<PAGE> 1
- -------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
COMMISSION FILE NUMBER 333-12707
MARINER ENERGY, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 86-0460233
(State or other jurisdiction of (I.R.S. Employer
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)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
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 No [X]
Note: The Company is not subject to the filing requirements of the
Securities Exchange Act of 1934. This annual report is filed pursuant to
contractual obligations imposed on the Company by an Indenture, dated as of
August 1, 1996, under which the Company is the issuer of certain debt.
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ [X] ]
The aggregate market value of the voting stock held by non-affiliates of
registrant is indeterminable, as there is no established public trading market
for the registrant's common stock.
As of March 27, 1999, there were 1,378 shares of the registrant's
common stock outstanding.
- -------------------------------------------------------------------------------
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Item Page
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
PART I
1.and 2. Business and Properties
(a) Overview ....................................................................... 1
(b) Business Strategy .............................................................. 3
(c) Reserves ....................................................................... 4
(d) Oil and Gas Properties ......................................................... 5
(e) Production ...................................................................... 8
(f) Productive Wells ............................................................... 8
(g) Acreage ........................................................................ 9
(h) Drilling Activity................................................................ 9
(i) Marketing, Customers and Hedging Activities ................................... 10
(j) Competition ................................................................... 11
(k) Regulation .................................................................... 11
(l) Employees....................................................................... 12
3. Legal Proceedings............................................................................... 12
4. Submission of Matters to a Vote of Security Holders............................................. 12
PART II
5. Market for Registrant's Common Equity and Related Stockholder Matters........................... 13
6. Selected Financial Data......................................................................... 13
7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
(a) Introduction ....................................................................... 14
(b) General............................................................................. 14
(c) Results of Operations............................................................... 15
(d) Liquidity and Capital Resources..................................................... 17
(e) Year 2000 Issues..................................................................... 20
(f) Market Risk Disclosure............................................................... 21
8. Financial Statements and Supplementary Data..................................................... 22
9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure......................................................................42
PART III
10. Directors and Executive Officers of the Registrant.............................................. 42
11. Executive Compensation.......................................................................... 44
12. Security Ownership of Certain Beneficial Owners and Management.................................. 45
13. Certain Relationships and Related Party Transactions............................................ 46
PART IV
14. Exhibits, Financial Statement Schedules and Reports on Form 8-K................................. 49
Glossary........................................................................................ 51
</TABLE>
<PAGE> 3
PART I
In addition to historical information, this Annual Report on Form 10-K
contains statements regarding future financial performance and results and
other statements which are not historical facts. These constitute
forward-looking statements which are subject to risks and uncertainties that
could cause the Company's actual results to differ materially. Such risks
include, but are not limited to, oil and gas price volatility, results of
future drilling, availability of drilling rigs, future production and costs and
other factors. Some of the more important factors that could cause or
contribute to such differences include those discussed in Items 1 and 2
"Business and Properties" and Item 7 "Management's Discussion and Analysis of
Financial Condition and Results of Operations" in this report.
ITEMS 1. AND 2. BUSINESS AND PROPERTIES
Certain technical terms used in these Items are described or defined in the
Glossary presented on page 51 of this report.
(a) OVERVIEW
Mariner Energy, Inc. ("Mariner" or "Company") is an independent oil
and natural gas exploration, development and production company with principal
operations in three geographical areas of the United States; the shallow water
or "shelf" (water depths less than 600 feet) of the Gulf of Mexico ("Gulf") and
onshore areas near the Gulf; the "Deepwater" Gulf (water depths greater than
600 feet); and the Permian Basin of West Texas. Most of the Company's senior
managers have been with the Company since 1984 and have over 20 years
experience in the oil and natural gas exploration and production business. The
Company has been an active explorer in the Gulf Coast area since the mid-
1980s, when it operated as Hardy Oil & Gas USA Inc., and has grown its
production and reserve base through the drillbit. Mariner's increasing focus on
the Gulf in water depths greater than 600 feet since the early 1990's has made
it one of the most experienced independent operators in the Deepwater Gulf,
where it has operated six subsea development projects.
Management of the Company and an affiliate of Enron Capital & Trade
Resources Corp. ("ECT") acquired the Company from Hardy Oil & Gas, plc
effective April 1, 1996 ("the Acquisition"). From the Acquisition effective
date though December 31, 1998, the Company boosted its reserve base
approximately 56%, increasingly emphasizing Deepwater Gulf exploration along
with its well-established Deepwater Gulf exploitation activities. The Company's
Deepwater Gulf drilling program has resulted in four new field discoveries in
eight exploration wells drilled since the Acquisition. Mariner operates three
of these four discoveries. First production from two of these discoveries
commenced in 1998 and the Company expects first production from the other two
in 1999 or 2000. Subsequent to year-end the Company had another Deepwater
discovery which may be the most significant discovery for the Company to date,
pending successful appraisal drilling.
Since the Acquisition, the Company has more than tripled its inventory
of Deepwater Gulf lease blocks through federal lease sales in which new
Deepwater leases include royalty relief benefits. In 1998, Mariner acquired 20
Deepwater Gulf lease blocks through federal lease sales and farm-in
arrangements, which blocks the Company believes add significant potential for
reserve and production growth. As of December 31, 1998, Mariner had 128 blocks
in the Gulf of Mexico, including 66 in the Deepwater Gulf, and held an
inventory of 22 drillable exploration prospects, including 16 in the Deepwater
Gulf, which it expects to drill over the next two to three years. In March
1999, the Company was the apparent high bidder at a federal lease sale on three
blocks in water depths of 4,000 to 5,000 feet. Management believes all of these
blocks encompass drillable prospects.
As of December 31, 1998, the Company had proved reserves of 185.1
Bcfe, of which 70% was natural gas and 30% was oil and condensate. Also, the
Company held a total undeveloped leasehold inventory of approximately 216,000
net acres, including 87 undeveloped Gulf blocks, and held under license or
other arrangement approximately 8,200 square miles of 3-D seismic data and
approximately 241,000 linear miles of 2-D seismic data.
From June 1, 1989 (when the Company began to focus its efforts on the
Gulf) through December 31, 1998, the Company drilled 287 gross (95.6 net)
wells, including 97 gross (31.2 net) exploration and Deepwater exploitation
wells. Of these wells, 32 were completed (26 in Gulf shallow water or onshore
and 6 in Gulf Deepwater), representing a 33%
1
<PAGE> 4
success rate on its exploration and Deepwater exploitation activities. During
the same period, the Company completed approximately 92% of its development
wells.
From January 1, 1994 through December 31, 1998, the Company increased
its annual average daily production by 41% to approximately 66 Mmcfe per day.
During the same period the Company replaced 170% of its annual production
through the drill bit, primarily on Company-generated drilling prospects. To
partially fund the drilling program, the Company sold some properties. Net of
disposals, proved reserves have increased 45% over the period.
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, 1998. Reserve volumes and values were determined under
the method prescribed by the Securities and Exchange Commission, which requires
the application of year-end oil and natural gas prices for each year, held
constant throughout the projected reserve life. See "Reserves" later in this
item and Item 7. "Management's Discussion and Analysis of Financial Condition
and Results of Operations".
<TABLE>
<CAPTION>
Year ended December 31,
(in thousands unless otherwise indicated)
-------------------------------------------------------------------
1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Proved reserves:
Oil (Mbbls).......................................... 9,359 6,630 5,280 6,669 6,900
Natural gas (Mmcf)................................... 128,895 121,366 92,284 98,330 100,645
Natural gas equivalent (Mmcfe)....................... 185,049 161,148 123,964 138,344 142,045
Present value of estimated future net revenues (1)...... $ 147,629 $ 183,829 $ 303,363 $ 173,421 $ 95,318
Annual reserve replacement ratio (2)................... 2.0 2.6 1.2 1.2 2.0
Capital expenditures:
Capital costs incurred............................... $ 141,855 $ 68,868 $ 46,625 $ 41,772 $ 36,923
Percentage attributable to:
Lease acquisition................................. 30.4% 36.0% 30.7% 11.0% 6.8%
Exploratory drilling, geological and geophysical.. 25.1% 39.7% 48.7% 58.2% 48.5%
Development and other............................. 44.5% 24.3% 20.6% 30.8% 44.7%
Proceeds from property sales......................... -- -- $ 7,528 $ 20,688 $ 3,480
Production:
Oil (Mbbls).......................................... 786 977 750 424 459
Natural gas (Mmcf)................................... 19,477 18,004 20,429 13,770 14,362
Natural gas equivalents (Mmcfe)...................... 24,193 23,866 24,929 16,314 17,116
Average realized sales price per unit
(including the effects of hedging):
Oil (per Bbl)........................................ $ 12.80 $ 18.48 $ 18.04 $ 17.10 $ 15.83
Natural gas (per Mcf)................................ 2.39 2.48 2.29 1.83 1.92
Gas equivalent (per Mcfe)............................ 2.34 2.63 2.42 1.99 2.04
Expenses per Mcfe:
Lease operating...................................... 0.41 0.39 0.36 0.39 0.36
General and administrative, net...................... 0.20 0.13 0.13 0.12 0.11
</TABLE>
(1) Discounted at an annual rate of 10%. See "Glossary" included
elsewhere in this report for the definition of "present value of
estimated future net revenues".
(2) 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.
2
<PAGE> 5
(b) BUSINESS STRATEGY
Mariner's strategy is to increase reserves, production and cash flow
in a cost effective manner primarily "through the drill bit" -- emphasizing
growth through exploration, exploitation and development of internally
generated prospects, with heavy emphasis on the Deepwater Gulf. Approximately
90% by value of Mariner's proved reserves as of December 31, 1998 was
attributable to fields developed from internally generated prospects. The
Company prefers to operate the wells in which it participates.
The Company pursues a portfolio approach to its drilling program,
balancing risk and potential reward and currently targeting 5 to 10 new
projects per year. This program is designed to supply predictable reserve
replacement and production growth through lower risk Deepwater Gulf
exploitation and substantial growth through a moderate risk exploration
component where individual prospects can significantly increase the reserve
base. Mariner currently targets capital allocation for exploration and
exploitation efforts as follows:
<TABLE>
<CAPTION>
Portfolio Component Capital allocation Target
------------------- -------------------------
<S> <C>
Deepwater Gulf Exploration 55-70%
Deepwater Gulf Exploitation 20-30%
Shelf/Onshore Gulf Exploration 5-15%
</TABLE>
The Company focuses on the Deepwater Gulf because of (i) the potential
for discovery of large hydrocarbon deposits, (ii) relatively favorable
reservoir characteristics, (iii) the prevalence of 3-D seismic direct
hydrocarbon indicators, (iv) the relatively under-explored nature of the
region, (v) recent advances in Deepwater production technology that reduce
development costs and expedite production and (vi) the favorable operating
margins resulting from generally favorable prices for Gulf production and lower
operating costs per unit. These lower operating costs per unit are attributed
to prolific wells, concentration of labor and equipment, absence of severance
and ad valorem taxes and generally lower royalties.
Deepwater Gulf Exploitation. Six years ago Mariner was one of the
first to recognize the opportunity to partner with major oil companies to
develop smaller Deepwater discoveries which do not meet a large company's
field-size threshold. The Company's initial Deepwater activities were
exploitation projects involving subsea tiebacks of natural gas wells to
existing platforms in water depths of 1,000 feet or less. After developing
significant experience managing these projects, Mariner added more challenging
natural gas projects in deeper water and oil subsea tieback projects. The
Company operated two subsea tieback exploitation projects in the Deepwater Gulf
in 1995 and 1996 and was recognized for its deepwater expertise by Hart
Publications, which awarded its 1996 "Best in Gulf" Award for the Company's
"Shasta" project. During 1997 and 1998, the Company acquired a 97% working
interest in and operatorship of the planned "Pluto" exploitation subsea tieback
project located in 2,800 feet of water on Mississippi Canyon block 718.
Deepwater Gulf Exploration. Mariner expanded its Deepwater Gulf
program in 1996 to include moderate risk exploratory drilling for small to
mid-sized targets where its subsea expertise, coupled with the benefits of
royalty relief on new leases, provide an opportunity for attractive economic
returns. From the Acquisition through December 31, 1998, the Company has
discovered four new fields in eight Deepwater Gulf exploratory test wells
drilled. These four discoveries have been or are in the process of being
developed with subsea tieback production systems. In 1997, Mariner further
expanded its Deepwater Gulf program to selectively pursue larger exploratory
targets which, if successful, may require the installation of dedicated
floating production systems. The Company believes that these prospects offer
significant reserve and production potential. In March 1999, the Company
announced a significant discovery on one of these prospects located in
approximately 7,100 feet of water offshore Louisiana in Mississippi Canyon
block 305, on which appraisal drilling is expected to be undertaken during
1999. To support its Deepwater exploration strategy, Mariner acquired 28 total
Deepwater Gulf blocks in 1996 and 1997, 20 Deepwater Gulf blocks in 1998 and
three Deepwater Gulf blocks in the March 1999 lease sale.
Shelf/Onshore Gulf Exploration. Mariner's strategy in the Gulf shallow
water and near onshore fields is to focus on certain prospects in areas where
it has been successful in obtaining attractive rates of return. Since the
Acquisition, the Company has made five exploratory discoveries in the
Shelf/Onshore Gulf area, three of which the Company generated internally.
Mariner also devotes a small portion of its capital resources to relatively low
risk development infill drilling operations in the Spraberry Trend of the
Permian Basin of West Texas, which continues to be important to its internal
growth strategy by providing a consistent source of cash flow for use in other
activities.
3
<PAGE> 6
Mariner believes that the following competitive strengths distinguish
the Company from other independent oil and gas companies. These advantages are
responsible to a significant extent for the success of the Company's
exploration and exploitation efforts in recent years.
Early Entry Into Deepwater Gulf. Mariner established operations in the
Deepwater Gulf in 1992 as one of the first independent oil and natural gas
companies in the deepwater. After six years of managing projects in the
Deepwater Gulf, the Company believes it has a competitive operating advantage
in the area. This competitive advantage consists of a strong understanding of
the geology and geophysics of the Deepwater Gulf, familiarity with challenges
peculiar to operating in the Deepwater Gulf and relationships with vendors,
major oil companies and other partners having complementary skills and
knowledge of the area.
Experienced Geoscience Staff. The Company's skilled technical staff of
twelve geoscientists averages over 20 years experience, including extensive
experience in the Deepwater Gulf and with major oil companies. This staff
applies state-of-the-art technology to minimize exploration risk and maximize
returns. Substantially all of the Company's exploration and exploitation
prospects are generated using 3-D seismic data.
Exploration Prospect Inventory. Mariner had an inventory of 22
drillable exploration prospects as of December 31, 1998 (including 16 in the
Deepwater Gulf), which it expects to drill over the next two to three years.
Pursuant to arrangements with partners on three of the prospects it was awarded
in 1998, Mariner's share of exploration drilling costs on these prospects,
estimated to be approximately $16 million, will be paid by its partners. The
Company holds 87 undeveloped blocks and approximately 8,200 square miles of 3-D
seismic under license or other arrangements to facilitate prospect generation.
With 128 blocks on the Gulf of Mexico, including 66 in the Deepwater Gulf and
numerous Deepwater Gulf lease blocks scheduled to become available over the
next several years, Mariner believes that it is positioned to increase its
lease and prospect holdings.
Access to Deepwater Drilling Rig. The Company executed a letter of
intent in February 1998 regarding the provision of a Deepwater drilling rig to
Mariner and another company on an equally shared basis for five years beginning
late 1999 or early 2000. The Company is currently in discussions with the owner
of the rig to determine if a mutually acceptable drilling contract can be
negotiated.
Deepwater Operating Ability. The Company has made a substantial
investment in obtaining experienced Deepwater drilling and project management
personnel. Key management positions have been filled with individuals who
average over 20 years of subsea experience in the North Sea and the Deepwater
Gulf. This investment gives the Company the ability to execute Deepwater
projects beyond the scope of most independents.
Experienced Management with Significant Equity Incentives. The
management team 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 either (i) eligible to participate in an
incentive program that provides overriding royalty interests in successful
projects or (ii) participate in a Stock Option Plan. The Company believes this
program strongly aligns management's and investors' interests. In addition, the
Company believes this program is a significant reason why it has been able to
retain the services of its senior management team, most of whom have been
working together at the Company for over 10 years. Certain members of
management and other key personnel of the Company have purchased approximately
4% of the common stock of Mariner Holdings and have acquired or received
options to purchase an additional 12% of the common stock of Mariner Holdings.
These shares and options were converted to Mariner Energy LLC shares and
options in 1998.
(c) RESERVES
The following table sets forth certain information with respect to the
Company's proved reserves by geographic area as of December 31, 1998. Reserve
volumes and values were determined under the method prescribed by the
Securities and Exchange Commission which requires the application of year-end
prices for each year, held constant throughout the projected reserve life. The
reserve information as of December 31, 1998 is based upon a reserve report
prepared by the independent petroleum consulting firm of Ryder Scott Company.
Producing oil and natural gas reservoirs generally are characterized by
declining production rates that vary depending upon reservoir characteristics
and other factors. Therefore, without reserve additions in excess of production
through successful exploration and development activities, the Company's
reserves and production will decline. See Note 10 to the Financial Statements
of the Company included elsewhere in this annual report for a discussion of the
risks inherent in oil and natural gas estimates and for certain additional
information concerning the proved reserves of the Company.
4
<PAGE> 7
<TABLE>
<CAPTION>
As of December 31, 1998
---------------------------------------------------------------------------
Present Value of
Proved Reserve Quantities Estimated Future Net Revenues (1)
---------------------------------- -------------------------------------
Oil Natural Gas Total Developed Undeveloped Total
Geographic Area (MBbls) (MMcf) (MMcfe) ($000) ($000) ($000)
- --------------- ------- ------ ------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Deepwater Gulf.................... 4,183 60,851 85,949 $ 41,208 $21,821 $ 63,029
Gulf of Mexico Shelf and
Gulf Coast Onshore.......... 1,105 46,659 53,289 70,315 40 70,355
Permian Basin..................... 4,071 21,385 45,811 9,401 4,844 14,245
----- ------- ------- -------- ------- --------
Total....................... 9,359 128,895 185,049 $120,924 $26,705 $147,629
===== ======= ======= ======== ======= ========
Proved Developed Reserves......... 2,886 86,024 103,340 $120,924
===== ====== ======= ========
</TABLE>
(1) Discounted (at 10%) present value as of December 31, 1998 (year-end prices
held constant).
The Company's estimates of proved reserves set forth in the foregoing
table do not differ materially from those filed by the Company with other
federal agencies.
(d) OIL AND GAS PROPERTIES
(i) SIGNIFICANT PRODUCING PROPERTIES
The Company owns oil and gas properties, both producing and for future
exploration and development, onshore in Texas and offshore in the Gulf,
primarily in federal waters. The Company's seven largest producing properties,
as shown in the following table, accounted for approximately 52% of the
Company's proved reserves as of December 31, 1998.
<TABLE>
<CAPTION>
As of December 31, 1998
----------------------------------------------------------
Mariner Ownership Producing Net Average Net Proved
Working Net Revenue Wells Daily Production Reserves
Interest Interest (gross) Oil (Bbls) Gas (Mmcf) (Mmcfe)
-------- -------- -------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Deepwater Gulf:
Green Canyon 136 25.0% 21.5% 2 13 5.1 3,409
Garden Banks 240 33.0% 26.9% 1 42 5.0 6,910
Gulf Shallow Water and
Near Onshore Areas:
Sandy Lake 48.3% 36.0% 5 715 16.3 14,544
Brazos A-105 12.5% 9.9% 5 11 7.2 13,594
Galveston 151 33.3% 26.7% 3 843 12.0 7,405
Matagorda Island 683/703 25.0% 20.1% 4 1 32.1 4,257
Permian Basin of West Texas:
Spraberry Aldwell Unit 70.3% 54.4% 82 501 2.1 45,811
-------
Totals - Principal Producing Properties 95,930
=======
</TABLE>
Following is additional information regarding the properties in the table shown
above.
5
<PAGE> 8
Deepwater Gulf
GREEN CANYON 136 ("SHASTA"). Shasta was generated by the Company,
acquired through a farmout transaction with Texaco and achieved initial
production in 1995. The 5,760 acre block is located offshore Louisiana in water
depths of approximately 840 to 1,040 feet. The Company operated the property to
the date of first production when Texaco became the operator. Two producing
wells have been drilled, and no additional drilling is currently planned. Green
Canyon 136 is tied back, by a specially laid subsea 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 three years.
GARDEN BANKS 240 ("MUSTIQUE"). Mustique was generated by the Company,
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. One producing well has been drilled and no additional drilling is
currently planned. Garden Banks 240 is tied back by a subsea pipeline and
connecting system to a production platform operated by Chevron approximately 12
miles from the well site, where its production is commingled and marketed with
Chevron's production. The field has an estimated remaining life of five years.
Gulf Shallow Water and Near Onshore Areas
SANDY LAKE. The Sandy Lake property, located onshore in the Pine
Island Bayou Field of the Texas Gulf Coast, was generated by the Company and
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. Currently there are five producing wells in the field, and the
Company is in the process of acquiring a 3D seismic survey to determine
additional drilling potential in the area. The current field production has an
estimated remaining life of three years.
BRAZOS A-105. Brazos A-105 was generated by the Company and achieved
initial production in 1993. The 4,320 acre block is located offshore Texas at a
water depth of approximately 190 feet. Union Oil Company of California is the
operator of the property and has drilled five producing wells thus far. No
additional drilling is currently planned. The field has an estimated remaining
life of nine years.
GALVESTON 151 ("REMBRANDT"). Rembrandt was generated by the Company
and achieved initial production in 1997. During 1998, Mariner drilled two
additional successful wells in adjacent fault blocks, significantly increasing
field production and proved reserves from the field. The 4,800 acre block is
located offshore Texas in less than 50 feet of water. Mariner is the operator
of the block. Additional drilling potential is currently under evaluation. The
reserves developed to date have a remaining life of approximately four years.
MATAGORDA ISLAND 683/703. Matagorda Island blocks 683 and 703 were
acquired by the Company as part of a bid group and commenced 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.
Four producing wells have been drilled, and no additional drilling is currently
planned. The field has an estimated remaining economic life of six 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 its working
interest in individual wells ranges from 33% to 84% approximately. An infill
well drilling program was implemented in 1997, and, to date, 70 wells have been
drilled, all of which are currently producing. The drilling of additional
infill wells is planned as market conditions allow. The estimated remaining
life of the field is more than 45 years.
6
<PAGE> 9
(ii) OTHER SIGNIFICANT PROPERTIES
In addition to the producing properties described above, the Company
also owns interests in three other properties which, while not producing at
December 31, 1998, represent a significant portion of proved reserves as of
that date. Those properties are described below.
GARDEN BANKS 367 ("DULCIMER"). Dulcimer was generated by the Company
and acquired at a federal offshore Gulf of Mexico lease sale in September 1996.
In late 1997, a successful exploration well was drilled on this 5,760 acre
block located offshore Louisiana at a water depth of approximately 1,100 feet.
The Company is the operator of the property and has a 41.7% working interest
and a 40.7% net revenue interest. No additional drilling is currently planned.
Dulcimer is expected to commence production in the second quarter of 1999,
after being tied back by a subsea pipeline and connecting system to a
production platform located approximately 14 miles from the well site. The
field has an estimated life of approximately seven years after the start of
production. Net proved reserves of 16.2 Bcfe, 97% natural gas, were included by
the Company at December 31, 1998.
MISSISSIPPI CANYON 673, 674, 717 AND 718 ("PLUTO"). During 1998, the
Company increased its working interest in this deepwater exploitation project
to 97% through a transaction with Chevron USA. The Company is operator of the
prospect, located offshore Louisiana in water depths exceeding 2,800 feet, and
has filed for Deepwater royalty relief with the Mineral Management Service. Two
exploration and appraisal wells had been drilled in this project prior to the
Company's ownership, which wells encountered a high-quality, gas condensate
reservoir. Drilling of one or two additional production wells and the
installation of a 30 mile flow line/umbilical system to a host platform on the
shelf will be necessary to fully develop the discovery. Drilling of the first
additional well is expected to commence in mid-1999 with concurrent
infrastructure installation, and first production is planned for the fourth
quarter of 1999. Ultimately, the Company expects to own a working interest in
the project between 33% and 75%. The field has an estimated life of
approximately eight years after the start of production, and net proved
reserves of 39.7 Bcfe (70% natural gas), reflecting a 75% working interest,
were included by the Company's estimate of proved reserves at December 31,
1998.
EWING BANK 966 ("BLACK WIDOW"). Mariner generated the Black Widow
deepwater prospect and acquired it at a federal offshore Gulf of Mexico lease
sale in March 1997. Mariner operates and has a 45% working interest in this
project, which is located offshore Louisiana at a water depth of approximately
1,900 feet. In early 1998, a successful exploration well was drilled on the
prospect. Mariner expects the well to commence production in 2000 via subsea
tieback to an existing platform. The Company estimates its net proved reserves
from the Black Widow at December 31, 1998, to be approximately 14 Bcfe, 82% of
which is oil.
(iii) SIGNIFICANT RECENT DEVELOPMENT
MISSISSIPPI CANYON 305 ("ACONCAGUA"). Aconcagua was generated by the
Company and acquired at a federal offshore Gulf of Mexico Lease Sale in March
1998. In March 1999, the Company announced an exploratory discovery on this
block, located in approximately 7,100 feet of water offshore Louisiana which
logged multiple pay sands and encountered additional sands with productive
potential. Appraisal and development plans for this significant discovery are
currently being prepared to quantify reserve estimates and to ensure an
appropriate development scenario. Drilling of the first appraisal well is
anticipated for the third or fourth quarter of 1999. The Company holds a
non-operating 25% working interest in the block.
(iv) 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. No property dispositions were made by the Company
during 1998.
(v) 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
7
<PAGE> 10
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.
(e) PRODUCTION
The following table presents certain information with respect to oil
and natural gas production attributable to the Company's properties, average
sales price received and expenses per unit of production during the periods
indicated.
<TABLE>
<CAPTION>
Year ended December 31,
--------------------------------------------------------------
1998 1997 1996
------ ------ ----
<S> <C> <C> <C>
Production:
Oil (Mbbls)......................................... 786 977 750
Natural gas (Mmcf).................................. 19,477 18,004 20,429
Gas equivalent (per Mcfe)........................... 24,193 23,866 24,929
Average sales prices including effects of hedging:
Oil (per Bbl)....................................... $ 12.80 $ 18.48 $ 18.04
Natural gas (per Mcf)............................... 2.39 2.48 2.29
Gas equivalent (per Mcfe)........................... 2.34 2.63 2.42
Expenses (per Mcfe):
Lease operating..................................... .41 .39 .36
General and administrative, net (1)................. .20 .13 .13
Depreciation, depletion and amortization (2)........ 1.40 1.33 1.25
Cash margin per Mcfe (3)............................... 1.47 1.92 1.77
</TABLE>
(1) Net of overhead reimbursements received by the Company from other
working interest owners and amounts capitalized under the full cost accounting
method.
(2) Excludes impairment of oil & gas properties
(3) Average equivalent gas sales price (including the effects of hedging),
minus lease operating and gross general and administrative expenses.
(f) PRODUCTIVE WELLS
The following table sets forth the number of productive oil and gas
wells in which the Company owned a working interest at December 31, 1998:
<TABLE>
<CAPTION>
Total Productive Wells
------------------------
Gross Net
------- -----
<S> <C> <C>
Oil.............................. 92 65.5
Gas.............................. 99 17.5
--- ----
Total....................... 191 83.0
=== ====
</TABLE>
Productive wells consist of producing wells and wells capable of
production, including gas wells awaiting pipeline connections. The Company has
six wells that are completed in more than one producing horizon; those wells
have been counted as single wells.
8
<PAGE> 11
(g) ACREAGE
The following table sets forth certain information with respect to the
developed and undeveloped acreage of the Company as of December 31, 1998.
<TABLE>
<CAPTION>
Developed Acres (1) Undeveloped Acres (2)
---------------------- ----------------------
Gross Net Gross Net
------- ------- ------- -------
<S> <C> <C> <C> <C>
Texas (Onshore).............................. 21,128 13,899 5,467 2,412
All other states (Onshore)................... 671 212 644 196
Offshore..................................... 211,391 60,414 435,167 213,614
------- ------- ------- -------
Total................................... 233,190 74,525 441,278 216,222
======= ====== ======= =======
</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.
(h) DRILLING ACTIVITY
Certain information with regard to the Company's drilling activity
during the years ended December 31, 1998, 1997 and 1996 is set forth below.
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------------------------
1998 1997 1996
------------------- ------------------- ------------------
Gross Net Gross Net Gross Net
----- ----- ----- ------ ----- -----
<S> <C> <C> <C> <C> <C> <C>
Exploratory wells:
Producing........................ 3 1.10 4 1.37 3 0.78
Dry.............................. 5 1.54 7 1.60 4 1.40
---- ----- ---- ----- ---- -----
Total........................ 8 2.64 11 2.97 7 2.18
==== ===== ==== ===== ==== =====
Development wells:
Producing........................ 19 8.61 11 5.27 5 1.73
Dry.............................. 3 1.13 - - - -
---- ----- ---- ----- ---- -----
Total........................ 22 9.74 11 5.27 5 1.73
==== ===== ==== ===== ==== =====
Total wells:
Producing........................ 22 9.71 15 6.64 8 2.51
Dry.............................. 8 2.67 7 1.60 4 1.40
---- ----- ---- ----- ---- -----
Total........................ 30 12.38 22 8.24 12 3.91
==== ===== ==== ===== ==== =====
</TABLE>
9
<PAGE> 12
(i) MARKETING, CUSTOMERS AND HEDGING ACTIVITIES
The Company markets substantially all oil and gas production from
Company-operated properties and from properties operated by others where
Mariner's interest is significant. The majority of the Company's natural gas,
oil and condensate production is sold to a variety of purchasers under
short-term (less than 12 months) contracts at market-sensitive prices. As to gas
produced from the Spraberry 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 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 that location.
The following table lists customers accounting for more than 10% of the
Company's total revenues for the year indicated (a "-" indicates that revenues
from the customer accounted for less than 10% of the Company's total revenues
for that year).
<TABLE>
<CAPTION>
Percentage of total revenues
For the year ended December 31
----------------------------------------------
Customer 1998 1997 1996
-------- --------- ----------- -----------
<S> <C> <C> <C>
PanEnergy Marketing Co. 29% 19% -
Transco Energy Marketing Company 16% 14% 15%
Enron Capital & Trade Resources Corp.
(An affiliate) 15% 18% -
Genesis Crude Oil LP (formerly
Howell Crude Oil Company) 10% 19% 13%
Texaco Natural Gas, Inc. - - 13%
Seneca Resources Corporation - - 10%
</TABLE>
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.
Historically, demand for natural gas has been seasonal in nature, with
peak demand and typically higher prices occurring during the colder winter
months.
From time to time, the Company has utilized hedging transactions with
respect to a portion of its oil and gas production to reduce its exposure to
price fluctuations and to achieve a more predictable cash flow. The Company
does not engage in hedging activities for speculative purposes. 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. During
1998, approximately 40% of the Company's equivalent production was subject to
hedge positions, and the Company did not have any open positions at December
31, 1998. Subsequent to December 31, 1998, the Company entered into a commodity
price hedging contract under a costless collar covering 60,000 Mmbtu per day of
natural gas production with a floor price of $1.85 per Mmbtu and a ceiling
price of $2.05 per Mmbtu for the period beginning April 1, 1999 to October 31,
1999. This agreement can be extended for the same daily volume through March
2000 for a floor price of $2.00 per Mmbtu and a ceiling of $2.70 per Mmbtu at
the option of the counterparty to the transaction. Subsequent to December 31,
1998, the Company entered into a long-term hedging agreement for a three-year
period from November 1, 1999 through October 31, 2002. Average volumes hedged
by year are approximately 44,000, 30,000, 12,000 and 6,000 Mmbtu per day for
1999, 2000, 2001, and 2002, respectively, at a price of $2.18 per Mmbtu. In
April 1999, the Company entered into a hedging agreement covering 600 barrels
of oil per day for the period May 1, 1999 through December 31, 1999 at a price
of $16.32 per Bbl. Hedging arrangements for 1999 cover approximately 53% of the
Company's anticipated equivalent production for the year. Hedging arrangements
for 2000, 2001 and 2002 cover approximately 30%, 10% and 3% of the Company's
anticipated equivalent production, respectively. 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 Company's Revolving Credit Facility (see note 4 of the
financial statements) places certain restrictions on the Company's use of
hedging. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Changes in Prices and Hedging Activities".
10
<PAGE> 13
(j) COMPETITION
The Company believes that the locations of its leasehold acreage, its
exploration, drilling and production capabilities, and the experience of its
management generally enable it to compete effectively. However, 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 is 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.
(k) REGULATION
The Company's operations are subject to extensive and continually
changing regulation because 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.
(i) TRANSPORTATION AND SALE OF NATURAL GAS
The FERC regulates interstate natural gas pipeline transportation rates
and service conditions, which affect the marketing of gas produced by the
Company and the revenues received by the Company for sales of such natural gas.
In 1985, the FERC adopted policies that make natural gas transportation
accessible to natural gas buyers and sellers on an open-access,
non-discriminatory basis. The FERC issued Order No. 636 on April 8, 1992, which,
among other things, prohibits interstate pipelines from tying sales of gas to
the provision of other services and requires pipelines to "unbundle" the
services they provide. This has enabled buyers to obtain natural gas supplies
from any source and secure independent delivery service from the pipelines. All
of the interstate pipelines subject to FERC's jurisdictions are now operating
under Order No. 636 open access tariffs. On July 29, 1998, the FERC issued a
Notice of Proposed Rulemaking regarding the regulation of short term natural gas
transportation services. FERC proposes to revise its regulations to require all
available short term capacity (including capacity released by shippers holding
firm entitlements) to be allocated through an auction process. FERC also
proposes to require pipelines to offer additional services under open access
principles, such as "park and loan" services. In a related initiative, FERC
issued a Notice of Inquiry on July 29, 1998 seeking input from natural gas
industry players and affected entities regarding virtually every aspect of the
regulation of interstate natural gas transportation services. Among other
things, FERC is seeking input on retention of cost-based rate regulation for
long term transportation services, potential changes in the manner in which
rates are designed and the use of index driven or incentive rates for pipelines.
The July 29, 1998 Notice of Inquiry may lead to a subsequent Notice of Proposed
Rulemaking to further revised FERC's regulations.
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 closely 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.
(ii) 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
11
<PAGE> 14
Company can drill. Moreover, each state generally imposes a production or
severance tax with respect to production and sale of crude oil, natural gas and
gas liquids within its jurisdiction.
(iii) 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.
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 Environmental Protection Agency
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 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.
(l) EMPLOYEES
As of December 31, 1998, the Company had 71 full-time employees. The
Company's employees are not represented by any labor union. The Company
considers relations with its employees to be satisfactory. The Company has never
experienced a work stoppage or strike.
ITEM 3. LEGAL PROCEEDINGS
In December, 1996, ETOCO, Inc., which owns a 20% interest in one
producing well operated by the Company, filed a lawsuit against the Company in
the district court of Hardin County, Texas, alleging damage due to the Company's
refusal to drill an additional well. In April 1998, after a trial on the merits,
a jury awarded ETOCO $2.38 million in damages. In August, the court awarded
ETOCO $0.5 million in attorneys' fees. On February 8, 1999, the claim was
settled for an amount previously provided by the Company.
The Company, in the ordinary course of business, is a claimant and/or
a defendant in various other 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
<PAGE> 15
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
There is no established public trading market for the Company's common
stock, its only class of equity securities.
ITEM 6. SELECTED FINANCIAL DATA
The information below should be read in conjunction with Item 7
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the financial statements included in Item 8 of this report. The
following table sets forth selected financial data of the Company for the
periods indicated.
<TABLE>
<CAPTION>
Predecessor Company (1)
-------------------------------------
(ALL AMOUNTS IN THOUSANDS) 3 Mos. 9 Mos. Year Year
Years Ended December 31, Ended Ended Ended Ended
-----------------------
1994 1995 3/31/96 12/31/96 12/31/97 12/31/98
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenues $ 34,861 $ 32,386 $ 13,309 $ 47,079 $ 62,771 $ 56,690
Lease operating expenses 6,123 6,408 2,403 6,495 9,376 9,858
Depreciation, depletion and amortization 16,221 15,635 6,309 24,747 31,719 33,833
Impairment of oil and gas properties 6,257 -- -- 22,500 28,514 50,800
Provision for litigation -- -- -- -- -- 2,800
General and administrative expenses 1,830 2,028 712 2,406 3,195 4,749
---------- ---------- ---------- ---------- ---------- ----------
Operating income (loss) 4,430 8,315 3,885 (9,069) (10,033) (45,350)
Interest income 1,084 9,255 2,167 515 467 313
Interest expense (8,125) (12,772) (3,391) (7,746) (10,644) (13,384)
Write-off of bridge loan fees -- -- -- (2,392) -- --
---------- ---------- ---------- ---------- ---------- ----------
Income (loss) before income taxes (2,611) 4,798 2,661 (18,692) (20,210) (58,421)
Provision for income taxes -- 338 -- -- -- --
---------- ---------- ---------- ---------- ---------- ----------
Net income (loss) $ (2,611) $ 4,460 $ 2,661 $ (18,692) $ (20,210) $ (58,421)
========== ========== ========== ========== ========== ==========
CAPITAL EXPENDITURE AND DISPOSAL DATA:
Exploration, incl. leasehold/seismic $ 19,016 $ 17,460 $ 4,926 $ 31,885 $ 48,933 $ 78,817
Development and other 17,907 24,312 2,545 7,043 19,935 63,038
---------- ---------- ---------- ---------- ---------- ----------
Total capital expenditures $ 36,923 $ 41,772 $ 7,471 $ 38,928 $ 68,868 $ 141,855
========== ========== ========== ========== ========== ==========
Proceeds from disposals $ 3,480 $ 20,688 -- $ 7,528 -- --
========== ========== ========== ========== ========== ==========
BALANCE SHEET DATA (AT END OF PERIOD):
Oil and gas properties, net, at full cost $ 120,135 $ 125,817 $ 127,095 $ 166,619 $ 175,668 $ 233,327
Long-term receivable from affiliates 4,000 106,000 104,000 -- -- --
Total assets 138,202 250,726 254,301 196,749 212,577 262,342
Long-term debt, less current maturities 105,500 162,500 162,500 99,525 113,574 124,624
Stockholder's equity 18,798 69,258 71,919 77,053 57,174 27,534
</TABLE>
(1) - In an acquisition effective April 1, 1996 for accounting purposes, Mariner
Holdings, Inc. acquired all the capital stock of the Company from Hardy Holdings
Inc. as part of a management-led buyout. In connection with the acquisition,
substantial intercompany indebtedness and receivables and third-party
indebtedness of the Company were eliminated. The acquisition was accounted for
using the purchase method of accounting, and Mariner Holdings' cost of acquiring
the Company was 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. "Predecessor Company" refers
to Mariner Energy, Inc. (formerly named "Hardy Oil & Gas USA Inc.") prior to the
effective date of the acquisition.
13
<PAGE> 16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
(a) INTRODUCTION
The following discussion is intended to assist in an understanding of
the Company's financial position and results of operations for each of the three
years in the period that began January 1, 1996 and ended December 31, 1998. This
discussion should be read in conjunction with the information contained in the
financial statements of the Company included elsewhere in this annual report.
All statements other than statements of historical fact included in this annual
report, 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.
(b) GENERAL
A key component of the Company's strategy is growth "through the drill
bit", with heavy emphasis on the exploration, exploitation and development
spending on projects in the Deepwater Gulf. This strategy is supported by a
capital expenditures plan which is expected to decrease in 1999 due to a
constrained capital environment and increase thereafter due to development
opportunities, subject to capital availability. The Company expects that a
combination of internally generated cash flows, borrowings against the Company's
Revolving Credit Facility and a short-term credit facility with an affiliate and
equity capital contributions will provide the capital resources to support the
Company's capital expenditure plan.
During 1998, the Company achieved the following in pursuit of its
growth strategy:
o Added proved reserves of 48 Bcfe, primarily as a result of
drilling three successful exploratory wells, including 1 in
the Deepwater Gulf, and acquiring an additional 30% working
interest in the "Pluto" Deepwater Gulf exploitation project
(see page 7 for additional information regarding the "Pluto"
project).
o Increased its prospect inventory, adding 20 new blocks in the
Gulf of Mexico for a total of 87 undeveloped blocks, including
47 blocks in the Deepwater Gulf covering 22 prospects.
Included in the new prospects added during 1998 were six large
prospects, success on any one of which the Company believes
would significantly increase the proved reserves and value of
the Company. As a result of arrangements made with industry
partners, most of the Company's share of exploratory drilling
costs for three of these large prospects, two of which the
Company anticipates will be drilled in 1999 and one in 2000,
will be paid by these partners.
A key to the Company's growth strategy is the availability of capital.
During 1998, the Company's capital expenditures of $141.9 million were funded by
internally generated cash flow, borrowing against the Revolving Credit Facility
and equity contributions from existing shareholders. Access to additional debt
or equity capital has proven difficult for independent oil and gas companies in
general and for the Company. Accordingly, in 1999 the Company is pursuing a
flexible capital expenditures plan and expects capital expenditures to be in the
$40 to $60 million range, depending on changes in the amount of internally
generated cash and access to other sources of capital during the year.
The Company expects to fund its 1999 activities with a combination of
cash flow from operations, borrowings against its Revolving Credit Facility and
a short-term credit facility with an affiliate, and equity contributions from
its parent company. In support of this plan, a credit facility between Mariner's
parent company, Mariner Energy LLC, and Enron Capital & Trade Resources Corp.
was increased from $25 million to $50 million in early 1999. The maturity of
this facility was subsequently extended from April 30, 1999 to April 30, 2000.
This additional capital, net of related fees and interest, was contributed to
Mariner. In April 1999, a $25 million short-term credit facility, maturing
December 31, 1999, was established between the Company and Enron Capital & Trade
Resources Corp. to fund Mariner's capital needs for the remainder of 1999.
Including this additional capital, the Company believes its capital resources
will be sufficient to meet its capital requirements for 1999. However, there can
be no assurances that the Company's access to capital will be sufficient to meet
its needs for capital.
The Company's revenue, profitability, access to capital and future rate
of growth are heavily influenced by prevailing prices for natural gas, oil and
condensate, which prices are dependent upon numerous factors beyond the
Company's control, such as economic, political and regulatory developments.
Energy market prices have been extremely volatile in recent years. The Company
expects this volatility to continue. While the Company uses hedging transactions
from time
14
<PAGE> 17
to time to reduce its exposure to price fluctuations, a substantial extended
decline in oil and gas prices could have a material adverse effect on the
Company's financial position, results of operations, future exploration and
development plans and access to capital. Since December 31, 1998, oil prices
have increased. However, natural gas prices had decreased significantly over the
same period of time.
The Company uses the full cost method of accounting for its investments
in oil and natural gas properties. Under this methodology, all costs of
exploration, development and acquisition of oil and natural gas reserves are
capitalized into a "full cost pool" as incurred and properties in the pool are
depleted and charged to operations using the unit-of-production method based on
a ratio of current production to total proved oil and natural gas reserves. To
the extent that capitalized costs (net of accumulated depreciation, depletion,
and amortization) less deferred applicable taxes exceed the present value (using
a 10% discount rate) of estimated future net cash flows from proved oil and
natural gas reserves and the lower of cost or fair market value of unproved
properties, the excess costs are charged to operations. If a writedown were
required, it would result in a charge to earnings but would not have an impact
on cash flows. In 1998, the Company recorded a writedown of $50.8 million as a
result of the above described requirements. Decreased natural gas prices since
December 31, 1998 could require an additional writedown in 1999.
Another significant factor affecting the Company will be competition,
both from other sources of energy such as electricity, and from within the
industry. Many of the Company's larger competitors possess and employ financial
and personnel resources substantially greater than those available to Mariner,
which can be particularly important in Deepwater Gulf activities. 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 resources permit.
The Company's results of operations may vary significantly from year to
year based upon the factors discussed above and by other factors such as
exploratory and development drilling success, curtailments of production due to
workover and recompletion activities and the timing and amount of reimbursement
for overhead costs received by the Company from its co-owners. Therefore, the
results of any one year may not be indicative of future results.
(c) RESULTS OF OPERATIONS
The following table repeats certain operating information found in Item
2. of this report with respect to oil and natural gas production, average sales
price received and expenses per unit of production during the periods indicated.
<TABLE>
<CAPTION>
Year ended December 31,
----------------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Production:
Oil (Mbbls) ................................... 786 977 750
Natural gas (Mmcf) ............................ 19,477 18,004 20,429
Gas equivalent (Mmcfe) ........................ 24,193 23,866 24,929
Average sales prices including effects of hedging:
Oil (per Bbl) ................................. $ 12.80 $ 18.48 $ 18.04
Natural gas (per Mcf) ......................... 2.39 2.48 2.29
Gas equivalent (per Mcfe) ..................... 2.34 2.63 2.42
Expenses (per Mcfe):
Lease operating ............................... .41 .39 .36
General and administrative, net ............... .20 .13 .13
Depreciation, depletion and amortization
(excluding impairments) .................... 1.40 1.33 1.25
</TABLE>
15
<PAGE> 18
(i) 1998 COMPARED TO 1997
NET PRODUCTION increased 1% to 24.2 Bcfe in 1998 from 23.9 Bcfe in
1997. Natural gas production increased by 1.4 Bcf, or 8%, to 19.5 Bcf from 18.0
Bcf. Gas production from offshore properties decreased 0.3 Bcf or 3%, primarily
due to the natural production decline offset by the addition of two offshore
properties, while gas production from onshore properties increased 1.8 Bcf or
32%. The Company expects net production to increase by over 20% in 1999 compared
to 1998, as the result of the commencement of production from several 1996 and
1997 discoveries.
OIL AND GAS REVENUES for 1998 decreased by $6.1 million, or 10%,
compared to 1997 primarily due to decreased oil and gas sales prices partially
offset by the production increase described above. The average realized sales
price of natural gas decreased 4%, to $2.39 per Mcf in 1998 from $2.48 per Mcf
in 1997, while the average realized oil sales price decreased by 31% to $12.80
per Bbl in 1998 from $18.48 per Bbl in 1997.
HEDGING ACTIVITIES of the Company in 1998, with respect to the average
realized natural gas sales price received, increased by $0.12 per Mcf and
revenues by $2.3 million. In 1997, the Company's natural gas hedging activities
decreased the average realized natural gas sales price received by $0.22 per mcf
and revenues by $3.9 million. There were no hedging activities for oil in 1998.
The Company's hedging activities with respect to crude oil during 1997 reduced
the average sales price received by $0.63 per Bbl and revenues by $0.6 million.
During 1998, approximately 40% of the Company's equivalent production was
subject to hedge positions compared to 60% in 1997. See "Changes in Prices and
Hedging Activities" below for a summary of 1999 hedging positions as of the date
of this annual report.
LEASE OPERATING EXPENSES increased 5% to $9.9 million for 1998 from
$9.4 million for 1997. Lease operating expense per Mcfe increased to $0.41 per
Mcfe for 1998 from $0.39 per Mcfe for 1997, due primarily to higher fixed costs
associated with offshore properties.
DEPRECIATION, DEPLETION AND AMORTIZATION EXPENSE (DD&A) increased 7% to
$33.8 million for 1998, from $31.7 million for 1997, as a result of a 5%
increase in the unit-of-production depreciation, depletion and amortization rate
to $1.40 per Mcfe from $1.33 per Mcfe, due primarily to increased drilling and
completion costs, and a 1% increase in equivalent volumes produced.
IMPAIRMENT OF OIL AND GAS PROPERTIES of $50.8 million was recorded in
the fourth quarter of 1998 for a non-cash full cost ceiling test impairment
using prices in effect at December 31, 1998. During the first quarter of 1997, a
$28.5 million non-cash full cost ceiling writedown was also recorded due to low
commodity prices in effect as of the end of that period.
GENERAL AND ADMINISTRATIVE EXPENSES, which are net of overhead
reimbursements received by the Company from other working interest owners on
properties operated by the Company, increased 49% to $4.7 million in 1998, up
from $3.2 million in 1997, due primarily to higher employment levels to build
the necessary expertise for Deepwater Gulf projects and related office costs in
1998. General and administrative expense increased $0.07 per Mcfe from 1997 to
1998. In addition, during 1998 the Company recognized a one-time charge of $2.8
million relating to litigation expense.
INTEREST EXPENSE increased 26% to $13.4 million for 1998, from $10.6
million for 1997, due primarily to the 47% increase in average outstanding debt
to $151.4 million in 1998, from $103.2 million in 1997, which was partially
offset by a 10.1% decrease in the average interest rate paid on outstanding debt
to 9.33%, from 10.38%.
INCOME (LOSS) BEFORE INCOME TAXES decreased to a loss of $58.4 million
for 1998, from a loss of $20.2 million loss for 1997, as a result of the factors
described above.
(ii) 1997 COMPARED TO 1996
NET PRODUCTION decreased 4% to 23.9 Bcfe in 1997 from 24.9 Bcfe in
1996. Natural gas production decreased by 2.4 Bcf, or 12%, to 18.0 Bcf from 20.4
Bcf. Gas production from offshore properties decreased 3.8 Bcf or 23%, primarily
due to natural production decline, while gas production from onshore properties
increased 1.4 Bcf or 34%, due to the capacity expansion of the Sandy Lake
Central facility, which became operational in the first quarter of 1997. Oil and
condensate production increased by 227 Mbbls to 977 Mbbls from 750 Mbbls, also
due primarily to the expansion of the Sandy Lake Central facility, offset in
part by a decrease in other onshore oil production resulting from the sale of
non-core Permian Basin properties in early 1996.
OIL AND GAS REVENUES for 1997 increased by $2.4 million, or 4%,
compared to 1996. The increase was primarily the result of increased oil and gas
sales prices, offset in part by the production decrease described above. The
average
16
<PAGE> 19
realized sales price of natural gas increased 8%, to $2.48 per Mcf in 1997 from
$2.29 per Mcf in 1996, while the realized oil sales price increased by 2% to
$18.48 per Bbl in 1997 from $18.04 per Bbl in 1996.
HEDGING ACTIVITIES for 1997 reduced the average realized natural gas
sales price received by $0.22 per Mcf and revenues by $3.9 million. In 1996,
natural gas hedging activities decreased the average realized sales price
received by $0.18 per mcf and revenues by $3.7 million. Hedging activities of
crude oil during 1997 reduced the average sales price received by $0.63 per Bbl
and revenues by $0.6 million, compared with a reduction in the average realized
sales price of $2.55 per Bbl and revenues of $1.9 million during 1996. During
1997, approximately 60% of the Company's equivalent production was subject to
hedge positions compared to 64% in 1996. See "Changes in Prices and Hedging
Activities" below for a summary of 1998 hedging positions as of the date of this
annual report.
LEASE OPERATING EXPENSES increased 6% to $9.4 million for 1997, from
$8.9 million for 1996. Lease operating expense per Mcfe increased to $0.39 for
1997 from $0.36 for 1996, due primarily to relatively fixed operating expenses
spread over reduced production volumes.
DEPRECIATION, DEPLETION AND AMORTIZATION EXPENSE (DD&A) increased 2% to
$31.7 million for 1997, from $31.1 million for 1996, as a result of a 6%
increase in the unit-of-production depreciation, depletion and amortization rate
to $1.33 per Mcfe from $1.25 per Mcfe, due primarily to increased drilling and
completion costs, partially offset by a 4% reduction in equivalent volumes
produced.
IMPAIRMENT OF OIL AND GAS PROPERTIES of $28.5 million was recorded in
the first quarter of 1997 for a 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 more conservatively state the book value of its assets. During the second
quarter of 1996, a $22.5 million full cost ceiling writedown was recorded in
conjunction with Mariner Holdings' acquisition of the Company.
GENERAL AND ADMINISTRATIVE EXPENSES, which are net of overhead
reimbursements received by the Company from other working interest owners on
properties operated by the Company, increased 3% to $3.2 million in 1997, up
from $3.1 million in 1996, due primarily to higher employment and office costs
in 1997 which were almost entirely offset by increased overhead reimbursements
during 1997. Accordingly, there was no change in general and administrative
expense per Mcfe of $0.13 for both 1997 and 1996.
INTEREST EXPENSE decreased 5% to $10.6 million for 1997, from $11.1
million for 1996, due primarily to the 9% decrease in average outstanding debt
to $103.2 million in 1997, from $113.2 million in 1996, which decrease was
partially offset by a 7% increase in the average interest rate paid on
outstanding debt to 10.38%, from 9.68%. During 1996, the Company wrote off $2.4
million of 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 83% to $0.5 million for 1997, from $2.7 million for 1996, due
primarily to the retirement of receivables from affiliates resulting from the
acquisition by Mariner Holdings of the stock of the Company.
INCOME (LOSS) BEFORE INCOME TAXES decreased to a loss of $20.2 million
for 1997, from a $16.0 million loss for 1996, as a result of the factors
described above.
(d) LIQUIDITY AND CAPITAL RESOURCES
(i) CASH FLOWS
Liquidity is a company's ability to generate cash to meet its needs for
cash. As of December 31, 1998, the Company had a working capital deficit of
approximately $84.1 million, compared with a working capital deficit of $8.6
million as of December 31, 1997. The increased working capital deficit was
primarily a result of the classification of the Company's Revolving Credit
Facility as a current liability, which had a balance of $53.4 million at
December 31, 1998 and which matures October 1, 1999. The Company expects that
this facility will be extended, which extension would result in a
reclassification of the balance due thereunder to long-term debt. However, there
can be no assurance to that effect. The working capital deficit also was
increased as a result of increased accounts payable at year-end compared to the
prior year due to a higher level of drilling and completion activity. In
addition, the Company will require a significant amount of capital to develop
its properties in order to achieve higher levels of production and cash flow. To
obtain the necessary funds to reduce the working capital deficit and continue
its planned capital expenditure program, in April 1999, the
17
<PAGE> 20
Company established a $25 million short-term credit facility with Enron Capital
& Trade Resources Corp. There can be no assurances, however, that the Company's
access to capital will be sufficient to meets its needs for capital.
Primary sources of cash during the three year period ended December 31,
1998 were funds generated from operations, proceeds from the sale of oil and gas
properties, proceeds from the issuance of notes, bank borrowings and capital
contributions by the Company's former and present parent companies. Primary uses
of cash for the same period were funds used in exploration and production
activities, repayment of notes and bank debt, and the purchase of Hardy Oil &
Gas USA, Inc.
The Company had a net cash outflow of $9.1 million in 1998, compared to
a net cash outflow of $1.7 million in 1997 and a net cash inflow of $10.8
million in 1996. A discussion of the major components of cash flows for these
years follows.
<TABLE>
<CAPTION>
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Cash flows provided by operating activities (in millions)....... $ 39.6 $ 52.9 $ 44.3
</TABLE>
Cash flows provided by operating activities in 1998 decreased by $13.3
million compared to 1997 primarily due to decreased oil and gas prices. Cash
flows from operating activities in 1997 increased by $8.6 million from 1996
primarily due to increased oil and gas prices and changes in working capital.
<TABLE>
<CAPTION>
1998 1997 1996
------ ------ -------
<S> <C> <C> <C>
Cash flows used in investing activities (in millions)............. $ 141.9 $ 68.9 $ 221.8
</TABLE>
Cash flows used in investing activities in 1998 increased by $73
million compared to 1997 primarily due to increased capital expenditures to
acquire leasehold inventory. Cash flows used in investing activities in 1997
decreased by $152.9 million compared to 1996 primarily because in 1996, cash
was used to fund the acquisition of Hardy Oil & Gas USA, Inc. for $184.7
million. This decrease was partially offset by an increase of $22.6 million for
capital expenditures for oil and gas properties in 1997 over 1996 and $7.5
million lower proceeds from the sale of oil and gas properties in 1997 from
1996.
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Cash flows provided by financing activities (in millions)....... $ 93.2 $ 14.3 $ 188.3
</TABLE>
Cash flows provided by financing activities in 1998 increased by $78.9
million as compared to 1997 due to the Company receiving approximately $28.8
million in equity contributions and $64.4 million from its revolving credit
facilities. Cash flows provided by financing activities in 1997 decreased by
$174.0 million compared to 1996 primarily because in 1996, cash was provided by
$92.2 million of equity contributed by the Company's shareholders and the
issuance of $99.5 million of senior subordinated notes, offset in part by
proceeds of borrowings from the revolving credit facility in 1997 of $14.0
million.
(ii) CHANGES IN PRICES AND HEDGING ACTIVITIES
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
also limits 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.
18
<PAGE> 21
<TABLE>
<CAPTION>
Year Ended December 31
--------------------------------
1998 1997 1996
------- -------- --------
<S> <C> <C> <C>
Increase (decrease) in natural gas sales (in thousands)......... $ 2,337 $(3,931) $(3,701)
Increase (decrease) in oil sales (in thousands)................. -- (614) (1,912)
Effect of hedging transactions on average gas sales price
(per Mcf)................................................. 0.12 (0.22) (0.18)
Effect of hedging transactions on average oil sales price
(per Bbl)................................................. -- (0.63) (2.55)
</TABLE>
Subsequent to December 31, 1998, the Company entered into a commodity
price hedging contract under a costless collar covering 60,000 Mmbtu per day of
natural gas production with a floor price of $1.85 per Mmbtu and a ceiling price
of $2.05 per Mmbtu for the period beginning April 1, 1999 to October 31, 1999.
This agreement can be extended for the same daily volume through March 2000 for
a floor price of $2.00 per Mmbtu and a ceiling of $2.70 per Mmbtu at the option
of the counterparty to the transaction. Subsequent to December 31, 1998, the
Company entered into a long-term hedging agreement for a three-year period from
November 1, 1999 through October 31, 2002. Average volumes hedged by year are
approximately 44,000, 30,000, 12,000 and 6,000 Mmbtu per day for 1999, 2000,
2001, and 2002, respectively, at a price of $2.18 per Mmbtu. In April 1999, the
Company entered into a hedging agreement covering 600 barrels of oil per day for
the period May 1, 1999 through December 31, 1999 at a price of $16.32 per Bbl.
Hedging arrangements for 1999 cover approximately 53% of the Company's
anticipated equivalent production for the year. Hedging arrangements for 2000,
2001 and 2002 cover approximately 30%, 10% and 3% of the Company's anticipated
equivalent production, respectively.
(iii) CAPITAL EXPENDITURES AND CAPITAL RESOURCES
The following table presents major components of capital and
exploration expenditures for each of the three years ended December 31,
respectively.
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Capital Expenditures (in millions):
Leasehold acquisition-unproved properties $ 43.1 $ 21.6 $ 14.3
Leasehold acquisition-proved properties -- 3.2 --
Oil and gas exploration 35.7 27.4 22.7
Oil and gas development and other 63.1 16.7 9.6
-------- -------- --------
Total capital expenditures $ 141.9 $ 68.9 $ 46.6
======== ======== ========
</TABLE>
Total capital expenditures for 1998 were $73.0 million more than 1997.
The increase was due primarily to (1) the Company's continued focus on building
and evaluating its exploration and exploitation prospect inventory, as evidenced
by the increase in both leasehold acquisition of unproved properties and oil and
gas exploration and (2) increased development-related spending, both to acquire
additional interests in existing proved properties and to develop successful
exploratory prospects.
The Company's board of directors has approved a flexible 1999 capital
expenditures budget of $40 to $60 million depending on the availability of
capital. This budget represents a significant decrease from capital expenditures
of $141.9 million in 1998. The goal of this flexible plan is to maximize the
opportunity for growth in proved reserves and related value while conserving
cash. Focal points of this expenditure plan are to:
o Bring development projects on production to increase
production and cash flow, including the Dulcimer exploration
success and the Pluto exploitation project, both in the
Deepwater Gulf.
o Extend and enlarge the Company's successful Sandy Lake field.
o Evaluate five to six exploration projects while exposing
minimal Company capital, including two large Deepwater
prospects on which the Company's share of exploratory drilling
costs are covered by industry partners.
o Appraise the early 1999 Deepwater Gulf exploratory discovery
at Mississippi Canyon block 305 in which Mariner has a 25%
working interest.
o Acquire several new high quality prospects in the Deepwater
Gulf via participation in 1999 lease sales.
To increase the probability of achieving this plan, the Company
anticipates using other steps to generate access to additional capital as may be
needed, such as selling a package of part of its drilling prospects and/or
reducing the Company's share of other successful projects such as Pluto.
19
<PAGE> 22
Capital spending plans will be re-evaluated throughout the year. 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. The planned levels of capital expenditures could be reduced if the
Company experiences lower than anticipated net cash from operations or other
liquidity needs or could be increased if the Company experiences increased cash
flow or access to additional sources of capital. Though the 1999 capital
expenditures plan does not include any acquisitions, the Company expects to
pursue acquisition opportunities selectively looking for proved reserves where
it believes significant operating improvement or exploration potential exists,
provided it has access to capital.
On March 17, 1999, the Company participated in a federal offshore Gulf
of Mexico lease sale in which it was the apparent high bidder on three blocks in
the Deepwater Gulf. Upon award of the leases, the Company would have a 100%
working interest in two blocks and a 50% working interest in the third block.
The anticipated net cost to the Company for these blocks is approximately $9
million.
The Company has used its Revolving Credit Facility with a group of
banks led by Bank of America (see Note 4 to the Financial Statements) to fund a
portion of its expenditures. The Revolving Credit Facility, which provides for a
maximum $150 million revolving credit loan, had a borrowing base of $60.0
million as of December 31, 1998, and $53.4 million of debt was outstanding as of
that date. The borrowing base is subject to semi-annual redetermination as of
June 30 and December 31 of each year, and one additional redetermination per
year may be requested by either the Bank Group or the Company. In April 1999,
the Company pledged certain mineral interests to secure the Revolving Credit
Facility. The borrowing under the Revolving Credit Facility matures on
October 1, 1999. The semi-annual borrowing base redetermination as of
December 31, 1998 was in progress as of the date of this annual report. While
the Company expects to extend this Facility on a long-term basis at its
current level, there can be no assurance that either the borrowing base will
remain unchanged or that the facility will be extended on a long-term basis.
In April 1999, the Company established a $25 million borrowing-based,
short-term credit facility with Enron Capital & Trade Resources Corp. to obtain
funds needed to execute the Company's 1999 capital expenditure program and for
short-term working capital needs. This facility will mature on December 31, 1999
and is expected to be repaid from internally-generated cash flows.
Equity capital has been a significant source of capital for the
Company. In June 1998, the Company's parent Mariner Holdings, Inc., reached an
agreement in which management shareholders and an affiliate of Enron Corp.
agreed to contribute approximately $28.8 million of net equity capital, which
capital was used to supplement funding of the Company's 1998 capital
expenditure plan. In September 1998, Mariner's parent company entered into a
$25 million credit facility with Enron Capital & Trade Resources Corp. Proceeds
from that credit facility, net of related transaction fees and interest, were
provided to the Company in the form of an equity contribution. At December 31,
1998 the Company used push down accounting treatment and reported this
contribution as debt. Subsequent to December 31, 1998, this facility was
increased to $50 million and the Company has reclassified the entire net
proceeds to equity contribution. See further discussion of this transaction
under Item 13. "Certain Relationships and Related Transactions".
The Company expects to fund its 1999 activities with a combination of
cash flow from operations, borrowings against its Revolving Credit Facility and
a short-term credit facility with an affiliate, and equity contributions from
its parent company. However, there can be no assurance that the Company will
realize its anticipated growth, that the Company's business will generate
sufficient cash flow from operations or that future borrowings or equity capital
will be available in an amount sufficient to enable the Company to service its
indebtedness or make necessary capital expenditures.
(e) YEAR 2000 ISSUES
Year 2000 issues result from the inability of computer programs or
computerized equipment to accurately calculate, store or use a date subsequent
to December 31, 1999. The erroneous date can be interpreted in a number of
different ways; typically the year 2000 is represented as the year 1900. This
could result in a system failure or miscalculations causing disruptions of
operations, including, among other things, a temporary inability to process
transactions, send invoices or engage in similar normal business transactions.
The Company has reviewed the majority of its primary Information
Technology ("IT") systems with the vendors from which the systems were purchased
and believes these systems were Year 2000 compliant as of December 31, 1998. The
Company is also reviewing its non-IT systems (such as technology embedded within
its operational equipment) and any material third-party relationships for Year
2000 problems that could affect the Company's operations. A consulting firm has
been engaged to assist in this effort. The Company expects to complete this
review by mid-1999. The Company believes the potential impact, if any, of these
IT, non-IT or third-party systems not being Year 2000 compliant should not
20
<PAGE> 23
materially impact the Company's ability to continue exploration, drilling,
production and sales activities. Based on reviews conducted to date and other
preliminary information, costs of addressing potential problems are not expected
to have a material adverse impact on the Company's financial position, results
of operations, or cash flow in future periods. Cost to date has been immaterial.
The Company relies on other producers and transmission companies to
conduct its basic operations. Should any third party with which the Company has
a material relationship fail, the impact could be a significant challenge to the
Company's ability to perform its basic operations. Examples of such changes are
an inability to transport production to market or an inability to continue
drilling activities. As part of the above-mentioned review, the Company will
address the most reasonably likely worst-case Year 2000 scenarios and potential
costs. The Company will also develop a Year 2000 contingency plan for unknown
events. The Company is scheduled to have these plans completed by June 1999.
Statements in this section are intended to be and are hereby designated
"Year 2000 Readiness Disclosure" within the meaning of the Year 2000 Information
and Readiness Disclosure Act.
(f) MARKET RISK DISCLOSURE
See Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations - (d) (ii) Changes in Prices and Hedging Activities.
21
<PAGE> 24
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Financial Statements
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report.............................................................................23
Balance Sheets at December 31, 1998 and 1997 (Mariner Energy, Inc.)......................................24
Statements of Operations for the years ended December 31, 1998 and
1997, the nine months ended December 31, 1996 (Mariner Energy,
Inc.), and the three months ended March 31, 1996 (Predecessor Company).............................25
Statements of Stockholder's Equity for the year ended December 31, 1998 and 1997,
the nine months ended December 31, 1996 (Mariner Energy, Inc.), and the three
months ended March 31, 1996 (Predecessor Company)..................................................26
Statements of Cash Flows for the year ended December 31, 1998 and 1997,
the nine months ended December 31, 1996 (Mariner Energy, Inc.),
and the three months ended March 31, 1996 (Predecessor Company)....................................27
Notes to Financial Statements............................................................................28
</TABLE>
22
<PAGE> 25
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholder
Mariner Energy, Inc.
Houston, Texas
We have audited the accompanying financial statements of Mariner Energy, Inc.
(the "Company"), formerly Hardy Oil & Gas USA Inc. (the"Predecessor Company"),
as listed in the Index to Financial Statements in Item 8. 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 audits 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, 1998 and 1997, and the results of its operations and cash flows for
the years ended December 31, 1998 and 1997, the nine months ended December 31,
1996, and the three months ended March 31, 1996, in conformity with generally
accepted accounting principles.
/s/ DELOITTE & TOUCHE LLP
DELOITTE & TOUCHE LLP
Houston, Texas
April 14, 1999
23
<PAGE> 26
MARINER ENERGY, INC.
BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
December 31, December 31,
1998 1997
------------ ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 2 $ 9,131
Receivables 16,007 18,585
Prepaid expenses and other 7,234 3,628
------------ ------------
Total current assets 23,243 31,344
------------ ------------
PROPERTY AND EQUIPMENT:
Oil and gas properties, at full cost:
Proved 316,056 222,829
Unproved, not subject to amortization 84,076 36,526
------------ ------------
Total 400,132 259,355
Other property and equipment 3,300 2,222
Accumulated depreciation, depletion and amortization (167,846) (84,236)
------------ ------------
Total property and equipment, net 235,586 177,341
------------ ------------
OTHER ASSETS, Net of Amortization 3,513 3,892
------------ ------------
TOTAL ASSETS $ 262,342 $ 212,577
============ ============
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Accounts payable $ 20,375 $ 5,556
Accrued liabilities 29,082 29,908
Accrued interest 4,503 4,443
Revolving credit facility 53,400 --
------------ ------------
Total current liabilities 107,360 39,907
------------ ------------
ACCRUAL FOR FUTURE ABANDONMENT COSTS 2,824 1,922
LONG-TERM DEBT:
Subordinated notes 99,624 99,574
Revolving credit facility -- 14,000
Affiliated credit facility 25,000 --
------------ ------------
Total long-term debt 124,624 113,574
------------ ------------
COMMITMENTS AND CONTINGENCIES (Note 7)
STOCKHOLDER'S EQUITY:
Common stock, $1 par value; 1,000 shares authorized,
1,000 shares were issued and outstanding 1 1
Additional paid-in-capital 124,856 96,075
Accumulated deficit (97,323) (38,902)
------------ ------------
Total stockholder's equity 27,534 57,174
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $ 262,342 $ 212,577
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements
24
<PAGE> 27
MARINER ENERGY, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Predecessor
Company
------------
Year Year Nine Months Three Months
Ended Ended Ended Ended
December 31, December 31, December 31, March 31,
1998 1997 1996 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
REVENUES:
Oil sales $ 10,066 $ 18,061 $ 9,897 $ 3,632
Gas sales 46,624 44,710 37,182 9,677
---------- ---------- ---------- ----------
Total revenues 56,690 62,771 47,079 13,309
---------- ---------- ---------- ----------
COSTS AND EXPENSES:
Lease operating expenses 9,858 9,376 6,495 2,403
Depreciation, depletion and amortization 33,833 31,719 24,747 6,309
Impairment of oil and gas properties 50,800 28,514 22,500 --
Provision for litigation 2,800 -- -- --
General and administrative expenses 4,749 3,195 2,406 712
---------- ---------- ---------- ----------
Total costs and expenses 102,040 72,804 56,148 9,424
---------- ---------- ---------- ----------
OPERATING INCOME (LOSS) (45,350) (10,033) (9,069) 3,885
INTEREST:
Related party income -- -- -- 57
Other income 313 467 515 2,110
Related party expense (993) -- -- (381)
Other expense (12,391) (10,644) (7,746) (3,010)
Write-off of Bridge Loan fees -- -- (2,392) --
---------- ---------- ---------- ----------
INCOME (LOSS) BEFORE INCOME TAXES (58,421) (20,210) (18,692) 2,661
PROVISION FOR INCOME TAXES -- -- -- --
---------- ---------- ---------- ----------
NET INCOME (LOSS) $ (58,421) $ (20,210) $ (18,692) $ 2,661
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements
25
<PAGE> 28
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 December 31, 1995 1,000 $ 1 $ 81,094 $ (11,837) $ 69,258
Net income -- -- -- 2,661 2,661
---------- ---------- ---------- ---------- ----------
Balance at March 31, 1996 1,000 1 81,094 (9,176) 71,919
POST ACQUISITION:
Adjustments due to Acquisition -- -- 14,650 9,176 23,826
Net loss -- -- -- (18,692) (18,692)
---------- ---------- ---------- ---------- ----------
Balance at December 31, 1996 1,000 1 95,744 (18,692) 77,053
Capital contribution -- -- 331 -- 331
Net loss -- -- -- (20,210) (20,210)
---------- ---------- ---------- ---------- ----------
Balance at December 31, 1997 1,000 1 96,075 (38,902) 57,174
Capital contribution -- proceeds
from the sale of common
stock of Parent -- -- 28,781 -- 28,781
Net loss -- -- -- (58,421) (58,421)
---------- ---------- ---------- ---------- ----------
Balance at December 31, 1998 1,000 $ 1 $ 124,856 $ (97,323) $ 27,534
========== ========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements
26
<PAGE> 29
MARINER ENERGY, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Predecessor
Company
------------
Year Year Nine Months Three Months
Ended Ended Ended Ended
December 31, December 31, December 31, March 31,
1998 1997 1996 1996
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $ (58,421) $ (20,210) $ (18,692) $ 2,661
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation, depletion and amortization 33,762 32,588 27,706 6,437
Impairment of oil and gas properties 50,800 28,514 22,500 --
Provision for litigation 2,800 -- -- --
Imputed interest -- -- 1,322 --
Changes in operating assets and liabilities:
Receivables 2,578 (5,014) (769) (1,873)
Receivables from affiliates -- -- -- (2,109)
Other current assets (3,606) (3,210) (317) (307)
Other assets 379 (483) -- --
Accounts payable and accrued liabilities 11,253 20,693 6,955 832
Payables to affiliates -- -- -- (11)
---------- ---------- ---------- ----------
Net cash provided by operating activities 39,545 52,878 38,705 5,630
---------- ---------- ---------- ----------
INVESTING ACTIVITIES:
Purchase of Predecessor Company, net of cash of $5,438 -- -- (184,742) --
Additions to oil and gas properties (140,777) (68,317) (38,236) (7,495)
Additions to other property and equipment (1,078) (551) (741) (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 (141,855) (68,868) (216,191) (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 -- (29) (3,961) --
Proceeds from Subordinated notes -- -- 99,506 --
Proceeds from long-term debt -- -- 92,000 --
Proceeds from revolving credit facility, net 39,400 14,000 50,000 --
Proceeds from affiliate credit facility 25,000 -- -- --
Additional capital contributed by Parent -- -- 92,150 --
Proceeds from sale of common stock of parent 28,781 331 610 --
---------- ---------- ---------- ----------
Net cash provided by financing activities 93,181 14,302 188,305 --
---------- ---------- ---------- ----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (9,129) (1,688) 10,819 (18)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 9,131 10,819 -- 5,456
---------- ---------- ---------- ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 2 $ 9,131 $ 10,819 $ 5,438
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements
27
<PAGE> 30
MARINER ENERGY, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION -- 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
("Hardy plc"), a public company incorporated in the United Kingdom. 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"), together with members of management of the
Predecessor Company, formed Mariner Holdings, Inc. ("Mariner Holdings"), which
then purchased from Hardy Holdings Inc. all of the issued and outstanding stock
of the Predecessor Company for a purchase price of approximately $185.5 million
effective April 1, 1996 for financial accounting purposes (the "Acquisition").
See Notes 2 and 3. 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. (the
"Company"). Additionally, ECT and Mariner Holdings entered into agreements with
certain members of the Predecessor Company's management providing for a
continued role of management in the Company after the Acquisition. 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 Texas and Louisiana.
EXCHANGE OFFERING -- In October 1998 the Company, JEDI and other
shareholders exchanged all of their common shares of Mariner Holdings for common
shares of Mariner Energy LLC. As of December 31, 1998 Mariner Energy LLC owns
100% of Mariner Holdings.
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.
RECEIVABLES -- Substantially all of the Company's receivables 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, permanent impairments of oil and gas properties of
approximately $50,800,000, $28,514,000 and $22,500,000 were recorded during
1998, 1997 and 1996, respectively. Subsequent to year-end, natural gas prices
have declined. This decline could result in an additional writedown in 1999.
Unproved properties are reviewed for impairment quarterly.
OTHER PROPERTY AND EQUIPMENT -- Depreciation of other 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 Predecessor Company's taxable income was and the
Company's taxable income is included in a consolidated United States income tax
return with Hardy Holdings Inc. and Mariner Holdings Inc., respectively. 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 using an asset and liability approach 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 bases of assets and liabilities (see Note 8).
28
<PAGE> 31
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 were approximately $1,702,000, $729,000 and $449,000 for the years ended
December 31, 1998, 1997 and 1996, 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.
HEDGING PROGRAM -- The Company utilizes derivative instruments in the
form of natural gas and crude oil price swap and price collar agreements in
order to manage price risk associated with future crude oil and natural gas
production and fixed-price crude oil and natural gas purchase and sale
commitments. Such agreements are accounted for as hedges using the deferral
method of accounting. Gains and losses resulting from these transactions are
deferred and included in other assets or accrued liabilities, as appropriate,
until recognized as operating income in the Company's Consolidated Statement of
Operations as the physical production required by the contracts is delivered.
The net cash flows related to any recognized gains or losses associated
with these hedges are reported as cash flows from operations. If the hedge is
terminated prior to expected maturity, gains or losses are deferred and included
in income in the same period as the physical production required by the
contracts is delivered.
The conditions to be met for a derivative instrument to qualify as a
hedge are the following: (i) the item to be hedged exposes the Company to price
risk; (ii) the derivative reduces the risk exposure and is designated as a hedge
at the time the derivative contract is entered into; and (iii) at the inception
of the hedge and throughout the hedge period there is a high correlation of
changes in the market value of the derivative instrument and the fair value of
the underlying item being hedged.
When the designated item associated with a derivative instrument
matures, is sold, extinguished or terminated, derivative gains or losses are
recognized as part of the gain or loss on sale or settlement of the underlying
item. When a derivative instrument is associated with an anticipated transaction
that is no longer expected to occur or if correlation no longer exists, the gain
or loss on the derivative is recognized in income to the extent the future
results have not been offset by the effects of price or interest rate changes on
the hedged item since the inception of the hedge.
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. At December 31, 1998
and 1997, the estimated fair value of the Company's Senior Subordinated Notes
was approximately $100,000,000. The estimated fair value was determined based on
borrowing rates available at December 31, 1998 and 1997, respectively, for debt
with similar terms and maturities. 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.
MAJOR CUSTOMERS -- During the year ended December 31, 1998, sales of
oil and gas to four purchasers, including an affiliate, accounted for 29%, 16%,
15% and 10% of total revenues. During the year ended December 31, 1997, sales of
oil and gas to four purchasers accounted for 19%, 19%, 18% and 14% of total
revenues. During the year ended December 31, 1996, sales of oil and gas to four
purchasers accounted for 15%, 13%, 13% and 10% of total revenues.
29
<PAGE> 32
MARINER ENERGY, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Management believes that the loss of any of these purchasers would not have a
material impact on the Company's financial condition or results of operations.
2. THE ACQUISITION
Effective April 1, 1996, Mariner Holdings, Inc. acquired all the
capital stock of the Company from Hardy Holdings Inc. for an aggregate purchase
price of approximately $185.5 million, including $14.5 for net working capital.
In connection with the Acquisition, substantial intercompany indebtedness and
receivables and third-party indebtedness of the Company were eliminated.
The sources and uses of funds related to financing the Acquisition (See
Note 1) were as follows:
<TABLE>
Sources of Funds
(in millions)
<S> <C>
Bridge loan provided by JEDI(1)....................................................... $ 92.0
Common stock purchased by JEDI(2)..................................................... 95.0
Working capital provided by the Company............................................... 6.0
------
Total........................................................................... $193.0
======
Uses of Funds
(in millions)
Acquisition purchase price............................................................. $185.5
Acquisition costs and other expenses(3)................................................ 7.5
------
Total............................................................................ $193.0
======
</TABLE>
(1) The JEDI Bridge Loan (see Note 4) 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
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 (See Note 4).
The Acquisition was 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.
30
<PAGE> 33
MARINER ENERGY, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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 was a non-cash charge and
was included in the results of operations for the nine months ended December 31,
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>
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:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1996
-------
<S> <C>
Revenues...................... $62,300
Net income (loss)............ $ 6,511
</TABLE>
3. RELATED-PARTY TRANSACTIONS
RECEIVABLES FROM AFFILIATES -- Prior to the management buyout, the
Company had four lending facilities with Hardy plc. These facilities earned
interest income of approximately $2,110,000 for the three month period ending
March 31, 1996.
DEBT TO AFFILIATE -- Prior to the management buyout, the Company had
one loan facility outstanding with Hardy plc. The Company incurred approximately
$381,000 of interest expense relating to this debt for the three month period
ending March 31, 1996.
SALES TO AFFILIATES -- For the years ending December 31, 1998, 1997 and
1996, sales to affiliates were approximately $8.9 million, $13.0 million and
$29,000, respectively.
GENERAL AND ADMINISTRATIVE EXPENSES -- Prior to April 1, 1996, the
Company paid an affiliate for various administrative support services. Included
in general and administrative expenses was approximately $29,000 for the three
months ended March 31, 1996, for such services. In management's opinion, such
allocated expenses reasonably represented expenses incurred by the affiliate on
behalf of the Company.
AFFILIATE TRANSACTIONS SUBSEQUENT TO THE ACQUISITION -- Enron
Corp. ("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, six 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
31
<PAGE> 34
MARINER ENERGY, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
industry and are, therefore, competitors of the Company. In addition, ECT and
JEDI have provided, and may in the future provide, and ECT Securities Limited
Partnership 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 shareholders of Mariner Energy LLC 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. Certain of the
Company's debt instruments restrict the Company's ability to engage in
transaction with its affiliates, but those restrictions are subject to
significant exceptions. The Company believes that its current agreements with
Enron and its affiliates are, and anticipates 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.
4. LONG-TERM DEBT
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. 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 (see below) and $42 million from the issuance of the 10 1/2% Senior
Subordinated Notes (see below) 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 nine months ended December 31, 1996.
REVOLVING CREDIT FACILITY -- On June 28, 1996, the Company entered into
an unsecured revolving credit facility (the "Revolving Credit Facility") with
Bank of America as agent for a group of lenders (the "Lenders"). On that date,
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 Company's 10 1/2%
Senior Subordinated Notes.
The Revolving Credit Facility provides for a maximum $150 million
revolving credit loan which matures on October 1, 1999. The borrowing base under
the Revolving Credit Facility is currently $60 million and is subject to
periodic redetermination. The Revolving Credit Facility, with an outstanding
balance of $53.4 million at December 31, 1998, is classified as a current
liability. The October 1, 1999 maturity date on this liability is expected to be
extended in excess of one year as part of its semi-annual redetermination and
would be reclassified to a non-current liability at that time. In April 1999,
the Company pledged certain mineral interests to secure the Revolving Credit
Facility.
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 or (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.
32
<PAGE> 35
MARINER ENERGY, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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 specified relationships
between cash flow and fixed charges and cash flow and interest on indebtedness.
As of December 31, 1998, the Company was in compliance with all such
requirements.
AFFILIATE CREDIT FACILITY -- Mariner Holdings., the Company's parent
and later assigned to Mariner Energy LLC, entered into an agreement with Enron
Capital & Trade Resources Corp. to provide a $25 million unsecured, subordinated
credit facility (the "Facility"), the funds from which were contributed to the
Company. The Facility accrues interest at an annual rate of LIBOR plus 2.5% and
requires a structuring fee of 4% of the borrowed amount. The Facility requires
that a portion of the proceeds of any private or public equity or debt offering
by the Company's parent be applied to repay amounts outstanding under the
Facility. The terms of the Facility required that if financing did not become
available by March 1, 1999, up to $25 million of the Facility would be converted
to equity. Interest expense recorded as a result of this Facility for the year
ended December 31, 1998, was approximately $993,000. As of December 31, 1998 the
Company had applied push down accounting treatment and reported the Mariner
Energy LLC debt as a liability of the Company. Subsequent to December 31, 1998,
the Facility was amended to (i) increase the size of the Facility to $50
million, (ii) extend the maturity to April 30, 2000, (iii) accrue interest at an
annual rate of LIBOR plus 4.5%, and (iv) provide for an optional conversion to
equity of Mariner Energy LLC by ECT.
SHORT-TERM CREDIT FACILITY WITH ECT -- In April 1999, the Company
established a $25 million short-term credit facility with Enron Capital & Trade
Resources Corp. to obtain funds needed to execute the Company's 1999 capital
expenditure program and for short-term working capital needs. The borrowing base
under the short-term credit facility is currently $25 million and is subject to
periodic redetermination. The facility accrues interest at an annual rate of
LIBOR plus 2.5% and requires a structuring fee of 1% of the committed amount.
The facility will mature on December 31, 1999 and is expected to be repaid from
internally-generated cash flows.
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, (the "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 incurred in the Acquisition, and
(ii) repay the Revolving Credit Facility. The Notes bear interest at 10 1/2%
payable semiannually in arrears on February 1 and August 1 of each year. The
Notes are unsecured obligations of the Company, and are subordinated in right of
payment to all senior debt (as defined in the indenture governing the Notes) of
the Company, including indebtedness under the Revolving Credit Facility.
The indenture pursuant to which the 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. As of December 31, 1998, the Company was in compliance with all
such requirements.
The 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 Notes may 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 Notes are issued), each holder of the 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.
As required in the indenture, in January 1997 the Company exchanged all
of the Notes for Series B notes with substantially the same terms as to
principal amount, interest rate, maturity and redemption rights. If the exchange
offer had not been consummated, the interest rate on the Notes would have
increased by 0.5% per annum.
33
<PAGE> 36
MARINER ENERGY, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
5. STOCKHOLDER'S EQUITY
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 shares
that may be issued under the Plan was 142,800. In June 1998, the Plan was
amended to increase the number of eligible shares to be issued to 202,800. In
September 1998, concurrent with the exchange of each common share of Mariner
Holdings for twelve common shares of Mariner Energy LLC the maximum number of
shares of common shares that can be issued under the Plan was 2,433,600.
At December 31, 1998, options (the "Options") to purchase 2,011,188
shares had been granted at exercise prices ranging from $8.33 to $14.58 per
share. The Options generally become exercisable as to one-fifth to one-third on
each of the first three or five anniversaries of the date of grant. The Options
expire from seven years to ten years after the date of grant.
The Company applies APB Opinion 25 and related interpretations in
accounting for the Plan. Accordingly, no compensation cost has been recognized
for the Plan. Had compensation cost for the Company's Plan been determined based
on the fair value at the grant date for awards under the Plan consistent with
the method of Financial Accounting Standards Board Statement 123 ("FAS 123"),
the Company's net loss for the year ended December 31, 1998, 1997 and for the
nine months ended December 31, 1996 would have increased $912,000, $777,000 and
$356,000, respectively to $59,333,000, $20,987,000 and $19,048,000 respectively.
The effects of applying FAS 123 in this pro forma disclosure are not indicative
of future amounts. The fair value of each option grant is estimated on the date
of grant using a present value calculation, risk free interest of 4.6%, no
dividends and expected life of 5 years. Stock options available for future grant
amounted to 422,412 shares at December 31, 1998. Exercisable stock options
amounted to 644,292 shares at December 31, 1998.
EQUITY INVESTMENT -- In June 1998, Mariner Holdings reached an
agreement with management shareholders and an affiliate of Enron to purchase
common shares of approximately $28.8 million of net equity capital, which was
used to supplement funding of the Company's 1998 capital expenditure plan.
6. EMPLOYEE BENEFIT AND ROYALTY PLANS
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 1998, 1997 and
1996, the Company contributed $182,000, $200,000, and $165,000, respectively, to
the Plan. This plan is a continuation of a plan provided by the Predecessor
Company.
OVERRIDING ROYALTY INTERESTS -- Pursuant to agreements, certain key
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.
34
<PAGE> 37
MARINER ENERGY, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
7. 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, 1998 are as follows (in thousands):
<TABLE>
<S> <C> <C>
1999.................................... $ 1,112
2000.................................... 1,046
2001.................................... 1,073
2002.................................... 1,082
2003.................................... 454
Total............................. $ 4,767
</TABLE>
Rental expense, before capitalization, was approximately $1,000,000,
$544,000, and $427,000 for the years ended December 31, 1998, 1997 and 1996,
respectively.
HEDGING PROGRAM -- The Company conducts a hedging program with respect
to its sales of crude oil and 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 crude
oil and 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.
The following table sets forth the results of hedging transactions
during the periods indicated:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Natural gas quantity hedged (Mmbtu) ......... 9,800,000 13,573,500 13,482,900
Increase (decrease) in natural gas sales .... $ 2,337,000 $ (3,931,000) $ (3,701,000)
Crude oil quantity hedged (Bbls) ............ 0 118,000 428,000
Increase (decrease) in crude oil sales ...... $ 0 $ (614,000) $ (1,912,000)
</TABLE>
35
<PAGE> 38
MARINER ENERGY, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Subsequent to year-end, the Company entered into a costless natural gas
collar with an affiliate from April to October 1999 with an extension at the
collar parties' option to extend the collar at a higher price through March
2000. In addition, in March, the Company entered into a three-year gas swap with
an affiliate. The following tables set forth the Company's position as of March
15, 1999.
<TABLE>
<CAPTION>
Average
Daily
Volume
Type Location Time Period (Mmmbtu) Floor Ceiling Fixed Price
---- -------- ----------- -------- ----- ------- -----------
<S> <C> <C> <C> <C> <C> <C>
Collar Henry Hub April 1 - October 31, 1999 60 $1.85 $2.05 -
Swap Henry Hub November 1 - December 31, 1999 44 - - $2.18
Swap Henry Hub January 1 - December 31, 2000 30 - - $2.18
Swap Henry Hub January 1 - December 31, 2001 12 - - $2.18
Swap Henry Hub January 1 - October 31, 2002 6 - - $2.18
</TABLE>
DEEPWATER RIG -- The Company executed a letter of intent in February
1998 regarding the provision of a Deepwater rig to Mariner and another company
on an equally shared basis for five years beginning in late 1999 or early 2000.
The Company is currently in discussions with the owner of the rig to determine
if a mutually acceptable drilling contract can be negotiated.
LITIGATION -- In December, 1996, ETOCO, Inc., which owns a 20% interest
in one producing well operated by the Company, filed a lawsuit against the
Company in the district court of Hardin County, Texas, alleging damage due to
the Company's refusal to drill an additional well. In April 1998, after a trial
on the merits, a jury awarded ETOCO $2.38 million in damages. In August, the
court awarded ETOCO $0.5 million in attorneys' fees. On February 8, 1999, the
case was settled.
8. INCOME TAXES
The following table sets forth a reconciliation of the statutory
federal income tax with the income tax provision (in thousands):
<TABLE>
<CAPTION>
Predecessor
Company
Year Ended Year Ended ------------------
December 31 December 31 9 Months Ended 3 Months Ended
1998 1997 12/31/96 3/ 31/96
------------------ ------------------ ------------------ ------------------
$ % $ % $ % $ %
------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C>
Income (loss) before income
taxes........................... (58,421) -- (20,210) -- (18,692) -- 2,661 --
Income tax expense (benefit)
computed at statutory rates .... (20,447) (35) (7,074) (35) (6,542) (35) 931 35
Change in valuation allowance .. 18,804 32 6,871 34 8,125 43 (3,597) (135)
Other .......................... 1,643 3 203 1 (1,583) (8) 2,666 100
------- ------- ------- ------- ------- ------- ------- -------
Tax Expense .................... -- -- -- -- -- -- -- --
======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
36
<PAGE> 39
No federal income taxes were paid by the Company during the years ended
December 31, 1998, December 31, 1997, or the nine months ending December 31,
1996 or the three months ending March 31, 1996.
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>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Deferred tax assets:
Net operating loss carry forwards ....................... $ 34,471 $ 10,410 $ 6,323
Differences between book and tax bases of properties .... -- 4,586 1,802
---------- ---------- ----------
34,771 14,996 8,125
Valuation allowance .......................................... (33,800) (14,996) (8,125)
---------- ---------- ----------
Total net deferred tax assets ................................ 971 -- --
Deferred tax liabilities --
Differences between book and tax bases of properties .... (971) -- --
Total net deferred taxes ........................... $ -- $ -- $ --
========== ========== ==========
</TABLE>
As of December 31, 1998, the Company has a cumulative net operating
loss carryforward ("NOL") for federal income tax purposes of approximately $98
million, which begins to expire in the year 2012. A valuation allowance is
recorded against tax assets which are not likely to be realized. Because of the
uncertain nature of their ultimate realization, as well as past performance and
the NOL expiration date, the Company has established a valuation allowance
against this NOL carryforward benefit and for all net deferred tax assets in
excess of net deferred tax liabilities.
9. OIL AND GAS PRODUCING ACTIVITIES AND CAPITALIZED COSTS
The results of operations from the Company's oil and gas producing
activities were as follows (in thousands):
<TABLE>
<CAPTION>
Predecessor
Company
------------
Year ended Year ended Nine months Three months
December December ended December ended March
31, 1998 31, 1997 31, 1996 31, 1996
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Oil and gas sales ........................... $ 56,690 $ 62,771 $ 47,079 $ 13,309
Production costs ............................ (9,858) (9,376) (6,495) (2,403)
Depreciation, depletion and amortization .... (33,833) (31,719) (24,747) (6,309)
Impairment of oil and gas properties ........ (50,800) (28,514) (22,500) --
Income tax expense .......................... -- -- -- --
---------- ---------- ---------- ----------
Results of operations ................... $ (37,801) $ (6,838) $ (6,663) $ 4,597
========== ========== ========== ==========
</TABLE>
37
<PAGE> 40
MARINER ENERGY, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Costs incurred in property acquisition, exploration and development
activities were as follows (in thousands, except per equivalent mcf amounts):
<TABLE>
<CAPTION>
Predecessor
Company
------------
Year ended Year ended Nine months Three months
December 31, December 31, ended December ended March
1998 1997 31, 1996 31, 1996
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Property acquisition costs
Unproved properties .................... $ 43,143 $ 21,569 $ 13,477 $ 949
Proved properties ...................... -- 3,250 -- --
Exploration costs ........................... 35,674 27,364 18,627 3,903
Development costs ........................... 61,960 16,134 6,132 2,643
---------- ---------- ---------- ----------
Total costs ............................. $ 140,777 $ 68,317 $ 38,236 $ 7,495
========== ========== ========== ==========
Depreciation, depletion and amortization
rate per equivalent Mcf before impairment ... $ 1.40 $ 1.33 $ 1.33 $ 1.00
</TABLE>
The Company capitalizes internal costs associated with exploration
activities. These capitalized costs were approximately $6,386,000, $4,418,000
and $4,362,000, for the years ended December 31, 1998, 1997 and 1996,
respectively.
The following table summarizes costs related to unevaluated properties
which have been excluded from amounts subject to amortization at December 31,
1998. The Company regularly evaluates these costs to determine whether
impairment has occurred. The majority of these costs are expected to be
evaluated and included in the amortization base within three years.
<TABLE>
<CAPTION>
Predecessor Company
------------------------------------
Nine months Three months
Year ended Year ended ended ended Total at
December 31, December 31, December 31, March 31, Prior December 31,
1998 1997 1996 1996 Years 1998
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Property
Acquisition costs ..... $ 53,936 $ 19,509 $ 7,949 $ 24 $ 1,628 $ 83,046
Exploration costs ...... 1,030 -- -- -- -- 1,030
-------- -------- -------- -------- -------- --------
Total .............. $ 54,966 $ 19,509 $ 7,949 $ 24 $ 1,628 $ 84,076
======== ======== ======== ======== ======== ========
</TABLE>
Approximately 95% of excluded costs at December 31, 1998 relate to
activities in the Deepwater Gulf of Mexico and the remaining 5% relates to
activities in the Gulf of Mexico shallow waters and onshore areas near the Gulf.
38
<PAGE> 41
MARINER ENERGY, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
10. SUPPLEMENTAL OIL AND GAS RESERVE AND STANDARDIZED MEASURE INFORMATION
(UNAUDITED)
Estimated proved net recoverable reserves as shown below include only
those quantities that are expected to be commercially recoverable at prices and
costs in effect at the balance sheet dates under existing 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. Also included in the Company's
proved undeveloped reserves as of December 31, 1998 were reserves expected to be
recovered from wells for which certain drilling and completion operations had
occurred as of that date, but for which significant future capital expenditures
were required to bring the wells into commercial production.
Reserve estimates are inherently imprecise and may 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 in 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 are based. Actual results will differ, and are
likely to differ materially, from the results estimated.
39
<PAGE> 42
MARINER ENERGY, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
Estimated Quantities of Proved Reserves
(in thousands)
Oil (Bbl) Gas (Mcf)
----------- ----------
<S> <C> <C>
December 31, 1995 6,669 98,330
Revisions of previous estimates 3 (518)
Extensions, discoveries and other additions 1,168 24,326
Sales of reserves in place (1,810) (9,425)
Production (750) (20,429)
----------- ----------
December 31, 1996 5,280 92,284
Revisions of previous estimates 210 (1,817)
Extensions, discoveries and other additions 2,062 46,166
Purchase of reserves in place 55 2,737
Production (977) (18,004)
----------- ----------
December 31, 1997 6,630 121,366
Revisions of previous estimates (836) (410)
Extensions, discoveries and other additions 4,351 27,416
Production (786) (19,477)
----------- ----------
December 31, 1998 9,359 128,895
=========== ==========
</TABLE>
<TABLE>
<CAPTION>
Estimated Quantities of Proved Developed Reserves
(in thousands)
Oil (Bbl) Gas (Mcf)
----------- ----------
<S> <C> <C>
December 31, 1996 3,456 83,529
December 31, 1997 3,486 76,343
December 31, 1998 2,886 86,024
</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.
40
<PAGE> 43
MARINER ENERGY, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Standardized Measure of Discounted Future Net Cash Flows
(in thousands)
<TABLE>
<CAPTION>
Year ended December 31,
------------------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Future cash inflows ........................................ $ 383,490 $ 447,681 $ 548,451
Future production costs .................................... (103,400) (109,405) (103,777)
Future development costs ................................... (81,090) (73,568) (20,413)
Future income taxes ........................................ -- (35,346) (90,971)
---------- ---------- ----------
Future net cash flows ...................................... 199,000 229,362 333,290
Discount of future net cash flows at 10% per annum ......... (51,371) (52,903) (78,914)
---------- ---------- ----------
Standardized measure of discounted future net cash flows ... $ 147,629 $ 176,459 $ 254,376
========== ========== ==========
</TABLE>
During recent years, there have been significant fluctuations in the
prices paid for crude oil in the world markets and 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, 1998, 1997 and 1996, used
in the above table, were $10.36, $16.43 and $25.16 per Bbl, respectively, and
$2.22, $2.79 and $4.50 per Mcf, respectively.
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,
------------------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Sales and transfers of oil and gas produced,
net of production costs ..................... $ (46,832) $ (53,395) $ (51,505)
Net changes in prices and production costs ....... (67,815) (132,658) 120,843
Extensions and discoveries, net of future
development and production costs ............ 23,730 42,717 62,551
Development costs during period and net
change in development costs ................. 30,799 4,188 --
Revision of previous quantity estimates .......... (6,846) (730) (1,293)
Purchases of reserves in place ................... -- 6,071 --
Sales of reserves in place ....................... -- -- (10,813)
Net change in income taxes ....................... 27,193 29,619 (36,082)
Accretion of discount before income taxes ........ 20,365 30,336 17,342
Changes in production rates (timing) and
other ....................................... (9,424) (4,065) (7,182)
---------- ---------- ----------
Net change ....................................... $ (28,830) $ (77,917) $ 93,861
========== ========== ==========
</TABLE>
41
<PAGE> 44
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
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 March 1, 1999. 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 46 Chairman of the Board, President and Chief Executive Officer
Richard R. Clark 43 Executive Vice President and Director
L. V. "Bud" McGuire 55 Senior Vice President of Operations
Michael W. Strickler 43 Senior Vice President of Exploration and Director
Frank A. Pici 43 Vice President of Finance and Chief Financial Officer
Gregory K. Harless 49 Vice President of Oil and Gas Marketing
W. Hunt Hodge 43 Vice President of Administration
Tom E. Young 40 Vice President of Land
Christopher E. Lindsey 32 General Counsel and Secretary
David S. Huber 48 Consultant and Director of Deepwater Development
Richard B. Buy 47 Director
Mark E. Haedicke 44 Director
Stephen R. Horn 41 Director
Jeffrey McMahon 37 Director
Jere C. Overdyke, Jr. 47 Director
Frank Stabler 46 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. Mr. Henderson served as a director of London-based Hardy Plc, the
Company's former parent company, between 1989 and 1996. From 1984 to 1987, he
served the Company or predecessors as Vice President of Finance and Chief
Financial Officer. From 1976 to 1984, he held various positions with ENSTAR
Corporation, including Treasurer of ENSTAR Petroleum, which operated in the U.S.
and Indonesia.
Mr. Clark has served the Company in various engineering and operations
activities since 1984 and has been Executive Vice President since May 1998. He
served as Senior Vice President of Production from 1991 until May 1998 and has
served as 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. McGuire joined the Company in June 1998 as Senior Vice
President-Operations. Prior to joining the Company, Mr. McGuire was Vice
President-Operations for Enron Oil & Gas International, Inc. Before joining
EOGI, he served five years with Kerr-McGee Corporation as Senior Vice President
over worldwide production operations. His experience prior to Kerr-McGee
included Hamilton Oil Corporation from 1981 to 1991, where he served as
Deepwater Operations Manager then as Vice President of Operations for Hamilton
in the North Sea. He began his career in 1966 with Conoco.
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. Prior to joining the Company, Mr. Strickler worked for several
independent oil companies as an exploration geologist, generating and evaluating
exploration plays in the Gulf Coast, Mid Continent, Rocky Mountains, West Texas
and several overseas basins.
42
<PAGE> 45
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. Prior to joining Cabot Oil & Gas, he was Controller of an
independent oil & gas company in Pittsburgh, and he began his career with
Coopers & Lybrand. He's a Certified Public Accountant.
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 and
District Operating Manager with Coastal States Oil & Gas.
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.
Mr. Young has served as Vice President of Land since November 1998.
Prior to his current position, Mr. Young served Mariner as Manager of Land for
the Central Gulf for approximately 10 years. Prior to joining Mariner in 1985,
Mr. Young served as a landman for TXO Production Corp.
Mr. Lindsey, General Counsel, joined the Company in August 1998. Prior
to joining the Company, Mr. Lindsey was associated with Bracewell & Patterson,
L.L.P. for five years.
Mr. Huber, a consultant to the Company, began his association with the
Company in 1991 as a deepwater project management consultant and is presently
Mariner's Director of Deepwater Developments. Prior to joining Mariner, Mr.
Huber was employed by Hamilton Oil Corporation in the North Sea from 1981 to
1991, holding 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. Buy has served as a director since January 1998. Since 1994 he has
been an employee of ECT or its affiliates, currently serving as Senior Vice
President and Chief Risk Officer of Enron Corp. Prior to joining ECT Mr. Buy was
a Vice President at Bankers Trust in the Energy Group.
Mr. Haedicke has served as a director since October 1998. He is
currently Managing Director, Legal, of ECT. Mr. Haedicke also serves on the
board of directors of the International Swaps and Derivatives Association, Inc.
and he holds a seat on the New York Mercantile Exchange. He has been associated
with ECT since its inception in 1990.
Mr. Horn has served as a director since November 1998. Since 1996, he
has been as employee and Vice President, Equity Investments, of ECT. Prior to
joining ECT, Mr. Horn was a principal in Yellowstone Energy Partners, a private
equity investing firm in Houston, Texas.
Mr. McMahon has served as a director since September 1998. Since 1994,
he has been an employee of Enron, or its affiliates, currently serving as Senior
Vice President, Finance and Corporate Treasurer of Enron. Prior to joining
Enron, Mr. McMahon served as Senior Vice President and Chief Financial Officer
of MG Natural Gas Corp., a medium-sized natural gas marketing and finance
company in Houston, Texas.
Mr. Overdyke has served as a director since May 1996. Since 1991 he has
been an employee of ECT or one of its affiliates, currently serving as
President, ECT North America, Merchant Finance. Mr. Overdyke has over 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
Managing Director of Enron International, Inc. 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 Shareholders' 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 Relationships and Related Transactions -- The Acquisition, the
Shareholders' Agreement and Related Matters" on page 46.
43
<PAGE> 46
ITEM 11. 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 three fiscal years ended December 31, 1998, and
includes two additional persons who were not executive officers as of December
31, 1998. These individuals are sometimes referred to as the "named executive
officers".
<TABLE>
<CAPTION>
Long-Term
Annual Compensation Compensation
-------------------------------------- Received from
Other Annual Overriding Royalty All Other
Name and Principal Position Salary Compensation(1) Program(2) Compensation(3)
- ------------------------------- -------------- ------------------- --------------------- -----------------
<S> <C> <C> <C> <C> <C>
Robert E. Henderson 1998 $285,000 $4,800 $354,857 $ 522
President and 1997 255,000 6,000 394,136 315
Chief Executive Officer 1996 236,000 6,000 421,311 306
Richard R. Clark 1998 225,000 4,800 218,077 306
Executive Vice President 1997 185,000 6,000 237,982 306
of Production 1996 166,500 6,000 247,971 306
Michael W. Strickler 1998 182,000 4,800 212,803 306
Senior Vice President 1997 165,000 6,000 234,603 306
of Exploration 1996 150,000 5,880 258,731 306
Frank A. Pici (6) 1998 160,000 4,380 0 306
Vice President of Finance and 1997 146,000 2,747 0 306
Chief Financial Officer 1996 12,167 0 0 26
Gregory K. Harless 1998 143,000 3,813 70,541 522
Vice President of Oil & Gas 1997 127,100 4,911 81,725 522
Marketing 1996 121,000 4,760 86,383 522
Clinton D. Smith (4) 1998 111,993 4,221 N/A (5) 183,229
Formerly Vice President of 1997 140,700 5,367 60,449 306
Operations 1996 131,500 5,154 96,447 306
James M. Fitzpatrick (4) 1998 107,269 3,720 N/A (5) 151,227
Formerly Vice President of 1997 124,000 4,762 N/A (5) 522
Land & Legal 1996 120,000 4,390 N/A (5) 522
</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 a short plan year of nine months). For each of the
named executive officers, the aggregate amount of perquisites and other personal
benefits did not exceed the lesser of $50,000 or 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. No such sales were made in 1998, 1997 or 1996.
(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. Smith left the Company in September 1998, and Mr. Fitzpatrick
left the Company in October 1998. The "All Other Compensation" column reflects
both insurance premium paid by the Company with respect to term life insurance
and severance benefits pursuant to their Employment Agreements.
(5) Information is not available to the Company.
(6) Mr. Pici joined the Company in December 1996.
EMPLOYMENT AGREEMENTS
The Company and each of the named executive officers have entered into
employment agreements (each, an "Employment Agreement" and collectively, the
"Employment Agreements") for initial terms of five years in the case of Messrs.
Henderson, Clark and Strickler, and one year in the case of Mr. Pici and three
years in the case of Mr. Harless.
44
<PAGE> 47
The terms for Messrs. Pici and Harless were recently extended for one and
one-half years. The Employment Agreements then extend for six months in the case
of Messrs. Henderson, Clark, Strickler and Pici, and three months in the case of
Mr. Harless, unless notice of termination is given by either the Company or the
named executive officer at least three or six months before the end of the term.
Under the Employment Agreements, the current annual salaries are $285,000,
$225,000, $190,000, $160,000, and $143,000 for Messrs. Henderson, Clark,
Strickler, Pici and Harless, respectively, which the Company may in its
discretion increase. The named executive officers are eligible for participation
in any 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 that
leased vehicle. As incentive compensation, the named executive officers are
entitled to overriding royalty interests in certain oil and gas prospects
acquired by the Company. See "Overriding Royalty Program".
If a named executive officer's Employment Agreement is terminated by
the Company, with or without Cause (as defined in each Employment Agreement) or
by the named executive officer for Good Reason (as defined in each Employment
Agreement), the named executive officer 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 (to be paid in a lump sum cash payment
in the case of termination by the Company without Cause or termination by the
named executive officer for Good Reason), (ii) a lump sum cash payment equal to
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 Messrs. Pici and Harless), (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 named executive officer's Employment Agreement is terminated by
the named executive officer without Good Reason or by the Company for cause, he
will be entitled to the amounts specified in the preceding sentence except that
he will not be entitled to the lump sum cash payment described in clause (ii).
Any amounts paid on termination of an Employment Agreement will be grossed-up to
cover any applicable taxes.
Each named executive officer has agreed that during the term of his
Employment Agreement, and for 12 months thereafter in the case of Messrs.
Henderson, Clark and Strickler and six months thereafter in the case of Messrs.
Pici and Harless, if the named executive officer's Employment Agreement is
terminated by the Company for Cause or by the named executive officer other than
for Good Reason, he will not compete with the Company for business or hire away
the Company's employees.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The Company is an indirect wholly owned subsidiary of Mariner Energy
LLC. The following table sets forth the name and address of the only shareholder
of Mariner Energy LLC that is known by the Company to beneficially own more than
5% of the outstanding common shares of Mariner Energy LLC, the number of shares
beneficially owned by such shareholder, and the percentage of outstanding shares
of common shares of Mariner Energy LLC so owned, as of March 1, 1999. As of
March 1, 1999, there were 13,928,304 common shares of Mariner Energy LLC
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 13,334,184 95.7%
Mariner Energy LLC 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 Enron Capital Management
Limited Partnership, a Delaware limited partnership, whose general partner is
Enron Capital Corp., a Delaware corporation and a wholly owned subsidiary of
ECT. The general partner of JEDI exercises sole voting and investment power
with respect to such shares.
The table appearing below sets forth information as of March 1, 1999,
with respect common shares of Mariner Energy LLC beneficially owned by each of
the Company's directors, the Company's named officers, a key consultant
45
<PAGE> 48
of the Company and all directors and executive officers and such key consultant
as a group, and the percentage of outstanding common shares of Mariner Energy
LLC 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......................... 84,840 *
Richard R. Clark............................ 61,440 *
L. V. "Bud" McGuire......................... 6,000 *
Michael W. Strickler........................ 61,440 *
Frank A. Pici............................... 20,472 *
Gregory K. Harless.......................... 13,200 *
David S. Huber.............................. 61,440 *
Richard B. Buy.............................. 0 *
Mark E. Haedicke............................ 0 *
Stephen R. Horn............................. 0 *
Jeffrey McMahon............................. 0 *
Jere C. Overdyke, Jr........................ 0 *
Frank Stabler............................... 0 *
All directors and executive officers and
key consultant as a group (15 persons).... 308,832 2.22%
</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.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
THE ACQUISITION, THE SHAREHOLDERS' AGREEMENT AND RELATED MATTERS
Mariner, JEDI and each other shareholder of Mariner are parties to the
Amended and Restated Shareholders' Agreement (as amended, the "Shareholders'
Agreement").
Mariner has agreed to reimburse each Management Shareholder who paid
for equity in Mariner's predecessor by assignment of overriding royalty
interests for any additional taxes and related costs incurred by such Management
Shareholder 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.
ENRON AND AFFILIATES
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 and
the Company. See "Ownership of Securities". In addition, six of the Company's
directors are officers of Enron or of affiliates of Enron: Mr. Buy is Senior
Vice President and Chief Risk Officer of Enron Corp., Mr. Haedicke is a
Managing Director of ECT, Mr. McMahon is Vice President, Finance and the
Corporate Treasurer for Enron, Mr. Horn is a Vice President of ECT, Mr. Overdyke
is the President of ECT N.A., Merchant Finance, and Mr. Stabler is a Managing
Director of Enron International, Inc.
Enron and certain of its subsidiaries and other affiliates collectively
participate in nearly all phases of the oil and natural gas industry and,
therefore, compete with Mariner. In addition, ECT, JEDI and other affiliates of
ECT have provided, and may in the future provide, and ECT Securities Limited
Partnership, 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
46
<PAGE> 49
are or may become competitors of Mariner. Because of these various possible
conflicting interests, the Company Agreement includes provisions designed to
clarify that generally Enron and its affiliates have no duty to make business
opportunities available to Mariner and no duty to refrain from conducting
activities that may be competitive with the Company.
Under the terms of the Company Agreement, Enron and its affiliates
(which include, without limitation, ECT and JEDI) are specifically permitted to
compete with the Company, and neither Enron nor any of its affiliates has any
obligation to bring any business opportunity to the Company.
Under the Revolving Credit Facility, the Company has covenanted that it
will not 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 Shareholders' Agreement, (ii) the grant of options to purchase
or sales of equity securities to directors, officers, employees and consultants
of the Company and (iii) the assignment of any overriding royalty interest
pursuant to an employee incentive compensation plan.
The Indenture, dated as of August 1, 1996, between Mariner Energy, Inc.
and United States Trust Company of New York (the "Indenture"), under which the
Senior Subordinated Notes were issued, contains similar restrictions. Under the
Indenture, Mariner Energy, Inc. has covenanted not to engage in any transaction
with an affiliate unless the terms of that transaction are no less favorable to
the Company than could be obtained in an arm's-length transaction with a
nonaffiliate. Further, if such transaction involves more than $1 million, it
must be approved in writing by a majority of Mariner Energy, Inc.'s
disinterested directors, and if such a transaction involves more than $5
million, it must be determined by a nationally recognized banking firm to be
fair, from a financial standpoint, to Mariner Energy, Inc. However, this
covenant is subject to several significant exceptions, including, among others,
(i) certain industry-related agreements made in the ordinary course of business
where such agreements are approved by a majority of Mariner Energy, Inc.'s
disinterested directors as being the most favorable of several bids or
proposals, (ii) transactions under employment agreements or compensation plans
entered into in the ordinary course of business and consistent with industry
practice and (iii) certain prior transactions.
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.
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 judgement, 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.
47
<PAGE> 50
1998 EQUITY INVESTMENT
In June 1998, Mariner Holdings issued additional equity to its existing
shareholders, including JEDI, for approximately $14.58 per share, for an
aggregate investment of $30.0 million (the "1998 Equity Investment"). The
Company paid approximately $1.2 million as a structuring fee, on a pro rata
basis, to existing shareholders participating in this transaction. Approximately
$1.0 million of this fee was paid to ECT Securities Corp., an affiliate of JEDI.
ECT CREDIT FACILITY
In August 1998, the Company's parent established the ECT Credit
Facility to provide the Company with additional capital. The ECT Credit Facility
provides for unsecured, subordinated loans up to $25 million, bearing interest
at LIBOR plus 2.5%, payable monthly. In addition, upon any draw against the
facility, the Company's parent must pay ECT Securities Limited Partnership a
structuring fee equal to 4% of the principal amount of the borrowing. This
agreement was due to mature on March 1, 1999 and if not repaid will be converted
to common shares. Subsequent to December 31, 1998, the Facility was amended to
(i) increase the size of the Facility to $50 million, (ii) extend the maturity
to April 30, 2000, (iii) accrue interest at an annual rate of LIBOR plus 4.5%,
and (iv) provide for an optional conversion to equity of Mariner Energy LLC by
ECT.
SHORT-TERM CREDIT FACILITY WITH ECT
In April 1999, the Company established a $25 million borrowing-based,
short-term credit facility with Enron Capital & Trade Resources Corp. to obtain
funds needed to execute the Company's 1999 capital expenditure program and for
short-term working capital needs. This facility will mature on December 31,
1999. The Company paid ECT Securities Limited Partnership a structuring fee
equal to 1% of the commitment.
48
<PAGE> 51
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) DOCUMENTS INCLUDED IN THIS REPORT:
1. FINANCIAL STATEMENTS and 2. FINANCIAL STATEMENT SCHEDULES
These documents are listed in the Index to Financial Statements in
Item 8 hereof.
3. EXHIBITS
Exhibits designated by the symbol * are filed with this Annual Report
on Form 10-K. All exhibits not so designated are incorporated by
reference to a prior filing as indicated.
Exhibits designated by the symbol + are management contracts or
compensatory plans or arrangements that are required to be filed with
this report pursuant to this Item 14.
The Company undertakes to furnish to any stockholder so requesting a
copy of any of the following exhibits upon payment to the Company of
the reasonable costs incurred by Company in furnishing any such
exhibit.
3.1* Amended and Restated Certificate of Incorporation of the
Registrant, as amended.
3.2* Bylaws of Registrant, as amended.
4.1(a) Indenture, dated as of August 1, 1996, between the Registrant
and United States Trust Company of New York, as Trustee.
4.2(d) First Amendment to Indenture, dated as of January 31, 1998,
between the Registrant and United States Trust Company of New
York, as Trustee.
4.3(a) Credit Agreement, dated June 28, 1996, among the Registrant,
Nations Bank of Texas, N.A., as Agent, and the financial
institutions listed on schedule 1 thereto, as amended by First
Amendment to Credit Agreement, dated August 12, 1996, among
the Registrant, Nations Bank of Texas, N.A., as Agent, Toronto
Dominion (Texas), Inc., as Co-agent, and the financial
institutions listed on schedule 1 thereto.
4.4(a) Note, dated August 12, 1996, in the principal amount of up to
$45,000,000, made by the Registrant in favor of Nations Bank
of Texas, N.A.
4.5(a) 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(a) 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(a) Note, dated 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(a) Form of the Registrant's 10 1/2% Senior Subordinated Note Due
2006, Series B.
4.9* Credit and Subordination Agreement dated as of September 2,
1998 between Mariner Holdings, Inc. and Enron Capital & Trade
Resources Corp.
10.2(a) Participation Agreement, dated as of May 16, 1996, between
Hardy Oil & Gas plc. and Mariner Holdings, Inc.
10.3* Amended and Restated Shareholders' Agreement, dated October
12, 1998, among Mariner Energy LLC, Enron Capital & Trade
Resources Corp., Mariner Holdings, Inc., Joint Energy
Development Investments Limited Partnership and the other
shareholders of Mariner Energy LLC.
49
<PAGE> 52
10.4(a)+ Amended and Restated Employment Agreement, dated June 27,
1996, between the Registrant and Robert E. Henderson.
10.5(a)+ Amended and Restated Employment Agreement, dated June 27,
1996, between the Registrant and Richard R. Clark.
10.6(a)+ Amended and Restated Employment Agreement, dated June 27,
1996, between the Registrant and Michael W. Strickler.
10.7*+ Amended and Restated Employment Agreement, dated January 1,
1997, between the Registrant and Tom E. Young.
10.8(a)+ Amended and Restated Employment Agreement, dated December 27,
1998, between the Registrant and Gregory K. Harless.
10.9*+ Amended and Restated Employment Agreement, dated December 27,
1998, between the Registrant and W. Hunt Hodge.
10.10*+ Employment Agreement, dated August 1, 1998, between the
Registrant and Chris E. Lindsey.
10.11(a)+Amended and Restated Consulting Services Agreement, dated June
27, 1996, between the Registrant and David S. Huber.
10.12(a)+Mariner Holdings, Inc. 1996 Stock Option Plan (assumed by
Mariner Energy LLC).
10.13(a)+Form of Incentive Stock Option Agreement (pursuant to the
Mariner Holdings, Inc. 1996 Stock Option Plan, assumed by
Mariner Energy LLC).
10.14* List of executive officers who are parties to an Incentive
Stock Option Agreement.
10.15(a)+Form of Nonstatutory Stock Option Agreement (pursuant to the
Mariner Holdings, Inc. 1996 Stock Option Plan, assumed by
Mariner Energy LLC).
10.16* List of executive officers who are parties to a Nonstatutory
Stock Option Agreement.
10.17(a)+Nonstatutory Stock Option Agreement, dated June 27, 1996,
between the Registrant and David S. Huber.
10.19(d) Amended and Restated Employment Agreement, dated as of
December 1, 1998, between the Registrant and Frank A. Pici.
10.20*+ Amended and Restated Employment Agreement, dated as of June 1,
1998, between the Registrant and L.V. Bud McGuire.
23.1* Consent of Ryder Scott Company.
23.2* Ryder Scott Company Letter of Estimated Proved Reserves dated
March 29, 1999
27.1* Financial Data Schedule.
- -----------------------------
(a) Incorporated by reference to the Company's Registration Statement on Form
S-4 (Registration No. 333-12707), filed September 25, 1996.
(b) Incorporated by reference to Amendment No. 1 to the Company's Registration
Statement on Form S-4 (Registration No. 333-12707), filed December 6,
1996.
(c) Incorporated by reference to Amendment No. 2 to the Company's Registration
Statement on Form S-4 (Registration No. 333-12707), filed December 19,
1996.
(d) Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1996 (Registration No. 333-12707) filed March
31, 1997.
50
<PAGE> 53
(b) REPORTS ON FORM 8-K:
The Company filed no reports on Form 8-K during the quarter ended
December 31, 1998.
GLOSSARY
The terms defined in this glossary are used throughout this annual
report.
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) -- geophysical data that depicts the
subsurface strata in two dimensions.
3-D. (Three-Dimensional Seismic) -- geophysical data that depicts the
subsurface strata in three dimensions. 3-D seismic typically provides a more
detailed and accurate interpretation of the subsurface strata than can be
achieved using 2-D seismic.
"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.
"generate" Generally refers to the creation of an exploration or
exploitation idea after evaluation of seismic and other available data.
"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 overhead costs, ad
51
<PAGE> 54
valorem taxes and other expenses incidental to production, but not including
lease acquisition, drilling or completion expenses or other "finding costs".
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).
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).
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 Securities and Exchange
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 or of the proceeds from the sale thereof. Such an interest
generally 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.
52
<PAGE> 55
"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 vicinity.
"unitized" 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 to carry on certain production techniques, maximize reservoir
production and serve conservation interests economically.
"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.
53
<PAGE> 56
SIGNATURES
The registrant has duly caused this report to be signed on its behalf
by the undersigned, hereunto duly authorized.
April 15, 1999
MARINER ENERGY, INC.
by: /s/ Robert E. Henderson
-------------------------
Robert E. Henderson,
Chairman of the Board, President and Chief Executive Officer
This report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ Robert E. Henderson Chairman of the Board, President and April 15, 1999
- ------------------------------------ Chief Executive Officer
Robert E. Henderson (Principal Executive Officer)
/s/ Frank A. Pici Vice President of Finance and April 15, 1999
- ------------------------------------ Chief Financial Officer
Frank A. Pici (Principal Financial Officer and
Principal Accounting Officer)
/s/ Richard R. Clark Executive Vice President April 15, 1999
- ------------------------------------
Richard R. Clark
/s/ Michael W. Strickler Senior Vice President of Exploration April 15, 1999
- ------------------------------------ and Director
Michael W. Strickler
/s/ Richard B. Buy Director April 15, 1999
- ------------------------------------
Richard B. Buy
/s/ Mark E. Haedicke Director April 15, 1999
- ------------------------------------
Mark E. Haedicke
/s/ Stephen R. Horn Director April 15, 1999
- ------------------------------------
Stephen R. Horn
/s/ Jeffery D. McMahon Director April 15, 1999
- ------------------------------------
Jeffery D. McMahon
/s/ Jere C. Overdyke, Jr. Director April 15, 1999
- ------------------------------------
Jere C. Overdyke, Jr.
/s/ Frank Stabler Director April 15, 1999
- ------------------------------------
Frank Stabler
</TABLE>
<PAGE> 57
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO
SECTION 15(d) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED
SECURITIES PURSUANT TO SECTION 12 OF THE ACT
No annual report covering the Registrant's last fiscal year or proxy
statement, form of proxy or other proxy soliciting material with respect to any
annual or other meeting of security holders has been sent to the Company's
security holders.
<PAGE> 58
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<S> <C> <C>
Exhibits designated by the symbol * are filed with this Annual Report
on Form 10-K. All exhibits not so designated are incorporated by
reference to a prior filing as indicated.
Exhibits designated by the symbol + are management contracts or
compensatory plans or arrangements that are required to be filed with
this report pursuant to this Item 14.
The Company undertakes to furnish to any stockholder so requesting a
copy of any of the following exhibits upon payment to the Company of
the reasonable costs incurred by Company in furnishing any such
exhibit.
3.1* Amended and Restated Certificate of Incorporation of the
Registrant, as amended.
3.2* Bylaws of Registrant, as amended.
4.1(a) Indenture, dated as of August 1, 1996, between the Registrant
and United States Trust Company of New York, as Trustee.
4.2(d) First Amendment to Indenture, dated as of January 31, 1998,
between the Registrant and United States Trust Company of New
York, as Trustee.
4.3(a) Credit Agreement, dated June 28, 1996, among the Registrant,
Nations Bank of Texas, N.A., as Agent, and the financial
institutions listed on schedule 1 thereto, as amended by First
Amendment to Credit Agreement, dated August 12, 1996, among
the Registrant, Nations Bank of Texas, N.A., as Agent, Toronto
Dominion (Texas), Inc., as Co-agent, and the financial
institutions listed on schedule 1 thereto.
4.4(a) Note, dated August 12, 1996, in the principal amount of up to
$45,000,000, made by the Registrant in favor of Nations Bank
of Texas, N.A.
4.5(a) 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(a) 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(a) Note, dated 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(a) Form of the Registrant's 10 1/2% Senior Subordinated Note Due
2006, Series B.
4.9* Credit and Subordination Agreement dated as of September 2,
1998 between Mariner Holdings, Inc. and Enron Capital & Trade
Resources Corp.
10.2(a) Participation Agreement, dated as of May 16, 1996, between
Hardy Oil & Gas plc. and Mariner Holdings, Inc.
10.3* Amended and Restated Shareholders' Agreement, dated October
12, 1998, among Mariner Energy LLC, Enron Capital & Trade
Resources Corp., Mariner Holdings, Inc., Joint Energy
Development Investments Limited Partnership and the other
shareholders of Mariner Energy LLC.
</TABLE>
<PAGE> 59
<TABLE>
<S> <C>
10.4(a)+ Amended and Restated Employment Agreement, dated June 27,
1996, between the Registrant and Robert E. Henderson.
10.5(a)+ Amended and Restated Employment Agreement, dated June 27,
1996, between the Registrant and Richard R. Clark.
10.6(a)+ Amended and Restated Employment Agreement, dated June 27,
1996, between the Registrant and Michael W. Strickler.
10.7*+ Amended and Restated Employment Agreement, dated January 1,
1997, between the Registrant and Tom E. Young.
10.8(a)+ Amended and Restated Employment Agreement, dated December 27,
1998, between the Registrant and Gregory K. Harless.
10.9*+ Amended and Restated Employment Agreement, dated December 27,
1998, between the Registrant and W. Hunt Hodge.
10.10*+ Employment Agreement, dated August 1, 1998, between the
Registrant and Chris E. Lindsey.
10.11(a)+Amended and Restated Consulting Services Agreement, dated June
27, 1996, between the Registrant and David S. Huber.
10.12(a)+Mariner Holdings, Inc. 1996 Stock Option Plan (assumed by
Mariner Energy LLC).
10.13(a)+Form of Incentive Stock Option Agreement (pursuant to the
Mariner Holdings, Inc. 1996 Stock Option Plan, assumed by
Mariner Energy LLC).
10.14* List of executive officers who are parties to an Incentive
Stock Option Agreement.
10.15(a)+Form of Nonstatutory Stock Option Agreement (pursuant to the
Mariner Holdings, Inc. 1996 Stock Option Plan, assumed by
Mariner Energy LLC).
10.16* List of executive officers who are parties to a Nonstatutory
Stock Option Agreement.
10.17(a)+Nonstatutory Stock Option Agreement, dated June 27, 1996,
between the Registrant and David S. Huber.
10.19(d) Amended and Restated Employment Agreement, dated as of
December 1, 1998, between the Registrant and Frank A. Pici.
10.20*+ Amended and Restated Employment Agreement, dated as of June 1,
1998, between the Registrant and L.V. Bud McGuire.
23.1* Consent of Ryder Scott Company.
23.2* Ryder Scott Company Letter of Estimated Proved Reserves dated
March 29, 1999
27.1* Financial Data Schedule.
</TABLE>
- -----------------------------
(a) Incorporated by reference to the Company's Registration Statement on Form
S-4 (Registration No. 333-12707), filed September 25, 1996.
(b) Incorporated by reference to Amendment No. 1 to the Company's Registration
Statement on Form S-4 (Registration No. 333-12707), filed December 6,
1996.
(c) Incorporated by reference to Amendment No. 2 to the Company's Registration
Statement on Form S-4 (Registration No. 333-12707), filed December 19,
1996.
(d) Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1996 (Registration No. 333-12707) filed March
31, 1997.
<PAGE> 1
Exhibit 3.1
CERTIFICATE OF AMENDMENT
TO
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF
MARINER ENERGY, INC.
Mariner Energy, Inc., a corporation organized and existing under and
by virtue of the General Corporation Law of the State of Delaware, does hereby
certify:
FIRST: That the Board of Directors of Mariner Energy, Inc., at a
meeting held on January 12, 1999, adopted resolutions proposing and declaring
advisable the following amendment to the Amended and Restated Certificate of
Incorporation of Mariner Energy, Inc.:
ARTICLE IV, Paragraph 1. is amended to read in its entirety as
follows:
" 1. The total number of shares of stock which this
corporation shall have authority to issue is two thousand (2,000)
shares, all of which are to be of the par value of $1.00 each and all
of one class and all to be designated as the Common Stock of the
corporation."
SECOND: That at a special meeting of the stockholders of the
corporation, the holder of all of the outstanding stock of Mariner Energy, Inc.
approved such amendment in accordance with the provisions of the General
Corporation Law of the State of Delaware.
THIRD: That the aforesaid amendment was duly adopted in accordance
with the applicable provisions of Section 242 of the General Corporation Law of
the State of Delaware.
IN WITNESS WHEREOF, Mariner Energy, Inc. has caused this certificate
to be signed by L.V. McGuire, its Senior Vice President of Operations, on
January 14, 1999.
MARINER ENERGY, INC.
By: /s/ L. V. McGuire
-------------------------------------
L. V. McGuire
Senior Vice President, Operations
<PAGE> 1
Exhibit 3.2
AMENDED AND RESTATED BYLAWS
OF
MARINER ENERGY, INC.
A Delaware Corporation
Date of Adoption
January 12, 1999
<PAGE> 2
Table of Contents
<TABLE>
<CAPTION>
Page
----
<S> <C> <C> <C> <C>
Article I. Offices
-------
Section 1. Registered Office ................................................... 1
Section 2. Other Offices ....................................................... 1
Article II. Stockholders
------------
Section 1. Place of Meetings ................................................... 1
Section 2. Quorum; Adjournment of Meetings ..................................... 1
Section 3. Annual Meetings ................................................... 2
Section 4. Special Meetings ................................................... 2
Section 5. Record Date ......................................................... 2
Section 6. Notice of Meetings................................................... 3
Section 7. Stockholder List ................................................... 3
Section 8. Proxies.............................................................. 3
Section 9. Voting; Election; Inspectors ........................................ 4
Section 10. Conduct of Meeting................................................... 5
Section 11. Treasury Stock ................................................... 5
Section 12. Action Without Meeting .............................................. 5
Article III. Board of Directors
-----------------
Section 1. Power; Number; Term of Office ....................................... 6
Section 2. Quorum; Voting ...................................................... 6
Section 3. Place of Meetings; Order of Business ................................ 6
Section 4. First Meeting ....................................................... 7
Section 5. Regular Meetings .................................................... 7
Section 6. Special Meetings .................................................... 7
Section 7. Removal.............................................................. 7
Section 8. Vacancies; Increases in the Number
of Directors ........................................................ 7
Section 9. Compensation ........................................................ 7
Section 10. Action Without a Meeting; Telephone
Conference Meeting .................................................. 7
Section 11. Approval or Ratification of Acts or
Contracts by Stockholders ........................................... 8
Section 12. Actions Requiring Approval........................................... 8
</TABLE>
i
<PAGE> 3
<TABLE>
<S> <C> <C>
Article IV. Committees
----------
Section 1. Designation; Powers ................................................. 11
Section 2. Procedure; Meetings; Quorum ......................................... 11
Section 3. Substitution and Removal of Members; Vacancies ...................... 11
Article V. Officers
--------
Section 1. Number, Titles and Term of Office ................................... 12
Section 2. Powers and Duties of the
Chairman of the Board ............................................... 12
Section 3. Powers and Duties of the Chief Executive Officer .................... 12
Section 4. Powers and Duties of the
President ........................................................... 13
Section 5. Powers and Duties of the
Vice Chairman of the Board........................................... 13
Section 6. Vice Presidents ..................................................... 13
Section 7. General Counsel...................................................... 13
Section 8. Secretary ........................................................... 13
Section 9. Deputy Corporate Secretary and
Assistant Secretaries ............................................... 14
Section 10. Treasurer ........................................................... 14
Section 11. Assistant Treasurers ................................................ 14
Section 12. Action with Respect to Securities of
Other Corporations .................................................. 14
Section 13. Delegation .......................................................... 15
Article VI. Capital Stock
-------------
Section 1. Certificates of Stock ............................................... 15
Section 2. Transfer of Shares .................................................. 15
Section 3. Ownership of Shares ................................................. 15
Section 4. Regulations Regarding Certificates .................................. 15
Section 5. Lost or Destroyed Certificates ...................................... 16
Article VII. Miscellaneous Provisions
------------------------
Section 1. Fiscal Year ......................................................... 16
Section 2. Corporate Seal ...................................................... 16
Section 3. Notice and Waiver of Notice ......................................... 16
Section 4. Facsimile Signatures ................................................ 17
</TABLE>
ii
<PAGE> 4
<TABLE>
<S> <C> <C> <C>
Section 5. Reliance upon Books, Reports and
Records ............................................................. 17
Section 6. Application of Bylaws ............................................... 17
Article VIII. Amendments .................................................................. 17
----------
</TABLE>
iii
<PAGE> 5
BYLAWS
OF
MARINER ENERGY, INC.
Article I
Offices
Section 1. Registered Office. The registered office of the
Corporation required by the state of incorporation of the Corporation to be
maintained in the state of incorporation of the Corporation shall be the
registered office named in the charter documents of the Corporation, or such
other office as may be designated from time to time by the Board of Directors
in the manner provided by law.
Section 2. Other Offices. The Corporation may also have offices
at such other places both within and without the state of incorporation of the
Corporation as the Board of Directors may from time to time determine or the
business of the Corporation may require.
Article II
Stockholders
Section 1. Place of Meetings. All meetings of the stockholders
shall be held at the principal office of the Corporation, or at such other
place within or without the state of incorporation of the Corporation as shall
be specified or fixed in the notices or waivers of notice thereof.
Section 2. Quorum; Adjournment of Meetings. Unless otherwise
required by law or provided in the charter documents of the Corporation or
these Bylaws, (i) the holders of a majority of the stock issued and outstanding
and entitled to vote thereat, present in person or represented by proxy, shall
constitute a quorum at any meeting of stockholders for the transaction of
business, (ii) in all matters other than election of directors, the affirmative
vote of the holders of a majority of such stock so present or represented at
any meeting of stockholders at which a quorum is present shall constitute the
act of the stockholders, and (iii) where a separate vote by a class or classes
is required, a majority of the outstanding shares of such class or classes,
present in person or represented by proxy shall constitute a quorum entitled to
take action with respect to that vote on that matter and the affirmative vote
of the majority of the shares of such class or classes present in person or
represented by proxy at the meeting shall be the act of such class. The
stockholders present at a duly organized meeting may continue to transact
business until adjournment, notwithstanding the withdrawal of enough
stockholders to leave less than a quorum, subject to the provisions of clauses
(ii) and (iii) above.
1
<PAGE> 6
Directors shall be elected by a plurality of the votes of the shares
present in person or represented by proxy at the meeting and entitled to vote
on the election of directors.
Notwithstanding the other provisions of the charter documents of the
Corporation or these Bylaws, the chairman of the meeting or the holders of a
majority of the issued and outstanding stock, present in person or represented
by proxy and entitled to vote thereat, at any meeting of stockholders, whether
or not a quorum is present, shall have the power to adjourn such meeting from
time to time, without any notice other than announcement at the meeting of the
time and place of the holding of the adjourned meeting. If the adjournment is
for more than thirty (30) days, or if after the adjournment a new record date
is fixed for the adjourned meeting, a notice of the adjourned meeting shall be
given to each stockholder of record entitled to vote at such meeting. At such
adjourned meeting at which a quorum shall be present or represented any
business may be transacted which might have been transacted at the meeting as
originally called.
Section 3. Annual Meetings. An annual meeting of the
stockholders, for the election of directors to succeed those whose terms expire
and for the transaction of such other business as may properly come before the
meeting, shall be held at such place (within or without the state of
incorporation of the Corporation), on such date, and at such time as the Board
of Directors shall fix and set forth in the notice of the meeting, which date
shall be within thirteen (13) months subsequent to the last annual meeting of
stockholders.
Section 4. Special Meetings. Unless otherwise provided in the
charter documents of the Corporation, special meetings of the stockholders for
any purpose or purposes may be called at any time by the Chairman of the Board,
by the Chief Executive Officer, by the President, by the Vice Chairman of the
Board, by a majority of the Board of Directors, or by a majority of the
executive committee (if any), at such time and at such place as may be stated
in the notice of the meeting. Business transacted at a special meeting shall
be confined to the purpose(s) stated in the notice of such meeting.
Section 5. Record Date. For the purpose of determining
stockholders entitled to notice of or to vote at any meeting of stockholders,
or any adjournment thereof, or entitled to receive payment of any dividend or
other distribution or allotment of any rights, or entitled to exercise any
rights in respect of any change, conversion or exchange of stock or for the
purpose of any other lawful action, the Board of Directors of the Corporation
may fix a date as the record date for any such determination of stockholders,
which record date shall not precede the date on which the resolutions fixing
the record date are adopted and which record date shall not be more than sixty
(60) days nor less than ten (10) days before the date of such meeting of
stockholders, nor more than sixty (60) days prior to any other action to which
such record date relates.
If the Board of Directors does not fix a record date for any meeting
of the stockholders, the record date for determining stockholders entitled to
notice of or to vote at such meeting shall be at the close of business on the
day next preceding the day on which notice is given, or, if in accordance with
Article VII, Section 3 of these Bylaws notice is waived, at the close of
business on the day next preceding the day on which the meeting is held. The
record date for determining stockholders for any other purpose (other than the
consenting to corporate action in writing without a meeting) shall
2
<PAGE> 7
be at the close of business on the day on which the Board of Directors adopts
the resolution relating thereto. A determination of stockholders of record
entitled to notice of or to vote at a meeting of stockholders shall apply to
any adjournment of the meeting; provided, however, that the Board of Directors
may fix a new record date for the adjourned meeting.
For the purpose of determining the stockholders entitled to consent to
corporate action in writing without a meeting, the Board of Directors may fix a
record date, which record date shall not precede the date upon which the
resolution fixing the record date is adopted by the Board of Directors, and
which date shall not be more than ten (10) days after the date upon which the
resolution fixing the record date is adopted by the Board of Directors. If the
Board of Directors does not fix the record date, the record date for
determining stockholders entitled to consent to corporate action in writing
without a meeting, when no prior action by the Board of Directors is necessary,
shall be the first date on which a signed written consent setting forth the
action taken or proposed to be taken is delivered to the Corporation at its
registered office in the state of incorporation of the Corporation or at its
principal place of business. If the Board of Directors does not fix the record
date, and prior action by the Board of Directors is necessary, the record date
for determining stockholders entitled to consent to corporate action in writing
without a meeting shall be at the close of business on the day on which the
Board of Directors adopts the resolution taking such prior action.
Section 6. Notice of Meetings. Written notice of the place,
date and hour of all meetings, and, in case of a special meeting, the purpose
or purposes for which the meeting is called, shall be given by or at the
direction of the Chairman of the Board, the Chief Executive Officer, the
President, the Vice Chairman of the Board, the Secretary or the other person(s)
calling the meeting to each stockholder entitled to vote thereat not less than
ten (10) nor more than sixty (60) days before the date of the meeting. Such
notice may be delivered either personally or by mail. If mailed, notice is
given when deposited in the United States mail, postage prepaid, directed to
the stockholder at such stockholder's address as it appears on the records of
the Corporation.
Section 7. Stockholder List. A complete list of stockholders
entitled to vote at any meeting of stockholders, arranged in alphabetical order
for each class of stock and showing the address of each such stockholder and
the number of shares registered in the name of such stockholder, shall be open
to the examination of any stockholder, for any purpose germane to the meeting,
during ordinary business hours, for a period of at least ten (10) days prior to
the meeting, either at a place within the city where the meeting is to be held,
which place shall be specified in the notice of the meeting, or, if not so
specified, at the place where the meeting is to be held. The stockholder list
shall also be produced and kept at the time and place of the meeting during the
whole time thereof, and may be inspected by any stockholder who is present.
Section 8. Proxies. Each stockholder entitled to vote at a
meeting of stockholders or to express consent or dissent to a corporate action
in writing without a meeting may authorize another person or persons to act for
him by proxy. Proxies for use at any meeting of stockholders shall be filed
with the Secretary, or such other officer as the Board of Directors may from
time to time determine by resolution, before or at the time of the meeting.
All proxies shall be received and taken charge of and all ballots shall be
received and canvassed by the secretary of the meeting, who shall
3
<PAGE> 8
decide all questions touching upon the qualification of voters, the validity of
the proxies, and the acceptance or rejection of votes, unless an inspector or
inspectors shall have been appointed by the chairman of the meeting, in which
event such inspector or inspectors shall decide all such questions.
No proxy shall be valid after three (3) years from its date, unless
the proxy provides for a longer period. Each proxy shall be revocable unless
expressly provided therein to be irrevocable and coupled with an interest
sufficient in law to support an irrevocable power.
Should a proxy designate two or more persons to act as proxies, unless
such instrument shall provide the contrary, a majority of such persons present
at any meeting at which their powers thereunder are to be exercised shall have
and may exercise all the powers of voting or giving consents thereby conferred,
or if only one be present, then such powers may be exercised by that one; or,
if an even number attend and a majority do not agree on any particular issue,
each proxy so attending shall be entitled to exercise such powers in respect of
such portion of the shares as is equal to the reciprocal of the fraction equal
to the number of proxies representing such shares divided by the total number
of shares represented by such proxies.
Section 9. Voting; Election; Inspectors. Unless otherwise
required by law or provided in the charter documents of the Corporation, each
stockholder shall on each matter submitted to a vote at a meeting of
stockholders have one vote for each share of the stock entitled to vote which
is registered in his name on the record date for the meeting. For the purposes
hereof, each election to fill a directorship shall constitute a separate
matter. Shares registered in the name of another corporation, domestic or
foreign, may be voted by such officer, agent or proxy as the bylaws (or
comparable body) of such corporation may determine. Shares registered in the
name of a deceased person may be voted by the executor or administrator of such
person's estate, either in person or by proxy.
All voting, except as required by the charter documents of the
Corporation or where otherwise required by law, may be by a voice vote;
provided, however, upon request of the chairman of the meeting or upon demand
therefor by stockholders holding a majority of the issued and outstanding stock
present in person or by proxy at any meeting a stock vote shall be taken.
Every stock vote shall be taken by written ballots, each of which shall state
the name of the stockholder or proxy voting and such other information as may
be required under the procedure established for the meeting. All elections of
directors shall be by written ballots, unless otherwise provided in the charter
documents of the Corporation.
At any meeting at which a vote is taken by written ballots, the
chairman of the meeting may appoint one or more inspectors, each of whom shall
subscribe an oath or affirmation to execute faithfully the duties of inspector
at such meeting with strict impartiality and according to the best of such
inspector's ability. Such inspector shall receive the written ballots, count
the votes, and make and sign a certificate of the result thereof. The chairman
of the meeting may appoint any person to serve as inspector, except no
candidate for the office of director shall be appointed as an inspector.
Unless otherwise provided in the charter documents of the Corporation,
cumulative voting for the election of directors shall be prohibited.
4
<PAGE> 9
Section 10. Conduct of Meetings. The meetings of the
stockholders shall be presided over by the Chairman of the Board, or, if the
Chairman of the Board is not present, by the Chief Executive Officer, or, if
the Chief Executive Officer is not present, by the President, or, if the
President is not present, by the Vice Chairman of the Board, or, if neither the
Chairman of the Board, the Chief Executive Officer, the President nor the Vice
Chairman of the Board is present, by a chairman elected at the meeting. The
Secretary of the Corporation, if present, shall act as secretary of such
meetings, or, if the Secretary is not present, the Deputy Corporate Secretary
or an Assistant Secretary shall so act; if neither the Secretary nor the
Deputy Corporate Secretary nor an Assistant Secretary is present, then a
secretary shall be appointed by the chairman of the meeting.
The chairman of any meeting of stockholders shall determine the order
of business and the procedure at the meeting, including such regulation of the
manner of voting and the conduct of discussion as seem to the chairman in
order.
Section 11. Treasury Stock. The Corporation shall not vote,
directly or indirectly, shares of its own stock owned by it and such shares
shall not be counted for quorum purposes. Nothing in this Section 11 shall be
construed as limiting the right of the Corporation to vote stock, including but
not limited to its own stock, held by it in a fiduciary capacity.
Section 12. Action Without Meeting. Unless otherwise provided in
the charter documents of the Corporation, any action permitted or required by
law, the charter documents of the Corporation or these Bylaws to be taken at a
meeting of stockholders, may be taken without a meeting, without prior notice
and without a vote, if a consent or consents in writing, setting forth the
action so taken, shall be signed by the holders of outstanding stock having not
less than the minimum number of votes that would be necessary to authorize or
take such action at a meeting at which all shares entitled to vote thereon were
present and voted and shall be delivered to the Corporation by delivery to its
registered office in the state of incorporation, its principal place of
business, or an officer or agent of the Corporation having custody of the book
in which proceedings of meetings of stockholders are recorded. Delivery made
to the Corporation's registered office shall be by hand or by certified or
registered mail, return receipt requested.
Every written consent shall bear the date of signature of each
stockholder who signs the consent, and no written consent shall be effective to
take the corporate action referred to therein unless, within sixty (60) days of
the earliest dated consent delivered in the manner required by this Section to
the Corporation, written consents signed by a sufficient number of holders to
take action are delivered to the Corporation by delivery to its registered
office in the state of incorporation, its principal place of business, or an
officer or agent of the Corporation having custody of the book in which
proceedings of meetings of stockholders are recorded. Delivery made to the
Corporation's registered office shall be by hand or by certified or registered
mail, return receipt requested.
Prompt notice of the taking of corporation action without a meeting by
less than a unanimous written consent shall be given by the Secretary to those
stockholders who have not consented in writing.
5
<PAGE> 10
Article III
Board of Directors
Section 1. Power; Number; Term of Office. The business and
affairs of the Corporation shall be managed by or under the direction of the
Board of Directors, and, subject to the restrictions imposed by law or the
charter documents of the Corporation, or by the provisions of that certain
Amended and Restated Shareholders' Agreement dated October 12, 1998, among
Mariner Energy, LLC, Mariner Holdings, Inc., Enron Capital & Trade Resources
Corp., and the shareholders named therein (the "Shareholders' Agreement"), the
Board of Directors may exercise all the powers of the Corporation.
Subject to the provisions of the Shareholders' Agreement, the number
of directors which shall constitute the whole Board of Directors shall be
determined from time to time by the Board of Directors (provided that no
decrease in the number of directors which would have the effect of shortening
the term of an incumbent director may be made by the Board of Directors). If
the Board of Directors makes no such determination, the number of directors
shall be three. Subject to the provisions of the Shareholders' Agreement, each
director shall hold office for the term for which such director is elected, and
until such director's successor shall have been elected and qualified or until
such director's earlier death, resignation or removal.
Unless otherwise provided in the charter documents of the Corporation
or in the Shareholders' Agreement, directors need not be stockholders nor
residents of the state of incorporation of the Corporation.
Section 2. Quorum; Voting. A quorum of the Board of Directors
shall be deemed to be present at any meeting if (a) a majority of the total
number of directors are present at the meeting and (b) either (i) at least one
Management Director (as that term is defined in the Shareholders' Agreement) is
present at the meeting or (ii) all Management Directors (as that term is
defined in the Shareholders' Agreement) received at least three business days'
written notice of the meeting at their respective addresses for notice
described in the Shareholders' Agreement; for purposes of the foregoing, a
notice given by email or other electronic communication shall not constitute a
"written notice". The vote of a majority of the directors present at a meeting
at which a quorum is present shall be the act of the Board of Directors.
Section 3. Place of Meetings; Order of Business. The directors
may hold their meetings and may have an office and keep the books of the
Corporation, except as otherwise provided by law, in such place or places,
within or without the state of incorporation of the Corporation, as the Board
of Directors may from time to time determine. At all meetings of the Board of
Directors business shall be transacted in such order as shall from time to time
be determined by the Chairman of the Board, or in the Chairman of the Board's
absence by the Chief Executive Officer (should the Chief Executive Officer be a
director), or in the Chief Executive Officer's absence by the President (should
the President be a director), or in the President's absence by the Vice
Chairman of the Board, or by the Board of Directors.
6
<PAGE> 11
Section 4. First Meeting. Each newly elected Board of Directors
may hold its first meeting for the purpose of organization and the transaction
of business, if a quorum is present, immediately after and at the same place as
the annual meeting of the stockholders. Notice of such meeting shall not be
required, subject to the provisions of Section 2 of this Article III. At the
first meeting of the Board of Directors in each year at which a quorum shall be
present, held next after the annual meeting of stockholders, the Board of
Directors shall elect the officers of the Corporation.
Section 5. Regular Meetings. Regular meetings of the Board of
Directors shall be held at such times and places as shall be designated from
time to time by the Chairman of the Board or, in the absence of the Chairman of
the Board, by the Chief Executive Officer (should the Chief Executive Officer
be a director), or in the Chief Executive Officer's absence, by the President
(should the President be a director), or in the President's absence, by the
Vice Chairman of the Board. Notice of such regular meetings shall not be
required, subject to the provisions of Section 2 of this Article III.
Section 6. Special Meetings. Special meetings of the Board of
Directors may be called by the Chairman of the Board, the Chief Executive
Officer (should the Chief Executive Officer be a director), the President
(should the President be a director) or the Vice Chairman of the Board or, on
the written request of any two directors, by the Secretary, in each case on at
least twenty-four (24) hours' personal, written, telegraphic, cable or wireless
notice to each director, subject to the provisions of Section 2 of this Article
III. Such notice, or any waiver thereof pursuant to Article VII, Section 3
hereof, need not state the purpose or purposes of such meeting, except as may
otherwise be required by law or provided for in the charter documents of the
Corporation or these Bylaws. Meetings may be held at any time without notice
if all the directors are present or if those not present waive notice of the
meeting in writing.
Section 7. Removal. Subject to the provisions of the
Shareholders' Agreement, any director or the entire Board of Directors may be
removed, with or without cause, by the holders of a majority of the shares then
entitled to vote at an election of directors.
Section 8. Vacancies; Increases in the Number of Directors.
Unless otherwise provided in the charter documents of the Corporation or in the
Shareholders' Agreement, vacancies existing on the Board of Directors for any
reason and newly created directorships resulting from any increase in the
authorized number of directors may be filled by the affirmative vote of a
majority of the directors then in office, although less than a quorum, or by a
sole remaining director; and any director so chosen shall hold office until
the next annual election and until such director's successor shall have been
elected and qualified, or until such director's earlier death, resignation or
removal.
Section 9. Compensation. No compensation shall be paid to
directors and members of standing committees, if any, for their services in
such capacities, provided, however, that they shall be reimbursed for all
reasonable expenses incurred in attending and returning from meetings of the
Board of Directors.
Section 10. Action Without a Meeting; Telephone Conference
Meeting. Unless otherwise restricted by the charter documents of the
Corporation, any action required or permitted to be taken at any meeting of the
Board of Directors or any committee designated by the Board of Directors may
7
<PAGE> 12
be taken without a meeting if all members of the Board of Directors or
committee, as the case may be, consent thereto in writing, and the writing or
writings are filed with the minutes of proceedings of the Board of Directors or
committee. Such consent shall have the same force and effect as a unanimous
vote at a meeting, and may be stated as such in any document or instrument
filed with the Secretary of State of the state of incorporation of the
Corporation.
Unless otherwise restricted by the charter documents of the
Corporation, subject to the requirement for notice of meetings, members of the
Board of Directors, or members of any committee designated by the Board of
Directors, may participate in a meeting of such Board of Directors or
committee, as the case may be, by means of a conference telephone connection or
similar communications equipment by means of which all persons participating in
the meeting can hear each other, and participation in such a meeting shall
constitute presence in person at such meeting, except where a person
participates in the meeting for the express purpose of objecting to the
transaction of any business on the ground that the meeting is not lawfully
called or convened.
Section 11. Approval or Ratification of Acts or Contracts by
Stockholders. The Board of Directors in its discretion may submit any act or
contract for approval or ratification at any annual meeting of the
stockholders, or at any special meeting of the stockholders called for the
purpose of considering any such act or contract, and any act or contract that
shall be approved or be ratified by the vote of the stockholders holding a
majority of the issued and outstanding shares of stock of the Corporation
entitled to vote and present in person or by proxy at such meeting (provided
that a quorum is present) shall be as valid and as binding upon the Corporation
and upon all the stockholders as if it has been approved or ratified by every
stockholder of the Corporation. In addition, any such act or contract may be
approved or ratified by the written consent of stockholders holding a majority
of the issued and outstanding shares of capital stock of the Corporation
entitled to vote, and such consent shall be as valid and binding upon the
Corporation and upon all the stockholders as if it had been approved or
ratified by every stockholder of the Corporation.
Section 12. Actions Requiring Approval. Notwithstanding anything
to the contrary herein, the Corporation shall not take (or permit to be taken
in its capacity as a shareholder or partner or permit any subsidiary of the
Corporation to take) any of the actions set forth below unless approved by a
majority of the directors present at a meeting at which a quorum is in
attendance:
(i) approving any capital or operating budget for any fiscal year;
(ii) making a commitment for any payment, whether as or in
connection with a capital expenditure, asset purchase, investment, rental,
settlement, equity contribution, loan, guaranty or otherwise, other than
specific commitments for projects included in any current capital or operating
budget approved by the Board of Directors, (a) in excess of $1,500,000, but
equal to or less than $3,000,000, per transaction or contract (or series of
related transactions or contracts) unless expressly approved by a member of the
Executive Committee of the Board of Directors that is not a member of
management of the Corporation, (b) in excess of $3,000,000, but equal to or
less than $5,000,000, per transaction or contract (or series of related
transactions or contracts) unless expressly approved by the Executive Committee
of the Board of Directors, and (c) in excess of $5,000,000 per
8
<PAGE> 13
transaction or contract (or series of related transactions or contracts);
provided, that, in the event an Executive Committee is not established, a
director not a member of management of the Corporation may provide the
approvals contemplated above that may be granted by the Executive Committee or
a member thereof;
(iii) borrowing any amount (other than pursuant to a credit facility
or loan arrangement previously approved by the Board of Directors), (a) in
excess of $3,000,000, but equal to or less than $5,000,000, per transaction or
contract (or series of related transactions or contracts) unless expressly
approved by a member of the Executive Committee of the Board of Directors that
is not a member of management of the Corporation, (b) in excess of $5,000,000,
but equal to or less than $7,500,000, per transaction or contract (or series of
related transactions or contracts) unless expressly approved by the Executive
Committee of the Board of Directors, and (c) in excess of $7,500,000 per
transaction or contract (or series of related transactions or contracts);
provided, that, if an Executive Committee is not established, a director not a
member of management of the Corporation may provide the approvals contemplated
above that may be granted by the Executive Committee or a member thereof;
(iv) disposing of or otherwise transferring any capital asset (or
related capital assets) whose fair market value or book value is (a) in excess
of $1,500,000, but equal to or less than $3,000,000, unless expressly approved
by a member of the Executive Committee of the Board of Directors that is not a
member of management of the Corporation, (b) in excess of $3,000,000, but equal
to or less than $5,000,000, unless expressly approved by the Executive
Committee of the Board of Directors, and (c) in excess of $5,000,000; provided,
that, if an Executive Committee is not established, a director not a member of
management of the Corporation may provide the approvals contemplated above that
may be granted by the Executive Committee or a member thereof;
(v) entering into any agreement, contract or transaction (or
series of contracts or transactions), not related solely to the marketing of
hydrocarbons in the ordinary course of business, pursuant to which the
Corporation or any subsidiary is to receive an amount that is (a) in excess of
$1,750,000, but equal to or less than $3,500,000, per transaction or contract
(or a series of related transactions or contracts) unless expressly approved by
a member of the Executive Committee of the Board of Directors that is not a
member of management of the Corporation, (b) in excess of $3,500,000, but equal
to or less than $5,000,000, per transaction or contract (or series of related
transactions or contracts) unless expressly approved by the Executive Committee
of the Board of Directors, and (c) in excess of $5,000,000 per transaction or
contract (or series of related transactions or contracts); provided, that, in
the event an Executive Committee is not established, a director not a member of
management of the Corporation may provide the approvals contemplated above that
may be granted by the Executive Committee or a member thereof;
(vi) entering into any agreement, contract or transaction (or
series of contracts or transactions) related solely to the marketing of
hydrocarbons in the ordinary course of business, pursuant to which the
Corporation or any subsidiary is to receive an amount that is (a) in excess of
9
<PAGE> 14
$1,750,000, but equal to or less than $5,000,000, per transaction or contract
(or a series of related transactions or contracts) unless expressly approved by
a member of the Executive Committee of the Board of Directors that is not a
member of management of the Corporation, (b) in excess of $5,000,000, but equal
to or less than $15,000,000, per transaction or contract (or series of related
transactions or contracts) unless expressly approved by the Executive Committee
of the Board of Directors, and (c) in excess of $15,000,000 per transaction or
contract (or series of related transactions or contracts); provided, that, in
the event an Executive Committee is not established, a director not a member of
management of the Corporation may provide the approvals contemplated above that
may be granted by the Executive Committee or a member thereof;
(vii) entering into any agreement (a) pursuant to which the
Corporation or any subsidiary agrees not to enter into any negotiations,
arrangements or agreements relating to a consolidation or merger or, the sale
or disposition of its stock that would involve a change in control or a sale of
all or substantially all of its assets, (b) that binds or purports to bind any
person affiliated with the Corporation other than the Corporation's
subsidiaries or (c) that restricts the Corporation or any of its subsidiaries,
directly or indirectly, from (1) acquiring or disposing of securities or assets
of any other person, (2) voting or seeking proxies with respect to securities
of any other person or (3) taking any other action the effect of which involves
the seeking of control or influence of the management of any other person;
(viii) the indemnification of any officer or any other person except
as specifically provided in the Corporation's Certificate of Incorporation or
Bylaws;
(ix) executing or otherwise entering into any employment agreement,
appointing or removing (with or without cause) any officer or hiring or firing
(with or without cause) any officer or other similarly compensated person;
(x) setting or amending the compensation level of any director,
officer, consultant or employee, which employee's aggregate annual compensation
from the Corporation or its affiliates would exceed $130,000;
(xi) making an equity investment in any non-affiliated person;
(xii) (a) filing any claim or lawsuit against any person except
where the amount claimed is for less than $250,000 or (b) settling any claim or
lawsuit except where the fair market value of the settlement amount is less
than $250,000;
(xiii) adopting or amending the Corporation's Certificate of
Incorporation or Bylaws;
(xiv) any approval of any financial statements for any fiscal year;
and
10
<PAGE> 15
(xv) authorizing any merger (or other sale or disposition of stock
involving a change of control) or sale of all or substantially all of the
assets of the Corporation or any of its subsidiaries.
The foregoing shall be in addition to any requirements imposed by the
Shareholders' Agreement.
Article IV
Committees
Section 1. Designation; Powers. The Board of Directors may, by
resolution passed by a majority of the whole board, designate one or more
committees, including, if they shall so determine, an executive committee, with
each such committee to consist of one or more of the directors of the
Corporation. Any such designated committee shall have and may exercise such of
the powers and authority of the Board of Directors in the management of the
business and affairs of the Corporation as may be provided in such resolution,
except that no such committee shall have the power or authority of the Board of
Directors in reference to amending the charter documents of the Corporation,
adopting an agreement of merger or consolidation, recommending to the
stockholders the sale, lease or exchange of all or substantially all of the
Corporation's property and assets, recommending to the stockholders a
dissolution of the Corporation or a revocation of a dissolution of the
Corporation, or amending, altering or repealing these Bylaws or adopting new
bylaws for the Corporation. Any such designated committee may authorize the
seal of the Corporation to be affixed to all papers which may require it. In
addition to the above, such committee or committees shall have such other
powers and limitations of authority as may be determined from time to time by
the Board of Directors.
Section 2. Procedure; Meetings; Quorum. Any committee
designated pursuant to this Article IV shall keep regular minutes of its
actions and proceedings in a book provided for that purpose and report the same
to the Board of Directors at its meeting next succeeding such action, shall fix
its own rules or procedures, and shall meet at such times and at such place or
places as may be provided by such rules, or by such committee or the Board of
Directors. Should a committee fail to fix its own rules, the provisions of
these Bylaws, pertaining to the calling of meetings and conduct of business by
the Board of Directors, shall apply as nearly as may be possible. At every
meeting of any such committee, a quorum shall be present if (a) a majority of
all the members of the committee are present and (b) if one or more Management
Directors is a member of the committee pursuant to the provisions of the
Shareholders' Agreement, either (i) at least one Management Director who is a
member of the committee is present at the meeting or (ii) each Management
Director who is a member of the committee received at least three business
days' written notice of the meeting at his address for notice described in the
Shareholders' Agreement; for purposes of the foregoing, a notice given by email
or other electronic communication shall not constitute a ""written notice".
The affirmative vote of a majority of the members present at a meeting at which
there is a quorum shall be necessary for the adoption by it of any resolution.
Section 3. Substitution and Removal of Members; Vacancies.
Subject to the provisions of the Shareholders' Agreement, the Board of
Directors may designate one or more directors as
11
<PAGE> 16
alternate members of any committee, who may replace any absent or disqualified
member at any meeting of such committee. Subject to the provisions of the
Shareholders' Agreement, in the absence or disqualification of a member of a
committee, the member or members present at any meeting and not disqualified
from voting, whether or not constituting a quorum, may unanimously appoint
another member of the Board of Directors to act at the meeting in the place of
the absent or disqualified member. Subject to the provisions of the
Shareholders' Agreement, the Board of Directors shall have the power at any
time to remove any member(s) of a committee and to appoint other directors in
lieu of the person(s) so removed and shall also have the power to fill
vacancies in a committee.
Article V
Officers
Section 1. Number, Titles and Term of Office. The officers of
the Corporation shall be a Chairman of the Board, President, one or more Vice
Presidents (any one or more of whom may be designated Executive Vice President
or Senior Vice President), a General Counsel, a Treasurer, a Secretary, and
such other officers as the Board of Directors may from time to time elect or
appoint (including, but not limited to, a Chief Executive Officer, a Vice
Chairman of the Board, a Deputy Corporate Secretary, one or more Assistant
Secretaries and one or more Assistant Treasurers). Each officer shall hold
office until such officer's successor shall be duly elected and shall qualify
or until such officer's death or until such officer shall resign or shall have
been removed. Any number of offices may be held by the same person, unless the
charter documents of the Corporation provide otherwise. Except for the
Chairman of the Board and the Vice Chairman of the Board, no officer need be a
director.
Section 2. Powers and Duties of the Chairman of the Board.
Subject to the control of the Board of Directors and the Executive Committee
(if any), the Chairman of the Board shall have general executive charge,
management and control of the properties, business and operations of the
Corporation with all such powers as may be reasonably incident to such
responsibilities; may agree upon and execute all leases, contracts, evidences
of indebtedness and other obligations in the name of the Corporation and may
sign all certificates for shares of capital stock of the Corporation; and
shall have such other powers and duties as designated in accordance with these
Bylaws and as from time to time may be assigned to the Chairman of the Board by
the Board of Directors. The Chairman of the Board shall preside at all
meetings of the stockholders and of the Board of Directors.
Section 3. Powers and Duties of the Chief Executive Officer.
Subject to the control of the Board of Directors and the Chairman of the Board,
the Chief Executive Officer shall have general executive charge, management and
control of the properties, business and operations of the Corporation with all
such powers as may be reasonably incident to such responsibilities; may agree
upon and execute all leases, contracts, evidences of indebtedness and other
obligations in the name of the Corporation and may sign all certificates for
shares of capital stock of the Corporation; and, unless the Board of Directors
otherwise determines, the Chief Executive Officer shall, in the absence of the
Chairman of the Board or if there be no Chairman of the Board (should the Chief
Executive
12
<PAGE> 17
Officer be a Director) preside at all meetings of the stockholders and of the
Board of Directors, perform the other duties of the Chairman of the Board, and
when so acting will have all the powers and be subject to all the restrictions
upon the Chairman of the Board; and shall have such other powers and duties as
designated in accordance with these Bylaws and as from time to time may be
assigned to the Chief Executive Officer by the Board of Directors or the
Chairman of the Board.
Section 4. Powers and Duties of the President. Unless the Board
of Directors otherwise determines, the President shall have the authority to
agree upon and execute all leases, contracts, evidences of indebtedness and
other obligations in the name of the Corporation; and, unless the Board of
Directors otherwise determines, the President shall, in the absence of the
Chief Executive Officer or if there be no Chief Executive Officer (should the
President be a director) preside at all meetings of the stockholders and of the
Board of Directors, perform the other duties of the Chief Executive Officer,
and when so acting will have all the powers and be subject to all the
restrictions upon the Chief Executive Officer; and the President shall have
such other powers and duties as designated in accordance with these Bylaws and
as from time to time may be assigned to the President by the Board of
Directors, the Chairman of the Board or the Chief Executive Officer.
Section 5. Powers and Duties of the Vice Chairman of the Board.
The Board of Directors may assign areas of responsibility to the Vice Chairman
of the Board, and, in such event, and subject to the overall direction of the
Chairman of the Board and the Board of Directors, the Vice Chairman of the
Board shall be responsible for supervising the management of the affairs of the
Corporation and its subsidiaries within the area or areas assigned and shall
monitor and review on behalf of the Board of Directors all functions within
such corresponding area or areas of the Corporation and each such subsidiary of
the Corporation. In the absence of the President, or in the event of the
President's inability or refusal to act, the Vice Chairman of the Board shall
perform the duties of the President, and when so acting shall have all the
powers of and be subject to all the restrictions upon the President. Further,
the Vice Chairman of the Board shall have such other powers and duties as
designated in accordance with these Bylaws and as from time to time may be
assigned to the Vice Chairman of the Board by the Board of Directors or the
Chairman of the Board.
Section 6. Vice Presidents. Each Vice President shall at all
times possess power to sign all certificates, contracts and other instruments
of the Corporation, except as otherwise limited in writing by the Chairman of
the Board, the President or the Vice Chairman of the Board of the Corporation.
Each Vice President shall have such other powers and duties as from time to
time may be assigned to such Vice President by the Board of Directors, the
Chairman of the Board, the Chief Executive Officer, the President or the Vice
Chairman of the Board.
Section 7. General Counsel. The General Counsel shall act as
legal advisor to the Corporation. The General Counsel may have one or more
staff attorneys and assistants, and may retain other attorneys to conduct the
legal affairs and litigation of the Corporation under the General Counsel's
supervision.
Section 8. Secretary. The Secretary shall keep the minutes of
all meetings of the Board of Directors, committees of the Board of Directors
and the stockholders, in books provided for that purpose; shall attend to the
giving and serving of all notices; may in the name of the Corporation
13
<PAGE> 18
affix the seal of the Corporation to all contracts and attest the affixation of
the seal of the Corporation thereto; may sign with the other appointed officers
all certificates for shares of capital stock of the Corporation; shall have
charge of the certificate books, transfer books and stock ledgers, and such
other books and papers as the Board of Directors may direct, all of which shall
at all reasonable times be open to inspection of any director upon application
at the office of the Corporation during business hours; shall have such other
powers and duties as designated in these Bylaws and as from time to time may be
assigned to the Secretary by the Board of Directors, the Chairman of the Board,
the Chief Executive Officer, the President or the Vice Chairman of the Board;
and shall in general perform all acts incident to the office of Secretary,
subject to the control of the Board of Directors, the Chairman of the Board,
the Chief Executive Officer, the President or the Vice Chairman of the Board.
Section 9. Deputy Corporate Secretary and Assistant Secretaries.
The Deputy Corporate Secretary and each Assistant Secretary shall have the
usual powers and duties pertaining to such offices, together with such other
powers and duties as designated in these Bylaws and as from time to time may be
assigned to the Deputy Corporate Secretary or an Assistant Secretary by the
Board of Directors, the Chairman of the Board, the Chief Executive Officer, the
President, the Vice Chairman of the Board, or the Secretary. The Deputy
Corporate Secretary shall exercise the powers of the Secretary during that
officer's absence or inability or refusal to act.
Section 10. Treasurer. The Treasurer shall have responsibility
for the custody and control of all the funds and securities of the Corporation,
and shall have such other powers and duties as designated in these Bylaws and
as from time to time may be assigned to the Treasurer by the Board of
Directors, the Chairman of the Board, the Chief Executive Officer, the
President or the Vice Chairman of the Board. The Treasurer shall perform all
acts incident to the position of Treasurer, subject to the control of the Board
of Directors, the Chairman of the Board, the Chief Executive Officer, the
President and the Vice Chairman of the Board; and the Treasurer shall, if
required by the Board of Directors, give such bond for the faithful discharge
of the Treasurer's duties in such form as the Board of Directors may require.
Section 11. Assistant Treasurers. Each Assistant Treasurer shall
have the usual powers and duties pertaining to such office, together with such
other powers and duties as designated in these Bylaws and as from time to time
may be assigned to each Assistant Treasurer by the Board of Directors, the
Chairman of the Board, the Chief Executive Officer, the President, the Vice
Chairman of the Board, or the Treasurer. The Assistant Treasurers shall
exercise the powers of the Treasurer during that officer's absence or inability
or refusal to act.
Section 12. Action with Respect to Securities of Other
Corporations. Unless otherwise directed by the Board of Directors, the
Chairman of the Board, the Chief Executive Officer, the President or the Vice
Chairman of the Board, together with the Secretary, the Deputy Corporate
Secretary or any Assistant Secretary shall have power to vote and otherwise act
on behalf of the Corporation, in person or by proxy, at any meeting of security
holders of or with respect to any action of security holders of any other
corporation in which this Corporation may hold securities and otherwise to
exercise any and all rights and powers which this Corporation may possess by
reason of its ownership of securities in such other corporation.
14
<PAGE> 19
Section 13. Delegation. For any reason that the Board of
Directors may deem sufficient, the Board of Directors may, except where
otherwise provided by statute, delegate the powers or duties of any officer to
any other person, and may authorize any officer to delegate specified duties of
such office to any other person. Any such delegation or authorization by the
Board shall be effected from time to time by resolution of the Board of
Directors.
Article VI
Capital Stock
Section 1. Certificates of Stock. The certificates for shares
of the capital stock of the Corporation shall be in such form, not inconsistent
with that required by law and the charter documents of the Corporation, as
shall be approved by the Board of Directors. Every holder of stock represented
by certificates shall be entitled to have a certificate signed by or in the
name of the Corporation by the Chairman of the Board, the Chief Executive
Officer, President, Vice Chairman of the Board or a Vice President and the
Secretary, Deputy Corporate Secretary or an Assistant Secretary or the
Treasurer or an Assistant Treasurer of the Corporation representing the number
of shares (and, if the stock of the Corporation shall be divided into classes
or series, certifying the class and series of such shares) owned by such
stockholder which are registered in certified form; provided, however, that
any of or all the signatures on the certificate may be facsimile. The stock
record books and the blank stock certificate books shall be kept by the
Secretary or at the office of such transfer agent or transfer agents as the
Board of Directors may from time to time determine. In case any officer,
transfer agent or registrar who shall have signed or whose facsimile signature
or signatures shall have been placed upon any such certificate or certificates
shall have ceased to be such officer, transfer agent or registrar before such
certificate is issued by the Corporation, such certificate may nevertheless be
issued by the Corporation with the same effect as if such person were such
officer, transfer agent or registrar at the date of issue. The stock
certificates shall be consecutively numbered and shall be entered in the books
of the Corporation as they are issued and shall exhibit the holder's name and
number of shares.
Section 2. Transfer of Shares. The shares of stock of the
Corporation shall be transferable only on the books of the Corporation by the
holders thereof in person or by their duly authorized attorneys or legal
representatives upon surrender and cancellation of certificates for a like
number of shares. Upon surrender to the Corporation or a transfer agent of the
Corporation of a certificate for shares duly endorsed or accompanied by proper
evidence of succession, assignment or authority to transfer, it shall be the
duty of the Corporation to issue a new certificate to the person entitled
thereto, cancel the old certificate and record the transaction upon its books.
Section 3. Ownership of Shares. The Corporation shall be
entitled to treat the holder of record of any share or shares of capital stock
of the Corporation as the holder in fact thereof and, accordingly, shall not be
bound to recognize any equitable or other claim to or interest in such share or
shares on the part of any other person, whether or not it shall have express or
other notice thereof, except as otherwise provided by the laws of the state of
incorporation of the Corporation.
Section 4. Regulations Regarding Certificates. The Board of
Directors shall have the power and authority to make all such rules and
regulations as they may deem expedient concerning
15
<PAGE> 20
the issue, transfer and registration or the replacement of certificates for
shares of capital stock of the Corporation.
Section 5. Lost or Destroyed Certificates. The Board of
Directors may determine the conditions upon which the Corporation may issue a
new certificate of stock in place of a certificate theretofore issued by it
which is alleged to have been lost, stolen or destroyed and may require the
owner of such certificate or such owner's legal representative to give bond,
with surety sufficient to indemnify the Corporation and each transfer agent and
registrar against any and all losses or claims which may arise by reason of the
alleged loss, theft or destruction of any such certificate or the issuance of
such new certificate in the place of the one so lost, stolen or destroyed.
Article VII
Miscellaneous Provisions
Section 1. Fiscal Year. The fiscal year of the Corporation
shall begin on the first day of January of each year.
Section 2. Corporate Seal. The corporate seal shall be circular
in form and shall have inscribed thereon the name of the Corporation and the
state of its incorporation, which seal shall be in the charge of the Secretary
and shall be affixed to certificates of stock, debentures, bonds, and other
documents, in accordance with the direction of the Board of Directors or a
committee thereof, and as may be required by law; however, the Secretary may,
if the Secretary deems it expedient, have a facsimile of the corporate seal
inscribed on any such certificates of stock, debentures, bonds, contract or
other documents. Duplicates of the seal may be kept for use by the Deputy
Corporate Secretary or any Assistant Secretary.
Section 3. Notice and Waiver of Notice. Whenever any notice is
required to be given by law, the charter documents of the Corporation or under
the provisions of these Bylaws, said notice shall be deemed to be sufficient if
given (i) by telegraphic, cable or wireless transmission (including by telecopy
or facsimile transmission) or (ii) by deposit of the same in a post office box
or by delivery to an overnight courier service company in a sealed prepaid
wrapper addressed to the person entitled thereto at such person's post office
address, as it appears on the records of the Corporation, and such notice shall
be deemed to have been given on the day of such transmission or mailing or
delivery to courier, as the case may be, subject to the provisions of Section 2
of Article III of these Bylaws and Section 2 of Article IV of these Bylaws.
Whenever notice is required to be given by law, the charter documents
of the Corporation or under any of the provisions of these Bylaws, a written
waiver thereof, signed by the person entitled to notice, whether before or
after the time stated therein, shall be deemed equivalent to notice.
Attendance of a person, including without limitation a director, at a meeting
shall constitute a waiver of notice of such meeting, except when the person
attends a meeting for the express purpose of objecting, at the beginning of the
meeting, to the transaction of any business because the meeting is not lawfully
called or convened. Neither the business to be transacted at, nor the purpose
of, any regular or special meeting of the stockholders, directors, or members
of a committee of directors
16
<PAGE> 21
need be specified in any written waiver of notice unless so required by the
charter documents of the Corporation or these Bylaws.
Section 4. Facsimile Signatures. In addition to the provisions
for the use of facsimile signatures elsewhere specifically authorized in these
Bylaws, facsimile signatures of any officer or officers of the Corporation may
be used whenever and as authorized by the Board of Directors.
Section 5. Reliance upon Books, Reports and Records. A member
of the Board of Directors, or a member of any committee designated by the Board
of Directors, shall, in the performance of such person's duties, be protected
to the fullest extent permitted by law in relying upon the records of the
Corporation and upon information, opinion, reports or statements presented to
the Corporation.
Section 6. Application of Bylaws. In the event that any
provisions of these Bylaws is or may be in conflict with any law of the United
States, of the state of incorporation of the Corporation or of any other
governmental body or power having jurisdiction over this Corporation, or any
provision of the Shareholders' Agreement, or over the subject matter to which
such provision of these Bylaws applies, or may apply, such provision of these
Bylaws shall be inoperative to the extent only that the operation thereof
unavoidably conflicts with such law or provision, and shall in all other
respects be in full force and effect.
Article VIII
Amendments
The Board of Directors shall have the power to adopt, amend and repeal
from time to time Bylaws of the Corporation, subject to the right of the
stockholders entitled to vote with respect thereto to amend or repeal such
Bylaws as adopted or amended by the Board of Directors and subject to the
provisions of the Shareholders' Agreement.
17
<PAGE> 1
Exhibit 4.9
CREDIT AND SUBORDINATION AGREEMENT
DATED AS OF SEPTEMBER 2, 1998
BETWEEN
MARINER HOLDINGS, INC.
AS BORROWER
AND
ENRON CAPITAL & TRADE RESOURCES CORP.,
AS LENDER
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
ARTICLE I
DEFINITIONS AND ACCOUNTING MATTERS
<S> <C> <C>
Section 1.01 Terms Defined Above.........................................1
Section 1.02 Certain Defined Terms.......................................1
Section 1.03 Accounting Terms and Determinations.........................8
ARTICLE II
LOANS AND COMMITMENTS
Section 2.01 Loans.......................................................8
Section 2.02 Borrowing...................................................8
Section 2.03 Fees........................................................9
Section 2.04 Note........................................................9
Section 2.05 Prepayments.................................................9
ARTICLE III
PAYMENTS OF PRINCIPAL AND INTEREST
Section 3.01 Repayment of Loans..........................................9
Section 3.02 Interest...................................................10
ARTICLE IV
PAYMENTS; COMPUTATIONS; ETC.
Section 4.01 Payments...................................................10
Section 4.02 Computations...............................................11
Section 4.03 Taxes......................................................11
</TABLE>
-i-
<PAGE> 3
ARTICLE V
CAPITAL ADEQUACY
<TABLE>
<S> <C> <C>
Section 5.01 Capital Adequacy; Additional Costs.........................12
Section 5.02 Limitation on Eurodollar Loans.............................13
Section 5.03 Illegality.................................................13
Section 5.04 Base Rate Loans Pursuant to Sections 5.01, 5.02 and 5.03...14
Section 5.05 Compensation...............................................14
ARTICLE VI
COVENANTS
Section 6.01 Financial Covenants........................................14
Section 6.02 Limitation on Indebtedness.................................15
ARTICLE VII
SUBORDINATION
Section 7.01 Loans Subordinated to Senior Indebtedness..................15
Section 7.02. Borrower and its Subsidiaries Not to Make Payments with
Respect to Loans in Certain Circumstances..................15
Section 7.03. Loans Subordinated to Prior Payment of All Senior
Indebtedness on Dissolution, Liquidation or Reorganization
for the Benefit of Creditors of the Borrower...............16
Section 7.04. Lender to be Subrogated to Rights of Holders of Senior
Indebtedness...............................................17
Section 7.05. Obligation of the Borrower Unconditional...................18
Section 7.06. Knowledge of Lender........................................18
Section 7.07. Application by Lender of Monies Deposited With It..........18
Section 7.08. Subordination Rights Not Impaired by Acts or Omissions
of Borrower or Holders of Senior Indebtedness..............19
Section 7.09. Article VII Not to Prevent Events of Default...............19
Section 7.10. Other Provisions Subject Hereto............................19
</TABLE>
-ii-
<PAGE> 4
ARTICLE VIII
EVENTS OF DEFAULT; REMEDIES
<TABLE>
<S> <C> <C>
Section 8.01 Events of Default..........................................20
Section 8.02 Remedies...................................................21
ARTICLE IX
MISCELLANEOUS
Section 9.01 Waiver.....................................................22
Section 9.02 Notices....................................................22
Section 9.03 Payment of Expenses, Indemnities, etc......................23
Section 9.04 Amendments, Etc............................................24
Section 9.05 Successors and Assigns.....................................25
Section 9.06 Assignments and Participations.............................25
Section 9.07 Invalidity.................................................26
Section 9.08 Counterparts...............................................26
Section 9.09 References.................................................26
Section 9.10 Survival...................................................26
Section 9.11 Captions...................................................26
Section 9.12 NO ORAL AGREEMENTS.........................................26
Section 9.13 GOVERNING LAW; WAIVERS; ARBITRATION........................26
Section 9.14 Interest...................................................27
Section 9.15 EXCULPATION PROVISIONS.....................................28
</TABLE>
Exhibit A - Form of Note
-iii-
<PAGE> 5
THIS CREDIT AND SUBORDINATION AGREEMENT dated as of September 2, 1998
is between: MARINER HOLDINGS, INC., a Delaware corporation (together with its
permitted successors and assigns hereunder, the "Borrower") and ENRON CAPITAL &
TRADE RESOURCES CORP., a Delaware corporation (together with its permitted
successors and assigns hereunder, the "Lender").
R E C I T A L S
A. The Borrower has requested that the Lender lend certain funds to
the Borrower.
B. The Lender has agreed to make such loans subject to the terms and
conditions of this Agreement.
C. Contemporaneously with the funding of each loan hereunder, the
Borrower will apply the proceeds thereof for the purposes of (i) making
contributions to Mariner Energy, Inc., a Delaware corporation and a wholly
owned subsidiary of the Borrower ("Mariner Energy") for general corporate
purposes, or (ii) paying interest on the loans, or (iii) both of the foregoing.
D. In consideration of the mutual covenants and agreements herein
contained and of the loans hereinafter referred to, the parties hereto agree as
follows:
ARTICLE I
DEFINITIONS AND ACCOUNTING MATTERS
Section 1.01 Terms Defined Above. As used in this Agreement, the terms
"Borrower" and "Lender" shall have the meanings indicated above.
Section 1.02 Certain Defined Terms. As used herein, the following
terms shall have the following meanings (all terms defined in this Article I or
in other provisions of this Agreement in the singular to have the same meanings
when used in the plural and vice versa).
"Additional Costs" shall have the meaning assigned such term in
Section 5.01(a).
"Affiliate" of any Person shall mean (i) any Person directly or
indirectly controlled by, controlling or under common control with such first
Person, (ii) any director or officer of such first Person or of any Person
referred to in clause (i) above and (iii) if any Person in clause (i) above is
an individual, any member of the immediate family (including parents, spouse
and children) of such individual and any trust whose principal beneficiary is
such individual or one or more members of such immediate family and any Person
who is controlled by any such member or trust. As used in this definition,
"control" (including, with its correlative meanings, "controlled by" and "under
common control with") shall mean any Person which owns directly or indirectly
10% or more of the securities having ordinary voting power for the election of
directors or other governing body of a corporation or 10% or more of the
partnership or other ownership interests of any other Person (other than as a
limited partner of such other Person) will be deemed to control such
corporation or other Person.
<PAGE> 6
"Agreement" shall mean this Credit and Subordination Agreement, as the
same may from time to time be amended or supplemented.
"Applicable Margin" shall mean (i) 0% per annum with respect to the
Base Rate Loans; and (ii) 2.50% per annum with respect to the Eurodollar Loans.
"Base Rate" at any time shall mean a fluctuating interest rate per
annum as shall be in effect from time to time which rate per annum shall at all
times be equal to the higher of (i) the Prime Commercial Lending Rate as in
effect from time to time and (ii) the Federal Funds Rate as in effect from time
to time plus one-half of one percent (1/2%) per annum.
"Base Rate Loan" shall mean the Loans during the period of time that
the interest rate is determined on the basis of the rate referred to in the
definition of "Base Rate."
"Business Day" shall mean any day other than a day on which commercial
banks are authorized or required to close in New York, New York and, if such
day relates to a borrowing or continuation of, a payment or prepayment of
principal of or interest on, or the Interest Period for, a Eurodollar Loan or a
notice by the Borrower with respect to any such borrowing, payment, prepayment,
or Interest Period, any day which is also a day on which dealings in Dollar
deposits are carried out in the London interbank market.
"Closing Date" shall mean the date the initial Loan is made.
"Commitment" shall mean the obligation of the Lender to make Loans to
the Borrower under Section 2.01 hereof, not to exceed $25,000,000.
"Dollars" and "$" shall mean lawful money of the United States of
America.
"EBITDA" shall mean, as to the Borrower and its Subsidiaries on a
consolidated basis, and for any twelve month period, the amount equal to net
income of the Borrower and its Subsidiaries, plus, to the extent deducted from
net income, interest expense, depreciation, depletion and impairment,
amortization of leasehold and intangibles, other non-cash expenses (including
deferred taxes), and cash taxes; provided, that, gains or losses on the
disposition of assets shall not be included in EBITDA.
"Environmental Laws" shall mean any and all Governmental Requirements
pertaining to health or the environment in effect in any and all jurisdictions
in which the Borrower or any of its Subsidiaries is conducting or at any time
has conducted business, or where any Property of the Borrower or any of its
Subsidiaries is located, including without limitation, the Oil Pollution Act of
1990 ("OPA"), the Clean Air Act, as amended, the Comprehensive Environmental,
Response, Compensation, and Liability Act of 1980 ("CERCLA"), as amended, the
Federal Water Pollution Control Act, as amended, the Occupational Safety and
Health Act of 1970, as amended, the Resource Conservation and Recovery Act of
1976 ("RCRA"), as amended, the Safe Drinking Water Act, as amended, the Toxic
Substances Control Act, as amended, the Superfund Amendments and
Reauthorization Act of 1986, as amended, the Hazardous Materials Transportation
Act, as amended,
-2-
<PAGE> 7
and other environmental conservation or protection laws. The term "oil" shall
have the meaning specified in OPA, the terms "hazardous substance" and
"release" (or "threatened release") have the meanings specified in CERCLA, and
the terms "solid waste" and "disposal" (or "disposed") have the meanings
specified in RCRA; provided, however, that (i) in the event either OPA, CERCLA
or RCRA is amended so as to broaden the meaning of any term defined thereby,
such broader meaning shall apply subsequent to the effective date of such
amendment and (ii) to the extent the laws of the state in which any Property of
the Borrower or any of its Subsidiaries is located establish a meaning for
"oil," "hazardous substance," "release," "solid waste" or "disposal" which is
broader than that specified in either OPA, CERCLA or RCRA, such broader meaning
shall apply.
"Eurodollar Loan" shall mean a Loan during the period of time that the
interest rate is determined on the basis of the rate referred to in the
definition of "Eurodollar Rate."
"Eurodollar Rate" for each Interest Period shall mean an interest rate
per annum equal to the rate of interest per annum at which deposits in Dollars
in immediately available funds are offered to prime banks in the London
interbank market at 11:00 a.m. (London time) on the Interest Setting Date in an
amount substantially equal to the applicable Loan and for a period equal to
such Interest Period, determined on the basis of the provisions set forth
below:
(i) On the Interest Setting Date the Lender will determine
the interest rate for deposits in Dollars, for a period equal to that
of the Interest Period to which such Interest Setting Date relates,
which appears on the Bloomberg Financial Markets Services Display
Screen as of 11:00 a.m. (London time) on such date or if such screen
on such service ceases to display such information, such other screen
as may replace it on that service for the purpose of display of such
information (the "Bloomberg Rate"). If such rate does not appear on
the Bloomberg Financial Markets Services Display Screen, then the rate
will be determined in accordance with clause (ii) below.
(ii) If the Lender is unable to determine the Bloomberg Rate,
then on the Interest Setting Date, the Lender will determine the
arithmetic mean (rounded if necessary to the nearest one-hundredth
percent (1/100%)) of the interest rate for a period equal to that of
the Interest Period to which such Interest Setting Date relates quoted
on Reuters Screen page "LIBO" or (a) if such page on such service
ceases to display such information, such other page as may replace it
on that service for the purpose of displaying such information or (b)
if that service ceases to display such information, such page as
displays such information on such service (or, if more than one, that
one approved by the Lender as may replace the Reuters Screen) as at or
about 11:00 a.m. (London time) on that Interest Setting Date (the rate
quoted as aforesaid being the "LIBOR Screen Rate"). If the Lender is
to make a determination pursuant to this paragraph and one or more of
the LIBOR Screen Rates required for such determination shall be
unavailable, the determination shall be made on the basis of those
rates which are available.
"Event of Default" shall have the meaning set forth in Section 8.01.
-3-
<PAGE> 8
"Federal Funds Rate" shall mean, for any day, a fluctuating interest
rate per annum equal, for such day, to the weighted average of the rates on
overnight Federal funds transactions with members of the Federal Reserve System
arranged by Federal funds brokers, as published for such day (or, if such day
is not a Business Day, for the next preceding Business Day) by the Federal
Reserve Bank of New York, or, if such rate is not so published for any day
which is a Business Day, the average of the quotations for such day on such
transactions received by the Lender from three Federal funds brokers of
recognized standing selected by the Lender.
"Final Maturity Date" shall mean the earlier of (i) the date is Note
is prepaid pursuant to Section 2.05 (b) (i) hereof, (ii) the date the Loans
become due and payable pursuant to the provisions of Section 8.02, (iii) the
date that is one Business Day following the IPO Date, and (iv) March 1, 1999.
"GAAP" shall mean United States generally accepted accounting
principles as applied in accordance with Section 1.03.
"Governmental Authority" shall include the country, the state, county,
city and political subdivisions in which any Person or such Person's Property
is located or which exercises valid jurisdiction over any such Person or such
Person's Property, and any court, agency, department, commission, board, bureau
or instrumentality of any of them including monetary authorities which
exercises valid jurisdiction over any such Person or such Person's Property.
Unless otherwise specified, all references to Governmental Authority herein
shall mean a Governmental Authority having jurisdiction over, where applicable,
the Borrower or any of its Subsidiaries or any of their respective Property or
the Lender.
"Governmental Requirement" shall mean any law, statute, code,
ordinance, order, determination, rule, regulation, judgment, decree,
injunction, franchise, permit, certificate, license, authorization or other
directive or requirement (whether or not having the force of law), including,
without limitation, environmental laws, energy regulations and occupational,
safety and health standards or controls, of any Governmental Authority.
"Highest Lawful Rate" shall mean the maximum nonusurious interest
rate, if any, that at any time or from time to time may be contracted for,
taken, reserved, charged or received on the Note under laws applicable to the
Lender which are presently in effect or, to the extent allowed by law, under
such applicable laws which may hereafter be in effect and which allow a higher
maximum nonusurious interest rate than applicable laws now allow.
"Indebtedness" shall mean for any Person, without duplication, (i) all
indebtedness or other obligations of such Person for borrowed money and all
indebtedness of such Person with respect to any other items (other than
accounts payable, income taxes payable, deferred taxes and deferred credits)
which would, in accordance with GAAP, be classified as a liability on the
balance sheet of such Person, (ii) obligations of such Person to pay the
deferred purchase price of property or services (other than accounts payable in
the ordinary course of business), (iii) obligations of such Person (contingent
or otherwise) under reimbursement or similar agreements with respect to the
issuance of letters of credit, (iv) the aggregate of the present values
(discounted in accordance with sound
-4-
<PAGE> 9
financial practice at a rate of 10.00% per annum) of the net amount of all
rental and other minimum lease payments that such Person is obligated to pay,
or has guaranteed, during the remaining term of all Principal Operating Leases
(and, in the case of guarantees by such Person, all leases which would be
Principal Operating Leases if such Person were the lessee thereunder)
(including any period for which any such lease has been extended or may, at the
option of the lessor, be extended) (the net amount of rental and other minimum
lease payments required to be paid under any such lease for any such term shall
be the amount of the rent payable by the lessee with respect to such period,
after excluding amounts required to be paid on account of maintenance and
repairs, insurance, Taxes, assessments, water rates and similar charges and
contingent rents such as those based on sales), (v) all indebtedness or other
obligations of any other Person of the type specified in clause (i), (ii),
(iii), or (iv) above, the payment or collection of which such Person has
guaranteed (except by reason of endorsement for collection in the ordinary
course of business) or in respect of which such Person is liable, contingently
or otherwise, including, without limitation, liable by way of agreement to
purchase products or securities, to provide funds for payment, to maintain
working capital or other balance sheet conditions or otherwise to assure a
creditor against loss, and (vi) all indebtedness or other obligations of any
other Person of the type specified in clause (i), (ii), (iii), (iv), or (v)
above secured by (or for which the holder of such indebtedness has an existing
right, contingent or otherwise, to be secured by) any lien, upon or in property
(including, without limitation, accounts and contract rights) owned by such
Person, whether or not such Person has assumed or becomes liable for the
payment of such indebtedness or obligations.
"Indemnity Matters" shall mean any and all actions, suits, proceedings
(including any investigations, litigation or inquiries), claims, demands and
causes of action made or threatened against a Person and, in connection
therewith, all losses, liabilities, damages (including, without limitation,
consequential damages) or reasonable costs and expenses of any kind or nature
whatsoever incurred by such Person whether caused by the sole or concurrent
negligence of such Person seeking indemnification.
"Initial Date" shall have the meaning assigned to such term in Section
7.02(c).
"Interest Period" shall mean, with respect to Eurodollar Loans, the
period commencing on and including (i) the Closing Date, (ii) the date of
expiration of the then current Interest Period applicable thereto if any
Eurodollar Loan is continued pursuant to Section 2.02(b), or (iii) the date of
any conversion of the Base Rate Loan back to a Eurodollar Loan pursuant to
Section 5.04, and ending on but excluding the numerically corresponding day in
each month thereafter, provided that, each Interest Period which commences on
the last Business Day of a calendar month (or on any day for which there is no
numerically corresponding day in the appropriate subsequent calendar month),
shall end on the last Business Day of the appropriate subsequent calendar
month, and provided further that, each Interest Period which would otherwise
end on a day which is not a Business Day shall end on the next succeeding
Business Day (or, if such next succeeding Business Day falls in the next
succeeding calendar month, on the next preceding Business Day).
"Interest Setting Date" shall mean the date which is two Business Days
before the first day of a particular Interest Period.
-5-
<PAGE> 10
"IPO Date" means the closing date of the initial public offering of
equity securities of the Borrower in a firm commitment underwriting registered
under the Securities Act of 1933, as amended.
"Loan" shall have the meaning set forth in Section 2.01.
"Note" shall mean the Note provided for by Section 2.04, together with
any and all renewals, extensions for any period, increases, rearrangements,
substitutions or modifications thereof.
"Other Taxes" shall have the meaning assigned such term in Section
4.03(b).
"Payment Blockage Period" shall have the meaning assigned to such term
in Section 7.02(c).
"Person" shall mean any individual, corporation, company, voluntary
association, partnership, joint venture, trust, unincorporated organization or
government or any agency, instrumentality or political subdivision thereof, or
any other form of entity.
"Post-Default Rate" shall mean, in respect of any principal of the
Loans or any other amount payable by the Borrower under this Agreement or the
Note which is not paid when due (whether at stated maturity, by acceleration or
otherwise), a rate per annum during the period commencing on the due date until
such amount is paid in full or the default is cured or waived equal to 2% per
annum above the Base Rate or the Eurodollar Rate, as applicable, plus the
Applicable Margin, but in no event to exceed the Highest Lawful Rate.
"Prime Commercial Lending Rate" shall mean that per annum rate of
interest from time to time announced by The Chase Manhattan Bank, N.A. at its
principal office as its prime commercial lending rate (or comparable rate, if
The Chase Manhattan Bank, N.A. does not so designate a "prime commercial
lending rate"), the Prime Commercial Lending Rate to change when and as such
prime commercial lending rate changes. The Prime Commercial Lending Rate is a
reference rate and does not necessarily represent the lowest or best rate
actually charged to any customer. The Chase Manhattan Bank, N.A. may make
commercial loans or other loans at rates of interest at, above or below the
Prime Commercial Lending Rate. For purposes hereof, the principal office of The
Chase Manhattan Bank, N.A. as the date hereof, is its office located at 4 Chase
Metrotech Center, 13th Floor, Brooklyn, New York 11245.
"Principal Office" shall mean the principal office of the Lender,
presently located at 1400 Smith Street, Houston, Texas 77002.
"Principal Operating Lease" shall mean a lease (other than a capital
lease) of the Borrower or any of its Subsidiaries in respect of which lease the
aggregate of the present values (discounted in accordance with sound financial
practice at a rate of 10% per annum) of the net amount of all rental and other
minimum lease payments that the Borrower or any of its Subsidiaries is
obligated to pay during the remaining term of such lease (including any period
for which any such lease has been extended or may, at the option of the lessor,
be extended) is equal to or greater than five percent of the net worth of the
Borrower and its Subsidiaries on a consolidated basis at the time such
determination is made. The net amount of rental and other minimum lease
payments required to be
-6-
<PAGE> 11
paid under any Principal Operating Lease for any such term shall be the amount
of rent payable by the lessee with respect to such period, after excluding
amounts required to be paid on account of maintenance and repairs, insurance,
Taxes, assessments, water rates and similar charges and contingent rents such
as those based on sales; provided, that, in no event shall the Borrower's lease
of office space for its principal place of business be considered a Principal
Operating Lease.
"Property" shall mean any interest in any kind of property or asset,
whether real, personal or mixed, or tangible or intangible.
"Refunding Debt" means Indebtedness for borrowed money incurred by the
Borrower or any of its Subsidiaries after the date hereof.
"Regulatory Change" shall mean any change after the Closing Date in
any Governmental Requirement or the adoption or making after such date of any
interpretations, directives or requests applying to a class of lenders
(including the Lender) of or under any Governmental Requirement (whether or not
having the force of law) by any Governmental Authority charged with the
interpretation or administration thereof.
"Required Senior Lenders" shall mean with respect to any action to be
taken or proposed to be taken by holders of Senior Indebtedness, the requisite
number or percentage of holders of Senior Indebtedness necessary to approve
such action pursuant to the terms of the instruments governing such Senior
Indebtedness.
"Senior Credit Agreement" means the Credit Agreement dated June 28,
1996 among Mariner Energy and the banks party thereto.
"Senior Indebtedness" shall mean the Borrower's obligations in respect
of the Senior Loan and all indebtedness, liabilities and obligations of Mariner
Energy evidenced by the Senior Credit Agreement, as such agreement may be
amended, renewed, extended, supplemented, restated, refinanced, increased, or
otherwise modified from time to time, including without limitation, as such
agreement may be refinanced with different lenders under a different agreement.
"Senior Loan" means any and all of the loans to Mariner Energy
pursuant to the Senior Credit Agreement.
"Subordinate Obligations" shall mean all debts, liabilities and
obligations of the Borrower to the Lender arising under or pursuant to this
Agreement and all other documents, instruments or agreements evidencing,
securing, or otherwise pertaining to the Note or the Loans, including, without
limitation, all obligations to pay principal and interest on the Note and all
obligations to pay costs, fees, expenses and indemnification payments under
this Agreement and all other documents, instruments or agreements evidencing,
securing, or otherwise pertaining to the Note or the Loans.
"Subsidiary" shall mean, as to any Person, (i) any corporation more
than 50% of whose stock of any class or classes having by the terms thereof
ordinary voting power to elect a majority of the directors of such corporation
(irrespective of whether or not at the time stock of any class or classes of
such corporation shall have or might have voting power by reason of the
happening of any
-7-
<PAGE> 12
contingency) is at the time owned by such Person and/or one or more
Subsidiaries of such Person and (ii) any partnership, association, joint
venture or other entity in which such Person and/or one or more Subsidiaries of
such Person has more than a 50% equity interest at the time.
"Taxes" shall have the meaning assigned such term in Section 4.03(a).
Section 1.03 Accounting Terms and Determinations. Unless otherwise
defined or specified herein, all accounting terms shall be construed herein,
all accounting determinations hereunder shall be made, and all financial
records shall be maintained in accordance with GAAP applied on a consistent
basis.
ARTICLE II
LOANS AND COMMITMENTS
Section 2.01 Loans. The Lender agrees, subject to the terms and
conditions of this Agreement, to advance funds (each such advance, a "Loan")
from time to time prior to the earlier of the IPO Date and the Final Maturity
Date to the Borrower in an aggregate principal amount not to exceed the
Commitment. The initial Loan shall be made by way of a single borrowing made on
the Closing Date. Whenever the Borrower desires that the Lender make an
additional Loan hereunder after the Closing Date, the Borrower shall give at
least three (3) Business Days advance written notice to the Lender specifying,
subject to the provisions hereof, (i) the aggregate principal amount of such
Loan to be made (which shall be in a minimum amount of $1,000,000 and in
integral amounts of $100,000) and (ii) the date of such Loan (which shall be a
Business Day). The Lender shall make such additional Loans to the Borrower in
an aggregate amount which, when added to the principal amount of all other
outstanding Loans, does not exceed the unused portion of the Commitment so long
as (A) no condition or event that constitutes or would, with notice or lapse of
time or both, constitute, an Event of Default has occurred and is continuing
and (B) there has been no material adverse change in (1) the assets,
liabilities, financial condition or operations of the Borrower and its
Subsidiaries taken as a whole or (2) the ability of the Borrower to carry out
its business or meet its obligations under this Agreement and the Note. Loans
that are prepaid pursuant to Section 2.05 (a) may be reborrowed. Loans that are
prepaid pursuant to Section 2.05 (b) may not be reborrowed.
Section 2.02 Borrowing.
(a) Borrowing. Initially, each Loan shall be a Eurodollar Loan and the
Interest Period shall be one month.
(b) Continuation. Except as otherwise provided in Article V, the
entire amount of each Eurodollar Loan shall be automatically continued beyond
the expiration of the then current Interest Period relating thereto as a
Eurodollar Loan with an Interest Period of one month.
-8-
<PAGE> 13
Section 2.03 Fees. The Borrower shall pay to ECT Securities Limited
Partnership. the structuring fee in the amounts and at the times set forth in
the fee letter between ECT Securities Limited Partnership and the Borrower
dated the date hereof.
Section 2.04 Note. The Loans shall be evidenced by a single promissory
note of the Borrower in substantially the form of Exhibit A hereto, dated as of
the Closing Date, payable to the order of the Lender and otherwise duly
completed. The date, amount, interest rate, and Interest Period of each Loan
and all payments made on account of the principal thereof, shall be recorded by
the Lender on its books for the Note, and, prior to any transfer, endorsed by
the Lender on the schedule attached to the Note or any continuation thereof.
Such records shall be deemed conclusive absent manifest error.
Section 2.05 Prepayments.
(a) Optional Prepayments. Except as permitted by Section 2.05 (b), the
Borrower may not prepay, in whole or in part, the Loans.
(b) Mandatory Prepayments. The Borrower shall prepay the Loans:
(i) in whole or in part, together with interest accrued
thereon, from the net cash proceeds received by the Borrower with
respect to the securities offering effected on the IPO Date, within
one Business Day after the IPO Date; and
(ii) in whole or in part, together with interest accrued
thereon, from the net cash proceeds of Refunding Debt or sale of
equity (other than in an initial public offering) within one Business
Day after the date any Refunding Debt is incurred or such sale is
consummated.
Any partial prepayment shall be applied first to interest on and then to the
principal of the Note.
(c) Prepayments permitted or required under this Section 2.05 shall be
without premium or penalty, except as required under Section 5.05.
ARTICLE III
PAYMENTS OF PRINCIPAL AND INTEREST
Section 3.01 Repayment of Loans. Except as is otherwise provided in
the Note, the Borrower will pay to the Lender the entire outstanding principal
balance of the Loans on the Final Maturity Date.
-9-
<PAGE> 14
Section 3.02 Interest.
(a) The Borrower will pay to the Lender interest on the unpaid
principal amount of the Loans, for the period commencing on the Closing Date,
to but excluding, the date the Loans are paid in full, at the following rates
per annum:
(i) if such a Loan is a Eurodollar Loan, for each Interest
Period relating thereto, the Eurodollar Rate (as in effect from time
to time) plus the Applicable Margin, but in no event to exceed the
Highest Lawful Rate; and
(ii) if such a Loan is the Base Rate Loan, the Base Rate for
such Loan plus the Applicable Margin, but in no event to exceed the
Highest Lawful Rate.
(b) Notwithstanding the foregoing, the Borrower will pay to the Lender
interest at the applicable Post-Default Rate on any principal of the Loans, and
(to the fullest extent permitted by law) on any other amount payable by the
Borrower hereunder or under the Note which shall not be paid in full when due
(whether at stated maturity, by acceleration or otherwise), for the period
commencing on the due date thereof until the same is paid in full.
(c) Accrued interest on the Loans shall be payable as follows:
(i) if such Loan is a Eurodollar Loan, on the last day of
each Interest Period applicable thereto, at maturity (whether by
acceleration or otherwise), and after maturity, on demand; and
(ii) if such Loan is a Base Rate Loan, on the last day of
each month, at maturity (whether by acceleration or otherwise), and
after maturity, on demand.
(d) Promptly after the determination of any interest rate provided for
herein or any change therein, the Lender shall notify the Borrower thereof.
Each determination by the Lender of an interest rate or fee hereunder shall,
except in cases of manifest error, be final, conclusive and binding on the
parties.
ARTICLE IV
PAYMENTS; COMPUTATIONS; ETC.
Section 4.01 Payments. Except to the extent otherwise provided herein,
all payments of principal, interest and other amounts to be made by the
Borrower under this Agreement and the Note shall be made in Dollars, in
immediately available funds, to the Lender at CitiBank N.A., New York, New
York, ABA No. 021000089 for the account of ECT-Finance, Account No. 4067-3621,
Re: Mariner, not later than 11:00 a.m. (New York time) on the date on which
such payments shall become due (each such payment made after such time on such
due date to be deemed to have been made on the next succeeding Business Day).
Such payments shall be made without (to the fullest
-10-
<PAGE> 15
extent permitted by applicable law) defense, set-off or counterclaim. All
payments shall be applied first to interest and then to principal.
Section 4.02 Computations. Interest on Eurodollar Loans shall be
computed on the basis of a year of 360 days and actual days elapsed (including
the first day but excluding the last day) occurring in the period for which
payable, unless such calculation would exceed the Highest Lawful Rate, in which
case interest shall be calculated on the per annum basis of a year of 365 or
366 days, as the case may be. Interest on the Base Rate Loan and fees shall be
computed on the basis of a year of 365 or 366 days, as the case may be.
Section 4.03 Taxes.
(a) Payments Free and Clear. Any and all payments by the Borrower
hereunder shall be made, in accordance with Section 4.01, free and clear of,
and without deduction for, any and all present or future taxes, levies,
imposts, deductions, charges or withholdings, and all liabilities with respect
thereto, excluding, taxes imposed on Lender's income, and franchise or similar
taxes imposed on the Lender, by (i) any jurisdiction (or political subdivision
thereof) of which the Lender, is a citizen or resident, (ii) the jurisdiction
(or any political subdivision thereof) in which the Lender is organized, or
(iii) any jurisdiction (or political subdivision thereof) in which the Lender
is presently doing business which taxes are imposed solely as a result of doing
business in such jurisdiction (all such non-excluded taxes, levies, imposts,
deductions, charges, withholdings and liabilities being hereinafter referred to
as "Taxes"). If the Borrower shall be required by law to deduct any Taxes from
or in respect of any sum payable hereunder to the Lender (i) the sum payable
shall be increased by the amount necessary so that after making all required
deductions (including deductions applicable to additional sums payable under
this Section 4.03) the Lender shall receive an amount equal to the sum it would
have received had no such deductions been made, (ii) the Borrower shall make
such deductions and (iii) the Borrower shall pay the full amount deducted to
the relevant taxing authority or other Governmental Authority in accordance
with applicable law.
(b) Other Taxes. In addition, to the fullest extent permitted by
applicable law, the Borrower agrees to pay any present or future stamp or
documentary taxes or any other excise or property taxes, charges or similar
levies that arise from any payment made hereunder or from the execution,
delivery or registration of, or otherwise with respect to, this Agreement
(hereinafter referred to as "Other Taxes").
(c) INDEMNIFICATION. TO THE FULLEST EXTENT PERMITTED BY APPLICABLE
LAW, THE BORROWER WILL INDEMNIFY THE LENDER FOR THE FULL AMOUNT OF TAXES AND
OTHER TAXES (INCLUDING, BUT NOT LIMITED TO, ANY TAXES OR OTHER TAXES IMPOSED BY
ANY GOVERNMENTAL AUTHORITY ON AMOUNTS PAYABLE UNDER THIS SECTION 4.03) PAID BY
THE LENDER, AND ANY LIABILITY (INCLUDING PENALTIES, INTEREST AND EXPENSES)
ARISING THEREFROM OR WITH RESPECT THERETO, WHETHER OR NOT SUCH TAXES OR OTHER
TAXES WERE CORRECTLY OR LEGALLY ASSERTED UNLESS THE PAYMENT OF SUCH TAXES WAS
NOT CORRECTLY OR LEGALLY ASSERTED AND THE LENDER'S PAYMENT OF SUCH TAXES OR
OTHER TAXES WAS THE RESULT OF ITS GROSS NEGLIGENCE OR WILLFUL MISCONDUCT. ANY
PAYMENT PURSUANT TO SUCH INDEMNIFICATION SHALL BE MADE WITHIN THIRTY (30) DAYS
AFTER THE DATE THE LENDER MAKES WRITTEN DEMAND THEREFOR. IF THE LENDER
-11-
<PAGE> 16
RECEIVES A REFUND OR CREDIT IN RESPECT OF ANY TAXES OR OTHER TAXES FOR WHICH
THE LENDER HAS RECEIVED PAYMENT FROM THE BORROWER IT SHALL PROMPTLY NOTIFY THE
BORROWER OF SUCH REFUND OR CREDIT AND SHALL, IF NO DEFAULT HAS OCCURRED AND IS
CONTINUING, WITHIN THIRTY (30) DAYS AFTER RECEIPT OF A REQUEST BY THE BORROWER
(OR PROMPTLY UPON RECEIPT, IF THE BORROWER HAS REQUESTED APPLICATION FOR SUCH
REFUND OR CREDIT PURSUANT HERETO), PAY AN AMOUNT EQUAL TO SUCH REFUND OR CREDIT
TO THE BORROWER WITHOUT INTEREST (BUT WITH ANY INTEREST SO REFUNDED OR
CREDITED), PROVIDED THAT THE BORROWER, UPON THE REQUEST OF THE LENDER, AGREES
TO RETURN SUCH REFUND OR CREDIT (PLUS PENALTIES, INTEREST OR OTHER CHARGES) TO
THE LENDER IN THE EVENT THE LENDER IS REQUIRED TO REPAY SUCH REFUND OR CREDIT.
ARTICLE V
CAPITAL ADEQUACY
Section 5.01 Capital Adequacy; Additional Costs.
(a) Eurodollar Regulations, etc. The Borrower shall pay directly to
Lender from time to time such amounts as the Lender may determine to be
necessary to compensate the Lender for any costs which it determines are
attributable to its making or maintaining of Eurodollar Loans hereunder or its
obligation to make any Eurodollar Loans hereunder, or any reduction in any
amount receivable by the Lender hereunder in respect of any Eurodollar Loan or
such obligation (such increases in costs and reductions in amounts receivable
being herein called "Additional Costs"), resulting from any Regulatory Change
which: (i) changes the basis of taxation of any amounts payable to the Lender
under this Agreement or the Note in respect of the Eurodollar Loans (other than
taxes imposed on the overall net income of the Lender for the Eurodollar Loans
by the jurisdiction of the Principal Office); or (ii) imposes or modifies any
reserve, special deposit, minimum capital, capital ratio or similar
requirements relating to any extensions of credit or other assets of, or any
deposits with or other liabilities of the Lender (including Eurodollar Loans or
any deposits referred to in the definition of "Eurodollar Rate" in Section 1.02
hereof), or the Eurodollar interbank market; or (iii) imposes any other
condition affecting this Agreement or the Note (or any of such extensions of
credit or liabilities). The Lender will notify the Borrower of any event
occurring after the Closing Date which will entitle the Lender to compensation
pursuant to this Section 5.01(a) as promptly as practicable after it obtains
knowledge thereof and determines to request such compensation.
(b) Regulatory Change. Without limiting the effect of the provisions
of Section 5.01(a), in the event that, by reason of any Regulatory Change or
any other circumstances arising after the Closing Date affecting the Lender,
the Eurodollar interbank market or the Lender's position in such market, the
Lender either (i) incurs Additional Costs or (ii) becomes subject to
restrictions on the amount of such a category of liabilities or assets which it
may hold, then, if the Lender so elects by notice to the Borrower, the
obligation of the Lender to continue Eurodollar Loans shall be terminated.
(c) Capital Adequacy. Without limiting the effect of the foregoing
provisions of this Section 5.01 (but without duplication), the Borrower shall
pay directly to the Lender from time to
-12-
<PAGE> 17
time on request such amounts as the Lender may reasonably determine to be
necessary to compensate it or its parent or holding company for any costs which
it determines are attributable to the maintenance by it or its parent or
holding company pursuant to any Governmental Requirement following any
Regulatory Change, of capital in respect of the Note or the Loans (such
compensation to include, without limitation, an amount equal to any reduction
of the rate of return on assets or equity of the Lender or its parent or
holding company to a level below that which the Lender or its parent or holding
company could have achieved but for such Governmental Requirement). The Lender
will notify the Borrower that the Lender is entitled to compensation pursuant
to this Section 5.01(c) as promptly as practicable after it determines to
request such compensation.
(d) Compensation Procedure. If Lender notifies the Borrower of the
incurrence of Additional Costs under this Section 5.01, such notice to the
Borrower shall set forth the basis and amount of its request for compensation.
Determinations and allocations by the Lender for purposes of this Section 5.01
of the effect of any Regulatory Change pursuant to Section 5.01(a) or (b), or
of the effect of capital maintained pursuant to Section 5.01(c), on its costs
or rate of return of maintaining the Loans or its obligation to make the Loans,
or on amounts receivable by it in respect of the Loans, and of the amounts
required to compensate the Lender under this Section 5.01, shall be conclusive
and binding for all purposes, provided that such determinations and allocations
are made on a reasonable basis. Any request for additional compensation under
this Section 5.01 shall be paid by the Borrower within thirty (30) days of the
receipt by the Borrower of the notice described in this Section 5.01(d).
Section 5.02 Limitation on Eurodollar Loans. Anything herein to the
contrary notwithstanding, if, on or prior to the determination of any
Eurodollar Rate for any Interest Period:
(i) the Lender determines (which determination shall be
conclusive absent manifest error) that quotations of interest rates
for the relevant deposits referred to in the definition of "Eurodollar
Rate" in Section 1.02 are not being provided in the relevant amounts
or for the relevant maturities for purposes of determining rates of
interest for the Eurodollar Loans as provided herein; or
(ii) the Lender determines (which determination shall be
conclusive absent manifest error) that the relevant rates of interest
referred to in the definition of "Eurodollar Rate" in Section 1.02
upon the basis of which the rate of interest for the Eurodollar Loans
for such Interest Period is to be determined are not likely to
adequately cover the cost to the Lender of making or maintaining the
Eurodollar Loans;
then the Lender shall give the Borrower prompt notice thereof, and the
obligation of the Lender to continue the Eurodollar Loans shall be terminated.
Section 5.03 Illegality. Notwithstanding any other provision of this
Agreement, in the event that it becomes unlawful for the Lender to honor its
obligation to make or maintain the Eurodollar Loans hereunder, then the Lender
shall promptly notify the Borrower thereof and the Lender's obligation to
continue the Eurodollar Loans shall be terminated.
-13-
<PAGE> 18
Section 5.04 Base Rate Loans Pursuant to Sections 5.01, 5.02 and 5.03.
If the obligation of the Lender to make Eurodollar Loans shall be terminated
pursuant to Sections 5.01, 5.02 or 5.03, all Eurodollar Loans shall be
automatically converted to a Base Rate Loan. Notwithstanding anything to the
contrary contained in this Article V, the Lender agrees that it will
immediately notify the Borrower if any of the matters that were described in
any notice provided by the Lender pursuant to Section 5.01, 5.02 or 5.03 cease
to exist, and each such notice shall constitute a withdrawal of the notice
given by the Lender pursuant to such Section. Upon delivery of the notice
referred to in the immediately preceding sentence, the Base Rate Loan shall
automatically convert back to a Eurodollar Loan with an Interest Period of one
month, beginning on the date of conversion. If the Lender requests additional
compensation under Section 5.01, the Borrower shall have the right, if no Event
of Default then exists, to convert each of the Eurodollar Loans to a Base Rate
Loan on the last day of such Eurodollar Loan's current Interest Period, upon
payment of all such compensation accrued to the date of such conversion.
Section 5.05 Compensation. The Borrower shall pay to the Lender within
thirty (30) days of receipt of written request of the Lender (which request
shall set forth, in reasonable detail, the basis for requesting such amounts
and which shall be conclusive and binding for all purposes provided that such
determinations are made on a reasonable basis), such amount or amounts as shall
compensate it for any funding losses or other loss, cost, expense or liability
which the Lender may sustain as a result of any prepayment of the Eurodollar
Loans for any reason (including, without limitation, the acceleration of the
Loans pursuant to Section 8.02) on any day other than the last day of the
applicable Interest Period.
ARTICLE VI
COVENANTS
Section 6.01 Financial Covenants. So long as the Commitment is
outstanding hereunder or any Loan remains unpaid, the Borrower shall:
(a) Cash Flow Coverage Ratio. Maintain for itself and its
Subsidiaries on a consolidated basis and for each twelve month period
ending on the last day of each fiscal quarter, a ratio of (i) EBITDA
to (ii) the sum of (A) interest expense of the Borrower and its
Subsidiaries on a consolidated basis during such period plus (B)
maintenance capital expenditures of the Borrower and its Subsidiaries
on a consolidated basis during such twelve month period plus (C) cash
taxes paid by or on behalf of the Borrower and its Subsidiaries on a
consolidated basis during such period of at least 1.50 to 1.00. For
purposes of this Section 6.01(a), "maintenance capital expenditures"
shall mean the annual capital expenditures made by the Borrower and
its Subsidiaries on a consolidated basis as necessary to maintain
proved producing reserves at the levels set forth for the Properties
listed in the Ryder Scott Reserve Report relating to the Company dated
December 31, 1997; and
(b) Interest Coverage Ratio. Maintain for itself and its
Subsidiaries on a consolidated basis and for each twelve month period
ending on the last day of each fiscal
-14-
<PAGE> 19
quarter, a ratio of (i) EBITDA to (ii) interest expense of the
Borrower and its Subsidiaries on a consolidated basis during such
period of at least 2.25 to 1.00.
Section 6.02 Limitation on Indebtedness. The Borrower shall not, and
shall not permit its Subsidiaries to, create, incur, assume or suffer to exist
any consolidated Indebtedness other than consolidated Indebtedness outstanding
on the Closing Date, Refunding Debt, the Loans and the Senior Indebtedness.
ARTICLE VII
SUBORDINATION
Section 7.01 Loans Subordinated to Senior Indebtedness. The Borrower
and the Lender agree that the payment of the Subordinate Obligations is
subordinated, to the extent and in the manner provided in this Article VII, to
the prior payment in full of all Senior Indebtedness. This Article is intended
for the benefit of all Persons who hold, or, in reliance on the provisions of
this Article, become holders of, or continue to hold, Senior Indebtedness, and
each such Person shall be entitled to enforce such provision. No amendment or
other modification of the provisions of this Article shall be effective against
any holder of Senior Indebtedness without the prior written consent of Required
Senior Lenders.
Section 7.02. Borrower and its Subsidiaries Not to Make Payments with
Respect to Loans in Certain Circumstances.
(a) Upon the maturity of any Senior Indebtedness by lapse of time,
acceleration (unless waived) or otherwise (including all installments of
principal and interest), all Senior Indebtedness then due and owing shall first
be paid in full, or such payment shall be duly provided for in cash in a manner
satisfactory to all of the holders of such Senior Indebtedness, before any
payment is made on account of the Subordinate Obligations.
(b) Upon the happening of any default in payment of any Senior
Indebtedness and the continuation of such default beyond any applicable period
of grace, then, unless and until such default shall have been cured to the
reasonable satisfaction of Required Senior Lenders or waived or shall have
ceased to exist, no payment shall be made by the Borrower or any of its
Subsidiaries with respect to the Subordinate Obligations.
(c) During the continuance of any default or other event (other than a
payment default) with respect to the Senior Indebtedness that will, with the
giving of notice, lapse of time, or both, unless cured or waived, permit the
holders of the Senior Indebtedness as to which such default relates to
accelerate its maturity, unless the representatives for the holders of such
Senior Indebtedness(or the holders of at least a majority in principal amount
of the aggregate amount of all the Senior Indebtedness then outstanding), have
failed, within thirty (30) days after the occurrence of such default or other
event, to instruct the Lender in writing to not receive such payment, no
payment may be made by the Borrower or any of its Subsidiaries in respect to
the Subordinate Obligations, for a period ("Payment Blockage Period")
commencing on the date of such notice (such
-15-
<PAGE> 20
date being the "Initial Date") and ending 179 days thereafter (unless such
Payment Blockage Period shall be terminated by written notice to the Lender
from such representative who commenced the Payment Blockage Period). No new
Payment Blockage Period may be commenced with respect to the Subordinate
Obligations unless and until (i) 360 consecutive days have elapsed since the
Initial Date of the immediately prior Payment Blockage Period and (ii) all
scheduled payments in respect of the Subordinate Obligations that have come
due, but that have not been paid as a result of the prior Payment Blockage
Period, have been paid in full. No nonpayment default that existed or was
continuing on the Initial Date of any Payment Blockage Period shall be, or be
made, the basis of a subsequent notice to the Lender for the commencement of a
subsequent Payment Blockage Period. Nothing contained in the proviso described
in this paragraph will limit the ability of the Lender to take any action to
accelerate the maturity of the Loans or pursue any rights or remedies
hereunder, provided that the Senior Indebtedness then and thereafter due or
declared to be due shall first be paid in full before the Lender is entitled to
receive any payment from the Borrower of principal of or interest on the Loans.
Notwithstanding the foregoing, it is expressly acknowledged and agreed that
should the holders of the Senior Indebtedness (or the representatives for such
holders) accelerate the maturity of the Senior Indebtedness, the provisions of
Section 7.02 (a) shall thereupon become applicable, in lieu of the provisions
of this Section 7.02 (c).
(d) In the event that notwithstanding the provisions of this Section
7.02 the Borrower or any of its Subsidiaries shall make any payment to the
Lender on account of the Subordinate Obligations or Lender shall receive or
retain any such payment at any time when such payment is prohibited pursuant to
clauses (a) through (c) of this Section 7.02, then, such payment (subject to
the provisions of Sections 7.06 and 7.07) shall be held by the Lender in trust
for the benefit of, and shall be paid forthwith over and delivered to, the
holders of Senior Indebtedness (pro rata as to each of such holders on the
basis of the respective amounts of Senior Indebtedness held by them) or their
representative under the credit agreement pursuant to which Senior Indebtedness
may have been issued, as their respective interests may appear, for application
to the payment of all Senior Indebtedness remaining unpaid to the extent
necessary to pay all Senior Indebtedness in full in accordance with its terms,
after giving effect to any concurrent payment or distribution to or for the
holders of Senior Indebtedness.
(e) The Borrower shall give prompt written notice to the Lender of any
default in the payment of principal of or interest on any Senior Indebtedness;
provided, however that the failure by the Borrower to provide such notice shall
not affect the rights of the holders of the Senior Indebtedness.
Section 7.03. Loans Subordinated to Prior Payment of All Senior
Indebtedness on Dissolution, Liquidation or Reorganization for the Benefit of
Creditors of the Borrower. Upon any distribution of assets of the Borrower or
any of its Subsidiaries in any dissolution, winding up, liquidation or
reorganization for the benefit of creditors of the Borrower or any of its
Subsidiaries (whether in bankruptcy, insolvency or receivership proceedings or
upon an assignment for the benefit of creditors or otherwise):
(a) the holders of all Senior Indebtedness shall first be entitled to
receive payments in full of all Senior Indebtedness (including without
limitation interest accruing after the
-16-
<PAGE> 21
commencement of any such proceeding at the rate specified in the documentation
governing the terms of the respective Senior Indebtedness) in cash or in a
manner satisfactory to all of its holders before the Lender is entitled to
receive any payment on account of the Subordinate Obligations;
(b) any payment or distribution of assets of the Borrower or any of
its Subsidiaries of any kind or character, whether in cash, property or
securities, to which the Lender would be entitled except for the provisions of
this Article VII, including any such payment or distribution which may be
payable or deliverable by reason of the payment of any other indebtedness of
the Borrower being subordinated to the payment of the Subordinated Obligations,
shall be paid by the liquidating trustee or agent or other person making such
payment or distribution directly to the holders of the Senior Indebtedness or
their representative under the credit agreement under which Senior Indebtedness
may have been issued (pro rata as to each such holder, on the basis of the
respective amounts of unpaid Senior Indebtedness held by each), to the extent
necessary to make payment in full of all Senior Indebtedness remaining unpaid,
after giving effect to any concurrent payment or distribution or provision
therefor to the holders of such Senior Indebtedness, except that the Lender
would be entitled to receive securities that are subordinated to Senior
Indebtedness remaining outstanding after such proceeding to at least the same
extent as the Subordinate Obligations; and
(c) in the event that notwithstanding the foregoing provisions of this
Section 7.03, any payment or distribution of assets of the Borrower or any of
its Subsidiaries of any kind or character, whether in cash, property or
securities, including any such payment or distribution which may be payable or
deliverable by reason of the payment of any other indebtedness of the Borrower
being subordinated to the payment of the Subordinate Obligations, shall be
received by the Lender on account of the Subordinate Obligations before all
Senior Indebtedness is paid in full, such payment or distribution (subject to
the provisions of Sections 7.06 and 7.07) shall be received and held in trust
for and shall be paid over to the holders of the Senior Indebtedness remaining
unpaid or unprovided for or their representative under the credit agreement
under which such Senior Indebtedness may have been issued (pro rata as provided
in subsection (b) above), for application to the payment of such Senior
Indebtedness until all such Senior Indebtedness shall have been paid in full,
after giving effect to any concurrent payment or distribution or provision
therefor to the holders of such Senior Indebtedness, except that the Lender
would be entitled to receive securities that are subordinated to Senior
Indebtedness to at least the same extent as the Subordinate Obligations.
(d) The Borrower shall give prompt written notice to the
Lender of any dissolution, winding up, liquidation or reorganization of the
Borrower or any of its Subsidiaries.
Section 7.04. Lender to be Subrogated to Rights of Holders of Senior
Indebtedness. Subject to the payment in full of all Senior Indebtedness, the
Lender shall be subrogated equally and ratably to the rights of the holders of
the Senior Indebtedness to receive payments or distributions of assets of the
Borrower or any of its Subsidiaries, whether in cash, property or securities,
applicable to the Senior Indebtedness until all amounts owing on the Loans
shall be paid in full, and for the purpose of such subrogation no payments or
distributions to the holders of the Senior Indebtedness by or on behalf of the
Borrower or any of its Subsidiaries or by or on behalf of the Lender by virtue
of this Article which otherwise would have been made to the Lender shall, as
between the Borrower, its
-17-
<PAGE> 22
creditors other than holders of the Senior Indebtedness, and the Lender be
deemed to be payment by the Borrower or such Subsidiary to or on account of the
Senior Indebtedness.
Section 7.05. Obligation of the Borrower Unconditional. The provisions
of this Article VII are intended solely for the purpose of defining the
relative rights of the Lender, on the one hand, and the holders of the Senior
Indebtedness, on the other hand, and nothing contained in this Article VII or
elsewhere in this Agreement is intended to or shall impair as between the
Borrower, its creditors other than holders of Senior Indebtedness, and the
Lender, the obligation of the Borrower, which is absolute and unconditional, to
pay to the Lender the principal of, interest or premium, if any, on the Loans
as and when the same shall become due and payable in accordance with their
terms, or is intended to or shall affect the relative rights of the Lender and
creditors of the Borrower other than the holders of the Senior Indebtedness,
nor shall anything herein or therein prevent the Lender from exercising all
remedies otherwise permitted by applicable law upon default under this
Agreement, subject to the rights, if any, under this Article VII of the holders
of Senior Indebtedness in respect of cash, property or securities of the
Borrower received upon the exercise of any such remedy. Upon any distribution
of assets of the Borrower or any of its Subsidiaries referred to in this
Article VII, the Lender shall be entitled to rely upon any order or decree made
by any court of competent jurisdiction in which such dissolution, winding up,
liquidation or reorganization proceedings are pending, or a certificate of the
liquidating trustee or agent or other person making any distribution of the
Lender for the purpose of ascertaining the Persons entitled to participate in
such distribution, the holders of the Senior Indebtedness and other
indebtedness of the Borrower, the amount thereof or payable thereon, the amount
or amounts paid or distributed thereon, and all other facts pertinent thereto
or to this Article VII. Nothing contained in this Article VII or elsewhere in
this Agreement is intended to or shall affect the obligation of the Borrower to
make, or prevent the Borrower from making, at any time except during the
pendency of any dissolution, winding up, liquidation or reorganization
proceeding, and except during the continuance of any default specified in
Section 7.02 (not cured or waived), payments at any time of the principal of,
interest or premium, if any, on the Loans.
Section 7.06. Knowledge of Lender. Notwithstanding any provision of
this Agreement, the Lender shall not be charged with knowledge of the existence
of any facts which would prohibit the making of any payment of monies to or by
the Lender, or the taking of any other action by the Lender, in the case of any
matter other than default in the payment of any Senior Indebtedness, until the
earlier to occur of (i) receipt of actual knowledge of any such fact by any
officer of the Lender, any officer of any partner of the Lender or any officer
of any partner of a partner of the Lender, or (ii) receipt by the Lender of
written notice of the existence of such facts from the Borrower or any holder,
or the representative of any holder, of Senior Indebtedness.
Section 7.07. Application by Lender of Monies Deposited With It. If
prior to the date on which by the terms of this Agreement any monies deposited
with the Lender may become payable for any purpose (including, without
limitation, the payment of either the principal of or the interest on the
Loans) the Lender shall not have received either (i) the actual notice provided
for in Section 7.06(i) or, if the Lender shall have received such notice, shall
have notified in writing the representative of the holders of the Senior
Indebtedness of such default, and neither such representative nor the holders
of at least a majority in principal amount of the aggregate amount of
-18-
<PAGE> 23
all Senior Indebtedness then outstanding shall have given, within thirty (30)
days after receipt by such representative or such holders of such written
notice, a notice of the commencement of a Payment Blockage Period in accordance
with Section 7.02(c), or (ii) the written notice provided for in Section
7.06(ii), then the Lender shall have the full power and authority to receive
such monies and to apply the same to the purpose for which they were received
and shall not be affected by any notice to the contrary which may be received
by it on or after such date. This Section 7.07 shall be construed solely for
the benefit of the Lender.
Section 7.08. Subordination Rights Not Impaired by Acts or Omissions
of Borrower or Holders of Senior Indebtedness. The right or interest of any
present or future holders of any Senior Indebtedness, and all agreements and
obligations of the Lender under this Article VII, shall remain in full force
and effect irrespective of: (a) any change in the time, manner or place of
payment of, or in any other term in respect of, all or any of the Senior
Indebtedness, or any amendment or waiver of any agreement or instrument related
thereto; (b) any exchange or release of, or non-perfection of any lien on or
security interest in, any collateral, or any release from, amendment or waiver
of or consent to departure from any guaranty or other obligation, for all or
any of the Senior Indebtedness; (c) any other circumstance which might
otherwise constitute a defense available to or discharge of the Lender in
respect of the provisions of this Article VII; or (d) any act or failure to act
on the part of the Borrower or any of its Subsidiaries or by any act or failure
to act, in good faith, by any holder of the Senior Indebtedness, or by any
noncompliance by the Borrower with the terms of the Agreement, regardless of
any knowledge thereof which any holder of Senior Indebtedness may have or be
otherwise charged with.
Section 7.09. Article VII Not to Prevent Events of Default. The
failure to make a payment on account of principal or interest by reason of any
provision in this Article VII shall not be construed as preventing the
occurrence of an Event of Default described under Section 8.01.
Section 7.10. Other Provisions Subject Hereto. Except as expressly
stated in this Article VII, notwithstanding anything contained in this
Agreement to the contrary, all provisions of the Agreement are subject to the
provisions of this Article VII. The provisions of the Article VII shall
continue to be effective or shall be reinstated, as the case may be, if at any
time any payment in respect of Senior Indebtedness is rescinded or must
otherwise be returned on the insolvency, bankruptcy or reorganization of the
Borrower or any of its Subsidiaries or otherwise, all as though such payment
had not been made.
Section 7.11. Payment of Loans with Borrower's Stock. The provisions
of this Article VII will not preclude the payment of the Loans with shares of
the Borrower's stock as provided in the Note.
-19-
<PAGE> 24
ARTICLE VIII
EVENTS OF DEFAULT; REMEDIES
Section 8.01 Events of Default. One or more of the following events
shall constitute an "Event of Default":
(a) the Borrower shall default in the payment or prepayment when due
of (i) any principal of the Loans or any fees; or (ii) any interest on the
Loans or any other amount payable by the Borrower hereunder, and such failure
to pay interest or other amounts continues unremedied for a period of five (5)
Business Days; or
(b) the Borrower shall default in the performance of any other
covenant on the part of the Borrower to be performed hereunder, and such
default continues for a period of thirty (30) days after receipt of written
notice of such default; or
(c) the Borrower or any of its Subsidiaries shall admit in writing its
inability to, or be generally unable to, pay their respective debts as such
debts become due; or
(d) the Borrower or any of its Subsidiaries shall (i) apply for or
consent to the appointment of, or the taking of possession by, a receiver,
custodian, trustee or liquidator of itself or of all or a substantial part of
its Property, (ii) make a general assignment for the benefit of its creditors,
(iii) commence a voluntary case under the Federal Bankruptcy Code (as now or
hereafter in effect), (iv) file a petition seeking to take advantage of any
other law relating to bankruptcy, insolvency, reorganization, winding-up,
liquidation or composition or readjustment of debts, (v) fail to controvert in
a timely and appropriate manner, or acquiesce in writing to, any petition filed
against it in an involuntary case under the Federal Bankruptcy Code, or (vi)
take any corporate action for the purpose of effecting any of the foregoing; or
(e) a proceeding or case shall be commenced, without the application
or consent of the Borrower or any of its Subsidiaries, as applicable, in any
court of competent jurisdiction, seeking (i) its liquidation, reorganization,
dissolution or winding-up, or the composition or readjustment of its debts,
(ii) the appointment of a trustee, receiver, custodian, liquidator or the like
of the Borrower or such Subsidiary of all or any substantial part of its
assets, or (iii) similar relief in respect of the Borrower or such Subsidiary
under any law relating to bankruptcy, insolvency, reorganization, winding-up,
or composition or adjustment of debts, and such proceeding or case shall
continue undismissed, or an order, judgment or decree approving or ordering any
of the foregoing shall be entered and continue unstayed and in effect, for a
period of 60 days; or (iv) an order for relief against the Borrower or such
Subsidiary shall be entered in an involuntary case under the Federal Bankruptcy
Code; or
(f) a judgment or judgments for the payment of money in excess of
$5,000,000 in the aggregate shall be rendered by a court against the Borrower
or any of its Subsidiaries and the same shall not be discharged (or provision
shall not be made for such discharge), or a stay of execution thereof shall not
be procured, within thirty (30) days from the date of entry thereof and the
Borrower
-20-
<PAGE> 25
or such Subsidiary shall not, within said period of 30 days, or such longer
period during which execution of the same shall have been stayed, appeal
therefrom and cause the execution thereof to be stayed during such appeal; or
(g) proceeds from the issuance of any Refunding Debt are not used to
repay the Loans; or
(h) the Borrower or any of its Subsidiaries becomes an "investment
company" within the meaning of the Investment Company Act of 1940, as amended;
or
(i) the Borrower or any of its Subsidiaries becomes a "holding
company", a "subsidiary company" of a "holding company", an "affiliate" of a
"holding company", or an "affiliate" of a "subsidiary company" of a "holding
company", in each case, as such terms are defined in the Public Utility Holding
Company Act of 1935, as amended; or
(j) the Borrower or any of its Subsidiaries shall:
(i) fail to make any payment or payments of any Indebtedness
when due (whether by scheduled maturity, required prepayment,
acceleration, demand or otherwise) and such failure shall continue
after the applicable grace period, if any, specified in the agreement
or instrument relating to such Indebtedness, or
(ii) fail to perform or observe any term, covenant or
condition on its part to be performed or observed under any agreement
or instrument evidencing Indebtedness (other than any failure to
perform any term contemplated by subclause (i) hereof) and such
failure shall continue after the applicable grace period, if any,
specified in the agreement or instrument relating to such
Indebtedness,
if, in either case, the effect of such failure to perform or observe is to
accelerate, or to permit the acceleration of, the maturity of any Indebtedness
(other than Indebtedness in respect of the Loans or this Agreement), and any
obligee (or obligees) of such Indebtedness has or have claimed a default
thereunder, and has or have not waived in writing the Borrower's or the
Borrower's Subsidiaries' obligation to such performance or observance.
Section 8.02 Remedies.
(a) In the case of an Event of Default other than one referred to in
clauses (c), (d) or (e) of Section 8.01, the Lender may, by notice to the
Borrower, declare the principal amount then outstanding of, and the accrued
interest on, the Loans and all other amounts payable by the Borrower hereunder
and under the Note to be forthwith due and payable, whereupon such amounts
shall be immediately due and payable without presentment, demand, protest,
notice of intent to accelerate, notice of acceleration or other formalities of
any kind, all of which are hereby expressly waived by the Borrower.
-21-
<PAGE> 26
(b) In the case of the occurrence of an Event of Default referred to
in clauses (c), (d) or (e) of Section 8.01, the principal amount then
outstanding of, and the accrued interest on, the Loans and all other amounts
payable by the Borrower hereunder and under the Note shall become automatically
immediately due and payable without presentment, demand, protest, notice of
intent to accelerate, notice of acceleration or other formalities of any kind,
all of which are hereby expressly waived by the Borrower.
(c) All proceeds received after maturity of the Note, whether by
acceleration or otherwise shall be applied first to reimbursement of expenses
and indemnities provided for in this Agreement; second to accrued interest on
the Note; third to principal outstanding on the Note; and, to the extent of any
excess, to the Borrower or as otherwise required by any Governmental
Requirement.
(d) The Lender and the Borrower acknowledge and agree that the
occurrence of an Event of Default will constitute a default under the Senior
Indebtedness of the type described in Section 7.02 (as to which the Lender
acknowledges and agrees it will have actual knowledge for purposes of Section
7.06), which occurrence will invoke the subordination provisions of Section
7.02 and the other applicable provisions of Article VII.
ARTICLE IX
MISCELLANEOUS
Section 9.01 Waiver. No failure on the part of the Lender to exercise
and no delay in exercising, and no course of dealing with respect to, any
right, power or privilege under this Agreement or the Note shall operate as a
waiver thereof, nor shall any single or partial exercise of any right, power or
privilege under this Agreement or the Note preclude any other or further
exercise thereof or the exercise of any other right, power or privilege. The
remedies provided herein are cumulative and not exclusive of any remedies
provided by law.
Section 9.02 Notices. All notices and other communications provided
for herein (including, without limitation, any modifications of, or waivers or
consents under, this Agreement) shall be given or made by telex, telecopy,
courier or U.S. Mail or in writing and telexed, telecopied, mailed or delivered
to the intended recipient at the "Address for Notices" specified below its name
on the signature pages hereof or, as to any party, at such other address as
shall be designated by such party in a notice to each other party. Except as
otherwise provided in this Agreement, all such communications shall be deemed
to have been duly given when transmitted, if transmitted before 1:00 p.m. local
time on a Business Day (otherwise on the next succeeding Business Day) by telex
or telecopier and evidence or confirmation of receipt is obtained, or
personally delivered or, in the case of a mailed notice, on the date deposited
in the mails, postage prepaid, in each case given or addressed as aforesaid.
-22-
<PAGE> 27
Section 9.03 Payment of Expenses, Indemnities, etc. The Borrower
agrees:
(a) To pay all reasonable expenses of the Lender, in its capacity as
Lender hereunder, but not in any other capacity, in the administration (both
before and after the execution hereof and including advice of counsel as to the
rights and duties of the Lender with respect thereto) of, and in connection
with the negotiation, syndication, investigation, preparation, execution and
delivery of, recording or filing of, preservation of rights under, enforcement
of, and refinancing, renegotiation or restructuring of, this Agreement and any
amendment, waiver or consent relating thereto (including, without limitation,
travel, photocopy, mailing, courier, telephone and other similar expenses of
the Lender, the cost of environmental audits, surveys and appraisals at
reasonable intervals, the reasonable fees and disbursements of counsel and
other outside consultants for the Lender and, in the case of enforcement, the
reasonable fees and disbursements of counsel for the Lender), and to reimburse
promptly the Lender for all amounts expended, advanced or incurred by the
Lender to satisfy any obligation of the Borrower under this Agreement;
(b) TO INDEMNIFY THE LENDER AND ITS AFFILIATES (OTHER THAN THE
BORROWER AND ITS SUBSIDIARIES) AND EACH OF THEIR OFFICERS, DIRECTORS,
EMPLOYEES, REPRESENTATIVES, AGENTS, ATTORNEYS, ACCOUNTANTS AND EXPERTS
("INDEMNIFIED PARTIES") FROM, HOLD EACH OF THEM HARMLESS AGAINST AND PROMPTLY
UPON DEMAND PAY OR REIMBURSE EACH OF THEM FOR, THE INDEMNITY MATTERS WHICH MAY
BE INCURRED BY OR ASSERTED AGAINST OR INVOLVE ANY OF THEM (WHETHER OR NOT ANY
OF THEM IS DESIGNATED A PARTY THERETO) AS A RESULT OF, ARISING OUT OF OR IN ANY
WAY RELATED TO (I) ANY ACTUAL OR PROPOSED USE BY THE BORROWER OR ANY OF ITS
SUBSIDIARIES OF THE PROCEEDS OF THE LOANS, OTHER THAN INDEMNITY MATTERS SOUGHT
AGAINST THE INDEMNIFIED PARTIES BY ANY THIRD PARTY FOR USURPATION OF A
CORPORATE OPPORTUNITY OF SUCH THIRD PARTY, (II) THE EXECUTION, DELIVERY AND
PERFORMANCE OF THIS AGREEMENT, (III) THE OPERATIONS OF THE BUSINESS OF THE
BORROWER OR ANY OF ITS SUBSIDIARIES, (IV) THE FAILURE OF THE BORROWER OR ANY OF
ITS SUBSIDIARIES TO COMPLY WITH THE TERMS OF THIS AGREEMENT, OR WITH ANY
GOVERNMENTAL REQUIREMENT, OR (V) ANY OTHER ASPECT OF THIS AGREEMENT, INCLUDING,
WITHOUT LIMITATION, THE REASONABLE FEES AND DISBURSEMENTS OF COUNSEL AND ALL
OTHER EXPENSES INCURRED IN CONNECTION WITH INVESTIGATING, DEFENDING OR
PREPARING TO DEFEND ANY SUCH ACTION, SUIT, PROCEEDING (INCLUDING ANY
INVESTIGATIONS, LITIGATION OR INQUIRIES) OR CLAIM AND INCLUDING ALL INDEMNITY
MATTERS ARISING BY REASON OF THE ORDINARY NEGLIGENCE OF ANY INDEMNIFIED PARTY,
BUT EXCLUDING ALL INDEMNITY MATTERS ARISING SOLELY BY REASON OF CLAIMS OF THE
LENDER'S SHAREHOLDERS AGAINST THE LENDER OR BY REASON OF THE GROSS NEGLIGENCE
OR WILLFUL MISCONDUCT ON THE PART OF THE INDEMNIFIED PARTY; AND
(c) TO INDEMNIFY AND HOLD HARMLESS FROM TIME TO TIME THE INDEMNIFIED
PARTIES FROM AND AGAINST ANY AND ALL LOSSES, CLAIMS, COST RECOVERY ACTIONS,
ADMINISTRATIVE ORDERS OR PROCEEDINGS, DAMAGES AND LIABILITIES TO WHICH ANY SUCH
PERSON MAY BECOME SUBJECT (I) UNDER ANY ENVIRONMENTAL LAW APPLICABLE TO THE
BORROWER, ANY OF ITS SUBSIDIARIES OR ANY OF THEIR RESPECTIVE PROPERTIES,
INCLUDING WITHOUT LIMITATION, THE TREATMENT OR DISPOSAL OF HAZARDOUS SUBSTANCES
ON ANY OF THEIR RESPECTIVE PROPERTIES, (II) AS A RESULT OF THE BREACH OR
NON-COMPLIANCE BY THE BORROWER OR ANY OF ITS SUBSIDIARIES WITH ANY
ENVIRONMENTAL LAW APPLICABLE TO THE BORROWER OR SUCH SUBSIDIARY, (III) DUE TO
-23-
<PAGE> 28
PAST OWNERSHIP BY THE BORROWER OR ANY OF ITS SUBSIDIARIES OF ANY OF THEIR
RESPECTIVE PROPERTIES OR PAST ACTIVITY ON ANY OF THEIR RESPECTIVE PROPERTIES
WHICH, THOUGH LAWFUL AND FULLY PERMISSIBLE AT THE TIME, COULD RESULT IN PRESENT
LIABILITY, (IV) THE PRESENCE, USE, RELEASE, STORAGE, TREATMENT OR DISPOSAL OF
HAZARDOUS SUBSTANCES ON OR AT ANY OF THE PROPERTIES OWNED OR OPERATED BY THE
BORROWER OR ANY OF ITS SUBSIDIARIES, OR (V) ANY OTHER ENVIRONMENTAL, HEALTH OR
SAFETY CONDITION IN CONNECTION WITH THIS AGREEMENT, PROVIDED, HOWEVER, NO
INDEMNITY SHALL BE AFFORDED UNDER THIS SECTION 9.03(C) IN RESPECT OF ANY
PROPERTY FOR ANY OCCURRENCE ARISING FROM THE ACTS OR OMISSIONS OF THE LENDER
DURING THE PERIOD AFTER WHICH SUCH PERSON, ITS SUCCESSORS OR ASSIGNS SHALL HAVE
OBTAINED POSSESSION OF SUCH PROPERTY (WHETHER BY FORECLOSURE OR DEED IN LIEU OF
FORECLOSURE, AS MORTGAGEE- IN-POSSESSION OR OTHERWISE).
(d) No Indemnified Party may settle any claim to be indemnified
without the consent of the indemnitor, such consent not to be unreasonably
withheld; provided, that the indemnitor may not reasonably withhold consent to
any settlement that an Indemnified Party proposes, if the indemnitor does not
have the financial ability to pay all its obligations outstanding and asserted
against the indemnitor at that time, including the maximum potential claims
against the Indemnified Party to be indemnified pursuant to this Section 9.03.
(e) In the case of any indemnification hereunder, the Lender shall
give notice to the Borrower of any such claim or demand being made against the
Indemnified Party and the Borrower shall have the non-exclusive right to join
in the defense against any such claim or demand provided that if the Borrower
provides a defense, the Indemnified Party shall bear its own cost of defense
unless there is a conflict between the Borrower and such Indemnified Party.
(f) THE FOREGOING INDEMNITIES SHALL EXTEND TO THE INDEMNIFIED PARTIES
NOTWITHSTANDING THE SOLE OR CONCURRENT NEGLIGENCE OF EVERY KIND OR CHARACTER
WHATSOEVER, WHETHER ACTIVE OR PASSIVE, WHETHER AN AFFIRMATIVE ACT OR AN
OMISSION, INCLUDING WITHOUT LIMITATION, ALL TYPES OF NEGLIGENT CONDUCT
IDENTIFIED IN THE RESTATEMENT (SECOND) OF TORTS OF ONE OR MORE OF THE
INDEMNIFIED PARTIES OR BY REASON OF STRICT LIABILITY IMPOSED WITHOUT FAULT ON
ANY ONE OR MORE OF THE INDEMNIFIED PARTIES. TO THE EXTENT THAT AN INDEMNIFIED
PARTY IS FOUND TO HAVE COMMITTED AN ACT OF GROSS NEGLIGENCE OR WILLFUL
MISCONDUCT, THIS CONTRACTUAL OBLIGATION OF INDEMNIFICATION SHALL CONTINUE BUT
SHALL ONLY EXTEND TO THE PORTION OF THE CLAIM THAT IS DEEMED TO HAVE OCCURRED
BY REASON OF EVENTS OTHER THAN THE GROSS NEGLIGENCE OR WILLFUL MISCONDUCT OF
THE INDEMNIFIED PARTY.
(g) The Borrower's obligations under this Section 9.03 shall survive
any termination of this Agreement and the payment of the Note and shall
continue thereafter in full force and effect.
(h) The Borrower shall pay any amounts due under this Section 9.03
within thirty (30) days of the receipt by the Borrower of notice of the amount
due.
Section 9.04 Amendments, Etc. Any provision of this Agreement may be
amended, modified or waived with the Borrower's and the Lender's prior written
consent; provided, however,
-24-
<PAGE> 29
no amendment, modification or waiver with respect to the subordination
provisions contained herein (and related definitions) shall be permitted
without the prior written consent of Required Senior Lenders.
Section 9.05 Successors and Assigns. This Agreement shall be binding
upon and inure to the benefit of the parties hereto and their respective
successors and permitted assigns, and with respect to the subordination
provisions contained herein, any holder at any time of the Senior Indebtedness.
Section 9.06 Assignments and Participations.
(a) The Borrower may not assign its rights or obligations hereunder or
under the Note without the prior consent of the Lender.
(b) The Lender may assign to one or more assignees all or a portion of
its rights and obligations under this Agreement; provided, that any such
assignee shall expressly acknowledge in writing that such assignee is bound by
the terms of the subordination provisions contained herein. Any assignment will
become effective upon the execution and delivery of the assignment to the
Borrower. Upon receipt and acceptance of such executed assignment, the
Borrower, will, at the Lender's expense, execute and deliver new Notes to the
assignor and/or assignee, as appropriate, in accordance with their respective
interests as they appear. Upon the effectiveness of any assignment pursuant to
this Section 9.06(b), the assignee will become a "Lender," if not already a
"Lender," for all purposes of this Agreement. The assignor shall be relieved of
its obligations hereunder to the extent of such assignment (and if the
assigning Lender no longer holds any rights or obligations under this
Agreement, such assigning Lender shall cease to be a "Lender" hereunder except
that its rights under Sections 5.01, 5.05 and 9.03 shall not be affected); or
provided, however, that Lender shall not be relieved of its obligations with
respect to any payments received and retained by Lender in contravention of the
provisions contained in Article VII hereof.
(c) The Lender may transfer, grant or assign participations in all or
any part of its interests hereunder pursuant to this Section 9.06(c) to any
Person, provided that: (i) the Lender shall remain the "Lender" for all
purposes of this Agreement and the transferee of such participation shall not
constitute a "Lender" hereunder; and (ii) no participant under any such
participation shall have rights to approve any amendment to or waiver of any
provision of this Agreement or the Note, except to the extent such amendment or
waiver would (x) extend the Final Maturity Date or (y) reduce the interest rate
(other than as a result of waiving the applicability of any post-default
increases in interest rates) or fees applicable to the Loans in which such
participant is participating, or postpone the payment of any thereof. In the
case of any such participation, the participant shall not have any rights under
this Agreement (the participant's rights against the Lender in respect of such
participation to be those set forth in the agreement creating such
participation), and all amounts payable by the Borrower hereunder shall be
determined as if the Lender had not sold such participation, provided that such
participant shall be entitled to receive additional amounts under Article V on
the same basis as if it were a Lender and be indemnified under Section 9.03 as
if it were a Lender.
-25-
<PAGE> 30
(d) The Lender may furnish any information concerning the Borrower in
its possession from time to time to assignees and participants (including
prospective assignees and participants).
Section 9.07 Invalidity. In the event that any one or more of the
provisions contained in the Agreement or the Note shall, for any reason, be
held invalid, illegal or unenforceable in any respect, such invalidity,
illegality or unenforceability shall not affect any other provision of such
documents.
Section 9.08 Counterparts. This Agreement may be executed in any
number of counterparts, all of which taken together shall constitute one and
the same instrument and any of the parties hereto may execute this Agreement by
signing any such counterpart.
Section 9.09 References. The words "herein," "hereof," "hereunder" and
other words of similar import when used in this Agreement refer to this
Agreement as a whole, and not to any particular article, section or subsection.
Any reference herein to a Section shall be deemed to refer to the applicable
Section of this Agreement unless otherwise stated herein. Any reference herein
to an exhibit or schedule shall be deemed to refer to the applicable exhibit or
schedule attached hereto unless otherwise stated herein.
Section 9.10 Survival. The obligations of the parties under Section
4.03, Article V, and Section 9.03 shall survive the repayment of the Loans. To
the extent that any payments of the Loans or proceeds of any collateral are
subsequently invalidated, declared to be fraudulent or preferential, set aside
or required to be repaid to a trustee, debtor in possession, receiver or other
Person under any bankruptcy law, common law or equitable cause, then to such
extent, the Loans so satisfied shall be revived and continue as if such payment
or proceeds had not been received and the Lender's liens, security interests,
rights, powers and remedies under this Agreement shall continue in full force
and effect.
Section 9.11 Captions. Captions and section headings appearing herein
are included solely for convenience of reference and are not intended to affect
the interpretation of any provision of this Agreement.
Section 9.12 NO ORAL AGREEMENTS. THIS AGREEMENT AND THE NOTE EMBODY
THE ENTIRE AGREEMENT AND UNDERSTANDING BETWEEN THE PARTIES AND SUPERSEDE ALL
OTHER AGREEMENTS AND UNDERSTANDINGS BETWEEN SUCH PARTIES RELATING TO THE
SUBJECT MATTER HEREOF AND THEREOF. THIS AGREEMENT AND THE NOTE REPRESENT THE
FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF
PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE
NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES RELATING TO THE SUBJECT MATTER
OF THIS AGREEMENT AND THE NOTE.
Section 9.13 GOVERNING LAW; WAIVERS; ARBITRATION.
(a) THIS AGREEMENT AND THE NOTE SHALL BE GOVERNED BY, AND CONSTRUED IN
ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK.
-26-
<PAGE> 31
(b) EACH OF THE BORROWER AND THE LENDER HEREBY (I) IRREVOCABLY WAIVE,
TO THE MAXIMUM EXTENT NOT PROHIBITED BY LAW, ANY RIGHT IT MAY HAVE TO CLAIM OR
RECOVER IN ANY SUCH LITIGATION ANY SPECIAL, EXEMPLARY, PUNITIVE OR
CONSEQUENTIAL DAMAGES, OR DAMAGES OTHER THAN, OR IN ADDITION TO, ACTUAL
DAMAGES; (II) CERTIFY THAT NO PARTY HERETO NOR ANY REPRESENTATIVE OR AGENT OR
COUNSEL FOR ANY PARTY HERETO HAS REPRESENTED, EXPRESSLY OR OTHERWISE, OR
IMPLIED THAT SUCH PARTY WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE
THE FOREGOING WAIVERS, AND (III) ACKNOWLEDGE THAT IT HAS BEEN INDUCED TO ENTER
INTO THIS AGREEMENT AND THE TRANSACTIONS CONTEMPLATED HEREBY AND THEREBY BY,
AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS CONTAINED IN THIS
SECTION 9.13.
(c) ANY ACTION, DISPUTE, CLAIM OR CONTROVERSY OF ANY KIND BETWEEN THE
BORROWER AND THE LENDER ARISING OUT OF, OR PERTAINING TO THIS AGREEMENT OR THE
TRANSACTIONS CONTEMPLATED HEREBY (A "DISPUTE") SHALL BE RESOLVED BY BINDING
ARBITRATION IN ACCORDANCE WITH THE TERMS HEREOF. ANY PARTY MAY, BY SUMMARY
PROCEEDINGS, BRING AN ACTION IN COURT TO COMPEL ARBITRATION OF ANY DISPUTE. ANY
ARBITRATION SHALL BE ADMINISTERED BY THE AMERICAN ARBITRATION ASSOCIATION
("AAA") IN ACCORDANCE WITH THE TERMS OF THIS SECTION, THE COMMERCIAL
ARBITRATION RULES OF THE AAA, AND, TO THE MAXIMUM EXTENT APPLICABLE, THE
FEDERAL ARBITRATION ACT. JUDGMENT ON ANY AWARD RENDERED BY AN ARBITRATOR MAY BE
ENTERED IN ANY COURT HAVING JURISDICTION. ANY ARBITRATION SHALL BE CONDUCTED
BEFORE A THREE PERSON PANEL OF ARBITRATORS. SUCH PANEL SHALL CONSIST OF ONE
PERSON DESIGNATED BY THE BORROWER, ONE DESIGNATED BY THE LENDER AND ONE
DESIGNATED BY THE NOMINEES OF THE BORROWER AND THE LENDER (COLLECTIVELY, THE
"ARBITRATORS"). SUCH ARBITRATORS DESIGNATED BY EACH OF THE BORROWER AND THE
LENDER DO NOT HAVE TO BE NEUTRAL. IF EITHER OF THE BORROWER OR THE LENDER FAILS
TO DESIGNATE AN ARBITRATOR WITHIN TEN (10) DAYS AFTER THE FILING OF THE DISPUTE
WITH THE AAA, OR EITHER OF THE BORROWER'S OR THE LENDER'S ARBITRATORS FAIL TO
DESIGNATE A THIRD ARBITRATOR WITHIN THIRTY (30) DAYS AFTER THEIR APPOINTMENTS,
THE THIRD ARBITRATOR SHALL BE APPOINTED BY THE AAA. AN ARBITRATION PROCEEDING
HEREUNDER SHALL BE CONDUCTED IN HOUSTON, TEXAS AND SHALL BE CONCLUDED WITHIN
180 DAYS OF THE FILING OF THE DISPUTE WITH THE AAA. THE ARBITRATORS SHALL BE
EMPOWERED TO AWARD SANCTIONS AND TO TAKE SUCH OTHER ACTIONS AS THEY DEEM
NECESSARY, TO THE SAME EXTENT A JUDGE COULD IMPOSE SANCTIONS OR TAKE SUCH OTHER
ACTIONS PURSUANT TO THE FEDERAL RULES OF CIVIL PROCEDURE AND APPLICABLE LAW. NO
AWARD BY THE ARBITRATORS SHALL ASSESS CONSEQUENTIAL, PUNITIVE OR EXEMPLARY
DAMAGES BUT MAY ASSESS COSTS AND EXPENSES IN A MANNER DEEMED EQUITABLE. THE
ARBITRATOR SHALL MAKE SPECIFIC WRITTEN FINDINGS OF FACT AND CONCLUSIONS OF LAW.
THE DECISION OF THE ARBITRATOR SHALL BE FINAL AND BINDING ON EACH PARTY. ALL
FEES OF THE ARBITRATORS AND ANY ENGINEER, ACCOUNTANT OR OTHER CONSULTANT
ENGAGED BY THE ARBITRATORS, SHALL BE PAID BY THE BORROWER AND THE LENDER AS
AWARDED BY THE ARBITRATORS.
Section 9.14 Interest. It is the intention of the parties hereto that
Lender shall conform strictly to usury laws applicable to it. Accordingly, if
the transactions contemplated hereby would be usurious as to the Lender under
laws applicable to it (including the laws of the United States of America or
any other jurisdiction whose laws may be mandatorily applicable to the Lender
notwithstanding the other provisions of this Agreement), then, in that event,
notwithstanding anything to the contrary in this Agreement or the Note or any
agreement entered into in connection
-27-
<PAGE> 32
with or as security for the Note, it is agreed as follows: (i) the aggregate of
all consideration which constitutes interest under law applicable to the Lender
that is contracted for, taken, reserved, charged or received by the Lender in
connection with the Note shall under no circumstances exceed the maximum amount
allowed by such applicable law, and any excess shall be canceled automatically
and if theretofore paid shall be credited by the Lender on the principal amount
of the Loans (or, to the extent that the principal amount of the Loans shall
have been or would thereby be paid in full, refunded by the Lender to the
Borrower); and (ii) in the event that the maturity of the Note is accelerated
by reason of an election of the holder thereof resulting from any Event of
Default under this Agreement or otherwise, or in the event of any required or
permitted prepayment, then such consideration that constitutes interest under
law applicable to the Lender may never include more than the maximum amount
allowed by such applicable law, and excess interest, if any, provided for in
this Agreement or otherwise shall be canceled automatically by the Lender as of
the date of such acceleration or prepayment and, if theretofore paid, shall be
credited by the Lender on the principal amount of the Indebtedness (or, to the
extent that the principal amount of the Loans shall have been or would thereby
be paid in full, refunded by the Lender to the Borrower). All sums paid or
agreed to be paid to the Lender for the use, forbearance or detention of sums
due hereunder shall, to the extent permitted by law applicable to the Lender,
be amortized, prorated, allocated and spread throughout the full term of the
Loans evidenced by the Note until payment in full so that the rate or amount of
interest on account of the Loans hereunder does not exceed the maximum amount
allowed by such applicable law. If at any time and from time to time (i) the
amount of interest payable to the Lender on any date shall be computed at the
Highest Lawful Rate applicable to the Lender pursuant to this Section 10.14 and
(ii) in respect of any subsequent interest computation period the amount of
interest otherwise payable to the Lender would be less than the amount of
interest payable to the Lender computed at the Highest Lawful Rate applicable
to the Lender, then the amount of interest payable to the Lender in respect of
such subsequent interest computation period shall continue to be computed at
the Highest Lawful Rate applicable to the Lender until the total amount of
interest payable to the Lender shall equal the total amount of interest which
would have been payable to the Lender if the total amount of interest had been
computed without giving effect to this Section 9.14.
Section 9.15 EXCULPATION PROVISIONS. EACH OF THE PARTIES HERETO
SPECIFICALLY AGREES THAT IT HAS A DUTY TO READ THIS AGREEMENT AND AGREES THAT
IT IS CHARGED WITH NOTICE AND KNOWLEDGE OF THE TERMS OF THIS AGREEMENT; THAT IT
HAS IN FACT READ THIS AGREEMENT AND IS FULLY INFORMED AND HAS FULL NOTICE AND
KNOWLEDGE OF THE TERMS, CONDITIONS AND EFFECTS OF THIS AGREEMENT; THAT IT HAS
BEEN REPRESENTED BY INDEPENDENT LEGAL COUNSEL OF ITS CHOICE THROUGHOUT THE
NEGOTIATIONS PRECEDING ITS EXECUTION OF THIS AGREEMENT; AND HAS RECEIVED THE
ADVICE OF ITS ATTORNEY IN ENTERING INTO THIS AGREEMENT; AND THAT IT RECOGNIZES
THAT CERTAIN OF THE TERMS OF THIS AGREEMENT RESULT IN ONE PARTY ASSUMING THE
LIABILITY INHERENT IN SOME ASPECTS OF THE TRANSACTION AND RELIEVING THE OTHER
PARTY OF ITS RESPONSIBILITY FOR SUCH LIABILITY. EACH PARTY HERETO AGREES AND
COVENANTS THAT IT WILL NOT CONTEST THE VALIDITY OR ENFORCEABILITY OF ANY
EXCULPATORY PROVISION OF THIS AGREEMENT ON THE BASIS THAT THE PARTY HAD NO
NOTICE OR KNOWLEDGE OF SUCH PROVISION OR THAT THE PROVISION IS NOT
"CONSPICUOUS."
-28-
<PAGE> 33
The parties hereto have caused this Agreement to be duly executed as
of the day and year first above written.
BORROWER: MARINER HOLDINGS, INC.
By:
--------------------------------
Name:
Title:
Address for Notices:
580 WestLake Park Blvd.
Suite 1300
Houston, Texas 77079
Telecopier No.:(281) 584-5690
Telephone No.: (281) 584-5540
Attention: VP, Finance and CFO
LENDER: ENRON CAPITAL & TRADE RESOURCES CORP.
By:
--------------------------------
Name:
Title:
Address for Notices:
1400 Smith Street
Houston, Texas 77002
Telecopier No.: (713) 646-3602
Telephone No.: (713) 853-5259
Attention: Donna Lowrey
-29-
<PAGE> 34
THE RIGHTS, TITLE AND INTERESTS OF ANY HOLDER OF THIS
PROMISSORY NOTE ARE SECONDARY, SUBORDINATE AND INFERIOR TO
THE RIGHTS, TITLE AND INTERESTS OF THE HOLDERS OF SENIOR
INDEBTEDNESS (AS SUCH TERM IS DEFINED IN THE CREDIT AGREEMENT
REFERRED TO BELOW).
EXHIBIT A
FORM OF NOTE
$25,000,000 September __, 1998
FOR VALUE RECEIVED, MARINER HOLDINGS, INC., a Delaware corporation
(the "Borrower") hereby promises to pay to the order of ENRON CAPITAL & TRADE
RESOURCES CORP. or its designees (the "Lender"), at New York, New York, or such
other location as the Lender may hereafter specify, the principal sum of
TWENTY-FIVE MILLION DOLLARS ($25,000,000.00), or such lesser amount as shall
equal the aggregate unpaid principal amount of the Loans made by the Lender
hereunder to the Borrower pursuant to the Credit Agreement, as defined below,
in lawful money of the United States of America and in immediately available
funds, on the dates and in the principal amounts provided in the Credit
Agreement (hereinafter defined), and to pay interest at such location, in like
money and funds, at the rates per annum and on the dates provided in the Credit
Agreement.
In addition to and cumulative of any payments required to be made
against this Note pursuant to the Credit Agreement, this Note, including all
principal and accrued interest then unpaid, shall be due and payable on the
Final Maturity Date. All payments shall be applied first to accrued interest
and the balance to principal, except as otherwise expressly provided in the
Credit Agreement. Prepayments on this Note shall be applied in the manner set
forth in the Credit Agreement.
This Note is the Note referred to in that certain Credit and
Subordination Agreement of even date herewith between the Borrower and the
Lender and evidences the Loans made by the Lender thereunder (such Agreement as
the same may be amended or supplemented from time to time, the "Credit
Agreement"). Capitalized terms used in this Note have the respective meanings
assigned to them in the Credit Agreement.
Notwithstanding the foregoing, if the IPO Date shall not have occurred
on or before the day next preceding the Final Maturity Date, then on the Final
Maturity Date the then aggregate unpaid principal amount of the Loans shall be
automatically converted into fully paid and nonassessable shares of Common
Stock (as defined below), free of any preemptive rights not validly waived, and
the unpaid accrued interest thereon shall be paid as provided above in
immediately available funds. The number of shares of Common Stock into which
the principal of the Loans shall be converted shall be determined by dividing
(rounding up to next integer) the aggregate unpaid principal amount of the
Loans on the Final Maturity Date by the Conversion Price (as defined below).
"Common Stock" shall mean shares of the common stock, $.01 par value, of
Mariner Holdings, Inc. "Conversion Price" shall mean $175.00; provided, however
that (i) if the Borrower shall (a) pay a dividend or make a distribution in
shares of its common stock (or its equivalent), (b) subdivide its
<PAGE> 35
outstanding shares of common stock (or its equivalent) into a greater number of
shares, (c) combine its outstanding shares of common stock (or its equivalent)
into a smaller number of shares or (d) issue by reclassification of its common
stock (or its equivalent) any shares of its capital stock (or its equivalent),
the Conversion Price in effect immediately prior to such action shall be
adjusted so that the Lender shall be entitled to receive the number of shares
of Common Stock or other securities or assets which it would have owned
immediately following such action had this Note been converted immediately
prior thereto (assuming this Note was then convertible on the terms applicable
on the Final Maturity Date based on the aggregate unpaid principal amount of
the Loans as of the Final Maturity Date), (ii) if any event shall occur as to
which the provisions of clause (i) or (iii) of this sentence are not applicable
but the failure to make an adjustment to the Conversion Price would not fairly
protect the Lender against dilution, then the Conversion Price shall be
adjusted to fairly protect the Lender against such dilution and (iii) if after
the date of the Credit Agreement, there shall have occurred any material
adverse effect on the business, operations or condition (financial or
otherwise) of Borrower and its subsidiaries taken as a whole, the Conversion
Price shall be reduced to the then fair market value of one share of Common
Stock after taking into account appropriate liquidity and other discounts. In
addition, if any of the following shall occur after the date of the Credit
Agreement: (a) any consolidation or merger of the Company or share exchange
involving the Borrower as a result of which the holders of Common Stock shall
be entitled to receive stock, other securities or other assets (including cash)
with respect to or in exchange for Common Stock; or (b) any conveyance transfer
or lease of the properties and assets of the Company substantially as an
entirety to any entity, then the Lender shall receive upon any conversion
hereunder the kind and amount of shares of stock and other securities and
assets (including cash) receivable upon or in connection with such
consolidation, merger, share exchange, conveyance, transfer or lease by a
holder of the number of shares of Common Stock issuable upon conversion of this
Note immediately prior to such consolidation, merger, share exchange,
conveyance, transfer or lease (assuming the Note was then convertible on the
terms applicable on the Final Maturity Date based on the aggregate unpaid
principal amount of the Loans as of the Final Maturity Date). Upon the receipt
of any Common Stock hereunder, the Lender shall become entitled to the benefits
under, and shall be subject to the restrictions provided in, the Amended and
Restated Stockholders' Agreement, as amended, among the Borrower and the
stockholders of Borrower. As promptly as practicable after the conversion of
the principal of the Loans, the Borrower at its expense will issue and deliver
to the Lender a certificate or certificates for the number of full shares of
Common Stock or other securities issuable upon such conversion.
The Lender is hereby authorized by the Borrower to endorse on Schedule
A (or a continuation thereof) attached to this Note, the amount and date of
each Loan, the date and the amount of each payment or prepayment of principal
of each Loan received by the Lender, and the interest rates applicable to each
Loan; provided that any failure by the Lender to make any such endorsement
shall not affect the obligations of the Borrower under the Credit Agreement or
under this Note in respect of such Loans.
This Note is issued pursuant to the Credit Agreement and is entitled
to the benefits provided for in the Credit Agreement. All of the terms of the
Credit Agreement, including without limitation, the usury savings provisions
thereof, are incorporated herein by this reference. The Credit Agreement
provides for the acceleration of the maturity of this Note upon the occurrence
of certain
-2-
<PAGE> 36
events, for prepayments of the Loans upon the terms and conditions specified
therein and other provisions relevant to the Note.
THIS NOTE SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE
LAWS OF THE STATE OF NEW YORK.
MARINER HOLDINGS, INC.
By: /s/ Robert E. Henderson
-----------------------------------
Name: /s/ Robert E. Henderson
---------------------------------
Title: President and Chief Executive
Officer
--------------------------------
-3-
<PAGE> 37
SCHEDULE A
This Note evidences Loans made by the Lender under the within-described Credit
Agreement to the Borrower, in the principal amounts set forth below, which
Loans are at the interest rate and were made on the dates set forth below,
subject to the payments of principal set forth below:
<TABLE>
<CAPTION>
Principal Date of
Amount of Payment or Amount Paid Balance
Date Made Loan Interest Rate Prepayment or Prepaid Outstanding
-------- --------- ------------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C>
-------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- --------
</TABLE>
<PAGE> 1
EXHIBIT 10.3
AMENDED AND RESTATED
SHAREHOLDERS' AGREEMENT
between
MARINER ENERGY, LLC,
a Delaware limited liability company,
MARINER HOLDINGS, INC.,
a Delaware corporation,
ENRON CAPITAL & TRADE RESOURCES CORP.,
a Delaware corporation,
JOINT ENERGY DEVELOPMENT INVESTMENTS LIMITED PARTNERSHIP,
a Delaware limited partnership,
and
<TABLE>
<S> <C> <C>
Robert E. Henderson James M. Fitzpatrick III Laurence J. Lapeze
Richard R. Clark James L. Gregory Cory L. Loegering
Michael W. Strickler Alan K. Hadfield Richard A. Molohon
David S. Huber Gregory K. Harless Jerry L. Sheets
William J. Anderson William Hunt Hodge Clinton D. Smith
Thomas M. Campbell, Jr. William F. Howell Ward H. Taylor
Donald M. Clement Jacqueline S. Hudson Richard F. Weser
Ralph J. Dobbins Barbara C. Kyse Thomas E. Young
Frederic L. Lettieri D. Bruce Nevin Richard W. Webb
Frank A. Pici Steven W. Burt Lindell V. McGuire
Robert C. Strauss James W. Anderson
</TABLE>
October 12, 1998
<PAGE> 2
TABLE OF CONTENTS
This Table of Contents is solely for convenience of reference and shall
be given no effect in the construction or interpretation of this Agreement.
<TABLE>
<CAPTION>
Page
----
<S> <C>
A. MATTERS RELATING TO COMPANY GOVERNANCE,
MANAGEMENT AND OPERATION OF MARINER LLC AND ITS SUBSIDIARIES..................................-2-
A.1. CHARTER DOCUMENTS OF MARINER LLC AND SUBSIDIARIES AND RELATED
PROVISIONS....................................................................................-2-
(a)..................................................................................-2-
Existing Certificate of Formation and LLC Agreement of Mariner LLC and
Certificates of Incorporation and Bylaws of Mariner Holdings and
Mariner Energy.......................................................................-2-
(b) Indemnification and Director Quorum Provisions in Charter
Documents of New Subsidiaries........................................................-2-
(c) Changes to Indemnification and Director Quorum Provisions
....................................................................................-3-
(d) Indemnification and Director Quorum Provisions in Charter
Documents of Mariner LLC.............................................................-3-
A.2. BOARDS OF DIRECTORS OF MARINER LLC AND SUBSIDIARIES...........................................-6-
(a) Election of Management Nominees Generally...................................-6-
(b) Election of Replacement Directors...........................................-6-
(c) Removal of Directors........................................................-6-
(d) Selection of Management Directors...........................................-6-
(e) Election of Other Directors.................................................-7-
(f) Committees of the Board of Directors........................................-7-
(g) Election of Management Directors of Mariner LLC's
Subsidiaries.........................................................................-7-
A.3. CERTAIN BUSINESS OPPORTUNITIES................................................................-8-
B. MATTERS RELATING TO INDEMNIFICATION OF MANAGEMENT SHAREHOLDERS
REGARDING CERTAIN TAX MATTERS........................................-8-
B.1. INDEMNITY.....................................................................................-8-
(a) Obligations to Indemnify....................................................-8-
(b) Determination of Amounts....................................................-9-
(c) Timing of Payments..........................................................-9-
B.2. TAX REFUNDS AND TAX BENEFITS..................................................................-9-
(a) Tax Refunds.................................................................-9-
(b) Tax Benefits................................................................-9-
(c) Actually Realized...........................................................-9-
B.3. TAX REPORTING................................................................................-10-
B.4. CERTAIN PROCEDURES...........................................................................-10-
(a) Procedures Relating to Indemnification of Tax Claims.......................-10-
</TABLE>
(i)
<PAGE> 3
<TABLE>
<S> <C>
(b) Settlement.................................................................-11-
(c) Definition of Tax..........................................................-11-
C. MATTERS RELATING TO CERTAIN EMPLOYMENT AGREEMENTS
AND BENEFITS................................................-11-
C.1. EMPLOYEE BENEFIT PLANS.......................................................................-11-
C.2. OVERRIDING ROYALTY INTERESTS.................................................................-12-
D. MATTERS RELATING TO ACQUISITION AND DISPOSITION OF SHARES........................-12-
D.1. COMPLIANCE WITH SECURITIES LAWS..............................................................-12-
(a) Representations............................................................-12-
(b) Agreements.................................................................-13-
(c) Stock Certificates.........................................................-13-
D.2. PREEMPTIVE RIGHTS TO ACQUIRE ADDITIONAL SECURITIES............................................-13-
(a) Offer to Certain Shareholders..............................................-13-
(b) Responses to Offer.........................................................-13-
(c) Compliance with Securities Laws............................................-14-
(d) Issuance of Unaccepted Securities..........................................-14-
(e) Exceptions.................................................................-14-
D.3. TRANSFERABILITY OF COMMON SHARES.............................................................-14-
(a) Transferability by Non-Management Shareholders.............................-14-
(b) Transferability by Management Shareholders.................................-14-
(c) Tagalong Rights............................................................-15-
D.4. REGISTRATION RIGHTS..........................................................................-19-
(a) Demand Registration Rights of JEDI.........................................-19-
(b) Piggy-Back Registration Rights of JEDI and the Management
Shareholders........................................................................-20-
(c) Special Demand Registration Right of JEDI..................................-20-
(d) Registration Responsibilities of Mariner LLC...............................-21-
(e) Indemnification by Mariner LLC.............................................-24-
(f) Indemnification by Selling Persons.........................................-24-
(g) Procedures for Indemnification.............................................-25-
(h) Mariner LLC's Indemnification of Underwriters..............................-25-
(i) Transferability of Registered Shares.......................................-25-
D.5. AGREEMENT TO APPLY TO TRANSFERRED AND NEWLY ISSUED SHARES....................................-25-
D.6. POWER OF ATTORNEY............................................................................-26-
E. GENERAL MATTERS RELATING TO THIS AGREEMENT...............................-26-
E.1. AMENDMENT....................................................................................-26-
E.2. WAIVER.......................................................................................-26-
E.3. INCLUSIVENESS................................................................................-26-
E.4. NOTICES......................................................................................-26-
E.5. ASSIGNABILITY AND BINDING EFFECT.............................................................-27-
E.6. NO THIRD PARTY BENEFICIARIES.................................................................-27-
E.7. SEVERABILITY.................................................................................-27-
</TABLE>
(ii)
<PAGE> 4
<TABLE>
<S> <C>
E.8. HEADINGS.....................................................................................-27-
E.9. COUNTERPARTS.................................................................................-27-
E.10. GOVERNING LAW................................................................................-27-
E.11. TERMINATION..................................................................................-27-
E.12. AGREEMENT OF SPOUSES.........................................................................-28-
E.13. ARBITRATION..................................................................................-28-
(a) Conduct of Arbitration.....................................................-28-
(b) Injunctive Relief..........................................................-29-
(c) Payment of Expenses........................................................-29-
E.14. INDEMNIFICATION OF OFFICERS AND DIRECTORS......................................................-30-
</TABLE>
(iii)
<PAGE> 5
INDEX TO DEFINITIONS
This Index to Definitions is solely for convenience of reference and
shall be given no effect in the construction or interpretation of this
Agreement.
<TABLE>
<CAPTION>
Terms Defined in This Agreement Where Defined
- ------------------------------- -------------
<S> <C>
AAA ....................................................................................................... E.13(a)
Acquiring Persons ......................................................................................... D.3(c)
Acquisition Agreement .................................................................................... D.3(c)
Actually realized ......................................................................................... B.2(c)
Addendum Agreement ........................................................................................ D.5
Agreement .......................................................................................... [Introduction]
Business opportunity ......................................................................................... A.3
Capital stock equivalents ................................................................................. D.2(a)
Code....................................................................................................... B.1(a)
Commission ................................................................................................ D.4(d)
Common Shares............................................................................................[Recitals]
Conversion Shares............................................................................................D.2(e)
Disposition ............................................................................................... D.1(a)
Disputing Parties............................................................................................ E.13
ECT ................................................................................................ [Introduction]
Enron Directors ........................................................................................... A.2(e)
Exchange Offer...........................................................................................[Recitals]
Existing Shareholders....................................................................................[Recitals]
Financial Participant ..................................................................................... D.3(c)
Indemnified Management Shareholder......................................................................... B.1(a)
Initial Management Directors .............................................................................. A.2(d)
Initial Public Offering ................................................................................... D.2(e)
Issuance .................................................................................................. D.2(a)
JEDI ................................................................................................[Introduction]
Management Directors ...................................................................................... A.2(a)
Management Shareholders ............................................................................ [Introduction]
Mariner Energy ......................................................................................... [Recitals]
Mariner Holdings.........................................................................................[Recitals]
Mariner LLC..........................................................................................[Introduction]
Option Plan..................................................................................................A.2(f)
Original Agreement ......................................................................................[Recitals]
Other Common Shares ....................................................................................... D.4(b)
Parent..................................................................................................... A.1(b)
Registration Expenses ..................................................................................... D.4(d)
Relevant Transactions...................................................................................... B.1(b)
Representatives ........................................................................................ [Recitals]
Securities Act ............................................................................................ D.4(a)
Selling Expenses .......................................................................................... D.4(d)
Selling Shareholders ...................................................................................... D.3(c)
Shareholders ......................................................................................A.2(a), D.5, E.1
Subsidiary ................................................................................................ A.1(b)
Tagalong Notice ........................................................................................... D.3(c)
</TABLE>
(iv)
<PAGE> 6
<TABLE>
<CAPTION>
Terms Defined in This Agreement Where Defined
- ------------------------------- -------------
<S> <C>
Tax......................................................................................... B.1(a), B.4(a), B.4(c)
Tax Benefit................................................................................................ B.2(b)
Tax Claim.................................................................................................. B.4(a)
Tax Refund................................................................................................. B.2(a)
30% Shareholder............................................................................................ D.4(c)
</TABLE>
(v)
<PAGE> 7
INDEX TO EXHIBITS
This Index to Exhibits is solely for convenience of reference and shall
be given no effect in the construction or interpretation of this Agreement.
<TABLE>
<CAPTION>
Exhibit Name Exhibit Description Where Referred To
- ------------ ------------------- -----------------
<S> <C> <C>
EXHIBIT 1 -- Certificate of Formation of Mariner LLC........................................ Sections A.1(a)
EXHIBIT 2 -- Limited Liability Company Agreement of
of Mariner LLC............................................................... Sections A.1(a)
EXHIBIT 3 -- Certificate of Incorporation of
Mariner Holdings..................................... Sections A.1(a), A.1(b), A.1(c), A.1(d)
EXHIBIT 4 -- Bylaws of Mariner Holdings............................. Sections A.1(a), A.1(b), A.1(c), A.1(d)
EXHIBIT 5 -- Certificate of Incorporation of Mariner Energy.................................. Section A.1(a)
EXHIBIT 6 -- Bylaws of Mariner Energy........................................................ Section A.1(a)
EXHIBIT 7 -- Employee benefit plans to be continued............................................. Section C.1
EXHIBIT 8 -- Form of Addendum Agreement......................................................... Section D.5
</TABLE>
(vi)
<PAGE> 8
AMENDED AND RESTATED SHAREHOLDERS' AGREEMENT
THIS AMENDED AND RESTATED SHAREHOLDERS' AGREEMENT dated October 12,
1998, (this "Agreement"), among MARINER ENERGY LLC, a Delaware limited liability
company ("Mariner LLC"), ENRON CAPITAL & TRADE RESOURCES CORP., a Delaware
corporation ("ECT"), JOINT ENERGY DEVELOPMENT LIMITED PARTNERSHIP, a Delaware
limited partnership ("JEDI"), and the following individuals (the "Management
Shareholders"): Robert E. Henderson, Richard R. Clark, Michael W. Strickler, D.
S. Huber, William J. Anderson, Thomas M. Campbell, Jr., Donald M. Clement, Ralph
J. Dobbins, James M. Fitzpatrick III, James L. Gregory, Alan K. Hadfield,
Gregory K. Harless, William Hunt Hodge, William F. Howell, Jacqueline S. Hudson,
Barbara C. Kyse, Laurence J. Lapeze, Cory L. Loegering, Richard A. Molohon,
Jerry L. Sheets, Clinton D. Smith, Ward H. Taylor, Richard F. Weser, Thomas E.
Young, Frederic L. Lettieri, Frank A. Pici, Robert C. Strauss, D. Bruce Nevin,
Steven W. Burt, James W. Anderson, Richard W. Webb and Lindell V. McGuire.
WHEREAS, Robert E. Henderson, Richard R. Clark, Michael W. Strickler
and D. S. Huber (together, the "Representatives"), ECT and MARINER HOLDINGS,
INC., a Delaware corporation ("Mariner Holdings"), entered into a Stockholders'
Agreement dated April 2, 1996 (the "Original Agreement"); and
WHEREAS, JEDI and the parties to the Original Agreement entered into
Amendment No. 1 dated May 16, 1996 to the Original Agreement; and
WHEREAS, JEDI, the parties to the Original Agreement and certain of
the Management Shareholders entered into Amendment No. 2 dated May 31, 1996, to
the amended Original Agreement; and
WHEREAS, effective April 1, 1996, Mariner Holdings purchased all of
the outstanding shares of stock of Mariner Energy, Inc., a Delaware corporation
formerly named "Hardy Oil & Gas USA Inc." ("Mariner Energy") pursuant to the
Stock Purchase Agreement dated as of April 1, 1996, between Hardy Oil & Gas plc,
a company incorporated in England as a public limited company, Hardy Holdings
Inc., a Delaware corporation, Holdings and ECT; and
WHEREAS, on June 27, 1996, JEDI, as ECT's assignee, and certain of
the Management Shareholders purchased shares of common stock, $.01 par value, of
Mariner Holdings, pursuant to the Original Agreement, as amended by Amendment
Nos. 1 and 2; and
WHEREAS, from time to time after June 27, 1996, certain additional
Management Shareholders purchased shares of the Common Stock from Mariner
Holdings and became parties to the Original Agreement, as amended; and
WHEREAS, ECT, Mariner Holdings, the Representatives and JEDI entered
into Amendment No. 3 dated September 2, 1998 to the amended Original Agreement;
and
<PAGE> 9
WHEREAS, on October 12, 1998, Mariner LLC consummated an exchange
offer (the "Exchange Offer") by which it issued 12 of its common shares, $.01
par value (the "Common Shares"), for each share of the Common Stock, with the
result that the stockholders of Mariner Holdings became the shareholders of
Mariner LLC (the "Existing Shareholders") and Mariner Holdings became a wholly
owned subsidiary of Mariner LLC; and
WHEREAS, ECT and the Existing Shareholders wish to amend and restate
the Original Agreement, as amended by Amendment Nos. 1, 2 and 3, to reflect the
purchase of stock of Mariner Energy by Mariner Holdings, the purchase of Common
Stock by JEDI and the Management Shareholders and the Exchange Offer (without
negating the effect of provisions relating to past actions); to continue to
provide for certain obligations, rights and restrictions with respect to each
Shareholder; and to provide for other matters as set forth below;
NOW, THEREFORE, in consideration of the premises, the Original
Agreement is amended and restated in its entirety as set forth below:
A. MATTERS RELATING TO COMPANY GOVERNANCE,
MANAGEMENT AND OPERATION OF MARINER LLC AND ITS SUBSIDIARIES
A.1. CHARTER DOCUMENTS OF MARINER LLC AND SUBSIDIARIES AND RELATED PROVISIONS.
(a) Existing Certificate of Formation and LLC Agreement of Mariner
LLC and Certificates of Incorporation and Bylaws of Mariner Holdings and Mariner
Energy. The certificate of formation and limited liability company agreement of
Mariner LLC are attached as EXHIBITS 1 and 2 to this Agreement and shall be
effective until amended in accordance with the Delaware Limited Liability
Company Act and any applicable provisions of the certificate of formation and
limited liability company agreement of Mariner LLC, subject to subsection A.1(d)
of this Agreement. The amended and restated certificates of incorporation and
bylaws of Holdings and Mariner Energy are attached as EXHIBITS 3, 4, 5 and 6 to
this Agreement and shall be effective until amended in accordance with the
General Corporation Law of the State of Delaware and any applicable provisions
of the applicable restated certificate of incorporation or bylaws, subject to
subsection A.1(c) of this Agreement.
(b) Indemnification and Director Quorum Provisions in Charter
Documents of New Subsidiaries. Upon the formation or acquisition of any new
direct or indirect subsidiary of Mariner or Holdings, the parties to this
Agreement will take all actions necessary to amend or adopt the certificate of
incorporation (or analogous document) and the bylaws (or analogous document) of
the new subsidiary so that the provisions of new Sections X.4, X.5, X.6 and X.7
of EXHIBIT 3 (relating to indemnification of certain persons) and Sections III.2
and IV.2 of EXHIBIT 4 (relating to the requirements for a quorum of a meeting of
the board of directors and committees) are included in the new subsidiary's
certificate of incorporation (or analogous document) and bylaws (or analogous
document) and so that this Agreement is referred to therein as appropriate. For
purposes of this Agreement a "subsidiary" shall mean, with respect to any person
(the "parent"), (i) any corporation, association, joint venture, partnership or
other business entity of which securities or other ownership
-2-
<PAGE> 10
interests representing more than 50% of the ordinary voting power or beneficial
interest are, at the time as of which any determination is being made, owned or
controlled by the parent or one or more subsidiaries of the parent or by the
parent and one or more subsidiaries of the parent and (ii) any joint venture or
partnership of which the parent or any subsidiary of the parent is a general
partner or has responsibility for its management (provided, however, that the
term "subsidiary" shall not include joint operating agreements).
(c) Changes to Indemnification and Director Quorum Provisions. The
indemnification and director quorum provisions described in subsection A.1(b) to
this Agreement and contained in the certificate of incorporation (or analogous
document) or the bylaws (or analogous document) of Mariner Holdings, Mariner
Energy or any other direct or indirect subsidiary of Mariner Holdings or Mariner
Energy (i.e., those amendments related thereto described in EXHIBIT 3 and
EXHIBIT 4 and analogous provisions in the documents of any subsidiary) shall not
be amended without the written consent of a majority of the Management Directors
(as defined in Section A.2 of this Agreement). The amendments to new Articles
VII, X and XI of Mariner Holdings' certificate of incorporation reflected in
EXHIBIT 3 and to Articles III, IV, VII and VIII of Mariner Holdings' bylaws
reflected in EXHIBIT 4 (and analogous provisions in the documents of any
subsidiary) shall not be amended without the written consent of a majority of
the Management Directors.
(d) Indemnification and Director Quorum Provisions in Charter
Documents of Mariner LLC. In addition to any other indemnification rights of any
person under the limited liability company agreement of Mariner LLC, the
following indemnification provisions (which are intended to be analogous to
Sections X.4, X.5, X.6 and X.7 of EXHIBIT 3) shall apply:
"(i) Each person who was or is made a party or is threatened to be
made a party to or is involved in any action, suit or
proceeding, whether civil, criminal, administrative or
investigative (hereinafter a "proceeding"), by reason of the
fact that he or she, or a person of whom he or she is the
legal representative, is or was a director, officer, employee
or consultant of Mariner LLC or is or was serving at the
request of Mariner LLC as a director, officer, employee,
consultant or agent of another business entity or of a
partnership, joint venture, trust or other enterprise,
including service with respect to employee benefit plans,
whether the basis of such proceeding is alleged action in an
official capacity as a director, officer, employee, consultant
or agent or in any other capacity while serving as a director,
officer, employee, consultant or agent, shall be indemnified
and held harmless by Mariner LLC to the fullest extent
permitted by the Delaware Limited Liability Company Act, as
the same exists or may hereafter be amended (but, in the case
of any such amendment, only to the extent that such amendment
permits Mariner LLC to provide broader indemnification rights
than said law permitted Mariner LLC to provide prior to such
amendment), against all expense, liability and loss (including
attorneys' fees, judgments, fines, ERISA, excise taxes or
penalties and amounts paid or to be paid in settlement)
reasonably incurred or suffered by such person in connection
therewith and such indemnification shall continue as to a
person who has ceased to be a director, officer, employee,
consultant or agent and shall inure to the benefit of his or
her heirs, executors and administrators; provided, however,
that, except as provided in paragraph (ii) below,
-3-
<PAGE> 11
Mariner LLC shall indemnify any such person seeking
indemnification in connection with a proceeding (or part
thereof) initiated by such person only if such proceeding (or
part thereof) was authorized by the board of directors of
Mariner LLC; provided further, however, that Mariner LLC shall
not be obligated to indemnify any employee of Mariner LLC who
is not an officer or director of Mariner LLC under this
paragraph (i) if the employee's involvement in the action,
suit or proceeding is determined by a court of competent
jurisdiction to have been due to the employee's gross
negligence or willful misconduct. The right to indemnification
conferred in this paragraph (i) shall be a contract right and
shall include the right to be paid by Mariner LLC the expenses
incurred in defending any such proceeding in advance of its
final disposition; provided, however, that, if applicable law
requires, the payment of such expenses incurred by a director,
officer, employee or consultant in such capacity (and not in
any other capacity in which service was or is rendered by such
person) in advance of the final disposition of a proceeding,
shall be made only upon delivery to Mariner LLC of an
undertaking, by or on behalf of such person, to repay all
amounts so advanced if it shall ultimately be determined that
such person is not entitled to be indemnified under this
paragraph (i) or otherwise.
"(ii) If a claim under paragraph (i) above is not paid in full by
Mariner LLC within 30 days after a written claim has been
received by Mariner LLC, the claimant may at any time
thereafter bring suit against Mariner LLC to recover the
unpaid amount of the claim, and, if successful in whole or in
part, the claimant shall be entitled to be paid also the
expense of prosecuting such claim. It shall be a defense to
any such action (other than an action brought to enforce a
claim for expenses incurred in defending any proceeding in
advance of its final disposition whether required undertaking,
if any is required, has been tendered to Mariner LLC) that the
claimant has not met the standards of conduct which make it
permissible under applicable law for Mariner LLC to indemnify
the claimant for the amount claimed, but the burden of proving
such defense shall be on Mariner LLC. Neither the failure of
Mariner LLC (including its board of directors, independent
counsel or shareholders) to have made a determination prior to
the commencement of such action that indemnification of the
claimant is proper in the circumstances because he or she has
met the applicable standard of conduct set forth in any
applicable statute, nor an actual determination by Mariner LLC
(including its board of directors, independent legal counsel
or its shareholders) that the claimant has not met such
applicable standard of conduct, shall be a defense to the
action or create a presumption that the claimant has not met
the applicable standard of conduct.
"(iii) The right to indemnification and the payment of expenses
incurred in defending a proceeding in advance of its final
disposition conferred in paragraphs (i) and (ii) above shall
not be exclusive of any other right which any person may have
or hereafter acquire under any statute, provision of the
certificate of formation, limited liability agreement, other
agreement, vote of shareholders or disinterested directors or
otherwise.
-4-
<PAGE> 12
"(iv) Mariner LLC may maintain insurance, at its expense, to protect
itself and any director, officer, employee, consultant or
agent of Mariner LLC or another business entity, partnership,
joint venture, trust or other enterprise against any such
expense, liability or loss, whether or not Mariner LLC would
have the power to indemnify such person against such expense,
liability or loss under applicable law."
In addition to any other requirements provided for in the limited liability
company agreement of Mariner LLC, the following provisions relating to the
requirements for a quorum of a meeting of the board of directors and committees
of Mariner LLC (which are intended to be analogous to Section III.2 and IV.2 of
EXHIBIT 4) shall apply:
"(v) A quorum of the board of directors of Mariner LLC shall be
deemed to be present at any meeting if (a) a majority of the
total number of directors are present at the meeting and (b)
either (y) at least one Management Director (as that term is
defined in this Agreement) is present at the meeting or (z)
all Management Directors (as that term is defined in this
Agreement) received at least 3 business days' written notice
of the meeting at their respective addresses for notice
described in this Agreement; for purposes of the foregoing, a
notice given by email or other electronic communication shall
not constitute a "written notice". The vote of a majority of
the directors present at a meeting at which a quorum is
present shall be the act of the board of directors of Mariner
LLC.
"(vi) Any committee designated pursuant to the Limited Liability
Company Agreement of Mariner LLC shall keep regular minutes of
its actions and proceedings in a book provided for that
purpose and report the same to the board of directors of
Mariner LLC at its meeting next succeeding such action, shall
fix its own rules or procedures, and shall meet at such time
and at such place or places as may be provided by such rules,
or by such committee or the board of directors. Should a
committee fail to fix its own rules, the provisions of the
Limited Liability Company Agreement of Mariner LLC pertaining
to the calling of meetings and conduct of business by the
board of directors of Mariner LLC shall apply as nearly as may
be possible. At every meeting of any such committee, a quorum
shall be present if (a) a majority of all the members of the
committee are present and (b) if one or more Management
Directors is a member of the committee pursuant to the
provisions of this Agreement, either (y) at least one
Management Director who is a member of the committee is
present at the meeting or (z) each Management Director who is
a member of the committee received at least 3 business days'
written notice of the meeting at his address for notice
described in this Agreement; for purposes of the foregoing, a
notice given by email or other electronic communication shall
not constitute a "written notice". The affirmative vote of a
majority of the members present at a meeting at which there is
a quorum shall be necessary for the adoption by it of any
resolution."
The indemnification and director quorum provisions described above shall not be
amended without the written consent of a majority of the Management Directors
(as defined in Section A.2 of this Agreement). The foregoing provisions are
intended to be in addition to the provisions of the Limited
-5-
<PAGE> 13
Liability Company Agreement of Mariner LLC. If there is any conflict between the
provisions of this Agreement and the provisions of the Limited Liability Company
Agreement of Mariner LLC, then the conflict shall be resolved in favor of the
provisions of this Agreement, which shall prevail; provided, however, that any
person entitled to indemnification pursuant to both the provisions of the
limited liability company agreement and of this subsection A.2(d) shall be
entitled to the maximum benefit of all such provisions, taken as a whole but
without duplication, regardless of such conflict.
A.2. BOARDS OF DIRECTORS OF MARINER LLC AND SUBSIDIARIES.
(a) Election of Management Nominees Generally. Membership on the
board of directors of Mariner LLC shall at all times include at least three
nominees of the group consisting of the Management Shareholders, subject to the
provisions of clause (d)(iv) of this Section A.2. At any annual or special
election of a new board of directors, the Management Shareholders shall nominate
three individuals to serve as directors of Mariner LLC (the "Management
Directors"), to be selected by the Management Shareholders in accordance with
subsection (d) of this Section A.2. JEDI, each Existing Shareholder and each
person who becomes a shareholder of Mariner LLC and a party to this Agreement
(together, the "Shareholders") shall vote all of its, his or her shares of
voting securities issued by Mariner LLC in favor of the nominees so nominated.
(b) Election of Replacement Directors. If any Management Director
shall cease to serve as a director as a result of his resignation, removal,
death or incapacity, then the vacancy created by that director's absence shall
be filled by an individual selected by the Management Shareholders in accordance
with subsection (d) of this Section A.2. Each Shareholder shall vote all of its,
his or her shares of voting securities issued by Mariner LLC in favor of the
nominees so nominated.
(c) Removal of Directors. The removal from office as a director of
any Management Director shall, in addition to any other requirement by Mariner
LLC's certificate of formation or limited liability company agreement, require
the approval of two of the Management Directors.
(d) Selection of Management Directors. The persons who shall
constitute the nominees for Management Directors shall be determined as follows:
(i) The initial Management Directors are Robert E. Henderson,
Richard R. Clark and Michael W. Strickler ("Initial Management
Directors");
(ii) As long as each Initial Management Director is an
employee of Mariner LLC, Mariner Holdings, Mariner Energy or a direct
or indirect subsidiary of Mariner LLC, Mariner Holdings or Mariner
Energy, is willing to serve as a director of Mariner LLC and is able
to serve as a director of Mariner LLC, he shall be named as a nominee
for election as a Management Director;
(iii) If any Initial Management Director (or his successor
selected in accordance with this subsection (d)) shall cease to serve
as a director as a result of his resignation, removal, death or
incapacity or because he no longer meets the requirements of
subparagraph (ii) above, then his directorship shall be filled by the
then-highest ranking
-6-
<PAGE> 14
executive officer of Mariner LLC who is not then serving as a
director of Mariner LLC; provided, however, that if as a result of
such selection there would then be no Management Director who was or
became a Management Shareholder as of June 27, 1996, then instead the
vacant directorship (and each successor) shall be filled by the
then-highest ranking executive officer of Mariner LLC who is not then
serving as a director and who was or became a Management Shareholder
as of June 27, 1996, and if there is no such person, then the vacant
directorship (and each successor) shall be filled by a person who is
then the holder of the highest number of Common Shares and who was or
became a Management Shareholder as of June 27, 1996 and is not
currently serving as a director of Mariner LLC; any such replacement
(or his successor) shall serve as long as he is willing to serve as a
director of Mariner LLC and is able to serve as a director of Mariner
LLC;
(iv) If any directorship to be held by a Management Director
cannot be filled as described above for any reason, then the
provisions of subparagraphs (a), (b) and (c) this Section A.2 shall
no longer apply to that directorship, which shall be filled by a
person nominated and elected in accordance with law and the
provisions of Mariner LLC's limited liability company agreement.
(e) Election of Other Directors. At any annual or special election of
directors and except with respect to the Management Directors, each Shareholder
shall vote all of its, his or her shares of voting securities issued by Mariner
LLC in favor of nominees (the "Enron Directors") named by JEDI. If any Enron
Director shall cease to serve as a director as a result of his resignation,
removal, death or incapacity, then each Shareholder shall vote all of its, his
or her shares of voting securities issued by Mariner LLC in favor of a
replacement nominee named by JEDI.
(f) Committees of the Board of Directors. If any executive committee
(or committee having similar functions) of the board of directors of Mariner LLC
is appointed, at least two members of that committee shall be Management
Directors. If any compensation committee (or committee having similar functions)
of the board of directors of Mariner LLC is appointed, at least one member of
that committee shall be a Management Director. At least one member of the
committee appointed pursuant to Mariner LLC's Share Option Plan (the "Option
Plan") shall be a person who is a Management Director. No Management Director
shall be appointed to any audit committee of the board of directors of Mariner
LLC.
(g) Election of Management Directors of Mariner LLC's Subsidiaries.
The provisions of this Section A.2 regarding the nomination, election,
replacement and removal of the Management Directors shall apply with respect to
each direct and indirect subsidiary of Mariner LLC, it being intended that the
Management Shareholders shall have the same representation on the boards of
directors of each such subsidiary as they have on the board of directors of
Mariner LLC. The provisions of this Section A.2 regarding the appointment of
Management Directors on committees of the board of directors of Holdings shall
apply with respect to each direct and indirect subsidiary of Mariner LLC, it
being intended that the Management Shareholders shall have the same
representation on committees of the boards of directors of each such subsidiary
as they have on the board of directors of Mariner LLC. For purposes of this
subsection A.2(g), references in subsections A.2(a)-(f) to Mariner LLC's
certificate of formation and limited liability company agreement shall
-7-
<PAGE> 15
be deemed to be references to the subject subsidiary's certification of
incorporation and bylaws, or analogous corporate governance documents.
A.3. CERTAIN BUSINESS OPPORTUNITIES.
Neither Mariner LLC nor any of its subsidiaries shall have any
obligation to bring, or otherwise share, any business opportunities with ECT,
Enron or any affiliate of ECT or Enron. Mariner LLC and its subsidiaries may
compete directly with ECT, Enron and their affiliates. ECT and each Shareholder
acknowledge that, and agree to and waive any right to complain as a result of
the fact that, Mariner LLC and its subsidiaries may, among other things, engage
in oil and gas exploration and development in competition with Enron, ECT and
their affiliates. For purposes of this Section A.3, a "business opportunity"
means any opportunity for a person (i) to enter into any transaction pursuant to
which the person would acquire (whether by purchase, lease or other
transaction), own, invest in, finance, lend funds to, contribute capital to,
manage, operate or otherwise participate in any person, assets or transaction,
or (ii) to act as a broker, finder, financial adviser or investment banker with
respect to any such transaction by any other person.
B. MATTERS RELATING TO INDEMNIFICATION OF MANAGEMENT SHAREHOLDERS
REGARDING CERTAIN TAX MATTERS
B.1. INDEMNITY.
(a) Obligations to Indemnify. Mariner LLC and each of its
subsidiaries shall, jointly and severally, indemnify, protect, save and hold
harmless, on a fully grossed-up, after tax basis, the Management Shareholders
(each an "Indemnified Management Shareholder") from and against any and all
federal, state and local income taxes, together with any interest thereon, any
penalties, additions to tax, fines and additional amounts with respect thereto
and any interest in respect of such penalties, additions to tax, fines or
additional amounts (each, a "Tax" and collectively, "Taxes") imposed on him or
her and caused by or resulting from (i) the failure of the transactions
described in Section B.1(c) of the Original Agreement to qualify for any reason
as a Tax-free exchange under Section 351 of the Internal Revenue Code of 1986,
as amended (the "Code") and (ii) the failure of the Exchange Offer to qualify
for any reason as a Tax-free exchange under Section 351 of the Code.
(b) Determination of Amounts. The amount of Taxes for which
indemnification is provided under subsection B.1(a): (i) shall be determined on
a marginal basis, by comparing the amount of Taxes that the Indemnified
Management Shareholder would have paid if the transactions described in Section
B.1(c) of the Original Agreement or consummated pursuant to the Exchange Offer
(as applicable, the "Relevant Transactions") had qualified as a Tax-free
exchange under Section 351 of the Code and the amount of Taxes that such
Indemnified Management Shareholder actually pays; and (ii) shall be increased to
take account of any net Tax cost incurred by the Indemnified Shareholder arising
from the receipt, payment or accrual of indemnity payments hereunder. In
computing the amount of any such Tax cost, the Indemnified Management
-8-
<PAGE> 16
Shareholder shall be deemed to recognize all other items of income, gain, loss,
deduction or credit before recognizing any item arising from the receipt or
accrual of any indemnity payment hereunder.
(c) Timing of Payments. Mariner LLC shall make indemnity payments
under this Section B.1 to the relevant Indemnified Management Shareholder five
days prior to the date on which the Indemnified Management Shareholder is
required to pay the relevant Tax to the relevant taxing authority, but in no
case earlier than 20 days after the date the relevant Indemnified Management
Shareholder notifies Mariner LLC in writing that such Tax is due and the amount
thereof.
B.2. TAX REFUNDS AND TAX BENEFITS.
(a) Tax Refunds. If a refund, credit or other offset to Tax (a "Tax
Refund") of any Taxes for which an Indemnified Management Shareholder has been
indemnified by Mariner LLC pursuant to subsection B.1(a) is actually realized by
such Indemnified Management Shareholder, such Indemnified Management Shareholder
shall pay over to Mariner LLC the amount of such Tax Refund (together with
interest received from the relevant taxing authority with respect thereto) no
later than five days after such Tax Refund is actually realized by such
Indemnified Management Shareholder.
(b) Tax Benefits. If the amount of Taxes payable by an Indemnified
Management Shareholder (or transferee of such Indemnified Management
Shareholder) with respect to a subsequent transaction or with respect to a
subsequent taxable period is less than the amount of Taxes such Indemnified
Management Shareholder (or transferee) would have paid absent the Relevant
Transactions as a result of a step-up in tax basis in the shares of common stock
of Mariner Holdings or the Common Shares resulting from the Relevant
Transactions failing to qualify as a tax-free exchange under Section 351 of the
Code (such reduction in Taxes payable, a "Tax Benefit"), then such Indemnified
Management Shareholder shall pay (or cause such transferee to pay) to Mariner
LLC the amount of such Tax Benefit no later than five days after the date such
Tax Benefit is actually realized by such Indemnified Management Shareholder (or
transferee, as the case may be).
(c) Actually Realized. For purposes of subsection B.2(b), an
Indemnified Management Shareholder shall be deemed to have "actually realized" a
Tax Refund, and an Indemnified Management Shareholder (or a transferee of an
Indemnified Management Shareholder, as the case may be), shall be deemed to have
"actually realized" a Tax Benefit, at the earlier of (i) the time such Tax
Refund or Tax Benefit is realized by such Indemnified Management Shareholder (or
transferee, as the case may be) in the form of a payment from the relevant
taxing authority or (ii) the time the Indemnified Management Shareholder (or
transferee, as the case may be) files a Tax return reflecting, or makes a
payment of, Taxes in an amount that is less than the amount of Taxes that would
have been payable by such Indemnified Management Shareholder (or transferee, as
the case may be).
B.3. TAX REPORTING. Except as otherwise provided in subsection B.4 with
respect to the resolution of a Tax Claim (as defined in subsection B.4) in
accordance with the procedures set forth therein, the parties jointly and
severally agree and acknowledge that the Relevant Transactions are
-9-
<PAGE> 17
intended to qualify as a tax-free exchange under Section 351 of the Code, and
shall not take any position before any taxing authority that is inconsistent
with such position.
B.4. CERTAIN PROCEDURES.
(a) Procedures Relating to Indemnification of Tax Claims. If any
taxing authority shall notify a party hereto that it is making a claim which, if
successful, might result in an indemnity payment by Mariner LLC or a subsidiary
to an Indemnified Management Shareholder pursuant to Section B.1 (a "Tax
Claim"), then such party shall give notice to Mariner LLC (or, if such party is
Mariner LLC, Mariner LLC shall give notice to each Management Shareholder) in
writing of such Tax Claim within five days of becoming aware of the existence of
such Tax Claim. Mariner LLC shall thereafter control at its sole risk and
expense all proceedings and may make all decisions taken in connection with such
Tax Claim (including selection of counsel and settlement thereof) and, without
limiting the foregoing, may in its sole discretion and at its sole risk and
expense pursue or forego any and all administrative appeals, proceedings,
hearings and conferences with any taxing authority with respect thereto, and
may, in its sole discretion, either pay the Tax claimed on behalf of the
relevant Indemnified Management Shareholder and sue for a refund where
applicable law permits such refund suits or contest or settle such Tax Claim in
any other permissible manner; provided, however, that (i) Mariner LLC shall not
have the authority to extend the statute of limitations with respect to any Tax
without the relevant Indemnified Management Shareholder's consent (which consent
shall not be unreasonably withheld) and (ii) Mariner LLC's control of any
contest or proceeding shall be limited to issues with respect to the Tax Claim
and the relevant Indemnified Management Shareholder shall be entitled to settle
or contest, in his or her sole and absolute discretion, any other issue raised
by the Internal Revenue Service or any other taxing authority. If Mariner LLC
elects to pay the relevant Tax on behalf of an Indemnified Management
Shareholder and sue for a refund, Mariner LLC shall indemnify and hold harmless
the Indemnified Management Shareholder (on a fully grossed-up, after-tax basis,
determined in a manner analogous to that described in Section B.1) for any
"taxes" (as defined in subsection B.4(c)) arising from such payment on such
Indemnified Management Shareholder's behalf. In addition, Mariner LLC shall
indemnify and hold harmless the Indemnified Management Shareholder (on a fully
grossed-up, after-tax basis, determined in a manner analogous to that described
in Section B.1) for any taxes arising from the payment of expenses by Mariner
LLC incident to such contest or proceeding of such Tax Claim (including without
limitation fees and disbursements of counsel and experts retained by Mariner
LLC. If a claim by a taxing authority involves multiple issues, the contest of
some of which are controlled by Mariner LLC hereunder, and the contest of others
of which are controlled by an Indemnified Management Shareholder hereunder, and
it is impossible to sever such issues, the choice of whether to pay the taxes
relating to such multiple issues and sue for a refund (where available) or,
instead, to contest such multiple issues without payment (such as in United
States Tax Court), shall be made by the party (Mariner LLC or the Indemnified
Management Shareholder) controlling the contest of the issues involving the
larger potential liability for taxes.
(b) Settlement. An Indemnified Management Shareholder shall not
settle any Tax Claim without the prior written consent of Mariner LLC. Each
party hereunder shall cooperate with the others in contesting any Tax Claim,
which cooperation shall include the granting of appropriate powers of attorney
to Mariner LLC, the retention and, upon request, the provision of records and
-10-
<PAGE> 18
information that are relevant to such Tax Claim, and making himself or herself
available to provide additional information or explanation of any material
provided hereunder or to testify at proceedings relating to such Tax Claim, and
keeping the other parties reasonably informed of all developments, written
materials, and events relating to such Tax Claim. If Mariner LLC requests an
Indemnified Management Shareholder pursuant to this subsection B.4(b) to perform
a particular task, Mariner LLC shall reimburse such Indemnified Management
Shareholder (on a fully grossed-up, after-tax basis determined in a manner
analogous to that described in subsection B.1(a)) for any necessary, reasonable
and customary out-of-pocket expenses incurred by such Indemnified Management
Shareholder in complying with such request.
(c) Definition of Tax. For purposes of this Section B.4, the terms
"tax" and "taxes" mean any and all federal, state and local taxes of any kind
whatsoever (including, but in no way limited to, income taxes), together with
any interest thereon, any penalties, additions to tax, fines or additional
amounts with respect thereto and any interest in respect to such penalties,
additions to tax, fines or additional amounts.
C. MATTERS RELATING TO CERTAIN EMPLOYMENT AGREEMENTS
AND BENEFITS
C.1. EMPLOYEE BENEFIT PLANS. For at least three years after June 27, 1996, the
parties to this Agreement shall cause Mariner Energy to continue the employee
benefit plans described on EXHIBIT 7 to this Agreement on the same terms and
conditions as in effect on May 16, 1996; provided, however, that those plans may
be amended, revised, merged and replaced if such action is required (or required
to maintain the plan's qualified status, if applicable) under the Code, the
Employee Retirement Income Security Act or applicable federal or state law and
regulations promulgated thereunder; provided further, however, that if any such
amendment, revision, merger or replacement results in a reduction in,
discontinuance of or disallowance of any Management Shareholders' participation
in or continued participation in, any plan, Mariner LLC shall take such steps as
are necessary or advisable to provide such Management Shareholders, in the
aggregate, with benefits reasonably comparable to those provided to such
Management Shareholder prior to such reduction, discontinuance or disallowance.
C.2. OVERRIDING ROYALTY INTERESTS. At all times while this Agreement is in
effect, the aggregate overriding royalty interests to be held by or due to David
S. Huber and employees of Mariner Energy (excluding Alan K. Hadfield) pursuant
to their employment agreements with Mariner Energy or otherwise shall not exceed
an aggregate of 1-1/2% before Payout (as defined in such agreements) and an
aggregate of 6% after Payout, proportionately reduced to the Company Group's
Working Interest (as defined in such agreements), and the aggregate overriding
royalty interest to be held by or due to Alan K. Hadfield and other consultants
(excluding David S. Huber) pursuant to their consulting services agreement with
Mariner Energy or otherwise shall not exceed an aggregate of 1-1/2% before
Payout and an aggregate of 1-1/2% after Payout, proportionately reduced to the
Company Group's Working Interest, in each case subject to the adjustments,
including without limitation those described in Sections 9.4.8(a), 9.4.8(b),
9.4.9 and 9.5, provided for in such
-11-
<PAGE> 19
employment agreements and the comparable provisions in such consulting services
agreements; provided, however, that the aggregate overriding royalty interests
held by and due to employees and consultants in a prospect owned by Mariner
Energy as of April 2, 1996, shall not be increased except as provided in such
employment or consulting services agreement. The division from time to time
while this Agreement is in effect among employees and consultants of the
percentages described in the foregoing sentence will be determined by the
Compensation Committee of the board of directors of Mariner Energy based on the
recommendation of the chief executive officer of Mariner Energy.
D. MATTERS RELATING TO ACQUISITION AND DISPOSITION OF SHARES
D.1. COMPLIANCE WITH SECURITIES LAWS.
(a) Representations. Each of the Shareholders represents to Mariner
LLC and its subsidiaries and to all other Shareholders that as of the date the
Shareholder acquired or acquires any securities issued by Mariner LLC or its
subsidiaries, (i) those securities are and were acquired for that Shareholder's
own account, for investment and not with a view to any distribution (except as
set forth below with respect to JEDI's shares), (ii) the Shareholder's financial
and other circumstances are such that the Shareholder can foresee no situation
in which the Shareholder may be required to sell the securities, and (iii)
Mariner LLC or its subsidiaries have furnished the Shareholder with such
financial and other information as the Shareholder may reasonably request to
enable the Shareholder to make an informed decision concerning the acquisition.
Each Shareholder understands that no securities issued by Mariner LLC or any of
its subsidiaries have been registered under the Securities Act of 1933 or under
the securities laws of any other jurisdiction. Each Shareholder understands
that, except with respect of the provisions of Section D.4. of this Agreement,
neither Mariner LLC nor any of its subsidiaries is under any obligation to take
any action to register any securities under any securities laws and that
exemptions under applicable securities laws may not be available in connection
with any Disposition (as defined below) of these securities. For purposes of
this Agreement, a "Disposition" means any transfer, pledge, mortgage or other
encumbrance, or any other disposition, of securities issued by Mariner LLC or
its subsidiaries (or any interest in those securities), whether voluntary or
involuntary, whether during the lifetime of the Shareholder making the
Disposition or on the death of the Shareholder, as applicable. JEDI may make a
Disposition of its Common Shares from time to time in accordance with the
provisions of Section D.3. of this Agreement, but any such Disposition shall be
made in compliance with the provisions of this Section D.1.
(b) Agreements. No Shareholder shall make a Disposition of any Common
Shares unless there is furnished to Mariner LLC an opinion of counsel reasonably
satisfactory in form and substance to Mariner LLC that registration of the
Common Shares which are the subject of the Disposition is not required under
applicable securities laws or unless the requirement contained in this
subparagraph (b) is waived in writing by Mariner LLC.
-12-
<PAGE> 20
(c) Stock Certificates. Each certificate representing Common Shares
shall bear an appropriate legend covering the matters described in this Section
D.1. and other provisions of this Agreement.
D.2. PREEMPTIVE RIGHTS TO ACQUIRE ADDITIONAL SECURITIES.
(a) Offer to Certain Shareholders. If Mariner LLC proposes to issue,
sell or grant any of its capital shares or any right, warrant, option,
convertible security or exchangeable security, or indebtedness or other rights
exercisable for or convertible into, or exchangeable for, directly or
indirectly, any capital stock of Mariner LLC ("capital stock equivalents"), then
Mariner shall, no later than 16 days before the consummation of any such
issuance, sale or grant (collectively, any "Issuance") give written notice to
each Shareholder of the proposed Issuance. The notice shall describe the
proposed Issuance, identify the proposed purchasers, and contain an offer to
each Shareholder to sell to such Shareholder, at the same price and for the same
consideration to be paid by the proposed purchasers, the Shareholder's pro rata
portion (which is the ratio of the number of shares of fully diluted Common
Shares owned by the Shareholder immediately before such Issuance to the total
number of shares of fully diluted Common Shares owned by all Shareholders
immediately before such Issuance) of such capital shares and capital share
equivalents included in such Issuance, subject to the provisions of this Section
D.2. Each Shareholder shall have a right of over-allotment to the effect that if
any Shareholder fails to exercise its, his or her rights under this Section D.2.
to purchase its, his or her pro rata portion, the other Shareholders may
purchase the nonpurchasing Shareholder's portion on a pro rata basis or on such
other basis as the Shareholders who are purchasing securities pursuant to the
offer shall agree.
(b) Responses to Offer. Any Shareholder desiring to exercise an
over-allotment right shall so indicate in its response to Mariner LLC. Any
Shareholder desiring to purchase a portion or all of the Issuance shall indicate
its, his or her acceptance of Mariner LLC's offer by written notice within 15
days after its or his receipt of Mariner LLC's notice pursuant to this Section
D.2. The Issuance of and payment for the securities so accepted shall be
consummated at a time (but no more than 60 days following the expiration of such
15-day period) and place within Houston, Texas, to be designated by Mariner LLC.
(c) Compliance with Securities Laws. If any Shareholder who has
elected to purchase a portion or all of the Issuance is not an accredited
investor (as that term is defined by applicable federal securities laws), then
Mariner LLC shall use all reasonable efforts to permit that Shareholder to
exercise its, his or her rights under this Section D.2 in compliance with
applicable securities laws, but Mariner LLC shall not be required to register
the Issuance to permit that Shareholder to purchase any part of the Issuance. To
the extent a Shareholder who wishes to purchase part of the Issuance is not able
to do so notwithstanding such reasonable efforts by Mariner LLC, that
Shareholder will not have the right to purchase any part of the Issuance,
notwithstanding the provisions of this Section D.2.
(d) Issuance of Unaccepted Securities. If the Shareholders
collectively fail, after taking into account exercises of over-allotment rights,
to elect to purchase all of the capital shares proposed to be issued, then
Mariner LLC may, within the 60 days following the expiration of such 15-day
-13-
<PAGE> 21
period, proceed with that portion of the Issuance that the Shareholders did not
elect to purchase, free of any right on the part of such Shareholder under this
Section D.2. in respect thereof.
(e) Exceptions. This Section D.2. shall not apply to (i) Issuances of
options to employees pursuant to the Option Plan and the exercise of those
options, (ii) capital shares or capital share equivalents issued pursuant to the
acquisition of a business entity or assets by way of merger, purchase of assets
or otherwise, (iii) capital shares or other securities issued in connection with
the Credit and Subordination Agreement dated as of September 2, 1998 between
Mariner Holdings (or its successor, including Mariner LLC) and ECT whereby
Mariner Holdings may issue up to 142,858 shares of Common Shares (subject to
adjustment based on antidilution adjustments provided for therein (the
"Conversion Shares"), (iv) Common Shares issued pursuant to the Exchange Offer,
and (v) Common Shares issued in 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 LLC if immediately
thereafter Mariner LLC (or its successor) is subject to the reporting
requirements of Section 13 or Section 15 of the Securities Exchange Act of 1934
(in either case, an "Initial Public Offering").
D.3. TRANSFERABILITY OF COMMON SHARES.
(a) Transferability by Non-Management Shareholders. Each Shareholder
who is not a Management Shareholder has the right to transfer Common Shares,
subject only to the provisions of Section D.1 of this Agreement.
(b) Transferability by Management Shareholders. On or after May 16,
2001, a Management Shareholder shall have the right to transfer his or her
shares, subject only to the provisions of Section D.1 of this Agreement. Until
the expiration of May 16, 2001, a Management Shareholder may not voluntarily
transfer his or her Common Shares unless they are transferred to a family member
or to another Management Shareholder. However, a Management Shareholder shall
have the right at any time to make a bona fide pledge or mortgage of his or her
shares. Any transfer of Common Shares resulting from the death, divorce,
bankruptcy or foreclosure of any pledged shares shall not be deemed to be a
voluntary transfer. The Management Shareholders may enter into any such
agreement among themselves regarding their rights to purchase and sell each
other's shares as they deem appropriate. The provisions of this subsection
D.3(b) shall not be deemed to have applied to the exchange of common stock of
Mariner Holdings for Common Shares pursuant to the Exchange Offer.
(c) Tagalong Rights.
1. Requirement to Send Tagalong Notice. If any Shareholder or
group of Shareholders proposes to sell or exchange Common Shares 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 any group (as such term is
used under Section 13(d)(3) of the Securities Exchange Act of 1934
and provided that no person shall be deemed a member of
-14-
<PAGE> 22
a group solely because he is a party to this Agreement) of persons
that has any member that is not a Financial Participant, together
with the affiliates of the members of the group (the "Acquiring
Persons"), beneficially owning at least 30 percent of the outstanding
Common Shares, then the proposing Shareholder or Shareholders (the
"Selling Shareholders") shall give a written notice (the "Tagalong
Notice") to each Management Shareholder describing the consideration
proposed to be paid per Common Share in the proposed transaction and
including a true and complete copy of the agreement (the "Acquisition
Agreement") pursuant to which the shares would be acquired. A
"Financial Participant" shall mean an entity that represents and
warrants in writing to the Selling Shareholders and to Mariner LLC
that (i) as to that part of the entity's business engaged in or
relating to, directly or indirectly, the oil and gas industry, the
entity is primarily engaged in investing, including without
limitation by way of purchase of debt or equity securities, in other
entities, which may include oil and gas companies, and (ii) the
entity is not the operator of any oil and gas wells and does not have
a significant oil and gas management team, including geologists and
production engineers.
2. Exceptions to Requirements. The provisions of this
subsection D.3(c) shall not apply (1) if the Acquiring Person is ECT
or Mariner LLC or any entity controlled, directly or indirectly, by
ECT or Mariner LLC or (2) if Mariner LLC has consummated an Initial
Public Offering.
3. Tagalong Rights. Notwithstanding Section D.3(b) hereof,
(1) If the proposed transaction would result
in the beneficial ownership by the Acquiring Persons
of at least 30 percent but less than 50 percent of
the outstanding Common Shares, then each Management
Shareholder shall have the right to include in the
proposed transaction a number of shares equal to the
product of (a) the aggregate number of shares to be
sold by the Selling Shareholders in the proposed
transaction and (b) a fraction with a numerator equal
to the number of shares of Common Shares owned by
such Management Shareholder plus the number of Common
Shares acquirable by such Management Shareholder upon
the
-15-
<PAGE> 23
exercise of share options granted to such Management
Shareholder under the Option Plan (whether then
vested or not) and a denominator equal to the number
of Common Shares owned in the aggregate by all
Shareholders plus all the shares acquirable by the
Management Shareholders under the Option Plan
(whether then vested or not); and
(2) if the proposed transaction would result
in the beneficial ownership by the Acquiring Persons
of at least 50 percent of the outstanding Common
Shares, then each Management Shareholder shall have
the right to include in the proposed transaction a
number of shares equal to the total number of Common
Shares owned by such Management Shareholder at the
time of the closing of the proposed transaction plus
the number of Common Shares acquirable by such
Management Shareholder upon the exercise of share
options granted to such Management Shareholder under
the Option Plan (whether vested or not), to the
extent such options are exercised at the time of the
closing of the proposed transaction; provided, that,
if the proposed transaction would result in the
beneficial ownership by the Acquiring Persons of at
least 50 percent of the outstanding Common Shares, in
no event shall a Management Shareholder be entitled
to sell more than the number of shares such that
after such sale such Management Shareholder would
beneficially own (after taking into account Common
Shares acquirable by such Management Shareholder upon
the exercise of share options granted to such
Management Shareholder under the Option Plan (whether
then vested or not)) less than the number of shares
that, when divided by the total number of Common
-16-
<PAGE> 24
Shares owned at the Management Closing Time or
thereafter acquired by such Management Shareholder
plus the number of Common Shares acquirable by such
Management Shareholder upon the exercise of options
granted to such Management Shareholder under the
Option Plan (whether then vested or not), would equal
the quotient of (x) the number of Common Shares owned
by ECT, JEDI or any entity controlled, directly or
indirectly, by ECT, immediately after the proposed
transaction, divided by (y) the number of Common
Shares owned by JEDI as of June 27, 1996.
4. Consideration in the Form of Securities. If the
consideration to be received in the proposed transaction includes any
securities and if any Management Shareholder who has exercised his
right to include Common Shares in the proposed transaction is not an
accredited investor (as that term is defined by applicable federal
securities laws), then Mariner LLC and the Shareholders who are
participating in the proposed transaction shall use all reasonable
efforts to permit that Management Shareholder to participate in the
proposed transaction in compliance with applicable securities laws;
to the extent such participation is not possible notwithstanding such
reasonable efforts, then Mariner LLC and the Shareholders who are
participating in the proposed transaction shall cause the shares to
be acquired by the Management Shareholder that is not an accredited
investor to be registered to enable the Management Shareholder to
acquire such securities. Notwithstanding the obligations described in
the immediately preceding sentence, the Shareholders participating in
the proposed transaction may, instead of satisfying such obligations,
require the purchaser in the proposed transaction to pay one or more
such nonaccredited investors the cash value of the securities
otherwise issuable in the proposed transaction, such value to be
determined by an independent investment banking company engaged by
Mariner LLC, at its expense.
5. Acceptance of Tagalong Offer. Each Management Shareholder
who wishes to include his or its Common Shares in the proposed
transaction in accordance with the terms of this Section D.3(c) shall
so notify the Selling Shareholders not more than 14 days after the
date the Tagalong Notice is sent to the Management
-17-
<PAGE> 25
Shareholders. The participation of any Management Shareholder in the
proposed transaction shall be conditioned upon the Management
Shareholder's (i) execution of an agreement substantially similar to
the Acquisition Agreement whereby the Management Shareholder would
make representations and warranties comparable to those to be made by
the Selling Shareholders, but with respect to representations and
warranties particular to the Selling Shareholders or the Common
Shares owned by them, a Management Shareholder shall be required only
to provide comparable representations and warranties concerning such
Management Shareholder and the shares owned by such Management
Shareholder and (ii) agreeing to use his reasonable efforts to assist
in consummating the proposed transaction.
6. Obligations of Selling Shareholders upon Acceptance of
Tagalong Offer. If any Management Shareholder elects to participate
in the proposed transaction, the Selling Shareholders shall use their
reasonable efforts to cause the other party or parties to the
transaction to acquire from such Management Shareholder the number of
Common Shares that such Management Shareholder is entitled to include
in the transaction under this Section D.3(c), on the same terms and
conditions applicable to the Selling Shareholders. If, however, such
other parties are for any reason unwilling or unable to purchase the
aggregate number of shares from the Selling Shareholders as well as
such Management Shareholder, then the Selling Shareholders shall
reduce, to the extent necessary, the number of shares they otherwise
would have sold in the proposed transaction so as to permit the
Management Shareholders who have properly elected to participate in
such transaction to sell the number of shares they are entitled to
sell under this Section D.3(c).
7. Alternative Pricing in Certain Events. If the proposed
transaction would result in the beneficial ownership by the Acquiring
Persons of 50 percent or more of the outstanding Common Shares, and
if that transaction is one of two or more related transactions, the
purpose of which is to minimize the benefits otherwise available to
the Management Shareholders under this Section D.3(c), then each
Management Shareholder participating in the proposed transaction
shall be entitled to receive, and the Selling Shareholders shall pay
to each Management Shareholder participating in the proposed
transaction, the excess, if any, of (a) the product of (i) the number
of shares to be acquired from a Management Shareholder in the
proposed transaction and (ii) the average per-share price (or value)
received or to be received by the Selling Shareholders for all Common
Shares sold or exchanged in all such related transactions, over (b)
the product of (i) the number of shares to be acquired from the
Management Shareholder
-18-
<PAGE> 26
in the proposed transaction and (ii) the per-share price (or value)
to be received by the Selling Shareholders in the proposed
transaction.
8. Closing. At the closing of the proposed transaction, each
participating Shareholder shall deliver to the acquiring party in the
transaction certificates representing the shares to be purchased duly
endorsed for transfer or accompanied by duly executed stock powers or
assignments, free and clear of all liens, encumbrances and adverse
claims with respect thereto.
9. Special Provisions for Options. Notwithstanding the terms
of the Option Plan or the option agreements issued thereunder, each
Management Shareholder shall be entitled to exercise unvested options
to the extent, but only to the extent, necessary to allow the
Management Shareholder to sell Common Shares such Management
Shareholder is actually selling pursuant to this Section D.3(c) (it
being the intent of the parties that a participating Management
Shareholder first sell Common Shares he already owns, then Common
Shares issuable on exercise of options then vested, and finally, if
necessary, Common Shares issuable on exercise of options not then
vested).
D.4. REGISTRATION RIGHTS.
(a) Demand Registration Rights of JEDI and ECT. At any time after the
expiration of 90 days after the consummation of an Initial Public Offering, JEDI
or ECT may request Mariner LLC to register under the Securities Act of 1933 (the
"Securities Act") all or any portion of its Common Shares. Promptly following
the receipt of a notice from JEDI or ECT pursuant to this subparagraph (a),
Mariner LLC shall notify each other Shareholder (including JEDI or ECT as the
case may be) of the receipt of the notice and shall use its best efforts to
register under the Securities Act the Common Shares specified in the notice from
JEDI or ECT and any Common Shares then held by the other Shareholders as
specified in any notices received from those other Shareholders not later than
the fifth day after receipt of the notice sent by Mariner LLC. Mariner LLC shall
be obligated to register Common Shares pursuant to this subparagraph (a) in
respect of a request by JEDI on three occasions only and in respect of a request
by ECT on one occasion only. However, Mariner LLC shall not be obligated to
prepare and file any registration statement pursuant to this subparagraph (a),
or to prepare or file any amendment or supplement thereto, at any time when
Mariner LLC, in the good faith judgment of its board of directors, expressed by
resolution specifying the reason therefor, reasonably believes that the filing
thereof at the time requested, or the offering of securities pursuant thereto,
would materially adversely affect a pending or proposed public offering of
Mariner LLC's securities, or an acquisition, merger, recapitalization,
consolidation, reorganization or similar transaction or negotiations,
discussions or pending proposals with respect thereto. The filing of a
registration statement, or any amendment or supplement thereto, by Mariner LLC
may not be deferred pursuant to the provisions of the preceding sentence on more
than one occasion with respect to each demand registration right, nor may it be
deferred for more than 30 days after the abandonment or consummation of any of
the foregoing proposals or transactions or, in any event,
-19-
<PAGE> 27
for more than 90 days after Mariner LLC's receipt of notice from JEDI or ECT
under this subparagraph (a). However, if the deferral is with respect to any
effective registration statement the deferral may not extend beyond such date as
would reasonably be necessary to permit any post-effective amendment thereto to
become effective, and the time period set forth in clause (vii) of subparagraph
(d) below shall be extended for a period equal to the length of time of that
deferral.
(b) Piggy-Back Registration Rights of JEDI and the Management
Shareholders. If Mariner LLC proposes to register any Common Shares under the
Securities Act (except with the respect to registration statements filed on Form
S-8 or Form S-4 or such other forms as shall be prescribed under the Securities
Act for the same purposes as of those forms), it will at each such time, before
the filing of a registration statement in connection therewith give written
notice to all of the Shareholders of its intention so to do and, on the written
request (which must specify the number of Common Shares and the proposed manner
of their distribution for inclusion in the registration) of any of the
Shareholders delivered to Mariner LLC within five days of receipt of Mariner
LLC's notice, Mariner LLC will use its best efforts to cause any Common Shares
then held by the requesting Shareholders to be included in the shares to be
registered by the registration statement proposed to be filed by Mariner LLC,
all to the extent requisite to permit the sale or other disposition (in
accordance with the written request of the requesting shareholders) by such of
the Shareholders as have so requested registration. Nothing contained in this
subparagraph (b) shall, however, limit Mariner LLC's right to cancel, postpone
or withdraw any proposed registration. If any registration pursuant to this
subparagraph (b) shall be, in whole or in part, in connection with an
underwritten offering of Common Shares, any request by the Shareholders to
register Common Shares may, but need not, request that the Common Shares be
included in the underwriting on the same terms and conditions as the Common
Shares to be registered, if any, and sold through underwriters under the
registration. However, as a condition to that inclusion the requesting
Shareholders shall execute an underwriting agreement having such customary terms
as the underwriters shall request and if the managing underwriter determines and
advises in writing that the inclusion in the underwriting of all Common Shares
proposed to be included by the requesting Shareholders and any other Common
Shares sought to be registered by any other Shareholder of Mariner LLC
exercising rights comparable to those of the Shareholders under this subsection
(b) ("Other Common Shares") would interfere with the successful marketing of the
securities proposed to be registered for underwriting by Mariner LLC or by any
holder of Common Shares having the right to require Mariner LLC to file a
registration statement to register Common Shares, then the number of Common
Shares and Other Common Shares requested to be included in the underwriting
shall be reduced pro rata among the Shareholders and the holders of Other Common
Shares requesting such registration and inclusion in the underwriting and may,
in the determination of the managing underwriter and consistent with the pro
rata reduction, be reduced to zero. If Mariner LLC has an underwritten offering
of Common Shares and the requesting Shareholders' Common Shares is registered in
the registration statement for the offering but the requesting Shareholders do
not for any reason sell any of their Common Shares to the underwriter for
Mariner LLC in connection with the offering, the Shareholders shall refrain from
selling their Common Shares during the period of distribution of Mariner LLC's
equity securities by the underwriter and the period in which the underwriter
participates in the after-market. However, any such Shareholders shall be
entitled to sell their shares in connection with the registration commencing on
the 90th day after the effective date of the registration.
-20-
<PAGE> 28
(c) Special Demand Registration Right of JEDI. If no Initial Public
Offering has been consummated by the fifth anniversary of [April 1, 1996], then
at any time thereafter, any person who at the time of the request described
below owns at least 30% of the outstanding Common Shares and who is JEDI or an
assignee of JEDI (the "30% Shareholder") may request Mariner LLC to register
under the Securities Act all or any portion of its Common Shares. Promptly
following receipt of a notice from the 30% Shareholder pursuant to this
subparagraph (c), Mariner LLC shall notify each other Shareholder of the receipt
of the notice and shall use its best efforts to register under the Securities
Act, for public sale pursuant to such distribution, the Common Shares specified
in the notice from the 30% Shareholder and any Common Shares issued to the other
Shareholders as specified in any notices received from the other Shareholders no
later than the fifth day after receipt of the notice sent by Mariner LLC.
Mariner LLC shall be obligated to register stock pursuant to this subparagraph
(c) on one occasion only. However, Mariner LLC shall not be obligated to prepare
any registration statement pursuant to this subparagraph (c) or to prepare or
file any amendment or supplement thereto, at any time when Mariner LLC, in the
good faith judgment of its board of directors, expressed by resolutions
specifying the reason therefor, reasonably believes that the filing thereof at
the time of request, or the offering of securities pursuant thereto, would
materially adversely affect a pending or proposed public offering of Mariner
LLC's securities, or an acquisition, merger, recapitalization, consolidation,
reorganization or similar transaction or negotiations, discussions, or pending
proposals with respect thereto. The filing of a registration statement, or any
amendment or supplement thereto, by Mariner LLC may not be deferred pursuant to
the provisions of the preceding sentence on more than one occasion nor may it be
deferred for more than 30 days after the abandonment or consummation of any of
the foregoing proposals or transactions or, in any event, for more than 90 days
after Mariner LLC's receipt of notice from the 30% Shareholder under this
subparagraph (c). However, if the deferral is with respect to any effective
registration statement the deferral may not extend beyond such date as would
reasonably be necessary to permit any post-effective amendment thereto to become
effective, and the time period set forth in clause (vii) of subparagraph (d)
below shall be extended for a period equal to the length of time of that
deferral.
(d) Registration Responsibilities of Mariner LLC. Whenever Mariner
LLC is required by the provisions of this Section D.4 to use its best efforts to
effect the registration of stock under the Securities Act, Mariner LLC will,
subject to the other provisions of this Section D.4:
(i) as expeditiously as practicable, prepare and file with
the Securities and Exchange Commission (the "Commission") a
registration statement on the appropriate form with respect to the
shares to be registered and seek to cause the registration statement
to become and remain effective;
(ii) as expeditiously as practicable, prepare and file with
the Commission such amendments and supplements to the registration
statement and the prospectus used in connection therewith as may be
necessary to keep the registration statement effective and to comply
with the provisions of the Securities Act;
(iii) as expeditiously as practicable, furnish to each of the
persons registering shares pursuant to the registration statement and
to each underwriter, if any, such number of copies of a prospectus
and a preliminary prospectus in conformity with the requirements
-21-
<PAGE> 29
of the Securities Act, and such other documents as such persons and
underwriter may reasonably request to facilitate the public sale or
other disposition of the stock to be sold; however, the obligation of
Mariner LLC to deliver copies of prospectuses or preliminary
prospectuses to the sellers shall be subject to the receipt by
Mariner LLC of reasonable assurances from them that they will comply
with the applicable provisions of the Securities Act and of such
other securities laws as may be applicable in connection with any use
by them of any prospectuses or preliminary prospectuses;
(iv) as expeditiously as practicable, furnish at the request
of the Shareholders requesting registration, on the date that the
Common Shares are to be delivered to the underwriters for sale
pursuant to the registration or if the Common Shares are not being
sold through underwriters, on the date the registration statement
with respect to the Common Shares becomes effective (A) an opinion,
dated such date, of the independent counsel representing Mariner LLC
for the purposes of the registration, addressed to the underwriters,
if any, and to the Shareholders making the request, stating that the
registration statement has become effective under the Securities Act
and that (1) to the best of counsel's notice, no stop order
suspending the effectiveness of the registration statement has been
instituted or is pending or contemplated under the Securities Act;
(2) the registration statement, the related prospectus and each
amendment or supplement thereto, including all documents incorporated
by reference therein, comply as to form in all material respects with
the requirements of the Securities Act and the applicable rules and
regulations of the Commission thereunder (except that counsel need
express no opinion as to financial statements or other financial or
reserve data contained or incorporated by reference therein); (3) no
facts have come to the attention of counsel that cause counsel to
believe (with customary qualifications) that either the registration
statement or the prospectus, or amendment or supplement thereto,
including all documents incorporated by reference therein, in light
of the circumstances under which they were made, contains any untrue
statement of a material fact or omits to state a material fact
required to be stated therein or necessary to make the statements
therein not misleading (except that counsel need express no belief as
to financial statements or other financial or reserve data contained
or incorporated by reference therein or as to any information
provided by the selling Shareholders or any underwriter for inclusion
therein); (4) counsel does not know of any legal or governmental
proceedings, pending or contemplated required to be described in the
registration statement or prospectus, or any amendment or supplement
thereto, including all documents incorporated by reference therein,
that are not described as required, or of any contracts or documents
or instruments of a character required to be described in the
registration statement or prospectus, or any amendment or supplement
thereto, including all documents incorporated by reference therein,
or to be filed as exhibits to the registration statement that are not
described and filed as required; and (5) as to such other customary
matters as the underwriter or the selling Shareholders shall
reasonably request; and (B) a letter dated such date, from the
independent certified public accountants of Mariner LLC, addressed to
the underwriters, if any, and to the selling Shareholders making the
request, stating that they are independent certified public
accountants within the meaning of the Securities Act and that in the
opinion of the accountants, the financial statements and other
financial data of Mariner LLC included in the registration statement
or the prospectus, or
-22-
<PAGE> 30
any amendment or supplement thereto, including all documents
incorporated by reference therein, comply as to form in all material
respects with the applicable accounting requirements of the
Securities Act. The letter from the independent certified public
accountants shall cover also such other customary financial matters
(including information as to the period ending not more than five
business days before the date of the letter) with respect to the
registration in respect of which the letter is being given as the
underwriters, if any, or the selling Shareholders making request may
reasonably request;
(v) as expeditiously as practicable, use its best efforts to
register or qualify the Common Shares registered by the registration
statement under such other securities laws of such U.S. jurisdictions
as the underwriters, if any, or the selling Shareholders making the
request shall reasonably request (considering the nature and size of
the offering) and do any and all other acts and things that may be
necessary or desirable to enable the selling Shareholders making the
request to consummate the public sale or other disposition of the
Common Shares being registered in those jurisdictions. However,
Mariner LLC shall not be required to qualify to transact business as
a foreign corporation in any jurisdiction in which it otherwise would
not be required to be so qualified or to take any action that would
subject it to general service of process in any jurisdiction in which
it has not been so subject;
(vi) bear all Registration Expenses (as defined below) in
connection with all registrations under this Section D.4. However,
all Selling Expenses (as defined below) of Common Shares held by
selling Shareholders and all fees and disbursements of counsel for
selling Shareholders in connection with each registration pursuant to
this Section D.4 shall be born by the selling Shareholders pro rata
in proportion to the number of Common Shares covered by the
registration or in such other proportion as the selling Shareholders
may agree. For purposes of this subparagraph (d), expenses incurred
by Mariner LLC in complying with this Section D.4, including without
limitation all registration and filing fees, all printing expenses,
all fees and disbursements of counsel for Mariner LLC, all blue sky
fees and expenses and all fees and expenses of accountants for
Mariner LLC are referred to as "Registration Expenses". All
underwriting fees and discounts and selling commissions and fees and
expenses of any underwriters applicable to the sales in connection
with the registration are referred to as "Selling Expenses";
(vii) keep each registration pursuant to this Section D.4
effective for a period of 90 days or such shorter period of time
until the transfer or sale of all Common Shares so registered has
been completed; and
(viii) take such other action as is customary and reasonable in
connection with such registration.
(e) Indemnification by Mariner LLC. If Mariner LLC registers any
Common Shares under the Securities Act pursuant to this Section D.4, Mariner LLC
will indemnify and hold harmless each selling Shareholder, and any other person
who controls a selling Shareholder within the meaning of Section 15 of the
Securities Act, against any losses, claims, damages or liabilities, joint
-23-
<PAGE> 31
or severally, to which the selling Shareholder or the controlling person may
become subject under the Securities Act or otherwise, insofar as the losses,
claims, damages or liabilities or actions in respect thereof arise out of or are
based on any untrue statement or alleged statement of any material fact
contained, on the effective date thereof, in any registration statement under
which the Common Shares were registered under the Securities Act, any
preliminary prospectus or final prospectus contained therein, or any amendment
thereof or supplement thereto, including all documents incorporated by reference
therein, or arise out of or are based on the omission or alleged omission to
state therein a material fact required to be stated therein or necessary to make
the statements not misleading, and will reimburse each such Shareholder and each
such controlling person for any legal or any other expenses reasonably incurred
by them in connection with investigating or defending any such loss, claim,
damage, liability or action; however, Mariner LLC will not be liable in any such
case to the extent that such loss, claim, damage, or liability arises out of or
is based on an untrue statement or alleged untrue statement or omission or
alleged omission made in the registration statement, preliminary prospectus,
final prospectus or amendment or supplement, including all documents
incorporated by reference therein, in reliance on and in conformity with written
information furnished to Mariner LLC through an instrument duly executed by or
on behalf of any of the selling Shareholders or a controlling person of any of
the selling Shareholders specifically for use in the preparation thereof.
(f) Indemnification by Selling Persons. If Mariner LLC registers
Common Shares under the Securities Act pursuant to this Section D.4, each
selling Shareholder will severally indemnify and hold harmless Mariner and each
person, if any, who controls Mariner LLC within the meaning of Section 15 of the
Securities Act, each officer of Mariner LLC who signs the registration
statement, each director of Mariner LLC, and each underwriter, and each person
who controls any underwriter within the meaning of Section 15 of the Securities
Act, against any and all such losses, claims, damages, liabilities or actions
that Mariner LLC or such officer, director, underwriter or controlling person
may become subject to under the Securities Act or otherwise, and will reimburse
Mariner LLC, each such officer, director, underwriter and controlling person for
any legal or other expenses reasonably incurred by such party in connection with
investigating or defending such loss, claim, damage, liability or action, if
such loss, claim, damage, liability or action relates to a statement or omission
that was made in reliance on and in conformity with information furnished in
writing to Mariner LLC by or on behalf of such selling Shareholder specifically
for use in connection with the preparation of the registration statement or
prospectus. The selling Shareholders shall also indemnify each such underwriter
and each person who controls any such underwriter within the meaning of Section
15 of the Securities Act as may reasonably and customarily be requested by the
underwriters in connection with any underwritten offering of Common Shares, but
in no event shall any selling Shareholder be required to pay more under any
circumstances than the amount he or it receives from the proceeds of the sale of
his or its Common Shares pursuant to such indemnification provisions.
(g) Procedures for Indemnification. Promptly after receipt by any
indemnified person of notice of any claim or commencement of any action in
respect of which indemnity is to be sought against an indemnifying person
pursuant to subparagraph (e) or subparagraph (f) under this Section D.4, the
indemnified person shall notify the indemnifying person in writing of the claim
or commencement of an action and, subject to the provisions hereinafter stated,
in case any such action
-24-
<PAGE> 32
shall be brought against an indemnified person and the indemnifying person shall
have been notified of the same, the indemnifying person shall be entitled to
participate therein and, to the extent it shall wish to assume the defense
thereof, with counsel reasonably satisfactory to the indemnified person, and
after notice from the indemnifying person to the indemnified person of its
election to assume the defense thereof, the indemnifying person shall not be
liable to the indemnified person in connection with the defense thereof.
However, if there exists or will exist a conflict of interest that would make it
inappropriate in the reasonable judgment of the indemnified person for the same
counsel to represent both the indemnified person and the indemnifying person,
then the indemnified person shall be entitled to retain its own counsel at the
expense of the indemnifying person.
(h) Mariner LLC's Indemnification of Underwriters. To the extent
necessary to facilitate the sale of Common Shares and an underwritten offering
pursuant to a registration statement registering shares pursuant to this Section
D.4, Mariner LLC shall, in connection with any such sale, enter into an
agreement indemnifying the underwriter or underwriters and each other person, if
any, who controls the underwriter or underwriters in the registration from
liability under the Securities Act; however, the agreement shall be reasonable
and customary in scope and effect.
(i) Transferability of Registered Shares. The provisions of Section
D.1 of this Agreement relating to the transfer of Common Shares shall cease and
terminate as to any Common Shares that have been effectively registered under
the Securities Act and sold or otherwise disposed of in accordance with the
intended method of disposition by the selling Shareholder set forth in the
registration statement covering those shares. Whenever the time period
limitations and other conditions imposed by Rule 144 promulgated under the
Securities Act or any successor or similar rule or statute shall allow free
transferability of Common Shares, the Shareholder holding the Common Shares
bearing the restrictive legend as to which such conditions have terminated shall
be entitled to receive from Mariner LLC, without expense, a new stock
certificate not bearing the restrictive legend representing the Common Shares,
and the rights of the Shareholders as to registration provided for in this
Section D.4 shall terminate immediately upon their becoming so entitled with
respect to those shares.
D.5. AGREEMENT TO APPLY TO TRANSFERRED AND NEWLY ISSUED SHARES. No transfer of
any Common Shares shall be effected and no capital shares of Mariner LLC or
capital share equivalents shall be issued unless the transferee or issuee shall
have simultaneously entered into an addendum agreement in substantially the form
attached to this Agreement as EXHIBIT 8 ("Addendum Agreement") with Mariner LLC
on its own behalf and on behalf of the other Shareholders pursuant to the power
of attorney granted in Section D.6. of this Agreement. All provisions of this
Agreement shall continue to apply to any holders of those securities, it being
the intention of the parties to this Agreement that the provisions of this
Agreement shall be applicable to the securities issued by Mariner LLC, as well
as to the holders of those securities. However, the foregoing sentence shall not
apply to JEDI's right to name non-Management Directors pursuant to subsection
(e) of Section A.2 of this Agreement. All references to "Shareholder" in this
Agreement, shall include ECT, and ECT agrees to be bound as a non-Management
Stockholder, if and as long as ECT owns Common Shares, and the execution and
delivery of this Agreement by ECT shall be deemed to satisfy the requirements of
Subsection D.5 of this Agreement with respect to the issuance of the Conversion
Shares.
-25-
<PAGE> 33
D.6. POWER OF ATTORNEY. For the purpose of executing an Addendum Agreement, the
Shareholders appoint Mariner LLC as their agent and attorney to execute the
Addendum Agreement on their behalf and expressly bind themselves to the Addendum
Agreement by Mariner LLC's execution of that Agreement without further action on
their part.
E. GENERAL MATTERS RELATING TO THIS AGREEMENT
E.1. AMENDMENT. This Agreement may be amended by the parties only by an
instrument in writing signed by (a) the holders of two-thirds of the outstanding
Common Shares, (b) each Shareholder who holds, as of the effective date of the
amendment, at least ten percent of the then-outstanding Common Shares, (c) a
majority of the Management Directors and (d) at least one Management Director
who was or became a Management Shareholder as of June 27, 1996, and, if there is
no such person, at least one Management Shareholder who was or became a
Management Shareholder as of June 27, 1996 (unless no such person exists, in
which case the amendment need not be signed by the person described in this
clause (d)). However, no amendment shall impose any additional material
obligation on any party to this Agreement without that party's written consent.
For purposes of this Section E.1, a person who held shares of Mariner Holdings
common stock as of a specified date shall be a "Shareholder".
E.2. WAIVER. A party to this Agreement may (without the consent of any other
person) waive in writing any (i) obligation owed to him, her or it under this
Agreement by any other party to this Agreement or (ii) right he or it has in
this Agreement. A waiver may be made prospectively or retroactively. Any term or
provision of this Agreement may be waived in writing at any time by the party
entitled to its benefits. Any waiver of any term or condition of this Agreement
by any party shall not be construed as a waiver of any subsequent breach or
failure of the same term or condition, or waiver of any other term or condition
of this Agreement.
E.3. INCLUSIVENESS. This Agreement and the exhibits to this Agreement set forth
the entire understanding of the parties to this Agreement with respect to the
subject matter of this Agreement. This Agreement and the exhibits to this
Agreement supersede all existing agreements concerning the subject matter of
this Agreement.
E.4. NOTICES. Any notice or other communication required or permitted to be
given under this Agreement shall be in writing and may be mailed by certified
mail, return receipt requested (or by the most nearly comparable method if
mailed from or to a location outside of the United States), to the party to whom
it is to be given at the address of that party set forth at the end of this
Agreement under the signature of that party (or to another address that the
party shall have furnished in writing in accordance with the provisions of this
Section E.4), or sent by other means, with a copy to each of the other parties
to this Agreement. Any notice or other communication shall be dated as of the
date it is sent and shall be deemed given when sent in accordance with the
provisions of this Agreement.
-26-
<PAGE> 34
E.5. ASSIGNABILITY AND BINDING EFFECT. JEDI and the Management Shareholders may
transfer their Common Shares pursuant to the provisions of Section D.3 of this
Agreement, subject only to the provisions of Section D.1 of this Agreement
(relating to compliance with securities laws) and Section D.5 of this Agreement
(relating to transferees' execution and delivery of Addendum Agreements). Any
person becoming a holder of Common Shares shall be subject to the provisions of
this Agreement, in accordance with the terms of Section D.5 of this Agreement.
The provisions of this Agreement shall be binding on and inure to the benefit of
the successors and assigns of the parties to this Agreement.
E.6. NO THIRD PARTY BENEFICIARIES. This Agreement does not create, and shall not
be construed as creating, any rights enforceable by any person who is not or has
not become a party to this Agreement, except with respect to Enron and its
affiliates pursuant to subsection A.3(a) of this Agreement.
E.7. SEVERABILITY. If any provision of this Agreement is invalid, illegal or
unenforceable, the balance of this Agreement shall remain in full force and
effect, and if any provision is inapplicable to any person or circumstance, it
shall, nevertheless, remain applicable to all other persons and circumstances.
E.8. HEADINGS. The headings in this Agreement are solely for convenience of
reference and shall be given no effect in the construction or interpretation of
this Agreement.
E.9. COUNTERPARTS. This Agreement may be executed in any number of counterparts,
each of which shall be deemed an original, but all of which shall constitute one
and the same instrument.
E.10. GOVERNING LAW. This Agreement shall be governed and construed in
accordance with the laws of the State of Texas, without giving effect to
principles of conflict of laws (recognizing that Delaware corporate law or
limited liability company law, as applicable, will apply to matters relating to
the internal affairs of each party that is a Delaware entity).
E.11. TERMINATION. This Agreement shall terminate automatically upon (a) the
bankruptcy (whether by a court of competent jurisdiction or voluntarily) or
dissolution of Mariner LLC, (b) the occurrence of any event that reduces the
number of Shareholders to one, (c) the merger or consolidation of Mariner LLC
with a corporation or other business entity, if Mariner LLC is not the surviving
entity and if the Shareholders do not hold, directly or indirectly, at least 50%
of the outstanding voting stock of the surviving corporation, (d) the sale of
substantially all of the assets of Mariner LLC, Mariner Holdings or Mariner
Energy, (e) the acquisition by one person (or group of affiliated persons), not
affiliated with JEDI, of more than two-thirds of the outstanding Common Shares
unless (i) the holders of at least 90 percent of the then-outstanding Common
Shares elect not to terminate this Agreement and (ii) the non-termination of
this Agreement is approved by the Management Directors, (f) the consummation of
an Initial Public Offering, (g) the consummation of a business combination
pursuant to which Mariner LLC (or its successor) becomes (or its successor
becomes or is) a reporting company under Section 13 or Section 15 of the
Securities Exchange Act of 1934, or (h) May 16, 2006; provided, however, that if
this Agreement is terminated pursuant to clause (f) above, then Sections D.4
(regarding registration rights) and, to the extent
-27-
<PAGE> 35
applicable, this Section E shall continue in full force and effect until
terminated pursuant to another clause of this Section E.11; and provided further
that if this Agreement is terminated pursuant to any of clauses (a) through (h)
above, then Section B (relating to certain tax payments) and, to the extent
applicable, this Section E shall continue in full force and effect. No
termination of this Agreement shall affect any other agreement (including
without limitation any employment agreements with employees of Mariner Energy
and any stock option agreements with employees of Mariner Energy), except
pursuant to the specific terms of such other agreement.
E.12. AGREEMENT OF SPOUSES. The spouses of the Shareholders who are individuals
are fully aware of, understand and fully consent and agree to the provisions of
this Agreement and its binding effect on any community property interests they
may now or hereafter own, and agree that the termination of their marital
relationship for any reason shall not have the effect of removing any Common
Shares otherwise subject to the coverage this Agreement and that their
awareness, understanding, consent and agreement are evidenced by their signing
this Agreement.
E.13. ARBITRATION. If a dispute arises between any two or more parties to this
Agreement ("Disputing Parties") with respect to matters related to this
Agreement and the dispute cannot be settled through direct discussions, the
Disputing Parties 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 Section B.4 of this Agreement, be resolved as follows:
(a) Conduct of Arbitration. Except as provided in subsection (b)
below, any and all claims, demands, causes 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, 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 any Disputing Party by
providing to the other Disputing Party or Parties a written notice of
arbitration specifying the claims, and the parties shall thereafter endeavor to
agree on an arbitrator. If within 30 days of the notice of initiation of the
arbitration procedure, the parties are unable to agree on an arbitrator, the
party requesting arbitration shall file a request with the AAA that the Houston
office of the AAA provide a list of potential arbitrators to each Disputing
Party. The Disputing Parties shall thereafter have 60 days to select an
arbitrator from such list, with such selection to be by mutual agreement. If the
Disputing Parties fail to select an arbitrator within such time by mutual
agreement, then any Disputing 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 AAA, 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 arbitrators' 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
-28-
<PAGE> 36
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). 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.
(b) Injunctive Relief. Notwithstanding the agreement to arbitrate
contained in subsection (a) above, if any 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, 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.
(c) Payment of Expenses. Mariner LLC shall pay all costs and expenses
of any party to this Agreement (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 a Disputing Party 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.
E.14. INDEMNIFICATION OF OFFICERS AND DIRECTORS. Mariner LLC shall indemnify
each of the Representatives for all reasonable expenses incurred by him in
defending any suit, action or proceeding (or any suit, action or proceeding
threatened to be made) brought by or in the right of Hardy Oil & Gas plc, any of
its affiliates or any of their stockholders, whether civil, administrative or
investigative, by reason of the fact that the Representatives entered into this
Agreement or otherwise participated in the transactions contemplated by this
Agreement or the purchase by Mariner Holdings of shares of the common stock of
Mariner Energy from Hardy Oil & Gas plc. In no event shall Mariner LLC be
responsible for (a) any judgments, losses, damages, fines and penalties actually
incurred by the Representatives in connection with any such suit, action or
proceeding, except as expressly stated in the preceding sentence or (b) the
payment of any of the expenses contemplated by the preceding sentence if the
Representative is found guilty of, or pleads
-29-
<PAGE> 37
no contest to, or is finally determined to be liable in, an action for willful
misconduct, gross negligence or a knowing violation of any duty, contractual or
otherwise, owing by the Representative to Hardy Oil & Gas plc or any of its
affiliates. Expenses incurred by a Representative may be paid in advance of the
final disposition of any action, suit or proceeding, but it shall be a condition
to receipt of any amounts paid or payable in advance pursuant to this Section
E.14 that the Representative to whom the advance is to be made undertake to
repay all amounts so advanced if it shall ultimately be determined that the
Representative is not entitled to be indemnified hereunder. If more than one
Representative is involved in the same suit, action or proceeding, the
Representatives so involved will endeavor to use the same legal counsel in that
suit, action or proceeding insofar as practicable, as long as no conflict of
interest exists as a result thereof and as long as such counsel would not be
ethically prohibited from representing more than one Representative.
-30-
<PAGE> 38
IN WITNESS WHEREOF, the parties to this Agreement have caused this
Agreement to be executed on the date first above written.
<TABLE>
<S> <C>
ENRON CAPITAL & TRADE
Address for delivery RESOURCES CORP. ("ECT")
of Notice:
By: /s/ illegible
--------------------------------------------
1400 Smith Street Name:
Houston, Texas 77002 --------------------------------------
Attention: Brenda McGee, Specialist Title:
-------------------------------------
Address for delivery JOINT ENERGY DEVELOPMENT
of Notice: INVESTMENTS LIMITED PARTNERSHIP
c/o Enron Corp. By: ENRON CAPITAL MANAGEMENT LIMITED
1400 Smith Street PARTNERSHIP, ITS GENERAL PARTNER
Houston, Texas 77002
Telecopier No. (713) 646-3602 By: ENRON CAPITAL CORP.,
Telephone No. (713) 853-5259 ITS GENERAL PARTNER
Attention: Brenda McGee - 29th Floor
By: /s/ illegible
-------------------------------------
Name:
-----------------------------------
Title:
----------------------------------
MARINER ENERGY LLC ("Mariner LLC")
Address for delivery
of Notice:
By: /s/ Robert E. Henderson
--------------------------------------------
580 WestLake Park Boulevard Name: Robert E. Henderson
Suite 1300 ------------------------------------------
Houston, Texas 77079-2638 Title: President
-----------------------------------------
MARINER HOLDINGS, INC. ("Mariner Holdings")
Address for delivery
of Notice:
By: /s/ Robert E. Henderson
--------------------------------------------
580 WestLake Park Boulevard Name: Robert E. Henderson
Suite 1300 ------------------------------------------
Houston, Texas 77079-2638 Title: President
-----------------------------------------
</TABLE>
-31-
<PAGE> 39
Address for delivery
of Notice
580 WestLake Park Boulevard /s/ Robert E. Henderson
Suite 1300 -------------------------------
Houston, Texas 77079-2638 ROBERT E. HENDERSON
/s/ Michele Henderson
--------------------------------
Michele Henderson
Address for delivery
of Notice:
580 WestLake Park Boulevard /s/ Richard R. Clark
Suite 1300 --------------------------------
Houston, Texas 77079-2638 RICHARD R. CLARK
/s/ Stacy Clark
--------------------------------
Stacy Clark
Address for delivery
of Notice:
580 WestLake Park Boulevard /s/ Michael W. Strickler
Suite 1300 --------------------------------
Houston, Texas 77079-2638 MICHAEL W. STRICKLER
/s/ Juanita Strickler
--------------------------------
Juanita Strickler
-32-
<PAGE> 40
Address for delivery
of Notice:
580 WestLake Park Boulevard /s/ D. S. Huber
Suite 1300 --------------------------------
Houston, Texas 77079-2638 D. S. HUBER
/s/ Cynthia K. Huber
--------------------------------
Cynthia K. Huber
Address for delivery
of Notice:
/s/ William J. Anderson
- -------------------- --------------------------------
- -------------------- WILLIAM J. ANDERSON
- --------------------
- --------------------
/s/ Mary L. Lamont Anderson
--------------------------------
Mary L. Lamont Anderson
Address for delivery
of Notice:
/s/ Thomas M. Campbell
- -------------------- --------------------------------
- -------------------- THOMAS M. CAMPBELL
- --------------------
- --------------------
/s/ Ana L. Campbell
--------------------------------
Ana L. Campbell
Address for delivery
of Notice:
/s/ Donald M. Clement
- -------------------- --------------------------------
- -------------------- DONALD M. CLEMENT
- --------------------
- --------------------
-33-
<PAGE> 41
/s/ Allison S. Clement
--------------------------------
Allison S. Clement
Address for delivery
of Notice:
/s/ Ralph J. Dobbins
--------------------------------
RALPH J. DOBBINS
- --------------------
- --------------------
- -------------------- /s/ Linda N. Dobbins
- -------------------- --------------------------------
Linda N. Dobbins
Address for delivery
of Notice:
/s/ James M. Fitzpatrick III
- -------------------- --------------------------------
- -------------------- JAMES M. FITZPATRICK III
- --------------------
- --------------------
Address for delivery
of Notice:
/s/ James L. Gregory
--------------------------------
JAMES L. GREGORY
- --------------------
- --------------------
- -------------------- /s/ Gladys J. Gregory
- -------------------- --------------------------------
Gladys J. Gregory
Address for delivery
of Notice:
/s/ Alan K. Hadfield
- -------------------- --------------------------------
- -------------------- ALAN K. HADFIELD
- --------------------
- --------------------
-34-
<PAGE> 42
Address for delivery
of Notice:
/s/ Gregory K. Harless
--------------------------------
GREGORY K. HARLESS
- --------------------
- --------------------
- -------------------- /s/ Jill Carter Harless
- -------------------- --------------------------------
Jill Carter Harless
Address for delivery
of Notice:
/s/ William Hunt Hodge
- -------------------- --------------------------------
- -------------------- WILLIAM HUNT HODGE
- --------------------
- --------------------
/s/ Georgia Hodge
--------------------------------
Georgia Hodge
Address for delivery
of Notice:
/s/ William F. Howell
--------------------------------
- -------------------- WILLIAM F. HOWELL
- --------------------
- --------------------
- -------------------- /s/ Suzanne Howell
--------------------------------
Suzanne Howell
Address for delivery
of Notice:
- -------------------- /s/ Jacqueline S. Hudson
- -------------------- --------------------------------
- -------------------- JACQUELINE S. HUDSON
- --------------------
-35-
<PAGE> 43
Address for delivery
of Notice:
/s/ Barbara C. Kyse
- -------------------- --------------------------------
- -------------------- BARBARA C. KYSE
- --------------------
- --------------------
Address for delivery
of Notice:
/s/ Laurence J. Lapeze
--------------------------------
- -------------------- LAURENCE J. LAPEZE
- --------------------
- --------------------
- -------------------- /s/ Alisa Wynne Young
--------------------------------
Alisa Wynne Young
Address for delivery
of Notice:
/s/ Cory L. Loegering
- -------------------- --------------------------------
- -------------------- CORY L. LOEGERING
- --------------------
- --------------------
Address for delivery
of Notice:
/s/ Richard A. Molohon
--------------------------------
- -------------------- RICHARD A. MOLOHON
- --------------------
- --------------------
- -------------------- /s/ Nora Ann Molohon
--------------------------------
Nora Ann Molohon
-36-
<PAGE> 44
Address for delivery
of Notice:
/s/ Jerry L. Sheets
- -------------------- --------------------------------
- -------------------- JERRY L. SHEETS
- --------------------
- --------------------
/s/ Sonya M. Sheets
--------------------------------
Sonya M. Sheets
Address for delivery
of Notice:
/s/ Clinton D. Smith
- -------------------- --------------------------------
- -------------------- CLINTON D. SMITH
- --------------------
- --------------------
/s/ Linda A. Smith
--------------------------------
Linda A. Smith
Address for delivery
of Notice:
/s/ Ward H. Taylor
--------------------------------
- -------------------- WARD H. TAYLOR
- --------------------
- --------------------
- -------------------- /s/ Annelisi M. Taylor
--------------------------------
Annelisi M. Taylor
Address for delivery
of Notice:
/s/ Richard F. Weser
--------------------------------
- -------------------- RICHARD F. WESER
- --------------------
- --------------------
- -------------------- /s/ Joan Weser
--------------------------------
Joan Weser
-37-
<PAGE> 45
Address for delivery
of Notice:
/s/ Thomas E. Young
- -------------------- --------------------------------
- -------------------- THOMAS E. YOUNG
- --------------------
- --------------------
Address for delivery
of Notice:
/s/ Frederic L. Lettieri
- -------------------- --------------------------------
- -------------------- FREDERIC L. LETTIERI
- --------------------
- --------------------
--------------------------------
Address for delivery
of Notice:
/s/ Frank A. Pici
- -------------------- --------------------------------
- -------------------- FRANK A. PICI
- --------------------
- --------------------
--------------------------------
Address for delivery
of Notice:
/s/ Robert C. Strauss
--------------------------------
ROBERT C. STRAUSS
- --------------------
- --------------------
- --------------------
- --------------------
--------------------------------
-38-
<PAGE> 46
Address for delivery
of Notice:
/s/ D. Bruce Nevin
- -------------------- --------------------------------
- -------------------- D. BRUCE NEVIN
- --------------------
- --------------------
--------------------------------
Address for delivery
of Notice:
/s/ Steven W. Burt
- -------------------- --------------------------------
- -------------------- STEVEN W. BURT
- --------------------
- --------------------
--------------------------------
Address for delivery
of Notice:
/s/ James W. Anderson
- -------------------- --------------------------------
- -------------------- JAMES W. ANDERSON
- --------------------
- --------------------
--------------------------------
-39-
<PAGE> 47
Address for delivery
of Notice:
/s/ Richard W. Webb
- -------------------- --------------------------------
- -------------------- RICHARD W. WEBB
- --------------------
- --------------------
Address for delivery
of Notice:
/s/ Lindell V. McGuire
- -------------------- --------------------------------
- -------------------- LINDELL V. McGUIRE
- --------------------
- --------------------
--------------------------------
-40-
<PAGE> 1
Exhibit 10.7
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., a Delaware corporation
(hereinafter called "Company"), and Thomas E. Young (hereinafter called
"Employee").
WHEREAS, (i) Company and Employee entered into that certain Employment
Agreement effective as of June 27, 1996 (the "Original Employment Agreement"),
and (ii) the Original Employment Agreement was amended pursuant to that certain
First Amendment to Employment Agreement effective as of January 1, 1997 (the
"Employment Agreement First Amendment"), by and between Company and Employee
(the Original Employment Agreement as amended by the Employment Agreement First
Amendment is referred to herein as the "Employment Agreement"); and
WHEREAS, Company and Employee also entered into that certain letter
agreement (including Exhibit A thereto) dated June 27, 1996 (the "Letter
Agreement"), concerning Employee's participation in Company's Employee
Overriding Royalty Interest Pool Program; and
WHEREAS, Company and Employee desire to amend and restate the
Employment Agreement and the Letter Agreement, and in connection therewith, to
incorporate the provisions of the Letter Agreement, as amended and restated,
into the Employment Agreement, as amended and restated, all as hereinafter
provided;
NOW, THEREFORE, in consideration of the premises and the mutual
covenants and agreements herein contained, the parties hereto agree as follows:
1. Employment.
For the period June 27, 1996 through October 31, 1998,
Company hereby employs Employee as an employee of Company to
perform such duties and responsibilities and act in such
capacity as may from time to time be determined by Company.
On and after November 1, 1998, Company hereby employs
Employee to serve as Vice President - Land 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 begin on the Effective Date and
end on September 30, 2000, subject, however, to the
provisions of paragraph 3.
AMENDED AND RESTATED EMPLOYMENT
AGREEMENT--THOMAS E. YOUNG
-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 promises, covenants and
AMENDED AND RESTATED EMPLOYMENT
AGREEMENT--THOMAS E. YOUNG
-2-
<PAGE> 3
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 Company in good faith determines that
the continued employment of Employee would be
materially detrimental to 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) Employee materially breaches any of
the other material terms of this Agreement and any
such breach is not cured within thirty (30) days
after Company has provided Employee with written
notice of such breach, and (f) the occurrence of an
AMENDED AND RESTATED EMPLOYMENT
AGREEMENT--THOMAS E. YOUNG
-3-
<PAGE> 4
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
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
AMENDED AND RESTATED EMPLOYMENT
AGREEMENT--THOMAS E. YOUNG
-4-
<PAGE> 5
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 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.
AMENDED AND RESTATED EMPLOYMENT
AGREEMENT--THOMAS E. YOUNG
-5-
<PAGE> 6
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 his 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.
5.1 As compensation for his services rendered to Company
hereunder for the period June 27, 1996 -- December
31, 1996, Company shall pay to Employee a salary at
the rate of $7,916.67 per month.
5.2 As compensation for his services rendered to Company
hereunder for the period January 1, 1997 -- December
31, 1997, Company shall pay to Employee a salary at
the rate of $8,166.66 per month.
5.3 As compensation for his services rendered to Company
hereunder for the period January 1, 1998 - October
31, 1998, Company shall pay to Employee a salary at
the rate of $8,750.00 per month.
5.4 As compensation for his services rendered to Company
hereunder on and after November 1, 1998, Company
shall pay to Employee a salary at the rate of
$10,000.00 per month.
5.5 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.
AMENDED AND RESTATED EMPLOYMENT
AGREEMENT--THOMAS E. YOUNG
-6-
<PAGE> 7
6. Automobile Allowance.
For the period June 27, 1996 through October 31, 1998,
Company agrees to pay an automobile allowance of $175.00 per
month to Employee. On and after November 1, 1998, Company
agrees to pay an automobile allowance of $250.00 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.
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
five (5) days of vacation leave may be carried over from one
calendar year to the next calendar 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.
AMENDED AND RESTATED EMPLOYMENT
AGREEMENT--THOMAS E. YOUNG
-7-
<PAGE> 8
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.
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 Company or any sale, lease, exchange or other
transfer of two-thirds or more of the consolidated
assets of 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.
AMENDED AND RESTATED EMPLOYMENT
AGREEMENT--THOMAS E. YOUNG
-8-
<PAGE> 9
"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 & 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.
AMENDED AND RESTATED EMPLOYMENT
AGREEMENT--THOMAS E. YOUNG
-9-
<PAGE> 10
"EXPLORATORY ACREAGE" means the acreage comprising a Prospect
which has not been designated by the committee described in
paragraph 9.5.1(a), 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.
A "PARENT" of a specified person is another person that
controls such specified person directly or indirectly through
one or more intermediaries.
AMENDED AND RESTATED EMPLOYMENT
AGREEMENT--THOMAS E. YOUNG
-10-
<PAGE> 11
"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.
"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.,
AMENDED AND RESTATED EMPLOYMENT
AGREEMENT--THOMAS E. YOUNG
-11-
<PAGE> 12
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 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 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.
AMENDED AND RESTATED EMPLOYMENT
AGREEMENT--THOMAS E. YOUNG
-12-
<PAGE> 13
"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:
EMPLOYEE: Thomas E. Young
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>
Groups XIV-XXII 4/18/96-12/31/98 0.051562 0.206249
Group XXIII 1/1/99 and Thereafter 0.063020 0.252083
</TABLE>
OVERRIDING ROYALTY INTEREST
IN
ALL OTHER PROSPECTS
<TABLE>
<CAPTION>
Group Time Period Before Payout After Payout
----- ----------- ------------- ------------
<S> <C> <C> <C>
Groups XIV-XXII 4/18/96-12/31/98 0.05625 0.22500
Group XXIII 1/1/99 and Thereafter 0.06875 0.27500
</TABLE>
AMENDED AND RESTATED EMPLOYMENT
AGREEMENT--THOMAS E. YOUNG
-13-
<PAGE> 14
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:
EMPLOYEE: Thomas E. Young
<TABLE>
<CAPTION>
EXISTING ORI
------------
GROUP DATES BEFORE PAYOUT AFTER PAYOUT
- --------- ---------------- ------------- ------------
<S> <C> <C> <C>
GROUP I 4/1/87-9/3/87 -- --
GROUP II 9/4/87-10/31/87 -- --
GROUP III 11/1/87-7/16/88 -- --
GROUP IV 7/17/88-12/15/88 -- --
GROUP V 12/16/88-3/31/89 -- --
GROUP VI 4/1/89-9/24/90 -- --
GROUP VII 9/25/90-6/30/91 -- --
GROUP VIII 7/1/91-9/30/91 0.03750% 0.1500%
GROUP IX 10/1/91-2/14/93 0.05000% 0.2000%
GROUP X 2/15/93-6/30/93 0.05000% 0.2000%
GROUP XI 7/1/93-4/29/94 0.05000% 0.2000%
GROUP XII 4/30/94-3/31/95 0.05000% 0.2000%
GROUP XIII 4/1/95-4/17/96 0.05000% 0.2000%
</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.
AMENDED AND RESTATED EMPLOYMENT
AGREEMENT--THOMAS E. YOUNG
-14-
<PAGE> 15
Mention is made that, effective June 1, 1996, Company
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.
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:
AMENDED AND RESTATED EMPLOYMENT
AGREEMENT--THOMAS E. YOUNG
-15-
<PAGE> 16
(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
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
AMENDED AND RESTATED EMPLOYMENT
AGREEMENT--THOMAS E. YOUNG
-16-
<PAGE> 17
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
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, 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
AMENDED AND RESTATED EMPLOYMENT
AGREEMENT--THOMAS E. YOUNG
-17-
<PAGE> 18
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
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
AMENDED AND RESTATED EMPLOYMENT
AGREEMENT--THOMAS E. YOUNG
-18-
<PAGE> 19
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.
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, Company's Working
Interest in any Prospect is sold,
transferred or conveyed to the holder of
any indebtedness of Company or of Newco or
of any parent or subsidiary of 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 Company's Working Interests in all or
substantially all Exploratory Acreage then owned by
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 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).
AMENDED AND RESTATED EMPLOYMENT
AGREEMENT--THOMAS E. YOUNG
-19-
<PAGE> 20
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
Company shall have the right to designate a
non-voting member of such committee, who
may be a director of 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 Company and a
majority of the Management Directors (as
that 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 Company, as it may be
amended and/or restated from time to time)
who became stockholders pursuant to Section
B.1 of that agreement.
AMENDED AND RESTATED EMPLOYMENT
AGREEMENT--THOMAS E. YOUNG
-20-
<PAGE> 21
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
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 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
AMENDED AND RESTATED EMPLOYMENT
AGREEMENT--THOMAS E. YOUNG
-21-
<PAGE> 22
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, Company's Working Interest in any
Prospect is sold, transferred or conveyed
to the holder of any indebtedness of
Company or of Newco or of any parent or
subsidiary of 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 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.
AMENDED AND RESTATED EMPLOYMENT
AGREEMENT--THOMAS E. YOUNG
-22-
<PAGE> 23
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.
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
AMENDED AND RESTATED EMPLOYMENT
AGREEMENT--THOMAS E. YOUNG
-23-
<PAGE> 24
"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, Company's Working Interest in any
Prospect is sold, transferred or conveyed
to the holder of any indebtedness of
Company or of Newco or of any parent or
subsidiary of 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.(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 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
AMENDED AND RESTATED EMPLOYMENT
AGREEMENT--THOMAS E. YOUNG
-24-
<PAGE> 25
(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 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 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 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
AMENDED AND RESTATED EMPLOYMENT
AGREEMENT--THOMAS E. YOUNG
-25-
<PAGE> 26
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 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, Company's Working Interest in any
Prospect is sold, transferred or conveyed
to the holder of any indebtedness of
Company or of Newco or of any parent or
subsidiary of 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
AMENDED AND RESTATED EMPLOYMENT
AGREEMENT--THOMAS E. YOUNG
-26-
<PAGE> 27
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
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
AMENDED AND RESTATED EMPLOYMENT
AGREEMENT--THOMAS E. YOUNG
-27-
<PAGE> 28
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
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
AMENDED AND RESTATED EMPLOYMENT
AGREEMENT--THOMAS E. YOUNG
-28-
<PAGE> 29
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:
(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
AMENDED AND RESTATED EMPLOYMENT
AGREEMENT--THOMAS E. YOUNG
-29-
<PAGE> 30
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, 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
AMENDED AND RESTATED EMPLOYMENT
AGREEMENT--THOMAS E. YOUNG
-30-
<PAGE> 31
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 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-Payout~interest}
X
---
Y
</TABLE>
AMENDED AND RESTATED EMPLOYMENT
AGREEMENT--THOMAS E. YOUNG
-31-
<PAGE> 32
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.
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.
AMENDED AND RESTATED EMPLOYMENT
AGREEMENT--THOMAS E. YOUNG
-32-
<PAGE> 33
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.
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:
AMENDED AND RESTATED EMPLOYMENT
AGREEMENT--THOMAS E. YOUNG
-33-
<PAGE> 34
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 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
AMENDED AND RESTATED EMPLOYMENT
AGREEMENT--THOMAS E. YOUNG
-34-
<PAGE> 35
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
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.
AMENDED AND RESTATED EMPLOYMENT
AGREEMENT--THOMAS E. YOUNG
-35-
<PAGE> 36
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.
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.
AMENDED AND RESTATED EMPLOYMENT
AGREEMENT--THOMAS E. YOUNG
-36-
<PAGE> 37
9.8 Substitution of Other Incentive Compensation.
9.8.1 Notwithstanding anything contained herein to the
contrary, but subject to the provisions of this
paragraph 9.8, if:
(a) the Board of Directors of Company approves
an incentive compensation program providing
for annual incentive compensation and
long-term, equity-based incentive
compensation (through, for example and not
for purposes of limitation, the use of
stock options) (the "New Program"), and
(b) a majority of the "Executives" (as defined
in paragraph 9.8.3) have each entered into
one or more written agreements with Company
(including, but not limited to, a written
amendment to and/or restatement of an
existing written employment agreement)
(such agreements entered into by such
majority of the Executives being
collectively referred to herein as the
"Executive Amendments") providing for:
(i) such Executive's participation in
the New Program; and
(ii) termination of such Executive's
future participation in incentive
compensation in the form of
assignments of overriding oil and
gas royalty interests ("ORRI
Incentive Compensation"), and
(c) Company has offered Employee the
opportunity to participate in the New
Program on a basis at least as favorable as
the most favorable participation provided
to other participants in the New Program
who are or were in the same position within
the same grade level as Employee at any
time during the period beginning 90 days
before the "Triggering Date" (as
hereinafter defined) and ending on the date
Employee and Company enter into the
"Amendment" (as hereinafter defined)
(participation in the New Program that is
offered to Employee and satisfies the terms
of this clause (c) is referred to herein as
"Qualifying Participation");
then Employee and Company shall enter into a written
amendment to this Agreement (the "Amendment") which:
(x) shall provide for Employee's participation
in the New Program on a basis no less
favorable than the Qualifying
Participation;
(y) shall provide for the termination of
Employee's participation in the incentive
compensation program described in this
paragraph 9 for
AMENDED AND RESTATED EMPLOYMENT
AGREEMENT--THOMAS E. YOUNG
-37-
<PAGE> 38
periods after a date (the "Termination
Date") that is no earlier than the latest
date (the "Triggering Date") on which any
of the Executives terminated his
participation in ORRI Incentive
Compensation under the Executive
Amendments; and
(z) except as otherwise provided in clauses (x)
and (y) of this sentence, shall otherwise
be in substantially the same form, and
contain substantially the same terms and
conditions, as the Executive Amendments.
9.8.2 For purposes of clause (y) of paragraph 9.8.1,
Company and Employee acknowledge and agree that
under the Amendment, (i) Employee will be entitled
under this paragraph 9 to receive an Overriding
Royalty Interest equal to an undivided percentage
(as specified in paragraph 9.2.1 of this Agreement)
of Company's Working Interest in each well on any
Prospect acquired, or deemed to have been acquired
under this paragraph 9, by Company on or before the
Termination Date, and the lease or leases allocated
thereto (collectively, the "Earned ORIs"), (ii)
Employee will not be entitled to receive any
Overriding Royalty Interest or other interest in or
benefits with respect to any Prospect or Prospects
acquired, or deemed to have been acquired under this
paragraph 9, by Company after the Termination Date,
or in the lease or leases allocated thereto, and
(iii) the provisions of this Agreement that state
they survive, by their terms survive, or are
otherwise designed to survive the Termination Date
and/or the termination of Employee's participation
in the incentive compensation program described in
this paragraph 9, and the respective rights and
obligations of Company and Employee under such
provisions with respect to the Existing ORIs in the
Existing Prospects and the Earned ORIs, shall
survive the Termination Date and/or such termination
of Employee's participation in the incentive
compensation program described in this paragraph 9
for the period or periods provided for in this
Agreement.
9.8.3 For purposes of this paragraph 9.8, the term
"Executives" means the following employees of
Company: Robert E. Henderson, Richard R. Clark,
Michael W. Strickler and Frank A. Pici; provided,
however, that the term -------- ------- "Executives"
shall not include any such individual to the extent
he is no longer an employee of Company at the time
Company has offered Qualifying Participation to
Employee; provided further, however, that if all of
such -------- ------- ------- individuals have
ceased to be an employee of Company prior to the
time Company has offered Qualifying Participation to
Employee, then Employee shall have no obligation
whatsoever (whether under this Paragraph 9.8 or
otherwise) to enter into the Amendment.
9.8.4 For purposes of clause (b) of paragraph 9.8.1, the
phrase "a majority of the Executives" shall have the
following meaning, as applicable:
AMENDED AND RESTATED EMPLOYMENT
AGREEMENT--THOMAS E. YOUNG
-38-
<PAGE> 39
(a) if there are four (4) Executives employed
by Company at the time Company offers
Qualifying Participation to Employee, the
phrase "a majority of the Executives" shall
mean three (3) of the Executives;
(b) if there are three (3) Executives employed
by Company at the time Company offers
Qualifying Participation to Employee, the
phrase "a majority of the Executives" shall
mean two (2) of the Executives;
(c) if there are two (2) Executives employed by
Company at the time Company offers
Qualifying Participation to Employee, the
phrase "a majority of the Executives" shall
mean all of the Executives; and
(d) if there is one (1) Executive employed by
Company at the time Company offers
Qualifying Participation to Employee, the
phrase "a majority of the Executives" shall
mean such Executive.
10. Insurance.
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 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, 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 Employee holds a directorship, Company
can require Employee to resign the outside directorship.
AMENDED AND RESTATED EMPLOYMENT
AGREEMENT--THOMAS E. YOUNG
-39-
<PAGE> 40
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.
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
AMENDED AND RESTATED EMPLOYMENT
AGREEMENT--THOMAS E. YOUNG
-40-
<PAGE> 41
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 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
AMENDED AND RESTATED EMPLOYMENT
AGREEMENT--THOMAS E. YOUNG
-41-
<PAGE> 42
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.
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 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
AMENDED AND RESTATED EMPLOYMENT
AGREEMENT--THOMAS E. YOUNG
-42-
<PAGE> 43
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:
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
AMENDED AND RESTATED EMPLOYMENT
AGREEMENT--THOMAS E. YOUNG
-44-
<PAGE> 44
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 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.
AMENDED AND RESTATED EMPLOYMENT
AGREEMENT--THOMAS E. YOUNG
-44-
<PAGE> 45
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. 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
AMENDED AND RESTATED EMPLOYMENT
AGREEMENT--THOMAS E. YOUNG
-45-
<PAGE> 46
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 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 counsel and experts as are reasonably
AMENDED AND RESTATED EMPLOYMENT
AGREEMENT--THOMAS E. YOUNG
-46-
<PAGE> 47
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 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
AMENDED AND RESTATED EMPLOYMENT
AGREEMENT--THOMAS E. YOUNG
-47-
<PAGE> 48
taxable year of Employee with respect to which the
contested issues involved in, and amount of,
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 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 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,
AMENDED AND RESTATED EMPLOYMENT
AGREEMENT--THOMAS E. YOUNG
-48-
<PAGE> 49
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 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
AMENDED AND RESTATED EMPLOYMENT
AGREEMENT--THOMAS E. YOUNG
-49-
<PAGE> 50
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
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.
AMENDED AND RESTATED EMPLOYMENT
AGREEMENT--THOMAS E. YOUNG
-50-
<PAGE> 51
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:
Thomas E. Young
1515 Banks
Houston, Texas 77006
Company and Employee may change the above addresses for
notice purposes by notifying the other in writing.
21.7 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 ON THE EFFECTIVE DATE, THAT CERTAIN CHANGE IN
CONTROL AGREEMENT DATED 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.
21.9 This Agreement supersedes and replaces the
Employment Agreement and the Letter Agreement;
provided, however, that (i) the provisions of
paragraph 3 of the Employment Agreement shall apply,
and the provisions of paragraph 3 of this Agreement
shall not apply, with respect to any claim, demand,
cause of action, right, obligation and/or liability
of Company and/or Employee with respect to, relating
to, or arising from any termination or alleged
termination of the Employment Agreement, this
Agreement and/or Employee's employment with Company
that occurred or arose during or relates to, or that
occurred or arose as a result of or with respect to
any act, failure to act, event or other matter that
occurred or arose during or relates to, the period
from June 27, 1996 through October 31, 1998, and
(ii) 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.
AMENDED AND RESTATED EMPLOYMENT
AGREEMENT--THOMAS E. YOUNG
-51-
<PAGE> 52
Executed as of the Effective Date in duplicate originals at Houston,
Texas.
COMPANY:
MARINER ENERGY, INC.
By: /s/ Robert E. Henderson
------------------------------------------------
Printed Name: Robert E. Henderson
Printed Title: President and Chief Executive Officer
EMPLOYEE:
/s/ Thomas E. Young
----------------------------------------------------
Thomas E. Young
AMENDED AND RESTATED EMPLOYMENT
AGREEMENT--THOMAS E. YOUNG
-52-
<PAGE> 1
EXHIBIT 10.9
THIRD AMENDMENT
TO
AMENDED AND RESTATED EMPLOYMENT AGREEMENT
BETWEEN
MARINER ENERGY, INC.
AND
WILLIAM HUNT HODGE
THIS THIRD AMENDMENT TO AMENDED AND RESTATED EMPLOYMENT AGREEMENT
(this "Third Amendment") is made and entered into by and between MARINER
ENERGY, INC. (the "Company") and WILLIAM HUNT HODGE ("Employee").
W I T N E S S E T H :
WHEREAS, (i) the Company and Employee entered into that certain
Amended and Restated Employment Agreement dated effective as of June 27, 1996
(the "Original Employment Agreement"), and (ii) the Original Employment
Agreement was amended pursuant to (A) that certain First Amendment to Amended
and Restated Employment Agreement executed as of March 18, 1997 (the "First
Amendment"), by and between the Company and Employee, and (B) that certain
Second Amendment to Amended and Restated Employment Agreement effective as of
January 1, 1998 (the "Second Amendment"), by and between the Company and
Employee (the Original Employment Agreement as amended by the First Amendment
and the Second Amendment is referred to herein as the "Employment Agreement");
and
WHEREAS, the Company and Employee desire to further amend the
Employment Agreement as hereinafter provided;
NOW, THEREFORE, in consideration of the premises and the mutual
covenants and agreements herein contained, the parties hereto agree as follows:
1. Paragraph 2 of the Employment Agreement is hereby amended to read
in its entirety as follows:
"2. Term.
The term of employment shall be for a term of four and
one-half (4 1/2) years beginning on the Effective Date,
subject, however, to the provisions of paragraph 3."
2. The Employment Agreement is hereby amended to add a new paragraph
9.8 which reads in its entirety as follows:
-1-
<PAGE> 2
"9.8 Substitution of Other Incentive Compensation.
9.8.1 Notwithstanding anything contained herein to the contrary,
but subject to the provisions of this paragraph 9.8, if:
(a) the Board of Directors of the Company approves an
incentive compensation program providing for annual
incentive compensation and long-term, equity-based
incentive compensation (through, for example and not
for purposes of limitation, the use of stock
options) (the "New Program"), and
(b) a majority of the "Executives" (as defined in
paragraph 9.8.3) have each entered into one or more
written agreements with the Company (including, but
not limited to, a written amendment to and/or
restatement of an existing written employment
agreement) (such agreements entered into by such
majority of the Executives being collectively
referred to herein as the "Executive Amendments")
providing for:
(i) such Executive's participation in the New
Program; and
(ii) termination of such Executive's future
participation in incentive compensation in
the form of assignments of overriding oil
and gas royalty interests ("ORRI Incentive
Compensation"), and
(c) the Company has offered Employee the opportunity to
participate in the New Program on a basis at least
as favorable as the most favorable participation
provided to other participants in the New Program
who are or were in the same position within the same
grade level as Employee at any time during the
period beginning 90 days before the "Triggering
Date" (as hereinafter defined) and ending on the
date Employee and the Company enter into the
"Amendment" (as hereinafter defined) (participation
in the New Program that is offered to Employee and
satisfies the terms of this clause (c) is referred
to herein as "Qualifying Participation");
then Employee and the Company shall enter into a written
amendment to this Agreement (the "Amendment") which:
(x) shall provide for Employee's participation in the
New Program on a basis no less favorable than the
Qualifying Participation;
(y) shall provide for the termination of Employee's
participation in the incentive compensation program
described in this paragraph 9 for periods after a
date (the "Termination Date") that is no earlier
than the latest date (the "Triggering Date") on
which any of the Executives terminated his
participation in ORRI Incentive Compensation under
the Executive Amendments; and
-2-
<PAGE> 3
(z) except as otherwise provided in clauses (x) and (y)
of this sentence, shall otherwise be in
substantially the same form, and contain
substantially the same terms and conditions, as the
Executive Amendments.
9.8.2 For purposes of clause (y) of paragraph 9.8.1, the Company
and Employee acknowledge and agree that under the Amendment,
(i) Employee will be entitled under this paragraph 9 to
receive an Overriding Royalty Interest equal to an undivided
percentage (as specified in paragraph 9.2.1 of this
Agreement) of the Company's Working Interest in each well on
any Prospect acquired, or deemed to have been acquired under
this paragraph 9, by the Company on or before the Termination
Date, and the lease or leases allocated thereto
(collectively, the "Earned ORIs"), (ii) Employee will not be
entitled to receive any Overriding Royalty Interest or other
interest in or benefits with respect to any Prospect or
Prospects acquired, or deemed to have been acquired under
this paragraph 9, by the Company after the Termination Date,
or in the lease or leases allocated thereto, and (iii) the
provisions of this Agreement that state they survive, by
their terms survive, or are otherwise designed to survive the
Termination Date and/or the termination of Employee's
participation in the incentive compensation program described
in this paragraph 9, and the respective rights and
obligations of the Company and Employee under such provisions
with respect to the Existing ORIs in the Existing Prospects
and the Earned ORIs, shall survive the Termination Date
and/or such termination of Employee's participation in the
incentive compensation program described in this paragraph 9
for the period or periods provided for in this Agreement.
9.8.3 For purposes of this paragraph 9.8, the term "Executives"
means the following employees of the Company: Robert E.
Henderson, Richard R. Clark, Michael W. Strickler and Frank
A. Pici; provided, however, that the term "Executives" shall
not include any such individual to the extent he is no longer
an employee of the Company at the time the Company has
offered Qualifying Participation to Employee; provided
further, however, that if all of such individuals have ceased
to be an employee of the Company prior to the time the
Company has offered Qualifying Participation to Employee,
then Employee shall have no obligation whatsoever (whether
under this Paragraph 9.8 or otherwise) to enter into the
Amendment.
9.8.4 For purposes of clause (b) of paragraph 9.8.1, the phrase "a
majority of the Executives" shall have the following meaning,
as applicable:
(a) if there are four (4) Executives employed by the
Company at the time the Company offers Qualifying
Participation to Employee, the phrase "a majority of
the Executives" shall mean three (3) of the
Executives;
(b) if there are three (3) Executives employed by the
Company at the time the Company offers Qualifying
Participation to Employee, the phrase "a majority of
the Executives" shall mean two (2) of the
Executives;
-3-
<PAGE> 4
(c) if there are two (2) Executives employed by the
Company at the time the Company offers Qualifying
Participation to Employee, the phrase "a majority of
the Executives" shall mean all of the Executives;
and
(d) if there is one (1) Executive employed by the
Company at the time the Company offers Qualifying
Participation to Employee, the phrase "a majority of
the Executives" shall mean such Executive."
3. All references to "this Agreement" contained in the Employment
Agreement shall be deemed to be a reference to the Employment
Agreement, as amended by this Third Amendment.
4. This Third Amendment is made and will be performed under, and shall be
governed by and construed in accordance with, the law of the State of
Texas.
5. Except as amended by this Third Amendment, the Employment Agreement
shall remain in full force and effect.
6. This Third Amendment may be executed in one or more counterparts, and
by the different parties hereto in separate counterparts, each of
which when executed shall be deemed to be an original but all of which
shall constitute one and the same agreement.
IN WITNESS WHEREOF, the Company and Employee have executed this Third
Amendment to be effective as December 27, 1998.
Acknowledged by: MARINER ENERGY, INC.
/s/ Christopher E. Lindsey By: /s/ Robert E. Henderson
- --------------------------------- ------------------------------
Christopher E. Lindsey Robert E. Henderson
Chief Legal Counsel President and
Chief Executive Officer
"COMPANY"
/s/ William Hunt Hodge
------------------------------
William Hunt Hodge
"EMPLOYEE"
-4-
<PAGE> 1
Exhibit 10.10
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (hereinafter called this "Agreement") is
entered into effective as of August 1, 1998 (the "Effective Date"), by and
between MARINER ENERGY, INC. (hereinafter called "Company") and Christopher E.
Lindsey (hereinafter called "Employee").
WHEREAS, Company desires to employ Employee upon the terms and
conditions set forth herein; and
WHEREAS, Employee desires to be employed by Company upon the terms and
conditions set forth herein;
NOW, THEREFORE, in consideration of the premises and the mutual
covenants and agreements herein contained, the parties hereto agree as follows:
1. Employment.
Company hereby employs Employee as an employee of Company to
perform such duties and responsibilities and act in such
capacity as may from time to time be determined by Company.
The place of employment shall be at such place or places as
Company may designate. If Company elects to utilize
Employee's services outside the metropolitan area of the City
of Houston, Texas, Employee's relocation expenses and
allowances will be paid in accordance with Company's
relocation policy. 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 two (2) years
beginning on the Effective Date, subject, however, to the
provisions of paragraph 3.
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 three (3) 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:
EMPLOYMENT AGREEMENT--CHRISTOPHER E. LINDSEY
-1-
<PAGE> 2
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 three (3)
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.
3.3 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 and
3.2.3 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
EMPLOYMENT AGREEMENT--CHRISTOPHER E. LINDSEY
-2-
<PAGE> 3
thereafter under this Agreement except 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. 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)
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 15, except as
otherwise provided in paragraph 15. 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 and 3.2.3 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
EMPLOYMENT AGREEMENT--CHRISTOPHER E. LINDSEY
-3-
<PAGE> 4
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 three (3)
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 paragraph 3.2.3.
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
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 Any (a) reduction in Employee's monthly
salary as established in paragraph 5
(including subsequent increases), (b)
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; or
3.9.2 A breach of any material provision of this
Agreement by Company (other than any breach
described in paragraph 3.9.1) 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
EMPLOYMENT AGREEMENT--CHRISTOPHER E. LINDSEY
-4-
<PAGE> 5
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; Signing Bonus.
5.1 As compensation for his services rendered to Company
hereunder, Company shall pay to Employee a salary at
the rate of $10,416.66 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.
5.2 Company shall pay Employee a bonus in the amount of
$7,500.00 upon commencement of the term of
Employee's employment under this Agreement.
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.
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;
EMPLOYMENT AGREEMENT--CHRISTOPHER E. LINDSEY
-5-
<PAGE> 6
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
five (5) days of vacation leave may be carried over from one
calendar year to the next calendar 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. Insurance.
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.
10. 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, 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
EMPLOYMENT AGREEMENT--CHRISTOPHER E. LINDSEY
-6-
<PAGE> 7
Employee holds a directorship, Company can require Employee
to resign the outside directorship.
11. 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:
11.1 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.
11.2 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.
11.3 Employee must purchase his interest in the oil and
gas prospect on terms which are no more favorable
than those made available to Company.
12. 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.
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.
EMPLOYMENT AGREEMENT--CHRISTOPHER E. LINDSEY
-7-
<PAGE> 8
13. 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.
14. Arbitration.
14.1 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 18, be resolved as follows:
14.1.1 Except as provided in paragraph 14.1.2
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 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
EMPLOYMENT AGREEMENT--CHRISTOPHER E. LINDSEY
-8-
<PAGE> 9
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.
14.1.2 Notwithstanding the agreement to arbitrate
contained in paragraph 14.1.1 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, 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
EMPLOYMENT AGREEMENT--CHRISTOPHER E. LINDSEY
-9-
<PAGE> 10
or temporary injunction, or other
injunctive relief will be brought in the
State or federal courts residing in
Houston, Harris County, Texas.
14.2 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.
15. 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 3.3 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.
16. Survival.
The provisions of paragraphs 4 and 20 shall survive any
termination of the employment relationship and/or of this
Agreement for the periods stated therein. The provisions of
paragraph 14 relating to arbitration shall survive any
termination of the employment relationship between Employee
and Company and the termination of this Agreement. 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.
EMPLOYMENT AGREEMENT--CHRISTOPHER E. LINDSEY
-10-
<PAGE> 11
17. Certain Additional Payments by Company.
17.1 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
17.11) imposed upon the Gross-Up Payment, Employee
retains an amount of such Gross-Up Payment equal to
the Excise Tax imposed upon the Payments.
17.2 Subject to the provisions of paragraph 17.3 through
17.11, any determination (individually, a
"Determination") required to be made under this
paragraph 17, 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 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,
EMPLOYMENT AGREEMENT--CHRISTOPHER E. LINDSEY
-11-
<PAGE> 12
however, to the provisions of paragraph 17.3 through
17.11 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.
17.3 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 17.10) that
any Payment is subject to the Excise Tax.
17.4 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 17 ("Claim"), including, but not limited
to, a claim for indemnification of Employee by
Company under paragraph 17.3, then such party shall
promptly notify the other party hereto in writing of
such Claim ("Tax Claim Notice").
17.5 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 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:
17.5.1 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
EMPLOYMENT AGREEMENT--CHRISTOPHER E. LINDSEY
-12-
<PAGE> 13
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
17.5.2 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 17.7,
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
17.5.3 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.
17.6 Subject to the provisions of paragraph 17.5 hereof, Company
shall have the right to defend or prosecute, at the sole
cost, expense and 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
EMPLOYMENT AGREEMENT--CHRISTOPHER E. LINDSEY
-13-
<PAGE> 14
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.
17.7 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
17.5.2 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 17.5.2, 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 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.
17.8 With respect to any Employee Claim, if Company fails
to deliver an Election Notice to Employee within the
period provided in paragraph 17.5.1 hereof or, after
delivery of such Election Notice, Company fails to
comply with the provisions of paragraph 17.5.2,
17.5.3 or 17.6 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
17.8 and shall bear its own costs and expenses with
respect thereto. In the case of any Employee
EMPLOYMENT AGREEMENT--CHRISTOPHER E. LINDSEY
-14-
<PAGE> 15
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.
17.9 In the case of any Employee Claim that is defended
or prosecuted to a Final Determination pursuant to
the terms of this paragraph 17.9, 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 17.9, 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 paid under
this paragraph 17.9 shall be made within the time
and in the manner otherwise provided in this
paragraph 17.9.
17.10 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.
17.11 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.
18. No Obligation to Mitigate.
EMPLOYMENT AGREEMENT--CHRISTOPHER E. LINDSEY
-15-
<PAGE> 16
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.
19. Annual Bonus; Stock Options.
19.1 In addition to the salary provided for in paragraph
5.1 hereof (the "Base Salary"), Employee shall be
eligible to receive, for each calendar year or
portion thereof occurring during the term of this
Agreement, an annual cash bonus based on performance
(the "Annual Bonus") in an amount up to twenty-five
percent (25%) of the Base Salary for such calendar
year or portion thereof (or such greater percentage
of such Base Salary as the Board of Directors or the
Committee may, in its discretion, determine) upon
approval of such Annual Bonus by the Board of
Directors of Company (the "Board of Directors") or a
committee of the Board of Directors designated by
the Board of Directors (the "Committee"). The amount
of any such Annual Bonus shall be determined by the
Board of Directors or the Committee, as the case may
be, in accordance with the cash incentive
compensation program of Company in effect with
respect to such determination. The Annual Bonus
shall be paid to Employee, less such amounts as
shall be required to be deducted or withheld
therefrom by applicable law and regulations, at such
time or times as is in accordance with the then
prevailing policy of Company relating to cash
incentive compensation payments.
19.2 As of the Effective Date, Company shall, or shall
cause Mariner Holdings Inc. to, grant to Employee
stock options for 1,429 shares of the common stock
of Mariner Holdings, Inc. ("Parent Common Stock")
pursuant to the Mariner Holdings Inc. 1996 Stock
Option Plan. To the fullest extent possible, the
options granted to Employee shall be incentive stock
options, and otherwise shall be non-qualified stock
options. The terms, conditions and restrictions with
regard to such stock options shall be evidenced by
an Incentive Stock Option Agreement substantially in
the form attached hereto as Exhibit A, which is
incorporated herein by reference and its terms,
conditions and restrictions shall be considered a
part of this Agreement.
20. Noncompetition Obligations.
20.1 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--CHRISTOPHER E. LINDSEY
-16-
<PAGE> 17
20.1.1 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
20.1.2 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;
20.1.3 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 20.1.1
and 20.1.2 above with respect to such
competitive business; or
20.1.4 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
20 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 20, constitute voluntary termination
without Good Reason by Employee).
20.2 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 enumeration and other
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
EMPLOYMENT AGREEMENT--CHRISTOPHER E. LINDSEY
-17-
<PAGE> 18
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.
20.3 It is expressly understood and agreed that Company
and Employee consider the restrictions contained in
this paragraph 20 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.
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
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.
EMPLOYMENT AGREEMENT--CHRISTOPHER E. LINDSEY
-18-
<PAGE> 19
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:
Christopher E. Lindsey
13118 Chriswood
Cypress, Texas 77429
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.
Executed as of the Effective Date in duplicate originals at Houston,
Texas.
Acknowledged by: MARINER ENERGY, INC.
/s/ W. Hunt Hodge By: /s/ Robert E. Henderson
- ------------------------------- ------------------------------
W. Hunt Hodge Robert E. Henderson
Vice President - Administration President and
Chief Executive Officer
"COMPANY"
/s/ Christopher E. Lindsey
----------------------------------
Christopher E. Lindsey
"EMPLOYEE"
EMPLOYMENT AGREEMENT--CHRISTOPHER E. LINDSEY
-19-
<PAGE> 1
EXHIBIT 10.14
Executive Officers who are Parties
to an Incentive Stock Option Agreement
Number of Shares of Mariner
Energy LLC, Common Stock
Executive Officer Subject to Stock Option Agreement
- ----------------- ---------------------------------
Robert E. Henderson 5,000
Richard R. Clark 5,000
Michael W. Strickler 5,000
L.V. McGuire 1,714
Frank A. Pici 5,000
Christopher E. Lindsey 1,429
Gregory K. Harless 3,570
W. Hunt Hodge 5,000
-----
Totals 31,713
======
<PAGE> 1
EXHIBIT 10.16
Executive Officers who are Parties
to an Nonstatutory Stock Option Agreement
Number of Shares of Mariner
Energy LLC, Common Stock
Executive Officer Subject to Stock Option Agreement
- ----------------- ---------------------------------
Robert E. Henderson 14,885
Richard R. Clark 8,994
Michael W. Strickler 8,994
L.V. McGuire 7,406
Frank A. Pici 1,090
W. Hunt Hodge 1,115
David S. Huber 13,548
------
Totals 56,032
======
<PAGE> 1
Exhibit 10.20
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (hereinafter called this "Agreement") is
entered into effective as of June 1, 1998 (the "Effective Date"), by and
between MARINER ENERGY, INC. (hereinafter called "Company") and L. V. McGuire
(hereinafter called "Employee").
WHEREAS, Company desires to employ Employee upon the terms and
conditions set forth herein; and
WHEREAS, Employee desires to be employed by Company upon the terms and
conditions set forth herein;
NOW, THEREFORE, in consideration of the premises and the mutual
covenants and agreements herein contained, the parties hereto agree as follows:
1. Employment.
Company hereby employs Employee to serve as Senior Vice
President - Operations 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.
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 six (6) 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
EMPLOYMENT AGREEMENT--L. V. McGUIRE
-1-
<PAGE> 2
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 nine (9)
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.
3.3 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 and
3.2.3 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 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. As used in this Agreement, the
term "Cause" means (a) Employee is found guilty
EMPLOYMENT AGREEMENT--L. V. McGUIRE
-2-
<PAGE> 3
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)
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 and 3.2.3 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.
EMPLOYMENT AGREEMENT--L. V. McGUIRE
-3-
<PAGE> 4
3.7.2 A lump sum cash payment equal to nine (9)
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 paragraph 3.2.3.
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
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, 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
EMPLOYMENT AGREEMENT--L. V. McGUIRE
-4-
<PAGE> 5
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 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 $15,833.33 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
EMPLOYMENT AGREEMENT--L. V. McGUIRE
-5-
<PAGE> 6
with Company policy, for all gasoline, insurance and
maintenance required for use of the automobile.
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
five (5) days of vacation leave may be carried over from one
calendar year to the next calendar 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. Annual Bonus; Stock Options.
9.1 In addition to the salary provided for in paragraph
5 hereof (the "Base Salary"), Employee shall be
eligible to receive, for each calendar year or
portion thereof occurring during the term of this
Agreement, an annual cash bonus based on performance
(the "Annual Bonus") in an amount up to forty
percent (40%) of the Base Salary for such calendar
year or portion thereof (or such greater percentage
of such Base Salary as the Board of Directors or the
Committee may, in its discretion, determine) upon
approval of such Annual Bonus by the Board of
Directors of Company (the "Board of Directors") or
EMPLOYMENT AGREEMENT--L. V. McGUIRE
-6-
<PAGE> 7
a committee of the Board of Directors designated by
the Board of Directors (the "Committee"). The amount
of any such Annual Bonus shall be determined by the
Board of Directors or the Committee, as the case may
be, in accordance with the cash incentive
compensation program of Company in effect with
respect to such determination. The Annual Bonus
shall be paid to Employee, less such amounts as
shall be required to be deducted or withheld
therefrom by applicable law and regulations, at such
time or times as is in accordance with the then
prevailing policy of Company relating to cash
incentive compensation payments.
9.2 As of the Effective Date, Company shall, or shall
cause Mariner Holdings Inc. to, grant to Employee
stock options for 9,120 shares of the common stock
of Mariner Holdings, Inc. ("Parent Common Stock")
pursuant to the Mariner Holdings Inc. 1996 Stock
Option Plan. To the fullest extent possible, the
options granted to Employee shall be incentive stock
options, and otherwise shall be non-qualified stock
options. The terms, conditions and restrictions with
regard to such stock options shall be evidenced by
an Incentive Stock Option Agreement (as to the
qualified stock options) and a Nonstatutory Stock
Option Agreement (as to be nonqualified stock
options), substantially in the forms attached hereto
as Exhibit A and Exhibit B, respectively, which are
incorporated herein by reference and their terms,
conditions and restrictions shall be considered a
part of this Agreement.
10. Insurance.
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, 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
EMPLOYMENT AGREEMENT--L. V. McGUIRE
-7-
<PAGE> 8
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.
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.
EMPLOYMENT AGREEMENT--L. V. McGUIRE
-8-
<PAGE> 9
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 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
EMPLOYMENT AGREEMENT--L. V. McGUIRE
-9-
<PAGE> 10
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.
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.
EMPLOYMENT AGREEMENT--L. V. McGUIRE
-10-
<PAGE> 11
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:
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) twelve (12)
EMPLOYMENT AGREEMENT--L. V. McGUIRE
-11-
<PAGE> 12
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 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
EMPLOYMENT AGREEMENT--L. V. McGUIRE
-12-
<PAGE> 13
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. 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
EMPLOYMENT AGREEMENT--L. V. McGUIRE
-13-
<PAGE> 14
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 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").
EMPLOYMENT AGREEMENT--L. V. McGUIRE
-14-
<PAGE> 15
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 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 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
EMPLOYMENT AGREEMENT--L. V. McGUIRE
-15-
<PAGE> 16
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 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,
EMPLOYMENT AGREEMENT--L. V. McGUIRE
-16-
<PAGE> 17
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 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
EMPLOYMENT AGREEMENT--L. V. McGUIRE
-17-
<PAGE> 18
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
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.
EMPLOYMENT AGREEMENT--L. V. McGUIRE
-18-
<PAGE> 19
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:
L. V. McGuire
266 Promenade East
Montgomery, Texas 77356
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.
Executed as of the Effective Date in duplicate originals at Houston,
Texas.
Acknowledged by: MARINER ENERGY, INC.
/s/ W. Hunt Hodge By: /s/ Robert E. Henderson
- ------------------------------- -----------------------------------
W. Hunt Hodge Robert E. Henderson
Vice President - Administration President and
Chief Executive Officer
"COMPANY"
/s/ L. V. McGuire
---------------------------------------
L. V. McGuire
"EMPLOYEE"
EMPLOYMENT AGREEMENT--L. V. McGUIRE
-19-
<PAGE> 20
EXHIBIT 23.1
CONSENT OF INDEPENDENT PETROLEUM ENGINEERS
We consent to the use of the name of this firm and of certain
information contained in our reserve report dated December 31, 1998, prepared
for Mariner Energy, Inc. ("Mariner"), in Mariner's Annual Report on Form 10-K
for the year ended December 31, 1998.
/s/ RYDER SCOTT COMPANY
PETROLEUM ENGINEERS
RYDER SCOTT COMPANY
PETROLEUM ENGINEERS
Houston, Texas
March 30, 1999
<PAGE> 21
[LOGO] [RYDER SCOTT COMPANY LETTERHEAD]
March 29, 1999
Mariner Energy, Inc.
580 WestLake Park Blvd., Suite 1300
Houston, Texas 77079
Gentlemen:
At your request, we have prepared an estimate of the reserves, future
production, and income attributable to certain leasehold interests of Mariner
Energy, Inc. (Mariner) as of January 1, 1999. The subject properties are
located in the states of Louisiana, Mississippi, and Texas and in the federal
waters offshore Louisiana and Texas. The income data were estimated using the
Securities and Exchange Commission (SEC) guidelines for future price and cost
parameters.
The estimated reserves and future income amounts presented in this
report are related to hydrocarbon prices. December 1998 hydrocarbon prices were
used in the preparation of this report as required by SEC guidelines; however,
actual future prices may vary significantly from December 1998 prices.
Therefore, volumes of reserves actually recovered and amounts of income
actually received may differ significantly from the estimated quantities
presented in this report. The results of this study are summarized below.
SEC PARAMETERS
Estimated Net Reserves and Income Data
Certain Leasehold Interests of
MARINER ENERGY, INC.
As of January 1, 1999
<TABLE>
<CAPTION>
Proved
------------------------------------------------------
Developed Total
--------------------------- --------------------------
Producing Non-Producing Undeveloped Proved
------------ ------------- ------------ ------------
<S> <C> <C> <C> <C>
NET REMAINING RESERVES
Oil/Condensate - Barrels 2,282,975 582,551 6,472,846 9,338,372
Plant Products - Barrels 10,329 10,580 0 20,909
Gas - MMCF 57,082 28,942 42,871 128,895
INCOME DATA
Future Gross Revenue $150,978,685 $ 65,653,902 $157,499,321 $374,131,908
Deductions 44,159,398 24,415,844 106,555,833 175,131,075
------------ ------------ ------------ ------------
Future Net Income (FNI) $106,819,287 $ 41,238,058 $ 50,943,488 $199,000,833
Discounted FNI @ 10% $ 86,947,896 $ 33,976,023 $ 26,705,382 $147,629,301
</TABLE>
Liquid hydrocarbons are expressed in standard 42 gallon barrels. All
gas volumes are sales gas expressed in millions of cubic feet (MMCF) at the
official temperature and pressure bases of the areas in which the gas reserves
are located.
<PAGE> 22
March 29, 1999
Page 2
The future gross revenue is after the deduction of production taxes.
The deductions are comprised of the normal direct costs of operating the wells,
ad valorem taxes, recompletion costs, development costs, and certain
abandonment costs net of salvage. The future net income is before the deduction
of state and federal income taxes and general administrative overhead, and has
not been adjusted for outstanding loans that may exist nor does it include any
adjustment for cash on hand or undistributed income. No attempt was made to
quantify or otherwise account for any accumulated gas production imbalances
that may exist. Gas reserves account for approximately 74.7 percent of the
total future gross revenue from proved reserves. Liquid hydrocarbon reserves
account for approximately 25.2 percent and plant product reserves account for
the remaining 0.1 percent of total future gross revenue from proved reserves.
The discounted future net income shown above was calculated using a
discount rate of 10 percent per annum compounded monthly. Future net income was
discounted at four other discount rates which were also compounded monthly.
These results are shown on each estimated projection of future production and
income presented in a later section of this report and in summary form below.
<TABLE>
<CAPTION>
Discounted Future Net Income
As of January 1, 1999
----------------------------
Discount Rate Total
Percent Proved
------------- ------------
<S> <C>
15 $130,676,504
20 $116,923,905
25 $105,465,882
30 $ 95,740,539
</TABLE>
The results shown above are presented for your information and should not be
construed as our estimate of fair market value.
RESERVES INCLUDED IN THIS REPORT
The proved reserves included herein conform to the definition as set
forth in the Securities and Exchange Commission's Regulation S-X Part 210.4-10
(a) as clarified by subsequent Commission Staff Accounting Bulletins. The
definition of proved reserves is included in the attached "Reserve Definitions
and Pricing Assumptions".
The proved developed non-producing reserves included herein are
comprised of shut-in and behind pipe categories. The various reserve status
categories are defined in the attached "Reserve Definitions and Pricing
Assumptions".
ESTIMATES OF RESERVES
In general, the reserves included herein were estimated by performance
methods or the volumetric method; however, other methods were used in certain
cases where characteristics of the data indicated such other methods were more
appropriate in our opinion. The reserves estimated by the performance method
utilized extrapolations of various historical data in those cases where such
data were definitive. Reserves were estimated by the volumetric method in those
cases where there
<PAGE> 23
March 29, 1999
Page 2
were inadequate historical performance data to establish a definitive trend or
where the use of production performance data as a basis for the reserve
estimates was considered to be inappropriate.
The reserves included in this report are estimates only and should not
be construed as being exact quantities. They may or may not be actually
recovered, and if recovered, the revenues therefrom and the actual costs
related thereto could be more or less than the estimated amounts. Moreover,
estimates of reserves may increase or decrease as a result of future
operations.
FUTURE PRODUCTION RATES
Initial production rates are based on the current producing rates for
those wells now on production. Test data and other related information were
used to estimate the anticipated initial production rates for those wells or
locations which are not currently producing. If no production decline trend has
been established, future production rates were held constant, or adjusted for
the effects of curtailment where appropriate, until a decline in ability to
produce was anticipated. An estimated rate of decline was then applied to
depletion of the reserves. If a decline trend has been established, this trend
was used as the basis for estimating future production rates. For reserves not
yet on production, sales were estimated to commence at an anticipated date
furnished by Mariner.
In general, we estimate that future gas production rates limited by
allowables or marketing conditions will continue to be the same as the average
rate for the latest available 12 months of actual production until such time
that the well or wells are incapable of producing at this rate. The well or
wells were then projected to decline at their decreasing delivery capacity
rate. Our general policy on estimates of future gas production rates is
adjusted when necessary to reflect actual gas market conditions in specific
cases.
The future production rates from wells now on production may be more
or less than estimated because of changes in market demand or allowables set by
regulatory bodies. Wells or locations which are not currently producing may
start producing earlier or later than anticipated in our estimates of their
future production rates.
HYDROCARBON PRICES
Mariner furnished us with prices in effect at January 1, 1999 and
these prices were held constant except for known and determinable escalations.
In accordance with Securities and Exchange Commission guidelines, changes in
liquid and gas prices subsequent to December 31, 1998 were not taken into
account in this report. Future prices used in this report are discussed in more
detail in the attached "Reserve Definitions and Pricing Assumptions".
COSTS
Operating costs for the leases and wells in this report are based on
the operating expense reports of Mariner and include only those costs directly
applicable to the leases or wells. When applicable, the operating costs include
a portion of general and administrative costs allocated directly to the leases
and wells under terms of operating agreements. No deduction was made for
indirect costs such as general administration and overhead expenses, loan
repayments, interest expenses, and exploration and development prepayments that
are not charged directly to the leases or wells.
<PAGE> 24
March 29, 1999
Page 2
Development costs were furnished to us by Mariner and are based on
authorizations for expenditure for the proposed work or actual costs for
similar projects. Three offshore undeveloped fields, Ewing Bank 966,
Mississippi Canyon 718 and Galveston Island 144, have relatively large capital
expense requirements which have been allocated to both the proved and probable
categories. In these three cases, two thirds of the total field development
costs were allocated to proved and one third of the costs were allocated to
probable. The estimated net cost of abandonment after salvage was included for
properties where abandonment costs net of salvage are significant. The
estimates of the net abandonment costs furnished by Mariner were accepted
without independent verification.
Current costs were held constant throughout the life of the
properties.
GENERAL
Table A presents a one line summary of proved reserve and income data
for each of the subject properties which are ranked according to their future
net income discounted at 10 percent per year. Table B presents a one line
summary of gross and net reserves and income data for each of the subject
properties. Table C presents a one line summary of initial basic data for each
of the subject properties. Tables 1 through 320 in our report present our
estimated projection of production and income by years beginning January 1,
1999, by state, field, and lease or well.
While it may reasonably be anticipated that the future prices received
for the sale of production and the operating costs and other costs relating to
such production may also increase or decrease from existing levels, such
changes were, in accordance with rules adopted by the SEC, omitted from
consideration in making this evaluation.
The estimates of reserves presented herein were based upon a detailed
study of the properties in which Mariner owns an interest; however, we have not
made any field examination of the properties. No consideration was given in
this report to potential environmental liabilities which may exist nor were any
costs included for potential liability to restore and clean up damages, if any,
caused by past operating practices. Mariner has informed us that they have
furnished us all of the accounts, records, geological and engineering data, and
reports and other data required for this investigation. The ownership
interests, prices, and other factual data furnished by Mariner were accepted
without independent verification. The estimates presented in this report are
based on data available through December 1998.
Neither we nor any of our employees have any interest in the subject
properties and neither the employment to make this study nor the compensation
is contingent on our estimates of reserves and future income for the subject
properties.
<PAGE> 25
March 29, 1999
Page 2
This report was prepared for the exclusive use and sole benefit of
Mariner Energy, Inc.. The data, work papers, and maps used in this report are
available for examination by authorized parties in our offices. Please contact
us if we can be of further service.
Very truly yours,
RYDER SCOTT COMPANY
PETROLEUM ENGINEERS
/s/ Timothy J. Torres
Timothy J. Torres, P.E.
Petroleum Engineer
JRW/sw
Approved:
/s/ John R. Warner
- --------------------------------
John R. Warner, P.E.
Senior Vice President
<PAGE> 26
DEFINITIONS OF RESERVES
PROVED RESERVES (SEC DEFINITION)
Proved reserves of crude oil, condensate, natural gas, and natural gas
liquids are estimated quantities that geological and engineering data
demonstrate with reasonable certainty to be recoverable in the future from
known reservoirs under existing operating conditions, i.e., prices and costs as
of the date the estimate is made. Prices include consideration of changes in
existing prices provided only by contractual arrangements, but not on
escalation based on future conditions.
Reservoirs are considered proved if economic producibility is
supported by either actual production or conclusive formation test. In certain
instances, proved reserves are assigned on the basis of a combination of core
analysis and electrical and other type logs which indicate the reservoirs are
analogous to reservoirs in the same field which are producing or have
demonstrated the ability to produce on a formation test. The area of a
reservoir considered proved includes (1) that portion delineated by drilling
and defined by fluid contacts, if any, and (2) the adjoining portions not yet
drilled that can be reasonably judged as economically productive on the basis
of available geological and engineering data. In the absence of data on fluid
contacts, the lowest known structural occurrence of hydrocarbons controls the
lower proved limit of the reservoir.
Reserves that can be produced economically through the application of
improved recovery techniques are included in the proved classification when
these qualifications are met: (1) successful testing by a pilot project or the
operation of an installed program in the reservoir provides support for the
engineering analysis on which the project or program was based, and (2) it is
reasonably certain the project will proceed. Improved recovery includes all
methods for supplementing natural reservoir forces and energy, or otherwise
increasing ultimate recovery from a reservoir, including (1) pressure
maintenance, (2) cycling, and (3) secondary recovery in its original sense.
Improved recovery also includes the enhanced recovery methods of thermal,
chemical flooding, and the use of miscible and immiscible displacement fluids.
Proved natural gas reserves are comprised of non-associated,
associated and dissolved gas. An appropriate reduction in gas reserves has been
made for the expected removal of natural gas liquids, for lease and plant fuel,
and for the exclusion of non-hydrocarbon gases if they occur in significant
quantities and are removed prior to sale. Estimates of proved reserves do not
include crude oil, natural gas, or natural gas liquids being held in
underground or surface storage.
Proved reserves are estimates of hydrocarbons to be recovered from a
given date forward. They may be revised as hydrocarbons are produced and
additional data become available.
<PAGE> 27
RESERVE STATUS CATEGORIES
Reserve status categories define the development and producing status
of wells and/or reservoirs.
PROVED DEVELOPED (SEC DEFINITION)
Proved developed oil and gas reserves are reserves that can be
expected to be recovered through existing wells with existing equipment and
operating methods. Additional oil and gas expected to be obtained through the
application of fluid injection or other improved recovery techniques for
supplementing the natural forces and mechanisms of primary recovery should be
included as "proved developed reserves" only after testing by a pilot project
or after the operation of an installed program has confirmed through production
response that increased recovery will be achieved.
Developed reserves may be subcategorized as producing or non-producing
using the SPE/SPEE Definitions:
Producing
Producing reserves are expected to be recovered from completion
intervals open at the time of the estimate and producing. Improved
recovery reserves are considered to be producing only after an
improved recovery project is in operation.
Non-Producing
Non-producing reserves include shut-in and behind pipe reserves.
Shut-in reserves are expected to be recovered from completion
intervals open at the time of the estimate, but which had not started
producing, or were shut-in for market conditions or pipeline
connection, or were not capable of production for mechanical reasons,
and the time when sales will start is uncertain. Behind pipe reserves
are expected to be recovered from zones behind casing in existing
wells, which will require additional completion work or a future
recompletion prior to the start of production.
PROVED UNDEVELOPED (SEC DEFINITION)
Proved undeveloped oil and gas reserves are reserves that are expected
to be recovered from new wells on undrilled acreage, or from existing wells
where a relatively major expenditure is required for recompletion. Reserves on
undrilled acreage shall be limited to those drilling units offsetting
productive units that are reasonably certain of production when drilled. Proved
reserves for other undrilled units can be claimed only where it can be
demonstrated with reasonable certainty that there is continuity of production
from the existing productive formation. Estimates for proved undeveloped
reserves are attributable to any acreage for which an application of fluid
injection or other improved technique is contemplated, only when such
techniques have been proved effective by actual tests in the area and in the
same reservoir.
<PAGE> 28
HYDROCARBON PRICING PARAMETERS
SECURITIES AND EXCHANGE COMMISSION PARAMETERS
OIL AND CONDENSATE
Mariner furnished us with oil and condensate prices in effect at
January 1, 1999 and these prices were held constant to depletion of the
properties. In accordance with Securities and Exchange Commission guidelines,
changes in liquid prices subsequent to January 1, 1999 were not considered in
this report.
PLANT PRODUCTS
Mariner furnished us with plant product prices in effect at January 1,
1999 and these prices were held constant to depletion of the properties.
GAS
Mariner furnished us with gas prices in effect at January 1, 1999 and
with its forecasts of future gas prices which take into account SEC guidelines,
current spot market prices, contract prices, and fixed and determinable price
escalations where applicable. In accordance with SEC guidelines, the future gas
prices used in this report make no allowances for future gas price increases
which may occur as a result of inflation nor do they make any allowance for
seasonal variations in gas prices which may cause future yearly average gas
prices to be somewhat lower than January 1, 1999 gas prices. For gas sold under
contract, the contract gas price including fixed and determinable escalations,
exclusive of inflation adjustments, was used until the contract expires and
then was adjusted to the current market price for the area and held at this
adjusted price to depletion of the reserves.
<PAGE> 29
MARINER ENERGY, INC.
Estimated
Future Reserves and Income
Attributable to Certain
Leasehold Interests
(SEC Parameters)
As of
January 1, 1999
<PAGE> 30
[LOGO] [RYDER SCOTT COMPANY LETTERHEAD]
March 29, 1999
Mariner Energy, Inc.
580 WestLake Park Blvd., Suite 1300
Houston, Texas 77079
Gentlemen:
At your request, we have prepared an estimate of the reserves, future
production, and income attributable to certain leasehold interests of Mariner
Energy, Inc. (Mariner) as of January 1, 1999. The subject properties are
located in the states of Louisiana, Mississippi, and Texas and in the federal
waters offshore Louisiana and Texas. The income data were estimated using the
Securities and Exchange Commission (SEC) guidelines for future price and cost
parameters.
The estimated reserves and future income amounts presented in this
report are related to hydrocarbon prices. December 1998 hydrocarbon prices were
used in the preparation of this report as required by SEC guidelines; however,
actual future prices may vary significantly from December 1998 prices.
Therefore, volumes of reserves actually recovered and amounts of income
actually received may differ significantly from the estimated quantities
presented in this report. The results of this study are summarized below.
SEC PARAMETERS
Estimated Net Reserves and Income Data
Certain Leasehold Interests of
MARINER ENERGY, INC.
As of January 1, 1999
<TABLE>
<CAPTION>
Proved
------------------------------------------------------
Developed Total
--------------------------- --------------------------
Producing Non-Producing Undeveloped Proved
------------ ------------- ------------ ------------
<S> <C> <C> <C> <C>
NET REMAINING RESERVES
Oil/Condensate - Barrels 2,282,975 582,551 6,472,846 9,338,372
Plant Products - Barrels 10,329 10,580 0 20,909
Gas - MMCF 57,082 28,942 42,871 128,895
INCOME DATA
Future Gross Revenue $150,978,685 $ 65,653,902 $157,499,321 $374,131,908
Deductions 44,159,398 24,415,844 106,555,833 175,131,075
------------ ------------ ------------ ------------
Future Net Income (FNI) $106,819,287 $ 41,238,058 $ 50,943,488 $199,000,833
Discounted FNI @ 10% $ 86,947,896 $ 33,976,023 $ 26,705,382 $147,629,301
</TABLE>
Liquid hydrocarbons are expressed in standard 42 gallon barrels. All
gas volumes are sales gas expressed in millions of cubic feet (MMCF) at the
official temperature and pressure bases of the areas in which the gas reserves
are located.
<PAGE> 31
March 29, 1999
Page 2
The future gross revenue is after the deduction of production taxes.
The deductions are comprised of the normal direct costs of operating the wells,
ad valorem taxes, recompletion costs, development costs, and certain
abandonment costs net of salvage. The future net income is before the deduction
of state and federal income taxes and general administrative overhead, and has
not been adjusted for outstanding loans that may exist nor does it include any
adjustment for cash on hand or undistributed income. No attempt was made to
quantify or otherwise account for any accumulated gas production imbalances
that may exist. Gas reserves account for approximately 74.7 percent of the
total future gross revenue from proved reserves. Liquid hydrocarbon reserves
account for approximately 25.2 percent and plant product reserves account for
the remaining 0.1 percent of total future gross revenue from proved reserves.
The discounted future net income shown above was calculated using a
discount rate of 10 percent per annum compounded monthly. Future net income was
discounted at four other discount rates which were also compounded monthly.
These results are shown on each estimated projection of future production and
income presented in a later section of this report and in summary form below.
<TABLE>
<CAPTION>
Discounted Future Net Income
As of January 1, 1999
----------------------------
Discount Rate Total
Percent Proved
------------- ------------
<S> <C>
15 $130,676,504
20 $116,923,905
25 $105,465,882
30 $ 95,740,539
</TABLE>
The results shown above are presented for your information and should not be
construed as our estimate of fair market value.
RESERVES INCLUDED IN THIS REPORT
The proved reserves included herein conform to the definition as set
forth in the Securities and Exchange Commission's Regulation S-X Part 210.4-10
(a) as clarified by subsequent Commission Staff Accounting Bulletins. The
definition of proved reserves is included in the attached "Reserve Definitions
and Pricing Assumptions".
The proved developed non-producing reserves included herein are
comprised of shut-in and behind pipe categories. The various reserve status
categories are defined in the attached "Reserve Definitions and Pricing
Assumptions".
ESTIMATES OF RESERVES
In general, the reserves included herein were estimated by performance
methods or the volumetric method; however, other methods were used in certain
cases where characteristics of the data indicated such other methods were more
appropriate in our opinion. The reserves estimated by the performance method
utilized extrapolations of various historical data in those cases where such
data were definitive. Reserves were estimated by the volumetric method in those
cases where there
<PAGE> 32
March 29, 1999
Page 2
were inadequate historical performance data to establish a definitive trend or
where the use of production performance data as a basis for the reserve
estimates was considered to be inappropriate.
The reserves included in this report are estimates only and should not
be construed as being exact quantities. They may or may not be actually
recovered, and if recovered, the revenues therefrom and the actual costs
related thereto could be more or less than the estimated amounts. Moreover,
estimates of reserves may increase or decrease as a result of future
operations.
FUTURE PRODUCTION RATES
Initial production rates are based on the current producing rates for
those wells now on production. Test data and other related information were
used to estimate the anticipated initial production rates for those wells or
locations which are not currently producing. If no production decline trend has
been established, future production rates were held constant, or adjusted for
the effects of curtailment where appropriate, until a decline in ability to
produce was anticipated. An estimated rate of decline was then applied to
depletion of the reserves. If a decline trend has been established, this trend
was used as the basis for estimating future production rates. For reserves not
yet on production, sales were estimated to commence at an anticipated date
furnished by Mariner.
In general, we estimate that future gas production rates limited by
allowables or marketing conditions will continue to be the same as the average
rate for the latest available 12 months of actual production until such time
that the well or wells are incapable of producing at this rate. The well or
wells were then projected to decline at their decreasing delivery capacity
rate. Our general policy on estimates of future gas production rates is
adjusted when necessary to reflect actual gas market conditions in specific
cases.
The future production rates from wells now on production may be more
or less than estimated because of changes in market demand or allowables set by
regulatory bodies. Wells or locations which are not currently producing may
start producing earlier or later than anticipated in our estimates of their
future production rates.
HYDROCARBON PRICES
Mariner furnished us with prices in effect at January 1, 1999 and
these prices were held constant except for known and determinable escalations.
In accordance with Securities and Exchange Commission guidelines, changes in
liquid and gas prices subsequent to December 31, 1998 were not taken into
account in this report. Future prices used in this report are discussed in more
detail in the attached "Reserve Definitions and Pricing Assumptions".
COSTS
Operating costs for the leases and wells in this report are based on
the operating expense reports of Mariner and include only those costs directly
applicable to the leases or wells. When applicable, the operating costs include
a portion of general and administrative costs allocated directly to the leases
and wells under terms of operating agreements. No deduction was made for
indirect costs such as general administration and overhead expenses, loan
repayments, interest expenses, and exploration and development prepayments that
are not charged directly to the leases or wells.
<PAGE> 33
March 29, 1999
Page 2
Development costs were furnished to us by Mariner and are based on
authorizations for expenditure for the proposed work or actual costs for
similar projects. Three offshore undeveloped fields, Ewing Bank 966,
Mississippi Canyon 718 and Galveston Island 144, have relatively large capital
expense requirements which have been allocated to both the proved and probable
categories. In these three cases, two thirds of the total field development
costs were allocated to proved and one third of the costs were allocated to
probable. The estimated net cost of abandonment after salvage was included for
properties where abandonment costs net of salvage are significant. The
estimates of the net abandonment costs furnished by Mariner were accepted
without independent verification.
Current costs were held constant throughout the life of the
properties.
GENERAL
Table A presents a one line summary of proved reserve and income data
for each of the subject properties which are ranked according to their future
net income discounted at 10 percent per year. Table B presents a one line
summary of gross and net reserves and income data for each of the subject
properties. Table C presents a one line summary of initial basic data for each
of the subject properties. Tables 1 through 320 in our report present our
estimated projection of production and income by years beginning January 1,
1999, by state, field, and lease or well.
While it may reasonably be anticipated that the future prices received
for the sale of production and the operating costs and other costs relating to
such production may also increase or decrease from existing levels, such
changes were, in accordance with rules adopted by the SEC, omitted from
consideration in making this evaluation.
The estimates of reserves presented herein were based upon a detailed
study of the properties in which Mariner owns an interest; however, we have not
made any field examination of the properties. No consideration was given in
this report to potential environmental liabilities which may exist nor were any
costs included for potential liability to restore and clean up damages, if any,
caused by past operating practices. Mariner has informed us that they have
furnished us all of the accounts, records, geological and engineering data, and
reports and other data required for this investigation. The ownership
interests, prices, and other factual data furnished by Mariner were accepted
without independent verification. The estimates presented in this report are
based on data available through December 1998.
Neither we nor any of our employees have any interest in the subject
properties and neither the employment to make this study nor the compensation
is contingent on our estimates of reserves and future income for the subject
properties.
<PAGE> 34
March 29, 1999
Page 2
This report was prepared for the exclusive use and sole benefit of
Mariner Energy, Inc.. The data, work papers, and maps used in this report are
available for examination by authorized parties in our offices. Please contact
us if we can be of further service.
Very truly yours,
RYDER SCOTT COMPANY
PETROLEUM ENGINEERS
/s/ Timothy J. Torres
Timothy J. Torres, P.E.
Petroleum Engineer
JRW/sw
Approved:
/s/ John R. Warner
- --------------------------------
John R. Warner, P.E.
Senior Vice President
<PAGE> 35
DEFINITIONS OF RESERVES
PROVED RESERVES (SEC DEFINITION)
Proved reserves of crude oil, condensate, natural gas, and natural gas
liquids are estimated quantities that geological and engineering data
demonstrate with reasonable certainty to be recoverable in the future from
known reservoirs under existing operating conditions, i.e., prices and costs as
of the date the estimate is made. Prices include consideration of changes in
existing prices provided only by contractual arrangements, but not on
escalation based on future conditions.
Reservoirs are considered proved if economic producibility is
supported by either actual production or conclusive formation test. In certain
instances, proved reserves are assigned on the basis of a combination of core
analysis and electrical and other type logs which indicate the reservoirs are
analogous to reservoirs in the same field which are producing or have
demonstrated the ability to produce on a formation test. The area of a
reservoir considered proved includes (1) that portion delineated by drilling
and defined by fluid contacts, if any, and (2) the adjoining portions not yet
drilled that can be reasonably judged as economically productive on the basis
of available geological and engineering data. In the absence of data on fluid
contacts, the lowest known structural occurrence of hydrocarbons controls the
lower proved limit of the reservoir.
Reserves that can be produced economically through the application of
improved recovery techniques are included in the proved classification when
these qualifications are met: (1) successful testing by a pilot project or the
operation of an installed program in the reservoir provides support for the
engineering analysis on which the project or program was based, and (2) it is
reasonably certain the project will proceed. Improved recovery includes all
methods for supplementing natural reservoir forces and energy, or otherwise
increasing ultimate recovery from a reservoir, including (1) pressure
maintenance, (2) cycling, and (3) secondary recovery in its original sense.
Improved recovery also includes the enhanced recovery methods of thermal,
chemical flooding, and the use of miscible and immiscible displacement fluids.
Proved natural gas reserves are comprised of non-associated,
associated and dissolved gas. An appropriate reduction in gas reserves has been
made for the expected removal of natural gas liquids, for lease and plant fuel,
and for the exclusion of non-hydrocarbon gases if they occur in significant
quantities and are removed prior to sale. Estimates of proved reserves do not
include crude oil, natural gas, or natural gas liquids being held in
underground or surface storage.
Proved reserves are estimates of hydrocarbons to be recovered from a
given date forward. They may be revised as hydrocarbons are produced and
additional data become available.
<PAGE> 36
RESERVE STATUS CATEGORIES
Reserve status categories define the development and producing status
of wells and/or reservoirs.
PROVED DEVELOPED (SEC DEFINITION)
Proved developed oil and gas reserves are reserves that can be
expected to be recovered through existing wells with existing equipment and
operating methods. Additional oil and gas expected to be obtained through the
application of fluid injection or other improved recovery techniques for
supplementing the natural forces and mechanisms of primary recovery should be
included as "proved developed reserves" only after testing by a pilot project
or after the operation of an installed program has confirmed through production
response that increased recovery will be achieved.
Developed reserves may be subcategorized as producing or non-producing
using the SPE/SPEE Definitions:
Producing
Producing reserves are expected to be recovered from completion
intervals open at the time of the estimate and producing. Improved
recovery reserves are considered to be producing only after an
improved recovery project is in operation.
Non-Producing
Non-producing reserves include shut-in and behind pipe reserves.
Shut-in reserves are expected to be recovered from completion
intervals open at the time of the estimate, but which had not started
producing, or were shut-in for market conditions or pipeline
connection, or were not capable of production for mechanical reasons,
and the time when sales will start is uncertain. Behind pipe reserves
are expected to be recovered from zones behind casing in existing
wells, which will require additional completion work or a future
recompletion prior to the start of production.
PROVED UNDEVELOPED (SEC DEFINITION)
Proved undeveloped oil and gas reserves are reserves that are expected
to be recovered from new wells on undrilled acreage, or from existing wells
where a relatively major expenditure is required for recompletion. Reserves on
undrilled acreage shall be limited to those drilling units offsetting
productive units that are reasonably certain of production when drilled. Proved
reserves for other undrilled units can be claimed only where it can be
demonstrated with reasonable certainty that there is continuity of production
from the existing productive formation. Estimates for proved undeveloped
reserves are attributable to any acreage for which an application of fluid
injection or other improved technique is contemplated, only when such
techniques have been proved effective by actual tests in the area and in the
same reservoir.
<PAGE> 37
HYDROCARBON PRICING PARAMETERS
SECURITIES AND EXCHANGE COMMISSION PARAMETERS
OIL AND CONDENSATE
Mariner furnished us with oil and condensate prices in effect at
January 1, 1999 and these prices were held constant to depletion of the
properties. In accordance with Securities and Exchange Commission guidelines,
changes in liquid prices subsequent to January 1, 1999 were not considered in
this report.
PLANT PRODUCTS
Mariner furnished us with plant product prices in effect at January 1,
1999 and these prices were held constant to depletion of the properties.
GAS
Mariner furnished us with gas prices in effect at January 1, 1999 and
with its forecasts of future gas prices which take into account SEC guidelines,
current spot market prices, contract prices, and fixed and determinable price
escalations where applicable. In accordance with SEC guidelines, the future gas
prices used in this report make no allowances for future gas price increases
which may occur as a result of inflation nor do they make any allowance for
seasonal variations in gas prices which may cause future yearly average gas
prices to be somewhat lower than January 1, 1999 gas prices. For gas sold under
contract, the contract gas price including fixed and determinable escalations,
exclusive of inflation adjustments, was used until the contract expires and
then was adjusted to the current market price for the area and held at this
adjusted price to depletion of the reserves.
<PAGE> 38
MARINER ENERGY, INC.
Estimated
Future Reserves and Income
Attributable to Certain
Leasehold Interests
(SEC Parameters)
As of
January 1, 1999
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT PETROLEUM ENGINEERS
We consent to the use of the name of this firm and of certain
information contained in our reserve report dated December 31, 1998, prepared
for Mariner Energy, Inc. ("Mariner"), in Mariner's Annual Report on Form 10-K
for the year ended December 31, 1998.
/s/ RYDER SCOTT COMPANY
PETROLEUM ENGINEERS
RYDER SCOTT COMPANY
PETROLEUM ENGINEERS
Houston, Texas
March 30, 1999
<PAGE> 1
[LOGO] [RYDER SCOTT COMPANY LETTERHEAD]
March 29, 1999
Mariner Energy, Inc.
580 WestLake Park Blvd., Suite 1300
Houston, Texas 77079
Gentlemen:
At your request, we have prepared an estimate of the reserves, future
production, and income attributable to certain leasehold interests of Mariner
Energy, Inc. (Mariner) as of January 1, 1999. The subject properties are
located in the states of Louisiana, Mississippi, and Texas and in the federal
waters offshore Louisiana and Texas. The income data were estimated using the
Securities and Exchange Commission (SEC) guidelines for future price and cost
parameters.
The estimated reserves and future income amounts presented in this
report are related to hydrocarbon prices. December 1998 hydrocarbon prices were
used in the preparation of this report as required by SEC guidelines; however,
actual future prices may vary significantly from December 1998 prices.
Therefore, volumes of reserves actually recovered and amounts of income
actually received may differ significantly from the estimated quantities
presented in this report. The results of this study are summarized below.
SEC PARAMETERS
Estimated Net Reserves and Income Data
Certain Leasehold Interests of
MARINER ENERGY, INC.
As of January 1, 1999
<TABLE>
<CAPTION>
Proved
------------------------------------------------------
Developed Total
--------------------------- --------------------------
Producing Non-Producing Undeveloped Proved
------------ ------------- ------------ ------------
<S> <C> <C> <C> <C>
NET REMAINING RESERVES
Oil/Condensate - Barrels 2,282,975 582,551 6,472,846 9,338,372
Plant Products - Barrels 10,329 10,580 0 20,909
Gas - MMCF 57,082 28,942 42,871 128,895
INCOME DATA
Future Gross Revenue $150,978,685 $ 65,653,902 $157,499,321 $374,131,908
Deductions 44,159,398 24,415,844 106,555,833 175,131,075
------------ ------------ ------------ ------------
Future Net Income (FNI) $106,819,287 $ 41,238,058 $ 50,943,488 $199,000,833
Discounted FNI @ 10% $ 86,947,896 $ 33,976,023 $ 26,705,382 $147,629,301
</TABLE>
Liquid hydrocarbons are expressed in standard 42 gallon barrels. All
gas volumes are sales gas expressed in millions of cubic feet (MMCF) at the
official temperature and pressure bases of the areas in which the gas reserves
are located.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 2
<SECURITIES> 0
<RECEIVABLES> 16,007
<ALLOWANCES> 0
<INVENTORY> 5,912
<CURRENT-ASSETS> 23,243
<PP&E> 403,432
<DEPRECIATION> 167,846
<TOTAL-ASSETS> 262,342
<CURRENT-LIABILITIES> 107,360
<BONDS> 0
0
0
<COMMON> 1
<OTHER-SE> 27,534
<TOTAL-LIABILITY-AND-EQUITY> 262,342
<SALES> 56,690
<TOTAL-REVENUES> 56,690
<CGS> 0
<TOTAL-COSTS> 97,291
<OTHER-EXPENSES> 4,749
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 13,384
<INCOME-PRETAX> (58,421)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (58,421)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
