and gas properties (40,257) (27,955) (7,495)
Additions to other property and equipment (488) (619) (153)
Proceeds from sale of oil and gas properties -- 7,528 --
Issuance of long-term receivable to affiliates -- -- (1,000)
Repayment of long-term receivable from affiliates -- -- 3,000
------------- -------------- ------------
Net cash used in investing activities (40,745) (205,788) (5,648)
------------- -------------- ------------
FINANCING ACTIVITIES:
Principal payments on long-term debt -- (92,000) --
Principal payments on revolving credit facility -- (50,000) --
Payments of debt issue costs (34) (3,715) --
Proceeds from subordinated notes -- 99,506 --
Proceeds from long-term debt -- 92,000 --
Proceeds from revolving credit facility 2,500 50,000 --
Additional capital contributed by Parent
(Mariner Holdings, Inc.) -- 92,150 --
Sale of common stock 170 610 --
------------- -------------- ------------
Net cash provided by financing activities 2,636 188,551 --
------------- -------------- ------------
INCREASE (DECREASE) IN CASH AND CASH EQUIV. (6,424) 14,829 (18)
CASH AND CASH EQUIV. AT BEGINNING OF PERIOD 10,819 -- 5,456
------------- -------------- ------------
CASH AND CASH EQUIV. AT END OF PERIOD $ $4,395 $ 14,829 $ 5,438
============= ============== ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
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MARINER ENERGY, INC.
NOTES TO FINANCIAL STATEMENTS
1. Basis of Presentation
The financial statements of Mariner Energy, Inc. (the "Company") included
herein have been prepared, without audit, pursuant to the rules and regulations
of the Securities and Exchange Commission ("SEC"). Accordingly, they reflect all
adjustments (consisting only of normal, recurring accruals) which are, in the
opinion of management, necessary for a fair presentation of the financial
results for the interim periods. Certain information and notes normally included
in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations, although the Company believes that the disclosures are adequate to
make the information presented not misleading. These financial statements should
be read in conjunction with the financial statements and notes thereto included
in the Company's 10-K for the year ended December 31, 1996.
For the three months ended March 31, 1996, Hardy Oil & Gas USA Inc. (the
"Predecessor Company"), was a wholly owned subsidiary of Hardy Holdings, Inc.,
which is a wholly owned subsidiary of Hardy Oil & Gas plc, a public company
incorporated in the United Kingdom. In an acquisition effective April 1, 1996,
Mariner Holdings, Inc. acquired all the capital stock of the Company from Hardy
Holdings Inc. as part of a management-led buyout financed by Joint Energy
Development Investments Limited Partnership, an affiliate of Enron Capital &
Trade Resources Corp. The aggregate purchase price was approximately $185.5
million, including $14.5 million for net working capital. As a result of the
sale of Hardy Oil & Gas USA Inc.'s common stock, the Predecessor Company changed
its name to Mariner Energy, Inc.
2. Oil and Gas Properties
Under the full cost method of accounting for oil and gas properties, 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 and reduced product prices
in March 1997, a non-cash full cost ceiling test impairment charge of $28.5
million was recorded in the quarter ended March 31, 1997. Price increases
subsequent to March 31, 1997 were sufficient to avoid the impairment charge,
but, given the unpredictable volatility of future prices, the Company elected to
record the charge in order to conservatively state the book value of its assets.
3. Revolving Credit Facility
Following the semi-annual borrowing base redetermination review, effective
November 5, 1997, the borrowing base under the revolving credit facility (the
"Revolving Credit Facility") with NationsBank of Texas, N.A. as agent for a
group of lenders remained unchanged at $58 million.
4. Hedging Program
The Company has entered into crude oil and natural gas price swaps or other
similar hedging transactions to reduce its exposure to price reductions. In the
first nine months of 1997, the Company hedged 62% of its crude oil and natural
gas production, the results of which were included in oil and gas revenues. At
September 30, 1997, the Company had three outstanding natural gas hedging
contracts, one with notional volumes of 40,000 Mmbtu per day at $2.17 per Mmbtu
for October 1997, one with notional volumes of 22,500 Mmbtu per day at $2.33 per
Mmbtu for November 1997, and another with notional volumes of 19,500 Mmbtu per
day at $2.84 per Mmbtu for November 1997.
4
<PAGE> 7
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS' REPORT ON REVIEW OF INTERIM FINANCIAL
INFORMATION
Board of Directors and Stockholder
Mariner Energy, Inc.
Houston, Texas
We have reviewed the accompanying financial statements of Mariner Energy, Inc.,
formerly Hardy Oil & Gas USA Inc. (the "Predecessor Company"), as listed in the
Table of Contents in Item 1. These financial statements are the responsibility
of the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists primarily of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying consolidated financial statements for them to be in
conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the balance sheet as of December 31, 1996, and the related statements
of operations, stockholder's equity, and cash flows for the nine months ended
December 31, 1996 (not presented herein), and the three months ended March 31,
1996 (stockholder's equity not presented herein); and, in our report dated March
7, 1997, we expressed an unqualified opinion on those financial statements. In
our opinion, the information set forth in the accompanying balance sheet as of
December 31, 1996 is fairly stated, in all material respects, in relation to the
balance sheet from which it has been derived.
/s/ DELOITTE & TOUCHE LLP
DELOITTE & TOUCHE LLP
Houston, Texas
November 11, 1997
5
<PAGE> 8
PART I, ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The following review of operations for the nine month periods ended
September 30, 1997 and 1996 and the three month periods ended September 30, 1997
and 1996 should be read in conjunction with the financial statements of the
Company and Notes thereto included elsewhere in this Form 10-Q and with the
Financial Statements, Notes and Management's Discussion and Analysis of
Financial Condition and Results of Operations included in the Company's Annual
Report on Form 10-K for the year ended December 31, 1996, filed with the
Securities and Exchange Commission on March 27, 1997.
INFORMATION REGARDING FORWARD LOOKING STATEMENTS
All statements other than statements of historical fact included in this
quarterly report on Form 10-Q, including, without limitation, statements
contained in this "Management's Discussion and Analysis of Financial Condition
and Results of Operations" regarding the Company's financial position, business
strategy, plans and objectives of management of the Company for future
operations and industry conditions, are forward-looking statements. Although the
Company believes that the expectations reflected in such forward-looking
statements are reasonable, it can give no assurance that such expectations will
prove to have been correct, and actual results could differ materially from the
Company's expectations. Factors that could influence these results include, but
are not limited to, oil and gas price volatility, results of future drilling,
availability of drilling rigs, and future production and costs.
6
<PAGE> 9
RESULTS OF OPERATIONS
The following table sets forth certain information regarding results of
operations for the periods shown:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
---------------------------------------- ----------------------------------------
September 30, September 30, September 30, September 30,
1997 1996 1997 1996 (a)
-------------------- ------------------ ------------------ --------------------
<S> <C> <C> <C> <C>
Total revenue, $MM $ 16.3 $ 16.8 $ 45.6 $ 46.5
EBITDA, $MM (b) 12.7 13.4 35.4 36.2
Impairment of oil & gas properties (c) -- -- 28.5 22.5
Net income (loss), $MM 1.6 0.5 (23.0) (18.7)(a)
Production:
Oil and condensate (Mbbls) 266 191 701 570
Natural gas (Mmcf) 4,702 5,477 13,237 15,655
Natural gas equivalents (Mmcfe) 6,298 6,623 17,443 19,075
Average sales prices post-hedging:
Oil and condensate ($/Bbl) $ 18.38 $ 17.37 $ 18.50 $ 18.38
Natural gas ($/Mcf) 2.42 2.46 2.47 2.30
Natural gas equivalents ($/Mcfe) 2.59 2.53 2.61 2.44
Cash Margin (d) per Mcfe:
Revenue (pre-hedge) $ 2.64 $ 2.60 $ 2.75 $ 2.60
Hedging impact (0.05) (0.07) (0.14) (0.16)
Lease operating expenses (0.44) (0.39) (0.45) (0.42)
Gross G&A costs (0.32) (0.27) (0.31) (0.29)
---------- ---------- ---------- ---------
Cash Margin $ 1.83 $ 1.87 $ 1.85 $ 1.73
========== ========== ========== =========
Capital Expenditures, $MM:
Exploration $ 13.0 $ 16.1 $ 25.1 $ 30.0
Development & other 7.7 1.5 15.6 6.0
---------- ---------- ---------- ---------
Total $ 20.7 $ 17.6 $ 40.7 $ 36.0
========== ========== ========== =========
</TABLE>
(a) - Includes first quarter 1996 results of Predecessor to Mariner Energy, Inc.
(formerly named "Hardy Oil & Gas USA Inc.") prior to the effective date of its
acquisition by Mariner Holdings, Inc. on April 1, 1996. Note that net income
(loss) amounts for the nine months ended September 30, 1997 and 1996 are not
comparable due to differences in cost basis between Mariner and the Predecessor
Company. None of the other data in the table is impacted by the acquisition of
Hardy Oil & Gas USA Inc. by Mariner Holdings, Inc.
(b) - EBITDA equals earnings before interest, income taxes, depreciation,
depletion, amortization and impairment of oil and gas properties.
(c) - See Note 2 to Financial Statements in Item 1. of this report on Form 10-Q
for further explanation of the ceiling test impairment charges.
(d) - Cash margin measures the net cash generated by a company's operations
during a given period, without regard to the period such cash is physically
received or spent by the company. Cash margin should be used as a supplement to,
and not as a substitute for, net earnings and net cash provided by operating
activities (as disclosed in the financial statements) in analyzing the Company's
results of operations and liquidity.
7
<PAGE> 10
RESULTS OF OPERATIONS FOR THE THIRD QUARTER OF 1997
NET PRODUCTION decreased 5% to 6.3 Bcfe for the third quarter of 1997
from 6.6 Bcfe for the third quarter of 1996. While production from onshore
properties rose 43% to 3.0 Bcfe for the third quarter of 1997 due to the Sandy
Lake plant expansion from 2.1 Bcfe for the same period in 1996, the overall
decrease was due to the natural production decline on offshore properties.
OIL AND GAS REVENUES decreased 3% to $16.3 million for the third
quarter of 1997 from $16.8 million for the third quarter of 1996. The decrease
was the result of lower production discussed above, offset partially by an
increase in realized oil and gas prices (on an equivalent Mcf basis) between the
two quarters, net of hedging. Hedging activities for the third quarter of 1997
decreased the average realized sales price received per Mcfe by $0.05 and
revenues by $0.3 million. In the third quarter of 1996, hedging activities
decreased the average realized sales price received by $0.07 per Mcfe and
revenues by $0.5 million. During the third quarter of 1997, approximately 56% of
the Company's equivalent production was subject to hedge positions, compared
with approximately 89% for the same quarter in 1996.
LEASE OPERATING EXPENSES increased 8% to $2.8 million for the third
quarter of 1997, from $2.6 million for the third quarter of 1996, due primarily
to the increased production at the Sandy Lake processing facility.
DEPRECIATION, DEPLETION AND AMORTIZATION EXPENSE (DD&A) decreased 8% to
$8.6 million for the third quarter of 1997, from $9.3 million for the third
quarter of 1996, as a result of a 3% decrease in the unit-of-production
depreciation, depletion and amortization rate to $1.36 per Mcfe from $1.40 per
Mcfe and the 5% reduction in equivalent volumes produced. The lower rate for the
third quarter of 1997 was primarily due to the $28.5 million non-cash full cost
ceiling test impairment recorded at the end of the first quarter of 1997.
GENERAL AND ADMINISTRATIVE EXPENSES, which are net of overhead
reimbursements received by the Company from other working interest owners,
increased 13% to $0.9 million for the third quarter of 1997, from $0.8 million
for the third quarter of 1996, due primarily to higher employment levels in
1997.
INTEREST EXPENSE increased 8% to $2.6 million for the third quarter of
1997, from $2.4 million for the third quarter of 1996, due to higher average
interest rates and higher average debt. During the third quarter of 1996, the
Company wrote off $1.4 million of bridge loan fees related to debt incurred in
connection with the Company's management-led buyout in the second quarter of
1996.
INCOME (LOSS) BEFORE INCOME TAXES rose 220% to $1.6 million for the
third quarter of 1997 from $0.5 million for the same period in 1996, primarily
as a result of the write-off of bridge loan fees in the third quarter of 1996.
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
NOTE: Where revenue and expense items discussed below would have been
affected in a pro forma presentation of the acquisition by Mariner Holdings of
the stock of the Company (formerly "Hardy Oil & Gas USA, Inc."), the pro forma
impact on that item is discussed.
NET PRODUCTION decreased 9% to 17.4 Bcfe for the nine months ended
September 30, 1997 from 19.1 Bcfe for the nine months ended September 30, 1996.
The decrease was due to the sale of non-core
8
<PAGE> 11
Permian Basin wells in April 1996 and by natural production decline on offshore
properties, offset in part by increased production from the Sandy Lake field.
OIL AND GAS REVENUES decreased 2% to $45.6 million for the nine months
ended September 30, 1997 from $46.5 million for the same period in 1996. The
decrease was the result of lower production discussed above, offset almost
entirely by a 7% increase in realized oil and gas prices (on an equivalent Mcf
basis) between the two periods, net of hedging. Hedging activities for the nine
months ended September 30, 1997 reduced the average realized sales price
received per Mcfe by $0.14 and revenues by $2.4 million. In the first nine
months of 1996, hedging activities decreased the average realized sales price
received by $0.16 per Mcfe and revenues by $3.0 million. During the first nine
months of 1997, approximately 62% of the Company's equivalent production was
subject to hedge positions, compared with approximately 56% for the first nine
months of 1996.
LEASE OPERATING EXPENSES decreased 2% to $7.9 million for the first
nine months of 1997, from $8.1 million for the first nine months of 1996, due
primarily to the sale of the non-core Permian Basin wells in April 1996 and
reduced production volumes.
DEPRECIATION, DEPLETION AND AMORTIZATION EXPENSE (DD&A) decreased 7% to
$22.4 million for the nine months ended September 30, 1997, from $24.0 million
for the same period in 1996, as a result of a 9% reduction in equivalent volumes
produced, which is partially offset by a 2% increase in the unit-of-production
depreciation, depletion and amortization rate to $1.29 per Mcfe from $1.26 per
Mcfe. On a pro forma basis, giving effect to the March 31, 1997 impairment of
oil and gas properties, DD&A for the first nine months of 1997 would have
decreased 10% to $22.4 million from $24.9 million in 1996, resulting from
production being 9% lower in the first nine months of 1997, and a 1% decrease in
the DD&A rate to $1.29 per Mcfe from $1.30 per Mcfe.
IMPAIRMENT OF OIL AND GAS PROPERTIES amounting to $28.5 million was
recorded in the first quarter of 1997 for the non-cash full cost ceiling test
impairment using prices in effect at March 31, 1997. Price increases subsequent
to March 31, 1997 were sufficient to avoid the impairment charge, but, given the
unpredictable volatility of future prices, the Company elected to record the
charge in order to conservatively state the book value of its assets. During the
second quarter of 1996, a $22.5 million impairment of oil and gas properties was
recorded in conjunction with the full cost ceiling writedown relating to Mariner
Holdings' acquisition of the Company. On a pro forma basis, the impairment
recorded in 1996 would not have been required.
GENERAL AND ADMINISTRATIVE EXPENSES, which are net of overhead
reimbursements received by the Company from other working interest owners,
remained constant at $2.2 million for the nine months ended September 30, 1997
and 1996. Higher employment costs in the nine months ended September 30, 1997
offset higher overhead reimbursements in the first quarter of 1997.
INTEREST EXPENSE decreased 2% to $7.9 million for the first nine months
of 1997, from $8.1 million for the first nine months of 1996, due primarily to
the 15% decrease in average outstanding debt to $100.1 million, from $117.6
million, which was partially offset by an 11% increase in the average interest
rate paid on outstanding debt to 10.49%, from 9.45%. During the first nine
months of 1996, the Company wrote off $2.4 million of bridge loan fees related
to debt incurred in connection with the Company's management-led buyout in the
second quarter of 1996. Interest income also decreased 84% to $0.4 million for
the first nine months of 1997, from $2.5 million for the first nine months of
1996, due primarily to the collection of receivables from affiliates as part of
the acquisition by Mariner Holdings of the stock of the Company. On a pro forma
basis, interest expense for the nine months of 1997 would
9
<PAGE> 12
have increased $0.1 million from $7.8 million in 1996. Interest income for the
nine months would be $0.4 million for both 1997 and pro forma 1996.
INCOME (LOSS) BEFORE INCOME TAXES decreased to a loss of $23.0 million
for the nine months ended September 30, 1997, from an $18.7 million loss for the
same period in 1996, primarily as a result of the $28.5 million impairment
recorded in the first quarter of 1997. On a pro forma basis, the income for the
first nine months of 1996 would have been $3.8 million, after the elimination of
the full cost ceiling writedown and adjustments to interest income and expense
and recording additional DD&A expense.
LIQUIDITY, CAPITAL EXPENDITURES AND CAPITAL RESOURCES
At September 30, 1997, the Company had cash and cash equivalents of
approximately $4.4 million and negative working capital of approximately $4.1
million. During the first nine months of 1997, the Company's primary source of
cash was from operations. The primary use of cash for the same period was for
capital expenditures associated with exploration and development.
The Company had a net cash outflow of $6.4 million for the first nine
months of 1997, resulting from capital expenditures of $40.7 million, offset by
cash inflow of $31.7 million from operations and $2.6 million from financing
activities.
Net cash provided by operating activities decreased by $6.0 million to
$31.7 million in the first nine months of 1997 from the corresponding period of
1996, primarily due to lower production volumes and lower cash from changes in
working capital.
Cash flows used in investing activities in the first nine months of
1997 decreased $170.7 million to $40.7 million due primarily to the second
quarter 1996 purchase of the Predecessor Company for $184.7 million, which was
partially reduced by the $7.5 million sale of non-core Permian Basin wells in
the same quarter. The first quarter of 1996 included a $2.0 million net
collection of a long-term receivable from an affiliate of the Predecessor
Company. Capital expenditures increased $4.7 million to $40.7 million for the
first nine months of 1997 from the same period in 1996.
The energy markets have historically been very volatile, and there can
be no assurance that oil and gas prices will not be subject to wide fluctuations
in the future. 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 from time to time 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 following table sets forth the increase (decrease) in the Company's
oil and gas sales as a result of hedging transactions and the effects of hedging
transactions on prices during the periods indicated.
<TABLE>
<CAPTION>
Nine Months
Ended September 30,
-------------------
1997 1996
----- -----
<S> <C> <C>
Increase (decrease) in natural gas sales (in thousands)................... $(1,795) $(2,171)
Increase (decrease) in oil sales (in thousands)........................... (614) (811)
Effect of hedging transactions on average gas sales price
(per Mcf)............................................................
(0.14) (0.14)
Effect of hedging transactions on average oil sales price
(per Bbl)............................................................
(0.88) (1.42)
</TABLE>
10
<PAGE> 13
The following table sets forth the Company's open hedging contracts for
natural gas and the weighted average prices hedged under various swap agreements
as of September 30, 1997.
<TABLE>
<CAPTION>
---------------------------------------------------
Hedge Quantity Fixed Price
Mmbtu $/Mmbtu
--------------- --------------
<S> <C> <C>
October 1997......... 1,240,000 $2.17
November 1997........ 675,000 2.33
November 1997........ 585,000 2.84
</TABLE>
Total capital expenditures were $40.7 million for the first nine months of
1997 of which $25.1 million was spent on exploration and $15.6 million on
development activities. The Company's capital expenditure budget for 1997 is
approximately $67 million. As a result of an active fourth quarter exploratory
drilling program, the acquisition of a 31% interest in the "Pluto/Blood, Sweat &
Tears" Deepwater Gulf of Mexico exploitation project located in Mississippi
Canyon blocks #673, 674, 717 and 718, and the acquisition of an additional 16%
working interest in the Company's 1996 discovery at Mississippi Canyon #357,
full year 1997 capital expenditures are now expected to total approximately $75
million. The Company expects to fund these programs through cash flow from
operations and periodic borrowing under its Revolving Credit Facility, under
which the available borrowing base was increased from $50 million to $58 million
effective April 10, 1997. Actual levels of capital expenditures may vary
significantly due to a variety of factors, including drilling results, oil and
gas prices, industry conditions including drilling rig availability, future
acquisitions and availability of capital.
Based upon the Company's current level of operations and anticipated growth,
the Company believes that available cash, together with available borrowings
under the Revolving Credit Facility 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 and
interest on its indebtedness. However, 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 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 its senior subordinated debt at or prior to maturity. However, there
can be no assurance that the Company would be able to obtain financing to
complete a refinancing.
PART I, ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable
11
<PAGE> 14
Part II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are filed herewith.
10.1 Promissory Note, dated July 1, 1997, from Frank A. Pici
to the Company.
10.2 Security Agreement, dated July 1, 1997, among Frank A.
Pici and the Company.
27.1 Financial Data Schedule
(b) The Company filed no Current Reports on Form 8-K during the quarter
ended September 30, 1997.
12
<PAGE> 15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MARINER ENERGY, INC.
Date: November 13, 1997 /s/ Frank A. Pici
-----------------------------
Frank A. Pici
Vice President of Finance and
Chief Financial Officer
(Principal Financial Officer and
Officer Duly Authorized to Sign
on Behalf of the Registrant)
13
<PAGE> 16
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
10.1 Promissory Note, dated July 1, 1997, from Frank A. Pici to
the Company.
10.2 Security Agreement, dated July 1, 1997, among Frank A. Pici
and the Company.
27.1 Financial Data Schedule
<PAGE> 1
EXHIBIT 10.1
PROMISSORY NOTE
$170,600.00 Houston, Texas July 1, 1997
1. FOR VALUE RECEIVED, the undersigned, Frank A. Pici, an
individual residing at 6306 Wagner Way, Sugar Land, Texas 77479 ("Maker"),
hereby promises to pay to the order of Mariner Energy, Inc., a Delaware
corporation (the "Payee"), in Houston, Harris County, Texas, at 580 Westlake
Boulevard, Suite 1300, Houston, Texas 77079, on or before July 1, 2002 (the
"Maturity Date"), in lawful money of the United States of America, the
principal amount of ONE HUNDRED SEVENTY THOUSAND SIX HUNDRED AND NO/100 DOLLARS
($170,600.00), together with interest on the unpaid balance of said principal
amount from time to time remaining outstanding, from the date hereof until
maturity (howsoever such maturity shall occur), in like money, at said office,
at a rate per annum equal to the lesser of (a) the Note Rate, and (b) the
Maximum Rate.
2. All past due principal of and interest on this Note shall bear
interest from the due date thereof (whether by acceleration or otherwise) until
paid at a per annum rate equal to the Maximum Rate.
3. Accrued unpaid interest on the outstanding principal balance
hereof shall be due and payable quarterly by Maker to Payee on the last
Business Day (as hereinafter defined) of each calendar quarter, commencing
September 30, 1997. The outstanding principal balance of this Note shall be
due and payable on the Maturity Date, upon which day all outstanding principal
shall be immediately due and payable. The foregoing notwithstanding, all
unpaid accrued interest on this Note, and the outstanding unpaid principal
balance hereof, shall be immediately due and payable in full upon the maturity
of the principal of this Note, whether by acceleration or otherwise.
4. Maker shall have the right and privilege of prepaying this
Note, in whole or in part, at any time or from time to time without premium or
penalty or notice to the holder hereof. All amounts prepaid shall be applied
first to earned, accrued and unpaid interest and the balance, if any, shall be
applied to the payment of the principal installments in inverse order of
maturity.
5. The terms set forth below shall have the meanings assigned to
such terms as used in this Note:
"Applicable Law" shall mean the law in effect from time to
time and applicable to the transactions between Payee and Maker
pursuant to this Note which lawfully permits the charging and
collection of the highest permissible lawful non-usurious rate of
interest on such transactions,
(Promissory Note - Frank A. Pici)
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including laws of the State of Texas, and to the extent controlling
and providing for a higher lawful rate of interest, laws of the United
States of America. It is intended that Article 1.04, Title 79,
Revised Civil Statutes of Texas, 1925, as amended, shall be included
in the laws of the State of Texas in determining Applicable Law; and
for the purpose of applying said Article 1.04, the interest ceiling
applicable to such transactions under said Article 1.04 shall be the
indicated (weekly) rate ceiling from time to time in effect.
"Business Day" shall mean any day on which banks are open for
general banking business in the State of Texas, other than on
Saturday, Sunday, a legal holiday or any other day on which banks in
the State of Texas are required or authorized by law or executive
order to close.
"Maximum Rate" shall mean the maximum lawful non-usurious rate
of interest, if any, which under Applicable Law Payee is permitted to
charge Maker on the loan evidenced by this Note from time to time.
If, however, during any period interest accruing on this Note is not
limited to any maximum lawful non-usurious rate of interest under
Applicable Law, then during each such period the "Maximum Rate" shall
be equal to a per annum rate of 10% plus the Note Rate.
"Note Rate" shall mean, for each calendar quarter during the
term of this Note, a per annum rate of interest equal to one and
one-quarter percent (1 1/4%) plus the London Interbank Offered Rate
("LIBOR") for the last month of such calendar quarter as reported in
the Wall Street Journal on the first Business Day of such calendar
quarter.
6. If any one of the following events shall occur and be
continuing (an "Event of Default"):
(a) Maker shall fail to pay timely when due, the
principal of, or accrued unpaid interest on, this Note or any other of
the obligations hereunder; or
(b) Maker shall breach any representation or warranty
made by Maker in any statement furnished concurrently herewith or
hereafter to Payee by or on behalf of Maker; or
(c)(i) Default shall be made in the due observance or
performance of, or compliance with, any of the covenants or agreements
contained herein or (ii) the occurrence of any event or circumstance
which constitutes an "event of default" under any security agreement
or other instrument securing payment hereof; or
(Promissory Note - Frank A. Pici)
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(d) Maker shall (i) die, resign from employment by Payee,
be disabled so as to be unable for more than three consecutive months
to work full time in the employ of Payee, or shall no longer be
employed by Payee for any other reason (including, without limiting
the generality of the foregoing, termination of employment by Maker
for cause or without cause) as an officer of Payee, or (ii) apply for
or consent to the appointment of a receiver, trustee, custodian or
liquidator of Maker or of all or a substantial part of Maker's
property, or (iii) generally fail to pay Maker's debts as they come
due in the ordinary course of business, or (iv) commence, or file an
answer admitting the material allegations of or consenting to, or
default in a petition filed against it in, any case, proceeding or
other action under any existing or future law of any jurisdiction,
domestic or foreign, relating to bankruptcy, insolvency,
reorganization or relief of debtors, or seeking to have an order for
relief entered with respect to Maker under the federal Bankruptcy Code
11 USC Section 101 et. seq., or seeking reorganization, arrangement,
adjustment, winding-up, liquidation, composition or the similar relief
with respect to Maker or Maker's debt; or
(e) A receiver, conservator, liquidator, custodian or
trustee of Maker or any of Maker's property is appointed by the order
or decree of any court or agency or supervisory authority having
jurisdiction; or Maker obtains an order for relief under the federal
Bankruptcy Code 11 USC Section 101 et. seq.; or any of the property of
Maker is sequestered by court order; or a petition is filed or a
proceeding is commenced against Maker under any bankruptcy,
reorganization, arrangement, insolvency, readjustment of debt or
liquidation law of any jurisdiction, whether now or hereafter in
effect; or
(f)(i) Any event or condition occurs which results in, or
permits the forfeiture by Maker of Maker's material rights, benefits
or privileges under any indenture, mortgage, deed of trust, promissory
note, loan agreement, note agreement or any other material agreement
or undertaking, which continues unremedied for any applicable cure
period; or (ii) the occurrence of any event, circumstance, or
condition which, after any applicable cure or notice period or lapse
of time, or both, would constitute a default under any material
agreement, contract, promissory note, loan agreement, indenture, lien
instrument or the like to which Maker is a party or by which any of
Maker's property is subject, which continues unremedied for any
applicable cure period, whether or not a party thereto exercises any
of its rights and remedies with respect to such default; or
(g) The levy or execution of any attachment, execution or
other process against any material part of the collateral (if any)
securing this Note or any other material property or interest in
property of Maker,
(Promissory Note - Frank A. Pici)
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which is not timely and completely stayed by appropriate proceedings
and/or bonding requirements; or
(h) Any court shall find or rule, or Maker shall assert
or claim, (i) that Payee does not have a valid, perfected, enforceable
lien and security interest in the collateral (if any) securing this
Note, or (ii) that this Agreement or any of the loan documents
executed in connection herewith does not or will not constitute the
legal, valid, binding and enforceable obligations of the party or
parties (as applicable) thereto, or (iii) that any person has a
conflicting or adverse lien, claim or right in, or with respect to,
the collateral (if any) securing this Note or any material portion
thereof; or
(i) The rendering of any judgment or judgments against
Maker for the payment of money in excess of $10,000, in the aggregate,
which remains unsatisfied and in effect for any period of 10
consecutive days without a stay of execution; or
(j) Maker shall have concealed, removed, or permitted to
be concealed or removed, any part of Maker's property, with intent to
hinder, delay or defraud Maker's creditors or any of them, or made or
suffered a transfer of any of Maker's property which may be fraudulent
under any bankruptcy, fraudulent conveyance or similar law; or shall
have made any transfer of Maker's property to or for the benefit of a
creditor at a time when other creditors similarly situated have not
been paid; or shall have suffered or permitted, while insolvent, any
creditor to obtain a lien upon any of Maker's property through legal
proceedings or distraint or other process which is not vacated within
10 days from the date thereof; or
(k) Any material adverse change shall occur in the
business, assets or condition (financial or otherwise) of Maker; or
(l) Payee at any time shall, in Payee's sole and absolute
discretion, consider the payment of this Note to be insecure or any
part of the collateral (if any) securing this Note to be unsafe,
insecure or insufficient and Maker shall not upon demand by Payee
furnish other collateral or make payment, satisfactory to Payee;
then the Payee, at its option, may declare the unpaid principal portion of this
Note to be forthwith due and payable, whereupon the said portion of this Note
and all accrued, earned and unpaid interest shall become immediately due and
payable by Maker without demand, presentment for payment, notice of
non-payment, protest, notice of protest, notice of intent to accelerate
maturity, notice of acceleration of maturity or any other notice of any kind to
Maker, or any other person liable hereon or with respect hereto, all of which
are hereby expressly waived by Maker and each other person liable hereon or
with respect hereto, anything contained herein or in any other documents or
(Promissory Note - Frank A. Pici)
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<PAGE> 5
instruments to the contrary notwithstanding; and upon the happening of any
Event of Default referred to in paragraphs (e) or (f), the unpaid principal
portion of this Note and all other interest on this Note then accrued, earned
and unpaid shall become automatically due and payable by Maker without demand,
presentment for payment, notice of nonpayment, protest, notice of protest,
notice of intent to accelerate maturity, notice of acceleration of maturity or
any other notice of any kind to Maker or any other person liable hereon or with
respect hereto, all of which are expressly waived by Maker and each other
Person liable hereon or with respect hereto, anything contained herein or in
any document or instrument to the contrary notwithstanding. Further, upon the
occurrence of any default or event of default, Payee shall have all other
rights and remedies as set forth herein and in the other documents (if any)
securing this Note and as otherwise provided at law or in equity, all such
rights and remedies being cumulative, including, but without limitation, the
right, without prior notice to Maker or any other person liable with respect
hereto, to set-off and apply any indebtedness at any time owing by Payee to, or
for the credit or account of, Maker against any indebtedness owed to Payee by
Maker, irrespective of whether or not Payee shall have made demand under this
Note or any other instrument securing this Note, and although this Note may not
then be matured; provided, that any exercise of said set-off by Payee shall be
subsequently followed by notice from Payee to Maker of such right exercised,
but the failure to give such notice shall in no manner affect the right of
Payee in respect to set-offs and corresponding applications of funds.
7. Maker shall, upon demand by Payee, promptly pay to Payee any
and all costs and expenses, including legal expenses, collections costs and
attorneys' fees (whether or not legal proceedings are instituted including,
without limitation, legal expenses and reasonable attorneys' fees in connection
with any bankruptcy proceedings), incurred or paid by Payee in protecting or
enforcing Payee's rights hereunder. Without limiting the generality of the
foregoing, if this Note is collected by suit or through the Bankruptcy Court,
or any judicial proceeding, or if this Note is not paid at maturity, however
such maturity may be brought about, and it is placed in the hands of an
attorney for collection (whether or not legal proceedings are instituted), then
Maker agrees to pay, in addition to all other amounts owing hereunder, the
collection costs and reasonable attorneys' fees of the holder hereof.
8. The records of Payee shall constitute rebuttably presumptive
evidence of the principal and earned, accrued and unpaid interest remaining
outstanding on this Note.
9. It is the intent of Payee and Maker in the execution and
performance of this Note to remain in strict compliance with Applicable Law
from time to time in effect. In furtherance thereof, Payee and Maker stipulate
and agree that none of the terms and provisions contained in this Note shall
ever be construed to create a contract to pay for the use, forbearance or
detention of money with interest at a rate or in an amount in excess of the
Maximum Rate or amount of interest permitted to be charged under Applicable
Law. For purposes of this Note "interest" shall include the aggregate of all
charges which constitute interest under Applicable Law that are contracted for,
(Promissory Note - Frank A. Pici)
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charged, reserved, received or paid under this Note. Maker shall never be
required to pay unearned interest and shall never be required to pay interest
at a rate or in an amount in excess of the Maximum Rate or amount of interest
that may be lawfully charged under Applicable Law, and the provisions of this
paragraph shall control over all other provisions of this Note, and of any
other instrument pertaining to or securing this Note, which may be in actual or
apparent conflict herewith. If this Note is prepaid, or if the maturity of
this Note is accelerated for any reason, or if under any other contingency the
effective rate or amount of interest which would otherwise be payable under
this Note would exceed the Maximum Rate or amount of interest Payee or any
other holder of this Note is allowed by Applicable Law to charge, contract for,
take, reserve or receive, or in the event Payee or any holder of this Note
shall charge, contract for, take, reserve or receive monies that are deemed to
constitute interest which would, in the absence of this provision, increase the
effective rate or amount of interest payable under this Note to a rate or
amount in excess of that permitted to be charged, contracted for, taken,
reserved or received under Applicable Law then in effect, then the principal
amount of this Note or the amount of interest which would otherwise be payable
under this Note or both shall be reduced to the amount allowed under Applicable
Law as now or hereinafter construed by the courts having jurisdiction, and all
such moneys so charged, contracted for, taken, reserved or received that are
deemed to constitute interest in excess of the Maximum Rate or amount of
interest permitted by Applicable Law shall immediately be returned to or
credited to the account of Maker upon such determination. Payee and Maker
further stipulate and agree that, without limitation of the foregoing, all
calculations of the rate or amount of interest contracted for, charged, taken,
reserved or received under this Note which are made for the purpose of
determining whether such rate or amount exceeds the Maximum Rate or amount,
shall be made to the extent not prohibited by Applicable Law, by amortizing,
prorating, allocating and spreading during the period of the full stated term
of this Note, all interest at any time contracted for, charged, taken, reserved
or received from Maker or otherwise by Payee or any other holder of this Note.
10. Maker and all sureties, endorsers and guarantors (if any) of
this Note waive demand, presentment for payment, notice of non-payment,
protest, notice of protest, notice of intent to accelerate maturity, notice of
acceleration of maturity and all other notice, filing of suit and diligence in
collecting this Note or enforcing any of the security herefor, and agree to any
substitution, exchange or release of any such security, the release of any
party primarily or secondarily liable hereon and further agree that it will not
be necessary for any holder hereof, in order to enforce payment of this Note,
to first institute suit or exhaust its remedies against any security herefor,
and consent to any one or more extensions or postponements of time of payment
of this Note on any terms or any other indulgences with respect hereto, without
notice thereof to any of them.
11. This Note is secured by all security agreements, collateral
assignments and lien instruments (if any) executed by the Maker in favor of
Payee, or executed by any other party as security for this Note, including any
executed prior to, simultaneously
(Promissory Note - Frank A. Pici)
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with, or after the date of this Note and including, without limitation, that
certain Security Agreement of even date herewith by Maker in favor of Payee.
12. Maker hereby irrevocably directs Payee to apply and set off,
against the accrued unpaid interest hereon and the outstanding unpaid principal
balance hereof, all deferred compensation and other payments and amounts due
and payable from Payee to Maker on or after the date hereof. It is Maker's
intention hereby to convey, assign and transfer as of the date hereof to Payee,
for the purposes of effecting the foregoing application and set off, all of
Maker's rights to receive such deferred compensation after the date hereof,
such that when, as and if such deferred compensation payments shall be due and
payable by Payee to Maker, Maker shall be deemed to have irrevocably assigned
and transferred all rights thereto to Payee, effective as of the date hereof.
13. This Note shall be governed by and construed in accordance
with the internal laws of the State of Texas and applicable federal laws of the
United States of America. This Note has been delivered and accepted and is
payable at Houston, Harris County, Texas. There are no unwritten or oral
agreements between the Maker and the Payee. Payee has no commitment to make
any additional loans to or to extend financial accommodations to Maker beyond
the loan evidenced hereby.
EXECUTED AND EFFECTIVE as of the day and year first above written.
MAKER:
-----
/s/ FRANK A. PICI
-----------------------------------------
Frank A. Pici
(Promissory Note - Frank A. Pici)
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<PAGE> 1
SECURITY AGREEMENT EXHIBIT 10.2
July 1, 1997
I. Parties, Collateral, and Obligations
FRANK A. PICI (hereinafter called "Debtor"), whose address is
6306 Wagner Way, Sugar Land, Texas 77479, for valuable considerations, receipt
of which is hereby acknowledged, hereby grants to MARINER ENERGY, INC., a
Delaware corporation (hereinafter called "Secured Party"), whose address is a
580 Westlake Boulevard, Suite 1300, Houston, Harris County, Texas 77079, a
security interest in the following property:
(i) all shares of capital stock of Mariner Holdings, Inc., a Delaware
corporation ("MHI"), now owned or hereafter acquired by Debtor
(including, but not limited to, all shares of MHI capital stock
acquired by Debtor with the proceeds of the Note (as hereinafter
defined) and all shares of MHI capital stock acquired by Debtor upon
the exercise of any stock options granted by MHI to Debtor); (ii) all
of Debtor's rights and interests in and under that certain Incentive
Stock Option Agreement dated July 1, 1997, between MHI and Debtor;
(iii) all of Debtor's rights and interests in and under that certain
Nonstatutory Stock Option Agreement dated July 1, 1997, between MHI
and Debtor; (iv) all of Debtor's rights and interests, whether now
existing or hereafter acquired or arising, to acquire any share of
capital stock of MHI (including, but not limited to, any rights of
Debtor under any future stock option agreements, stock option plans
and stock incentive or compensation plans or agreements); and (v) all
of Debtor's rights, title and interests in or in respect of, whether
now existing or hereafter acquired or arising in, any "Overriding
Royalty Interest," as such term is defined from time to time in that
certain Employment Agreement dated effective as of December 2, 1996,
as amended from time to time (the "Employment Agreement"), between
Secured Party and Debtor, and in any contractual or other rights to
acquire or obtain, or in respect of, any such Overriding Royalty
Interest;
together with all proceeds, monies, income, investment property, revenues,
royalties, funds and benefits attributable or accruing to said property, which
Debtor is or may hereafter become entitled to receive on account of said
property, including, but not by way of limitation, all interest, premium,
redemption proceeds and other principal payments and all dividends and other
distributions on or with respect to capital stock whether payable in cash,
stock or other property and all subscription and other rights. In the event
that Debtor shall receive any of the foregoing, Debtor shall receive and
(Security Agreement - Frank A. Pici)
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hold the same in trust for Secured Party and shall not commingle the same with
other monies or property, and Debtor shall promptly and immediately deliver
same to Secured Party. All property in which Secured Party is herein granted a
security interest is hereinafter called the "Collateral."
The security interest granted herein secures the payment of
all liabilities, indebtedness, and obligations of Debtor to Secured Party
(hereinafter called the "Obligations") arising under and evidenced by a
promissory note of even date herewith (hereafter called the "Note") executed by
Debtor in the principal amount of $170,600.00, payable to the order of Secured
Party, and including costs and expenses and attorney's fees and legal expenses,
all in accordance with the terms of the Note and this Security Agreement, and
all renewals, extensions and rearrangements of the above Obligations. Unless
otherwise agreed, all of the Obligations shall be payable at the offices of
Secured Party in Houston, Harris County, Texas.
II. Warranties, Covenants and Agreements of the Debtor
Debtor hereby warrants, covenants and agrees that:
(1) Except for the security interest granted hereby,
Debtor is the owner and holder of all the Collateral free from any adverse
claim, security interest, encumbrance, lien, charge or any other right, title,
or interest of any person other than Secured Party; Debtor has full power and
lawful authority to sell, transfer and assign the Collateral to Secured Party
and to grant to the Secured Party a first, prior and valid security interest
therein as herein provided; the execution and delivery and the performance
hereof are not in contravention of any indenture, agreement or undertaking to
which the Debtor is a party or by which the Debtor is bound.
(2)(a) Debtor has not heretofore signed any financing
statement or security agreement which covers any of the Collateral, and no such
financing statement or security agreement is now on file in any public office.
(b) As long as any amount remains unpaid on any of the
Obligations, (i) Debtor will not enter into or execute any security agreement
or any financing statement which covers any of the Collateral other than those
security agreements and financing statements in favor of Secured Party
hereunder, and further (ii) there will not be on file in any public office any
financing statement or statements (or any documents or papers filed as such)
which covers any of the Collateral other than financing statements in favor of
Secured Party hereunder.
(c) Debtor authorizes Secured Party to file, in
jurisdictions where this authorization will be given effect, a financing
statement signed only by Secured Party covering the Collateral. At the request
of Secured Party, Debtor will join Secured Party in executing such documents as
Secured Party may determine, from time to time, to be
(Security Agreement - Frank A. Pici)
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necessary or desirable under provisions of the Uniform Commercial Code; without
limiting the generality of the foregoing, Debtor agrees to join Secured Party,
at Secured Party's request, in executing one or more financing statements in
form satisfactory to Secured Party, and Debtor will pay the cost of filing or
recording the same, or of filing or recording this Security Agreement, in all
public offices at any time and from time to time, whenever filing or recording
of any such financing statement or of this Security Agreement is deemed by
Secured Party to be necessary or desirable. In connection with the foregoing,
it is agreed and understood between the parties hereto (and Secured Party is
hereby authorized to carry out and implement the following agreements and
understandings and Debtor hereby agrees to pay the cost thereof) that Secured
Party may, at any time or times, file as a financing statement any counterpart,
copy, or reproduction of this Security Agreement signed by Debtor if Secured
Party shall elect so to file, and it is also agreed and understood that Secured
Party may, if deemed necessary or desirable, file (or sign and file) as a
financing statement any carbon copy of, or photographic or other reproduction
of, this Security Agreement or of any financing statement executed in
connection with this Security Agreement.
(3) Debtor will not sell or offer to sell or otherwise
transfer or encumber the Collateral or any interest therein without the written
consent of Secured Party; and Debtor will keep the Collateral free from any
adverse, lien, security interest, encumbrance, charges or claim.
(4) Except as specifically otherwise permitted or
provided herein, if, at any time, the Debtor holds or has possession of the
Collateral or any part thereof, or of any other goods, documents or instruments
now or at any time constituting a part of the Collateral subject to this
Security Agreement, then the same shall remain in Debtor's possession and
control at all times at Debtor's risk of loss, and, if in Debtor's possession,
are now kept, and at all times shall be kept, at the address given in the blank
below:
or if left blank at the address first shown for Debtor at the beginning of this
Security Agreement; and in any event Debtor will promptly notify Secured Party
of any change in any of such addresses and of any new addresses where the
Collateral or any such goods, documents or instruments are or may be kept and
of any other change in the above-identified location of all or any part of the
Collateral, and Debtor will not move or remove the Collateral or such goods,
documents, or instruments, or any part thereof, from the addresses and places
described and specified above without the prior written consent of Secured
Party.
(5) All information supplied and statements made by
Debtor in any financial, credit or accounting statement or application for
credit made or delivered to Secured Party by or on behalf of Debtor prior to,
contemporaneously with or
(Security Agreement - Frank A. Pici)
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subsequent to the execution of this Security Agreement are and shall be true,
correct, complete, valid and genuine.
(6) Debtor will, upon the execution of this Security
Agreement by Debtor, deliver, or cause to be delivered, to Secured Party the
instruments, securities, documents, and chattel paper subject to this Security
Agreement; furthermore, if any instruments, securities, chattel paper, money or
monies, or documents are, at any time or times, included in the Collateral,
whether as proceeds or otherwise, Debtor will promptly deliver the same to
Secured Party upon the receipt thereof by Debtor, and in any event promptly
upon demand therefor by Secured Party. Notwithstanding anything contained in
the Employment Agreement to the contrary, as a condition precedent to Secured
Party's obligations to deliver to Debtor any recordable assignment of any
Overriding Royalty Interest, Debtor shall execute and deliver to Secured Party
in recordable form and otherwise in form and substance satisfactory to Secured
Party a mortgage, assignment of production and security agreement, and/or such
other instruments and/or documents as Secured Party shall determine, covering
such Overriding Royalty Interest and securing payment of the Obligations.
III. Events of Default
Debtor shall be in default under this Security Agreement upon
the happening of any of the following events or conditions (each an "Event of
Default"):
(1) Default in the payment when due of the principal of,
or interest on, the Note or of any other of the Obligations;
(2) Default in the performance of any agreement or
obligation of Debtor to the holder of the Obligations;
(3) Any warranty, representation or statement made in
this Security Agreement or made or furnished to Secured Party by or on behalf
of Debtor in connection with this Security Agreement or to induce Secured Party
to make any loan to Debtor proves to have been false in any material respect
when made or furnished; or any financial statement of Debtor or of any
endorser, guarantor or surety on any of the Obligations which has been or may
be furnished to Secured Party by or on behalf of Debtor or such guarantor,
endorser or surety shall prove to be false in any materially detrimental
respect;
(4) The levy of any attachment, execution, or other
process against Debtor or any of the Collateral;
(5) Death, insolvency or business failure of Debtor, or
the commission of any act of bankruptcy by, or the appointment of receiver or
other legal representative for any part of the property of, assignment for the
benefit of creditors by, or the
(Security Agreement - Frank A. Pici)
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commencement of any proceedings under any bankruptcy or insolvency law by or
against, Debtor;
(6) Failure or refusal of Debtor to perform or observe
any of the covenants, duties or agreements herein imposed upon or agreed to be
performed or observed by Debtor;
(7) The occurrence of any "Event of Default" as such term
is defined in the Note.
IV. Remedies
(1) In the event of the default in the payment of any of
the Obligations or any principal, interest or other amount payable thereunder,
when due, or upon the happening of any of the Events of Default specified
above, and at any time thereafter, at the option of the holder thereof, any or
all of the Obligations shall become immediately due and payable without
presentment or demand or any notice to the Debtor or any other person obligated
thereon and Secured Party shall have and may exercise with reference to the
Collateral and Obligations any or all of the rights and remedies of a secured
party under the Uniform Commercial Code as adopted and as amended in the State
of Texas, and as otherwise granted herein or under any other law or under any
other agreement executed by Debtor, including, without limitation, the right
and power to sell, at public or private sale or sales, or otherwise dispose of
or utilize the Collateral and any part or parts thereof in any manner
authorized or permitted under said Uniform Commercial Code after default by a
debtor, and to apply the proceeds thereof toward payment of any costs and
expenses and attorney's fees and legal expenses thereby incurred by Secured
Party and toward payment of the Obligations in such order or manner as Secured
Party may elect. To the extent permitted by law, Debtor expressly waives any
notice of sale or other disposition of the Collateral and any other rights or
remedies of Debtor or formalities prescribed by law relative to sale or
disposition of the Collateral or exercise of any other right or remedy of
Secured Party existing after default hereunder; and to the extent any such
notice is required and cannot be waived, Debtor agrees that if such notice is
mailed, postage prepaid, to Debtor either at the street address first shown
hereinabove or at the mailing address, if any, shown for Debtor at the
beginning of this Security Agreement at least five days before the time of the
sale or disposition, such notice shall be deemed reasonable and shall fully
satisfy any requirement for giving of notice.
(2) Secured Party is expressly granted the right, at its
option, to transfer at any time to itself or to its nominee the Collateral, or
any part thereof, and to receive the monies, income, proceeds or benefits
attributable or accruing thereto and to hold the same as security for the
Obligations or to apply the same on the principal and interest or other amounts
owing on any of the Obligations, whether or not then due, in such order or
manner as Secured Party may elect. Secured Party is further
(Security Agreement - Frank A. Pici)
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expressly granted the rights, exercisable at its option at any time, whether
before or after default, to take control of any proceeds, payments, monies,
income, collections or benefits and to notify account debtors, lessees,
obligors on any instruments or other obligors to make all payments directly to
Secured Party on any and all accounts, leases, instruments, or obligations,
constituting, at any time or from time to time, a part of the Collateral and to
make payment directly to Secured Party of all such income, monies, proceeds or
other benefits; and Debtor will, upon request of Secured Party, so notify all
such account debtors, lessees or obligors. Without limiting in any way the
generality of the preceding sentences, it is expressly acknowledged and agreed
by Debtor and Secured Party that Secured Party shall have the express right, at
its option, to receive directly any and all cash payable to Debtor on, or
otherwise in respect of, any Overriding Royalty Interest and apply such amounts
as received to the outstanding principal balance of the Obligations, whether or
not then due, without further consent or authorization from Debtor.
(3) All recitals in any instrument of assignment or any
other instrument executed by Secured Party incident to sale, transfer,
assignment or other disposition or utilization of the Collateral or any part
thereof hereunder shall be full proof of the matters stated therein and no
other proof shall be requisite to establish full legal propriety of the sale or
other action taken by Secured Party or of any fact, condition or thing incident
thereto and all prerequisites of such sale or other action or of any fact,
condition or thing incident thereto shall be presumed conclusively to have been
performed or to have occurred.
(4) All rights to marshalling of assets of Debtor,
including any such right with respect to the Collateral, are hereby waived by
Debtor.
(5) The right of Secured Party to take possession or
control of the Collateral upon the happening of any of the events or conditions
constituting a default may be exercised without resort to any court proceeding
or judicial process whatever and without any hearing whatever thereon; and, in
this connection, DEBTOR EXPRESSLY WAIVES ANY CONSTITUTIONAL RIGHTS OF DEBTOR
WITH REGARD TO NOTICE, ANY JUDICIAL PROCESS OR ANY HEARING PRIOR TO THE
EXERCISE OF THE RIGHT OF SECURED PARTY TO TAKE POSSESSION OR CONTROL OF THE
COLLATERAL UPON THE HAPPENING OF ANY OF THE EVENTS OR CONDITIONS CONSTITUTING A
DEFAULT.
V. General
(1) Secured Party may, at its option, whether or not the
Obligations are due, demand, sue for, collect or make any compromise or
settlement it deems desirable with reference to the Collateral. Secured Party
shall not be obligated to take any steps necessary to preserve any rights in
the Collateral against other parties, which Debtor hereby assumes to do.
(Security Agreement - Frank A. Pici)
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(2) This Security Agreement shall not be construed as
relieving Debtor from full personal liability on the Obligations and any and
all future and other indebtedness secured hereby and for any deficiency
thereon.
(3) If maturity of the Obligations shall be accelerated
for any reason, the full amount of any interest then unearned which has been
collected theretofore by or for Secured Party shall thereupon be credited
against the Obligations. Notwithstanding any other provision in this Security
Agreement or in the Obligations or any of them, Debtor shall never be liable
for unearned interest on the Obligations, or on any of them, and shall further
never be required to pay interest on the Obligations, or on any of them, at a
rate in excess of the maximum percentage rate authorized and allowed by
applicable law. The intent of the parties being to conform and comply fully
with all laws concerning usury applicable hereto or to the Obligations or any
part thereof, any agreement concerning interest in any of the foregoing shall
be subject to reduction to the amount allowed under the applicable laws with
respect to usury, as now or hereafter construed by the courts with jurisdiction
thereof, and any interest collected in excess of the amount authorized and
permitted by such laws shall be refunded to the person paying the same, or
credited against the Obligations.
(4) No delay or omission on the part of Secured Party in
exercising any right hereunder shall operate as a waiver of any such right or
any other right. A waiver on any one or more occasions shall not be construed
as a bar to or waiver of any right or remedy on any future occasion.
(5) The execution and delivery of this Security Agreement
in no manner shall impair or affect any other security (by endorsement or
otherwise) for the payment of the Obligations and no security taken hereafter
as security for payment of any part or all of the Obligations shall impair in
any manner or affect this Security Agreement, all such present and future
additional security to be considered as cumulative security. Any of the
Collateral may be released from this Security Agreement without altering,
varying or diminishing in any way the force, effect, lien, security interest,
or charge of this Security Agreement as to the Collateral not expressly
released, and this Security Agreement shall continue as a first lien, security
interest and charge on all of the Collateral not expressly released until all
sums and indebtedness secured hereby have been paid in full. Any future
assignment or attempted assignment or transfer of the interest of Debtor in and
to any of the Collateral shall not deprive Secured Party of the right to sell
or otherwise dispose of or utilize all of the Collateral as above provided or
necessitate the sale or disposition thereof in parcels or in severalty.
(6) Any notice or demand to Debtor hereunder or in
connection herewith may be given and shall conclusively be deemed and
considered to have been given and received upon the deposit thereof, in
writing, in the United States mails, duly stamped and addressed to Debtor
either at the street address first shown hereinabove
(Security Agreement - Frank A. Pici)
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or at the mailing address, if any, given for Debtor at the beginning of this
Security Agreement; but actual notice, however given or received, shall always
be effective.
(7) All rights of Secured Party hereunder shall inure to
the benefit of its successors and assigns; and all obligations of Debtor shall
bind his heirs, executors, or administrators, and his or its successors or
assigns. If there be more than one Debtor, their obligations hereunder shall
be joint and several.
(8) Each term used in this Security Agreement, unless the
context otherwise requires, and in all events subject to any express
definitions set forth in this Security Agreement, shall be deemed to have the
same meaning herein as that given each such term under the Uniform Commercial
Code, as adopted and as amended in the State of Texas.
(9) As used in this Security Agreement and when required
by the context, each number (singular and plural) shall include all numbers,
and each gender shall include all genders; and unless the context otherwise
requires, the word "person" shall include "corporation, firm or association."
(10) The law governing this secured transaction shall be
that of the State of Texas existing as of the date hereof; provided, that if
any additional rights or remedies are granted by the law of Texas to secured
parties or to persons similarly situated to Secured Party, then Secured Party
shall also have and may exercise any such additional rights or remedies.
Signed in multiple original counterparts and delivered on the day and year
first above written.
/s/ FRANK A. PICI
----------------------------------
Frank A. Pici
The undersigned, Sharon Pici, is the spouse of Debtor and in such capacity
executes the Security Agreement for the purpose of binding any and all rights
(including spousal rights and community property rights) that she may have in
the Collateral.
/s/ SHARON PICI
----------------------------------
Sharon Pici
(Security Agreement - Frank A. Pici)
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<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 4,395
<SECURITIES> 0
<RECEIVABLES> 14,886
<ALLOWANCES> 0
<INVENTORY> 36
<CURRENT-ASSETS> 19,955
<PP&E> 233,455
<DEPRECIATION> 75,476
<TOTAL-ASSETS> 181,585
<CURRENT-LIABILITIES> 24,018
<BONDS> 0
0
0
<COMMON> 1
<OTHER-SE> 54,204
<TOTAL-LIABILITY-AND-EQUITY> 181,585
<SALES> 45,619
<TOTAL-REVENUES> 45,619
<CGS> 0
<TOTAL-COSTS> 58,868
<OTHER-EXPENSES> 2,252
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7,874
<INCOME-PRETAX> (23,020)
<INCOME-TAX> 0
<INCOME-CONTINUING> (23,020)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (23,020)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
