<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 18, 1996
REGISTRATION NO. 333-14029
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
------------------
TITAN EXPLORATION, INC.
(Exact name of Registrant as specified in its charter)
------------------
<TABLE>
<S> <C> <C>
DELAWARE 1311 75-2671582
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
500 WEST TEXAS, SUITE 500
MIDLAND, TEXAS 79701
(915) 682-6612
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
------------------
JACK HIGHTOWER
PRESIDENT, CHIEF EXECUTIVE OFFICER AND CHAIRMAN OF THE BOARD
TITAN EXPLORATION, INC.
500 WEST TEXAS, SUITE 500
MIDLAND, TEXAS 79701
(915) 682-6612
(Name, address, including zip code, and telephone number, including area code,
of Registrant's agent for service)
------------------
Copies of Communication to:
<TABLE>
<S> <C>
JOE DANNENMAIER ROBERT L. KIMBALL
THOMPSON & KNIGHT, P.C. VINSON & ELKINS L.L.P.
1700 PACIFIC AVENUE, SUITE 3300 2001 ROSS AVENUE, SUITE 3700
DALLAS, TEXAS 75201 DALLAS, TEXAS 75201
</TABLE>
------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the Prospectus is expected to be made pursuant to Rule 434,
please check the following box. [X]
------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
TITAN EXPLORATION, INC.
CROSS-REFERENCE SHEET
PURSUANT TO ITEM 501(B) OF REGULATION S-K
<TABLE>
<CAPTION>
ITEM NUMBER OF FORM S-1 AND TITLE OF ITEM PROSPECTUS LOCATION OR CAPTION
-------------------------------------------- --------------------------------------------
<C> <S> <C>
1. Forepart of the Registration Statement and
Outside Front Cover Page of Prospectus.... Forepart of the Registration Statement;
Cross-Reference Sheet; Outside Front Cover
Page
2. Inside Front and Outside Back Cover Pages of
Prospectus................................ Inside Front Cover Page; Additional
Information; Outside Back Cover Page
3. Summary Information, Risk Factors and Ratio
of Earnings to Fixed Charges.............. Prospectus Summary; Risk Factors
4. Use of Proceeds............................. Prospectus Summary; Use of Proceeds
5. Determination of Offering Price............. Underwriting
6. Dilution.................................... Risk Factors; Dilution
7. Selling Security Holders.................... Principal and Selling Stockholders
8. Plan of Distribution........................ Outside Front Cover Page; Underwriting
9. Description of Securities to be
Registered................................ Description of Capital Stock
10. Interests of Named Experts and Counsel...... Legal Matters; Experts
11. Information with Respect to the
Registrant................................ Outside Front Cover Page; Prospectus
Summary; Risk Factors; The Company; Use of
Proceeds; Dividend Policy; Capitalization;
Selected Consolidated Financial Data;
Management's Discussion and Analysis of
Financial Condition and Results of
Operations; Business and Properties;
Management; Certain Transactions; Principal
and Selling Stockholders; Description of
Capital Stock; Shares Eligible for Future
Sale; Financial Statements
12. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities............................... *
</TABLE>
- ---------------
* Omitted from the Prospectus because the item is inapplicable.
<PAGE> 3
***************************************************************************
* *
* Information contained herein is subject to completion or amendment. A *
* registration statement relating to these securities has been filed *
* with the Securities and Exchange Commission. These securities may not *
* be sold nor may offers to buy be accepted prior to the time the *
* registration statement becomes effective. This prospectus shall not *
* constitute an offer to sell or the solicitation of an offer to buy *
* nor shall there be any sale of these securities in any State in which *
* such offer, solicitation or sale would be unlawful prior to *
* registration or qualification under the securities laws of any such *
* State. *
* *
***************************************************************************
SUBJECT TO COMPLETION, DATED NOVEMBER 18, 1996
12,610,000 Shares
Titan Exploration, Inc.
Common Stock
($.01 par value)
------------------
Of the shares offered hereby, 12,500,000 shares are being sold by Titan
Exploration, Inc. (the "Company") and 110,000 shares are being sold by
the Selling Stockholder named herein under "Principal and Selling
Stockholders." The Company will not receive any of the proceeds
of Shares sold by the Selling Stockholder. Prior to this
offering, there has been no public market for the
Common Stock. It is anticipated that the initial
public offering price will be between $9.50 and
$11.50 per share. For information relating to
the factors to be considered in determining
the initial offering price to the public,
see "Underwriting." The Common Stock has been
approved for listing on the
.
------------------
FOR A DISCUSSION OF CERTAIN RISKS THAT SHOULD BE CONSIDERED IN CONNECTION WITH
AN INVESTMENT IN THE COMMON STOCK, SEE "RISK FACTORS" BEGINNING ON PAGE 8 OF
THIS PROSPECTUS.
------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR
HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY OR AD-
EQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL
OFFENSE.
<TABLE>
<CAPTION>
Underwriting
Price to Discounts and Proceeds to
Public Commissions(1) the Company(2)
---------------- ---------------- ----------------
<S> <C> <C> <C>
Per Share.................................... $ $ $
Total(3)..................................... $ $ $
</TABLE>
(1) The Company and the Selling Stockholder have agreed to indemnify the several
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933. See "Underwriting."
(2) Before deduction of expenses payable by the Company estimated at
$ .
(3) The Company has granted the Underwriters an option, exercisable for 30 days
from the date of this Prospectus, to purchase a maximum of 1,891,500
additional shares to cover over-allotments of shares. If the option is
exercised in full, the total Price to Public will be $ ,
Underwriting Discounts and Commissions will be $ , and Proceeds to
the Company will be $ .
------------------
The Shares are offered by the several Underwriters when, as and if issued
by the Company, delivered to and accepted by the Underwriters and subject to
their right to reject orders in whole or in part. It is expected that the Shares
will be ready for delivery on or about , 1996.
CS First Boston
Donaldson, Lufkin & Jenrette
Securities
Corporation
Howard, Weil, Labouisse, Friedrichs
Incorporated
J.P. Morgan & Co.
Petrie Parkman & Co.
The date of this Prospectus is December , 1996.
<PAGE> 4
TITAN EXPLORATION, INC.
PERMIAN BASIN PRINCIPAL PRODUCING PROPERTIES
[MAP OF THE COMPANY'S PRODUCING PROPERTIES]
---------------------
The Company intends to furnish its stockholders annual reports containing
consolidated financial statements certified by its independent auditors and
quarterly reports for each of the first three quarters of each fiscal year
containing unaudited financial information.
---------------------
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF
THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE
OR OTHERWISE. SUCH STABILIZING, IF
COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
DURING THIS OFFERING, CERTAIN PERSONS AFFILIATED WITH PERSONS PARTICIPATING
IN THE DISTRIBUTION MAY ENGAGE IN TRANSACTIONS FOR THEIR OWN ACCOUNTS OR FOR THE
ACCOUNTS OF OTHERS IN THE COMMON STOCK OF THE COMPANY PURSUANT TO EXEMPTIONS
FROM RULES 10B-6, 10B-7, AND 10B-8 UNDER THE SECURITIES EXCHANGE ACT OF 1934.
2
<PAGE> 5
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the detailed
information and financial statements and the notes thereto appearing elsewhere
in this Prospectus. The pro forma information gives effect to the reorganization
of the Company, the 1995 Acquisition and the 1996 Acquisition. See "The
Company." Unless otherwise indicated, the information in this Prospectus assumes
no exercise of the Underwriters' over-allotment option. Certain terms relating
to the oil and gas industry are defined in "Glossary of Oil and Gas Terms." As
noted in the glossary, PV-10 is calculated without giving effect to income
taxes.
THE COMPANY
Titan is an independent energy company engaged in the exploration,
development and acquisition of oil and gas properties. Since its inception in
March 1995, the Company has experienced significant growth in reserves,
production and cash flow by acquiring and exploiting producing properties
primarily in the Permian Basin of west Texas and southeastern New Mexico.
In December 1995, the Company acquired a concentrated group of Permian
Basin producing oil and gas properties from a large independent company for
approximately $40.6 million (the "1995 Acquisition"). On October 31, 1996, the
Company acquired additional Permian Basin producing properties from a major
integrated company for approximately $135.5 million (the "1996 Acquisition"). As
of September 30, 1996, the Company had pro forma estimated net proved reserves
of approximately 17.8 MMBbls of oil and 280.8 Bcf of natural gas, or an
aggregate of 64.6 MMBOE with a PV-10 of $292.1 million. If, in calculating the
PV-10, the Company's oil and gas prices at October 31, 1996 were substituted for
the prices at September 30, 1996, the PV-10 would be $351.9 million. The prices
of the Company's oil decreased 4% and gas increased 33%, respectively, from
September 30, 1996 to October 31, 1996. Approximately 62% of these reserves were
classified as proved developed. The Company acquired, explored for and developed
its reserves for an average reserve replacement cost of approximately $2.73 per
BOE through September 30, 1996, assuming the 1996 Acquisition was consummated on
September 30, 1996. Pro forma production for the nine months ended September 30,
1996 was 12,227 BOE per day, resulting in an annualized pro forma proved
reserves to production ratio of 14.5 to one.
The Company prefers to acquire properties over which it can exercise
operating control. The Company operated 456 gross wells (389 net wells) on a pro
forma basis at September 30, 1996, and these operated properties represented
approximately 71% of its pro forma proved developed producing PV-10 and 83% of
the Company's pro forma proved PV-10 at September 30, 1996. The Company's
emphasis on controlling the operation of its properties enables the Company to
manage expenses, capital allocation and other aspects of development and
exploration.
The Company's oil and gas properties are located in 57 fields in the
Permian Basin, one of the most prolific oil and gas producing regions in North
America. Approximately 70% of the Company's PV-10 of total proved reserves is
concentrated in 12 principal fields located in this region. The region is
characterized by complex geology with numerous known producing horizons and
provides significant opportunities to increase reserves, production and ultimate
recoveries through development, exploratory and horizontal drilling,
recompletions, secondary and tertiary recovery methods, and use of 3-D seismic
and other advanced technologies.
The Company believes that its personnel provide it with competitive
advantages for exploiting these opportunities in the Permian Basin and other
complex producing basins in North America. Members of the Company's management
team have an average of 25 years experience in the oil and gas industry and have
operating experience in all aspects of the industry, in particular deep well and
horizontal drilling. They have formulated and supervised acquisitions,
exploration projects, development drilling programs and production enhancement
plans, including workovers and enhanced recovery projects. In addition,
management has a significant equity investment in the Company. Giving effect to
this offering and assuming the exercise by management of all of their options to
acquire Common Stock, management will beneficially own an aggregate of 20% of
the Company's outstanding Common Stock.
3
<PAGE> 6
BUSINESS STRATEGY
The Company's strategy is to grow reserves, production and net income per
share through (i) the acquisition of producing properties that provide
significant development and exploratory drilling potential, (ii) the
exploitation and development of its reserve base, (iii) the exploration for oil
and gas reserves and (iv) the implementation of a low operating and overhead
cost structure.
- Acquisitions. The Company seeks to acquire oil and gas properties that
provide opportunities for the addition of reserves, production and value
through low risk exploitation and development, high-potential
exploration and control of operations. The Company believes that these
criteria can be met in the Permian Basin and in other North American
basins that have had high historical cumulative production levels that
represent a relatively small percentage of the recoverable in-place
reserves. At September 30, 1996, the Company had acquired and developed
64.6 MMBOE of proved oil and gas reserves at an average reserve
replacement cost of $2.73 per BOE, assuming the 1996 Acquisition was
consummated on September 30, 1996, which compares to an average reserve
replacement cost of $4.85 per BOE (for 1993 through 1995) for the 184
independent oil and gas companies included in the Arthur Andersen 1996
Oil and Gas Reserve Disclosures.
- Exploitation of Reserve Base. The Company engages in horizontal and
infill drilling activities, major workovers, recompletions, secondary
and tertiary recovery operations, and other production enhancement
techniques in order to increase reserves and production. On a pro forma
basis, the Company has identified 53 drilling locations on
Company-operated properties, which include 14 proved locations and 39
unproven locations. In drilling a portion of these wells in 1997, the
Company expects to spend approximately $12.9 million to develop proved
locations and $6.8 million to develop unproven locations. The Company
has also identified an additional 90 unproven drilling locations on
Company-owned, but nonoperated, properties.
- Exploration Activities. The Company seeks to apply management's
extensive geological and drilling expertise and 3-D seismic technology
to identify and develop exploration projects. As part of its exploration
strategy, the Company attempts to reduce the costs and risks of its
exploration activities by, in selected circumstances, applying 3-D
seismic technology, drilling wells with multiple pay objectives in known
producing areas and selling interests in its exploration prospects to
industry partners. A large portion of the Company's efforts have focused
on deep well opportunities in historically prolific fields.
- Low Cost Structure. The Company has implemented and plans to maintain
a low overhead and operating cost structure to enhance the profitability
and the exploitation potential of its properties. The Company provides
incentive stock awards to its senior management team in lieu of
comparatively higher salary levels in order to align management's
interests with stockholders, maintain relatively low general and
administrative expense and increase the amount of cash flow available
for reinvestment by the Company. The Company also seeks to be an
efficient operator and achieve reductions in labor and other field-level
costs from those incurred by previous operators of its properties. By
operating a significant portion of its daily production, the Company
believes it is well positioned to control the expenses and timing of
development and exploitation of such properties and to better manage
such cost reduction efforts.
4
<PAGE> 7
THE OFFERING
<TABLE>
<S> <C>
Common Stock Offered:
By the Company......................................... 12,500,000 Shares
By the Selling Stockholder............................. 110,000 Shares
Common Stock to be outstanding after this offering....... 32,050,013 Shares(1)
Use of Proceeds by the Company........................... For exploration, development and
acquisition activities and other
general corporate purposes.
Pending use of the net proceeds in
this manner, the Company intends
to use the net proceeds for
repayment of indebtedness incurred
in connection with the 1996
Acquisition. See "Use of
Proceeds."
Symbol.........................
</TABLE>
- ---------------
(1) Does not include (i) 3,631,350 shares of Common Stock issuable upon exercise
of outstanding employee stock options, with an exercise price of $2.08 per
share, and (ii) 85,000 shares of Common Stock issuable upon exercise of
outstanding employee stock options, with an exercise price equal to the
Price to Public on the cover page of this Prospectus. See "Capitalization,"
"Management" and Note 9 of Notes to Consolidated Financial Statements.
5
<PAGE> 8
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PERIOD ENDED NINE MONTHS ENDED
DECEMBER 31, 1995 SEPTEMBER 30, 1996
-------------------------- --------------------------
PRO FORMA AS PRO FORMA AS
HISTORICAL ADJUSTED(1) HISTORICAL ADJUSTED(1)
---------- ------------ ---------- ------------
<S> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues..................................... $ 985 $ 49,591 $ 10,377 $ 42,554
-------- ------- ------ -------
Expenses:
Oil and gas production.................... 304 17,435 4,339 13,820
General and administrative................ 1,546 4,625 1,452 3,469
Amortization of stock option awards....... 576 576 576 576
Exploration and abandonment............... 490 490 110 110
Depletion, depreciation and
amortization............................ 299 16,832 2,269 12,001
Interest.................................. 97 1,947 1,179 1,448
Other..................................... (796) (97) (336) --
-------- ------- ------ -------
Total expenses............................... 2,516 41,808 9,589 31,424
-------- ------- ------ -------
Net income (loss)............................ (1,531) 5,059 (2,210) 7,235
Net income (loss) per share.................. (.11) .17 (.12) .21
Weighted average shares outstanding.......... 14,066 29,585 18,835 34,412
CONSOLIDATED STATEMENT OF CASH FLOWS DATA:
Net cash provided by (used in):
Operating activities...................... $ (1,764) $ 5,653
Investing activities...................... (47,563) (12,763)
Financing activities...................... 55,540 11,700
OTHER CONSOLIDATED FINANCIAL DATA:
Capital expenditures......................... $ 43,811 $ 17,763
EBITDAX(2)................................... (69) $ 27,628 4,922 $ 25,265
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
-------------------------
PRO FORMA AS
HISTORICAL ADJUSTED(1)
---------- ------------
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents............................................ $ 10,803 $ 2,000
Working capital...................................................... 8,760 (350)
Oil and gas properties, net.......................................... 60,168 187,202
Total assets......................................................... 74,824 193,505
Total debt........................................................... 28,000 22,852
Total stockholders' equity........................................... 37,951 160,173
</TABLE>
- ---------------
(1) Assumes the 1995 Acquisition, the 1996 Acquisition, the Conversion (see "The
Company"), this offering and the application of the proceeds therefrom had
taken place on January 1, 1995 for purposes of the Consolidated Statement of
Operations Data, Consolidated Statement of Cash Flows Data and Other
Consolidated Financial Data and assumes the 1996 Acquisition, the
Conversion, this offering and the application of the proceeds therefrom had
taken place on September 30, 1996 for purposes of the Consolidated Balance
Sheet Data.
(2) EBITDAX is presented because of its wide acceptance as a financial indicator
of a company's ability to service or incur debt. EBITDAX (as used herein) is
calculated by adding interest, income taxes, depletion, depreciation and
amortization, amortization of stock option awards, and exploration and
abandonment costs to net income (loss). Interest includes interest expense
accrued and amortization of deferred financing costs. EBITDAX should not be
considered as an alternative to earnings (loss) or operating earnings
(loss), as defined by generally accepted accounting principles, as an
indicator of the Company's financial performance, as an alternative to cash
flow as a measure of liquidity or as being comparable to other similarly
titled measures of other companies.
6
<PAGE> 9
SUMMARY RESERVE INFORMATION
<TABLE>
<CAPTION>
DECEMBER 31, 1995 SEPTEMBER 30, 1996
-------------------------- --------------------------
HISTORICAL PRO FORMA(1) HISTORICAL PRO FORMA(1)
---------- ------------ ---------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Estimated Proved Reserves(2):
Oil (MBbls).................................. 6,146 16,460 6,563 17,843
Gas (MMcf)................................... 134,995 242,039 179,565 280,823
MBOE (6 Mcf per Bbl)......................... 28,645 56,800 36,491 64,647
Proved developed reserves as a percentage of
proved reserves.............................. 47% 68% 42% 62%
PV-10(3)....................................... $ 89,753 $198,341 $ 144,532 $292,080
Standardized Measure of Discounted Future Net
Cash Flows(4)................................ $ 66,352 $176,421 $ 104,678 $229,199
</TABLE>
- ---------------
(1) Gives effect to the 1996 Acquisition as if it had occurred on the last day
of the period indicated.
(2) The reserve and present value data at December 31, 1995 have been prepared
by the Company. The reserve and present value data at September 30, 1996
have been prepared by Williamson Petroleum Consultants, Inc. ("Williamson"),
independent petroleum engineering consultants. For additional information
relating to the Company's oil and gas reserves, see "Business and
Properties -- Oil and Natural Gas Reserves" and Note 14 of the Notes to the
Consolidated Financial Statements of the Company. Summaries of the October
1, 1996 reserve reports and the letter of Williamson with respect thereto
are included as Appendix A to this Prospectus.
(3) The present value of future net revenue attributable to the Company's
reserves was prepared using prices in effect at the end of the respective
periods presented, discounted at 10% per annum on a pre-tax basis. These
amounts reflect the effects of the Company's hedging activities. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Other Matters."
(4) The Standardized Measure of Discounted Future Net Cash Flows prepared by the
Company represents the present value of future net revenues after income
taxes discounted at 10%. These amounts reflect the effects of the Company's
hedging activities. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Other Matters."
SUMMARY OPERATING DATA
<TABLE>
<CAPTION>
PERIOD ENDED NINE MONTHS
DECEMBER 31, 1995 ENDED SEPTEMBER 30, 1996
--------------------------- ---------------------------
HISTORICAL PRO FORMA(1) HISTORICAL PRO FORMA(1)
---------- ------------ ---------- ------------
<S> <C> <C> <C> <C>
PRODUCTION:
Oil (MBbls)............................... 30 2,004 388 1,311
Gas (MMcf)................................ 245 17,952 2,725 12,235
Total (MBOE).............................. 71 4,996 842 3,350
AVERAGE SALES PRICE PER UNIT(2):
Oil (per Bbl)............................. $16.80 $14.23 $17.25 17.30
Gas (per Mcf)............................. .97 1.16 1.30 1.61
BOE....................................... 10.46 9.88 12.16 12.66
EXPENSES PER BOE:
Production costs, including production
taxes.................................. $ 4.28 $ 3.49 $ 5.15(3) $ 4.13(3)
General and administrative................ 21.77 .93 1.72 1.04
Depletion, depreciation and
amortization........................... 4.21 3.37 2.69 3.58
</TABLE>
- ---------------
(1) Gives effect to the 1995 Acquisition and the 1996 Acquisition as if those
transactions had occurred on January 1, 1995.
(2) Reflects results of hedging activities. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Other Matters."
(3) Includes approximately $.77 per BOE of production costs attributable to
necessary nonrecurring maintenance operations on the 1995 Acquisition
properties.
7
<PAGE> 10
RISK FACTORS
This Prospectus contains forward-looking statements. The words
"anticipate," "believe," "expect," "plan," "intend," "estimate," "project,"
"will," "could," "may" and similar expressions are intended to identify
forward-looking statements. These statements include information regarding oil
and gas reserves, future drilling and operations, future production of oil and
gas and future net cash flows. Such statements reflect the Company's current
views with respect to future events and financial performance and involve risks
and uncertainties, including without limitation the risks described in "Risk
Factors." Should one or more of these risks or uncertainties occur, or should
underlying assumptions prove incorrect, actual results may vary materially and
adversely from those anticipated, believed, estimated or otherwise indicated.
Investors should carefully consider the following risk factors, in addition to
other information contained in this Prospectus, before purchasing the shares of
Common Stock offered hereby.
VOLATILITY OF OIL AND GAS PRICES
The Company's revenues, operating results and future rate of growth are
highly dependent upon the prices received for the Company's oil and gas.
Historically, the markets for oil and gas have been volatile and may continue to
be volatile in the future. Revenues generated from the oil and gas operations of
the Company will be highly dependent on the future prices of oil and gas.
Various factors beyond the control of the Company will affect prices of oil and
gas, including the worldwide and domestic supplies of oil and gas, the ability
of the members of the Organization of Petroleum Exporting Countries ("OPEC") to
agree to and maintain oil price and production controls, political instability
or armed conflict in oil-producing regions, the price and level of foreign
imports, the level of consumer demand, the price and availability of alternative
fuels, the availability of pipeline capacity, weather conditions, domestic and
foreign governmental regulations and taxes and the overall economic environment.
Recent political instability in the Middle East has had a significant
effect on world oil markets. In the third quarter of 1996, prices of oil
experienced substantial price fluctuations, including large price escalations,
resulting in part from Iraq's attack against the Kurdish rebels in Northern Iraq
and the subsequent United States response. On September 30, 1996, the posted
price for West Texas Intermediate Crude was $22.75 per Bbl, as posted by the
Company's major purchaser. The Company is unable to predict the long-term
effects of these and other conditions on the prices of oil. Moreover, it is
possible that prices for any oil the Company produces will be lower than current
prices received by the Company.
Historically, the market for natural gas has been volatile and is likely to
continue to be volatile in the future. Prices for natural gas are subject to
wide fluctuation in response to market uncertainty, changes in supply and demand
and a variety of additional factors (including those referred to in the first
paragraph of this Risk Factor), all of which are beyond the Company's control.
Any significant decline in the price of oil or gas would adversely affect
the Company's revenues and operating income and may require a reduction in the
carrying value of the Company's oil and gas properties. See "Risk
Factors -- Uncertainty of Reserve Information and Future Net Revenue Estimates,"
"Business and Properties -- Competition" and "Business and
Properties -- Governmental Regulation."
UNCERTAINTY OF RESERVE INFORMATION AND FUTURE NET REVENUE ESTIMATES
There are numerous uncertainties inherent in estimating quantities of
proved reserves and their values, including many factors beyond the Company's
control. The reserve information set forth in this Prospectus represents
estimates only. Although the Company believes such estimates to be reasonable,
reserve estimates are imprecise and should be expected to change as additional
information becomes available.
Estimates of oil and gas reserves, by necessity, are projections based on
engineering data, and there are uncertainties inherent in the interpretation of
such data as well as the projection of future rates of production and the timing
of development expenditures. Reserve engineering is a subjective process of
estimating underground accumulations of oil and gas that are difficult to
measure. The accuracy of any reserve estimate is a function of the quality of
available data, engineering and geological interpretation and judgment.
Estimates
8
<PAGE> 11
of economically recoverable oil and gas reserves and of future net cash flows
necessarily depend upon a number of variable factors and assumptions, such as
historical production from the area compared with production from other
producing areas, the assumed effects of regulations by governmental agencies and
assumptions concerning future oil and gas prices, future operating costs,
severance and excise taxes, development costs and workover and remedial costs,
all of which may in fact vary considerably from actual results. For these
reasons, estimates of the economically recoverable quantities of oil and 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 may vary substantially. Moreover, there can be no assurance
that the Company's reserves will ultimately be produced or that the Company's
proved undeveloped reserves will be developed within the periods anticipated.
Any significant variance in the assumptions could materially affect the
estimated quantity and value of the Company's reserves. Actual production,
revenues and expenditures with respect to the Company's reserves will likely
vary from estimates, and such variances may be material. See "Business and
Properties -- Oil and Natural Gas Reserves."
RISK OF HEDGING ACTIVITIES
The Company's use of energy swap arrangements to reduce its sensitivity to
oil and gas price volatility is subject to a number of risks. If the Company's
reserves are not produced at the rates estimated by the Company due to
inaccuracies in the reserve estimation process, operational difficulties or
regulatory limitations, the Company would be required to satisfy its obligations
under fixed price sales and hedging contracts on potentially unfavorable terms
without the ability to hedge that risk through sales of comparable quantities of
its own production. Further, the terms under which the Company enters into fixed
price sales and hedging contracts are based on assumptions and estimates of
numerous factors such as cost of production and pipeline and other
transportation costs to delivery points. Substantial variations between the
assumptions and estimates used by the Company and actual results experienced
could materially adversely affect the Company's anticipated profit margins and
its ability to manage the risk associated with fluctuations in oil and gas
prices. Additionally, the fixed price sales and hedging contracts limit the
benefits the Company will realize if actual prices rise above the contract
prices.
In addition, fixed price sales and hedging contracts are subject to the
risk that the other party may prove unable or unwilling to perform its
obligations under such contracts. Any significant nonperformance could have a
material adverse financial effect on the Company.
As of September 30, 1996, excluding the effects of the 1996 Acquisition,
the Company had approximately 58% of its oil production and approximately 73% of
its natural gas production (based on the first three quarters' production)
committed to hedging contracts through December 1996. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Other Matters."
LIMITED OPERATING HISTORY; RAPID GROWTH
The Company, which began operations in March 1995, has a brief operating
history upon which investors may base their evaluation of the Company's
performance. As a result of its brief operating history and rapid growth, the
operating results from the Company's historical periods are not readily
comparable and may not be indicative of future results. There can be no
assurance that the Company will continue to experience growth in, or maintain
its current level of, revenues, oil and gas reserves or production. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
The Company's rapid growth has placed significant demands on its
administrative, operational and financial resources. Any future growth of the
Company's oil and gas reserves, production and operations would place
significant further demands on the Company's financial, operational and
administrative resources. The Company plans to hire 20 to 25 additional
employees following the 1996 Acquisition. The Company's future performance and
profitability will depend in part on its ability to successfully integrate the
administrative and financial functions of acquired properties into the Company's
operations, to hire additional personnel and to implement necessary enhancements
to its management systems to respond to changes in its business. There can be no
assurance that the Company will be successful in these efforts. The inability of
the Company to
9
<PAGE> 12
integrate acquired properties, to hire additional personnel or to enhance its
management systems could have a material adverse effect on the Company's results
of operations.
SUBSTANTIAL CAPITAL REQUIREMENTS
The Company makes, and will continue to make, substantial capital
expenditures for the exploration, development, acquisition and production of its
oil and gas reserves. The Company intends to finance such capital expenditures
primarily with funds provided by operations and borrowings under its $250
million Credit Agreement, which currently has a borrowing base of $165 million.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources." The cost of the 1995 Acquisition
was approximately $40.6 million, and the cost of the 1996 Acquisition was
approximately $135.5 million. The Company's direct capital expenditures for oil
and gas producing activities, excluding property acquisitions, were $2.0 million
for the nine months ended December 31, 1995 and $7.5 million for the nine months
ended September 30, 1996.
If revenues decrease as a result of lower oil or gas prices or otherwise,
the Company may have limited ability to expend the capital necessary to replace
its reserves or to maintain production at current levels, resulting in a
decrease in production over time. If the Company's cash flow from operations and
availability under the Credit Agreement are not sufficient to satisfy its
capital expenditure requirements, there can be no assurance that additional debt
or equity financing will be available to meet these requirements. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
RESERVE REPLACEMENT RISK
The Company's future success depends upon its ability to find, develop or
acquire additional oil and gas reserves that are economically recoverable. The
proved reserves of the Company will generally decline as reserves are depleted,
except to the extent that the Company conducts successful exploration or
development activities or acquires properties containing proved reserves, or
both. In order to increase reserves and production, the Company must continue
its development and exploration drilling and recompletion programs or undertake
other replacement activities. The Company's current strategy includes increasing
its reserve base through acquisitions of producing properties, continued
exploitation of its existing properties and exploration of new and existing
properties. There can be no assurance, however, that the Company's planned
development and exploration projects and acquisition activities will result in
significant additional reserves or that the Company will have continuing success
drilling productive wells at low finding and development costs. Furthermore,
while the Company's revenues may increase if prevailing oil and gas prices
increase significantly, the Company's finding costs for additional reserves
could also increase. For a discussion of the Company's reserves, see "Business
and Properties -- Oil and Natural Gas Reserves."
DRILLING AND OPERATING RISKS
Drilling activities are subject to many risks, including the risk that no
commercially productive reservoirs will be encountered. There can be no
assurance that new wells drilled by the Company will be productive or that the
Company will recover all or any portion of its investment. Drilling for oil and
gas may involve unprofitable efforts, not only from dry wells, but from wells
that are productive but do not produce sufficient net revenues to return a
profit after drilling, operating and other costs. The cost of drilling,
completing and operating wells is often uncertain. The Company's drilling
operations may be curtailed, delayed or canceled as a result of numerous
factors, many of which are beyond the Company's control, including economic
conditions, mechanical problems, title problems, weather conditions, compliance
with governmental requirements and shortages or delays in the delivery of
equipment and services. The Company's future drilling activities may not be
successful and, if unsuccessful, such failure may have a material adverse effect
on the Company's future results of operations and financial condition.
10
<PAGE> 13
In addition, the Company's use of 3-D seismic requires greater pre-drilling
expenditures than traditional drilling strategies. There can be no assurance
that the Company's drilling program will be successful or that unsuccessful
drilling efforts will not have a material adverse effect on the Company.
The Company's operations are subject to hazards and risks inherent in
drilling for and producing and transporting oil and gas, such as fires, natural
disasters, explosions, encountering formations with abnormal pressures,
blowouts, cratering, pipeline ruptures and spills, any of which can result in
the loss of hydrocarbons, environmental pollution, personal injury claims and
other damage to properties of the Company and others.
The Company expects to drill a number of deep vertical and horizontal wells
in the future. The Company's deep and/or horizontal drilling activities involve
greater risk of mechanical problems than other drilling operations. Future
drilling activity may be significantly more expensive than such activity to
date.
As protection against operating hazards, the Company maintains insurance
coverage against some, but not all, potential losses. The Company may elect to
self-insure in circumstances in which management believes that the cost of
insurance, although available, is excessive relative to the risks presented. The
occurrence of an event that is not covered, or not fully covered, by insurance
could have a material adverse effect on the Company's financial condition and
results of operations.
ACQUISITION RISKS
The Company's rapid growth since its inception in March 1995 has been
largely the result of acquisitions of producing properties. The Company expects
to continue to evaluate and pursue acquisition opportunities available on terms
management considers favorable to the Company. The successful acquisition of
producing properties requires an assessment of recoverable reserves, future oil
and gas prices, operating costs, potential environmental and other liabilities
and other factors beyond the Company's control. This assessment is necessarily
inexact and its accuracy is inherently uncertain. In connection with such an
assessment, the Company performs a review of the subject properties it believes
to be generally consistent with industry practices. This review, however, will
not reveal all existing or potential problems, nor will it permit a buyer to
become sufficiently familiar with the properties to assess fully their
deficiencies and capabilities. Inspections may not be performed on every well,
and structural and environmental problems are not necessarily observable even
when an inspection is undertaken. The Company generally assumes preclosing
liabilities, including environmental liabilities, and generally acquires
interests in the properties on an "as is" basis. With respect to its
acquisitions to date, the Company has no material commitments for capital
expenditures to comply with existing environmental requirements. There can be no
assurance that the Company's acquisitions will be successful. Any unsuccessful
acquisition could have a material adverse effect on the Company.
COMPLIANCE WITH GOVERNMENT REGULATIONS
The Company's business is subject to federal, state and local laws and
regulations relating to the exploration for, and the development, production and
transportation of, oil and gas, as well as safety matters. Although the Company
believes it is in substantial compliance with all applicable laws and
regulations, the requirements imposed by such laws and regulations are
frequently changed and subject to interpretation, and the Company is unable to
predict the ultimate cost of compliance with these requirements or their effect
on its operations. Significant expenditures may be required to comply with
governmental laws and regulations and may have a material adverse effect on the
Company's financial condition and results of operations. See "Business and
Properties -- Governmental Regulation."
COMPLIANCE WITH ENVIRONMENTAL REGULATIONS
The Company's operations are subject to complex and constantly changing
environmental laws and regulations adopted by federal, state and local
governmental authorities. The implementation of new, or the modification of
existing, laws or regulations could have a material adverse effect on the
Company. The discharge of oil, gas or other pollutants into the air, soil or
water may give rise to significant liabilities on the part of the Company to the
government and third parties and may require the Company to incur substantial
costs of remediation. Moreover, the Company has agreed to indemnify sellers of
producing properties
11
<PAGE> 14
purchased by the Company in the 1995 Acquisition and the 1996 Acquisition
against environmental claims associated with such properties. No assurance can
be given that existing environmental laws or regulations, as currently
interpreted or reinterpreted in the future, or future laws or regulations will
not materially adversely affect the Company's results of operations and
financial condition or that material indemnity claims will not arise against the
Company with respect to properties acquired by the Company. See "Business and
Properties -- Environmental Matters."
MARKETABILITY OF PRODUCTION
The marketability of the Company's production depends in part upon the
availability, proximity and capacity of natural gas gathering systems, pipelines
and processing facilities. Most of the Company's natural gas is delivered
through gas gathering systems and gas pipelines that are not owned by the
Company. Federal and state regulation of oil and gas production and
transportation, tax and energy policies, changes in supply and demand and
general economic conditions all could adversely affect the Company's ability to
produce and market its oil and gas. Any dramatic change in market factors could
have a material adverse effect on the Company.
The PV-10 referred to in this Prospectus should not be construed as the
current market value of the estimated oil and gas reserves attributable to the
Company's properties. In accordance with applicable requirements, the estimated
discounted future net cash flows from proved reserves are generally based on
prices and costs as of the date of the estimate, whereas actual future prices
and costs may be materially higher or lower. Actual future net cash flows also
will be affected by factors such as the amount and timing of actual production,
supply and demand for oil and gas, curtailments or increases in consumption by
gas purchasers and changes in governmental regulations or taxation. The timing
of actual future net cash flows from proved reserves, and thus their actual
present value, will be affected by the timing of both the production and the
incurrence of expenses in connection with development and production of oil and
gas properties. In addition, the 10% discount factor, which is required to be
used to calculate discounted future net cash flows for reporting purposes, is
not necessarily the most appropriate discount factor based on interest rates in
effect from time to time and risks associated with the Company or the oil and
gas industry in general.
DEPENDANCE ON KEY PERSONNEL
The Company's success has been and will continue to be highly dependent on
Jack Hightower, its Chairman of the Board and Chief Executive Officer, and a
limited number of other senior management personnel. Loss of the services of Mr.
Hightower or any of those other individuals could have a material adverse effect
on the Company's operations. In addition, as a result of the 1996 Acquisition,
the Company plans to employ 20 to 25 new employees and will face competition for
such personnel from other companies. There can be no assurance that the Company
will be successful in hiring or retaining key personnel. The Company's failure
to hire additional personnel or retain its key personnel could have a material
adverse effect on the Company.
CONTROL BY EXISTING STOCKHOLDERS
Upon completion of this offering, directors, executive officers and
principal stockholders of the Company, and certain of their affiliates, will
beneficially own approximately 59% of the Company's outstanding Common Stock
(approximately 56% if the Underwriters exercise their over-allotment option in
full). Accordingly, these stockholders, as a group, will be able to control the
outcome of stockholder votes, including votes concerning the election of
directors, the adoption or amendment of provisions in the Company's Certificate
of Incorporation or Bylaws and the approval of mergers and other significant
corporate transactions. The existence of these levels of ownership concentrated
in a few persons makes it unlikely that any other holder of Common Stock will be
able to affect the management or direction of the Company. These factors may
also have the effect of delaying or preventing a change in the management or
voting control of the Company, including transactions that otherwise could
involve payment of a premium over prevailing market prices to holders of Common
Stock. See "Principal and Selling Stockholders."
12
<PAGE> 15
COMPETITION
The Company operates in the highly competitive areas of oil and gas
exploration, development, acquisition and production with other companies, many
of which have substantially larger financial resources, staffs and facilities.
In seeking to acquire desirable producing properties or new leases for future
exploration and in marketing its oil and gas production, the Company faces
intense competition from both major and independent oil and gas companies. Many
of these competitors have financial and other resources substantially in excess
of those available to the Company. See "Business and Properties -- Competition."
This highly competitive environment could have a material adverse effect on the
Company.
CUMULATIVE VOTING; BLANK CHECK PREFERRED STOCK
The Company's Certificate of Incorporation (i) provides for cumulative
voting for the election of directors and (ii) authorizes the Board of Directors
of the Company to issue up to 10,000,000 shares of preferred stock without
stockholder approval and to set the rights, preferences and other designations,
including voting rights, of those shares as the Board of Directors may
determine. These provisions, alone or in combination with each other and with
the matters described in "Risk Factors -- Control by Existing Stockholders," may
discourage transactions involving actual or potential changes of control of the
Company, including transactions that otherwise could involve payment of a
premium over prevailing market prices to holders of Common Stock. The Company
also is subject to provisions of the Delaware General Corporation Law that may
make some business combinations more difficult. See "Description of Capital
Stock -- Delaware Law Provisions."
ABSENCE OF DIVIDENDS ON COMMON STOCK
The Company does not currently intend to pay regular cash dividends on the
Common Stock. In addition, the Credit Agreement prohibits the payment of cash
dividends. See "Dividend Policy."
SHARES ELIGIBLE FOR FUTURE SALE; REGISTRATION RIGHTS
Sales of a substantial number of shares of Common Stock in the public
market following this offering could adversely affect the market price for the
Common Stock. The Company believes all of the shares of Common Stock currently
outstanding will be eligible for sale under Rule 144 on October 1, 1998, based
on current Securities and Exchange Commission (the "Commission") rules and
subject to compliance with the manner-of-sale, volume and other limitations of
Rule 144. The Commission has proposed an amendment to Rule 144 that, if adopted,
could permit those shares to be sold earlier. Some investors have the right to
require the Company to register the public resale of their shares before that
time. See "Shares Eligible for Future Sale" and "Description of Capital
Stock -- Registration Rights."
IMMEDIATE AND SUBSTANTIAL DILUTION
Purchasers of the Common Stock in the offering will experience an immediate
and substantial dilution in pro forma net tangible book value per share. These
investors will also experience additional dilution upon the exercise of
outstanding options. See "Dilution."
NO PRIOR PUBLIC MARKET; POSSIBLE STOCK PRICE VOLATILITY
Before this offering, there has been no public market for the Common Stock,
and an active public market for the Common Stock may not develop or be
sustained. The initial public offering price will be determined through
negotiations between the Company and the Representatives of the Underwriters
based on several factors that may not be indicative of future market prices. See
"Underwriting" for a discussion of the factors to be considered in determining
the initial public offering price. The trading price of the Common Stock and the
price at which the Company may sell securities in the future could be subject to
large fluctuations in response to changes in government regulations, quarterly
variations in operating results, litigation, general market conditions, the
prices of oil and gas, the liquidity of the Company and the Company's ability to
raise additional funds and other events.
13
<PAGE> 16
THE COMPANY
Titan Exploration, Inc. is an independent energy company engaged in the
exploration, development and acquisition of oil and gas properties. The Company
was formed in 1996 for the purpose of becoming the holding company for Titan
Resources, L.P. (the "Partnership") pursuant to the terms of an Exchange
Agreement and Plan of Reorganization dated September 30, 1996 (the "Exchange
Agreement"). The Partnership was formed in March 1995 and has grown primarily
through acquisitions of oil and gas properties and the exploitation of these
properties. See "Business and Properties -- Principal Oil and Gas Properties."
Under the Exchange Agreement, effective September 30, 1996, (i) the limited
partners of the Partnership transferred all of their limited partnership
interests to the Company in exchange for an aggregate of 19,318,199 shares of
Common Stock, and (ii) the shareholders of Titan Resources I, Inc., a Texas
corporation that is the general partner of the Partnership, transferred all of
the issued and outstanding stock of that corporation to the Company in exchange
for an aggregate of 231,814 shares of Common Stock. These transactions are
referred to in this Prospectus as the "Conversion." As a result of the
Conversion, Titan Exploration, Inc. owns, directly or indirectly, all the
partnership interests in the Partnership and conducts its active business
operations through the Partnership. References to the "Company" or to "Titan"
are to Titan Exploration, Inc. and its predecessors and subsidiaries, including
the Partnership.
Titan's principal executive offices are located at 500 West Texas, Suite
500, Midland, Texas 79701 and its telephone number is (915) 682-6612.
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 12,500,000 shares of
Common Stock offered by the Company are estimated to be approximately $122.2
million ($140.8 million if the Underwriters exercise their over-allotment option
in full), based on the initial public offering price of $10.50 per share and
after deducting the estimated underwriting discounts and commissions and
estimated offering expenses.
The Company intends to use the net proceeds for exploration, development
and acquisition activities and other general corporate purposes. Pending use of
the net proceeds in this manner, the Company intends to use the net proceeds to
repay indebtedness under the Company's Amended and Restated Credit Agreement,
dated October 31, 1996 (the "Credit Agreement"), incurred in connection with the
1996 Acquisition. At September 30, 1996, on a pro forma basis, the outstanding
principal balance of indebtedness under the Credit Agreement would have been
$145.1 million, a substantial amount of which was incurred in connection with
the 1996 Acquisition. For the nine months ended September 30, 1996, the Credit
Agreement had an average interest rate of 6.75% per annum, and the indebtedness
has a final maturity of January 1, 2001. As a result of an interest rate swap
agreement, the Company effectively has a fixed interest rate of 6.72% on $10
million of the revolving portion of the Credit Agreement. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources" for a description of the Credit
Agreement. Affiliates of J.P. Morgan Securities Inc. (one of the Underwriters)
and First Union Corporation (an owner of in excess of 5% of the Common Stock)
are participants in that indebtedness and will each be entitled to receive 20%
of any repayments of that indebtedness. See "Certain Transactions" and
"Underwriting."
DIVIDEND POLICY
The Company has never declared or paid cash dividends on its Common Stock
and anticipates that all future earnings will be retained for development of its
business. In addition, the Credit Agreement prohibits the payment of cash
dividends on Common Stock. The Board of Directors of the Company may review the
Company's dividend policy from time to time in light of, among other things, the
Company's earning and financial position and limitations imposed by the
Company's debt instruments. See "Management's Discussion and Analysis of
Financial Condition and Results of Operation -- Liquidity and Capital
Resources."
14
<PAGE> 17
DILUTION
The Company's net tangible book value at September 30, 1996 was
$37,404,000, or approximately $1.91 per share of Common Stock. Net tangible book
value per share represents the amount of total tangible assets of the Company
reduced by the amount of the Company's total liabilities, divided by the number
of shares of Common Stock outstanding. After giving effect to the Company's
receipt of the estimated net proceeds from the sale of 12,500,000 shares of
Common Stock in this offering at an assumed initial public offering price of
$10.50 per share, the Company's pro forma as adjusted net tangible book value as
of September 30, 1996 would have been $159,176,000, or $4.97 per share. This
represents an immediate increase in pro forma net tangible book value of $3.06
per share to the Company's stockholders and an immediate dilution in pro forma
net tangible book value of $5.53 per share to new investors purchasing shares in
this offering. The following table illustrates the per share dilution in pro
forma net tangible book value to new investors:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share....................... $10.50
Pro forma net tangible book value per share of Common Stock at
September 30, 1996............................................... $1.91
Increase per share of Common Stock attributable to new investors.... 3.06
-----
Pro forma as adjusted net tangible book value per share of Common
Stock after the Offering............................................ 4.97
------
Pro forma as adjusted dilution per share to new investors............. $ 5.53
======
</TABLE>
The following table sets forth the number of shares of Common Stock
purchased from the Company, the total consideration paid, and the average price
per share paid by existing stockholders and to be paid (at an assumed initial
public offering price of $10.50 per share) by purchasers of shares offered
hereby (before deducting estimated underwriting discounts and commissions and
estimated offering expenses):
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
--------------------- ----------------------- AVERAGE PRICE
NUMBER PERCENTAGE AMOUNT PERCENTAGE PER SHARE
------ ---------- -------- ---------- -------------
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Existing stockholders....... 19,550 61.0% $ 40,540 23.6% $ 2.07
New investors............... 12,500 39.0 131,250 76.4 10.50
------ -------- -------- -------- ----------
Total............. 32,050 100.0% $171,790 100.0% $ 5.36
====== ======== ======== ======== ==========
</TABLE>
The preceding tables assume no exercise of any stock options to purchase
Common Stock outstanding at September 30, 1996. The preceding table excludes (i)
3,631,350 shares of Common Stock issuable upon exercise of options outstanding
at September 30, 1996, with an exercise price of $2.08 per share, and (ii)
85,000 shares issuable upon exercise of options that have been granted under the
Company's 1996 Incentive Plan with an exercise price equal to the Price to
Public set forth on the cover page of this Prospectus. A total of 850,000 shares
are reserved for future issuance under the Company's 1996 Incentive Plan. See
"Management -- Employee Benefit Plans -- 1996 Incentive Plan" and Note 9 of
Notes to Consolidated Financial Statements.
15
<PAGE> 18
CAPITALIZATION
The following table sets forth the capitalization of the Company (i) as of
September 30, 1996, (ii) pro forma to give effect to the 1996 Acquisition, and
(iii) pro forma as adjusted to reflect the estimated net proceeds from the
Company's sale of 12,500,000 shares of Common Stock pursuant to this offering.
This table should be read in conjunction with the Consolidated Financial
Statements and related notes in the Prospectus.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
---------------------------------------------
PRO FORMA
AS
HISTORICAL PRO FORMA ADJUSTED(2)
---------- -------------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Long-term debt(1).............................. $ 28,000 $145,074 $ 22,852
Stockholders' equity:
Preferred Stock, $.01 par value, 10,000,000
shares authorized; no shares outstanding
actual, pro forma and pro forma as
adjusted.................................. -- -- --
Common Stock, $.01 par value, 60,000,000
shares authorized; 19,550,013 shares
issued and outstanding actual; 19,550,013
shares issued and outstanding pro forma;
and 32,050,013 shares issued and
outstanding pro forma as
adjusted(2)............................... 195 195 320
Additional paid-in capital................... 54,180 54,180 176,277
Deferred compensation........................ (16,424) (16,424) (16,424)
------- -------- --------
Total stockholders' equity..................... 37,951 37,951 160,173
------- -------- --------
Total capitalization................. $ 65,951 $183,025 $ 183,025
======= ======== ========
</TABLE>
- ---------------
(1) See Note 4 of Notes to Consolidated Financial Statements.
(2) Common Stock pro forma as adjusted excludes 3,631,350 shares of Common Stock
issuable upon exercise of outstanding options at September 30, 1996, with an
exercise price of $2.08 per share. In addition, the Company has reserved
850,000 shares of Common Stock for future issuance under the Company's 1996
Incentive Plan, of which, 85,000 shares are issuable upon exercise of
options that have been granted with an exercise price equal to the Price to
Public set forth on the cover page of this Prospectus. See
"Management -- Employee Benefit Plans -- 1996 Incentive Plan" and Note 9 of
Notes to Consolidated Financial Statements.
16
<PAGE> 19
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Company's consolidated financial statements
and related notes included elsewhere in this Prospectus. The consolidated
statement of operations data, consolidated statement of cash flows data and
other consolidated financial data for the period from inception (March 31, 1995)
through December 31, 1995, and the consolidated balance sheet data and
consolidated operating data at December 31, 1995, are derived from, and are
qualified by reference to, the consolidated financial statements included
elsewhere in this Prospectus that have been audited by KPMG Peat Marwick LLP,
independent accountants. The unaudited consolidated financial data as of
September 30, 1995 and September 30, 1996, and for the six months ended
September 30, 1995 and for the nine months ended September 30, 1996 have been
prepared on a basis consistent with the audited consolidated financial
statements and, in the opinion of management, include all adjustments
(consisting only of normal recurring adjustments) necessary to present fairly
the financial condition and results of operations for the periods presented. The
pro forma consolidated financial data is derived from, and is qualified by
reference to, the Company's pro forma condensed financial statements and related
notes included elsewhere in this Prospectus. The results for the nine months
ended September 30, 1996, are not necessarily indicative of the results that may
be expected for the year ending December 31, 1996.
<TABLE>
<CAPTION>
PERIOD ENDED SIX MONTHS NINE MONTHS ENDED
DECEMBER 31, 1995 ENDED SEPTEMBER 30, 1996
----------------------------------- SEPTEMBER 30, -----------------------------------
PRO FORMA 1995 PRO FORMA
PRO AS ADJUSTED ------------- PRO AS ADJUSTED
HISTORICAL FORMA(1) (1)(2) HISTORICAL HISTORICAL FORMA(1) (1)(2)
---------- -------- ----------- ------------- ---------- -------- -----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND OPERATING DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Revenues:
Operating revenues........... $ 743 $49,349 $49,349 $ 12 $ 10,237 $42,414 $ 42,414
Other revenues............... 242 242 242 161 140 140 140
---------- -------- ----------- ------------- ---------- -------- -----------
Total revenues........... 985 49,591 49,591 173 10,377 42,554 42,554
---------- -------- ----------- ------------- ---------- -------- -----------
Expenses:
Oil and gas production....... 304 17,435 17,435 37 4,339 13,820 13,820
General and administrative... 1,546 4,625 4,625 668 1,452 3,469 3,469
Amortization of stock option
awards..................... 576 576 576 -- 576 576 576
Exploration and
abandonment................ 490 490 490 -- 110 110 110
Depletion, depreciation and
amortization............... 299 16,832 16,832 57 2,269 12,001 12,001
Interest..................... 97 10,189 1,947 -- 1,179 7,566 1,448
Other........................ (796) (97) (97) (669) (336) -- --
---------- -------- ----------- ------------- ---------- -------- -----------
Total expenses........... 2,516 50,050 41,808 93 9,589 37,542 31,424
---------- -------- ----------- ------------- ---------- -------- -----------
Net income (loss).............. (1,531) (459) 5,059 80 (2,210) 260 7,235
Net income (loss) per share.... (.11) (.03) .17 .01 (.12) .01 .21
Weighted average shares
outstanding.................. 14,066 13,974 29,585 14,860 18,835 21,032 34,412
CONSOLIDATED STATEMENT OF CASH
FLOWS DATA:
Net cash provided by (used in):
Operating activities......... $ (1,764) $ -- $ -- $ (513) $ 5,653 $ -- $ --
Investing activities......... (47,563) -- -- (6,439) (12,763) -- --
Financing activities......... 55,540 -- -- 20,540 11,700 -- --
OTHER CONSOLIDATED FINANCIAL
DATA:
Capital expenditures........... $ 43,811 $ -- $ -- $ 2,387 $ 17,763 $ -- $ --
EBITDAX(3)..................... (69) 27,628 27,628 137 4,922 25,265 25,265
</TABLE>
17
<PAGE> 20
<TABLE>
<CAPTION>
NINE MONTHS ENDED
PERIOD ENDED DECEMBER 31, 1995 SEPTEMBER 30, 1996
-------------------------------- --------------------------------
PRO FORMA PRO FORMA
HISTORICAL AS ADJUSTED(1)(2) HISTORICAL AS ADJUSTED(1)(2)
---------- ----------------- ---------- -----------------
(IN THOUSANDS, EXCEPT OPERATING DATA)
<S> <C> <C> <C> <C>
CONSOLIDATED OPERATING DATA:
Production:
Oil (MBbls)...................................... 30 2,004 388 1,311
Gas (MMcf)....................................... 245 17,952 2,725 12,235
Total (MBOE)..................................... 71 4,996 842 3,350
Average Sales Prices Per Unit(4):
Oil (per Bbl).................................... $ 16.80 $ 14.23 $ 17.25 $ 17.30
Gas (per Mcf).................................... .97 1.16 1.30 1.61
BOE.............................................. 10.46 9.88 12.16 12.66
Expenses per BOE:
Production costs, including production taxes..... $ 4.28 $ 3.49 $ 5.15(5) $ 4.13(5)
General and administrative....................... 21.77 .93 1.72 1.04
Depletion, depreciation and amortization......... 4.21 3.37 2.69 3.58
CONSOLIDATED BALANCE SHEET DATA (AS OF PERIOD END):
Cash and cash equivalents........................ $ 6,213 $ -- $ 10,803 $ 2,000
Working capital.................................. 11,905 -- 8,760 (350)
Oil and gas assets, net.......................... 42,869 -- 60,168 187,202
Total assets..................................... 57,487 -- 74,824 193,505
Total debt....................................... 20,000 -- 28,000 22,852
Stockholders' equity............................. 34,585 -- 37,951 160,173
</TABLE>
- ---------------
(1) Assumes the 1995 Acquisition, the 1996 Acquisition and the Conversion had
taken place on January 1, 1995 for purposes of the Consolidated Statement of
Operations Data, Consolidated Statement of Cash Flows Data, Other
Consolidated Financial Data and Consolidated Operating Data and assumes the
1996 Acquisition had taken place on September 30, 1996 for purposes of the
Consolidated Balance Sheet Data.
(2) Assumes this offering and the application of the proceeds therefrom had
taken place on January 1, 1995 for purposes of the Consolidated Statement of
Operations Data, Consolidated Statement of Cash Flows Data, Other
Consolidated Financial Data and Consolidated Operating Data and on September
30, 1996 for purposes of the Consolidated Balance Sheet Data.
(3) EBITDAX is presented because of its wide acceptance as a financial indicator
of a company's ability to service or incur debt. EBITDAX (as used herein) is
calculated by adding interest, income taxes, depletion, depreciation and
amortization, amortization of stock option awards, and exploration and
abandonment costs to net income (loss). Interest includes interest expense
accrued and amortization of deferred financing costs. EBITDAX should not be
considered as an alternative to earnings (loss) or operating earnings
(loss), as defined by generally accepted accounting principles, as an
indicator of the Company's financial performance, as an alternative to cash
flow as a measure of liquidity or as being comparable to other similarly
titled measures of other companies.
(4) Reflects results of hedging activities. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Other Matters."
(5) Includes approximately $.77 per BOE of production costs attributable to
necessary nonrecurring maintenance operations on the 1995 Acquisition
properties.
18
<PAGE> 21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
Titan is an independent energy company engaged in the exploration,
development and acquisition of oil and gas properties. The Company's strategy is
to grow reserves, production and net income per share through (i) the
acquisition of producing properties that provide significant development and
exploratory drilling potential, (ii) the exploitation and development of its
reserve base, (iii) the exploration for oil and gas reserves and (iv) the
implementation of a low operating and overhead structure. The Company has grown
rapidly through the acquisition and exploitation of oil and gas properties,
consummating the 1995 Acquisition for a purchase price of approximately $40.6
million and the 1996 Acquisition for approximately $135.5 million.
The Company's growth resulting from acquisitions has impacted its reported
financial results in a number of ways. Acquired properties frequently have not
received focused attention prior to sale. After acquisition, certain of these
properties require maintenance, workovers, recompletions and other remedial
activity not constituting capital expenditures, which initially serves to
increase lease operating expenses. The Company anticipates spending at least
$1.0 million in nonrecurring maintenance expenses with respect to the properties
obtained in the 1996 Acquisition. The Company may dispose of certain of the
properties if it determines they are outside the Company's strategic focus. The
increased production and revenue resulting from the rapid growth of the Company
has required it to recruit and develop operating, accounting and administrative
personnel compatible with its increased size. The Company believes that as a
result of the 1996 Acquisition it will need to employ 20 to 25 new employees, in
addition to its 20 employees at September 30, 1996. As a result, the Company
anticipates a corresponding increase in its general and administrative expense.
The Company believes that with its current inventory of drilling locations and
the anticipated additional staff it will be well positioned to follow a more
balanced program of exploration and exploitation activities to complement its
acquisition efforts.
Titan uses the successful efforts method of accounting for its oil and gas
producing activities. Costs to acquire mineral interests in oil and gas
properties, to drill and equip exploratory wells that result in proved reserves,
and to drill and equip development wells are capitalized. Costs to drill
exploratory wells that do not result in proved reserves, geological and
geophysical costs, and costs of carrying and retaining properties that do not
contain proved reserves are expensed. Costs of significant nonproducing
properties, wells in the process of being drilled and significant development
projects are excluded from depletion until such time as the related project is
developed and proved reserves are established or impairment is determined.
The Company's predecessor was classified as a partnership for federal
income tax purposes. Therefore, no income taxes were paid by the Company prior
to the Conversion. Future tax amounts, if any, will be dependent upon several
factors, including, but not limited to, the Company's results of operations.
RESULTS OF OPERATIONS
The financial statements of the Company, which began operations on March
31, 1995, include the results of the nine months ended December 31, 1995 and the
nine months ended September 30, 1996. As a result of the Company's limited
operating history and rapid growth, its financial statements are not readily
comparable and may not be indicative of future results. Furthermore, because the
period from inception of the Company to September 30, 1995 was only six months
in length, a comparison of results from that period to the nine months ended
September 30, 1996 would not be meaningful.
Nine Months Ended September 30, 1996
For the nine months ended September 30, 1996, the Company's revenues from
the sale of oil and gas (excluding the effects of hedging activities) were $7.6
million and $4.1 million, respectively. During the period, the Company produced
388 MBbls of oil and 2,725 MMcf of gas, with total oil and gas production of 842
MBOE. The revenues and production are primarily attributable to the 1995
Acquisition.
19
<PAGE> 22
As a result of hedging activities in the nine months ended September 30,
1996, oil revenues were reduced $899,000 ($2.32 per Bbl) to $17.25 per Bbl and
gas revenues were reduced $553,000 ($.20 per Mcf) to $1.30 per Mcf for a total
reduction of $1,452,000.
Oil and gas production costs, including production taxes, were $4.3 million
($5.15 per BOE) for the nine months ended September 30, 1996. These costs
included $645,000 ($.77 per BOE) that were attributable to rework expenses
incurred with respect to the 1995 Acquisition properties.
Exploration and abandonment costs were $110,000 for the nine months ended
September 30, 1996.
General and administrative expenses were $1,452,000 ($1.72 per BOE) for the
nine months ended September 30, 1996.
For the nine months ended September 30, 1996, depletion, depreciation and
amortization expense was $2.3 million ($2.69 per BOE), which primarily
represents the depletion, depreciation and amortization relating to the
production from the 1995 Acquisition.
Interest expense was $1,179,000 for the nine months ended September 30,
1996. The interest expense was attributable to bank financing incurred to fund
the 1995 Acquisition.
Nine Months Ended December 31, 1995
For the nine months ended December 31, 1995, the Company's revenues from
the sale of oil and gas were $504,000 and $239,000, respectively. During the
period, the Company produced 30 MBbls of oil and 245 MMcf of gas, for a total
production of 71 MBOE. The revenues and production are primarily attributable to
the 1995 Acquisition which was consummated December 11, 1995.
Oil and gas production costs, including production taxes, were $304,000
($4.28 per BOE) for the nine months ended December 31, 1995.
Exploration and abandonment costs were $490,000 for the nine months ended
December 31, 1995.
General and administrative expenses were $1.5 million ($21.77 per BOE) for
the nine months ended December 31, 1995.
For the nine months ended December 31, 1995, depletion, depreciation and
amortization expense was $299,000 ($4.21 per BOE).
LIQUIDITY AND CAPITAL RESOURCES
Capital Sources
Funding for the Company's business activities has been provided by its
initial capitalization, bank financing, cash flow from operations and private
equity sales. The 1995 Acquisition was funded with cash from the Company's
initial capitalization, additional private equity sales and bank financing. The
1996 Acquisition was funded with bank financing to be partially repaid with the
proceeds of this offering and the issuance of equity capital in a private
placement in September 1996.
While the Company regularly engages in discussions relating to potential
acquisitions of oil and gas properties, the Company has no present agreement,
commitment or understanding with respect to any such acquisition, other than the
acquisition of oil and gas properties and interests in its normal course of
business. Any future acquisitions may require additional financing and will be
dependent upon financing arrangements available at the time.
The Company believes that in the short-term -- that is, through
1997 -- availability under the Credit Agreement and cash flow from operations
will be sufficient for anticipated operating and capital expenditure
requirements in 1997. Immediately following the completion of this offering, the
Company expects to have approximately $142.1 million available under the Credit
Agreement. However, in the long term -- beyond 1997 -- if the Company's cash
flow from operations and availability under the Credit Agreement are not
20
<PAGE> 23
sufficient to satisfy cash requirements, there can be no assurance that
additional debt or equity financing will be available to meet its requirements.
Although certain of the Company's costs and expenses may be affected by
inflation, inflationary costs have not had a significant effect on the Company's
results of operations.
Net Cash Provided by (Used in) Operating Activities. For the nine months
ended December 31, 1995, net cash used in operations was $1.8 million primarily
due to initiation of the Company's operations. For the nine months ended
September 30, 1996, net cash provided by operating activities increased to $5.7
million due primarily to the 1995 Acquisition and the cash flow therefrom.
Net Cash Used in Investing Activities. For the nine months ended December
31, 1995, net cash used in investing activities was $47.6 million of which $39.9
million was primarily attributable to the 1995 Acquisition. An additional $3.8
million was expended in other acquisition, exploration and development
activities, along with the purchase of a $5.0 million short-term investment. Net
cash used in investing activities for the nine months ended September 30, 1996
was $12.8 million, which was the result of the redemption of $5.0 million in
short-term investments, additions to oil and gas properties of $17.6 million and
additions of $200,000 to other property and equipment.
Net Cash Provided by Financing Activities. Net cash provided by financing
activities was $55.5 million for the nine months ended December 31, 1995. This
included $20.0 million of proceeds from the issuance of long-term debt and $35.5
million of capital contributions. For the nine months ended September 30, 1996,
net cash provided by financing activities was $11.7 million, which included $8.0
million from the issuance of long-term debt and $3.7 million from capital
contributions.
Credit Agreement. The Credit Agreement establishes a four year revolving
credit facility, up to the maximum amount of $250 million, subject to a
borrowing base to be determined annually by the lenders based on certain proved
oil and gas reserves and other assets of the Company. Initially, the borrowing
base is established at $165 million. To the extent that the borrowing base is
less than the aggregate principal amount of all outstanding loans and letters of
credit under the Credit Agreement, such deficiency must be cured by the Company
ratably within 180 days, by either prepaying a portion of the outstanding
amounts under the Credit Agreement or pledging additional collateral to the
lenders. A portion of the credit facility is available for the issuance of up to
$15.0 million of letters of credit including $2.0 million outstanding at
September 30, 1996. The Company borrowed $154.5 million of the $165 million
available under the Credit Agreement at the closing of the 1996 Acquisition.
Pending other uses of the net proceeds of this offering, the Company intends to
use the net proceeds to repay indebtedness under the Credit Agreement. See "Use
of Proceeds."
All outstanding amounts under the Credit Agreement are due and payable in
full on January 1, 2001.
At the Company's option, borrowings under the Credit Agreement bear
interest at either (i) the "Base Rate" (i.e., the higher of the applicable prime
commercial lending rate, or the federal funds rate plus .5% per annum) or (ii)
the Eurodollar rate plus a margin ranging from 1% to 1.50% per annum that
depends on the level of the Company's aggregate outstanding borrowings under the
Credit Agreement. In addition, the Company is committed to pay quarterly in
arrears a fee ranging from .30% to .375% of the unused portion of the borrowing
base.
The loan documents governing the Credit Agreement contain certain covenants
and restrictions relating to the Company's operations that are customary in the
oil and gas industry. In addition, the line of credit is secured by a first lien
on properties that represented at least 80% of the value of the Company's proved
oil and gas properties (based on PV-10 as of September 30, 1996).
Capital Expenditures
The Company requires capital primarily for the exploration, development and
acquisition of oil and gas properties, the repayment of indebtedness and general
working capital needs.
21
<PAGE> 24
The following table sets forth costs incurred by the Company in its
exploration, development and acquisition activities during the periods
indicated.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
NINE MONTHS ENDED SEPTEMBER 30,
DECEMBER 31, 1995 1996
----------------- ----------------
(IN THOUSANDS)
<S> <C> <C>
Development costs.................................. $ 1,580 $ 7,358
Exploration costs.................................. 448 107
Acquisition costs:
Unproved properties.............................. 1,040 300
Proved properties................................ 40,873 11,837
------- ------
Total.................................... $43,941 $ 19,602
======= ======
</TABLE>
OTHER MATTERS
Stock Options and Compensation Expense
In connection with the Conversion, the Company issued options to purchase
3,631,350 shares of Common Stock to certain of its officers and employees in
substitution for options issued by the Partnership. Of the options issued by the
Partnership, approximately 93% were issued on March 31, 1995, the date of
inception, and approximately 7% were issued as of September 1, 1996. The options
issued by the Company have an exercise price of $2.08 per share. Options to
purchase 803,576 shares of Common Stock are currently vested and an additional
1,190,841, 1,209,966 and 426,967 shares will vest on March 31 of each of 1997,
1998 and 1999, respectively. Based in part on selling prices of interests in the
Partnership in December 1995 and September 1996, the Company expects to record a
noncash compensation expense of approximately $579,000 per month for a period of
30 months beginning in the fourth quarter of 1996 to reflect the estimated value
of the revised option plan on September 30, 1996.
Hedging Activities
The Company uses swap agreements in an attempt to reduce the risk of
fluctuating oil and gas prices and interest rates. In November and December
1995, the Company entered into four master agreements for energy price and other
swap transactions with each of Enron Capital & Trade Resources Corp. ("ECTRC")
(an affiliate of Joint Energy Development Investments Limited Partnership
("JEDI"), an owner of in excess of 5% of the outstanding Common Stock), First
Union National Bank of North Carolina (a lender to the Company under the Credit
Agreement and an affiliate of First Union Corporation, an owner of in excess of
5% of the outstanding Common Stock), Chemical Bank and Texas Commerce Bank
National Association (a lender to the Company and an affiliate of Chemical
Bank). The Company has entered into energy price swap arrangements from time to
time under these master agreements. Settlement of gains or losses on these
energy swap transactions is generally based on the difference between the
contract price and a formula using New York Mercantile Exchange ("NYMEX")
related prices and is reported as a component of oil and gas revenues as the
associated production occurs. The Company has entered into hedging transactions
with respect to a substantial portion of its estimated production through
December 1996, excluding the production attributable to the 1996 Acquisition.
The Company's reserve report at September 30, 1996 reflects hedging activities
contracted through December 31, 1996, resulting in a reduction of PV-10 of
$420,000. The Company continues to evaluate whether to enter into additional
hedging transactions for 1997 and future years. The following is a summary of
the Company's hedging transactions in effect as of September 30, 1996. See "Risk
Factors -- Risk of Hedging Activities."
Natural Gas. As of September 30, 1996, the Company had hedging transactions
related to 220,000 MMBtu of natural gas per month through December 1996 that
provide for settlements based on prices of natural gas determined by reference
to closing prices of natural gas futures contracts traded on NYMEX. These hedges
include a price swap using a "participating floor" with a price of $1.70 per
MMBtu. In the event that the NYMEX reference price for any settlement period is
less than the floor price, the
22
<PAGE> 25
Company will be paid 100% of the difference. In the event that the NYMEX
reference price for any settlement period is greater than the floor price, the
Company must pay 47% of the difference.
Since most of the Company's natural gas is sold under spot contracts with
reference to El Paso Permian Basin sales hub prices, the Company entered into
"basis differential swaps" related to 220,000 MMBtu of natural gas per month for
the period May 1996 through December 1996. In the event that the NYMEX reference
price for a reference period exceeds the average price per MMBtu for natural gas
delivered to El Paso Permian Basin hub by more than $.325 per MMBtu the Company
receives a payment based on the excess above the $.325 basis. In the event that
the NYMEX reference price for a reference period exceeds the El Paso Permian hub
price by less than $.325 per MMBtu (or in the event that the El Paso Permian
Basin hub price exceeds the NYMEX reference price), the Company must pay the
deficiency below the $.325 basis.
As a result of its hedging activities, the Company's natural gas revenues
were reduced by $553,000 for the nine months ended September 30, 1996.
Crude Oil. As of September 30, 1996, the Company had one hedging
transaction related to 25,000 Bbls of West Texas Intermediate Light Sweet crude
oil a month through December 1996 that provides for settlements based on prices
of oil determined by reference to NYMEX future oil contracts. The swap price for
this transaction is $17.18 per Bbl. In the event that the NYMEX reference price
for any settlement period is less than the swap price, the Company receives the
difference. In the event that the NYMEX reference price for any settlement
period is greater than the swap price, the Company must pay the difference.
As a result of its hedging activities, the Company's crude oil revenues
were reduced by $899,000 during the nine months ended September 30, 1996.
Interest Rates. The Company also uses derivative financial instruments to
manage interest rate risks. Under an interest rate swap agreement, the Company
has an effective rate of 6.72% on $10 million of its revolving line of credit
through December 23, 1996.
Natural Gas Balancing
It is customary in the natural gas industry for various working interest
partners to produce more or less than their entitlement share of natural gas
from time to time. The Company's net overproduced position at September 30, 1996
was 549,844 Mcf, and 205,182 Mcf on a pro forma basis. Under terms of typical
natural gas balancing agreements, the underproduced party can take a certain
percentage, typically 25% to 50% of the overproduced party's entitled share of
gas sales in future months, to eliminate such imbalances. During the make-up
period, the overproduced party's cash flow will be adversely affected. The
Company recognizes revenue and imbalance obligations under the entitlements
method of accounting.
Environmental and Other Laws and Regulations
The Company's business is subject to certain federal, state and local laws
and regulations relating to the exploration for and the development, production
and transportation of oil and gas, as well as environmental and safety matters.
Many of these laws and regulations have become more stringent in recent years,
often imposing greater liability on a larger number of potentially responsible
parties. Although the Company believes it is in substantial compliance with all
applicable laws and regulations, the requirements imposed by such laws and
regulations are frequently changed and subject to interpretation, and the
Company is unable to predict the ultimate cost of compliance with these
requirements or their effect on its operations. The Company has no material
commitments for capital expenditures to comply with existing environmental
requirements. Nevertheless, changes in existing environmental laws or in
interpretations thereof could have a significant impact on the operating costs
of the Company, as well as the oil and gas industry in general. See "Risk
Factors -- Compliance with Environmental Regulations," "Business and
Properties -- Environmental Matters" and "Business and Properties -- Abandonment
Costs."
23
<PAGE> 26
Accounting Pronouncements
On October 23, 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation," which establishes a fair value method for accounting for
stock-based compensation plans either through recognition or disclosure. The
Company adopted this standard in 1996 and will disclose the pro forma net income
(loss) and earnings (loss) per share amounts assuming the fair value method was
adopted on March 31, 1995 (date of inception) in its financial statements as of
and for the year ended December 31, 1996. The adoption of this standard will not
impact the Company's consolidated results of operations or financial position.
24
<PAGE> 27
BUSINESS AND PROPERTIES
GENERAL
Titan is an independent energy company engaged in the exploration,
development and acquisition of oil and gas properties. Since its inception in
March 1995, the Company has experienced significant growth in reserves,
production and cash flow by acquiring and exploiting producing properties
primarily in the Permian Basin of west Texas and southeastern New Mexico.
In December 1995, the Company acquired a concentrated group of Permian
Basin producing oil and gas properties from a large independent company for
approximately $40.6 million (the "1995 Acquisition"). On October 31, 1996, the
Company acquired additional Permian Basin producing properties from a major
integrated company for approximately $135.5 million (the "1996 Acquisition"). As
of September 30, 1996, the Company had pro forma estimated net proved reserves
of approximately 17.8 MMBbls of oil and 280.8 Bcf of natural gas, or an
aggregate of 64.6 MMBOE with a PV-10 of $292.1 million. If, in calculating the
PV-10, the Company's oil and gas prices at October 31, 1996 were substituted for
the prices at September 30, 1996, the PV-10 would be $351.9 million. The prices
of the Company's oil decreased 4% and gas increased 33%, respectively, from
September 30, 1996 to October 31, 1996. Approximately 62% of these reserves were
classified as proved developed. The Company acquired, explored for and developed
its reserves for an average reserve replacement cost of approximately $2.73 per
BOE through September 30, 1996, assuming the 1996 Acquisition was consummated on
September 30, 1996. Pro forma production for the nine months ended September 30,
1996 was 12,227 BOE per day, resulting in an annualized pro forma proved
reserves to production ratio of 14.5 to one.
The Company prefers to acquire properties over which it can exercise
operating control. The Company operated 456 gross wells (389 net wells) on a pro
forma basis at September 30, 1996, and these operated properties represented
approximately 71% of its pro forma proved developed producing PV-10 and 83% of
the Company's pro forma proved PV-10 at September 30, 1996. The Company's
emphasis on controlling the operation of its properties enables the Company to
manage expenses, capital allocation and other aspects of development and
exploration.
The Company's oil and gas properties are located in 57 fields in the
Permian Basin, one of the most prolific oil and gas producing regions in North
America. Approximately 70% of the Company's PV-10 of total proved reserves is
concentrated in 12 principal fields located in this region. The region is
characterized by complex geology with numerous known producing horizons and
provides significant opportunities to increase reserves, production and ultimate
recoveries through development, exploratory and horizontal drilling,
recompletions, secondary and tertiary recovery methods, and use of 3-D seismic
and other advanced technologies.
The Company believes that its personnel provide it with competitive
advantages for exploiting these opportunities in the Permian Basin and other
complex producing basins in North America. Members of the Company's management
team have an average of 25 years experience in the oil and gas industry and have
operating experience in all aspects of the industry, in particular deep well and
horizontal drilling. They have formulated and supervised acquisitions,
exploration projects, development drilling programs and production enhancement
plans, including workovers and enhanced recovery projects. In addition,
management has a significant equity investment in the Company. Giving effect to
this offering and assuming the exercise by management of all of their options to
acquire Common Stock, management will beneficially own an aggregate of 20% of
the Company's outstanding Common Stock.
BUSINESS STRATEGY
The Company's strategy is to grow reserves, production and net income per
share through (i) the acquisition of producing properties that provide
significant development and exploratory drilling potential, (ii) the
exploitation and development of its reserve base, (iii) the exploration for oil
and gas reserves and (iv) the implementation of a low operating and overhead
cost structure.
25
<PAGE> 28
- Acquisitions. The Company seeks to acquire oil and gas properties that
provide opportunities for the addition of reserves, production and value
through low risk exploitation and development, high-potential exploration
and control of operations. The Company believes that these criteria can be
met in the Permian Basin and in other North American basins have high
historical cumulative production levels that represent a relatively small
percentage of the recoverable in-place reserves. At September 30, 1996,
the Company had acquired and developed 64.6 MMBOE of proved oil and gas
reserves at an average reserve replacement cost of $2.73 per BOE, assuming
the 1996 acquisition was consummated on September 30, 1996, which compares
to an average reserve replacement cost of $4.85 per BOE (for 1993 through
1995) for the 184 independent oil and gas companies included in the Arthur
Andersen 1996 Oil and Gas Reserve Disclosures.
- Exploitation of Reserve Base. The Company engages in horizontal and
infill drilling activities, major workovers, recompletions, secondary and
tertiary recovery operations, and other production enhancement techniques
in order to increase reserves and production. On a pro forma basis, the
Company has identified 53 drilling locations on Company-operated
properties, which include 14 proved locations and 39 unproven locations.
In drilling a portion of these wells in 1997, the Company expects to spend
approximately $12.9 million to develop proved locations and $6.8 million
to develop unproven locations. The Company has also identified an
additional 90 unproven drilling locations on Company-owned, but
nonoperated, properties.
- Exploration Activities. The Company seeks to apply management's extensive
geological and drilling expertise and 3-D seismic technology to identify
and develop exploration projects. As part of its exploration strategy, the
Company attempts to reduce the costs and risks of its exploration
activities by, in selected circumstances, applying 3-D seismic technology,
drilling wells with multiple pay objectives in known producing areas and
selling interests in its exploration prospects to industry partners. A
large portion of the Company's efforts have focused on deep well
opportunities in historically prolific fields.
- Low Cost Structure. The Company has implemented and plans to maintain a
low overhead and operating cost structure to enhance the profitability and
the exploitation potential of its properties. The Company provides
incentive stock awards to its senior management team in lieu of
comparatively higher salary levels in order to align management's
interests with stockholders, maintain relatively low general and
administrative expense levels and increase the amount of cash flow
available for reinvestment by the Company. The Company also seeks to be an
efficient operator and achieve reductions in labor and other field-level
costs from those incurred by previous operators of its properties. By
operating a significant portion of its daily production, the Company
believes it is well positioned to control the expenses and timing of
development and exploitation of such properties and to better manage such
cost reduction efforts.
COMPANY HISTORY
The history of the Company's operations can be divided into three segments:
Initial Operations. The Company was formed in March 1995 by Jack Hightower,
members of his management team and Natural Gas Partners, L.P. and Natural Gas
Partners II, L.P. (collectively, "NGP"), with an initial equity capitalization
of approximately $20.5 million. From its inception, the Company engaged in the
exploration, development and acquisition of oil and gas properties, initially
focusing on those in Ward, Pecos, Winkler and Hardeman counties in Texas. From
inception until December 31, 1995, excluding the 1995 Acquisition, the Company
spent approximately $2.7 million to acquire and develop properties in these
counties. From January 1, 1996 until September 30, 1996, the Company spent an
additional $5.9 million to further develop these properties. This activity has
resulted in a PV-10 attributable to these initial properties of approximately
$53.6 million at September 30, 1996.
1995 Acquisition. On December 11, 1995, the Company acquired a concentrated
group of producing oil and gas properties in the Permian Basin from a large,
independent exploration and production company for a purchase price of
approximately $40.6 million. The 1995 Acquisition was financed principally
through cash from the initial capitalization of the Company and borrowings under
the Credit Agreement, which at that time
26
<PAGE> 29
had a $35 million borrowing base. From the consummation of the 1995 Acquisition
through September 30, 1996, the Company spent a total of approximately $4.3
million to acquire additional working interests and develop and enhance these
properties and has received net cash flow of approximately $7.2 million. As of
September 30, 1996, these properties, net to the Company, had an estimated 22.9
MMBOE of reserves and a PV-10 of $90.9 million.
1996 Acquisition. On October 31, 1996, the Company acquired leasehold
interests in certain oil and gas producing fields situated in the Permian Basin
from a major integrated oil and gas company for a purchase price of
approximately $135.5 million. The 1996 Acquisition was financed with
indebtedness under the Credit Agreement and proceeds from the issuance of equity
in a private placement in September 1996. Pending other uses, the net proceeds
from this offering will be used primarily to reduce indebtedness under the
Credit Agreement. See "Use of Proceeds." As of September 30, 1996, these
properties had an estimated 28.2 MMBOE of reserves and a PV-10 of $147.5
million.
ACQUISITIONS
The Company regularly pursues and evaluates acquisition opportunities
(including opportunities to acquire oil and gas properties or related assets or
entities owning oil and gas properties or related assets and opportunities to
engage in mergers, consolidations or other business combinations with entities
owning oil and gas properties or related assets) and at any given time may be in
various stages of evaluating such opportunities. Such stages may take the form
of internal financial and oil and gas property analysis, preliminary due
diligence, the submission of an indication of interest, preliminary
negotiations, negotiation of a letter of intent or negotiation of a definitive
agreement. While the Company is currently evaluating a number of potential
acquisition opportunities (some of which would be material in size to the
Company), it has not signed a letter of intent with respect to any material
acquisition and currently has no assurance of completing any particular material
acquisition or of entering into negotiations with respect to any particular
material acquisition.
PRINCIPAL OIL AND GAS PROPERTIES
Approximately 46% of the Company's PV-10 of total proved reserves is
concentrated in six principal fields, the Puckett, Dollarhide East, Foster, Mi
Vida, Barstow and North Robertson fields. In addition, approximately 24% of the
Company's PV-10 of total proved reserves is concentrated in six other fields,
the Gomez, University Waddell, Sand Hills, Evetts, Headlee and Petco. A
description of each of these 12 fields is set forth below. Cumulative field
production data is as of June 30, 1996 and may not include field production data
prior to 1966.
Puckett Field. The Company owns 1,280 gross leasehold acres (1,120 net
leasehold acres) in the Puckett Field in Pecos County, Texas. The Company's
working interests in this acreage range from 74% to 100%, and the Company
operates 100% of its PV-10 in this field. The primary producing formations in
the field are the Ellenburger and Devonian, which range from depths of 11,500
feet to 15,000 feet. Cumulative field production from these formations has been
3.4 Tcf and 464 Bcf, respectively. The Company's acreage has produced 207 Bcf
and 67 Bcf, respectively, from three wellbores in these formations. The Company
has identified two proved Ellenburger horizontal drilling replacement locations,
one of which is currently drilling. The Company has also identified one workover
opportunity in the Devonian formation, as well as a recompletion opportunity in
the Fusselman formation.
Dollarhide East Field. The Company owns approximately 2,500 gross leasehold
acres (approximately 2,200 net leasehold acres) in the Dollarhide East Field in
Andrews County, Texas. The Company's working interests in this field range from
69% to 100%, and the Company operates 100% of its PV-10 in this field. The
primary producing formations in the field are the Devonian, Silurian and
Ellenburger, which range from depths of 11,000 feet to 12,700 feet. Cumulative
field production from these formations has been 8.2 MMBbls, 1.3 MMBbls and 6.2
MMBbls, respectively. The Company will use existing 3-D seismic to plan
expansion of an existing waterflood program and analyze the potential for
tertiary recovery operations. Although no proved
27
<PAGE> 30
reserves have been attributed to tertiary operations on the Company's acreage,
tertiary recovery operations have been underway on an adjacent analogous field
since 1986.
Foster Field. The Company owns 6,280 gross leasehold acres (3,820 net
leasehold acres) in the Foster Field in Ector County, Texas. The Company's
interests in this field include a 19% working interest in the Amoco-operated
South Foster unit, a 40% working interest in the Conoco-operated Gist unit and
an 80% working interest in the Company-operated North Foster unit. The primary
producing formation in the field is the Grayburg at a maximum depth of 4,800
feet, with cumulative production in the field of 291 MMBbls.
Waterflood programs are underway on all three interests. The Company is
studying the economic feasibility of a tertiary recovery project in this field.
In the North Foster unit, the Company has identified four unproven drilling
locations to be defined further with 3-D seismic and five refracture stimulation
opportunities. Contingent on the success of the drilling of the four unproven
locations, the Company could drill 12 additional unproven locations.
Mi Vida Field. The Company owns approximately 5,900 gross leasehold acres
(approximately 4,300 net leasehold acres) in the Mi Vida Field in Ward County,
Texas. The Company's working interests in this field range from 54% to 98%, and
the Company operates 100% of its PV-10 in this field. The primary producing
formations in the field are the Fusselman, Ellenburger and Penn, which range
from depths of 14,500 feet to 19,100 feet. Cumulative field production from
these formations has been 740 Bcf, 181 Bcf and 6.0 Bcf, respectively.
The Company's plans include the installation of gas-lift equipment on three
wells and acquiring 3-D seismic on the entire field to identify infill, step-out
and sidetrack drilling opportunities. Subject to verification by the 3-D
seismic, the Company has identified four unproven sidetrack opportunities.
Barstow Field. The Company owns 2,315 gross leasehold acres (1,604 net
leasehold acres) in the Barstow Field in Ward County, Texas. The Company's
working interests in this field range from approximately 45% to 80%, and the
Company operates 100% of its PV-10 in this field. The primary producing
formations in the field are the Fusselman and Ellenburger, which range from
depths of 18,000 feet to 19,700 feet. Cumulative field production from these
formations has been 221 Bcf and 17 Bcf, respectively.
The Company completed a well in the Fusselman formation early in 1996. As
anticipated by the Company, bottom-hole pressure data indicated that a portion
of the field had repressurized since having been shut-in in 1981. Subsequently,
the Company conducted a 3-D seismic survey that identified two proved
undeveloped drilling locations. The first of those was spudded August 31, 1996.
The second well is planned for drilling in 1997. In addition, based on analysis
of the 3-D seismic, the Company has identified an exploratory drilling location
targeting the Ellenburger and Fusselman formations.
North Robertson Field. The Company owns approximately 5,400 gross leasehold
acres (approximately 860 net leasehold acres) in the North Robertson Field in
Gaines County, Texas. The Company's working interest in the North Robertson unit
is 16%. The primary producing formation in the unit is the Clearfork at a
maximum depth of 7,200 feet with cumulative field production of 111 MMBbls and
62 Bcf of gas.
The Company anticipates participating in 60 unproven 10-acre infill
development wells in the North Robertson Clearfork unit. Contingent on the
success of this infill program, the Company believes an additional 30 locations
could be drilled.
Gomez Field. The Company owns 2,490 gross leasehold acres (830 net
leasehold acres) in the Gomez Field in Pecos County, Texas. The Company's
working interests in this field range from 23% to 100%, and the Company operates
approximately 80% of its PV-10 in this field. The primary producing formations
in the field are the Ellenburger and Wolfcamp, which range from depths of 11,100
feet to 22,600 feet. Cumulative field production from these formations has been
4.7 Tcf and 54 Bcf with 3.8 MMBC, respectively.
University Waddell Field. The Company currently owns approximately 1,200
gross leasehold acres (approximately 1,100 net leasehold acres) in the
University Waddell Field in Crane County, Texas. The Company's working interest
in the University Waddell Devonian Unit is 89.51% and the Company operates 100%
of its PV-10 in this field. The primary producing formation in the field is the
Devonian to a maximum
28
<PAGE> 31
depth of 9,000 feet. Cumulative production from the unit has been approximately
19.3 Bcf of gas and 9.4 MMBbls of oil. Total field production from the Devonian
formation is approximately 67 MMBbls and 115 Bcf. The Company believes that by
altering the injection pattern and rates of the existing waterflood program it
can improve recoveries beyond the estimated remaining proved reserves on the
Company's properties in the field. The Company is studying the feasibility of
secondary recovery enhancements and tertiary recovery opportunities.
Sand Hills Field. The Company currently owns approximately 9,100 gross
leasehold acres (approximately 9,100 net leasehold acres) in the Sand Hills
Field in Crane County, Texas. The Company has a 100% working interest in this
acreage, and the Company operates 100% of its PV-10 in this field. The primary
producing formations in the field are the Judkins, McKnight, San Angelo and
Tubb, which range from depths of 2,800 feet to 4,200 feet. Cumulative field gas
production from these formations has been 1.1 Tcf, 561 Bcf, 40 Bcf and 228 Bcf,
respectively. In addition, cumulative oil production from the Judkins, McKnight
and Tubb formations in the field has been 12 MMBbls, 125 MMBbls and 96 MMBbls,
respectively.
Evetts Field. The Company owns 1,280 gross leasehold acres (724 net
leasehold acres) in the Evetts Field in Winkler County, Texas. The Company's
working interests in this field range from 3% to 91%, and the Company operates
approximately 84% of its PV-10 in this field. In addition, the Company has an
approximate 4.28% working interest in the balance of the field, which is
operated by another company. The primary producing formations in the field are
the Ellenburger, Silurian and Penn, which range from depths of 15,500 feet to
20,800 feet. Cumulative field production from these formations has been 82 Bcf,
653 Bcf and 35 Bcf, respectively.
In this field, the Company has identified one proved undeveloped location
in the Silurian formation. The Company will conduct a 3-D seismic survey to
optimize this location. The Company has identified one unproven drilling
location targeting the Atoka formation and four unproven drilling locations
targeting the Bone Spring formation. The Company has identified these locations
using data gathered from wells directly offsetting the proposed locations.
Headlee Field. The Company currently owns approximately 16,000 gross
leasehold acres (approximately 460 net leasehold acres) in the Headlee Field in
Ector County, Texas. The Company has a 2.91% working interest in the Headlee
Devonian Unit. Since 1989, a gas blowdown in the unit has produced 388 Bcf.
Petco Field. The Company currently owns 2,560 gross leasehold acres (1,632
net leasehold acres) in the Petco Field in Pecos County, Texas. The Company's
working interests in this acreage range from 60% to 75%, and the Company
operates 100% of its PV-10 in this field. The primary producing formations in
the field are the Devonian and the Ellenburger, which range from depths of
11,000 feet to 13,700 feet. Cumulative field natural gas production from these
formations has been 13 Bcf and 9.5 Bcf, respectively. In the second quarter of
1996, the Company conducted a 3-D seismic survey covering 15 square miles of the
Petco field. Based on analysis of this seismic and production data and extensive
studies of subsurface mapping and dipmeters, the Company has identified a proved
undeveloped location on its acreage with a planned dual completion in the
Devonian and Ellenburger formations. The Company has also identified an
exploration prospect and plans to extend the 3-D seismic survey to further
delineate this and other potential prospects in the field.
OIL AND NATURAL GAS RESERVES
The following table summarizes the estimates of the Company's historical
net proved reserves as of December 31, 1995 and September 30, 1996 and pro forma
reserves as of December 31, 1995 and September 30, 1996, and the present values
attributable to these reserves at such dates. The reserve and present value data
as of December 31, 1995 were prepared by the Company. The reserve and present
value data of the Company and of the 1996 Acquisition as of September 30, 1996
were prepared by Williamson. The pro forma December 31, 1995 and September 30,
1996 reserve data and present values give effect to the 1996 Acquisition as if
it had occurred on the last day of the period indicated. Summaries of the
September 30, 1996
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<PAGE> 32
reserve reports and the letters of Williamson with respect thereto are included
as Appendix A to this Prospectus.
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1995 AS OF SEPTEMBER 30, 1996
------------------------ ------------------------
HISTORICAL PRO FORMA HISTORICAL PRO FORMA
---------- --------- ---------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Estimated proved reserves:
Oil (MBbls)................................... 6,146 16,460 6,563 17,843
Gas (MMcf).................................... 134,995 242,039 179,565 280,823
MBOE (6 Mcf per Bbl).......................... 28,645 56,800 36,491 64,647
Proved developed reserves as a percentage of
proved reserves............................... 47% 68% 42% 62%
PV-10(1)........................................ $ 89,753 $ 198,341 $ 144,532 $ 292,080
Standardized Measure of Discounted Future Net
Cash Flows(2)................................. $ 66,352 $ 176,421 $ 104,678 $ 229,199
</TABLE>
- ---------------
(1) The present value of future net revenue attributable to the Company's
reserves was prepared using prices in effect at the end of the respective
periods presented, discounted at 10% per annum on a pre-tax basis. Such
amounts reflect the effects of the Company's hedging activities. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Other Matters."
(2) The Standardized Measure of Discounted Future Net Cash Flows prepared by the
Company represents the present value of future net revenues after income
taxes discounted at 10%. Such amounts reflect the effects of the Company's
hedging activities. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Other Matters."
In accordance with applicable requirements of the Commission, estimates of
the Company's proved reserves and future net revenues are made using sales
prices estimated to be in effect as of the date of such reserve estimates and
are held constant throughout the life of the properties (except to the extent a
contract specifically provides for escalation). The sales prices used in the
estimates presented above were based on oil and gas prices that the Company
would have received at the end of each reported period without escalation. The
average prices for the Company's reserves as of September 30, 1996 were $23.37
per Bbl of oil and $1.39 per Mcf of natural gas, compared to average prices for
the Company's reserves as of December 31, 1995 of $17.66 per Bbl and $1.38 per
Mcf.
Estimated quantities of proved reserves and future net revenues therefrom
are affected by natural gas prices, which have fluctuated widely in recent
years. There are numerous uncertainties inherent in estimating oil and gas
reserves and their estimated values, including many factors beyond the control
of the producer. The reserve data set forth in this Prospectus represents only
estimates. Reservoir engineering is a subjective process of estimating
underground accumulations of oil and gas that cannot be measured in an exact
manner. The accuracy of any reserve estimate is a function of the quality of
available data and of engineering and geological interpretation and judgment. As
a result, estimates of different engineers, including those used by the Company,
may vary. In addition, estimates of reserves are subject to revision based upon
actual production, results of future development and exploration activities,
prevailing oil and gas prices, operating costs and other factors, which
revisions may be material. Accordingly, reserve estimates are often different
from the quantities of oil and gas that are ultimately recovered and are highly
dependent upon the accuracy of the assumptions upon which they are based. The
Company's estimated proved reserves have not been filed with or included in
reports to any federal agency. See "Risk Factors -- Uncertainty of Reserve
Information and Future Net Revenue Estimates."
Estimates with respect to proved reserves that may be developed and
produced in the future are often based upon volumetric calculations and upon
analogy to similar types of reserves rather than actual production history.
Estimates based on these methods are generally less reliable than those based on
actual production history. Subsequent evaluation of the same reserves based upon
production history will result in variations, which may be substantial, in the
estimated reserves.
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<PAGE> 33
PRODUCTIVE WELLS AND ACREAGE
Productive Wells
The following table sets forth the Company's productive wells as of
September 30, 1996:
<TABLE>
<CAPTION>
ACTUAL PRO FORMA(1)
------------- -------------
GROSS NET GROSS NET
----- --- ----- ---
<S> <C> <C> <C> <C>
Oil.................................................... 626 187 1,351 444
Gas.................................................... 32 13 272 74
--- --- ----- ---
Total Productive Wells....................... 658 200 1,623 518
=== === ===== ===
</TABLE>
- ---------------
(1) Gives effect to the 1996 Acquisition as if it had occurred on September 30,
1996.
Productive wells consist of producing wells and wells capable of
production, including gas wells awaiting pipeline connections. Wells that are
completed in more than one producing horizon are counted as one well. Of the
gross wells reported above, on a pro forma basis, nine had multiple completions.
Acreage Data
Undeveloped acreage includes leased acres on which wells have not been
drilled or completed to a point that would permit the production of commercial
quantities of oil and gas, regardless of whether or not such acreage contains
proved reserves. A gross acre is an acre in which an interest is owned. A net
acre is deemed to exist when the sum of fractional ownership interests in gross
acres equals one. The number of net acres is the sum of the fractional interests
owned in gross acres expressed as whole numbers and fractions thereof. The
following table sets forth the approximate developed and undeveloped acreage in
which the Company held a leasehold mineral or other interest at December 31,
1995 and, on a pro forma basis, at September 30, 1996.
<TABLE>
<CAPTION>
DEVELOPED ACRES UNDEVELOPED ACRES
---------------------------------------- ---------------------------------------
ACTUAL PRO FORMA(1) ACTUAL PRO FORMA(1)
----------------- ------------------ ----------------- -----------------
GROSS NET GROSS NET GROSS NET GROSS NET
------ ------ ------- ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total.......... 48,050 13,113 141,604 48,258 33,364 17,116 48,760 27,258
</TABLE>
- ---------------
(1) Gives effect to the 1996 Acquisition as if it had occurred on September 30,
1996.
DRILLING ACTIVITIES
The following table sets forth the drilling activity of the Company on its
properties for the period from March 31, 1995 (inception) through December 31,
1995, and for the nine months ended September 30, 1996.
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
(MARCH 31,
1995) NINE MONTHS
THROUGH ENDED
DECEMBER 31, SEPTEMBER 30,
1995 1996
--------------- ---------------
GROSS NET GROSS NET
----- --- ----- ---
<S> <C> <C> <C> <C>
Exploratory Wells
Productive......................................... 1 0.5 -- --
Nonproductive...................................... 2 1.3 1 0.2
----- --- ----- ---
Total...................................... 3 1.8 1 0.2
==== === ==== ===
Development Wells
Productive......................................... -- -- 6 3.6
Nonproductive...................................... -- -- 1 0.2
----- --- ----- ---
Total...................................... -- -- 7 3.8
==== === ==== ===
</TABLE>
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<PAGE> 34
NET PRODUCTION, UNIT PRICES AND COSTS
The following table presents certain information with respect to oil and
gas production, prices and costs attributable to all oil and gas property
interests owned by the Company for the period from March 31, 1995 (inception)
through December 31, 1995 and for the nine months ended September 30, 1996.
<TABLE>
<CAPTION>
PERIOD ENDED NINE MONTHS ENDED
DECEMBER 31, 1995 SEPTEMBER 30, 1996
--------------------------- ---------------------------
HISTORICAL PRO FORMA(1) HISTORICAL PRO FORMA(1)
---------- ------------ ---------- ------------
<S> <C> <C> <C> <C>
Production:
Oil (MBbls)....................... 30 2,004 388 1,311
Gas (MMcf)........................ 245 17,952 2,725 12,235
Total (MBOE)...................... 71 4,996 842 3,350
Average sales price(2):
Oil (per Bbl)..................... $16.80 $14.23 $17.25 $17.30
Gas (per Mcf)..................... .97 1.16 1.30 1.61
Per BOE........................... 10.46 9.88 12.16 12.66
Production costs, including
production taxes (per BOE)........ $ 4.28 $ 3.49 $ 5.15(3) $ 4.13(3)
General and administrative costs
(per BOE)......................... $21.77 $ .93 $ 1.72 $ 1.04
Depletion, depreciation and
amortization expenses (per BOE)... $ 4.21 $ 3.37 $ 2.69 $ 3.58
</TABLE>
- ---------------
(1) Gives effect to the 1995 Acquisition and the 1996 Acquisition as if those
transactions had occurred on January 1, 1995.
(2) Reflects results of hedging activities. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Other Matters."
(3) Includes approximately $.77 per BOE of production costs attributable to
necessary nonrecurring maintenance operations on the 1995 Acquisition.
OIL AND GAS MARKETING AND MAJOR CUSTOMERS
The revenues generated by the Company's operations are highly dependent
upon the prices of, and demand for, oil and gas. The price received by the
Company for its oil and gas production depends on numerous factors beyond the
Company's control, including seasonality, the condition of the United States
economy, particularly the manufacturing sector, foreign imports, political
conditions in other oil-producing and gas-producing countries, the actions of
OPEC and domestic government regulation, legislation and policies. Decreases in
the prices of oil and natural gas could have an adverse effect on the carrying
value of the Company's proved reserves and the Company's revenues, profitability
and cash flow. Although the Company is not currently experiencing any
significant involuntary curtailment of its oil or gas production, market,
economic and regulatory factors may in the future materially affect the
Company's ability to sell its oil or gas production. See "Risk
Factors -- Volatility of Oil and Gas Prices" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
For the nine months ended September 30, 1996, sales to Enron Corp., and its
subsidiaries and affiliates, were approximately 52% of the Company's oil and gas
revenues. See "Certain Transactions." Certain of these sales were based on six
month contracts for crude oil and month-to-month spot sales for natural gas.
Due to the availability of other markets and pipeline connections, the
Company does not believe that the loss of any single crude oil or gas customer
would have a material adverse effect on the Company's results of operations.
32
<PAGE> 35
COMPETITION
The oil and gas industry is highly competitive. The Company encounters
competition from other oil and gas companies in all areas of its operations,
including the acquisition of producing properties. The Company's competitors
include major integrated oil and gas companies and numerous independent oil and
gas companies, individuals and drilling and income programs. Many of its
competitors are large, well established companies with substantially larger
operating staffs and greater capital resources than the Company and which, in
many instances, have been engaged in the energy business for a much longer time
than the Company. Such companies may be able to pay more for productive oil and
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 human resources permit. The Company's ability to acquire additional
properties and to discover reserves in the future will be dependent upon its
ability to evaluate and select suitable properties and to consummate
transactions in a highly competitive environment. See "Risk
Factors -- Competition" and "Risk Factors -- Substantial Capital Requirements."
OPERATING HAZARDS AND UNINSURED RISKS
Drilling activities are subject to many risks, including the risk that no
commercially productive reservoirs will be encountered. There can be no
assurance that new wells drilled by the Company will be productive or that the
Company will recover all or any portion of its investment. Drilling for oil and
gas may involve unprofitable efforts, not only from dry wells, but from wells
that are productive but do not produce sufficient net revenues to return a
profit after drilling, operating and other costs. The cost of drilling,
completing and operating wells is often uncertain. The Company's drilling
operations may be curtailed, delayed or canceled as a result of numerous
factors, many of which are beyond the Company's control, including title
problems, weather conditions, mechanical problems, compliance with governmental
requirements and shortages or delays in the delivery of equipment and services.
The Company's future drilling activities may not be successful and, if
unsuccessful, such failure may have a material adverse effect on the Company's
future results of operations and financial condition. See "Risk
Factors -- Drilling and Operating Risks."
In addition, the Company's use of 3-D seismic requires greater pre-drilling
expenditures than traditional drilling strategies. Although the Company believes
that its use of 3-D seismic will increase the probability of success of its
exploratory wells and should reduce average finding costs through the
elimination of prospects that might otherwise be drilled solely on the basis of
2-D seismic data and other traditional methods, unsuccessful wells are likely to
occur. There can be no assurance that the Company's drilling program will be
successful or that unsuccessful drilling efforts will not have a material
adverse effect on the Company.
The Company's operations are subject to hazards and risks inherent in
drilling for and producing and transporting oil and gas, such as fires, natural
disasters, explosions, encountering formations with abnormal pressures,
blowouts, cratering, pipeline ruptures and spills, any of which can result in
the loss of hydrocarbons, environmental pollution, personal injury claims and
other damage to properties of the Company and others.
The Company expects to drill a number of deep vertical and horizontal wells
in the future. The Company's deep and/or horizontal drilling activities involve
greater risk of mechanical problems than other drilling operations. These wells
may be significantly more expensive to drill than those drilled to date.
The Company maintains insurance against some, but not all, of the risks
described above. The Company may elect to self-insure in circumstances in which
management believes that the cost of insurance, although available, is excessive
relative to the risks presented. The occurrence of an event that is not covered,
or not fully covered, by insurance could have a material adverse effect on the
Company's financial condition and results of operations.
EMPLOYEES
As of September 30, 1996, the Company had 20 full-time employees, none of
whom is represented by any labor union. Included in the total were 19 corporate
employees located in the Company's office in Midland, Texas, eight of whom are
devoted to the management of the Company. The Company plans to employ an
33
<PAGE> 36
additional 20 to 25 employees as a result of the 1996 Acquisition. The Company
considers its relations with its employees to be good.
OTHER FACILITIES
The Company currently leases approximately 12,905 square feet of office
space in Midland, Texas, where its principal offices are located. This office
lease is with an affiliate of Jack Hightower. See "Certain Transactions." The
Company's principal offices are leased through December 31, 1998. The Company
expects to lease additional space in the fourth quarter of 1996 and believes it
can obtain such space on commercially reasonable terms.
TITLE TO PROPERTIES
The Company believes it has satisfactory title to all of its producing
properties in accordance with standards generally accepted in the oil and gas
industry. The Company's properties are subject to customary royalty interests,
liens incident to operating agreements, liens for current taxes and other
burdens which the Company believes do not materially interfere with the use of
or affect the value of such properties. The Company's Credit Agreement is
secured by a first lien on properties that represented at least 80% of the value
of the Company's proved oil and gas properties (based on PV-10 as of September
30, 1996).
GOVERNMENTAL REGULATION
The Company's oil and gas exploration, production and related operations
are subject to extensive rules and regulations promulgated by federal and state
agencies. Failure to comply with such rules and regulations can result in
substantial penalties. The regulatory burden on the oil and gas industry
increases the Company's cost of doing business and affects its profitability.
Although the Company believes it is in substantial compliance with all
applicable laws and regulations, because such rules and regulations are
frequently amended or reinterpreted, the Company is unable to predict the future
cost or impact of complying with such laws.
The State of Texas and many other states require permits for drilling
operations, drilling bonds and reports concerning operations and impose other
requirements relating to the exploration and production of oil and gas. Such
states also have statutes or regulations addressing conservation matters,
including provisions for the unitization or pooling of oil and gas properties,
the establishment of maximum rates of production from wells, and the regulation
of spacing, plugging and abandonment of such wells.
The Federal Energy Regulatory Commission ("FERC") regulates interstate
natural gas transportation rates and service conditions, which affect the
marketing of gas produced by the Company, as well as the revenues received by
the Company for sales of such production. Since the mid-1980s, FERC has issued a
series of orders, culminating in Order Nos. 636, 636-A and 636-B ("Order 636"),
that have significantly altered the marketing and transportation of gas. Order
636 mandates a fundamental restructuring of interstate pipeline sales and
transportation service, including the unbundling by interstate pipelines of the
sale, transportation, storage and other components of the city-gate sales
services such pipelines previously performed. One of FERC's purposes in issuing
the orders is to increase competition within all phases of the gas industry.
Order 636 and subsequent FERC orders on rehearing have been appealed and are
pending judicial review. Because these orders may be modified as a result of the
appeals, it is difficult to predict the ultimate impact of the orders on the
Company and its gas marketing efforts. Generally, Order 636 has eliminated or
substantially reduced the interstate pipelines' traditional role as wholesalers
of natural gas, and has substantially increased competition and volatility in
natural gas markets.
The price the Company receives from the sale of oil and natural gas liquids
is affected by the cost of transporting products to market. Effective January 1,
1995, FERC implemented regulations establishing an indexing system for
transportation rates for oil pipelines, which, generally, would index such rates
to inflation, subject to certain conditions and limitations. The Company is not
able to predict with certainty the effect, if any, of these regulations on its
operations. However, the regulations may increase transportation costs or
34
<PAGE> 37
reduce wellhead prices for oil and natural gas liquids. See "Risk
Factors -- Compliance with Government Regulations."
ENVIRONMENTAL MATTERS
The Company's operations and properties are subject to extensive and
changing federal, state and local laws and regulations relating to environmental
protection, including the generation, storage, handling, emission,
transportation and discharge of materials into the environment, and relating to
safety and health. The recent trend in environmental legislation and regulation
generally is toward stricter standards, and this trend will likely continue.
These laws and regulations may require the acquisition of a permit or other
authorization before construction or drilling commences and for certain other
activities; limit or prohibit construction, drilling and other activities on
certain lands lying within wilderness and other protected areas; and impose
substantial liabilities for pollution resulting from the Company's operations.
The permits required for various of the Company's operations are subject to
revocation, modification and renewal by issuing authorities. Governmental
authorities have the power to enforce compliance with their regulations, and
violations are subject to fines or injunction, or both. In the opinion of
management, the Company is in substantial compliance with current applicable
environmental laws and regulations, and the Company has no material commitments
for capital expenditures to comply with existing environmental requirements.
Nevertheless, changes in existing environmental laws and regulations or in
interpretations thereof could have a significant impact on the Company, as well
as the oil and gas industry in general. CERCLA and comparable state statutes
impose strict, joint and several liability on owners and operators of sites and
on persons who disposed of or arranged for the disposal of "hazardous
substances" found at such sites. It is not uncommon for neighboring landowners
and other third parties to file claims for personal injury and property damage
allegedly caused by the hazardous substances released into the environment. RCRA
and comparable state statutes govern the disposal of "solid waste" and
"hazardous waste" and authorize the imposition of substantial fines and
penalties for noncompliance. Although CERCLA currently excludes petroleum from
its definition of "hazardous substance," state laws affecting the Company's
operations impose clean-up liability relating to petroleum and petroleum related
products. In addition, although RCRA classifies certain oil field wastes as
"nonhazardous," such exploration and production wastes could be reclassified as
hazardous wastes thereby making such wastes subject to more stringent handling
and disposal requirements.
The Company has acquired leasehold interests in numerous properties that
for many years have produced oil and gas. Although the previous owners of these
interests may have used 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. In addition, some of the Company's
properties are operated by third parties over whom the Company has no control.
Notwithstanding the Company's lack of control over properties operated by
others, the failure of the operator to comply with applicable environmental
regulations may, in certain circumstances, adversely impact the Company. See
"Risk Factors -- Compliance with Environmental Regulations" and "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Other Matters."
ABANDONMENT COSTS
The Company is responsible for payment of plugging and abandonment costs on
the oil and gas properties pro rata to its working interest. Based on its
experience, the Company anticipates that the ultimate aggregate salvage value of
lease and well equipment located on its properties will exceed the costs of
abandoning such properties. There can be no assurance, however, that the Company
will be successful in avoiding additional expenses in connection with the
abandonment of any of its properties. In addition, abandonment costs and their
timing may change due to many factors including actual production results,
inflation rates and changes in environmental laws and regulations.
LEGAL PROCEEDINGS
The Company presently is not a party to any legal proceedings.
35
<PAGE> 38
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information regarding the executive
officers, directors and prospective director of the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION
------------------------ --- -------------------------------------------------------------
<S> <C> <C>
Jack D. Hightower....... 48 President, Chief Executive Officer and Chairman of the Board
George G. Staley........ 62 Executive Vice President, Exploration and Director
Rodney L. Woodard....... 41 Vice President, Engineering
Thomas H. Moore......... 52 Vice President, Business Development
Dan P. Colwell.......... 52 Vice President, Land
William K. White........ 54 Vice President, Finance and Chief Financial Officer
John L. Benfatti........ 51 Vice President, Accounting and Controller
Susan D. Rowland........ 35 Vice President, Corporate Administration and Secretary
David R. Albin.......... 37 Director
Kenneth A. Hersh........ 33 Director
William J. Vaughn,
Jr.................... 76 Director*
</TABLE>
- ---------------
* Expected to be elected as a director at the Company's first regular Board of
Directors meeting following the completion of this offering.
Set forth below is a description of the backgrounds of the executive
officers, directors and prospective director of the Company.
Jack D. Hightower has served as President, Chief Executive Officer and
Chairman of the Board of Directors of the Company since he founded the Company
in March 1995. Prior to forming the Company, from 1986 to January 1996, Mr.
Hightower served as Chairman of the Board and Chief Executive Officer of United
Oil Services, Inc., a complete oil field service company serving customers in
the Permian Basin. From 1978 to 1995, Mr. Hightower served as Chairman of the
Board and President of Amber Energy, Inc., a company formed to identify oil and
gas exploration prospects. From 1991 to 1994, Mr. Hightower served as Chairman
of the Board, Chief Executive Officer and President of Enertex, Inc., which
served as the operator of record for several oil and gas properties involving
Mr. Hightower and other nonoperators, including Selma International Investment
Limited. Prior to 1978, Mr. Hightower served in a number of positions for UNOCAL
and Texas Land and Mortgage. In 1981, Mr. Hightower was a founding director of
United Bank, Midland, which was sold to Texas Commerce Bank in 1990. Since 1990,
Mr. Hightower has served on the Board of Directors of Texas Commerce Bank, N.A.,
Midland. Mr. Hightower serves on the National Petroleum Council.
George G. Staley has served as Executive Vice President, Exploration and
Director of the Company since its formation. From 1975 until 1995, Mr. Staley
served as President and Chief Executive Officer of Staley Gas Co., Inc. and
Staley Operating Co., which are oil and gas exploration and operating companies.
Prior to 1975, Mr. Staley served in a number of positions with HNG Oil Company
and its predecessors.
Rodney L. Woodard has served as Vice President, Engineering for the Company
since its formation. From 1985 to 1995, Mr. Woodard served as Vice President of
Selma International Investment Limited. Mr. Woodard was employed by Delta
Drilling Company as West Texas Division Production Manager from 1984 to 1985 and
Division Engineering Manager from 1981 to 1984. From 1979 to 1981, Mr. Woodard
served as staff engineer for Delta Drilling Company. From 1977 to 1979, Mr.
Woodard was employed by AMOCO Production Company in a number of capacities,
including senior petroleum engineer.
Thomas H. Moore has served as Vice President, Business Development of the
Company since its formation. From 1992 to 1995, Mr. Moore served as Managing
Partner of Magnum Energy Corporation, L.L.C. From 1991 until 1992, Mr. Moore
served as Executive Vice President -- Exploration and Production, Chief
Operating Officer and Director of Clayton Williams Energy, Inc. From 1985 to
1991, Mr. Moore served
36
<PAGE> 39
as President, Chief Operating Officer and Director of Clayton W. Williams, Jr.
Inc. From 1981 to 1985, Mr. Moore served initially as Manager of Exploration and
then as General Manager of Clayton W. Williams, Jr., Inc. From 1974 until
joining the Williams organization in 1981, Mr. Moore was employed by Union Texas
Petroleum Corporation, initially as an exploration geologist and ultimately as
Exploration Manager.
Dan P. Colwell has served as Vice President, Land for the Company since its
formation. From 1993 to 1995, Mr. Colwell served as Vice President of Land for
Enertex, Inc. From 1991 to 1993, Mr. Colwell was employed by ARCO as Director of
Business Development from 1991 to 1993 and Area Land Manager from 1987 to 1991.
Prior to joining ARCO, Mr. Colwell served in a number of capacities for Texaco,
Inc., Adobe Oil and Gas Corp. and Valero Producing Co.
William K. White has served as Vice President, Finance and Chief Financial
Officer of the Company since September 1996. From 1994 to September 1996, Mr.
White was Senior Vice President of the Energy Investment Group of Trust Company
of The West. From 1991 to 1994, Mr. White was President of the Odessa
Associates, a private firm engaged in the practice of providing financial
consulting services to the oil and gas industry. Prior to 1991, Mr. White served
as Vice President and Chief Financial Officer of Eastex Energy, Inc., Senior
Vice President, Finance and Administration and Chief Financial Officer of
Ensource Inc., and as Vice President -- Finance and Treasurer of Lear Petroleum
Corporation and Mitchell Energy and Development Corp. Mr. White is a member of
the National Board of Governors of the Independent Petroleum Association of
America ("IPAA"), Chairman of the IPAA Capital Markets Committee and a member of
the Board of Directors of the Oil and Gas Investment Symposium.
John L. Benfatti has served as Vice President, Accounting and Controller of
the Company since its formation. From 1980 to 1995, Mr. Benfatti served as
Controller and Treasurer of Staley Gas Co., Inc. From 1978 to 1980, Mr. Benfatti
founded and operated a data processing consulting and service company in
Midland, Texas. From 1971 to 1978, Mr. Benfatti was employed by Houston Natural
Gas Production Company and its successor, HNG Oil Company, in a number of
capacities, including Manager of Information Management Systems.
Susan D. Rowland has served as Vice President, Corporate Administration and
Secretary of the Company since its formation. From 1986 to 1996, Ms. Rowland
served as a corporate officer and administrative manager of a number of
companies, including Amber Energy, Inc., Enertex, Inc., Haley Properties, Inc.
and United Oil Services, Inc.
David R. Albin has served as a director of the Company since its formation.
Since 1988, Mr. Albin has been a manager of the NGP investment funds, which were
organized to make direct equity investments in the North American oil and gas
industry. He is currently responsible for co-managing NGP's overall investment
portfolio. From December 1984 until November 1988, Mr. Albin was employed by
Bass Investment Limited Partnership, where he was also responsible for portfolio
management. Mr. Albin serves as a director of Offshore Energy Development
Corporation, an independent oil and gas company that does not materially compete
with the Company.
Kenneth A. Hersh has served as a director of the Company since its
formation. Since 1989, Mr. Hersh has served as a co-manager of the NGP
investment funds, which were organized to make direct equity investments in the
North American oil and gas industry. He is currently responsible for co-managing
NGP's overall investment portfolio. From 1985 to 1987, Mr. Hersh was employed by
the investment banking division of Morgan Stanley & Co., where he was a member
of the Energy Group specializing in oil and gas financing and merger and
acquisition transactions. Mr. Hersh serves as a director of Mesa Inc. and HS
Resources, Inc., two independent oil and gas companies whose operations do not
materially compete with those of the Company.
William J. Vaughn, Jr. is expected to be elected as director at the
Company's first regular Board of Directors meeting following the completion of
this offering. Since 1975, Mr. Vaughn has served as Chairman of the Board and
President of WJV, Inc. and DMV, Inc., which are oil and gas exploration
companies. From 1986 to 1996, Mr. Vaughn served as Vice President of United Oil
Services, Inc., a complete oil field service company. From 1975 to 1995, Mr.
Vaughn was an independent geologist in association with Mr. Hightower.
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<PAGE> 40
From 1948 to 1975, Mr. Vaughn was employed as a petroleum geologist by Texaco,
Inc. From 1953 to 1958, Mr. Vaughn served as District Geologist in North Texas
and from 1958 to 1975 he was Division Geologist in Texaco's Midland Division.
All directors are elected to serve until the next annual meeting of
stockholders and until their successors are elected and qualified. Executive
officers are generally elected annually by the Board of Directors to serve,
subject to the discretion of the Board of Directors, until their successors are
elected or appointed.
COMMITTEES OF THE BOARD
Upon completion of this offering, the Company will establish two standing
committees of the Board of Directors: an Audit Committee and a Compensation
Committee. Messrs. Albin, Hersh and Vaughn are expected to be members of the
Audit Committee and Compensation Committee following completion of this
offering. The Audit Committee will review the functions of the Company's
management and independent accountants pertaining to the Company's financial
statements and perform such other related duties and functions as are deemed
appropriate by the Audit Committee or the Board of Directors. The Compensation
Committee of the Board of Directors will recommend to the Board of Directors the
base salaries, bonuses and other incentive compensation for the Company's
officers. The Board of Directors has designated the Compensation Committee as
the administrator of the Company's 1996 Incentive Plan. See "Management --
Employee Benefit Plans -- 1996 Incentive Plan."
DIRECTOR COMPENSATION
Directors who are also employees of the Company are not separately
compensated for serving on the Board of Directors. Directors who are not
employees of the Company receive $15,000 per year for their services as
directors. In addition, the Company reimburses them for the expenses incurred in
connection with attending meetings of the Board of Directors and its committees.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
Section 102(b)(7) of the Delaware General Corporation Law ("DGCL") enables
a corporation to include in its certificate of incorporation a provision
eliminating or limiting the personal liability of members of its Board of
Directors to the corporation or its stockholders for monetary damages for breach
of fiduciary duty as a director. Such a provision may not eliminate or limit the
liability of a director (1) for any breach of a director's duty of loyalty to
the corporation or its stockholders, (2) for acts or omissions not in good faith
or which involve intentional misconduct or a knowing violation of a law, (3) for
paying an unlawful dividend or approving an illegal stock repurchase (as
provided in Section 174 of the DGCL), or (4) for any transaction from which the
director derived an improper personal benefit.
The Company has entered into indemnity agreements with each of its
executive officers and directors that provide for indemnification in certain
instances against liability and expenses incurred in connection with proceedings
brought by or in the right of the Company or by third parties by reason of a
person serving as an officer or director of the Company.
The Company believes that these provisions and agreements will assist the
Company in attracting and retaining qualified individuals to serve as directors
and officers.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
None of the members of the Compensation Committee is or has been an
employee of the Company. No executive officer of the Company serves as a member
of the board of directors or compensation committee of any entity that has one
or more executive officers serving as a member of the Company's Board of
Directors or Compensation Committee. Messrs. Hightower, Staley, Albin, Hersh and
Vaughn, or their affiliates, have acquired capital stock of the Company. See
"Certain Transactions."
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<PAGE> 41
EXECUTIVE COMPENSATION
The following table sets forth all compensation paid for the last fiscal
year to the Company's Chief Executive Officer and each of the Company's other
executive officers whose annual salary exceeded $100,000 on an annualized basis
for the fiscal year ended December 31, 1995, as well as to certain other
executive officers whose projected annual salary and bonus for the fiscal year
ending December 31, 1996 is in each case expected to exceed $100,000 on an
annualized basis (collectively, the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
ANNUAL COMPENSATION ------------
--------------------------------------------- SHARES
NAME AND OTHER ANNUAL UNDERLYING ALL OTHER
PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION(1) OPTIONS (#) COMPENSATION(2)
- ---------------------------------------- ---- ------- ------ --------------- ------------ ---------------
<S> <C> <C> <C> <C> <C> <C>
Jack D. Hightower(3).................... 1995 $75,000 $1,000 $-- 1,682,491 $ 6,201
President and Chief Executive Officer
George G. Staley(4)..................... 1995 75,000 1,000 -- 975,313 10,423
Executive Vice President, Exploration
Rodney L. Woodard(5).................... 1995 67,500 1,000 -- 196,313 5,596
Vice President, Engineering
Thomas H. Moore(6)...................... 1995 54,000 1,000 -- 210,456 3,718
Vice President, Business Development
Dan P. Colwell(7)....................... 1995 54,000 1,000 -- 196,313 5,869
Vice President, Land
</TABLE>
- ---------------
(1) Other Annual Compensation does not include perquisites and other personal
benefits because the aggregate amount of such compensation does not exceed
the lesser of (i) $50,000 or (ii) 10% of individual combined salary and
bonus for the Named Executive Officers in each year.
(2) Consists of premiums paid by the Company under a life insurance program and
contributions by the Company under its 401(k) Retirement Plan of $5,076 and
$1,125, respectively, for Mr. Hightower; $9,298 and $1,125, respectively,
for Mr. Staley; $4,583 and $1,013, respectively, for Mr. Woodard; $2,908 and
$810, respectively, for Mr. Moore; and $5,059 and $810, respectively, for
Mr. Colwell.
(3) For the period from March 31, 1995 through December 31, 1995, Mr. Hightower
earned an annual base salary of $100,000. Upon completion of this offering,
Mr. Hightower's base salary will be $160,000.
(4) For the period from March 31, 1995 through December 31, 1995, Mr. Staley
earned an annual base salary of $100,000. Upon completion of this offering,
Mr. Staley's base salary will be $160,000.
(5) For the period from March 31, 1995 through December 31, 1995, Mr. Woodard
earned an annual base salary of $90,000. Upon completion of this offering,
Mr. Woodard's base salary will be $135,000.
(6) For the period from March 31, 1995 through December 31, 1995, Mr. Moore
earned an annual base salary of $72,000. Upon completion of this offering,
Mr. Moore's base salary will be $135,000.
(7) For the period from March 31, 1995 through December 31, 1995, Mr. Colwell
earned an annual base salary of $72,000. Upon completion of this offering,
Mr. Colwell's base salary will be $135,000.
William K. White was elected Vice President, Finance and Chief Financial
Officer of the Company on September 30, 1996 and receives an annual base salary
of $135,000.
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<PAGE> 42
Option Grants
The following table contains information about stock option grants to the
Named Executive Officers in 1996 that were substituted for stock option grants
to Named Executive Officers in 1995:
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZED VALUE
AT
ASSUMED ANNUAL RATES OF
STOCK PRICE APPRECIATION
INDIVIDUAL GRANTS FOR OPTION TERM(1)
-------------------------------------------------- -------------------------
NUMBER OF % OF TOTAL (DOLLARS IN THOUSANDS)
SECURITIES OPTIONS EXERCISE
UNDERLYING GRANTED TO OR BASE
OPTIONS EMPLOYEES IN PRICE EXPIRATION
NAME GRANTED (#) FISCAL YEAR ($/SH) DATE 0% ($) 5% ($) 10% ($)
- ----------------------------- ----------- ------------ -------- ---------- ------ ------ -------
<S> <C> <C> <C> <C> <C> <C> <C>
Jack D. Hightower............ 1,682,491 49.66 2.08 3/31/2001 14,167 18,979 25,103
George G. Staley............. 975,313 28.79 2.08 3/31/2001 8,212 11,002 14,552
Rodney L. Woodard............ 196,313 5.79 2.08 3/31/2001 1,653 2,214 2,929
Thomas H. Moore.............. 210,456 6.21 2.08 3/31/2001 1,772 2,374 3,140
Dan P. Colwell............... 196,313 5.79 2.08 3/31/2001 1,653 2,214 2,929
</TABLE>
- ---------------
(1) Amounts represent hypothetical gains that could be achieved for the options
if they are exercised at the end of the option term. Those gains are based
on assumed rates of stock price appreciation of 0%, 5% and 10% compounded
annually from March 31, 1995, as if such options had been granted on such
date, through the expiration date.
Option Exercises and Year-End Option Values
The following table provides information about the number of shares issued
upon option exercises by the Named Executive Officers during 1995, and the value
realized by the Named Executive Officers. The table also provides information
about the number and value of options that would have been held by the Named
Executive Officers at December 31, 1995 as if the Initial Stock Option Plan had
been initiated on March 31, 1995.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION VALUES
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
NUMBER OF SECURITIES IN-THE-MONEY OPTIONS
SHARES UNDERLYING UNEXERCISED AT FY-END($)
ACQUIRED OPTIONS AT FY-END(#) IN THOUSANDS
ON EXERCISE VALUE ---------------------------- ----------------------------
NAME (#) REALIZED($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------ ----------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Jack D. Hightower....... 0 0 0 1,682,491 0 1,430
George G. Staley........ 0 0 0 975,313 0 829
Rodney L. Woodard....... 0 0 0 196,313 0 167
Thomas H. Moore......... 0 0 0 210,456 0 179
Dan P. Colwell.......... 0 0 0 196,313 0 167
</TABLE>
Employment Agreements
The Company and Jack Hightower are parties to an Employment Agreement (the
"Employment Agreement") that provides for the employment of Mr. Hightower as
President, Chief Executive Officer and Chairman of the Board of the Company for
a two year period. The agreement provides for an annual salary of $160,000,
subject to any increases that may be approved by the Compensation Committee of
the Board of Directors from time to time during the term of the Employment
Agreement. Under the Employment Agreement, Mr. Hightower shall be entitled to
participate in any employee benefit programs which the
40
<PAGE> 43
Company provides to its executive officers. As of the date hereof, the employee
benefit programs offered by the Company to its officers and employees include
group insurance coverage, participation in the Company's 401(k) Retirement Plan
and the 1996 Incentive Plan. Under the Employment Agreement, Mr. Hightower will
be entitled to receive up to one year's base salary if his employment is
terminated other than for cause (as defined therein) prior to the expiration of
his employment term. The agreement also provides that Mr. Hightower will not
compete with the Company for a certain period of time following any termination
of his employment for any reason.
Each of the other executive officers of the Company is a party to a
confidentiality and noncompete agreement with the Company.
EMPLOYEE BENEFIT PLANS
Initial Stock Option Plan. An option plan was adopted by the Company (the
"Initial Stock Option Plan"), in connection with the Conversion. The Initial
Stock Option Plan replaces the Option Plan adopted by the Partnership upon its
formation (the "Partnership Option Plan"). The terms of the Initial Stock Option
Plan and the options granted thereunder are substantially the same as the terms
of the Partnership Option Plan and the options granted thereunder (the
"Partnership Options"). All Partnership Options available under the Partnership
Plan were granted to officers and employees prior to the Conversion. Pursuant to
the Exchange Agreement, the Company was required to adopt the Initial Stock
Option Plan and issue options thereunder to each holder of the Partnership
Options, upon substantially the same terms as the Partnership Options held by
such holder. The Partnership and each of the holders of the Partnership Options
consented to the substitution of the Initial Stock Option Plan and the options
issued thereunder for the Partnership Option Plan and the Partnership Options.
The Initial Option Plan is for the benefit of the officers and employees of
the General Partner and the Partnership who held partnership options. Options
granted under the Plan may be exercised to acquire up to an aggregate of
3,631,350 shares of Common Stock at an exercise price per share of $2.08. Any
option holder may elect to pay the exercise price for an option in cash, or by
delivery of the option holder's secured interest-bearing promissory term note
(payable to the Company in fifteen months), or by any combination of the
foregoing.
There are four different series of options authorized under the plan, the
terms of which are substantially the same, except for the vesting requirements.
The Series A Options, which cover 2,410,728 option shares, vest ratably over
three years upon each anniversary date of March 31, if the holder remains
employed by the Company as of such date. If the holder's employment is
terminated prior to a vesting date either voluntarily by such holder or by
action of the Company for reasons other than for cause (as specified therein)
the Option may be exercised within three months after such termination (if
otherwise prior to the date of expiration of the Option), to purchase the number
of units then vested (with pro-rata vesting if in mid-year). One third of the
shares subject to the Series A Options (803,576 shares) are currently vested.
The Board of Directors of the Company has adopted a resolution, pursuant to the
terms of the Series B, C and D options granted under the plan, which declares
that the right to exercise the Series B Options, which cover 387,265 option
shares, will vest on March 31, 1997, the right to exercise the Series C Options,
which cover 406,390 shares, will vest on March 31, 1998 and the right to
exercise the Series D Options, which cover 426,967 shares, will vest on March
31, 1999.
1996 Incentive Plan. The Board of Directors and the stockholders of the
Company approved the adoption of the Company's 1996 Incentive Plan (the "1996
Incentive Plan") as of October 1, 1996. The purpose of the 1996 Incentive Plan
is to reward selected officers and key employees of the Company and others who
have been or may be in a position to benefit the Company, compensate them for
making significant contributions to the success of the Company and provide them
with a proprietary interest in the growth and performance of the Company.
Participants in the 1996 Incentive Plan are selected by the Board of
Directors or such committee of the Board as is designated by the Board to
administer the 1996 Incentive Plan (upon completion of this offering, the
Compensation Committee of the Board of Directors) from among those who hold
positions of responsibility with the Company and whose performance, in the
judgment of the Compensation Committee,
41
<PAGE> 44
can have a significant effect on the success of the Company. An aggregate of
850,000 shares of Common Stock have been authorized and reserved for issuance
pursuant to the 1996 Incentive Plan. As of October 1, 1996, options have been
granted to participants under the 1996 Incentive Plan to purchase a total of
85,000 shares of Common Stock at an exercise price per share equal to the Price
to Public set forth on the cover page of this Prospectus. These options vest
ratably on each of the first through fourth anniversaries of the grant date.
Subject to the provisions of the 1996 Incentive Plan, the Compensation
Committee will be authorized to determine the type or types of awards made to
each participant and the terms, conditions and limitations applicable to each
award. In addition, the Compensation Committee will have the exclusive power to
interpret the 1996 Incentive Plan and to adopt such rules and regulations as it
may deem necessary or appropriate in keeping with the objectives of the 1996
Incentive Plan.
Pursuant to the 1996 Incentive Plan, participants will be eligible to
receive awards consisting of (i) stock options, (ii) stock appreciation rights,
(iii) stock, (iv) restricted stock, (v) cash or (vi) any combination of the
foregoing. Stock options may be either incentive stock options within the
meaning of Section 422 of the Internal Revenue Code of 1986, as amended, or
nonqualified stock options.
42
<PAGE> 45
CERTAIN TRANSACTIONS
On March 31, 1995, the Partnership was formed with an initial
capitalization of approximately $20.5 million by NGP and certain individuals,
including the following officers and directors of the Company: Jack D. Hightower
(President, Chief Executive Officer and Chairman of the Board), George G. Staley
(Executive Vice President, Exploration, and Director), Rodney L. Woodard (Vice
President, Engineering), Thomas H. Moore (Vice President, Business Development),
Dan P. Colwell (Vice President, Land), David R. Albin (Director), Kenneth A.
Hersh (Director) and William J. Vaughn, Jr. (prospective Director). On December
11, 1995, the Company sold partnership units equivalent to 3,423,194 shares and
1,711,597 shares of Common Stock to JEDI and First Union Corporation,
respectively, for $10 million and $5 million, respectively. In connection with
these transactions, the Company granted NGP, Jack Hightower, JEDI and First
Union Corporation certain registration rights. See "Description of Capital
Stock -- Registration Rights."
The Company has entered into an administrative services contract with
Staley Operating Co. ("Staley Operating"), an affiliate of Mr. Staley. Pursuant
to the agreement, the Company provided certain administrative, accounting and
other office and technical services on behalf of Staley Operating, in its
capacity as the operator of certain producing oil and gas properties, in return
for which the Company received the amounts charged by Staley Operating for
providing such services under the applicable operating agreements for such
properties. The total amount of payments received by the Company under such
agreement was $241,563 in 1995 and $139,789 for the nine months ended September
30, 1996.
Mr. Hightower and certain of his affiliates have a common ownership
interest in the Haley 1302 gas well located in Winkler County, Texas. The well
is operated by the Company and, in accordance with a standard industry operating
agreement, Mr. Hightower and certain of his affiliates make payments to the
Company of leasehold costs and lease operating and supervision charges. These
payments aggregated approximately $12,000 for the nine months ended December 31,
1995 and approximately $284,000 for the nine months ended September 30, 1996.
The Company does not consider the property to constitute a material portion of
its assets and believes that the terms of the operating agreement and
arrangements pertaining to the property are no less favorable to the Company
than could have been obtained from unaffiliated third parties.
In April 1995, the Company purchased certain oil and gas properties from
Enertex, Inc., an affiliate of Mr. Hightower, and from Staley Gas Co. Inc.
("Staley"), an affiliate of George Staley. The purchase price for such
properties was approximately $1,065,000 for the Enertex properties and
approximately $77,000 for the Staley properties. The Company believes that the
terms of such property purchases were no less favorable to the Company than
could have been obtained from unaffiliated third parties.
For advisory services in connection with the organization and initial
financing of the Company, the Company paid NGP $125,000. The Company is also a
party to separate financial advisory services contracts with ECT Securities
Corp. ("ECT") (an affiliate of JEDI) and NGP. In 1995, the Company made payments
to ECT and NGP of $200,000 and approximately $79,000, respectively, for fees and
expense reimbursements under these agreements. During 1996, ECT is entitled to
an annual fee of $100,000, payable quarterly in arrears, plus expense
reimbursements, and NGP is entitled to an annual fee of $85,000 payable
quarterly in arrears, plus expense reimbursements. Both agreements will
terminate as of the completion of this offering.
In November 1995, the Company entered into master agreements for energy
price swaps with ECTRC and First Union National Bank of North Carolina,
affiliates of JEDI and First Union Corporation, respectively. Pursuant to the
terms of these agreements and as a result of losses attributable to natural gas
hedges, the Company paid $169,500 to each of ECTRC and First Union National Bank
of North Carolina. The Company believes that the terms of the agreement are no
less favorable to it than could have been obtained from unaffiliated third
parties.
For the nine months ended September 30, 1996, sales to Enron Corp. (an
affiliate of JEDI), its subsidiaries and affiliates were approximately 52% of
the Company's oil and gas revenues. The Company believes that the terms of these
sales are no less favorable to it than could have been obtained from
unaffiliated third parties.
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<PAGE> 46
The Company's offices located at 500 West Texas, Suite 500, in Midland,
Texas are leased from Fasken Center Ltd., an affiliate of Mr. Hightower. The
lease is a noncancellable operating lease that terminates on December 31, 1998
and requires monthly rent payments of $9,219. The Company expects to amend the
lease in the fourth quarter of 1996 to obtain additional space. In addition, the
Company also regularly uses certain aircraft owned by Lone Star Jet, Inc., an
affiliate of Jack Hightower. The Company is billed by Lone Star Jet, Inc. for
any use of such aircraft by Company personnel. Approximately $4,000 was paid by
the Company for the use of such aircraft in 1995 and approximately $11,000 was
paid for the nine months ended September 30, 1996. The Company believes that the
terms of these agreements and arrangements with affiliates of Mr. Hightower are
no less favorable to the Company than could be obtained from unaffiliated third
parties.
First Union Bank of North Carolina, an affiliate of First Union
Corporation, is a member of the bank group that lends to the Company under the
Credit Agreement. See "Use of Proceeds."
Mr. Hightower is party to an Employment Agreement that provides for his
employment as President, Chief Executive Officer and Chairman of the Board of
the Company for a two year period. See "Management -- Executive Compensation."
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<PAGE> 47
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of September 30, 1996, and as
adjusted to give effect to the sale of 12,500,000 shares of Common Stock in this
offering, by (i) each person the Company knows to be the beneficial owner of 5%
or more of the outstanding shares of Common Stock, (ii) each Named Executive
Officer, (iii) each director of the Company, (iv) all executive officers and
directors of the Company as a group and (v) the Selling Stockholder. Except as
indicated in the footnotes to this table and pursuant to applicable community
property laws, the Company believes that each stockholder named in this table
has sole investment and voting power with respect to the shares set forth
opposite such stockholder's name.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR TO THE OWNED AFTER THE
OFFERING(1) OFFERING(1)
--------------------- SHARES BEING ---------------------
BENEFICIAL OWNER NUMBER PERCENT OFFERED NUMBER PERCENT
-------------------------------- --------- ------- ------------ --------- -------
<S> <C> <C> <C> <C> <C>
Natural Gas Partners II, L.P.... 5,000,777 25.58% -- 5,000,777 15.60%
777 Main Street, Suite 2700
Fort Worth, Texas 76102
Natural Gas Partners, L.P....... 4,767,407 24.39% -- 4,767,407 14.87%
777 Main Street, Suite 2700
Fort Worth, Texas 76102
Joint Energy Development
Investments Limited
Partnership................... 3,423,194 17.51% -- 3,423,194 10.68%
1400 Smith Street
Houston, Texas 77002
First Union Corporation......... 1,711,597 8.75% 110,000 1,601,597 5.00%
One First Union Center
301 South College Street
Charlotte, North Carolina
28288
Jack D. Hightower(2)............ 3,255,988 16.33% -- 3,255,988 10.04%
500 West Texas, Suite 500
Midland, Texas 79701
George G. Staley(3)............. 428,231 2.17% -- 428,231 1.33%
Thomas H. Moore(4).............. 149,094 * -- 149,094 *
Dan P. Colwell(5)............... 94,598 * -- 94,598 *
Rodney L. Woodard(6)............ 95,518 * -- 95,518 *
David R. Albin(7)(8)............ 95,772 * -- 95,772 *
Kenneth A. Hersh(8)............. 49,881 * -- 49,881 *
William J. Vaughn, Jr.(9)....... 332,541 1.70% -- 332,541 1.04%
All executive officers and
directors as a group (10
persons)(10).................. 4,533,921 22.28% -- 4,533,921 13.80%
</TABLE>
- ---------------
* Represents less than 1% of outstanding Common Stock or voting power.
(1) Shares beneficially owned and percentage of ownership are based on
19,550,013 shares of Common Stock outstanding before this offering and
32,050,013 shares of Common Stock outstanding after the closing. Beneficial
ownership is determined in accordance with the rules of the Commission and
generally includes voting and investment power with respect to securities.
(2) Includes (i) 2,667,588 shares held by Mr. Hightower, (ii) 199,524 shares
held by Mr. Hightower's spouse and children, and (iii) 388,876 shares
subject to stock options that are exercisable within 60 days. Excludes
1,366,716 shares subject to stock options that are not exercisable within
60 days.
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<PAGE> 48
(3) Includes (i) 199,525 shares held by Mr. Staley, and (ii) 228,706 shares
subject to stock options that are exercisable within 60 days. Excludes
803,465 shares subject to stock options that are not exercisable within 60
days.
(4) Includes (i) 99,762 shares held by Mr. Moore, and (ii) 49,332 shares
subject to stock options that are exercisable within 60 days. Excludes
173,310 shares subject to stock options that are not exercisable within 60
days.
(5) Includes (i) 46,556 shares held by Mr. Colwell, and (ii) 48,042 shares
subject to stock options that are exercisable within 60 days. Excludes
168,577 shares subject to stock options that are not exercisable within 60
days.
(6) Includes (i) 46,556 shares held by Mr. Woodard, and (ii) 48,962 shares
subject to stock options that are exercisable within 60 days. Excludes
171,718 shares subject to stock options that are not exercisable within 60
days.
(7) All of these shares are held in trust for Mr. Albin.
(8) David R. Albin and Kenneth A. Hersh are each managing members of the
general partner of Natural Gas Partners II, L.P. As such, Mr. Albin and Mr.
Hersh may be deemed to share voting and investment power with respect to
the 5,000,777 shares beneficially owned by Natural Gas Partners II, L.P.
Mr. Albin and Mr. Hersh disclaim beneficial ownership of such shares.
(9) Includes 299,287 shares held in trust for Mr. Vaughn and his spouse and
33,254 shares held by an affiliate of Mr. Vaughn.
(10) Includes 796,216 shares that officers and directors as a group have the
right to acquire within 60 days through the exercise of options granted
pursuant to the 1996 Incentive Plan. Excludes 2,802,645 shares subject to
stock options that are not exercisable within 60 days.
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<PAGE> 49
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 60,000,000 shares
of Common Stock, par value $.01 per share, and 10,000,000 shares of preferred
stock, par value $.01 per share ("Preferred Stock"). Of such authorized shares,
32,050,013 shares of Common Stock will be issued and outstanding upon completion
of this offering (33,941,513 shares if the Underwriters exercise their
over-allotment option in full). As of September 30, 1996, the Company had
outstanding 19,550,013 shares of Common Stock held of record by 24 stockholders
and stock options for an aggregate of 3,631,350 shares.
COMMON STOCK
The holders of Common Stock are entitled to one vote for each share held of
record on all matters submitted to the stockholders, and are entitled to
cumulate their votes for the election of directors. As a result of such
cumulative voting rights, any holder of at least 20% of the outstanding Common
Stock will be assured that such holder's nominee will be elected as a director
for so long as the Board of Directors of the Company consists of five members.
See "Risk Factors -- Control by Existing Stockholders." The Certificate of
Incorporation of the Company does not allow the stockholders to take action by
less than unanimous consent, but does permit the holders of 10% or more of the
Company's outstanding Common Stock to call a special meeting of the stockholders
not more frequently than once during each calendar year. Each share of Common
Stock is entitled to participate equally in dividends, if, as and when declared
by the Company's Board of Directors, and in the distribution of assets in the
event of liquidation, subject in all cases to any prior rights of outstanding
shares of Preferred Stock. The Company has never paid cash dividends on its
Common Stock. The shares of Common Stock have no preemptive or conversion
rights, redemption rights, or sinking fund provisions. The outstanding shares of
Common Stock are, and the shares of Common Stock offered hereby upon issuance
and sale will be, duly authorized, validly issued, fully paid, and
nonassessable.
PREFERRED STOCK
As of September 30, 1996, the Company has no outstanding Preferred Stock.
The Company is authorized to issue 10,000,000 shares of Preferred Stock. The
Company's Board of Directors may establish, without stockholder approval, one or
more classes or series of Preferred Stock having the number of shares,
designations, relative voting rights, dividend rates, liquidation and other
rights, preferences, and limitations that the Board of Directors may designate.
The Company believes that this power to issue Preferred Stock will provide
flexibility in connection with possible corporate transactions. The issuance of
Preferred Stock, however, could adversely affect the voting power of holders of
Common Stock and restrict their rights to receive payments upon liquidation of
the Company. It could also have the effect of delaying, deferring or preventing
a change in control of the Company. The Company does not currently plan to issue
any shares of Preferred Stock.
DELAWARE LAW PROVISIONS
The Company is a Delaware corporation and is subject to Section 203 of the
Delaware General Corporation Law. Generally, Section 203 prohibits the Company
from engaging in a "business combination" (as defined in Section 203) with an
"interested stockholder" (defined generally as a person owning 15% or more of
the Company's outstanding voting stock) for three years following the date that
person becomes an interested stockholder, unless (a) before that person became
an interested stockholder, the Company's Board of Directors approved the
transaction in which the interested stockholder became an interested stockholder
or approved the business combination; (b) upon completion of the transaction
that resulted in the interested stockholder's becoming an interested
stockholder, the interested stockholder owns at least 85% of the voting stock
outstanding at the time the transaction commenced (excluding stock held by
directors who are also officers of the Company and by employee stock plans that
do not provide employees with the right to determine confidentially whether
shares held subject to the plan will be tendered in a tender or exchange offer)
or (c) following the transaction in which that person became an interested
stockholder, the business combination is approved by the Company's Board of
Directors and authorized at a meeting of stockholders by
47
<PAGE> 50
the affirmative vote of the holders of at least two-thirds of the outstanding
voting stock not owned by the interested stockholder.
Under Section 203, these restrictions also do not apply to certain business
combinations proposed by an interested stockholder following the announcement or
notification of one of certain extraordinary transactions involving the Company
and a person who was not an interested stockholder during the previous three
years or who became an interested stockholder with the approval of a majority of
the Company's directors, if that extraordinary transaction is approved or not
opposed by a majority of the directors who were directors before any person
became an interested stockholder in the previous three years or who were
recommended for election or elected to succeed such directors by a majority of
such directors then in office.
REGISTRATION RIGHTS
The Company has entered into the Amended and Restated Registration Rights
Agreement with Natural Gas Partners, L.P., Natural Gas Partners, II, L.P., Jack
Hightower, JEDI, First Union Corporation and Selma International Investment
Limited (the "Shareholder Parties"). See "Management -- Certain Transactions."
Pursuant to the Amended and Restated Registration Rights Agreement, on three
separate occasions, commencing on the 180th day following the date of the
Company's initial registration statement under the securities laws, Shareholder
Parties owning at least 35% of the outstanding shares then subject to such
agreement may require the Company to register shares held by them under
applicable securities laws, provided that the shares to be registered have an
estimated aggregate offering price to the public of at least $3,000,000. The
Amended and Restated Registration Rights Agreement also provides that the
Shareholder Parties have "piggyback" registration rights pursuant to which such
persons may include shares of Common Stock held by them in certain registrations
initiated by the Company or by any other holder of the Company's Common Stock;
provided that, in an underwritten registered offering, if the managing
underwriters determine that the number of shares requested to be included in the
registration exceeds the number that the underwriters believe can be sold, the
Company will be given first priority and the persons requesting piggyback
registration under the Amended and Restated Registration Rights Agreement will
be allowed to include shares pro rata based on the number of shares each such
person requested to be included.
The Amended and Restated Registration Rights Agreement provides for
customary indemnities by the Company in favor of persons including shares in a
registration pursuant to the Amended and Restated Registration Rights Agreement,
and by such persons in favor of the Company, with respect to information to be
included in the relevant registration statement. These registration rights have
been waived in connection with this offering and for 180 days after the date of
this Prospectus.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock is First Union
National Bank of North Carolina.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, the Company will have 32,050,013 shares
of Common Stock outstanding (33,941,513 shares if the Underwriters exercise
their over-allotment option in full). Of these shares, the 12,500,000 shares of
Common Stock sold in this offering will be freely transferable without
restriction under the Securities Act unless they are held by the Company's
affiliates, as that term is used in Rule 144 under the Securities Act. The
Company issued the remaining 19,550,013 shares of Common Stock in reliance on
exemptions from the registration requirements of the Securities Act, and those
shares are "restricted" securities under Rule 144. Those shares may not be sold
publicly unless they are registered under the Securities Act, sold in compliance
with Rule 144, or sold in a transaction that is exempt from registration. The
Company believes that the earliest date on which the 19,550,013 shares of its
Common Stock currently outstanding will be eligible for sale under Rule 144 is
October 1, 1998. Therefore, no shares will be eligible for immediate sale in the
public market without restriction under Rule 144(k), and no shares will be
eligible for immediate sale under the manner-of-sale, volume and other
limitations of Rule 144. Beginning October 1,
48
<PAGE> 51
1998, all of the shares of Common Stock currently outstanding will become
eligible for sale under Rule 144, based on current Commission rules and subject
to compliance with the manner-of-sale, volume and other requirements of Rule
144. Beginning October 1, 1999, all of those shares of Common Stock will become
eligible for sale under Rule 144(k) if they are not held by affiliates of the
Company.
In general, under Rule 144 a person (or persons whose sales are
aggregated), including an affiliate, who has beneficially owned shares for at
least two years is entitled to sell in broker transactions, within any three-
month period commencing 90 days after this offering, a number of shares that
does not exceed the greater of (i) 1% of the then outstanding Common Stock
(approximately 320,500 shares immediately after this offering) or (ii) the
average weekly trading volume in the Common Stock during the four calendar weeks
preceding the sale, subject to the filing of a Form 144 with respect to the sale
and other limitations. In addition, a person who was not an affiliate of the
Company during the three months preceding a sale and who has beneficially owned
the shares proposed to be sold for at least three years is entitled to sell the
shares under Rule 144(k) without regard to the manner-of-sale, volume and other
limitations of Rule 144. The Commission has proposed to shorten the holding
periods under Rule 144 for restricted securities. The Commission has indicated
that, if adopted, the proposed amendment would apply to all outstanding
restricted securities. All shares of Common Stock, other than those offered
hereby, are subject to lock-up agreements with the Underwriters for 180 days
after the date of this Prospectus. See "Underwriting."
The holders of approximately 13,225,429 shares of Common Stock and their
permitted transferees are entitled to demand registration of those shares under
the Securities Act beginning 180 days after the date of this Prospectus. See
"Description of Capital Stock -- Registration Rights."
The Company intends to file a registration statement under the Securities
Act to register Common Stock to be issued pursuant to the exercise of options,
including options under the Incentive Plan. Taking into account the effect of
the lock-up agreement with the holders of options, approximately
shares issuable upon exercise of vested options will be eligible for sale in the
public market beginning 180 days after commencement of this offering, subject,
in the case of sales by affiliates, to the manner-of-sale, volume and other
limitations requirements of Rule 144.
Prior to this offering, there has been no public market for the securities
of the Company. No prediction can be made of the effect, if any, that the sale
or availability for sale of shares of additional Common Stock will have on the
market price of the Common Stock. Nevertheless, sales of substantial numbers of
shares by existing stockholders or by stockholders purchasing in this offering
could have a negative effect on the market price of the Common Stock.
49
<PAGE> 52
UNDERWRITING
Under the terms and subject to the conditions contained in an Underwriting
Agreement dated December , 1996 (the "Underwriting Agreement"), the
Underwriters named below (the "Underwriters"), for whom CS First Boston
Corporation; Donaldson, Lufkin & Jenrette Securities Corporation; Howard, Weil,
Labouisse, Friedrichs Incorporated; J.P. Morgan Securities Inc. and Petrie
Parkman & Co., Inc. are acting as representatives (the "Representatives"), have
severally, but not jointly, agreed to purchase from the Company and the Selling
Stockholder, the following respective numbers of shares of Common Stock:
<TABLE>
<CAPTION>
NUMBER
UNDERWRITERS OF SHARES
------------------------------------------------------------------------- ----------
<S> <C>
CS First Boston Corporation..............................................
Donaldson, Lufkin & Jenrette Securities Corporation......................
Howard, Weil, Labouisse, Friedrichs Incorporated.........................
J.P. Morgan Securities Inc. .............................................
Petrie Parkman & Co., Inc. ..............................................
----------
Total.......................................................... 12,610,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the
Underwriters are subject to certain conditions precedent and that the
Underwriters will be obligated to purchase all the shares of Common Stock
offered hereby (other than those shares covered by the over-allotment option
described below) if any are purchased. The Underwriting Agreement provides that,
in the event of a default by an Underwriter, in certain circumstances the
purchase commitments of nondefaulting Underwriters may be increased or the
Underwriting Agreement may be terminated.
The Company has granted to the Underwriters an option, expiring at the
close of business on the 30th day after the date of this Prospectus, to purchase
up to 1,891,500 additional shares of Common Stock at the initial public offering
price less the underwriting discounts and commissions, all as set forth on the
cover page of this Prospectus. Such option may be exercised only to cover
over-allotments in the sale of the shares of Common Stock. To the extent such
option is exercised, each Underwriter will become obligated, subject to certain
conditions, to purchase approximately the same percentage of such additional
shares of Common Stock as it was obligated to purchase pursuant to the
Underwriting Agreement.
The Company has been advised by the Representatives that the Underwriters
propose to offer the shares of Common Stock to the public initially at the
public offering price set forth on the cover page of this Prospectus and,
through the Representatives, to certain dealers at such price less a concession
of $ per share, and the Underwriters and such dealers may allow a
discount of $ per share on sales to certain other dealers. After the
initial public offering, the public offering price and concession and discount
to dealers may be changed by the Representatives.
The Representatives have informed the Company that they do not expect
discretionary sales by the Underwriters to exceed five percent of the shares
being offered hereby.
The Company intends to use more than 10% of the net proceeds from the sale
of the shares offered by the Company to repay indebtedness owed by it to Morgan
Guaranty Trust Company of New York, an affiliate of one of the underwriters,
J.P. Morgan Securities Inc. Accordingly, this offering is being made in
compliance with the requirements of Rule 2720(c) of the Conduct Rules of the
National Association of Securities
50
<PAGE> 53
Dealers, Inc. This rule provides generally that if more than 10% of the net
proceeds from the sale of stock, not including underwriting compensation, is
paid to the underwriters of such stock or their affiliates, the initial public
offering price of the stock may not be higher than that recommended by a
"qualified independent underwriter" meeting certain standards. CS First Boston
Corporation is assuming the responsibilities of acting as the qualified
independent underwriter in pricing this offering and conducting due diligence.
The initial public offering price of the Shares set forth on the cover page of
this Prospectus is no higher than the price recommended by CS First Boston
Corporation.
The Company, its officers, directors, stockholders and optionholders have
agreed that they will not offer, sell, contract to sell, announce an intention
to sell, pledge or otherwise dispose of, directly or indirectly, or file with
the Commission a Registration Statement under the Securities Act, relating to,
any additional shares of the Company's Common Stock or securities convertible
into or exchangeable or exercisable for any shares of the Company's Common Stock
without the prior written consent of CS First Boston Corporation for a period of
180 days after the date of this Prospectus, except issuances pursuant to the
exercise of employee stock options outstanding on the date hereof. See "Shares
Eligible for Future Sale."
Prior to this offering, there has been no public market for the Common
Stock. The initial public offering price for the shares of Common Stock was
negotiated among the Company and the Underwriters. Among the factors considered
in determining the initial public offering price, in addition to prevailing
market conditions, are the history of, and prospects for, the industry in which
the Company operates, the earnings of the Company and comparable companies in
recent periods, management expertise and the Company's business potential and
earnings prospects.
The Company and the Selling Stockholder have agreed to indemnify the
Underwriters against certain liabilities, including civil liabilities under the
Securities Act, or contribute to payments which the Underwriters may be required
to make in respect thereof.
Application has been made to list the shares of Common Stock on the
. In connection with the listing of the Common Stock on
the , the Underwriters will undertake to sell round
lots of 100 shares or more to a minimum of beneficial owners.
NOTICE TO CANADIAN RESIDENTS
RESALE RESTRICTIONS
The distribution of the shares of Common Stock in Canada is being made only
on a private placement basis exempt from the requirement that the Company
prepare and file a prospectus with the securities regulatory authorities in each
province where trades of the Common Stock are affected. Accordingly, any resale
of the shares of Common Stock in Canada must be made in accordance with
applicable securities laws, which will vary depending on the relevant
jurisdiction, and which may require resales to be made in accordance with
available statutory exemptions or pursuant to a discretionary exemption granted
by the applicable Canadian securities regulatory authority. Canadian purchasers
are advised to seek legal advice prior to any resale of the Common Stock.
REPRESENTATIONS OF PURCHASERS
Each purchaser of the Common Stock in Canada who receives a purchase
confirmation will be deemed to represent to the Company and the dealer from whom
such purchase confirmation is received that (i) such purchaser is entitled under
applicable provincial securities laws to purchase such Common Stock without the
benefit of a prospectus qualified under such securities laws, (ii) where
required by law, that such purchaser is purchasing as principal and not as
agent, and (iii) such purchaser has reviewed the text above under "Resale
Restrictions."
RIGHTS AND ACTIONS OF ENFORCEMENT
The securities being offered are those of a foreign issuer and Ontario
purchasers will not receive the contractual right of action prescribed by
section 32 of the Regulation under the Securities Act (Ontario). As a
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<PAGE> 54
result, Ontario purchasers must rely on other remedies that may be available,
including common law rights of action for damages or rescission or rights of
action under the civil liability provisions of the U.S. federal securities laws.
All of the issuer's directors and officers as well as the experts named
herein may be located outside of Canada and, as a result, it may not be possible
for Ontario purchasers to effect service of process within Canada upon the
issuer or such persons. All or a substantial portion of the assets of the issuer
and such persons may be located outside of Canada and, as a result, it may not
be possible to satisfy a judgment against the issuer or such persons in Canada
or to enforce a judgment obtained in Canadian courts against such issuer or
persons outside of Canada.
NOTICE TO BRITISH COLUMBIA RESIDENTS
A purchaser of shares of Common Stock to whom the Securities Act (British
Columbia) applies is advised that such purchaser is required to file with the
British Columbia Securities Commission a report within ten days of the sale of
any shares of Common Stock acquired by such purchaser pursuant to this Offering.
Such report must be in the form attached to British Columbia Securities
Commission Blanket Order BOR #88/5, a copy of which may be obtained from the
Company. Only one such report must be filed in respect of shares of the Common
Stock acquired on the same date and under the same prospectus exemption.
LEGAL MATTERS
Certain legal matters in connection with the Common Stock being offered
hereby will be passed upon for the Company by Thompson & Knight, P.C., Dallas,
Texas. Certain matters relating to the Offering will be passed upon for the
Underwriters by Vinson & Elkins L.L.P., Dallas, Texas.
EXPERTS
The consolidated financial statements of the Company as of December 31,
1995 and for the period March 31, 1995 (date of inception) to December 31, 1995,
the statements of revenues and direct operating expenses of the 1996 Acquisition
for the years ended December 31, 1993, 1994 and 1995, and the statements of
revenues and direct operating expenses of the 1995 Acquisition for the years
ended December 31, 1993 and 1994, and the period ended December 11, 1995, have
been included herein and in the registration statement in reliance upon the
report of KPMG Peat Marwick LLP, independent certified public accountants,
appearing elsewhere herein, and upon the authority of said firm as experts in
accounting and auditing.
With respect to the unaudited interim financial information for the periods
ended September 30, 1995 and 1996, included herein, the independent certified
public accountants have reported that they applied limited procedures in
accordance with professional standards for a review of such information.
However, their report included herein, states that they did not audit and they
do not express an opinion on such interim financial information. Accordingly,
the degree of reliance on their report on such information should be restricted
in light of the limited nature of the review procedures applied. The accountants
are not subject to the liability provisions of Section 11 of the Securities Act
for their report on the unaudited interim financial information because that
report is not a "report" or a "part" of the registration statement prepared or
certified by the accountants within the meaning of Sections 7 and 11 of the
Securities Act.
The letters of Williamson Petroleum Consultants, Inc., independent oil and
gas consultants, set forth in Appendix A, have been included herein in reliance
upon the firm as experts with respect to the matters contained in those letters.
In addition, the information with respect to the reserve reports prepared by
Williamson has been included herein in reliance upon the firm as experts with
respect to such information.
52
<PAGE> 55
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-1 (as amended and together with all exhibits thereto, the "Registration
Statement") under the Securities Act, with respect to the shares of Common Stock
offered by this Prospectus. This Prospectus constitutes a part of the
Registration Statement and does not contain all of the information set forth in
the Registration Statement, certain parts of which are omitted from this
Prospectus as permitted by the rules and regulations of the Commission.
Statements contained in this Prospectus as to the contents of any contract,
agreement or other document referred to herein are not necessarily complete.
Statements in this Prospectus about the contents of any contract or other
document are not necessarily complete; reference is made in each instance to the
copy of the contract or other document filed as an exhibit to the Registration
Statement. Each such statement is qualified in all respects by such reference.
The Registration Statement and accompanying exhibits and schedules may by
inspected and copies may be obtained (at prescribed rates) at the public
reference facilities of the Commission at Judiciary Plaza, 450 Fifth Street,
N.W., Room 1024, Washington, D.C. 20549. Copies of the Registration Statement
may also be inspected at the Commission's regional offices at 7 World Trade
Center, Suite 1300, New York, New York 10048 and Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661-2511. In addition, the
Common Stock will be listed on the , ,
, where such material may also be inspected and copied.
As a result of this offering, the Company will become subject to the
information and periodic reporting requirements of the Securities Exchange Act
of 1934, and, in accordance therewith, will file periodic reports, proxy
statements and other information with the Commission. Such periodic reports,
proxy statements and other information will be available for inspection and
copying at the public reference facilities and regional offices referred to
above. In addition, these reports, proxy statements and other information may
also be obtained from the web site that the Commission maintains at
http://www.sec.gov.
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<PAGE> 56
GLOSSARY OF OIL AND GAS TERMS
The following are abbreviations and definitions of terms commonly used in
the oil and gas industry and this Prospectus. Unless otherwise indicated in this
Prospectus, natural gas volumes are stated at the legal pressure base of the
state or area in which the reserves are located and at 60 degrees Fahrenheit and
in most instances are rounded to the nearest major multiple. BOEs are determined
using the ratio of six Mcf of natural gas to one Bbl of oil.
"Bbl" means a barrel of 42 U.S. gallons of oil.
"BBtu" means one billion British Thermal Units.
"Bcf" means billion cubic feet of natural gas.
"Blowdown" means the reduction of pressure in a formation as a result of
the production of gas.
"BOE" means barrels of oil equivalent.
"Btu" or "British Thermal Unit" means the quantity of heat required to
raise the temperature of one pound of water by one degree Fahrenheit.
"Completion" means the installation of permanent equipment for the
production of oil or gas.
"Condensate" means a hydrocarbon mixture that becomes liquid and separates
from natural gas when the gas is produced and is similar to crude oil.
"Development well" means a well drilled within the proved area of an oil or
gas reservoir to the depth of a stratigraphic horizon known to be productive.
"Down-spacing" means providing for more dense spacing by infill drilling.
"Exploratory well" means a well drilled to find and produce oil or gas in
an unproved area, to find a new reservoir in a field previously found to be
productive of oil or gas in another reservoir, or to extend a known reservoir.
"Gross," when used with respect to acres or wells, refers to the total
acres or wells in which the Company has a working interest.
"Infill drilling" means drilling of an additional well or wells provided
for by an existing spacing order to more adequately drain a reservoir.
"MBbls" means thousands of barrels of oil.
"Mcf" means thousand cubic feet of natural gas.
"MMBbls" means millions of barrels of oil.
"MMBC" means millions of barrels of condensate.
"MMBOE" means millions of barrels of oil equivalent on a 6:1 basis.
"MMBtu" means one million British Thermal Units.
"MMcf" means million cubic feet of natural gas.
"Net," when used with respect to acres or wells, refers to gross acres of
wells multiplied, in each case, by the percentage working interest owned by the
Company.
"Net production" means production that is owned by the Company less
royalties and production due others.
"Oil" means crude oil or condensate.
"Operator" means the individual or company responsible for the exploration,
development, and production of an oil or gas well or lease.
54
<PAGE> 57
"Present Value of Future Net Revenues" or "PV-10" means the pretax present
value of estimated future revenues to be generated from the production of proved
reserves calculated in accordance with Commission guidelines, net of estimated
production and future development costs, using prices and costs as of the date
of estimation without future escalation, without giving effect to non-property
related expenses such as general and administrative expenses, debt service and
depreciation, depletion and amortization, and discounted using an annual
discount rate of 10%.
"Project" means a proposal to add a producing completion of oil or gas. A
proposal may vary in range from work authorized to be performed to proposals
that are founded in geologic and engineering principles yet require further
research before funds are authorized.
"Proved developed reserves" means 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 will 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.
"Proved reserves" means the estimated quantities of crude oil, natural gas,
and natural gas liquids which geological and engineering data demonstrate with
reasonable certainty to be recoverable in future years from known reservoirs
under existing economic and operating conditions, 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
escalations based upon future conditions.
i. Reservoirs are considered proved if economic producibility is
supported by either actual production or conclusive formation test. The
area of a reservoir considered proved includes (A) that portion delineated
by drilling and defined by gas-oil and/or oil-water contacts, if any; and
(B) the immediately adjoining portions not yet drilled, but which can be
reasonably judged as economically productive on the basis of available
geological and engineering data. In the absence of information on fluid
contacts, the lowest known structural occurrence of hydrocarbons controls
the lower proved limit of the reservoir.
ii. Reserves which can be produced economically through application of
improved recovery techniques (such as fluid injection) are included in the
"proved" classification when 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.
iii. Estimates of proved reserves do not include the following: (A)
oil that may become available from known reservoirs but is classified
separately as "indicated additional reserves"; (B) crude oil, natural gas,
and natural gas liquids, the recovery of which is subject to reasonable
doubt because of uncertainty as to geology, reservoir characteristics, or
economic factors; (C) crude oil, natural gas, and natural gas liquids that
may occur in undrilled prospects; and (D) crude oil, natural gas, and
natural gas liquids that may be recovered from oil shales, coal, gilsonite
and other such sources.
"Proved undeveloped reserves" means 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
certainty that there is continuity of production from the existing productive
formation. Under no circumstances should estimates for proved undeveloped
reserves be attributable to any acreage for which an application of fluid
injection or other improved recovery technique is contemplated, unless such
techniques have been proved effective by actual tests in the area and in the
same reservoir.
"Recompletion" means the completion for production of an existing well bore
in another formation from that in which the well has been previously completed.
"Reserves" means proved reserves.
55
<PAGE> 58
"Royalty" means 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 of the sale thereof), but generally does not require
the owner to pay any portion of the costs of drilling or operating the wells on
the leased acreage. Royalties may be either landowner's royalties, which are
reserved by the owner of the leased acreage at the time the lease is granted, or
overriding royalties, which are usually reserved by an owner of the leasehold in
connection with a transfer to a subsequent owner.
"Sidetrack drilling" means an operation involving the use of a portion of
an existing well to drill a second hole, resulting in a well that is partly old
and partly new.
"Spud" means to start drilling a new well (or restart).
"3-D seismic" means seismic data that are acquired and processed to yield a
three-dimensional picture of the subsurface.
"Spudded" means the first boring of the hole in the drilling of a well.
"Step-out well" means a well drilled adjacent to a proven well but located
in an unproven area; a well drilled as a "step-out" from proven territory in an
effort to ascertain the extent and boundaries of a producing formation.
"Tcf" means trillion cubic feet of natural gas.
"Tertiary recovery" means enhanced recovery methods for the production of
oil or gas. Enhanced recovery of crude oil requires a means for displacing oil
from the reservoir rock, modifying the properties of the fluids in the reservoir
and/or the reservoir rock to cause movement of oil in an efficient manner, and
providing the energy and drive mechanism to force its flow to a production well.
The Company injects chemicals or energy as required for displacement and for the
control of flow rate and flow pattern in the reservoir, and a fluid drive is
provided to force the oil toward a production well.
"Waterflood" means the injection of water into a reservoir to fill pores
vacated by produced fluids, thus maintaining reservoir pressure and assisting
production.
"Working interest" means an interest in an oil and gas lease that gives the
owner of the interest the right to drill for and produce oil and gas on the
leased acreage and requires the owner to pay a share of the costs of drilling
and production operations. The share of production to which a working interest
owner is entitled will always be smaller than the share of costs that the
working interest owner is required to bear, with the balance of the production
accruing to the owners of royalties. For example, the owner of a 100% working
interest in a lease burdened only by a landowner's royalty of 12.5% would be
required to pay 100% of the costs of a well but would be entitled to retain
87.5% of the production.
"Workover" means operations on a producing well to restore or increase
production.
56
<PAGE> 59
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Financial Statements of Titan Exploration, Inc.
Pro Forma Condensed Balance Sheet as of September 30, 1996 (unaudited).............. F1-2
Pro Forma Condensed Statement of Operations for the year ended December 31, 1995
(unaudited)...................................................................... F1-3
Pro Forma Condensed Statement of Operations for the nine months ended September 30,
1996 (unaudited)................................................................. F1-4
Notes to Unaudited Pro Forma Condensed Financial Statements......................... F1-5
Independent Auditor's Report........................................................ F2-1
Independent Accountant's Review Report.............................................. F2-2
Consolidated Balance Sheets as of December 31, 1995 and September 30, 1996
(unaudited)...................................................................... F2-3
Consolidated Statements of Operations for the period March 31, 1995 (date of
inception) through December 31, 1995 and the periods ended September 30, 1995 and
1996
(unaudited)...................................................................... F2-4
Consolidated Statements of Stockholders' Equity for the period March 31, 1995 (date
of inception) through December 31, 1995 and the period ended September 30, 1996
(unaudited)...................................................................... F2-5
Consolidated Statements of Cash Flows for the period March 31, 1995 (date of
inception) through December 31, 1995 and the periods ended September 30, 1995 and
1996
(unaudited)...................................................................... F2-6
Notes to Consolidated Financial Statements.......................................... F2-7
Financial Statements of the 1995 Acquisition:
Independent Auditors' Report........................................................ F3-1
Statements of Revenues and Direct Operating Expenses for the years ended December
31, 1993 and 1994 and the period ended December 11, 1995......................... F3-2
Notes to the Statements of Revenues and Direct Operating Expenses................... F3-3
Financial Statements of the 1996 Acquisition:
Independent Auditors' Report........................................................ F4-1
Statements of Revenues and Direct Operating Expenses for the years ended December
31, 1993, 1994 and 1995, and the nine months ended September 30, 1995 and 1996
(unaudited)...................................................................... F4-2
Notes to the Statements of Revenues and Direct Operating Expenses................... F4-3
</TABLE>
F-1
<PAGE> 60
PRO FORMA CONDENSED FINANCIAL STATEMENTS
The Unaudited Pro Forma Condensed Financial Statements of the Company have
been prepared to give effect to the 1995 Acquisition and the 1996 Acquisition,
the Conversion, and this offering and the application of the estimated net
proceeds therefrom as if such transactions (to the extent not already reflected)
had taken place on September 30, 1996 for purposes of the Pro Forma Condensed
Balance Sheet and as if the transactions had taken place on January 1, 1995 for
purposes of the Pro Forma Condensed Statements of Operations. The Pro Forma
Condensed Financial Statements of the Company are not necessarily indicative of
the results for the periods presented had the 1995 Acquisition and the 1996
Acquisition, the Conversion, and this offering and the application of the
estimated net proceeds therefrom taken place on January 1, 1995. In addition,
future results may vary significantly from the results reflected in the
accompanying Pro Forma Condensed Financial Statements because of normal
production declines, changes in product prices, and the success of future
exploration and development activities, among other factors. This information
should be read in conjunction with the Consolidated Financial Statements of
Titan Exploration, Inc., and the Statements of Revenues and Direct Operating
Expenses with respect to the properties acquired in the 1995 Acquisition and the
1996 Acquisition, all included elsewhere herein.
F1-1
<PAGE> 61
TITAN EXPLORATION, INC.
PRO FORMA CONDENSED BALANCE SHEET -- UNAUDITED
SEPTEMBER 30, 1996
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
PRO FORMA
PRO FORMA OFFERING PRO FORMA
TITAN ADJUSTMENTS PRO FORMA ADJUSTMENTS AS ADJUSTED
-------- ----------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents.................. $ 10,803 $ (8,803)(b) $ 2,000 $ 122,222(c) $ 2,000
(122,222)(d)
Accounts receivable:
Oil & Gas............................... 1,844 1,844 1,844
Other................................... 1,143 1,143 1,143
Prepaid expenses and other current
assets.................................. 42 42 42
------- -------- --------
Total current assets............... 13,832 5,029 5,029
Oil and gas properties, using the
successful efforts method of accounting:
Proved properties....................... 62,022 127,034(a) 189,056 189,056
Unproved properties..................... 507 507 507
Accumulated depletion, depreciation and
amortization............................ (2,361) (2,361) (2,361)
------- -------- --------
60,168 187,202 187,202
Other property and equipment, net.......... 277 277 277
Other assets, net.......................... 547 450(a) 997 997
------- -------- --------
$ 74,824 $ 193,505 $ 193,505
======= ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable..................... $ 4,810 $ 4,810 $ 4,810
Accrued interest........................... 112 112 112
Other current liabilities.................. 150 307(a) 457 457
------- -------- --------
Total current liabilities.......... 5,072 5,379 5,379
Long-term debt............................. 28,000 (8,803)(b) 145,074 (122,222)(d) 22,852
125,877(a)
Other liabilities.......................... 803 1,300(a) 2,103 2,103
Deferred income taxes...................... 2,998 2,998 2,998
------- -------- --------
Total liabilities.................. 36,873 155,554 33,332
Stockholders' equity:
Preferred Stock, $.01 par value, 10,000
shares authorized, no shares issued..... -- --
Common Stock, $.01 par value, 60,000 shares
authorized, 19,550 shares issued and
outstanding............................. 195 195 320
Additional paid-in capital................. 54,180 54,180 176,277
Deferred compensation...................... (16,424) (16,424) (16,424)
------- -------- --------
Total stockholders' equity......... 37,951 37,951 122,222(c) 160,173
------- -------- --------
$ 74,824 $ 193,505 $ 193,505
======= ======== ========
</TABLE>
See accompanying notes to unaudited pro forma condensed financial statements.
F1-2
<PAGE> 62
TITAN EXPLORATION, INC.
PRO FORMA CONDENSED STATEMENT OF OPERATIONS -- UNAUDITED
YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PERIOD
MARCH 31, 1995
(DATE OF INCEPTION)
THROUGH
DECEMBER 31, 1995 PRO FORMA
------------------- 1995 1996 PRO FORMA OFFERING PRO FORMA
TITAN ACQUISITION ACQUISITION ADJUSTMENTS PRO FORMA ADJUSTMENTS AS ADJUSTED
------------------- ----------- ----------- ----------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues................ $ 985 $10,829 $37,777 $49,591 $49,591
------ ------- ------- ------- -------
Expenses:
Oil and gas
production......... 304 4,619 12,512 17,435 17,435
General and
administrative..... 1,546 -- -- 3,079(e) 4,625 4,625
Amortization of stock
option awards...... 576 -- -- 576 576
Exploration and
abandonments....... 490 -- -- 490 490
Depletion,
depreciation and
amortization....... 299 -- -- 16,533(f) 16,832 16,832
Interest.............. 97 -- -- 10,092(g) 10,189 (8,242)(i) 1,947
Other................. (796) -- -- 699(h) (97) (97)
------ ------- ------- ------- -------
2,516 4,619 12,512 50,050 41,808
------ ------- ------- ------- -------
Net income (loss) before
federal income
taxes................. (1,531) 6,210 25,265 (459) 7,783
Provision for federal
income taxes.......... -- -- -- -- 2,724(j) 2,724
------ ------- ------- ------- -------
Net income (loss)....... $(1,531) $ 6,210 $25,265 $ (459) $ 5,059
====== ======= ======= ======= =======
Net income (loss) per
share................. $ (.11) $ (.03) $
====== ======= =======
</TABLE>
See accompanying notes to unaudited pro forma condensed financial statements.
F1-3
<PAGE> 63
TITAN EXPLORATION, INC.
PRO FORMA CONDENSED STATEMENT OF OPERATIONS -- UNAUDITED
NINE MONTHS ENDED SEPTEMBER 30, 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER 30, 1996 PRO FORMA
------------------ 1996 PRO FORMA OFFERING PRO FORMA
TITAN ACQUISITION ADJUSTMENTS PRO FORMA ADJUSTMENTS AS ADJUSTED
------------------ ----------- ----------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Revenues............................ $ 10,377 $32,177 $42,554 $42,554
------ ------- ------- -------
Expenses:
Oil and gas production............ 4,339 9,481 13,820 13,820
General and administrative........ 1,452 -- 2,017(e) 3,469 3,469
Amortization of stock option
awards......................... 576 576 576
Exploration and abandonments...... 110 -- 110 110
Depletion, depreciation and
amortization................... 2,269 -- 9,732(f) 12,001 12,001
Interest.......................... 1,179 -- 6,387(g) 7,566 (6,118)(i) 1,448
Other............................. (336) -- 336(h) -- --
------ ------- ------- -------
9,589 9,481 37,542 31,424
------ ------- ------- -------
Net income (loss) before federal
income taxes...................... 788 22,696 5,012 11,130
Provision for federal income
taxes............................. 2,998 -- 1,754(j) 4,752 (857)(j) 3,895
------ ------- ------- -------
Net income (loss)................... $ (2,210) $22,696 $ 260 $ 7,235
====== ======= ======= =======
Net income (loss) per share......... $ (.12) $ .01 $ .21
====== ======= =======
</TABLE>
See accompanying notes to unaudited pro forma condensed financial statements.
F1-4
<PAGE> 64
TITAN EXPLORATION, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION
The Pro Forma Condensed Financial Statements of the Company have been
prepared to give effect to the 1995 Acquisition and the 1996 Acquisition, the
Corporate Reorganization and this offering and the application of estimated net
proceeds therefrom as if such transactions had taken place on September 30, 1996
for purposes of the Pro Forma Condensed Balance Sheet (with the exception of the
1995 Acquisition which was previously reflected in the balance sheet of Titan
Exploration, Inc.), and as if each of the transactions had taken place on
January 1, 1995 for purposes of the Pro Forma Condensed Statements of
Operations. The 1995 Acquisition and 1996 Acquisition are accounted for by the
purchase method.
Titan -- Represents the consolidated balance sheet of Titan
Exploration, Inc. as of September 30, 1996 and the related consolidated
statements of operations for the period March 31, 1995 (date of inception)
through December 31, 1995 and the nine months ended September 30, 1996.
1995 Acquisition -- Represents the revenues and direct operating
expenses of the properties acquired in the 1995 Acquisition for the period
from January 1, 1995 to December 11, 1995 (date of the 1995 Acquisition).
1996 Acquisition -- Represents the revenues and direct operating
expenses of the properties acquired in the 1996 Acquisition for the year
ended December 31, 1995 and the nine months ended September 30, 1996. The
1996 Acquisition was consummated on October 31, 1996.
(2) PRO FORMA ENTRIES
(a) To record the issuance of additional long-term debt under the Credit
Agreement, to record the related debt issuance costs, and to record the use of
the net proceeds for the 1996 Acquisition.
(b) To reflect the use of cash to partially repay borrowings under the
Credit Agreement.
(c) To reflect the issuance of 12,500,000 shares of Common Stock at an
estimated price of $10.50 per share for estimated proceeds of $122,222,000, net
of estimated expenses of the Offering.
(d) To record the use of the net proceeds of the Offering to partially
repay borrowings under the Credit Agreement.
(e) Estimated incremental general and administrative expenses necessary to
administer the properties acquired in the 1995 and 1996 acquisitions, and
increased public reporting and administration costs, which include salary and
benefits for one executive level employee and approximately 20 additional
administrative personnel, directors' fees, insurance coverage, and estimated
costs to administer shareholder communications.
(f) To record estimated incremental depletion expense for the properties
acquired in the 1995 Acquisition from January 1, 1995 through December 11, 1995
(date of the 1995 Acquisition) and for the properties acquired in the 1996
Acquisition from January 1, 1995 through September 30, 1996.
(g) To adjust interest expense to reflect additional borrowings for the
properties acquired in the 1995 Acquisition from January 1, 1995 to December 11,
1995 (date of the 1995 Acquisition) and for the properties acquired in the 1996
Acquisition from January 1, 1995 through September 30, 1996. Also included is
the amortization of estimated debt issuance costs of $450,000 over approximately
a four-year period.
F1-5
<PAGE> 65
TITAN EXPLORATION, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(2) PRO FORMA ENTRIES (CONTINUED)
Incremental interest expense includes the following components:
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
1995 1996
------------ -------------
(IN THOUSANDS)
<S> <C> <C>
Additional interest on borrowings associated with the
1995 Acquisition for the period January 1, 1995
through December 11, 1995 (average rate 6.82%)..... $ 1,289 $ --
Additional interest on borrowings for the 1996
Acquisition (average rate of 6.82% in 1995 and
6.75% in 1996)..................................... 9,241 6,860
Amortization of loan fees............................ 110 83
Effect of utilizing cash balances to partially repay
debt and other..................................... (548) (556)
------- ------
$ 10,092 $ 6,387
======= ======
</TABLE>
(h) Eliminate interest income due to pro forma utilization of cash balances
to partially repay borrowings under the Credit Agreement.
(i) To adjust interest expense to reflect the partial repayment of
borrowings under the Credit Agreement with net proceeds of this offering of
approximately $122,222,000 at average rates described in (g) above.
(j) To record income tax expense.
(3) INCOME TAXES
The Company accounts for income taxes pursuant to the provisions of SFAS
109. At September 30, 1996, the pro forma book basis of the Company's assets and
liabilities exceeded the pro forma tax basis by approximately $8,818,000, giving
rise to an estimated deferred tax liability of approximately $2,998,000. The
temporary differences are primarily related to the differences in book and tax
basis of oil and gas properties due to the expensing of intangible development
costs for tax purposes and other income tax differences arising from the tax
treatment of oil and gas producing activities.
(4) NET INCOME (LOSS) PER SHARE
Net income (loss) per share is calculated based on the pro forma weighted
average shares outstanding during the respective periods. Weighted average
shares reflect the pro forma issuance of 5,134,791 shares of Common Stock on
December 11, 1995, the pro forma issuance of 13,692,776 shares of Common Stock
to the original holders prior to January 1, 1995 and the issuance on September
27, 1996 of 722,446 shares for total consideration of $5,000,000. In addition,
the issuance of 12,500,000 shares in this offering is assumed to have taken
place on January 1, 1995 and assumes that the underwriters' overallotment option
is not exercised.
Outstanding options to acquire 3,631,350 shares at $2.08 per share are
treated as Common Stock equivalents for each period shown if dilutive. The
number of equivalent shares was determined by the treasury stock method based on
the estimated Offering price of $10.50 per share.
F1-6
<PAGE> 66
TITAN EXPLORATION, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(5) SUPPLEMENTAL OIL AND GAS RESERVE INFORMATION (UNAUDITED)
The estimates of proved oil and gas reserves, which are located in the
United States, were prepared by the Company as of December 31, 1993, 1994 and
1995. Reserves were estimated in accordance with guidelines established by the
Securities and Exchange Commission and FASB which require that reserve estimates
be prepared under existing economic and operating conditions with no provision
for price and cost escalations except by contractual arrangements. The Company
has presented the pro forma reserve estimates utilizing an oil price of $23.37
per Bbl and a gas price of $1.39 per Mcf as of September 30, 1996. The pro forma
information assumes that both the 1995 Acquisition and the 1996 Acquisition took
place on January 1, 1995.
Oil and gas reserve quantity estimates are subject to numerous
uncertainties inherent in the estimation of quantities of proved reserves and in
the projection of future rates of production and the timing of development
expenditures. The accuracy of such estimates is a function of the quality of
available data and of engineering and geological interpretation and judgment.
Results of subsequent drilling, testing and production may cause either upward
or downward revision of previous estimates. Further, the volumes considered to
be commercially recoverable fluctuate with changes in prices and operating
costs. The Company emphasizes that reserve estimates are inherently imprecise
and that estimates of new discoveries are more imprecise than those of currently
producing oil and gas properties. Accordingly, these estimates are expected to
change as additional information becomes available in the future.
<TABLE>
<CAPTION>
OIL AND NATURAL
CONDENSATE (MBBLS) GAS (MMCF)
------------------ ----------
<S> <C> <C>
Total Proved Reserves:
Balance, January 1, 1995............................... 16,822 225,556
Revision of previous estimates....................... 1,534 711
Extensions and discoveries........................... 108 33,724
Production........................................... (2,004) (17,952)
------ -------
Balance, December 31, 1995............................. 16,460 242,039
Extensions and discoveries........................... 180 45,931
Purchases of minerals-in-place....................... 704 264
Revision of previous estimates....................... 1,810 4,824
Production........................................... (1,311) (12,235)
------ -------
Balance, September 30, 1996............................ 17,843 280,823
====== =======
Proved Developed Reserves at December 31, 1995......... 14,260 145,023
====== =======
Proved Developed Reserves at September 30, 1996........ 15,533 148,477
====== =======
</TABLE>
Standardized Measure of Discounted Future Net Cash Flows of Proved Oil and Gas
Reserves
The standardized measure of discounted future net cash flows is computed by
applying year-end prices of oil and gas (with consideration of price changes
only to the extent provided by contractual arrangements) to the estimated future
production of proved oil and gas reserves less estimated future expenditures
(based on period-end costs) to be incurred in developing and producing the
proved reserves, less estimated future income tax expenses (based on period-end
statutory tax rates, with consideration of future tax rates already legislated)
to be incurred on pretax net cash flows less tax basis of the properties and
available credits, and assuming continuation of existing economic conditions.
The estimated future net cash flows are then discounted using a rate of 10% per
year to reflect the estimated timing of the future cash flows.
Discounted future cash flow estimates like those shown below are not
intended to represent estimates of the fair value of oil and gas properties.
Estimates of fair value should also consider probable reserves, anticipated
future oil and gas prices, interest rates, changes in development and production
costs and risks
F1-7
<PAGE> 67
TITAN EXPLORATION, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(5) SUPPLEMENTAL OIL AND GAS RESERVE INFORMATION (UNAUDITED) (CONTINUED)
associated with future production. Because of these and other considerations,
any estimate of fair value is necessarily subjective and imprecise.
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1995 1996
-------------- --------------
(IN THOUSANDS)
<S> <C> <C>
Future:
Cash inflows.............................................. $ 654,666 $ 808,031
Production and development costs.......................... (262,007) (302,959)
Future income taxes....................................... (73,518) (108,740)
Net cash flows......................................... 319,141 396,332
10% annual discount for estimated timing of cash flows...... (142,720) (167,133)
-------- --------
Standardized measure of discounted net cash flows........... $ 176,421 $ 229,199
======== ========
</TABLE>
Changes in Standardized Measure of Discounted Future Net Cash Flows From
Proved Reserves
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
1995 1996
-------------- --------------
(IN THOUSANDS)
<S> <C> <C>
Standardized measure, beginning of period................... $186,689 $176,421
Extensions and discoveries and improved recovery, net of
future production and development costs................ 18,421 31,919
Accretion of discount..................................... 18,689 13,195
Net change in sales prices, net of production costs....... 12,844 32,502
Net change in income taxes................................ (40,630) (22,251)
Change in estimated future development cost............... -- 692
Purchase of minerals-in-place............................. -- 4,928
Revision of quantity estimates............................ 6,642 12,502
Sales, net of production costs............................ (31,914) (28,594)
Other..................................................... 5,680 7,885
-------- --------
Standardized measure, end of period......................... $176,421 $229,199
======== ========
</TABLE>
F1-8
<PAGE> 68
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Titan Exploration, Inc.
We have audited the accompanying consolidated balance sheet of Titan
Exploration, Inc. and subsidiaries (the Company) as of December 31, 1995, and
the related consolidated statement of operations, stockholders' equity, and cash
flows for the period from March 31, 1995 (date of inception) through December
31, 1995. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Titan Exploration, Inc. and subsidiaries as of December 31, 1995, and the
results of its operations and its cash flows for the period from March 31, 1995
(date of inception) through December 31, 1995, in conformity with generally
accepted accounting principles.
Midland, Texas KPMG PEAT MARWICK LLP
March 21, 1996,
except as to Note 1,
which is as of
September 30, 1996.
F2-1
<PAGE> 69
INDEPENDENT ACCOUNTANTS' REVIEW REPORT
The Board of Directors and Shareholders
Titan Exploration, Inc.
We have reviewed the consolidated balance sheet of Titan Exploration, Inc.
and subsidiaries as of September 30, 1996, and the related consolidated
statements of operations and cash flows for the period March 31, 1995 (date of
inception) through September 30, 1995 and the nine-month period ended September
30, 1996. These financial statements are the responsibility of the Company's
management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical review
procedures to financial data and making inquiries of persons responsible for
financial and accounting matters. It is substantially less in scope than an
audit conducted in accordance with generally accepted auditing standards, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the consolidated financial statements referred to above for
them to be in conformity with generally accepted accounting principles.
KPMG PEAT MARWICK LLP
Midland, Texas
November 4, 1996
F2-2
<PAGE> 70
TITAN EXPLORATION, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1995 1996
----------- ------------
(UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents........................................ $ 6,213 $ 10,803
Short-term investment -- certificate of deposit.................. 5,000 --
Accounts receivable:
Oil and gas................................................... 996 1,844
Other......................................................... 1,554 1,143
Prepaid expenses and other current assets........................ 80 42
-------- ---------
Total current assets..................................... 13,843 13,832
Property, plant and equipment, at cost:
Oil and gas properties, using the successful efforts method of
accounting:
Proved properties............................................. 42,895 62,022
Unproved properties........................................... 190 507
Accumulated depletion, depreciation and amortization............. (216) (2,361)
-------- ---------
42,869 60,168
Other property and equipment, net................................ 129 277
-------- ---------
42,998 60,445
Other assets, net of accumulated amortization of $78 in 1995 and
$177 in 1996..................................................... 646 547
-------- ---------
$ 57,487 $ 74,824
======== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities:
Trade......................................................... $ 1,766 $ 4,810
Accrued interest.............................................. 97 112
Other......................................................... 75 150
-------- ---------
Total current liabilities................................ 1,938 5,072
Long-term debt..................................................... 20,000 28,000
Other liabilities.................................................. 964 803
Deferred income tax payable........................................ -- 2,998
Stockholders' equity:
Preferred Stock, $.01 par value, 10,000 shares authorized, no
shares issued................................................. -- --
Common Stock, $.01 par value, 60,000 shares authorized, 19,550
shares issued and outstanding................................. 188 195
Additional paid-in capital....................................... 36,893 54,180
Deferred compensation............................................ (2,496) (16,424)
-------- ---------
Total stockholders' equity............................... 34,585 37,951
-------- ---------
$ 57,487 $ 74,824
======== =========
</TABLE>
These consolidated financial statements reflect the reorganization described in
Note 1.
See accompanying notes to consolidated financial statements.
F2-3
<PAGE> 71
TITAN EXPLORATION, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PERIOD PERIOD
MARCH 31, 1995 MARCH 31, 1995
(DATE OF INCEPTION) (DATE OF INCEPTION) NINE MONTHS
THROUGH THROUGH ENDED
DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
1995 1995 1996
------------------- ------------------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Revenues:
Oil and gas sales............................. $ 743 $ 12 $10,237
Management fees -- affiliate.................. 242 161 140
------- ----- -------
Total revenues........................ 985 173 10,377
Expenses:
Oil and gas production........................ 304 37 4,339
General and administrative.................... 1,546 668 1,452
Amortization of stock option awards........... 576 -- 576
Exploration and abandonment................... 490 -- 110
Depletion, depreciation and amortization...... 299 57 2,269
------- ----- -------
Total expenses........................ 3,215 762 8,746
------- ----- -------
Operating income (loss)............... (2,230) (589) 1,631
Other income (expense):
Interest income............................... 699 471 336
Interest expense.............................. (97) -- (1,179)
Gain on sale of assets........................ 244 198 --
Loss on commodity derivative contracts........ (147) -- --
------- ----- -------
Net income (loss) before federal income
taxes.................................... $(1,531) $ 80 $ 788
======= ===== =======
Provision for federal income taxes:
Current....................................... -- -- --
Deferred...................................... -- -- 2,998
------- ----- -------
Net income (loss).......................... $(1,531) $ 80 $(2,210)
======= ===== =======
Net income (loss) per share................ $ (.11) $ .01 $ (.12)
======= ===== =======
</TABLE>
These consolidated financial statements reflect the reorganization described in
Note 1.
See accompanying notes to consolidated financial statements.
F2-4
<PAGE> 72
TITAN EXPLORATION, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONAL TOTAL
COMMON PAID-IN DEFERRED STOCKHOLDERS'
STOCK CAPITAL COMPENSATION EQUITY
------ ---------- ------------ ------------
<S> <C> <C> <C> <C>
Balance at March 31, 1995..................... $ -- $ -- $ -- $ --
Capital contributions....................... -- 35,540 -- 35,540
Common stock issued......................... 188 (188) -- --
Deferred compensation....................... -- 3,072 (2,496) 576
Net loss.................................... -- (1,531) -- (1,531)
---- -------- -------- --------
Balance at December 31, 1995.................. 188 36,893 (2,496) 34,585
Sale of common shares (unaudited)........... 7 4,993 -- 5,000
Deferred compensation (unaudited)........... -- -- 576 576
September 30, 1996 stock plan (unaudited)... -- 14,504 (14,504) --
Net loss (unaudited).......................... -- (2,210) -- (2,210)
---- -------- -------- --------
Balance at September 30, 1996 (unaudited)..... $195 $ 54,180 $(16,424) $ 37,951
==== ======== ======== ========
</TABLE>
These consolidated financial statements reflect the reorganization described in
Note 1.
See accompanying notes to consolidated financial statements.
F2-5
<PAGE> 73
TITAN EXPLORATION, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD PERIOD NINE
MARCH 31, 1995 MARCH 31, 1995 MONTHS
(DATE OF INCEPTION) (DATE OF INCEPTION) ENDED
THROUGH THROUGH SEPTEMBER
DECEMBER 31, SEPTEMBER 30, 30,
1995 1995 1996
------------------- ------------------- ----------
(UNAUDITED)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)................................. $ (1,531) $ 80 $ (2,210)
Adjustments to reconcile net income (loss) to net
cash used in operating activities:
Depletion, depreciation and amortization....... 299 57 2,269
Amortization of stock option awards............ 576 -- 576
Dry holes and abandonments..................... 434 -- 21
Gain on sale of assets......................... (244) (198) --
Deferred income taxes.......................... -- -- 2,998
Changes in assets and liabilities:
Increase in accounts receivable................ (2,153) (166) (833)
(Increase) decrease in prepaid expenses and
other current assets......................... (80) (11) 38
Increase in other assets....................... (724) (506) --
Increase in accounts payable and accrued
liabilities.................................. 1,659 231 2,794
--------- ------- --------
Total adjustments......................... (233) (593) 7,863
--------- ------- --------
Net cash provided by (used in) operating
activities.............................. (1,764) (513) 5,653
--------- ------- --------
Cash flows from investing activities:
Purchase of short-term investment................. (5,000) (5,000) --
Redemption of short-term investment............... -- -- 5,000
The 1995 Acquisition.............................. (39,881) -- --
Additions to oil and gas properties............... (3,796) (2,333) (17,590)
Additions to other property and equipment......... (134) (54) (173)
Proceeds from sale of nonproducing oil and gas
properties, net of commissions paid............ 1,248 948 --
--------- ------- --------
Net cash used in investing activities..... (47,563) (6,439) (12,763)
--------- ------- --------
Cash flows from financing activities:
Proceeds from the issuance of long-term debt...... 28,000 -- 8,000
Payments of long-term debt........................ (8,000) -- --
Capital contributions............................. 35,540 20,540 3,700
--------- ------- --------
Net cash provided by financing
activities.............................. 55,540 20,540 11,700
--------- ------- --------
Net increase in cash and cash
equivalents............................. 6,213 13,588 4,590
Cash and cash equivalents, beginning of period...... -- -- 6,213
--------- ------- --------
Cash and cash equivalents, end of period............ $ 6,213 $13,588 $ 10,803
========= ======= ========
</TABLE>
These consolidated financial statements reflect the reorganization described in
Note 1.
See accompanying notes to consolidated financial statements.
F2-6
<PAGE> 74
TITAN EXPLORATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(THE INFORMATION AND AMOUNTS FOR INTERIM PERIODS ARE UNAUDITED)
(1) ORGANIZATION AND NATURE OF OPERATIONS
Titan Exploration, Inc. (the "Company"), a Delaware corporation, was
organized on September 27, 1996 and began operations on September 30, 1996 with
the combination, pursuant to the terms of an Exchange Agreement and Plan of
Reorganization (the "Exchange Agreement"), of Titan Resources I, Inc. (the
"General Partner"), a Texas corporation, and Titan Resources, L.P. (the
"Partnership"). Under the exchange agreement, the limited partners of the
Partnership transferred all of their limited partnership interests to the
Company in exchange for 19,318,199 shares of common stock, and the General
Partner transferred all of the issued and outstanding stock of that corporation
to the Company in exchange for an aggregate of 231,814 shares of common stock.
These transactions are referred to as the "Conversion."
The Partnership and the General Partner were under common control due to
the General Partner's sole general partnership interest and control over the
Partnership and due to the commonality of ownership between the General Partner
and the Partnership. Consequently, the accompanying consolidated financial
statements have given effect to the Conversion as if it were a pooling of
interests. Revenues and costs arising from transactions between the two
predecessor entities (the General Partner and the Partnership) have been
eliminated. The following table sets forth revenues and net income with respect
to the two predecessor entities (in thousands):
<TABLE>
<CAPTION>
PERIOD PERIOD
MARCH 31, 1995 MARCH 31, 1995
(DATE OF INCEPTION) (DATE OF INCEPTION) NINE MONTHS
THROUGH THROUGH ENDED
DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
1995 1995 1996
------------------- ------------------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Revenues:
General Partner...................... $ 680 $ 453 $ 729
Partnership.......................... 985 173 10,377
Intercompany eliminations............ (680) (453) (729)
------- ----- -------
$ 985 $ 173 $10,377
======= ===== =======
Net income (loss):
General Partner...................... $ (9) $ 13 $ (26)
Partnership.......................... (1,522) 67 (2,184)
Intercompany eliminations............ -- -- --
------- ----- -------
$(1,531) $ 80 $(2,210)
======= ===== =======
</TABLE>
The Company is an independent energy company engaged in the exploration,
development and acquisition of oil and gas properties. Since its inception in
March 1995, the Company has experienced significant growth, primarily through
the acquisition of oil and gas properties and the exploitation of these
properties in the Permian Basin region of west Texas and southeastern New
Mexico.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its subsidiaries, each of which is wholly owned, since their formation (See
Note 1). All material intercompany accounts and transactions have been
eliminated in the consolidation.
F2-7
<PAGE> 75
TITAN EXPLORATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(THE INFORMATION AND AMOUNTS FOR INTERIM PERIODS ARE UNAUDITED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Use of Estimates
Preparation of the accompanying consolidated 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 consolidated financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Cash and Cash Equivalents
For purposes of the statements of cash flows, the Company considers all
demand deposits, money market accounts and certificates of deposit purchased
with an original maturity of three months or less to be cash equivalents.
Oil and Gas Properties
The Company utilizes the successful efforts method of accounting for its
oil and gas properties. Under this method of accounting, all costs associated
with productive wells and nonproductive development wells are capitalized while
nonproductive exploration costs are expensed.
Costs of significant nonproducing properties, wells in the process of being
drilled and development projects are excluded from depletion until such time as
the related project is developed and proved reserves are established or
impairment is determined. The Company capitalizes interest on expenditures for
significant development projects until such time as significant operations
commence.
Capitalized costs of individual properties abandoned or retired are charged
to accumulated depletion, depreciation and amortization. Sales proceeds from
sales of individual properties are credited to property costs. No gain or loss
is recognized until the entire amortization base is sold or abandoned.
Other property and equipment are recorded at cost. Major renewals and
betterments are capitalized while the costs of repairs and maintenance are
charged to operating expenses in the period incurred. With respect to
dispositions of assets other than oil and gas properties, the cost of assets
retired or otherwise disposed of, and the applicable accumulated depreciation
are removed from the accounts, and the resulting gains or losses, if any, are
reflected in operations.
Depletion, Depreciation and Amortization
Provision for depletion of oil and gas properties is calculated using the
unit-of-production method on the basis of an aggregation of properties with a
common geologic structural feature or stratigraphic condition, typically a field
or reservoir. Other property and equipment is depreciated using the
straight-line method over the estimated useful lives of the assets. Organization
costs are amortized over five years, while loan costs are amortized over the
life of the related loan.
Impairment of Long-Lived Assets
The Company follows the provisions of Statement of Financial Accounting
Standards No. 121 -- Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of ("FAS 121"). Consequently, the Company
reviews its long-lived assets to be held and used, including oil and gas
properties accounted for under the successful efforts method of accounting,
whenever events or circumstances indicate that the carrying value of those
assets may not be recoverable. An impairment loss is indicated if the sum of the
expected future cash flows is less than the carrying amount of the assets. No
F2-8
<PAGE> 76
TITAN EXPLORATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(THE INFORMATION AND AMOUNTS FOR INTERIM PERIODS ARE UNAUDITED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
impairment was determined to exist during the period March 31, 1995 (date of
inception) through December 31, 1995 or during the nine months ended September
30, 1996.
The Company accounts for long-lived assets to be disposed of at the lower
of their carrying amount or fair value less cost to sell once management has
committed to a plan to dispose of the assets.
Net Income (Loss) per Share
Net income (loss) per share is calculated based on the weighted average
number of shares and share equivalents, if dilutive, outstanding during the
period.
Income Taxes
The Company follows the provisions of Financial Accounting Standards No.
109, "Accounting for Income Taxes" ("FAS 109"). Under the asset and liability
method of FAS 109, deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. Under FAS
109, the effect on deferred tax assets and liabilities of a change in tax rate
is recognized in income in the period that includes the enactment date.
The Company has recorded the tax effect of the differences between the book
and tax basis of it assets and liabilities as a deferred tax liability and a
corresponding charge to deferred income tax expense. At September 30, 1996, the
excess of book basis over tax basis of assets and liabilities is $8,818,000.
Environmental
The Company is subject to extensive federal, state and local environmental
laws and regulations. These laws, which are constantly changing, regulate the
discharge of materials into the environment and may require the Company to
remove or mitigate the environmental effects of the disposal or release of
petroleum or chemical substances at various sites. Environmental expenditures
are expensed or capitalized depending on their future economic benefit.
Expenditures that relate to an existing condition caused by past operations and
that have no future economic benefits are expensed. Liabilities for expenditures
of a noncapital nature are recorded when environmental assessment and/or
remediation is probable, and the costs can be reasonably estimated.
Revenue Recognition
The Company uses the sales method of accounting for crude oil revenues.
Under this method, revenues are recognized based on actual volumes of oil sold
to purchasers.
The Company uses the entitlements method of accounting for natural gas
revenues. Under this method, revenues are recognized based on the Company's
proportionate share of actual sales of natural gas. Natural gas revenues would
not have been significantly altered in any period had the sales method of
recognizing natural gas revenues been utilized.
Commodity Hedging
The Company periodically enters into commodity derivative contracts (swaps)
in order to hedge the effect of price changes on commodities the Company
produces and sells. Gains and losses on contracts that
F2-9
<PAGE> 77
TITAN EXPLORATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(THE INFORMATION AND AMOUNTS FOR INTERIM PERIODS ARE UNAUDITED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
are designed to hedge commodities are included in income recognized from the
sale of those commodities. Gains and losses on derivative contracts which do not
qualify as hedges are recognized in each period based on the market value of the
related instrument.
Interest Rate Swap Agreements
The Company enters into interest rate swap agreements to effectively
convert a portion of its floating-rate borrowings into fixed rate obligations.
The interest rate differential to be received or paid is recognized over the
lives of the agreements as an adjustment to interest expense.
Interim Consolidated Financial Statements
The interim consolidated financial information as of September 30, 1996 and
for the periods ended September 30, 1995 and 1996, is unaudited. However, in the
opinion of management, these interim consolidated financial statements include
all the necessary adjustments to fairly present the results of the interim
periods, and all such adjustments are of a normal recurring nature. The interim
consolidated financial statements should be read in conjunction with the audited
financial statements for the period March 31, 1995 (date of inception) through
December 31, 1995.
(3) DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of cash, short-term investments, accounts receivable,
accounts payable, and accrued liabilities approximates fair value because of the
short maturity of these instruments.
The carrying amount of long-term debt approximates fair value because the
Company's current borrowing rate does not materially differ from market rates
for similar bank borrowings.
The fair market values of commodity derivative instruments are estimated
based upon the current market price of the respective commodities at the date of
valuation. It represents the amount which the Company would be required to pay
or able to receive based upon the differential between a fixed and a variable
commodity price as specified in the hedge contracts. At December 31, 1995 and
September 30, 1996, the Company would be required to pay approximately $606,000
and $652,000, respectively, to terminate the existing contracts.
The fair values of interest rate swap agreements are obtained from bank
quotes. This value represents the estimated amount the Company would pay to
terminate the agreement, taking into consideration current interest rates. The
Company estimates that, at December 31, 1995, the Company would be required to
pay approximately $17,000 to terminate the existing interest rate swap
agreement. At September 30, 1996, Titan would be entitled to receive
approximately $3,900.
(4) LONG-TERM DEBT
Long-term debt consists of the following at December 31, 1995 (in
thousands):
<TABLE>
<S> <C>
Note payable to bank secured by substantially all of the Company's
oil and gas properties, due in twenty quarterly payments
commencing January 1, 1998....................................... $20,000
=======
</TABLE>
On December 11, 1995, the Company entered into a credit agreement with
Texas Commerce Bank. The note provides for a two-year revolving line of credit
of $100,000,000 with an initial borrowing base of $35,000,000. The note converts
to a five-year term loan requiring twenty quarterly principal payments
F2-10
<PAGE> 78
TITAN EXPLORATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(THE INFORMATION AND AMOUNTS FOR INTERIM PERIODS ARE UNAUDITED)
(4) LONG-TERM DEBT (CONTINUED)
beginning January 1, 1998. The borrowing base is subject to redetermination
every six months with the next redetermination date being September 1, 1996. The
note is secured by substantially all of the Company's oil and gas properties.
Commitment fees are due quarterly and range from .300% to .375% per annum on the
difference between the borrowing base amount and the average daily amount
outstanding.
The unpaid principal balance on the note bears interest at the Company's
option based on (i) the higher of (a) the prime rate of Texas Commerce Bank, or
(b) one-half of one percent plus the Federal Funds rate, or (ii) a Eurodollar
rate (based upon a floating rate for a designated maturity of ninety days
adjusted for a Eurodollar margin percentage as defined in the credit agreement).
The interest rate in effect at December 31, 1995 was the Eurodollar rate of
7.0625%. The interest rate in effect at September 30, 1996 was 6.75%.
The credit agreement contains various restrictive covenants and compliance
requirements, which include (1) limiting the incurrence of additional
indebtedness, (2) limiting any mergers or consolidations with any party not
owned or controlled more than 50% by certain limited partners, on a consolidated
basis, and (3) prohibition of any return of capital payments or distributions to
any of its partners other than for taxes due as a result of their partnership
interest.
The Company is a party to an interest rate swap agreement entered into on
December 21, 1995. The effect of this agreement is to provide the Company with a
fixed interest rate of 6.72% on $10,000,000 of its revolving line of credit
through December 23, 1996.
Maturities of long-term debt are as follows (in thousands):
<TABLE>
<S> <C>
1996...................................................... $ --
1997...................................................... --
1998...................................................... 4,000
1999...................................................... 4,000
2000...................................................... 4,000
Thereafter................................................ 8,000
</TABLE>
On July 15, 1996, the Company borrowed an additional $8 million under its
line of credit in order to fund the required escrow payment on a potential
acquisition of certain oil and gas properties. (See Note 12).
(5) ACQUISITION OF OIL AND GAS PROPERTIES
On December 11, 1995, the Company completed the acquisition of certain oil
and gas properties from a large independent oil and gas company (the "1995
Acquisition"). The Company funded the acquisition from the bank credit agreement
described in Note 4. The total consideration paid for the properties was
$39,881,094. The acquisition of these oil and gas properties, accounted for
using the purchase method, resulted in the following noncash investing
activities:
<TABLE>
<S> <C>
Recorded amount of assets acquired, including receivables of
$396,719...................................................... $40,992,065
Liabilities assumed............................................. (1,110,971)
-----------
Cash paid....................................................... $39,881,094
===========
</TABLE>
Included in liabilities assumed is a $963,898 long-term liability recorded
as a purchase price adjustment related to the 1995 Acquisition for a gas
imbalance liability.
F2-11
<PAGE> 79
TITAN EXPLORATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(THE INFORMATION AND AMOUNTS FOR INTERIM PERIODS ARE UNAUDITED)
(5) ACQUISITION OF OIL AND GAS PROPERTIES (CONTINUED)
Pro Forma Results of Operations (Unaudited)
The following table reflects the pro forma results of operations for the
year ended December 31, 1995 as though the 1995 Acquisition had occurred as of
January 1, 1995 and as if the Conversion had taken place on January 1, 1995. The
pro forma amounts are not necessarily indicative of the results that may be
reported in the future (in thousands).
<TABLE>
<S> <C>
Revenues........................................................... $11,814
Net loss........................................................... (2,736)
Net loss per share................................................. (0.19)
</TABLE>
(6) STATEMENTS OF CASH FLOWS
No interest was paid in 1995. Interest expense of $1,164,399 was paid as of
September 30, 1996.
At December 31, 1995 and September 30, 1996, there were $131,993 and
$618,588, respectively, of property additions accrued in accounts payable.
At September 30, 1996, a $1,300,000 noncash capital contribution was made
in exchange for certain interests in oil and gas properties.
(7) DERIVATIVE FINANCIAL INSTRUMENTS
The Company has only limited involvement with derivative financial
instruments and does not use them for trading purposes. They are used to manage
well-defined interest rate and commodity price risks. The Company is exposed to
credit losses in the event of nonperformance by the counterparties to its
interest rate swap agreements and its commodity hedges. The Company anticipates,
however, that such counterparties will be able to fully satisfy their
obligations under the contracts. The Company does not obtain collateral or other
security to support financial instruments subject to credit risk but monitors
the credit standing of the counterparties.
Commodity Hedges
The Company utilizes various swap contracts to hedge the effect of price
changes on future oil and gas production. The following table sets forth the
future volumes hedged by year and the weighted average price to be received
based upon the fixed price of the individual swap contracts at December 31,
1995:
<TABLE>
<CAPTION>
GAS OIL
VOLUME VOLUME PRICE PER
YEAR (MMBTUS) (BBLS) MMBTU/BBL
------------------------------------------------ --------- ------- ---------
<S> <C> <C> <C>
Gas production:
1996.......................................... 2,640,000 -- $ 1.70
Oil production:
1996.......................................... -- 300,000 $ 17.18
</TABLE>
Under two separate natural gas swap agreements with a limited partner and
an affiliate of a limited partner, the Company receives the fixed price set
forth above. The Company pays a floating price determined as the NYMEX price,
reduced by 53% of the difference between the NYMEX price and the fixed price
received.
The Company relies upon the correlation that generally exists between the
NYMEX gas futures price and the cash prices realizable to effectively hedge its
production. However, with the lack of recent correlation
F2-12
<PAGE> 80
TITAN EXPLORATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(THE INFORMATION AND AMOUNTS FOR INTERIM PERIODS ARE UNAUDITED)
(7) DERIVATIVE FINANCIAL INSTRUMENTS (CONTINUED)
between the NYMEX gas futures price and the cash prices realizable in gas
markets outside the Northeastern United States, the Company recognized in
December 1995 an approximate $147,000 loss related to an uncorrelated position
for early 1996 gas production.
In April 1996, the Company entered into a natural gas swap agreement that
hedges a portion of the basis differential between the NYMEX price paid under
the contracts described above and actual cash prices received at local delivery
points. Under this contract covering 1,760,000 MMBtus of natural gas, the
Company pays a price equal to a Permian Basin index price and receives a price
based on the NYMEX price minus $.325 per MMBtu.
Interest Rate Swap Agreements
These instruments are used to reduce the potential impact of increases in
interest rates on floating-rate long-term debt. At December 31, 1995 and
September 30, 1996, the Company was a party to one interest rate swap agreement.
(See Note 4).
(8) RELATED PARTY TRANSACTIONS
During 1995, the Company received $241,563 for administrative services from
a related party. For the nine months ended September 30, 1996, revenue received
was $139,789.
Financial advisory service fees of $428,958 were paid to two shareholders
and two affiliates of shareholders during 1995. For the nine months ended
September 30, 1996, $146,250 of advisory service fees were paid to two
shareholders.
Director's fees of $20,833 and $7,500 were paid during 1995 and for the
nine months ended September 30, 1996, respectively.
The Company has recorded in other assets approximately $425,000 of
organization costs which were paid to related parties for consulting and
advisory fees. These costs are being amortized over a period of five years.
The Company has entered into natural gas swap agreements with certain
related parties. (See Note 7).
Certain properties that were owned or controlled by certain shareholders
were acquired by the Company for $1,142,000, which approximates the predecessor
cost of the properties.
The Company entered into a three-year noncancellable operating lease with
an entity controlled by an officer of the General Partner for office facilities
on January 1, 1996.
Future minimum lease commitments under the lease at December 31, 1995 are
as follows:
<TABLE>
<S> <C>
1996...................................................... $110,625
1997...................................................... 110,625
1998...................................................... 110,625
</TABLE>
Lease expense paid through September 30, 1996 was $82,969.
The Company is a party to two financial advisory service contracts with a
shareholder and an affiliate of a shareholder. These contracts require
consolidated annual payments of $185,000 per year to be paid by the Company
until any one of the following events occur:
(i) the date of dissolution of the Company;
F2-13
<PAGE> 81
TITAN EXPLORATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(THE INFORMATION AND AMOUNTS FOR INTERIM PERIODS ARE UNAUDITED)
(8) RELATED PARTY TRANSACTIONS (CONTINUED)
(ii) the first date on which the respective shareholder no longer owns
at least 35% of the outstanding shares of common stock of the Company;
(iii) the first date on which the Company or its successors complete
an equity offering to the public, or
(iv) written notice by the respective party of their election to
terminate the contracts with the Company.
The Company regularly uses certain aircraft owned by an affiliate. The
Company is billed for any use of such aircraft by Company personnel. Payments
made for the use of such aircraft were $4,140 for the period March 31, 1995
(date of inception) through December 31, 1995 and $10,859 for the nine months
ended September 30, 1996.
The President, Chief Executive Officer and Chairman of the Board of the
Company, and certain of his affiliates have a common ownership interest in an
oil and gas property that is operated by the Company and, in accordance with a
standard industry operating agreement, make payments to the Company of leasehold
costs and lease operating and supervision charges. These payments were
approximately $12,000 for the period March 31, 1995 (date of inception) through
December 31, 1995 and $284,000 for the nine months ended September 30, 1996.
(9) COMPANY OPTION PLANS
During 1995, the Titan Resources, L.P. established a unit option plan (the
"Plan") for certain officers and key employees of the Partnership and the
General Partner. The Plan provided for the issuance of 5,460,000 options in four
separate series with an initial exercise price of $1 which was to be increased
10% per annum from the initial plan adoption date of March 31, 1995. Option A
series, covering 3,624,706 units, was to vest at a rate of one-third of the
options at each of the dates of March 31, 1996, 1997 and 1998. Option B, C, and
D series were to vest on the dates that the Board determines that the current
value of partnership units had increased by a factor of 3, 4, and 5,
respectively or on the date that such per unit amounts of cash or other assets
have been or are authorized to be distributed to the Partners. Option B, C, and
D series cover 582,282, 611,037, and 641,975 units, respectively. As of December
31, 1995, 5,093,616 unit options had been awarded and none were vested or
exercised.
Based on the price of equity interests sold at December 11, 1995, the
Company recorded deferred compensation for the expected value of the options,
amortized over the period from March 31, 1995 through March 31, 1998.
On September 30, 1996, upon the consolidation of Titan Resources, L.P., the
Plan was replaced by a new stock option plan the ("Stock Plan"). The Stock Plan
provides for the issuance of 3,631,350 options to acquire common stock of the
Company, in four separate series with a fixed exercise price of $2.08. Option A
series, covering 2,410,728 shares of common stock, was to vest at a rate of
one-third of the options at each of the dates of March 31, 1996, 1997 and 1998.
Option B, C, and D series cover 387,265, 406,390, and 426,967 shares of common
stock, respectively and vest over a period through March 31, 1999. Deferred
compensation will be recorded based on the value of the Company's common stock
on September 30, 1996, and will be amortized to expense through March 31, 1999.
F2-14
<PAGE> 82
TITAN EXPLORATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(THE INFORMATION AND AMOUNTS FOR INTERIM PERIODS ARE UNAUDITED)
(10) 401(K) PLAN
The Company has established a qualified cash or deferred arrangement under
IRS code section 401(k) covering substantially all employees. Under the plan,
the employees have an option to make elective contributions of a portion of
their eligible compensation, not to exceed specified annual limitations, to the
plan and the Company has an option to match a portion of the employee's
contribution. The Company has made matching contributions to the plan totaling
$8,199 in 1995 and $16,604 for the nine months ended September 30, 1996.
(11) MAJOR CUSTOMERS
The following purchasers accounted for 10% or more of the Company's oil and
gas sales for the period March 31, 1995 (date of inception) through December 31,
1995 and the nine months ended September 30, 1996.
<TABLE>
<CAPTION>
1995 1996
----- ------
<S> <C> <C>
Purchaser A................................................ -- 52.50%
</TABLE>
(12) SUBSEQUENT EVENTS
On October 31, 1996, the Company acquired from a major integrated company
(the "1996 Acquisition") certain oil and gas properties for approximately $135.5
million. The properties are located primarily in west Texas and southeastern New
Mexico. The transaction will be accounted for using the purchase method.
Pro Forma Results of Operations (Unaudited)
The following table reflects the pro forma results of operations for the
nine months ended September 30, 1995 and 1996, as though the 1996 Acquisition
had occurred as of January 1, 1995. The pro forma amounts are not necessarily
indicative of the results that may be reported in the future (in thousands).
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------
1995 1996
------- -------
<S> <C> <C>
Revenues......................................................... $37,535 $42,554
Net income (loss)................................................ (623) 260
Net income (loss) per share...................................... (.05) .01
</TABLE>
In connection with the foregoing, the Company entered into a new credit
agreement (the "Credit Agreement") with Chase Securities, Inc., an affiliate of
the Company's current lender, which establishes a four year revolving credit
facility, up to the maximum amount of $250 million, subject to a borrowing base
to be determined semiannually by the lenders based on certain proved oil and gas
reserves and other assets of the Company. Proceeds of the credit facility will
be utilized to fund the 1996 Acquisition, development of oil and gas reserves,
and for general corporate requirements.
The initial borrowing base is $165 million with the next redetermination
date scheduled for April 1, 1997. The credit agreement, which is secured by the
Company's proved oil and gas reserves, is subject to mandatory prepayments. To
the extent that the borrowing base is less than the aggregate principal amount
of all outstanding loans and letters of credit under the Credit Agreement, such
deficiency must be cured by the Company ratably within 180 days, by either
prepaying a portion of the outstanding amounts or pledging additional
collateral.
At the Company's option, borrowings under the Credit Agreement bear
interest at either (i) the "Alternate Base Rate" (i.e. the higher of the agent's
prime commercial lending rate, or the federal funds rate
F2-15
<PAGE> 83
TITAN EXPLORATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(THE INFORMATION AND AMOUNTS FOR INTERIM PERIODS ARE UNAUDITED)
(12) SUBSEQUENT EVENTS (CONTINUED)
plus 0.5% per annum), or (ii) the Eurodollar rate plus a margin ranging from 1%
to 1.50% per annum, which margin increases as the level of the Company's
aggregate outstanding borrowings under the Credit Agreement increases.
The loan documents governing the Credit Agreement contain certain covenants
and restrictions that are customary in the oil and gas industry relating to the
Company's operations.
(13) OIL AND GAS EXPENDITURES
The following table reflects costs incurred in oil and gas property
acquisition, exploration and development activities:
<TABLE>
<CAPTION>
PERIOD
MARCH 31, 1995
(DATE OF INCEPTION) NINE MONTHS
THROUGH ENDED
DECEMBER 31, SEPTEMBER 30,
1995 1996
------------------- -------------
(IN THOUSANDS)
<S> <C> <C>
(UNAUDITED)
Property acquisition costs:
Proved............................................... $40,873 $11,837
Unproved............................................. 1,040 300
Exploration............................................ 448 107
Development............................................ 1,580 7,358
------- -------
$43,941 $19,602
======= =======
</TABLE>
(14) SUPPLEMENTAL OIL AND GAS RESERVE INFORMATION (UNAUDITED)
The estimates of proved oil and gas reserves, which are located principally
in the United States, were prepared by the Company as of December 31, 1995, and
Williamson Petroleum Consultants as of September 30, 1996. Reserves were
estimated in accordance with guidelines established by the SEC and FASB which
require that reserve estimates be prepared under existing economic and operating
conditions with no provision for price and cost escalations except by
contractual arrangements. The Company has presented the reserve estimates
utilizing an oil price of $16.78 per Bbl and a gas price of $1.20 per Mcf as of
December 31, 1995 and an oil price of $23.36 per Bbl and a gas price of $1.32
per Mcf as of September 30, 1996.
Oil and Gas Producing Activities
Oil and gas reserve quantity estimates are subject to numerous
uncertainties inherent in the estimation of quantities of proved reserves and in
the projection of future rates of production and the timing of development
expenditures. The accuracy of such estimates is a function of the quality of
available data and of engineering and geological interpretation and judgment.
Results of subsequent drilling, testing and production may cause either upward
or downward revision of previous estimates. Further, the volumes considered to
be commercially recoverable fluctuate with changes in prices and operating
costs. The Company emphasizes that reserve estimates are inherently imprecise
and that estimates of new discoveries are more imprecise than those of currently
producing oil and gas properties. Accordingly, these estimates are expected to
change as additional information becomes available in the future.
F2-16
<PAGE> 84
TITAN EXPLORATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(THE INFORMATION AND AMOUNTS FOR INTERIM PERIODS ARE UNAUDITED)
(14) SUPPLEMENTAL OIL AND GAS RESERVE INFORMATION (UNAUDITED) (CONTINUED)
<TABLE>
<CAPTION>
OIL AND
CONDENSATE NATURAL GAS
(MBBLS) (MMCF)
---------- -----------
<S> <C> <C>
Total Proved Reserves:
Balance, January 1, 1995............................................. -- --
Extensions and discoveries......................................... 108 33,724
Production......................................................... (30) (245)
Purchases of minerals-in-place..................................... 6,068 101,516
----- -------
Balance, December 31, 1995........................................... 6,146 134,995
Extensions and discoveries......................................... 180 45,931
Purchases of minerals-in-place..................................... 704 264
Revision of previous estimates..................................... (79) 1,100
Production......................................................... (388) (2,725)
----- -------
Balance, September 30, 1996.......................................... 6,563 179,565
===== =======
Proved Developed Reserves:
January 1, 1995.................................................... -- --
December 31, 1995.................................................. 5,945 45,470
September 30, 1996................................................. 6,252 54,119
</TABLE>
Standardized Measure of Discounted Future Net Cash Flows of Proved Oil and Gas
Reserves
The standardized measure of discounted future net cash flows is computed by
applying year-end prices of oil and gas (with consideration of price changes
only to the extent provided by contractual arrangements) to the estimated future
production of proved oil and gas reserves, less estimated future expenditures
(based on period-end costs) to be incurred in developing and producing the
proved reserves, less estimated future income tax expenses (based on period-end
statutory tax rates, with consideration of future tax rates already legislated)
to be incurred on pretax net cash flows less tax basis of the properties and
available credits, and assuming continuation of existing economic conditions.
The estimated future net cash flows are then discounted using a rate of 10% per
year to reflect the estimated timing of the future cash flows.
Discounted future cash flow estimates like those shown below are not
intended to represent estimates of the fair value of oil and gas properties.
Estimates of fair value should also consider probable reserves, anticipated
future oil and gas prices, interest rates, changes in development and production
costs and risks associated with future production. Because of these and other
considerations, any estimate of fair value is necessarily subjective and
imprecise.
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1995 1996
------------ -------------
(IN THOUSANDS)
<S> <C> <C>
Future:
Cash inflows............................................. $270,965 391,187
Production and development costs......................... (95,490) (128,223)
Future income taxes...................................... (45,754) (72,502)
-------- ---------
Net cash flows................................... 129,721 190,462
10% annual discount for estimated timing of cash flows... (63,369) (85,784)
-------- ---------
Standardized measure of discounted net cash flows........ $ 66,352 104,678
======== =========
</TABLE>
F2-17
<PAGE> 85
TITAN EXPLORATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(THE INFORMATION AND AMOUNTS FOR INTERIM PERIODS ARE UNAUDITED)
(14) SUPPLEMENTAL OIL AND GAS RESERVE INFORMATION (UNAUDITED) (CONTINUED)
Changes in Standardized Measure of Discounted Future Net Cash Flows From Proved
Reserves
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
1995 1996
------------ -------------
(IN THOUSANDS)
<S> <C> <C>
Standardized measure, beginning of period.......................... $ -- $ 66,352
Extensions and discoveries and improved recovery, net of future
production and development costs.............................. 18,087 31,920
Accretion of discount............................................ -- 4,963
Net change in sales prices, net of production costs.............. -- 15,992
Net change in income taxes....................................... (23,401) (16,453)
Change in estimated future development costs..................... -- 658
Purchase of minerals-in-place.................................... 71,561 4,928
Revision of quantity estimates................................... -- 445
Sales, net of production costs................................... (439) (5,898)
Other............................................................ 544 1,771
-------- --------
Standardized measure, end of period................................ $ 66,352 $ 104,678
======== ========
</TABLE>
F2-18
<PAGE> 86
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Titan Exploration, Inc.:
We have audited the accompanying statements of revenues and direct
operating expenses of the oil and gas properties acquired (1995 Acquisition) by
Titan Exploration, Inc. for the years ended December 31, 1993 and 1994 and the
period ended December 11, 1995. These statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the statements of revenues and direct
operating expenses 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 statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
The accompanying statements of revenues and direct operating expenses were
prepared for the purpose of complying with the rules and regulations of the
Securities and Exchange Commission (for inclusion in Form S-1 of Titan
Exploration, Inc. as described in Note 1) and are not intended to be a complete
presentation of the 1995 Acquisition revenues and expenses.
In our opinion, the statements of revenues and direct operating expenses
referred to above present fairly, in all material respects, the revenues and
direct operating expenses of the 1995 Acquisition for the years ended December
31, 1993 and 1994 and the period ended December 11, 1995 in conformity with
generally accepted accounting principles.
KPMG PEAT MARWICK LLP
Houston, Texas
September 23, 1996
F3-1
<PAGE> 87
TITAN EXPLORATION, INC.
1995 ACQUISITION
STATEMENTS OF REVENUES AND DIRECT OPERATING EXPENSES
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED PERIOD ENDED
DECEMBER 31, DECEMBER 11,
------------------ ------------
1993 1994 1995
------- ------- ------------
<S> <C> <C> <C>
Revenues:
Oil and condensate......................................... $ 8,847 $ 7,590 $ 7,130
Natural gas................................................ 6,441 5,229 3,699
------- ------- -------
15,288 12,819 10,829
Direct operating expenses:
Lease operating............................................ 3,277 3,436 3,515
Production taxes........................................... 1,223 1,271 1,104
------- ------- -------
4,500 4,707 4,619
------- ------- -------
Revenues in excess of direct operating expenses.............. $10,788 $ 8,112 $ 6,210
======= ======= =======
</TABLE>
See accompanying notes to statements of revenues and direct operating expenses.
F3-2
<PAGE> 88
TITAN EXPLORATION, INC.
1995 ACQUISITION
NOTES TO THE STATEMENTS OF REVENUES AND DIRECT OPERATING EXPENSES
(1) BASIS OF PRESENTATION
On December 11, 1995, Titan Exploration, Inc. (the "Company") acquired from
a large independent oil and gas company certain oil and gas properties (the
"1995 Acquisition") for $39,881,094. The accompanying statements of revenues and
direct operating expenses for the 1995 Acquisition do not include general and
administrative expenses, interest income or expense, a provision for
depreciation, depletion and amortization, or any provision for income taxes
since historical expenses of this nature incurred by Anadarko are not
necessarily indicative of the costs to be incurred by the Company.
Historical financial information reflecting financial position, results of
operations, and cash flows of the 1995 Acquisition, are not presented because
the purchase price was assigned to the oil and gas property interests acquired.
Other assets acquired and liabilities assumed were not material. In addition,
the properties acquired were a part of a much larger enterprise prior to
acquisition by the Company and representative amounts of general and
administrative expenses, depreciation, depletion and amortization, interest and
other indirect costs were not necessarily allocated to the specific properties
acquired, nor would such allocated historical costs be relevant to future
operations of the properties. Development and exploration expenditures related
to these properties have been insignificant in the relevant periods.
Accordingly, the historical statements of revenues and direct operating expenses
of the 1995 Acquisition are presented in lieu of the financial statements
required under Rule 3-05 of Securities and Exchange Commission Regulation S-X.
Revenues in the accompanying statements of revenues and direct operating
expenses are recognized on the sales method. Under this method, revenues are
recognized based on actual volumes of oil and gas sold to purchasers. Direct
operating expenses are recognized on the accrual method.
(2) SUPPLEMENTARY FINANCIAL INFORMATION FOR OIL AND GAS PRODUCING ACTIVITIES
(UNAUDITED)
Estimated Quantities of Proved Oil and Gas Reserves
Reserve information presented below is based on reserve estimates prepared
by the Company.
Proved reserves are estimated quantities of crude oil and natural gas 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 developed reserves are those which are expected to
be recovered through existing wells with existing equipment and operating
methods. Oil and gas reserve quantity estimates are subject to numerous
uncertainties inherent in the estimation of quantities of proved reserves and in
the projection of future rates of production and the timing of development
expenditures. The accuracy of such estimates is a function of the quality of
available data and of engineering and geological interpretation and judgment.
Results of subsequent drilling, testing and production may cause either upward
or downward revision of previous estimates. Further, the volumes considered to
be commercially recoverable fluctuate with changes in prices and operating
costs. The Company emphasizes that reserve estimates are inherently imprecise
and that estimates of new discoveries are more imprecise than those of currently
producing oil and gas properties. Accordingly, these reserve estimates are
expected to change as additional information becomes available in the future.
F3-3
<PAGE> 89
TITAN EXPLORATION, INC.
1995 ACQUISITION
NOTES TO THE STATEMENTS OF REVENUES AND DIRECT
OPERATING EXPENSES (CONTINUED)
(2) SUPPLEMENTARY FINANCIAL INFORMATION FOR OIL AND GAS PRODUCING ACTIVITIES
(UNAUDITED) (CONTINUED)
Below are the net estimated quantities of proved reserves and proved
developed reserves for the 1995 Acquisition.
<TABLE>
<CAPTION>
OIL AND NATURAL
CONDENSATE (MBBLS) GAS (MMCF)
------------------ ----------
<S> <C> <C>
Proved reserves at December 31, 1992.................. 7,598 116,693
Revision of previous estimates...................... (869) (226)
Production.......................................... (535) (4,291)
------ ----------
Proved reserves at December 31, 1993.................. 6,194 112,176
Revision of previous estimates...................... 470 (1,612)
Production.......................................... (491) (4,002)
------ ----------
Proved reserves at December 31, 1994.................. 6,173 106,562
Revision of previous estimates...................... 320 (1,517)
Production.......................................... (425) (3,529)
------ ----------
Proved reserves at December 11, 1995.................. 6,068 101,516
=============== ==========
Proved developed reserves at December 11, 1995........ 5,923 45,707
=============== ==========
</TABLE>
Standardized Measure of Discounted Future Net Cash Flows of Proved Oil and Gas
Reserves
The Company has estimated the standardized measure of discounted future net
cash flows and changes therein relating to proved oil and gas reserves in
accordance with the standards established by the Financial Accounting Standards
Board through its Statement No. 69. The estimates of future cash flows and
future production and development costs are based on period-end sales prices for
oil and gas, estimated future production of proved reserves, and estimated
future production and development costs of proved reserves, based on current
costs and economic conditions. The estimated future net cash flows are then
discounted at a rate of 10%.
Discounted future net cash flow estimates like those shown below are not
intended to represent estimates of the fair market value of oil and gas
properties. Estimates of fair market value should also consider probable
reserves, anticipated future oil and gas prices, interest rates, changes in
development and production costs and risks associated with future production.
Because of these and other considerations, any estimate of fair market value is
necessarily subjective and imprecise.
F3-4
<PAGE> 90
TITAN EXPLORATION, INC.
1995 ACQUISITION
NOTES TO THE STATEMENTS OF REVENUES AND DIRECT
OPERATING EXPENSES (CONTINUED)
(2) SUPPLEMENTARY FINANCIAL INFORMATION FOR OIL AND GAS PRODUCING ACTIVITIES
(UNAUDITED) (CONTINUED)
The following are the Company's estimated standardized measure of
discounted future net cash flows from proved reserves attributable to the 1995
Acquisition:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------- DECEMBER 11,
1993 1994 1995
-------- -------- ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Future:
Cash inflows................................... $272,478 $202,316 $221,731
Production and development costs............... (87,704) (82,079) (82,753)
-------- -------- --------
Net cash flows......................... 184,774 120,237 138,978
10% annual discount for estimated timing of
cash flows..................................... (98,187) (60,881) (67,837)
-------- -------- --------
Standardized measure of discounted future net
cash flows..................................... $ 86,587 $ 59,356 $ 71,141
======== ======== ========
</TABLE>
Changes in Standardized Measure of Discounted Future Net Cash Flows From
Proved Reserves
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31, PERIOD ENDED
--------------------- DECEMBER 11,
1993 1994 1995
-------- -------- ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Standardized measure, beginning of period........ $ 93,099 $ 86,587 $ 59,356
Accretion of discount............................ 9,309 8,658 5,276
Net change in sales prices, net of production
costs.......................................... (773) (28,377) 12,556
Revision of quantity estimates................... (3,227) 516 215
Sales, net of production costs................... (10,788) (8,112) (6,210)
Other............................................ (1,033) 84 (52)
-------- -------- --------
Standardized measure, end of period.............. $ 86,587 $ 59,356 $ 71,141
======== ======== ========
</TABLE>
F3-5
<PAGE> 91
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Titan Exploration, Inc.:
We have audited the accompanying statements of revenues and direct
operating expenses of the oil and gas properties to be acquired (1996
Acquisition) by Titan Exploration Inc. for the years ended December 31, 1993,
1994 and 1995. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the statements of revenues and direct
operating expenses 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 statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
The accompanying statements of revenues and direct operating expenses were
prepared for the purpose of complying with the rules and regulations of the
Securities and Exchange Commission (for inclusion in Form S-1 of Titan
Exploration, Inc. as described in Note 1) and are not intended to be a complete
presentation of the 1996 Acquisition revenues and expenses.
In our opinion, the statements of revenues and direct operating expenses
referred to above present fairly, in all material respects, the revenues and
direct operating expenses of the 1996 Acquisition for the years ended December
31, 1993, 1994 and 1995 in conformity with generally accepted accounting
principles.
KPMG PEAT MARWICK LLP
Dallas, Texas
September 25, 1996
F4-1
<PAGE> 92
TITAN EXPLORATION, INC.
1996 ACQUISITION
STATEMENTS OF REVENUES AND DIRECT OPERATING EXPENSES
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
------------------------------- -------------------
1993 1994 1995 1995 1996
------- ------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Oil and condensate..................... $25,627 $22,708 $20,891 $15,878 $15,991
Natural gas............................ 22,670 18,522 16,886 12,915 16,186
------- ------- ------- ------- -------
48,297 41,230 37,777 28,793 32,177
Direct operating expenses:
Lease operating........................ 13,151 11,428 10,538 8,290 7,842
Production taxes....................... 3,045 2,436 1,974 1,512 1,639
------- ------- ------- ------- -------
16,196 13,864 12,512 9,802 9,481
------- ------- ------- ------- -------
Revenues in excess of direct operating
expenses............................... $32,101 $27,366 $25,265 $18,991 $22,696
======= ======= ======= ======= =======
</TABLE>
See accompanying notes to statements of revenues and direct operating expenses.
F4-2
<PAGE> 93
TITAN EXPLORATION, INC.
1996 ACQUISITION
NOTES TO THE STATEMENTS OF REVENUES AND DIRECT OPERATING EXPENSES
(1) BASIS OF PRESENTATION
On October 31, 1996, Titan Exploration, Inc. (the "Company") acquired from
a major integrated company certain oil and gas properties located in the Permian
Basin (the "1996 Acquisition") for $135,524,139. The accompanying statements of
revenues and direct operating expenses for the 1996 Acquisition do not include
general and administrative expenses, interest income or expense, a provision for
depreciation, depletion and amortization, or any provision for income taxes
since historical expenses of this nature incurred by Mobil are not necessarily
indicative of the costs to be incurred by the Company.
Historical financial information reflecting financial position, results of
operations, and cash flows of the 1996 Acquisition, are not presented because
the purchase price will be assigned to the oil and gas property interests
acquired. Other assets acquired and liabilities assumed were not material. In
addition, the properties acquired were a part of a much larger enterprise prior
to acquisition by the Company and representative amounts of general and
administrative expenses, depreciation, depletion and amortization, interest and
other indirect costs were not necessarily allocated to the specific properties
acquired, nor would such allocated historical costs be relevant to future
operations of the properties. Development and exploration expenditures related
to these properties have been insignificant in the relevant periods.
Accordingly, the historical statements of revenues and direct operating expenses
of the 1996 Acquisition are presented in lieu of the financial statements
required under Rule 3-05 of Securities and Exchange Commission Regulation S-X.
Revenues in the accompanying statements of revenues and direct operating
expenses are recognized on the sales method. Under this method, revenues are
recognized based on actual volumes of oil and gas sold to purchasers. Direct
operating expenses are recognized on the accrual basis.
The financial information for the nine months ended September 30, 1995 and
1996, is unaudited. However, in the opinion of management, the statements of
revenues and direct operating expenses for the nine months ended September 30,
1995 and 1996 include all the necessary adjustments to fairly present the
results of these periods.
(2) SUPPLEMENTARY FINANCIAL INFORMATION FOR OIL AND GAS PRODUCING ACTIVITIES
(UNAUDITED)
Estimated Quantities of Proved Oil and Gas Reserves
Reserve information presented below is based on reserve estimates prepared
by the Company.
Proved reserves are estimated quantities of crude oil and natural gas 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 developed reserves are those which are expected to
be recovered through existing wells with existing equipment and operating
methods. Oil and gas reserve quantity estimates are subject to numerous
uncertainties inherent in the estimation of quantities of proved reserves and in
the projection of future rates of production and the timing of development
expenditures. The accuracy of such estimates is a function of the quality of
available data and of engineering and geological interpretation and judgment.
Results of subsequent drilling, testing and production may cause either upward
or downward revision of previous estimates. Further, the volumes considered to
be commercially recoverable fluctuate with changes in prices and operating
costs. The Company emphasizes that reserve estimates are inherently imprecise
and that estimates of new discoveries are more imprecise than those of currently
producing oil and gas properties. Accordingly, these reserve estimates are
expected to change as additional information becomes available in the future.
F4-3
<PAGE> 94
TITAN EXPLORATION, INC.
1996 ACQUISITION
NOTES TO THE STATEMENTS OF REVENUES AND DIRECT OPERATING EXPENSES (CONTINUED)
(2) SUPPLEMENTARY FINANCIAL INFORMATION FOR OIL AND GAS PRODUCING ACTIVITIES
(UNAUDITED) (CONTINUED)
Below are the net estimated quantities of proved reserves and proved
developed reserves for the 1996 Acquisition.
<TABLE>
<CAPTION>
OIL AND NATURAL
CONDENSATE (MBBLS) GAS (MMCF)
------------------ ----------
<S> <C> <C>
Proved reserves at December 31, 1992.................... 12,951 132,445
Revision of previous estimates........................ 76 10,901
Production............................................ (1,857) (12,650)
------ -------
Proved reserves at December 31, 1993.................... 11,170 130,696
Revision of previous estimates........................ 1,284 421
Production............................................ (1,804) (12,124)
------ -------
Proved reserves at December 31, 1994.................... 10,650 118,993
Revision of previous estimates........................ 1,213 2,228
Production............................................ (1,549) (14,177)
------ -------
Proved reserves at December 31, 1995.................... 10,314 107,044
Revision of previous estimates........................ 1,889 3,725
Production............................................ (923) (9,510)
------ -------
Proved reserves at September 30, 1996................... 11,280 101,259
====== =======
Proved developed reserves at December 31, 1995.......... 8,314 99,553
====== =======
Proved developed reserves at September 30, 1996......... 9,281 94,358
====== =======
</TABLE>
Standardized Measure of Discounted Future Net Cash Flows of Proved Oil and Gas
Reserves
The Company has estimated the standardized measure of discounted future net
cash flows and changes therein relating to proved oil and gas reserves in
accordance with the standards established by the Financial Accounting Standards
Board through its Statement No. 69. The estimates of future cash flows and
future production and development costs are based on period-end sales prices for
oil and gas, estimated future production of proved reserves, and estimated
future production and development costs of proved reserves, based on current
costs and economic conditions. The estimated future net cash flows are then
discounted at a rate of 10%.
Discounted future net cash flow estimates like those shown below are not
intended to represent estimates of the fair market value of oil and gas
properties. Estimates of fair market value should also consider probable
reserves, anticipated future oil and gas prices, interest rates, changes in
development and production costs and risks associated with future production.
Because of these and other considerations, any estimate of fair market value is
necessarily subjective and imprecise.
F4-4
<PAGE> 95
TITAN EXPLORATION, INC.
1996 ACQUISITION
NOTES TO THE STATEMENTS OF REVENUES AND DIRECT OPERATING EXPENSES (CONTINUED)
(2) SUPPLEMENTARY FINANCIAL INFORMATION FOR OIL AND GAS PRODUCING ACTIVITIES
(UNAUDITED) (CONTINUED)
The following are the Company's estimated standardized measure of
discounted future net cash flows from proved reserves attributable to the 1996
Acquisition:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------- SEPTEMBER 30,
1993 1994 1995 1996
--------- --------- --------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Future:
Cash inflows....................... $ 396,798 $ 393,721 $ 383,701 $ 416,844
Production and development costs... (172,110) (160,629) (166,517) (174,736)
-------- -------- -------- ---------
Net cash flows............. 224,688 233,092 217,184 242,108
10% annual discount for estimated
timing of cash flows............ (91,315) (105,759) (89,886) (94,559)
-------- -------- -------- ----------
Standardized measure of discounted
future net cash flows........... $ 133,373 $ 127,333 $ 127,298 $ 147,549
======== ======== ======== =========
</TABLE>
Changes in Standardized Measure of Discounted Future Net Cash Flows From
Proved Reserves
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, PERIOD ENDED
----------------------------------- SEPTEMBER 30,
1993 1994 1995 1996
--------- --------- --------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Standardized measure, beginning of
period............................. $ 163,590 $ 133,373 $ 127,333 $ 127,298
Accretion of discount................ 16,359 13,337 12,733 9,521
Net change in sales prices, net of
production costs................... (17,086) 13,823 (1,673) 15,581
Revision of quantity estimates....... 7,821 5,770 7,320 13,404
Sales, net of production costs....... (32,101) (27,366) (25,265) (22,696)
Other................................ (5,210) (11,604) 6,850 4,441
-------- -------- -------- ---------
Standardized measure, end of
period............................. $ 133,373 $ 127,333 $ 127,298 $ 147,549
======== ======== ======== =========
</TABLE>
F4-5
<PAGE> 96
[WILLIAMSON LOGO]
November 15, 1996
Titan Exploration, Inc.
500 West Texas, Suite 500
Midland, Texas 79701
Attention Mr. Rodney Woodard
Gentlemen:
Subject: Summary Letter (for Inclusion in a Prospectus Included in a
Registration Statement for Titan Exploration, Inc. on Form S-1)
Combining Specific Data from Two Williamson Petroleum Consultants, Inc.
Evaluations (1) to the Interests of Titan Exploration, Inc. in Titan
Original Properties and Properties Acquired from a Large Independent
Oil Company in 1995, Effective October 1, 1996 (the 1995 Acquisition
Properties) and (2) to the Interests in Properties Acquired from a
Major Integrated Oil and Gas Company (the Integrated Company),
Effective October 1, 1996 (the 1996 Acquisition Properties), for
Disclosure to the Securities and Exchange Commission, Williamson
Project 6.8432
In accordance with your request, Williamson Petroleum Consultants, Inc.
(Williamson) has prepared a summary letter for inclusion in a prospectus for
Titan Exploration, Inc. (Titan). This summary letter includes specific data from
two evaluations the subjects of which are described in Item I. All values and
discussion of proved reserves and net revenues, data utilized, assumptions, and
qualifications are taken from and include by reference data from these two
evaluations.
Interests in this summary letter represent the October 1, 1996 effective
date consolidation of the ownership interests of Titan and the ownership
interests purchased from the Integrated Company in various properties included
in the March 1996 Permian Basin Divestiture Package. The Titan properties
include interests in those properties designated as the Titan original
properties and the 1995 Acquisition Properties purchased by Titan in 1995. Titan
concluded the purchase of the 1996 Acquisition Properties on October 31, 1996.
The evaluation of the 1996 Acquisition Properties with an effective date of
October 1, 1996 and the summation with the Titan properties herein is based on
the October 31, 1996 closing on the 1996 Acquisition Properties.
I. THE TWO SUBJECT EVALUATIONS
This summary letter combines certain proved oil and gas reserves and
revenues from the following two Williamson evaluations:
(1) Evaluation of Oil and Gas Reserves to the Interests of Titan
Exploration, Inc. in Titan Original Properties and 1995 Acquisition
Properties, Effective October 1, 1996, for Disclosure to the Securities and
Exchange Commission, Williamson Project 6.8432 (the Titan report)
(2) Evaluation of Oil and Gas Reserves to the Interests in the 1996
Acquisition Properties, Effective October 1, 1996, for Disclosure to the
Securities and Exchange Commission, Williamson Project 6.8432 (the 1996
Acquisition report)
II. ESTIMATED SEC RESERVES AND FUTURE NET REVENUES
Projections of the reserves that are attributable to the consolidated
interests in this summary letter were based on economic parameters and operating
conditions considered applicable as of October 1, 1996 and are pursuant to the
requirements of the Securities and Exchange Commission (SEC).
A-1
<PAGE> 97
The present values of the estimated future net revenues from proved
reserves were calculated using a discount rate of 10.00 percent per year and
were computed in accordance with the financial reporting requirements of the
SEC. Following is a summary of the results of the two evaluations effective
October 1, 1996:
<TABLE>
<CAPTION>
PROVED PROVED
DEVELOPED DEVELOPED PROVED TOTAL
PRODUCING NONPRODUCING UNDEVELOPED PROVED
----------- ------------ ----------- -----------
<S> <C> <C> <C> <C>
Net Reserves to the Evaluated Interests:
Oil/Condensate, BBL.................... 15,506,378 26,417 2,310,102 17,842,897
Gas, MCF............................... 146,956,923 1,520,000 132,346,148 280,823,071
Future Net Revenue, $:
Undiscounted........................... 320,390,801 3,142,479 181,538,841 505,072,121
Discounted Per Annum at 10.00
Percent............................. 190,304,344 2,404,343 99,371,000 292,079,687
</TABLE>
- ---------------
Note: The values presented in this table are taken from the evaluations
described in Item I and include by reference all data, qualifications, and
assumptions from these evaluations. Realization of these values is
contingent on achieving successful results from the various schedules and
assumptions in these evaluations. The available engineering data and the
completeness and/or quality of data utilized in evaluating the properties
are detailed in the specific evaluation. Review of any additionally
available data may necessitate revision to these interpretations and
assumptions and impact these values.
III. DEFINITIONS OF SEC RESERVES(1)
The estimated reserves presented in this summary letter are net proved
reserves, including proved developed producing, proved developed nonproducing,
and proved undeveloped reserves, and were computed in accordance with the
financial reporting requirements of the SEC. In preparing these evaluations, no
attempt has been made to quantify the element of uncertainty associated with any
category. Reserves were assigned to each category as warranted. The definitions
of oil and gas reserves pursuant to the requirements of the Securities Exchange
Act are:
Proved Reserves(2)
Proved reserves are the estimated quantities of crude oil, natural gas, and
natural gas liquids which geological and engineering data demonstrate with
reasonable certainty to be recoverable in future years from known reservoirs
under the economic criteria employed and existing operating conditions, i.e.,
prices and costs as of the date the estimate is made. Prices and costs include
consideration of changes provided only by contractual arrangements but not on
escalations based upon an estimate of future conditions.
A. Reservoirs are considered proved if economic producibility is supported
by either actual production or conclusive formation test. The area of a
reservoir considered proved includes:
1. that portion delineated by drilling and defined by gas-oil and/or
oil-water contacts, if any; and
2. the immediately adjoining portions not yet drilled, but which can
be reasonably judged as economically productive on the basis of available
geological and engineering data. In the absence of information on fluid
contacts, the lowest known structural occurrence of hydrocarbons controls
the lower proved limit of the reservoir.
B. Reserves which can be produced economically through application of
improved recovery techniques (such as fluid injection) are included in the
"proved" classification when successful testing by a pilot project,
- ---------------
(1) For evaluations prepared for disclosure to the Securities and Exchange
Commission, see SEC Accounting Rules. Commerce Clearing House, Inc. October
1981, Paragraph 290, Regulation 210.4-10, p. 329.
(2) Any variations to these definitions will be clearly stated in the report.
A-2
<PAGE> 98
or the operation of an installed program in the reservoir, provides support for
the engineering analysis on which the project or program was based.
C. Estimates of proved reserves do not include the following:
1. oil that may become available from known reservoirs but is
classified separately as "indicated additional reserves";
2. crude oil, natural gas, and natural gas liquids, the recovery of
which is subject to reasonable doubt because of uncertainty as to geology,
reservoir characteristics, or economic factors;
3. crude oil, natural gas, and natural gas liquids, that may occur in
undrilled prospects; and
4. crude oil, natural gas, and natural gas liquids, that may be
recovered from oil shales, coal(3), gilsonite, and other such sources.
Proved Developed Reserves(4)
Proved developed 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.
Proved Undeveloped Reserves
Proved undeveloped 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 certainty
that there is continuity of production from the exiting productive formation.
Under no circumstances should estimates for proved undeveloped reserves be
attributable to any acreage for which an application of fluid injection or other
improved recovery technique is contemplated, unless such techniques have been
proved effective by actual tests in the area and in the same reservoir.
IV. DISCUSSION OF SEC RESERVES
A. The Titan Report
A total of 113 properties in 44 fields were evaluated in the Titan report.
These properties are located in the states of New Mexico and Texas with the
majority of value in Texas. Overall net reserves are 6,562,947 barrels of oil
(BO) and 179,564,506 thousand cubic feet of gas (MCF) or 36,490,365 barrels of
oil equivalent (BOE) at a conversion rate of six MCF of gas to one BO.
Associated future net revenue discounted at 10.00 percent per annum (DFNR) is
$144,531,504. Five fields in Texas represent a combined DFNR of $101,371,218 or
approximately 70.14 percent of the total Titan DFNR. These five fields are, in
descending order of DFNR, Puckett field, Pecos County, Texas; Foster field,
Ector County, Texas; Barstow field, Ward County, Texas; Gomez field, Pecos
County, Texas; and Evetts field, Loving and Winkler Counties, Texas. These
fields include 18 properties in the proved developed category and ten properties
in the proved
- ---------------
(3) According to Staff Accounting Bulletin 85, excluding certain coalbed methane
gas.
(4) Williamson Petroleum Consultants, Inc. separates proved developed reserves
into proved developed producing and proved developed nonproducing reserves.
This is to identify proved developed producing reserves as those to be
recovered from actively producing wells; proved developed nonproducing
reserves as those to be recovered from wells or intervals within wells,
which are completed but shut in waiting on equipment or pipeline
connections, or wells where a relatively minor expenditure is required for
recompletion to another zone.
A-3
<PAGE> 99
undeveloped category. The proved developed properties contribute $41,128,552
DFNR while the proved undeveloped properties in these five fields contribute
$60,242,666 DFNR. A more detailed property review is included in the Titan
report.
Prices for oil were based on data available as of September 26, 1996 and
were used as effective date prices. Prices were based on posted prices as of
September 26, 1996 and associated premiums being paid by the pipeline purchaser
or trucking purchaser for West Texas intermediate or West Texas sour crude oil.
Information pertaining to postings, premiums, purchaser, and quality of crude
oil were provided by Titan. When not provided, Williamson estimated oil prices
by analogy to similar properties. After the effective date, prices were held
constant for the life of the properties. The overall average oil price for all
properties was $23.36 per BO. No attempt has been made to account for oil price
fluctuations which have occurred in the market subsequent to the effective date
of the report.
The 1995 Acquisition Properties are subject to a hedging contract. This
hedging contract results in a penalty on oil sales through December 31, 1996.
Titan estimated the amount of these penalties and provided Williamson the
projected amount of dollars lost during October, November, and December 1996.
These negative dollars were included on a "Cost Tract" and deducted from the
total future net revenue.
Gas prices based on September 1996 prices or indexes were provided by Titan
and were used as effective date prices. After the effective date, prices were
held constant for the life of the properties. All gas prices were applied to
projected wellhead volumes. To account for known differences between sales and
produced volumes, any given residue gas sales price was adjusted by a factor in
order to make the price applicable to the wellhead stream. Similar adjustments
were made to account for any known lease use. Gas prices were also adjusted for
any known income from plant products not projected separately. When not
provided, Williamson estimated gas prices by analogy to similar properties. The
overall average gas price for all properties was $1.324 per MCF.
State production taxes have been deducted at the published rates as
appropriate. Ad valorem taxes were deducted based on information provided by
Titan or on published rates.
B. The 1996 Acquisition Report
A total of 142 properties in 54 fields were evaluated in the 1996
Acquisition report. These properties are located in the states of New Mexico and
Texas with the majority of value in Texas. Overall net reserves are 11,279,950
BO and 101,258,565 MCF of gas or 28,156,378 BOE. Associated DFNR is
$147,548,183. Five fields/areas in Texas and one area in New Mexico have a
combined DFNR of $97,551,043 or approximately 66.11 percent of the total
Integrated Company DFNR. These fields/areas are, in descending order of DFNR:
East Dollarhide field, Andrews County, Texas; Mi Vida field, Ward and Reeves
Counties, Texas; North Robertson field, Gaines County, Texas; Eunice field area,
Lea County, New Mexico; University Waddell field, Crane County, Texas; and
Headlee (Devonian) field, Ector County, Texas. These fields/areas include 34
properties in the proved developed producing category and 10 properties
classified as proved undeveloped. The proved developed producing category
contributes $78,479,044 DFNR while the proved undeveloped properties contribute
$19,071,999 DFNR. A more detailed property review is included in the 1996
Acquisition report.
Oil prices were provided by Titan and were used as effective date prices.
These were reported to be the Integrated Company's posted prices received by the
Integrated Company on September 26, 1996 for all properties they operate or in
which they retain a nonoperating working interest. These prices were used for
October and November 1996. Starting December 1, 1996, oil prices were set at the
Enron Oil Trading and Transportation Energy Operating Limited Partnership (EOTT)
postings as of September 26, 1996 plus premiums in accordance with a contract
for EOTT to purchase oil from Titan on the 1996 Acquisition Properties starting
December 1, 1996. On properties not covered by EOTT, the price at December 1,
1996 was set at prices consistent with September postings plus premiums for
trucked oil. When not provided, Williamson estimated oil prices by analogy to
similar properties. After December 1, 1996, prices were held constant for the
life of the properties. The overall average oil price for all properties was
$23.37 per BO. No
A-4
<PAGE> 100
attempt has been made to account for oil price fluctuations which have occurred
in the market subsequent to the effective date of the report.
Gas prices based on September 1996 prices or indexes were provided by Titan
and were used as effective date prices. After the effective date, prices were
held constant for the life of the properties. All gas prices were applied to
projected wellhead volumes. To account for known differences between sales and
produced volumes, any given residue gas sales price was adjusted by a factor in
order to make the price applicable to the wellhead stream. Similar adjustments
were made to account for any known lease use. Gas prices were also adjusted for
any known income from plant products not projected separately. When not
provided, Williamson estimated gas prices by analogy to similar properties. The
overall average gas price for all properties was $1.513 per MCF.
State production taxes have been deducted at the published rates as
appropriate. Ad valorem taxes were deducted based on information provided by
Titan or on published rates for all operated properties. On properties not
operated by the Integrated Company, ad valorem taxes were provided by Titan or,
if not provided, were assumed to be included in the operating costs.
V. GENERAL EVALUATION CONSIDERATIONS PERTAINING TO THE TITAN AND 1996
ACQUISITION REPORTS
The individual projections prepared to produce this summary letter include
data that describe the production forecasts and associated evaluation parameters
such as interests, taxes, product prices, operating costs, investments, salvage
values, abandonment costs, and net profit interests, as applicable.
Net income to the evaluated interests is the future net revenue after
consideration of royalty revenue payable to others, taxes, operating expenses,
investments, salvage values, abandonment costs, and net profit interests, as
applicable. The future net revenue is before federal income tax and excludes
consideration of any encumbrances against the properties if such exist.
No opinion is expressed by Williamson as to the fair market value of the
evaluated properties.
The future net revenue values presented in this summary letter were based
on projections of oil and gas production. It was assumed there would be no
significant delay between the date of oil and gas production and the receipt of
the associated revenue for this production.
This summary letter includes only those costs and revenues which are
considered by Titan to be directly attributable to individual leases and areas.
There could exist other revenues, overhead costs, or other costs associated with
Titan or the Integrated Company which are not included in this summary letter.
Such additional costs and revenues are outside the scope of this summary letter.
This summary letter is not a financial statement for Titan and should not be
used as the sole basis for any transaction concerning Titan, the Integrated
Company, or the evaluated properties.
The reserves projections in this summary letter are based on the use of the
available data and accepted industry engineering methods. Future changes in any
operational or economic parameters or production characteristics of the
evaluated properties could increase or decrease their reserves. Unforeseen
changes in market demand or allowables set by various regulatory agencies could
also cause actual production rates to vary from those projected. The dates of
first production for nonproducing properties were based on estimates by Titan or
Williamson and the actual dates may vary from those estimated. Williamson
reserves the right to alter any of the reserves projections and the associated
economics included in this summary letter in any future evaluations based on
additional data that may be acquired.
All data utilized in the preparation of this summary letter with respect to
interests, reversionary status, oil and gas prices, gas categories, gas contract
terms, operating expenses, investments, salvage values, abandonment costs, net
profit interests, well information, and current operating conditions, as
applicable, were provided by Titan and the operators. Production data from
public records were used where available. If public records were not available,
production data provided by Titan and various other operators were utilized.
Production data generally through February or June 1996 were obtained for the
properties in the Titan report and through January or June 1996 for the
properties in the 1996 Acquisition report. Additional production
A-5
<PAGE> 101
data for the months of July or August were provided by Titan or the operators on
various properties. All data have been reviewed for reasonableness and, unless
obvious errors were detected, have been accepted as correct. It should be
emphasized that revisions to the projections of reserves and economics included
in this summary letter may be required if the provided data are revised for any
reason. No inspection of the properties was made as this was not considered
within the scope of these projects. No investigation was made of any
environmental liabilities that might apply to the evaluated properties, and no
costs are included for any possible related expenses.
Operating expenses were provided by Titan and represented, when possible,
the latest available 12- to 18-month average of all recurring expenses which are
billable to the working interest owners. These expenses included, but were not
limited to, all direct operating expenses, field overhead costs, and any ad
valorem taxes not deducted separately. Expenses for workovers, well
stimulations, and other maintenance were not included in the operating expenses
unless such work was expected on a recurring basis. Judgments for the exclusion
of the nonrecurring expenses were made by Titan. The economic limit for each
property was determined using these costs. Any internal indirect overhead costs
(general and administrative) which are billable to the working interest owners
were included, while those not billable were not included. For new and
developing properties where data were unavailable, operating expenses were
estimated by Titan or Williamson based on analogy with similar properties.
Operating costs were held constant for the life of the properties.
Unless specifically identified and documented by Titan as having
curtailment problems, gas production trends have been assumed to be a function
of well productivity and not of market conditions. The effect of "take or pay"
clauses in gas contracts was not considered.
Oil reserves are expressed in United States (U.S.) barrels of 42 U.S.
gallons. Gas volumes are expressed in MCF's at 60 degrees Fahrenheit and at the
legal pressure base that prevails in the state in which the reserves are
located. No adjustment of the individual gas volumes to a common pressure base
has been made.
Titan represented to Williamson that it has, or can generate, the financial
and operational capabilities to accomplish those projects evaluated by
Williamson which require capital expenditures.
All capital costs for drilling and completion of wells and nonrecurring
workover or operating costs have been deducted as applicable. These costs were
provided by Titan or, where not supplied, were estimated by Williamson. No
adjustments were made to account for the potential effect of inflation on these
costs.
Neither salvage values nor abandonment costs were provided by Titan to be
included in this evaluation.
The estimates of reserves contained in this summary letter were determined
by accepted industry methods and in accordance with the definitions of oil and
gas reserves set forth above. Methods utilized in this summary letter include
extrapolation of historical production trends, material balance determinations,
analogy to similar properties, and volumetric calculations.
Where sufficient production history and other data were available, reserves
for producing properties were determined by extrapolation of historical
production trends or through the use of material balance determinations. Analogy
to similar properties or volumetric calculations were used for nonproducing
properties and those producing properties which lacked sufficient production
history and other data to yield a definitive estimate of reserves. Reserves
projections based on analogy are subject to change due to subsequent changes in
the analogous properties or subsequent production from the evaluated properties.
Volumetric calculations are often based upon limited log and/or core analysis
data and incomplete reservoir fluid and formation rock data. Since these limited
data must frequently be extrapolated over an assumed drainage area, subsequent
production performance trends or material balance calculations may cause the
need for significant revisions to the estimates of reserves.
It should be emphasized that with the current economic uncertainties,
fluctuation in market conditions could significantly change the economics in
this summary letter.
A-6
<PAGE> 102
VII. DECLARATION OF INDEPENDENT STATUS AND CONSENT
We understand that our estimates are to be included in a Registration
Statement on Form S-1 (the Registration Statement) to be filed by you with the
SEC and in the Prospectus for Titan as included in such Registration Statement
which will be registered under the Securities Act of 1933, as amended.
Williamson is an independent consulting firm and does not own any interests
in the oil and gas properties covered by this summary letter. No employee,
officer, or director of Williamson is an employee, officer, or director of
Titan. Neither the employment of nor the compensation received by Williamson is
contingent upon the values assigned to the oil and gas properties covered by
this summary letter.
We consent to the inclusion of this summary letter in the Registration
Statement, the inclusion in the Registration Statement of data extracted from
this summary letter, and to all references to our firm in the Prospectus,
including any references to our firm as Experts.
Yours very truly,
WILLIAMSON PETROLEUM CONSULTANTS, INC.
A-7
<PAGE> 103
- --------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS AND,
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY, THE SELLING STOCKHOLDER OR ANY
UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY IN ANY
JURISDICTION TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER IN SUCH JURISDICTION.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER
ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION HEREIN IS CORRECT
AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF OR THAT THERE HAS BEEN NO CHANGE IN
THE AFFAIRS OF THE COMPANY SINCE SUCH DATE.
---------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 3
Risk Factors.......................... 8
The Company........................... 14
Use of Proceeds....................... 14
Dividend Policy....................... 14
Dilution.............................. 15
Capitalization........................ 16
Selected Consolidated Financial
Data................................ 17
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 19
Business and Properties............... 25
Management............................ 36
Certain Transactions.................. 43
Principal and Selling Stockholders.... 45
Description of Capital Stock.......... 47
Shares Eligible for Future Sale....... 48
Underwriting.......................... 50
Notice to Canadian Residents.......... 51
Legal Matters......................... 52
Experts............................... 52
Additional Information................ 53
Glossary of Oil and Gas Terms......... 54
Index to Consolidated Financial
Statements.......................... F-1
Letter of Williamson Petroleum
Consultants, Inc.................... A-1
</TABLE>
---------------------
UNTIL , 1996 (25 DAYS AFTER THE COMMENCEMENT OF THIS OFFERING),
ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Titan Exploration, Inc.
12,610,000 Shares
Common Stock
($.01 par value)
PROSPECTUS
CS First Boston
Donaldson, Lufkin & Jenrette
Securities Corporation
Howard, Weil, Labouisse, Friedrichs
Incorporated
J.P. Morgan & Co.
Petrie Parkman & Co.
- --------------------------------------------------------------------------------
<PAGE> 104
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The estimated expenses payable by Titan Exploration, Inc. (the "Registrant"
or the "Company") in connection with the registration of the securities offered
hereby, other than underwriting discounts and commissions, are as follows:
<TABLE>
<S> <C>
SEC Registration Fee...................................................... $ 52,273
NASD Filing Fee........................................................... 17,750
Listing Fee...................................... *
Blue Sky Qualification Fees and Expenses.................................. 15,000
Accounting Fees and Expenses.............................................. *
Legal Fees and Expenses................................................... 175,000
Engineering Fees and Expenses............................................. *
Transfer Agent and Registrar Fees......................................... 2,500
Printing and Engraving Expenses........................................... *
Miscellaneous............................................................. *
-------
Total................................................................... $ *
=======
</TABLE>
- ---------------
* To be filed by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 102(b)(7) of the Delaware General Corporation Law ("DGCL") enables
a corporation to include in its certificate of incorporation a provision
eliminating or limiting the personal liability of members of its Board of
Directors to the corporation or its stockholders for monetary damages for breach
of fiduciary duty as a director. Such a provision may not eliminate or limit the
liability of a director (1) for any breach of a director's duty of loyalty to
the corporation or its stockholders, (2) for acts or omissions not in good faith
or which involve intentional misconduct or a knowing violation of a law, (3) for
paying an unlawful dividend or approving an illegal stock repurchase (as
provided in Section 174 of the DGCL), or (4) for any transaction from which the
director derived an improper personal benefit.
Under Section 145 of the DGCL, a corporation has the power to indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding (other than an
action by or in the right of the corporation) by reason of the fact that the
person is or was a director, officer, employee or agent of any corporation,
partnership, joint venture, trust or other enterprise, against any and all
expenses (including attorneys' fees), judgments, fines and amounts paid in
settlement and reasonably incurred in connection with such action, suit or
proceeding. The power to indemnify applies only if the person acted in good
faith and in a manner he reasonably believed to be in or not opposed to the best
interests of the corporation, and with respect to any criminal action or
proceeding, had no reasonable cause to believe the person's conduct was
unlawful.
In the case of an action by or in the right of the corporation, no
indemnification may be made with respect to any claim, issue or matter as to
which such person shall have been adjudged to be liable to the corporation
unless and only to the extent that the Court of Chancery or the court in which
such action or suit was brought shall determine that despite the adjudication of
liability such person is fairly and reasonably entitled to indemnity for such
expenses which the court shall deem proper. Section 145 of the DGCL further
provides that to the extent a director or officer of a corporation has been
successful in the defense of any action, suit or proceeding referred to above or
in the defense of any claim, issue or matter therein, he shall be indemnified
against expenses (including attorney's fees) actually and reasonably incurred by
him in connection therewith.
A corporation also has the power to purchase and maintain insurance on
behalf of any person covering any liability incurred by such person in his
capacity as a director, officer, employee or agent of the corporation,
II-1
<PAGE> 105
or arising out of his status as such, whether or not the corporation would have
the power to indemnify him against such liability.
The Registrant's Certificate of Incorporation and Bylaws provide that no
director of the Registrant will be personally liable to the Registrant or any of
its stockholders for monetary damages arising from the director's breach of
fiduciary duty as a director. However, this does not apply with respect to any
action in which the director would be liable under Section 174 of Title 8 of the
DGCL nor does it apply with respect to any liability in which the director (i)
breached his duty of loyalty to the Registrant; (ii) did not act in good faith
or, in failing to act, did not act in good faith; (iii) acted in a manner
involving intentional misconduct or a knowing violation of law or, in failing to
act, shall have acted in a manner involving intentional misconduct or a knowing
violation of law; or (iv) derived an improper personal benefit.
The Certificate of Incorporation and Bylaws provide that the Registrant
will indemnify its officers and directors and former officers and directors
against any expenses, judgments or settlement payments sustained or paid by such
persons as a result of having acted as an officer or director of the Registrant,
or, at the request of the Registrant, as an officer, director, agent or employee
of another business entity. The Certificate of Incorporation and Bylaws further
provide that the Registrant may, by action of its Board of Directors, provide
indemnification to employees and agents of the Registrant, individually or as a
group, with the same scope and effect as the indemnification of directors and
officers.
The form of Indemnity Agreement contained in Exhibit 10.23 provides for the
indemnification in certain instances against liability and expenses incurred in
connection with proceedings brought by or in the right of the Company or by
third parties by reason of a person serving as an officer or director of the
Company.
The form of Underwriting Agreement contained in Exhibit 1 provides for
indemnification of the directors and officers signing the Registration Statement
and certain controlling persons of the Company against certain liabilities
(including certain liabilities under the Securities Act of 1933, as amended (the
"Securities Act")) in certain instances by the Underwriters.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
The following information relates to all securities issued or sold by the
Registrant since inception and not registered under the Securities Act.
Unless otherwise specifically provided, each of the transactions described
below was conducted in reliance upon the exemption from registration provided in
Section 4(2) of the Securities Act and the rules and regulations promulgated
thereunder. Furthermore, each of the certificates representing the Registrant's
securities issued in connection with such transactions contains a restrictive
legend, as appropriate, requiring each person acquiring such securities from the
Registrant to furnish investment representations to the Registrant and stating
that no underwriters participated in such transactions.
The Registrant was formed on September 27, 1996 pursuant to the terms of an
Agreement and Plan of Reorganization dated September 30, 1996 (the "Exchange
Agreement"). Pursuant to the terms of the Exchange Agreement, the Company became
the holding company for Titan Resources, L.P., which conducts the Registrant's
operations and was formed on March 31, 1995 (the "Partnership"). Pursuant to the
terms of the Exchange Agreement, the limited partners of the Partnership
received approximately .665 shares of the Registrant's common stock for each
limited partnership unit owned by such limited partners. Each certificate issued
in connection with such exchange contains an appropriate restrictive legend. All
of the information regarding sales of the Registrant's securities set forth
below has been adjusted to give effect to the exchange.
On March 31, 1995, the Partnership was formed pursuant to the terms and
conditions of a Partnership Agreement between Titan Resources, I, Inc., as
general partner, and 20 limited partners, which provided for the issuance of
partnership units equivalent to 13,755,998 shares of the Registrant's Common
Stock, par value $.01 per share, for an aggregate purchase price of $20,547,980.
On December 11, 1995, the Partnership entered into a Stock and Unit
Purchase Agreement with Joint Energy Development Investments Limited
Partnership, providing for the sale by the Partnership of partner-
II-2
<PAGE> 106
ship units equivalent to 3,381,046 shares of the Registrant's Common Stock, par
value $.01 per share, for an aggregate purchase price of $10,000,000.
On December 11, 1995, the Partnership entered into a Stock and Unit
Purchase Agreement with First Union Corporation, providing for the sale by the
Partnership of partnership units equivalent to 1,690,523 shares of the
Registrant's Common Stock, par value $.01 per share, for an aggregate purchase
price of $5,000,000.
On September 27, 1996, the Partnership entered into an Unit Purchase and
Exchange Agreement with Selma International Investment Limited, providing for
the sale by the Partnership of partnership units equivalent to 722,446 shares of
the Registrant's Common Stock, par value $.01 per share, for an aggregate
purchase price of $5,000,000.
Since inception, the Registrant and its predecessor have granted options to
purchase an aggregate of 3,716,350 shares of Common Stock to officers and key
employees. These transactions did not involve a public offering and were done in
reliance on Section 4(2) of the Securities Act.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ---------------------------------------------------------------------------------------------
<S> <C>
1++ -- Form of Underwriting Agreement.
2.1+ -- Exchange Agreement and Plan of Reorganization.
3.1+ -- Certificate of Incorporation.
3.2+ -- Bylaws.
4.1++ -- Form of Common Stock Certificate.
5++ -- Opinion of Thompson & Knight, A Professional Corporation.
10.1+ -- Agreement of Limited Partnership, dated March 31, 1995, between Titan
Resources I, Inc., as general partner, and Natural Gas Partners,
L.P., Natural Gas Partners II, L.P. and Jack Hightower, as limited
partners.
10.1.2+ -- Amendment No. 1 to the Agreement of Limited Partnership of Titan
Resources, L.P., dated December 11, 1995, by and among Titan
Resources I, Inc., as the general partner, and a Majority Interest of
the Limited Partners.
10.1.3+ -- Amendment No. 2 to the Agreement of Limited Partnership of Titan
Resources, L.P., dated September 27, 1996, by and among Titan
Resources I, Inc., as the general partner, and a Majority Interest of
the Limited Partners.
10.1.4+ -- Amendment No. 3 to the Agreement of Limited Partnership of Titan
Resources, L.P., dated September 30, 1996, by and among Titan
Resources I, Inc., as the general partner, and a Majority Interest of
the Limited Partners.
10.2+ -- Amended and Restated Voting and Shareholders Agreement, dated
December 11, 1995, by and among Titan Resources, I, Inc, Jack
Hightower, Natural Gas Partners, L.P., Natural Gas Partners II, L.P.,
Joint Energy Development Investments Limited and First Union
Corporation.
10.3+ -- Amended and Restated Registration Rights Agreement, dated September
30, 1996, by and among Titan Exploration, Inc., Jack Hightower,
Natural Gas Partners, L.P., Natural Gas Partners II, L.P., Joint
Energy Development Investments Limited Partnership, First Union
Corporation and Selma International Investment Limited.
</TABLE>
II-3
<PAGE> 107
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ---------------------------------------------------------------------------------------------
<S> <C>
10.4+ -- Financial Advisory Services Contract, dated March 31, 1995, by and
between Titan Resources, L.P. and Natural Gas Partners, L.P. and
Natural Gas Partners II, L.P.
10.4.1+ -- First Amendment to Financial Advisory Services Contract, dated
December 11, 1995, between Titan Resources, L.P., Natural Gas
Partners, L.P. and Natural Gas Partners II, L.P.
10.5*+ -- Employment Agreement, dated September 30, 1996, by and between Titan
Exploration, Inc., Titan Resources I, Inc., and Jack Hightower.
10.6.1* -- Form of Confidentiality and Non-compete Agreement among Titan
Resources, L.P., Titan Resources I, Inc. and certain of the
Registrant's executive officers.
10.6.2* -- Form of Confidentiality and Non-compete Agreement among the
Registrant, Titan Resources I, Inc. and certain of the Registrant's
executive officers.
10.7*+ -- Titan Resources, L.P. Option Plan.
10.7.1*+ -- Form of Option Agreement (A Option).
10.7.2*+ -- Form of Option Agreement (B Option).
10.7.3*+ -- Form of Option Agreement (C Option).
10.7.4*+ -- Form of Option Agreement (D Option).
10.8*+ -- Titan Exploration, Inc. Option Plan.
10.8.1*+ -- Form of Option Agreement (A Option).
10.8.2*+ -- Form of Option Agreement (B Option).
10.8.3*+ -- Form of Option Agreement (C Option).
10.8.4*+ -- Form of Option Agreement (D Option).
10.9* -- 1996 Incentive Plan.
10.10+ -- Stock and Unit Purchase Agreement, dated December 11, 1995, by and
among Joint Energy Development Investments Limited Partnership, Titan
Resources, I, Inc. and Titan Resources, L.P.
10.10.1+ -- Designation Agreement, dated December 11, 1995, by and between Titan
Resources, L.P. and Joint Energy Development Investments Limited
Partnership.
10.11+ -- Stock and Unit Purchase Agreement, dated December 11, 1995, by and
among First Union Corporation, Titan Resources I, Inc. and Titan
Resources, L.P.
10.11.1+ -- Designation Agreement, dated December 11, 1995, by and between Titan
Resources, L.P. and First Union Corporation.
10.12+ -- Advisory Services Contract, dated December 11, 1995, between Titan
Resources, L.P. and ECT Securities Corp.
10.13 -- Amended and Restated Credit Agreement, dated October 31, 1996, among
Titan Resources, L.P. and Texas Commerce Bank National Association,
as Agent, and Financial Institutions now or hereafter parties hereto.
10.14+ -- Agreement of Sale and Purchase, dated April 19, 1995, between
Enertex, Inc. and Titan Resources, L.P.
10.15+ -- Agreement of Sale and Purchase, dated April 19, 1995, between Staley
Gas Co., Inc. and Titan Resources, L.P.
10.16+ -- Administrative Services Contract, dated March 31, 1995, between
Staley Operating Co. and Titan Resources, L.P.
10.17+ -- Services Agreement, dated April 1, 1995, between Titan Resources I,
Inc. and Titan Resources, L.P.
10.18+ -- Office Lease, dated January 8, 1996, between Fasken Center, Ltd. and
Titan Resources, L.P.
10.19+ -- Purchase and Sale Agreement, dated October 12, 1995, by and between
Anadarko Petroleum Corporation and Titan Resources, L.P.
</TABLE>
II-4
<PAGE> 108
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ---------------------------------------------------------------------------------------------
<S> <C>
10.20+ -- Amendment No. 1 to Purchase and Sale Agreement, dated December 11,
1995, by and between Anadarko Petroleum Corporation and Titan
Resources, L.P.
10.21+ -- Purchase and Sale Agreement, dated July 12, 1996, by and between
Mobil Producing Texas & New Mexico Inc. and Titan Resources, L.P.
10.22+ -- Unit Purchase and Exchange Agreement, dated September 27, 1996, by
and between Selma International Investment Limited and Titan
Resources, L.P.
10.23+ -- Form of Indemnity Agreement between the Registrant and each of its
executive officers.
10.24+ -- Advisory Director Agreement, dated September 30, 1996, by and between
Titan Exploration, Inc. and Joint Energy Development Investments
Limited Partnership.
21+ -- Subsidiaries of the Registrant.
23.1 -- Consent of Thompson & Knight, A Professional Corporation (included in
Exhibit 5 above).
23.2 -- Consent of KPMG Peat Marwick LLP, independent auditors.
23.2.1 -- Consent of KPMG Peat Marwick LLP, independent auditors.
23.3 -- Consent of Williamson Petroleum Consultants, Inc., independent
petroleum engineers (included in Annex A to the Prospectus).
24.1 -- Powers of Attorney (included on the first signature page to this
Registration Statement).
27+ -- Financial Data Schedule.
</TABLE>
- ---------------
+ Previously filed.
++ To be filed by amendment.
* Management contract or compensatory plan.
(b) Financial Statement Schedules: None.
ITEM 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreements, certificates in such
denominations and registered in such names as required by the particular
Underwriter, to permit prompt delivery to each purchaser.
The undersigned Registrant also hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the
II-5
<PAGE> 109
securities being registered, the registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
II-6
<PAGE> 110
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, Titan
Exploration, Inc. has duly caused this Amendment No. 1 to Registration Statement
to be signed on its behalf by the undersigned, thereunto duly authorized, in
Midland, Texas, on November 18, 1996.
TITAN EXPLORATION, INC.
By: /s/ JACK HIGHTOWER
------------------------------------
Jack Hightower
President, Chief Executive Officer
and
Chairman of the Board
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------------------------------------------- ------------------------- ------------------
<C> <S> <C>
/s/ JACK HIGHTOWER President, Chief November 18, 1996
- --------------------------------------------- Executive Officer and
Jack Hightower Chairman of the Board
(principal executive
officer)
/s/ GEORGE G. STALEY* Executive Vice President November 18, 1996
- --------------------------------------------- and Director
George G. Staley
/s/ WILLIAM K. WHITE* Vice President, Finance November 18, 1996
- --------------------------------------------- and Chief Financial
William K. White Officer (principal
financial and
accounting officer)
/s/ DAVID R. ALBIN* Director November 18, 1996
- ---------------------------------------------
David R. Albin
/s/ KENNETH A. HERSH* Director November 18, 1996
- ---------------------------------------------
Kenneth A. Hersh
*By: /s/ JACK HIGHTOWER
- ---------------------------------------------
Jack Hightower
Attorney-in-fact
</TABLE>
II-7
<PAGE> 111
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ---------------------------------------------------------------------------------------------
<S> <C>
1++ -- Form of Underwriting Agreement.
2.1+ -- Exchange Agreement and Plan of Reorganization.
3.1+ -- Certificate of Incorporation.
3.2+ -- Bylaws.
4.1++ -- Form of Common Stock Certificate.
5++ -- Opinion of Thompson & Knight, A Professional Corporation.
10.1+ -- Agreement of Limited Partnership, dated March 31, 1995, between Titan
Resources I, Inc., as general partner, and Natural Gas Partners,
L.P., Natural Gas Partners II, L.P. and Jack Hightower, as limited
partners.
10.1.2+ -- Amendment No. 1 to the Agreement of Limited Partnership of Titan
Resources, L.P., dated December 11, 1995, by and among Titan
Resources I, Inc., as the general partner, and a Majority Interest of
the Limited Partners.
10.1.3+ -- Amendment No. 2 to the Agreement of Limited Partnership of Titan
Resources, L.P., dated September 27, 1996, by and among Titan
Resources I, Inc., as the general partner, and a Majority Interest of
the Limited Partners.
10.1.4+ -- Amendment No. 3 to the Agreement of Limited Partnership of Titan
Resources, L.P., dated September 30, 1996, by and among Titan
Resources I, Inc., as the general partner, and a Majority Interest of
the Limited Partners.
10.2+ -- Amended and Restated Voting and Shareholders Agreement, dated
December 11, 1995, by and among Titan Resources, I, Inc, Jack
Hightower, Natural Gas Partners, L.P., Natural Gas Partners II, L.P.,
Joint Energy Development Investments Limited and First Union
Corporation.
10.3+ -- Amended and Restated Registration Rights Agreement, dated September
30, 1996, by and among Titan Exploration, Inc., Jack Hightower,
Natural Gas Partners, L.P., Natural Gas Partners II, L.P., Joint
Energy Development Investments Limited Partnership, First Union
Corporation and Selma International Investment Limited.
10.4+ -- Financial Advisory Services Contract, dated March 31, 1995, by and
between Titan Resources, L.P. and Natural Gas Partners, L.P. and
Natural Gas Partners II, L.P.
10.4.1+ -- First Amendment to Financial Advisory Services Contract, dated
December 11, 1995, between Titan Resources, L.P., Natural Gas
Partners, L.P. and Natural Gas Partners II, L.P.
10.5*+ -- Employment Agreement, dated September 30, 1996, by and between Titan
Exploration, Inc., Titan Resources I, Inc., and Jack Hightower.
10.6.1* -- Form of Confidentiality and Non-compete Agreement among Titan
Resources, L.P., Titan Resources I, Inc. and certain of the
Registrant's executive officers.
10.6.2* -- Form of Confidentiality and Non-compete Agreement among the
Registrant, Titan Resources I, Inc. and certain of the Registrant's
executive officers.
10.7*+ -- Titan Resources, L.P. Option Plan.
10.7.1*+ -- Form of Option Agreement (A Option).
10.7.2*+ -- Form of Option Agreement (B Option).
10.7.3*+ -- Form of Option Agreement (C Option).
</TABLE>
<PAGE> 112
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ---------------------------------------------------------------------------------------------
<S> <C>
10.7.4*+ -- Form of Option Agreement (D Option).
10.8*+ -- Titan Exploration, Inc. Option Plan.
10.8.1*+ -- Form of Option Agreement (A Option).
10.8.2*+ -- Form of Option Agreement (B Option).
10.8.3*+ -- Form of Option Agreement (C Option).
10.8.4*+ -- Form of Option Agreement (D Option).
10.9* -- 1996 Incentive Plan.
10.10+ -- Stock and Unit Purchase Agreement, dated December 11, 1995, by and
among Joint Energy Development Investments Limited Partnership, Titan
Resources, I, Inc. and Titan Resources, L.P.
10.10.1+ -- Designation Agreement, dated December 11, 1995, by and between Titan
Resources, L.P. and Joint Energy Development Investments Limited
Partnership.
10.11+ -- Stock and Unit Purchase Agreement, dated December 11, 1995, by and
among First Union Corporation, Titan Resources I, Inc. and Titan
Resources, L.P.
10.11.1+ -- Designation Agreement, dated December 11, 1995, by and between Titan
Resources, L.P. and First Union Corporation.
10.12+ -- Advisory Services Contract, dated December 11, 1995, between Titan
Resources, L.P. and ECT Securities Corp.
10.13 -- Amended and Restated Credit Agreement, dated October 31, 1996, among
Titan Resources, L.P. and Texas Commerce Bank National Association,
as Agent, and Financial Institutions now or hereafter parties hereto.
10.14+ -- Agreement of Sale and Purchase, dated April 19, 1995, between
Enertex, Inc. and Titan Resources, L.P.
10.15+ -- Agreement of Sale and Purchase, dated April 19, 1995, between Staley
Gas Co., Inc. and Titan Resources, L.P.
10.16+ -- Administrative Services Contract, dated March 31, 1995, between
Staley Operating Co. and Titan Resources, L.P.
10.17+ -- Services Agreement, dated April 1, 1995, between Titan Resources I,
Inc. and Titan Resources, L.P.
10.18+ -- Office Lease, dated January 8, 1996, between Fasken Center, Ltd. and
Titan Resources, L.P.
10.19+ -- Purchase and Sale Agreement, dated October 12, 1995, by and between
Anadarko Petroleum Corporation and Titan Resources, L.P.
10.20+ -- Amendment No. 1 to Purchase and Sale Agreement, dated December 11,
1995, by and between Anadarko Petroleum Corporation and Titan
Resources, L.P.
10.21+ -- Purchase and Sale Agreement, dated July 12, 1996, by and between
Mobil Producing Texas & New Mexico Inc. and Titan Resources, L.P.
10.22+ -- Unit Purchase and Exchange Agreement, dated September 27, 1996, by
and between Selma International Investment Limited and Titan
Resources, L.P.
10.23+ -- Form of Indemnity Agreement between the Registrant and each of its
executive officers.
10.24+ -- Advisory Director Agreement, dated September 30, 1996, by and between
Titan Exploration, Inc. and Joint Energy Development Investments
Limited Partnership.
21+ -- Subsidiaries of the Registrant.
</TABLE>
<PAGE> 113
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ---------------------------------------------------------------------------------------------
<S> <C>
23.1 -- Consent of Thompson & Knight, A Professional Corporation (included in
Exhibit 5 above).
23.2 -- Consent of KPMG Peat Marwick LLP, independent auditors.
23.2.1 -- Consent of KPMG Peat Marwick LLP, independent auditors.
23.3 -- Consent of Williamson Petroleum Consultants, Inc., independent
petroleum engineers (included in Annex A to the Prospectus).
24.1 -- Powers of Attorney (included on the first signature page to this
Registration Statement).
27+ -- Financial Data Schedule.
</TABLE>
- ---------------
+ Previously filed.
++ To be filed by amendment.
* Management contract or compensatory plan.
<PAGE> 1
EXHIBIT 10.6.1
CONFIDENTIALITY AND NON-COMPETE AGREEMENT
CONFIDENTIALITY AND NON-COMPETE AGREEMENT (this "AGREEMENT"), dated as
of March 31, 1995, between Titan Resources, L.P., a Texas limited partnership
("PARTNERSHIP"), Titan Resources I, Inc., a Texas corporation (the "COMPANY"),
and [See Schedule II attached hereto], an individual residing in Midland, Texas
(the "EMPLOYEE").
WHEREAS, the Company has been recently created and organized to serve
as the general partner of the Partnership in connection with a proposed
transaction in which Jack D. Hightower, Natural Gas Partners, L.P., Natural Gas
Partners II, L.P., and certain other individuals (collectively, "Investors")
will each purchase units of limited partnership interests ("L.P. UNITS") in the
Partnership (the "PROPOSED TRANSACTION") and the Partnership will grant to
Employee, and to certain other individuals, options to acquire additional L.P.
Units ("OPTIONS");
WHEREAS, promptly after the consummation of the Proposed Transaction,
the Company and/or the Partnership plans to employ the Employee on an "at-will"
basis, and the Employee desires to be employed on such basis;
WHEREAS, Employee acknowledges that in the course of his employment by
the Company and/or the Partnership and performance of services on behalf of the
Company, the Partnership and their respective subsidiaries, if any, (the
"RELATED PARTIES") he will become privy to various business opportunities,
economic and trade secrets and relationships of the Related Parties;
WHEREAS, it is a condition to (i) the consummation of the Proposed
Transaction, (ii) the grant to Employee of the Options, and (iii) the
employment of employee by the Related Parties, that Employee enter into a
confidentiality and non-compete agreement on the terms and conditions
hereinafter set forth;
NOW, THEREFORE, in consideration of, and as a material inducement to,
the Investors' consummation of the Proposed Transaction, the Partnership's
grant of Options to Employee and the employment of Employee by the Related
Parties, the Company, the Partnership and the Employee intending to be legally
bound, hereby agree as follows:
1. Business Opportunities and Intellectual Property.
(a) Employee shall promptly disclose to the Company and the
Partnership all "Business Opportunities" and "Intellectual Property" (as
defined below).
(b) Employee hereby assigns and agrees to assign to the Company
and the Partnership, its successors, assigns, or designees, all of the
Employee's right, title, and interest in and to all Business Opportunities and
Intellectual Property, and further acknowledges and agrees that all Business
Opportunities and Intellectual Property constitute the exclusive property of
the Company and the Partnership.
(c) For purposes hereof "BUSINESS OPPORTUNITIES" shall mean all
business ideas, prospects, proposals or other opportunities pertaining to the
lease, acquisition, exploration,
<PAGE> 2
production, gathering or marketing of hydrocarbons and related products and the
exploration potential of geographical areas on which hydrocarbon exploration
prospects are located, which are developed by Employee during the Employment
Term, or originated by any third party and brought to the attention of Employee
during the period that Employee is employed by any of the Related Parties (the
"EMPLOYMENT TERM"), together with information relating thereto (including,
without limitation, geological and seismic data and interpretations thereof,
whether in the form of maps, charts, logs, seismographs, calculations,
summaries, memoranda, opinions or other written or charted means).
(d) For purposes hereof "INTELLECTUAL PROPERTY" shall mean all
ideas, inventions, discoveries, processes, designs, methods, substances,
articles, computer programs, and improvements (including, without limitation,
enhancements to, or further interpretation or processing of, information that
was in the possession of Employee prior to the date of this Agreement), whether
or not patentable or copyrightable, which do not fall within the definition of
Business Opportunities, which the Employee discovers, conceives, invents,
creates, or develops, alone or with others, during the Employment Term, if such
discovery, conception, invention, creation, or development (i) occurs in the
course of the Employee's employment with the Company, or (ii) occurs with the
use of any of the Related Parties' time, materials, or facilities, or (iii) in
the opinion of the Board of Directors of the Company, relates or pertains in
any way to the Related Parties' purposes, activities, or affairs;
2. Non-Compete Obligations During Employment Term. Employee
agrees that during the Employment Term:
(i) Employee will not, other than through the Company and the
Partnership, engage or participate in any manner, whether directly or
indirectly through any family member or as an employee, employer,
consultant, agent, principal, partner, more than one percent
shareholder, officer, director, licensor, lender, lessor or in any
other individual or representative capacity, in any business or
activity which is engaged in leasing, acquiring, exploring, producing,
gathering or marketing hydrocarbons and related products; and
(ii) all investments made by Employee (whether in his own name
or in the name of any family members or made by Employee's controlled
affiliates), which relate to the lease, acquisition, exploration,
production, gathering or marketing of hydrocarbons and related
products shall be made solely through the Company and the Partnership;
and Employee will not (directly or indirectly through any family
members), and will not permit any of his controlled affiliates to: (A)
invest or otherwise participate alongside the Related Parties in any
Business Opportunities, or (B) invest or otherwise participate in any
business or activity relating to a Business Opportunity, regardless of
whether any of the Related Parties ultimately participates in such
business or activity;
provided that, this Section 2 shall not apply to (x) the existing personal oil
and gas investments owned by Employee, his family members and his controlled
affiliates as of the date hereof, which are described in a schedule,
substantially in the format set forth as Schedule I hereto, delivered to the
Company within 30 days of the date hereof (the "EXISTING PERSONAL
INVESTMENTS"), and (y) future expenditures made by Employee, his family members
and his controlled affiliates which are required to maintain, but not increase,
their respective current ownership interests in
2
<PAGE> 3
the Existing Personal Investments, excluding however, any expenditure to
participate in the acquisition, exploration or development of any acreage which
is not currently included in the Existing Personal Investments as of the date
hereof, unless such opportunity is first offered to, and subsequently declined
by, the Partnership.
3. Confidentiality Obligations.
(a) Employee hereby acknowledges that all trade secrets and
confidential or proprietary information of the Related Parties (collectively
referred to herein as "CONFIDENTIAL INFORMATION") constitutes valuable, special
and unique assets of the Related Parties' business, and that access to and
knowledge of such Confidential Information is essential to the performance of
Employee's duties hereunder. Employee agrees that during the Employment Term
and during the one year period following the date of termination of Employee's
employment by the Related Parties (the "TERMINATION DATE"), Employee will hold
the Confidential Information in strict confidence and will not publish,
disseminate or otherwise disclose, directly or indirectly, to any person other
than the Related Parties and their respective officers, directors and
employees, any Confidential Information or use any Confidential Information for
Employee's own personal benefit or for the benefit of anyone other than the
Related Parties.
(b) For purposes of this Section 3, it is agreed that Confidential
Information includes, without limitation, any information heretofore or
hereafter acquired, developed or used by any of the Related Parties relating to
Business Opportunities or Intellectual Property or other geological,
geophysical, economic, financial or management aspects of the business,
operations, properties or prospects of the Related Parties, whether oral or in
written form in a "Related Parties' Business Records" (as defined in Section 5
below), but shall exclude any information which (i) has become part of the
common knowledge or understanding in the oil and gas industry or otherwise in
the public domain (other than from disclosure by Employee in violation of this
Agreement), or (ii) was rightfully in the possession of Employee, as shown by
Employee's records, prior to the date of this Agreement; provided, however,
that Employee shall provide to the Company copies of all information described
in clause (ii); and provided further that this Section 3 shall not be
applicable to the extent Employee is required to testify in a judicial or
regulatory proceeding pursuant to the order of a judge or administrative law
judge after Employee requests that such Confidential Information be preserved.
4. Post Employment Non-Compete Covenant.
(a) Employee agrees that during the one year period following the
Termination Date, he will not engage or participate in any manner, whether
directly or indirectly through any family member or as an employee, employer,
consultant, agent, principal, partner, more than one percent shareholder,
officer, director, licensor, lender, lessor or in any other individual or
representative capacity, in any business or activity which is in direct
competition with the business of the Related Parties as to leasing, acquiring,
exploring, producing, gathering or marketing hydrocarbons and related products
within the boundaries of, or within a two mile radius of the boundaries of, any
mineral property interest of any of the Related Parties (including, without
limitation, a mineral lease, overriding royalty interest, production payment,
net profits interest, mineral fee interest, or option or right to acquire any
of the foregoing, or an area of mutual interest as designated pursuant to
contractual agreements between the Partnership and any third
3
<PAGE> 4
party) or any other property on which the Related Parties has an option, right,
license, or authority to conduct or direct exploratory activities, such as
three dimensional seismic acquisition or other seismic, geophysical and
geochemical activities (but not including any preliminary geological mapping),
as of the Termination Date; provided that, this Section 4 shall not preclude
Employee from:
(i) making investments in securities of oil and gas companies
which are registered on a national stock exchange, if (A) the
aggregate amount owned by Employee and all family members and
affiliates does not exceed 5% of such company's outstanding
securities, and (B) the aggregate amount invested in such investments
by Employee and all family members and affiliates after the date
hereof does not exceed $3,000,000; or
(ii) maintaining his Existing Personal Investments, if such
personal investments do not involve any business activity that relates
to the lease, acquisition, exploration, production, gathering or
marketing of hydrocarbons and related products other than as permitted
by Section 2; and
(b) Employee agrees that during the one year period following the
Termination Date, he will not solicit, entice, persuade or induce, directly or
indirectly, any employee (or person who within the preceding ninety (90) days
was an employee) of any of the Related Parties or any other person who is under
contract with or rendering services to any of the Related Parties, to (i)
terminate his or her employment by, or contractual relationship with, such
person, (ii) refrain from extending or renewing the same (upon the same or new
terms), (iii) refrain from rendering services to or for such person, (iv)
become employed by or to enter into contractual relations with any Persons
other than such person, or (v) enter into a relationship with a competitor of
any of the Related Parties.
5. Business Records.
(a) The Employee agrees to promptly deliver to the Company, upon
termination of his employment by the Related Parties, or at any other time when
the Company so requests, all documents relating to the business of the Related
Parties, including, without limitation: all geological and geophysical reports
and related data such as maps, charts, logs, seismographs, seismic records and
other reports and related data, calculations, summaries, memoranda and opinions
relating to the foregoing, production records, electric logs, core data,
pressure data, lease files, well files and records, land files, abstracts,
title opinions, title or curative matters, contract files, notes, records,
drawings, manuals, correspondence, financial and accounting information,
customer lists, statistical data and compilations, patents, copyrights,
trademarks, trade names, inventions, formulae, methods, processes, agreements,
contracts, manuals or any other documents relating to the business of the
Related Parties, (collectively, the "RELATED PARTIES' BUSINESS RECORDS"), and
all copies thereof and therefrom.
(b) The Employee confirms that all of the Related Parties'
Business Records (and all copies thereof and therefrom) which are required to
be delivered to the Company pursuant to this Section constitute the exclusive
property of the Company and the other Related Parties.
4
<PAGE> 5
(c) The obligation of confidentiality set forth in Section 3 shall
continue notwithstanding the Employee's delivery of any such documents to the
Company.
(d) Notwithstanding the foregoing provisions of this Section 5 or
any other provision of this Agreement, the Employee shall be entitled to retain
any (i) written materials received by the Employee in the capacity as limited
partner of the Partnership, and (ii) written materials which, as shown by the
Employee's records, were in Employee's possession on or prior to the date
hereof, subject to the Company's right to receive a copy of all such materials.
(e) The provisions of this Section 5 shall continue in effect
notwithstanding termination of the Employee's employment hereunder for any
reason.
6. Miscellaneous.
(a) The invalidity or non-enforceability of any provision of this
Agreement in any respect shall not affect the validity or enforceability of
this Agreement in any other respect or of any other provision of this
Agreement. In the event that any provision of this Agreement shall be held
invalid or unenforceable by a court of competent jurisdiction by reason of the
geographic or business scope or the duration thereof, such invalidity or
unenforceability shall attach only to the scope or duration of such provision
and shall not affect or render invalid or unenforceable any other provision of
this Agreement, and, to the fullest extent permitted by law, this Agreement
shall be construed as if the geographic or business scope or the duration of
such provision had been more narrowly drafted so as not to be invalid or
unenforceable.
(b) Employee acknowledges that the Partnership's and the Company's
remedy at law for any breach of the provisions of this Agreement is and will be
insufficient and inadequate and that the Partnership and the Company shall be
entitled to equitable relief, including by way of temporary and permanent
injunction, in addition to any remedies the Partnership and the Company may
have at law.
(c) The representations and covenants contained in this Agreement
on the part of the Employee will be construed as ancillary to and independent
of any other agreement between the Company and/or the Partnership and the
Employee, and the existence of any claim or cause of action of the Employee
against the Company or any of the other Related Parties or any officer,
director, or shareholder of the Company or any of the other Related Parties,
whether predicated on Employee's employment or otherwise, shall not constitute
a defense to the enforcement by the Company or the Partnership of the covenants
of the Employee contained in this Agreement. In addition, the provisions of
this Agreement shall continue to be binding upon the Employee in accordance
with their terms, notwithstanding the termination of the Employee's employment
for any reason.
(d) The parties to this Agreement agree that the limitations
contained in Section 4 with respect to time, geographical area, and scope of
activity are reasonable. However, if any court shall determine that the time,
geographical area, or scope of activity of any restriction contained in Section
4 is unenforceable, it is the intention of the parties that such restrictive
covenant set forth herein shall not thereby be terminated but shall be deemed
amended to the extent required to render it valid and enforceable.
5
<PAGE> 6
(e) Any notices or other communications required or permitted to
be sent hereunder shall be in writing and shall be duly given if personally
delivered or sent postage pre-paid by certified or registered mail, return
receipt requested, if to Employee at the address set forth opposite Employee's
name on the signature page hereof, and if to the Company or the Partnership, at
500 West Texas, Suite 500, Midland, Texas 79701. Either party may change his or
its address for the sending of notice to such party by written notice to the
other party sent in accordance with the provisions hereof.
(f) This Agreement may not be altered or amended except by a writing,
duly executed by the party against whom such alteration or amendment is sought
to be enforced.
(g) This Agreement may be executed in counterparts, each of which
shall be an original and all of which together shall constitute one and the
same instrument.
IN WITNESS WHEREOF, each of the parties hereto has executed this
Agreement in multiple counterparts as of the day and year first above written.
COMPANY
TITAN RESOURCES I, INC.
By:
---------------------------------
Title:
------------------------------
PARTNERSHIP
TITAN RESOURCES, L.P.
By: Titan Resources I, Inc.
By:
---------------------------------
Title:
------------------------------
ADDRESS FOR NOTICE: EMPLOYEE
- -------------------
- ------------------- [See Schedule II attached hereto]
- ------------------- ---------------------------------
6
<PAGE> 7
SCHEDULE II
John L. Benfatti
Dan P. Colwell
Thomas H. Moore
George G. Staley
Rodney L. Woodard
7
<PAGE> 1
EXHIBIT 10.6.2
CONFIDENTIALITY AND NON-COMPETE AGREEMENT
CONFIDENTIALITY AND NON-COMPETE AGREEMENT (this "AGREEMENT"), dated as
of September 30, 1996, between Titan Exploration, Inc., a Delaware corporation
(the "COMPANY"), Titan Resources I, Inc., a Texas corporation (the "GENERAL
PARTNER"), and [See Schedule II attached hereto], an individual residing in
Midland, Texas (the "EMPLOYEE").
WHEREAS, the General Partner is the general partner of Titan
Resources, L.P., a Texas limited partnership (the "PARTNERSHIP");
WHEREAS, the Company has been recently created and organized to serve
as the holding company of the General Partner and the Partnership in connection
with a transaction in which the shareholders of the General Partner and the
limited partners of the Partnership exchanged their ownership interests for
common stock of the Company (the "REORGANIZATION");
WHEREAS, in connection with the Reorganization, the Company will adopt
certain option plans pursuant to which particular employees and directors will
be eligible to receive options (the "OPTIONS") to purchase the common stock of
the Company on the terms provided by those option plans and the related option
agreements to be executed in connection therewith;
WHEREAS, the Company and/or the General Partner desire to employ
Employee on an "at-will" basis, and Employee desires to be employed on such
basis;
WHEREAS, Employee acknowledges that in the course of his employment by
the Company and/or the General Partner and his performance of services on
behalf of the Company, the General Partner and their respective subsidiaries
and affiliates, if any (the "RELATED PARTIES"), Employee will become privy to
various business opportunities, economic and trade secrets and relationships of
the Related Parties;
WHEREAS, it is a condition to (i) the employment of Employee by the
Company and/or the General Partner, and (ii) the eligibility of Employee to
receive any grants of the Options, that Employee enter into a confidentiality
and non-compete agreement on the terms and conditions hereinafter set forth;
NOW, THEREFORE, in consideration of, and as a material inducement to,
Employee's eligibility to receive grants of Options and the employment of
Employee by the Company and/or the General Partner, the parties intending to be
legally bound, hereby agree as follows:
1. Business Opportunities and Intellectual Property.
(a) Employee shall promptly disclose to the Company and the
General Partner all "Business Opportunities" and "Intellectual Property" (as
defined below).
(b) Employee hereby assigns and agrees to assign to the Company
and the General Partner, its successors, assigns, or designees, all of
Employee's right, title, and interest in and to all Business Opportunities and
Intellectual Property, and further acknowledges and agrees that all
<PAGE> 2
Business Opportunities and Intellectual Property constitute the exclusive
property of the Company and the General Partner.
(c) For purposes hereof "BUSINESS OPPORTUNITIES" shall mean all
business ideas, prospects, proposals or other opportunities pertaining to the
lease, acquisition, exploration, production, gathering or marketing of
hydrocarbons and related products and the exploration potential of geographical
areas on which hydrocarbon exploration prospects are located, which are
developed by Employee during the Employment Term, or originated by any third
party and brought to the attention of Employee during the period that Employee
is employed by any of the Related Parties (the "EMPLOYMENT TERM"), together
with information relating thereto (including, without limitation, geological
and seismic data and interpretations thereof, whether in the form of maps,
charts, logs, seismographs, calculations, summaries, memoranda, opinions or
other written or charted means).
(d) For purposes hereof "INTELLECTUAL PROPERTY" shall mean all
ideas, inventions, discoveries, processes, designs, methods, substances,
articles, computer programs, and improvements (including, without limitation,
enhancements to, or further interpretation or processing of, information that
was in the possession of Employee prior to the date of this Agreement), whether
or not patentable or copyrightable, which do not fall within the definition of
Business Opportunities, which Employee discovers, conceives, invents, creates,
or develops, alone or with others, during the Employment Term, if such
discovery, conception, invention, creation, or development (i) occurs in the
course of Employee's employment with the Company or the General Partner, or
(ii) occurs with the use of any of the Related Parties' time, materials, or
facilities, or (iii) in the opinion of the Board of Directors of the Company or
of the General Partner, relates or pertains in any way to the Related Parties'
purposes, activities, or affairs;
2. Non-Compete Obligations During Employment Term. Employee
agrees that during the Employment Term:
(i) Employee will not, other than through the Company and the
General Partner, engage or participate in any manner, whether directly
or indirectly through any family member or as an employee, employer,
consultant, agent, principal, partner, more than one percent
shareholder, officer, director, licensor, lender, lessor or in any
other individual or representative capacity, in any business or
activity which is engaged in leasing, acquiring, exploring, producing,
gathering or marketing hydrocarbons and related products; and
(ii) all investments made by Employee (whether in his own name
or in the name of any family members or made by Employee's controlled
affiliates), which relate to the lease, acquisition, exploration,
production, gathering or marketing of hydrocarbons and related
products shall be made solely through the Related Parties; and
Employee will not (directly or indirectly through any family members),
and will not permit any of his controlled affiliates to: (A) invest or
otherwise participate alongside the Related Parties in any Business
Opportunities, or (B) invest or otherwise participate in any business
or activity relating to a Business Opportunity, regardless of whether
any of the Related Parties ultimately participates in such business or
activity;
2
<PAGE> 3
provided that, this Section 2 shall not apply to (x) the existing personal oil
and gas investments owned by Employee, his family members and his controlled
affiliates as of the date hereof, which are described in a schedule,
substantially in the format set forth as Schedule I hereto, delivered to the
Company within 30 days of the date hereof (the "EXISTING PERSONAL
INVESTMENTS"), and (y) future expenditures made by Employee, his family members
and his controlled affiliates which are required to maintain, but not increase,
their respective current ownership interests in the Existing Personal
Investments, excluding however, any expenditure to participate in the
acquisition, exploration or development of any acreage which is not currently
included in the Existing Personal Investments as of the date hereof, unless
such opportunity is first offered to, and subsequently declined by, the Company
or the General Partner.
3. Confidentiality Obligations.
(a) Employee hereby acknowledges that all trade secrets and
confidential or proprietary information of the Related Parties (collectively
referred to herein as "CONFIDENTIAL INFORMATION") constitutes valuable, special
and unique assets of the Related Parties' business, and that access to and
knowledge of such Confidential Information is essential to the performance of
Employee's duties hereunder. Employee agrees that during the Employment Term
and during the one year period following the date of termination of Employee's
employment by the Related Parties (the "TERMINATION DATE"), Employee will hold
the Confidential Information in strict confidence and will not publish,
disseminate or otherwise disclose, directly or indirectly, to any person other
than the Related Parties and their respective officers, directors and
employees, any Confidential Information or use any Confidential Information for
Employee's own personal benefit or for the benefit of anyone other than the
Related Parties.
(b) For purposes of this Section 3, it is agreed that Confidential
Information includes, without limitation, any information heretofore or
hereafter acquired, developed or used by any of the Related Parties relating to
Business Opportunities or Intellectual Property or other geological,
geophysical, economic, financial or management aspects of the business,
operations, properties or prospects of the Related Parties, whether oral or in
written form in a "Related Parties' Business Records" (as defined in Section 5
below), but shall exclude any information which (i) has become part of the
common knowledge or understanding in the oil and gas industry or otherwise in
the public domain (other than from disclosure by Employee in violation of this
Agreement), or (ii) was rightfully in the possession of Employee, as shown by
Employee's records, prior to the date of this Agreement; provided, however,
that Employee shall provide to the Company copies of all information described
in clause (ii); and provided further that this Section 3 shall not be
applicable to the extent Employee is required to testify in a judicial or
regulatory proceeding pursuant to the order of a judge or administrative law
judge after Employee requests that such Confidential Information be preserved.
4. Post Employment Non-Compete Covenant.
(a) Employee agrees that during the one year period following the
Termination Date, he will not engage or participate in any manner, whether
directly or indirectly through any family member or as an employee, employer,
consultant, agent, principal, partner, more than one percent shareholder,
officer, director, licensor, lender, lessor or in any other individual or
representative capacity, in any business or activity which is in direct
competition with the business of the
3
<PAGE> 4
Related Parties as to leasing, acquiring, exploring, producing, gathering or
marketing hydrocarbons and related products within the boundaries of, or within
a two mile radius of the boundaries of, any mineral property interest of any of
the Related Parties (including, without limitation, a mineral lease, overriding
royalty interest, production payment, net profits interest, mineral fee
interest, or option or right to acquire any of the foregoing, or an area of
mutual interest as designated pursuant to contractual agreements between any of
the Related Parties and any third party) or any other property on which the
Related Parties has an option, right, license, or authority to conduct or
direct exploratory activities, such as three dimensional seismic acquisition or
other seismic, geophysical and geochemical activities (but not including any
preliminary geological mapping), as of the Termination Date; provided that,
this Section 4 shall not preclude Employee from:
(i) making investments in securities of oil and gas companies
which are registered on a national stock exchange, if (A) the
aggregate amount owned by Employee and all family members and
affiliates does not exceed 5% of such company's outstanding
securities, and (B) the aggregate amount invested in such investments
by Employee and all family members and affiliates after the date
hereof does not exceed $3,000,000; or
(ii) maintaining his Existing Personal Investments, if such
personal investments do not involve any business activity that relates
to the lease, acquisition, exploration, production, gathering or
marketing of hydrocarbons and related products other than as permitted
by Section 2; and
(b) Employee agrees that during the one year period following the
Termination Date, he will not solicit, entice, persuade or induce, directly or
indirectly, any employee (or person who within the preceding ninety (90) days
was an employee) of any of the Related Parties or any other person who is under
contract with or rendering services to any of the Related Parties, to (i)
terminate his or her employment by, or contractual relationship with, such
person, (ii) refrain from extending or renewing the same (upon the same or new
terms), (iii) refrain from rendering services to or for such person, (iv)
become employed by or to enter into contractual relations with any Persons
other than such person, or (v) enter into a relationship with a competitor of
any of the Related Parties.
5. Business Records.
(a) Employee agrees to promptly deliver to the Company, upon
termination of his employment by the Related Parties, or at any other time when
the Company so requests, all documents relating to the business of the Related
Parties, including, without limitation: all geological and geophysical reports
and related data such as maps, charts, logs, seismographs, seismic records and
other reports and related data, calculations, summaries, memoranda and opinions
relating to the foregoing, production records, electric logs, core data,
pressure data, lease files, well files and records, land files, abstracts,
title opinions, title or curative matters, contract files, notes, records,
drawings, manuals, correspondence, financial and accounting information,
customer lists, statistical data and compilations, patents, copyrights,
trademarks, trade names, inventions, formulae, methods, processes, agreements,
contracts, manuals or any other documents relating to the business of the
Related Parties, (collectively, the "RELATED PARTIES' BUSINESS RECORDS"), and
all copies thereof and therefrom.
4
<PAGE> 5
(b) Employee confirms that all of the Related Parties' Business
Records (and all copies thereof and therefrom) which are required to be
delivered to the Company pursuant to this Section 5 constitute the exclusive
property of the Company and the other Related Parties.
(c) The obligation of confidentiality set forth in Section 3 shall
continue notwithstanding Employee's delivery of any such documents to the
Company.
(d) Notwithstanding the foregoing provisions of this Section 5 or
any other provision of this Agreement, Employee shall be entitled to retain any
written materials which, as shown by Employee's records, were in Employee's
possession on or prior to the date hereof, subject to the Company's right to
receive a copy of all such materials.
(e) The provisions of this Section 5 shall continue in effect
notwithstanding termination of Employee's employment hereunder for any reason.
6. Miscellaneous.
(a) The invalidity or non-enforceability of any provision of this
Agreement in any respect shall not affect the validity or enforceability of
this Agreement in any other respect or of any other provision of this
Agreement. In the event that any provision of this Agreement shall be held
invalid or unenforceable by a court of competent jurisdiction by reason of the
geographic or business scope or the duration thereof, such invalidity or
unenforceability shall attach only to the scope or duration of such provision
and shall not affect or render invalid or unenforceable any other provision of
this Agreement, and, to the fullest extent permitted by law, this Agreement
shall be construed as if the geographic or business scope or the duration of
such provision had been more narrowly drafted so as not to be invalid or
unenforceable.
(b) Employee acknowledges that the Related Parties' remedies at
law for any breach of the provisions of this Agreement is and will be
insufficient and inadequate and that the Company and the General Partner shall
be entitled to equitable relief, including by way of temporary and permanent
injunction, in addition to any remedies the Company and the General Partner may
have at law.
(c) The representations and covenants contained in this Agreement
on the part of Employee will be construed as ancillary to and independent of
any other agreement between the Company and/or the General Partner and
Employee, and the existence of any claim or cause of action of Employee against
the Company or any of the other Related Parties or any officer, director, or
shareholder of the Company or any of the other Related Parties, whether
predicated on Employee's employment or otherwise, shall not constitute a
defense to the enforcement by the Company or the General Partner of the
covenants of Employee contained in this Agreement. In addition, the provisions
of this Agreement shall continue to be binding upon Employee in accordance with
their terms, notwithstanding the termination of Employee's employment for any
reason.
(d) The parties to this Agreement agree that the limitations
contained in Section 4 with respect to time, geographical area, and scope of
activity are reasonable. However, if any court shall determine that the time,
geographical area, or scope of activity of any restriction contained
5
<PAGE> 6
in Section 4 is unenforceable, it is the intention of the parties that such
restrictive covenant set forth herein shall not thereby be terminated but shall
be deemed amended to the extent required to render it valid and enforceable.
(e) Any notices or other communications required or permitted to
be sent hereunder shall be in writing and shall be duly given if personally
delivered or sent postage pre-paid by certified or registered mail, return
receipt requested, if to Employee at the address set forth opposite Employee's
name on the signature page hereof, and if to the Company or the General
Partner, at 500 West Texas, Suite 500, Midland, Texas 79701. Either party may
change his or its address for the sending of notice to such party by written
notice to the other party sent in accordance with the provisions hereof.
(f) This Agreement may not be altered or amended except by a writing,
duly executed by the party against whom such alteration or amendment is sought
to be enforced.
(g) This Agreement may be executed in counterparts, each of which
shall be an original and all of which together shall constitute one and the
same instrument.
6
<PAGE> 7
IN WITNESS WHEREOF, each of the parties hereto has executed this
Agreement in multiple counterparts as of the day and year first above written.
COMPANY
TITAN EXPLORATION, INC.
By:
--------------------------
Name:
------------------------
Title:
-----------------------
GENERAL PARTNER
TITAN RESOURCES I, INC.
By:
--------------------------
Name:
------------------------
Title:
-----------------------
ADDRESS FOR NOTICE: EMPLOYEE
- -------------------
- -------------------
- -------------------
[See Schedule II attached hereto]
7
<PAGE> 8
SCHEDULE I
FORM OF SCHEDULE OF EXISTING INVESTMENT
<TABLE>
<CAPTION>
Well Name Nature of Interest Lessor/Owner Lessee Acquired Location/County Description WI% NRI%
- --------- ------------------ ------------ ------ -------- --------------- ----------- --- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
</TABLE>
8
<PAGE> 9
SCHEDULE II
William K. White
Susan D. Rowland
9
<PAGE> 1
EXHIBIT 10.9
1996 INCENTIVE PLAN
OF
TITAN EXPLORATION, INC.
1. Plan. This 1996 Incentive Plan of Titan Exploration,
Inc. (the "Plan") was adopted by the Board of Directors of Titan Exploration,
Inc. (the "Company") to reward certain corporate officers and key employees of
the Company and its consolidated subsidiaries by enabling them to acquire
shares of Common Stock, par value $.01 per share, of the Company and/or to be
compensated for individual performances.
2. Objectives. That Plan is designed to attract and
retain key employees of the Company and its Subsidiaries (as hereinafter
defined), to encourage the sense of proprietorship of such employees and to
stimulate the active interest of such persons in the development and financial
success of the Company and its Subsidiaries. These objectives are to be
accomplished by making Awards (as hereinafter defined) under this Plan and
thereby providing Participants (as hereinafter defined) with a proprietary
interest in the growth and performance of the Company and its Subsidiaries.
3. Definitions. As used herein, the terms set forth
below shall have the following respective meanings:
"Authorized Officer" means the Chairman of the Board or the
Chief Executive Officer of the Company (or any other senior officer of the
Company to whom either of them shall delegate the authority to execute any
Award Agreement).
"Award" means the grant of any Option, SAR, Stock Award, Cash
Award or Performance Award, whether granted singly, in combination or in
tandem, to a Participant pursuant to such applicable terms, conditions and
limitations as the Committee may establish in order to fulfill the objectives
of the Plan.
"Award Agreement" means a written agreement between the
Company and a Participant setting forth the terms, conditions and limitations
applicable to an Award.
"Board" means the Board of Directors of the Company.
"Cash Award" means an award denominated in cash.
"Code" means the Internal Revenue Code of 1986, as amended
from time to time.
"Committee" means the Compensation Committee of the Board or
such other committee of the Board as is designated by the Board to administer
the Plan.
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"Common Stock" means the Common Stock, par value $.01 per
share, of the Company.
"Company" means Titan Exploration, Inc., a Delaware
corporation.
"Dividend Equivalents" means, with respect to shares of
Restricted Stock that are to be issued at the end of the Restriction Period, an
amount equal to all dividends and other distributions (or the economic
equivalent thereof) that are payable to stockholders of record during the
Restriction Period on a like number of shares of Common Stock.
"Effective Date" has the meaning set forth in paragraph 18
hereof.
"Employee" means an employee of the Company or any of its
Subsidiaries.
"Fair Market Value" of a share of Common Stock means, as of a
particular date, (i) if shares of Common Stock are listed on a national
securities exchange, the mean between the highest and lowest sales price per
share of Common Stock on the consolidated transaction reporting system for the
principal national securities exchange on which shares of Common Stock are
listed on that date, or, if there shall have been no such sale so reported on
that date, on the last preceding date on which such a sale was so reported,
(ii) if shares of Common Stock are not so listed but are quoted on the Nasdaq
National Market, the mean between the highest and lowest sales price per share
of Common Stock reported by the Nasdaq National Market on that date, or, if
there shall have been no such sale so reported on that date, on the last
preceding date on which such a sale was so reported, (iii) if the Common Stock
is not so listed or quoted, the mean between the closing bid and asked price on
that date, or, if there are no quotations available for such date, on the last
preceding date on which such quotations shall be available, as reported by the
Nasdaq National Market, or, if not reported by the Nasdaq National Market, by
the National Quotation Bureau Incorporated or (iv) if shares of Common Stock
are not publicly traded, the most recent value determined by an independent
appraiser appointed by the Company for such purpose.
"Incentive Option" means an Option that is intended to comply
with the requirements set forth in Section 422 of the Code.
"Nonqualified Stock Option" means an Option that is not an
Incentive Option.
"Option" means a right to purchase a specified number of
shares of Common Stock at a specified price.
"Participant" means an Employee to whom an Award has been
made under this Plan.
"Performance Award" means an award made pursuant to this Plan
to a Participant who is subject to the attainment of one or more Performance
Goals.
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"Performance Goal" means a standard established by the
Committee to determine in whole or in part whether a Performance Award shall be
earned.
"Restricted Stock" means any Common Stock that is restricted
or subject to forfeiture provisions.
"Restriction Period" means a period of time beginning as of
the date upon which an Award of Restricted Stock is made pursuant to this Plan
and ending as of the date upon which the Common Stock subject to such Award is
no longer restricted or subject to forfeiture provisions.
"SAR" means a right to receive a payment, in cash or Common
Stock, equal to the excess of the Fair Market Value or other specified
valuation of a specified number of shares of Common Stock on the date the right
is exercised over a specified strike price, in each case, as determined by the
Committee.
"Stock Award" means an award in the form of shares of Common
Stock or units denominated in shares of Common Stock.
"Subsidiary" means (i) in the case of a corporation, any
corporation in which the Company directly or indirectly owns shares
representing more than 50% of the combined voting power of the shares of all
classes or series of capital stock of such corporation which have the right to
vote generally on matters submitted to a vote of the stockholders of such
corporation and (ii) in the case of a partnership or other business entity not
organized as a corporation, any such business entity of which the Company
directly or indirectly owns more than 50% of the voting, capital or profits
interests (whether in the form of partnership interests, membership interests
or otherwise).
4. Eligibility. Key Employees eligible for Awards under
this Plan are those who hold positions of responsibility and whose performance,
in the judgment of the Committee, can have a significant effect on the success
of the Company and its Subsidiaries.
5. Common Stock Available for Awards. Subject to the
provisions of paragraph 14 hereof, there shall be available for Awards under
this Plan granted wholly or partly in Common Stock (including rights or options
that may be exercised for or settled in Common Stock) an aggregate of 850,000
shares of Common Stock. The number of shares of Common Stock that are the
subject to Awards under this Plan, that are forfeited or terminated, expire
unexercised, are settled in cash in lieu of Common Stock or in a manner such
that all or some of the shares covered by an Award are not issued to a
Participant or are exchanged for Awards that do not involve Common Stock, shall
again immediately become available for Awards hereunder. The Committee may from
time to time adopt and observe such procedures concerning the counting of
shares against the Plan maximum as it may deem appropriate. The Board and the
appropriate officers of the Company shall from time to time take whatever
actions are necessary to file any required documents with governmental
authorities, stock exchanges and transaction reporting systems to ensure that
shares of Common Stock are available for issuance pursuant to Awards.
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6. Administration.
(a) This Plan shall be administered by the Committee.
(b) Subject to the provisions hereof, the Committee shall
have full and exclusive power and authority to administer this Plan
and to take all actions that are specifically contemplated hereby or
are necessary or appropriate in connection with the administration
hereof. The Committee shall also have full and exclusive power to
interpret this Plan and to adopt such rules, regulations and
guidelines for carrying out this Plan as it may deem necessary or
proper, all of which powers shall be exercised in the best interests
of the Company and in keeping with the objectives of this Plan. The
Committee may, in its discretion, provide for the extension of the
exercisability of an Award, accelerate the vesting or exercisability
of an Award, eliminate or make less restrictive any restrictions
contained in an Award, waive any restrictions or other provision of
this Plan or an Award or otherwise amend or modify an Award in any
manner that is either (i) not adverse to the Participant to whom such
Award was granted or (ii) consented to by such Participant. The
Committee may correct any defect or supply any omission or reconcile
any inconsistency in this Plan or in any Award in the manner and to
the extent the Committee deems necessary or desirable to further the
Plan purposes. Any decision of the Committee in the interpretation
and administration of this Plan shall lie within its sole and absolute
discretion and shall be final, conclusive and binding on all parties
concerned.
(c) No member of the Committee or officer of the Company
to whom the Committee has delegated authority in accordance with the
provisions of paragraph 7 of this Plan shall be liable for anything
done by him or her, by any member of the Committee or by any officer
of the Company in connection with the performance of any duties under
this Plan, except for his or her own willful misconduct or as
expressly provided by statute.
7. Delegation of Authority. The Committee may delegate
to the Chief Executive Officer and to other senior officers of the Company its
duties under this Plan pursuant to such conditions or limitations as the
Committee may establish.
8. Awards. The Committee shall determine the type or
types of Awards to be made under this Plan and shall designate from time to
time the Employees who are to be the recipients of such Awards. Each Award may
be embodied in an Award Agreement, which shall contain such terms, conditions
and limitations as shall be determined by the Committee in its sole discretion
and shall be signed by the Participant to whom the Award is made and by an
Authorized Officer for and on behalf of the Company. Awards may consist of
those listed in this paragraph 8 hereof and may be granted singly, in
combination or in tandem. Awards may also be made in combination or in tandem
with, in replacement of, or as alternatives to, grants or rights under this
Plan or any other employee plan of the Company or any of its Subsidiaries,
including the plan of any acquired entity. An Award may provide for the grant
or issuance of additional, replacement or alternative Awards upon the
occurrence of specified events, including
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the exercise of the original Award granted to a Participant. All or part of an
Award may be subject to conditions established by the Committee, which may
include, but are not limited to, continuous service with the Company and its
Subsidiaries, achievement of specific business objectives, increases in
specified indices, attainment of specified growth rates and other comparable
measurements of performance. Upon the termination of employment by a
Participant, any unexercised, deferred, unvested or unpaid Awards shall be
treated as set forth in the applicable Award Agreement.
(a) Stock Option. An Award may be in the form of an
Option. An Option awarded pursuant to this Plan may consist of an
Incentive Option or a Nonqualified Option. The price at which shares
of Common Stock may be purchased upon the exercise of any Incentive
Option shall be not less than the Fair Market Value of the Common
Stock on the date of grant. The price at which shares of Common Stock
may be purchased upon the exercise of a Nonqualified Option shall be
not less than the greater of 50 percent of the Fair Market Value of
the Common Stock on the date of grant or its par value. The maximum
number of shares of Common Stock with respect to which any Option may
be granted to an Employee hereunder is the number of shares available
for Awards, pursuant to paragraph 5 hereof, at the time such Option is
granted. Subject to the foregoing provisions, the terms, conditions
and limitations applicable to any Options awarded pursuant to this
Plan, including the term of any Options and the date or dates upon
which they become exercisable, shall be determined by the Committee.
(b) Stock Appreciation Right. An Award may be in the form
of an SAR. The terms, conditions and limitations applicable to any
SARs awarded pursuant to this Plan, including the term of any SARs and
the date or dates upon which they become exercisable, shall be
determined by the Committee.
(c) Stock Award. An Award may be in the form of a Stock
Award. The terms, conditions and limitations applicable to any Stock
Awards granted pursuant to this Plan shall be determined by the
Committee.
(d) Cash Award. An Award may be in the form of a Cash
Award. The terms, conditions and limitations applicable to any Cash
Awards granted pursuant to this Plan shall be determined by the
Committee.
(e) Performance Award. Without limiting the type or
number of Awards that may be made under the other provisions of this
Plan, an Award may be in the form of a Performance Award. A
Performance Award shall be paid, vested or otherwise deliverable
solely on account of the attainment of one or more pre-established,
objective Performance Goals established by the Committee.
9. Payment of Awards.
(a) General. Payment of Awards may be made in the form of
cash or Common Stock, or a combination thereof, and may include such
restrictions as the Committee shall determine, including, in the case
of Common Stock, restrictions on
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transfer and forfeiture provisions. If payment of an Award is made in
the form of Restricted Stock, the Award Agreement relating to such
shares shall specify whether they are to be issued at the beginning or
end of the Restriction Period. In the event that shares of Restricted
Stock are to be issued at the beginning of the Restriction Period, the
certificates evidencing such shares (to the extent that such shares
are so evidenced) shall contain appropriate legends and restrictions
that describe the terms and conditions of the restrictions applicable
thereto. In the event that shares of Restricted Stock are to be issued
at the end of the Restriction Period, the right to receive such shares
shall be evidenced by book entry registration or in such other manner
as the Committee may determine.
(b) Deferral. With the approval of the Committee,
payments in respect of Awards may be deferred, either in the form of
installments or a future lump-sum payment. The Committee may permit
selected Participants to elect to defer payments of some or all types
of Awards in accordance with procedures established by the Committee.
Any deferred payment of an Award, whether elected by the Participant
or specified by the Award Agreement or by the Committee, may be
forfeited if and to the extent that the Award Agreement so provides.
(c) Dividends and Interest. Rights to dividends or
Dividend Equivalents may be extended to and made part of any Award
consisting of shares of Common Stock or units denominated in shares of
Common Stock, subject to such terms, conditions and restrictions as
the Committee may establish. The Committee may also establish rules
and procedures for the crediting of interest on deferred cash payments
and Dividend Equivalents for Awards consisting of shares of Common
Stock or units denominated in shares of Common Stock.
(d) Substitution of Awards. At the discretion of the
Committee, a Participant may be offered an election to substitute an
Award for another Award or Awards of the same or different type.
10. Stock Option Exercise. The price at which shares of
Common Stock may be purchased under an Option shall be paid in full at the time
of exercise in cash or, if elected by the optionee, the optionee may purchase
such shares by means of tendering Common Stock or surrendering another Award,
including Restricted Stock, valued at Fair Market Value on the date of
exercise, or any combination thereof. The Committee shall determine acceptable
methods for Participants to tender Common Stock or other Awards. The Committee
may provide for procedures to permit the exercise or purchase of such Awards by
use of the proceeds to be received from the sale of Common Stock issuable
pursuant to an Award. Unless otherwise provided in the applicable Award
Agreement, in the event shares of Restricted Stock are tendered as
consideration for the exercise of an Option, a number of the shares issued upon
the exercise of the Option, equal to the number of shares of Restricted Stock
used as consideration therefor, shall be subject to the same restrictions as
the Restricted Stock so submitted as well as any additional restrictions that
may be imposed by the Committee.
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11. Tax Withholding. The Company shall have the right to
deduct applicable taxes from any Award payment and withhold, at the time of
delivery or vesting of cash or shares of Common Stock under this Plan, an
appropriate amount of cash or number of shares of Common Stock or a combination
thereof for payment of taxes required by law or to take such other action as
may be necessary in the opinion of the Company to satisfy all obligations for
withholding of such taxes. The Committee may also permit withholding to be
satisfied by the transfer to the Company of shares of Common Stock theretofore
owned by the holder of the Award with respect to which withholding is required.
If shares of Common Stock are used to satisfy tax withholding, such shares
shall be valued based on the Fair Market Value when the tax withholding is
required to be made. The Committee may provide for loans, on either a
short-term or demand basis, from the Company to a Participant to permit the
payment of taxes required by law.
12. Amendment, Modification, Suspension or Termination.
The Board may amend, modify, suspend or terminate this Plan for the purpose of
meeting or addressing any changes in legal requirements or for any other
purpose permitted by law, except that no amendment or alteration that would
adversely affect the rights of any Participant under any Award previously
granted to such Participant shall be made without the consent of such
Participant.
13. Assignability. The Committee may prescribe and
include in applicable Award Agreements restrictions on transfer. Any attempted
assignment of an Award or any other benefit under this Plan in violation of
this paragraph 13 shall be null and void.
14. Adjustments.
(a) The existence of outstanding Awards shall not affect
in any manner the right or power of the Company or its stockholders to
make or authorize any or all adjustments, recapitalizations,
reorganizations or other changes in the capital stock of the Company
or its business or any merger or consolidation of the Company, or any
issue of bonds, debentures, preferred or prior preference stock
(whether or not such issue is prior to, on a parity with or junior to
the Common Stock) or the dissolution or liquidation of the Company, or
any sale or transfer of all or any part of its assets or business, or
any other corporate act or proceeding of any kind, whether or not of a
character similar to that of the acts or proceedings enumerated above.
(b) In the event of any subdivision or consolidation of
outstanding shares of Common Stock, declaration of a dividend payable
in shares of Common Stock or other stock split, then (i) the number of
shares of Common Stock reserved under this Plan, (ii) the number of
shares of Common Stock covered by outstanding Awards in the form of
Common Stock or units denominated in Common Stock, (iii) the exercise
or other price in respect of such Awards and (iv) the appropriate Fair
Market Value and other price determinations for such Awards shall each
be proportionately adjusted by the Board to reflect such transaction.
In the event of any other recapitalization or capital reorganization
of the Company, any consolidation or merger of the Company with
another corporation or entity, the adoption by the Company of any plan
of exchange
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affecting the Common Stock or any distribution to holders of Common
Stock of securities or property (other than normal cash dividends or
dividends payable in Common Stock), the Board shall make appropriate
adjustments to (i) the number of shares of Common Stock covered by
Awards in the form of Common Stock or units denominated in Common
Stock, (ii) the exercise or other price in respect of such Awards and
(iii) the appropriate Fair Market Value and other price determinations
for such Awards to give effect to such transaction shall each be
proportionately adjusted by the Board to reflect such transaction;
provided that such adjustments shall only be such as are necessary to
maintain the proportionate interest of the holders of the Awards and
preserve, without exceeding, the value of such Awards. In the event of
a corporate merger, consolidation, acquisition of property or stock,
separation, reorganization or liquidation, the Board shall be
authorized to issue or assume Awards by means of substitution of new
Awards, as appropriate, for previously issued Awards or to assume
previously issued Awards as part of such adjustment.
15. Restrictions. No Common Stock or other form of
payment shall be issued with respect to any Award unless the Company shall be
satisfied based on the advice of its counsel that such issuance will be in
compliance with applicable federal and state securities laws. Certificates
evidencing shares of Common Stock delivered under this Plan (to the extent that
such shares are so evidenced) may be subject to such stop transfer orders and
other restrictions as the Committee may deem advisable under the rules,
regulations and other requirements of the Securities and Exchange Commission,
any securities exchange or transaction reporting system upon which the Common
Stock is then listed or to which it is admitted for quotation and any
applicable federal or state securities law. The Committee may cause a legend or
legends to be placed upon such certificates (if any) to make appropriate
reference to such restrictions.
16. Unfunded Plan. Insofar as it provides for Awards of
cash, Common Stock or rights thereto, this Plan shall be unfunded. Although
bookkeeping accounts may be established with respect to Participants who are
entitled to cash, Common Stock or rights thereto under this Plan, any such
accounts shall be used merely as a bookkeeping convenience. The Company shall
not be required to segregate any assets that may at any time be represented by
cash, Common Stock or rights thereto, nor shall this Plan be construed as
providing for such segregation, nor shall the Company, the Board or the
Committee be deemed to be a trustee of any cash, Common Stock or rights thereto
to be granted under this Plan. Any liability or obligation of the Company to
any Participant with respect to an Award of cash, Common Stock or rights
thereto under this Plan shall be based solely upon any contractual obligations
that may be created by this Plan and any Award Agreement, and no such liability
or obligation of the Company shall be deemed to be secured by any pledge or
other encumbrance on any property of the Company. Neither the Company nor the
Board nor the Committee shall be required to give any security or bond for the
performance of any obligation that may be created by this Plan.
17. Governing Law. This Plan and all determinations made
and actions taken pursuant hereto, to the extent not otherwise governed by
mandatory provisions of the Code or the securities laws of the United States,
shall be governed by and construed in accordance with the laws of the State of
Delaware.
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18. Effectiveness. This Plan shall be effective as of
October 1, 1996, (the "Effective Date"), the date on which it was approved by
the Board of Directors of the Company. Notwithstanding the foregoing, the
ability of the Company to issue any Incentive Options under this Plan is
expressly conditioned upon the approval of the Plan by the holders of a
majority of shares of Common Stock on or before October 1, 1997. If the
Stockholders of the Company should fail to so approve this Plan prior to such
date, the Company's ability to issue Incentive Options under this Plan shall
terminate and cease to be of any further force or effect and any and all grants
of Incentive Options hereunder shall be null and void.
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EXHIBIT 10.13
AMENDED AND RESTATED CREDIT AGREEMENT
Among
TITAN RESOURCES, L.P.,
as the Company
and
THE CHASE MANHATTAN BANK
Individually, as Issuing Bank and as Administrative Agent,
FIRST UNION NATIONAL BANK OF NORTH CAROLINA,
Individually and as Documentation Agent,
MORGAN GUARANTY TRUST COMPANY OF NEW YORK,
Individually and as Syndication Agent,
and
FINANCIAL INSTITUTIONS
NOW OR HEREAFTER PARTIES HERETO
$250,000,000 Credit Facility
October 31, 1996
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TABLE OF CONTENTS
ARTICLE I DEFINITIONS; CONSTRUCTION
Section 1.01 Definitions . . . . . . . . . . . . . . . . . . . . . . . . . 1
Section 1.02 Accounting Terms and Determinations . . . . . . . . . . . . 16
Section 1.03 Other Definitional Terms . . . . . . . . . . . . . . . . . 16
ARTICLE II AMOUNT AND TERMS OF LOANS
Section 2.01 Commitments . . . . . . . . . . . . . . . . . . . . . . . . 16
Section 2.02 Borrowing Requests. . . . . . . . . . . . . . . . . . . . . 17
Section 2.03 Letters of Credit . . . . . . . . . . . . . . . . . . . . . 17
Section 2.04 Disbursement of Funds . . . . . . . . . . . . . . . . . . . 22
Section 2.05 Notes. . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Section 2.06 Interest . . . . . . . . . . . . . . . . . . . . . . . . . 23
Section 2.07 Interest Periods . . . . . . . . . . . . . . . . . . . . . 24
Section 2.08 Repayment of Loans . . . . . . . . . . . . . . . . . . . . 25
Section 2.09 Termination or Reduction of Commitments . . . . . . . . . . 25
Section 2.10 Prepayments. . . . . . . . . . . . . . . . . . . . . . . . 25
Section 2.11 Continuation and Conversion Options . . . . . . . . . . . . 26
Section 2.12 Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Section 2.13 Payments, etc . . . . . . . . . . . . . . . . . . . . . . . 28
Section 2.14 Interest Rate Not Ascertainable, etc . . . . . . . . . . . 29
Section 2.15 Illegality . . . . . . . . . . . . . . . . . . . . . . . . 30
Section 2.16 Increased Costs . . . . . . . . . . . . . . . . . . . . . . 30
Section 2.17 Change of Lending Office . . . . . . . . . . . . . . . . . 32
Section 2.18 Funding Losses . . . . . . . . . . . . . . . . . . . . . . 32
Section 2.19 Sharing of Payments, etc . . . . . . . . . . . . . . . . . 32
Section 2.20 Borrowing Base . . . . . . . . . . . . . . . . . . . . . . 33
Section 2.21 Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Section 2.22 Pro Rata Treatment . . . . . . . . . . . . . . . . . . . . 37
Section 2.23 Disposition of Proceeds . . . . . . . . . . . . . . . . . . 37
Section 2.24 Additional Collateral . . . . . . . . . . . . . . . . . . . 37
ARTICLE III CONDITIONS TO BORROWINGS AND TO PURCHASE,
RENEWAL AND REARRANGEMENT
Section 3.01 Closing . . . . . . . . . . . . . . . . . . . . . . . . . . 38
Section 3.02 Conditions Precedent to Initial Loan . . . . . . . . . . . 38
Section 3.03 Conditions Precedent to Each Loan . . . . . . . . . . . . . 40
Section 3.04 Recordings . . . . . . . . . . . . . . . . . . . . . . . . 40
ARTICLE IV REPRESENTATIONS AND WARRANTIES
Section 4.01 Existence . . . . . . . . . . . . . . . . . . . . . . . . . 41
Section 4.02 Power and Authorization . . . . . . . . . . . . . . . . . . 41
Section 4.03 Binding Obligations . . . . . . . . . . . . . . . . . . . . 41
Section 4.04 No Legal Bar or Resultant Lien . . . . . . . . . . . . . . 41
Section 4.05 No Consent . . . . . . . . . . . . . . . . . . . . . . . . 41
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Section 4.06 Financial Information . . . . . . . . . . . . . . . . . . . 42
Section 4.07 Investments and Guaranties . . . . . . . . . . . . . . . . 42
Section 4.08 Litigation . . . . . . . . . . . . . . . . . . . . . . . . 42
Section 4.09 Federal Reserve Regulations. . . . . . . . . . . . . . . 42
Section 4.10 Compliance with ERISA . . . . . . . . . . . . . . . . . . . 42
Section 4.11 Taxes; Governmental Charges . . . . . . . . . . . . . . . . 43
Section 4.12 Title and Liens . . . . . . . . . . . . . . . . . . . . . . 43
Section 4.13 Defaults . . . . . . . . . . . . . . . . . . . . . . . . . 43
Section 4.14 Casualties; Taking of Properties . . . . . . . . . . . . . 43
Section 4.15 Compliance with the Law . . . . . . . . . . . . . . . . . . 43
Section 4.16 No Material Misstatements . . . . . . . . . . . . . . . . . 44
Section 4.17 Investment Company Act . . . . . . . . . . . . . . . . . . 44
Section 4.18 Public Utility Holding Company Act . . . . . . . . . . . . 44
Section 4.19 Subsidiaries . . . . . . . . . . . . . . . . . . . . . . . 44
Section 4.20 Insurance . . . . . . . . . . . . . . . . . . . . . . . . . 44
Section 4.21 Mortgaged Property . . . . . . . . . . . . . . . . . . . . 44
Section 4.22 Gas Imbalances . . . . . . . . . . . . . . . . . . . . . . 45
Section 4.23 Environmental Matters . . . . . . . . . . . . . . . . . . . 45
ARTICLE V COVENANTS
Section 5.01 Certain Affirmative Covenants . . . . . . . . . . . . . . . 46
(a) Maintenance and Compliance, etc. . . . . . . . . . . . . . 47
(b) Payment of Taxes and Claims, etc. . . . . . . . . . . . . . 47
(c) Further Assurances. . . . . . . . . . . . . . . . . . . . . 47
(d) Performance of Obligations . . . . . . . . . . . . . . . . 47
(e) Insurance . . . . . . . . . . . . . . . . . . . . . . . . . 47
(f) Accounts and Records . . . . . . . . . . . . . . . . . . . 48
(g) Right of Inspection . . . . . . . . . . . . . . . . . . . . 48
(h) Operation and Maintenance of Property and
Compliance with Leases. . . . . . . . . . . . . . . . . . . 48
(i) Certain Additional Assurances Regarding Maintenance
and Operation of Properties . . . . . . . . . . . . . . . . 48
(j) Designation of Subsidiaries as Additional Guarantors. . . . 48
(k) Payment of Charters and Tariffs . . . . . . . . . . . . . . 49
(l) Environmental Covenant . . . . . . . . . . . . . . . . . . 49
Section 5.02 Reporting Covenants . . . . . . . . . . . . . . . . . . . . 49
(a) Annual Financial Statements . . . . . . . . . . . . . . . . 49
(b) Quarterly Financial Statements . . . . . . . . . . . . . . 49
(c) No Default/Compliance Certificate . . . . . . . . . . . . . 50
(d) Auditors' No Default Certificate; Management Letters . . . 50
(e) Engineering Reports . . . . . . . . . . . . . . . . . . . . 50
(f) Notice of Certain Events . . . . . . . . . . . . . . . . . 51
(g) Communications . . . . . . . . . . . . . . . . . . . . . . 51
(h) Litigation . . . . . . . . . . . . . . . . . . . . . . . . 51
(i) ERISA . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
(j) Other Information . . . . . . . . . . . . . . . . . . . . . 52
Section 5.03 Certain Negative Covenants . . . . . . . . . . . . . . . . 52
(a) Indebtedness . . . . . . . . . . . . . . . . . . . . . . . 52
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(b) Liens . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
(c) Mergers, Sales, etc . . . . . . . . . . . . . . . . . . . . 55
(d) Distribution, etc . . . . . . . . . . . . . . . . . . . . . 55
(e) Investments, Loans, etc . . . . . . . . . . . . . . . . . . 55
(f) Lease Payments . . . . . . . . . . . . . . . . . . . . . . 56
(g) Sales and Leasebacks . . . . . . . . . . . . . . . . . . . 57
(h) Nature of Business . . . . . . . . . . . . . . . . . . . . 57
(i) ERISA Compliance . . . . . . . . . . . . . . . . . . . . . 57
(j) Proceeds of Loans. . . . . . . . . . . . . . . . . . . . . 58
(k) Transactions with Affiliates . . . . . . . . . . . . . . . 58
(l) Unconditional Purchase Obligations . . . . . . . . . . . . 59
(m) Change in Management . . . . . . . . . . . . . . . . . . . 59
(n) Creation of Subsidiaries . . . . . . . . . . . . . . . . . 59
(o) Current Ratio . . . . . . . . . . . . . . . . . . . . . . . 59
(p) Debt Coverage Ratio . . . . . . . . . . . . . . . . . . . . 59
(q) Interest Coverage Ratio . . . . . . . . . . . . . . . . . . 59
(r) Amendments to Partnership Agreement . . . . . . . . . . . . 59
ARTICLE VI EVENTS OF DEFAULT AND REMEDIES
Section 6.01 Payments . . . . . . . . . . . . . . . . . . . . . . . . . 60
Section 6.02 Covenants Without Notice . . . . . . . . . . . . . . . . . 60
Section 6.03 Other Covenants . . . . . . . . . . . . . . . . . . . . . . 60
Section 6.04 Other Financing Document Obligations . . . . . . . . . . . 60
Section 6.05 Representations . . . . . . . . . . . . . . . . . . . . . . 60
Section 6.06 Non-Payments of Other Indebtedness . . . . . . . . . . . . 61
Section 6.07 Defaults Under Other Agreements . . . . . . . . . . . . . . 61
Section 6.08 Bankruptcy . . . . . . . . . . . . . . . . . . . . . . . . 61
Section 6.09 ERISA . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
Section 6.10 Money Judgment . . . . . . . . . . . . . . . . . . . . . . 61
Section 6.11 Security Instruments . . . . . . . . . . . . . . . . . . . 62
Section 6.12 Mandatory Prepayments . . . . . . . . . . . . . . . . . . . 62
Section 6.13 Change in Control . . . . . . . . . . . . . . . . . . . . . 62
ARTICLE VII THE ADMINISTRATIVE AGENT
Section 7.01 Appointment of Administrative Agent . . . . . . . . . . . . 62
Section 7.02 Nature of Duties of Administrative Agent . . . . . . . . . 63
Section 7.03 Lack of Reliance on the Administrative Agent . . . . . . . 63
Section 7.04 Certain Rights of the Administrative Agent . . . . . . . . 63
Section 7.05 Reliance by Administrative Agent . . . . . . . . . . . . . 63
Section 7.06 INDEMNIFICATION OF ADMINISTRATIVE AGENT . . . . . . . . . . 64
Section 7.07 The Administrative Agent in its Individual Capacity . . . . 64
Section 7.08 May Treat Lender as Owner . . . . . . . . . . . . . . . . . 64
Section 7.09 Successor Administrative Agent . . . . . . . . . . . . . . 64
ARTICLE VIII MISCELLANEOUS
Section 8.01 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . 65
Section 8.02 Amendments, etc . . . . . . . . . . . . . . . . . . . . . . 65
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Section 8.03 No Waiver; Remedies Cumulative . . . . . . . . . . . . . . 66
Section 8.04 Payment of Expenses, Indemnities, etc . . . . . . . . . . . 66
Section 8.05 Right of Setoff . . . . . . . . . . . . . . . . . . . . . . 68
Section 8.06 Benefit of Agreement . . . . . . . . . . . . . . . . . . . 69
Section 8.07 Assignments and Participations. . . . . . . . . . . . . . . 69
Section 8.08 Governing Law; Submission to Jurisdiction; Etc . . . . . . 71
Section 8.09 Independent Nature of Lenders' Rights . . . . . . . . . . . 71
Section 8.10 Invalidity . . . . . . . . . . . . . . . . . . . . . . . . 72
Section 8.11 Survival of Agreements . . . . . . . . . . . . . . . . . . 72
Section 8.12 Renewal, Extension or Rearrangement . . . . . . . . . . . . 72
Section 8.13 Interest . . . . . . . . . . . . . . . . . . . . . . . . . 72
Section 8.14 Confidential Information. . . . . . . . . . . . . . . . . . 73
Section 8.15 ENTIRE AGREEMENT . . . . . . . . . . . . . . . . . . . . . 73
Section 8.16 Attachments . . . . . . . . . . . . . . . . . . . . . . . . 74
Section 8.17 Counterparts . . . . . . . . . . . . . . . . . . . . . . . 74
Section 8.18 Survival of Indemnities . . . . . . . . . . . . . . . . . . 74
Section 8.19 Headings Descriptive . . . . . . . . . . . . . . . . . . . 74
Section 8.20 Satisfaction Requirement . . . . . . . . . . . . . . . . . 74
Section 8.21 Effectiveness . . . . . . . . . . . . . . . . . . . . . . . 74
Section 8.22 Conflict with Mortgage . . . . . . . . . . . . . . . . . . 74
Section 8.23 EXCULPATION PROVISIONS . . . . . . . . . . . . . . . . . . 74
ANNEXES
Annex I - Commitments
Annex II - Outstanding Letters of Credit
SCHEDULES
Schedule 4.05 - Consents
Schedule 4.07 - Investment and Guaranties
Schedule 4.08 - Litigation
Schedule 4.10 - ERISA
Schedule 4.13 - Defaults
Schedule 4.20 - Insurance
Schedule 4.22 - Gas Imbalances
Schedule 5.03(a) - Existing Indebtedness
Schedule 5.03(b) - Liens
EXHIBITS
Exhibit A - Form of Note
Exhibit B - Subsidiaries/Guarantors
Exhibit C - Form of Borrowing Request
Exhibit D - Form of Assignment and Acceptance
Exhibit E - Form of Letter to Hydrocarbon Purchasers
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<PAGE> 6
AMENDED AND RESTATED CREDIT AGREEMENT
THIS AMENDED AND RESTATED CREDIT AGREEMENT is made and entered into as
of the 31st day of October, 1996, among TITAN RESOURCES, L.P., a Texas limited
partnership (the "Company"); THE CHASE MANHATTAN BANK, individually, as the
Issuing Bank and as Administrative Agent (in such capacity, the "Administrative
Agent"), FIRST UNION NATIONAL BANK OF NORTH CAROLINA, individually and as
Documentation Agent, MORGAN GUARANTY TRUST COMPANY OF NEW YORK, individually
and as Syndication Agent, and each of the lenders that is a signatory hereto or
which becomes a party hereto as provided in Section 8.07 (individually, a
"Lender" and, collectively, the "Lenders").
RECITALS
A. On December 11, 1995, the Company, Texas Commerce Bank
National Association ("TCB"), individually and as Agent (in such capacity, the
"Former Agent") for itself and First Union National Bank of North Carolina
(together with TCB, the "Former Lenders"), and the Former Lenders entered into
a certain Credit Agreement (the "Prior Credit Agreement") whereby, upon the
terms and conditions therein stated, the Former Lenders agreed to make certain
loans and extend certain credit to the Company.
B. By separate Assignments of Notes and Liens of even date
herewith, each of the Former Lenders have assigned their respective "Notes" (as
defined in the Prior Credit Agreement, and herein called the "Prior Notes") and
all liens securing the payment thereof to the Former Agent.
C. By Assignment of Undivided Interest in Notes and Liens of even
date herewith (the "Assignments"), the Former Agent has assigned to each of the
Lenders and, to the extent set forth therein, to the Administrative Agent, an
undivided interest in the Prior Notes and a corresponding undivided interest in
and to all liens securing the payment thereof.
D. The Company, the Administrative Agent, and the Lenders
mutually desire to make certain amendments to the Prior Credit Agreement and to
restate the Prior Credit Agreement in its entirety.
E. In consideration of the mutual covenants and agreements herein
contained, the Company, the Administrative Agent, and the Lenders hereby agree
that the Prior Credit Agreement shall be and hereby is amended and restated in
its entirety to read herein and as follows:
ARTICLE I
DEFINITIONS; CONSTRUCTION
Section 1.01 Definitions. As used herein, the following terms
have the meanings herein specified (to be equally applicable to both the
singular and plural forms of the terms defined). Reference to any party to a
Financing Document means that party and its successors and assigns.
"Administrative Agent" means The Chase Manhattan Bank, acting
in the manner and to the extent described in Article VII.
<PAGE> 7
"Advance Notice" means written or telecopy notice (or
telephonic notice promptly confirmed in writing), which in each case
shall be irrevocable, from the Company to be received by the
Administrative Agent before 12:00 p.m. (New York time), by the number
of Business Days in advance of any borrowing, conversion, continuation
or prepayment of any Loan pursuant to this Agreement as respectively
indicated below:
(i) Eurodollar Loans - 3 Business Days; and
(ii) Base Rate Loans - same Business Day.
For the purpose of determining the respectively applicable
Loan in the case of the conversion from one type of Loan into another,
the Loan into which there is to be a conversion shall control. The
Administrative Agent, the Issuing Bank and each Lender are entitled to
rely upon and act upon telecopy notice made or purportedly made by the
Company, and the Company hereby waives the right to dispute the
authenticity and validity of any such telecopy once the Administrative
Agent or any Lender has advanced funds or the Issuing Bank has issued
Letters of Credit, absent manifest error.
"Affiliate" of any Person means any other Person directly or
indirectly controlling, controlled by, or under common control with,
such Person, whether through the ownership of voting securities, by
contract or otherwise; provided that, such term shall not include any
Person which would otherwise be deemed to be an Affiliate hereunder
solely as a result of NGP's or First Union Capital Partners', Enron
Capital & Trade Resources Corp.'s or Selma International Investment
Limited's investment in such Person, or such Person's investment in,
or control of, NGP, First Union Capital Partners, Enron Capital &
Trade Resources Corp. or Selma International Investment Limited.
"Aggregate Credit Exposure" means the sum of each Lender's
Credit Exposure.
"Agreement" means this Amended and Restated Credit Agreement,
as amended, supplemented or modified from time to time.
"Applicable Margin" means, on any day and with respect to any
Loan, the applicable per annum percentage set forth at the appropriate
intersection in the table shown below, based on the Maximum Available
Amount Utilization Percentage on such day:
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Max. Available
Amount Utilization Base Rate Loan Eurodollar Loan
Percentage Margin Percentage Margin Percentage
------------------ ----------------- -----------------
Greater than 66% 0.00% 1.50%
Less than or equal to
66% but greater than 33% 0.00% 1.25%
Less than or equal to
33% but greater than 0% 0.00% 1.00%
As used in this definition of Applicable Margin, "Maximum Available
Amount Utilization Percentage" means, as of any day, the fraction, expressed as
a percentage, the numerator of which is the Aggregate Credit Exposure on such
day, and the denominator of which is the Borrowing Base in effect on such day.
"Application" means an "Application and Agreement for Letters
of Credit," or similar instruments or agreements, entered into between
the Company and the Issuing Bank in connection with any Letter of
Credit.
"Assignment" has the meaning assigned such term in the opening
recitals of this Agreement.
"Assignment and Acceptance" has the meaning assigned such term
in Section 8.07(b).
"BB Properties" means at any time the Oil and Gas Properties
and other assets of the Company or a Subsidiary of the Company
evaluated by the Lenders and to which the Lenders gave loan value in
determining the most recent Borrowing Base.
"Bankruptcy Code" has the meaning provided in Section 6.08.
"Base Rate" has the meaning provided in Section 2.06(a).
"Base Rate Loan" means a Loan bearing interest at the rate
provided in Section 2.06(a).
"Borrowing" means a borrowing pursuant to a Borrowing Request
or a continuation or a conversion pursuant to Section 2.11 consisting,
in each case, of the same Type of Loans and having, in the case of
Eurodollar Loans, the same Interest Period (except as otherwise
provided in Sections 2.16 and 2.18) and made previously or being made
concurrently by all of the Lenders.
"Borrowing Base" means the amount of Aggregate Credit Exposure
that the Determining Lenders shall determine, pursuant to Section
2.20, can be supported by the BB Properties.
"Borrowing Request" means a request for a Borrowing pursuant
to Section 2.02, substantially in the form attached as Exhibit C.
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<PAGE> 9
"Business Day" means any day excluding Saturday, Sunday and
any other day on which banks are required or authorized to close in
New York, New York or Houston, Texas and, if the applicable Business
Day relates to Eurodollar Loans, on which trading is carried on by and
between banks in Dollar deposits in the applicable interbank
Eurodollar market.
"Capital Expenditures" means capital expenditures for capital
or fixed assets, whether by way of acquisition or otherwise.
"Capital Lease Obligations" means, as to any Person, the
obligations of such person to pay rent or other amounts under a lease
of (or other agreement conveying the right to use) real and/or
personal property which obligations are required to be classified and
accounted for as a liability for a capital lease on a balance sheet of
such Person and, for purposes of this Agreement, the amount of such
obligations shall be the capitalized amount thereof.
"Change of Control" means the occurrence of any of the
following:
(a) Parent at any time ceases to own, directly or
indirectly through one or more Subsidiaries, all of the
partnership interests of the Company, or
(b) prior to the consummation of the IPO,
Hightower and NGP cease to own, directly or indirectly, on a
combined basis, more than 50% of the issued and outstanding
shares of Parent, or
(c) at or after the consummation of the IPO, any
Other Group becomes the beneficial owner, directly or
indirectly, of voting stock of Parent which has aggregate
voting power that at the time in question both (i) exceeds the
aggregate voting power of all stock of Parent then owned by
the Hightower/NGP Group, and (ii) exceeds thirty percent (30%)
of the total voting power of all then outstanding voting stock
of Parent.
As used in this definition, "person" has the meaning applied to such
term in Sections 13(d) and 14(d)(2) of the Securities Exchange Act of
1934, as amended (the "Act"), "group" of persons has the meaning
applied to such term in Rule 13d-5 under the Act, and "beneficial
owners" has the meaning applied to such term in Rule 13d-3 under the
Act, in each case as the Act and the aforementioned Rules thereunder
are in effect on the Closing Date. "Hightower/NGP Group" means
Hightower, NGP, Joint Energy Development Investments Limited
Partnership, First Union Corporation, Selma International Investment
Limited and their respective Affiliates, and the directors, officers
and employees of the Company and Parent.
"Other Group" means any group made up of one or more persons who are
not part of the Hightower/NGP Group.
"Chase" means The Chase Manhattan Bank, in its individual
capacity or as Issuing Bank, as the case may be, and not as
Administrative Agent.
"Closing Date" means the as of date of this Agreement set
forth in the first paragraph.
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<PAGE> 10
"Code" means the Internal Revenue Code of 1986, as amended,
and any successor statute.
"Commitment" means, with respect to each Lender, the
obligation of such Lender to make loans to the Company under Section
2.01, up to the maximum amount set forth opposite such Lender's name
on Annex I under the caption "Commitment."
"Company" means Titan Resources, L.P., a Texas limited
partnership.
"Consolidated Net Income" means with respect to Parent and its
Consolidated Subsidiaries, for any period, the aggregate of the net
income (or loss) of Parent and its Consolidated Subsidiaries after
allowances for taxes for such period, determined on a consolidated
basis in accordance with GAAP; provided that there shall be excluded
from such net income (to the extent otherwise included therein) the
following: (i) the net income (but not loss) of any Consolidated
Subsidiary of Parent to the extent that the declaration or payment of
dividends or similar distributions or transfers or loans by that
Consolidated Subsidiary is not at the time permitted by operation of
the terms of its charter or any agreement, instrument or Governmental
Requirement applicable to such Consolidated Subsidiary, or is
otherwise restricted or prohibited in each case determined in
accordance with GAAP; (ii) the net income (or loss) of any Person
acquired in a pooling-of-interests transaction for any period prior to
the effective date of such transaction; (iii) any extraordinary gains
or losses, including gains or losses attributable to Property sales
not in the ordinary course of business; and (iv) the cumulative effect
of a change in accounting principles and any gains or losses
attributable to writeups or writedowns of assets; provided further
that until October 31, 1997, the net income attributable to the
Properties purchased under the Mobil Purchase and Sale Agreement for
any relevant period occurring before November 1, 1996 shall be
determined on a pro-forma basis using the oil and gas revenues
attributed to the production from such properties less the direct
operating expenses, severance and ad valorem taxes incurred with
respect to such properties during the relevant period.
"Consolidated Subsidiaries" means, as to any Person, each
Subsidiary of such Person (whether now existing or hereafter created
or acquired) the financial statements of which shall be (or should
have been) consolidated with the financial statements of such Person
in accordance with GAAP.
"Cover" for LC Liabilities shall be effected by paying to the
Administrative Agent in immediately available funds, to be held by the
Administrative Agent in a collateral account maintained by the
Administrative Agent at its Payment Office and collaterally assigned
as security for the financial accommodations extended pursuant to this
Agreement using documentation satisfactory to the Administrative
Agent, an amount equal to the maximum amount of each applicable Letter
of Credit available for drawing at any time on or after the date of
such assignment.
"Credit Exposure" means, at any time and as to each Lender,
the sum of (a) the aggregate principal amount of the Loans made by
such Lender as of such date plus (b) such Lender's Percentage Share of
the aggregate amount of all LC Liabilities as of such date.
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<PAGE> 11
"Default" means an Event of Default or any condition or event
which, with notice or lapse of time or both, would constitute an Event
of Default.
"Designated Borrowing Base" shall have the meaning assigned to
that term in Section 2.20(e).
"Determining Lenders" means, collectively, Chase, First Union
National Bank of North Carolina and Morgan Guaranty Trust Company of
New York.
"Dollar" and the sign "$" each means lawful money of the
United States of America.
"EBITDA" means, for any period, the sum of Consolidated Net
Income for such period plus the following expenses or charges to the
extent deducted from Consolidated Net Income in such period: interest,
taxes, depreciation, depletion, amortization and other non-cash
charges.
"Effective Date" means the date on which (i) each of the
conditions precedent set forth in Article III have been satisfied or
waived by each of the Lenders, (ii) the conditions to effectiveness
set forth in Section 8.21 have been satisfied and (iii) the initial
Loans have been made, or the initial Letter of Credit has been issued.
Subject to Section 3.01, the Effective Date and Closing Date may be
the same date.
"Eligible Transferee" means any financial institution which is
a Lender as of the Effective Date or which is a commercial bank, a
financial institution or an "accredited investor" (as defined in
Regulation D) which makes loans in the ordinary course of its business
and that makes or acquires Loans for its own account in the ordinary
course of its business and which has capital, surplus and undivided
profits aggregating at least $250,000,000 (as of the date of its most
recent financial statements).
"Environmental Laws" means any and all laws, statutes,
ordinances, rules, regulations, orders, or determinations of any
Governmental Authority pertaining to public health or the environment
in effect in any and all jurisdictions in which the Company or its
Subsidiaries are conducting or at any time have conducted business, or
where any Property of the Company or its Subsidiaries is located, or
where any hazardous substances generated by or disposed of by the
Company or its Subsidiaries are located, including but not limited to
the Oil Pollution Act of 1990 ("OPA"), the Clean Air Act, as amended,
the Comprehensive Environmental, Response, Compensation, and Liability
Act of 1980 ("CERCLA"), as amended, the Federal Water Pollution
Control Act, as amended, the Occupational Safety and Health Act of
1970, as amended, the Resource Conservation and Recovery Act of 1976
("RCRA"), as amended, the Safe Drinking Water Act, as amended, the
Toxic Substances Control Act, as amended, the Superfund Amendments and
Reauthorization Act of 1986, as amended, and other environmental
conservation or protection laws. For Environmental Law purposes, the
term "oil" has the meaning specified in OPA; the terms "hazardous
substance," "release" and "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, in
the event either 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 provided,
further, that, to the extent the laws of the state in which any
Property of the Company or its Subsidiaries is located
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<PAGE> 12
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.
"ERISA" means the Employee Retirement Income Security Act of
1974, as amended, and any successor statute.
"ERISA Affiliate" means each trade or business (whether or not
incorporated) which together with the Company or a Subsidiary of the
Company would be deemed to be a "single employer" within the meaning
of Section 4001(b)(1) of ERISA or Sections 414(b), (c), (m) or (o) of
the Code.
"ERISA Termination Event" means (i) a "Reportable Event"
described in Section 4043 of ERISA and the regulations issued
thereunder (other than a "Reportable Event" not subject to the
provision for 30-day notice to the PBGC under Sections .14, .18, .19
or .20 of Part 2615 of the PBGC regulations), (ii) the withdrawal of
the Company, a Subsidiary of the Company or any ERISA Affiliate from a
Plan during a plan year in which it was a "substantial employer" as
defined in Section 4001(a)(2) of ERISA, (iii) the filing of a notice
of intent to terminate a Plan or the treatment of a Plan amendment as
a termination under Section 4041 of ERISA, (iv) the institution of
proceedings to terminate a Plan by the PBGC, or (v) any other event or
condition which might constitute grounds under Section 4042 of ERISA
for the termination of, or the appointment of a trustee to administer,
any Plan.
"Eurodollar Loan" means a Loan bearing interest at the rate
provided in Section 2.06(b).
"Eurodollar Rate" means, for any Eurodollar Loan for any
Interest Period therefor, the rate per annum (rounded upwards, if
necessary, to the nearest 1/100 of 1%) appearing on Telerate Page 3750
(or any successor page) as the London interbank offered rate for
deposits in Dollars at approximately 11:00 a.m. (London time) two
Business Days prior to the first day of such Interest Period for a
term comparable to such Interest Period. If for any reason such rate
is not available, the term "Eurodollar Rate" means, for any Eurodollar
Loan for any Interest Period therefor, the rate per annum (rounded
upwards, if necessary, to the nearest 1/100 of 1%) appearing on
Reuters Screen LIBO Page as the London interbank offered rate for
deposits in Dollars at approximately 11:00 a.m. (London time) two
Business Days prior to the first day of such Interest Period for a
term comparable to such Interest Period; provided, however, if more
than one rate is specified on Reuters Screen LIBO Page, the applicable
rate shall be the arithmetic mean of all such rates.
"Event of Default" has the meaning provided in Article VI.
"Federal Funds Rate" means, for any period, a fluctuating
interest rate per annum equal for each day during such period 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
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<PAGE> 13
by the Administrative Agent from three Federal funds brokers of
recognized standing selected by it.
"Financial Statements" means the consolidated financial
statements of the Company and its Consolidated Subsidiaries described
or referred to in Section 4.06(a).
"Financing Documents" means this Agreement, the Notes, the
Guaranty Agreement, the Security Instruments, the Applications, the
Letters of Credit, Borrowing Requests, and the other documents,
instruments or agreements described in Section 3.02(d), together with
any other document, instrument or agreement (other than participation,
agency or similar agreements among the Lenders or between any Lender
and any other bank or creditor with respect to any indebtedness or
obligations of the Company hereunder) now or hereafter entered into by
the Company or any Guarantor with the Administrative Agent, the
Issuing Bank, the Lenders, or their respective Affiliates in
connection with the Loans, any LC Liabilities, the Notes, this
Agreement or the Mortgaged Properties, as such documents, instruments
or agreements may be amended, modified or supplemented from time to
time.
"Fiscal Quarter" means a three-month period ending on March
31, June 30, September 30, or December 31 of any year.
"Fiscal Year" means a twelve month period ending on December
31 of any year.
"Form 1001 Certification" has the meaning provided in Section
2.21(f).
"Form 4224 Certification" has the meaning provided in Section
2.21(f).
"Former Agent" has the meaning assigned such term in the
opening recitals of this Agreement.
"Funded Indebtedness" means, without duplication, all
Indebtedness for borrowed money, any Capital Lease Obligations and any
guaranty with respect to Funded Indebtedness of another Person.
"GAAP" means generally accepted accounting principles as
applied in accordance with Section 1.02.
"General Partner" means Titan Resources I, Inc., as general
partner of the Company, or any substitute general partner of the
Company (which shall be a wholly-owned Subsidiary of the Parent or
Titan Resources I, Inc.)
"Governmental Authority" means any (domestic or foreign)
federal, native American Indian, state, province, county, city,
municipal or other political subdivision or government, department,
commission, board, bureau, court, agency or any other instrumentality
of any of them, which exercises jurisdiction over the Company or any
of its Property or any Subsidiary of the Company or any of such
Subsidiary's Property.
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"Governmental Requirement" means any law, statute, code,
ordinance, order, rule, regulation, judgment, decree, injunction,
franchise, permit, certificate, license, authorization or other
direction or requirement (including but not limited to any of the
foregoing which relate to Environmental Laws, energy regulations and
occupational, safety and health standards or controls) of any
Governmental Authority.
"Guaranty Agreement" means the guaranty agreements dated the
date of execution executed by each of the Guarantors, as the same may
be amended from time to time, guaranteeing prompt payment of the
Lender Indebtedness and otherwise being in form and substance
satisfactory to the Administrative Agent and the Majority Lenders.
"Guarantors" means (a) the Parent, (b) the General Partner,
and (c) those Subsidiaries of the Company designated as Guarantors on
Exhibit B and any other Subsidiary of the Company, designated as a
Guarantor by (i) the Company with the approval of the Administrative
Agent, or (ii) the Majority Lenders, in each case pursuant to Section
5.01(j).
"Hedge Agreement" means (i) any Hydrocarbon Swap Agreement or
(ii) any Interest Rate Swap Agreement.
"Highest Lawful Rate" means, with respect to each Lender, the
maximum nonusurious interest rate, if any, that at any time or from
time to time may be contracted for, taken, reserved, charged or
received on the Notes or on other Lender Indebtedness, as the case may
be, owed to it under the law of any jurisdiction whose laws may be
mandatorily applicable to such Lender notwithstanding other provisions
of this Agreement, or law of the United States of America applicable
to such Lender and the Transactions which would permit such Lender to
contract for, charge, take, reserve or receive a greater amount of
interest than under such jurisdiction's law.
"Hightower" means Jack D. Hightower, an individual presently
residing in Midland, Texas.
"Hydrocarbon Interests" means all rights, titles, leasehold
and other interests and estates in and to oil and gas leases, oil, gas
and mineral leases, or other liquid or gaseous hydrocarbon leases,
mineral fee interests, overriding royalty and royalty interests, net
profit interests and production payment interests, including any
reserve or residual interest of whatever nature.
"Hydrocarbon Swap Agreement" means any contract for sale for
future delivery of Hydrocarbons (whether or not the subject
Hydrocarbons are to be delivered), hedging contract, forward contract,
swap agreement, futures contract or other hydrocarbon pricing
protection agreement or option with respect to any such transaction,
which is, in each case, designed to hedge against fluctuations in
Hydrocarbon prices.
"Hydrocarbons" means oil, gas, casinghead gas, condensate,
distillate, liquid hydrocarbons, gaseous hydrocarbons and all products
refined therefrom.
"Indebtedness" of any Person means, without duplication:
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(i) all obligations of such Person for borrowed
money and obligations evidenced by bonds, debentures, notes or
other similar instruments;
(ii) all obligations of such Person (whether
contingent or otherwise) in respect of bankers' acceptances,
letters of credit, surety bonds and similar instruments;
(iii) all obligations of such Person to pay the
deferred purchase price of Property or services (other than
for borrowed money), excluding trade accounts payable arising
in the ordinary course of business which are not in excess of
90 days past the invoice or billing date, or if in excess of
90 days past the invoice or billing date are being currently
contested in good faith by appropriate actions or proceedings
diligently conducted; provided, however, in no event shall the
aggregate net invoice or ledger amount owing on all trade
accounts payable exceed prudent industry standards.
(iv) all Capital Lease Obligations in respect of
which such Person is liable, contingently or otherwise, as
obligor, guarantor or otherwise, or in respect of which
obligations such Person otherwise assures a creditor against
loss;
(v) all guaranties (direct or indirect), and
other contingent obligations of such Person in respect of, or
obligations to purchase or otherwise acquire or to assure
payment of, Indebtedness of others;
(vi) Indebtedness of others secured by any Lien
upon Property owned by such Person, whether or not assumed;
(vii) all obligations or undertakings of such
Person to maintain or cause to be maintained the financial
position or covenants of other Persons;
(viii) the undischarged balance of any production
payment created by such Person or for the creation of which
such Person directly or indirectly received payment;
(ix) obligations to deliver goods or services
including Hydrocarbons in consideration of advance payments;
and
(x) the net amount of obligations of such Person
under agreements of the types described in the definitions of
Hydrocarbon Swap Agreement and Interest Rate Swap Agreement.
"Interest Period" means, with respect to each Borrowing of
Eurodollar Loans, an interest period complying with the terms and
provisions of Section 2.07.
"Interest Rate Swap Agreement" means any rate swap, rate cap,
rate floor, rate collar, forward rate agreement or other rate
protection agreement or option with respect to any such transaction,
designed to hedge against fluctuations in interest rates.
"IPO" means a public offering and sale of Parent's equity
securities which results in Parent's receipt of gross cash proceeds of
at least $125,000,000.
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"Issuing Bank" means, for each Letter of Credit, Chase (or any
Affiliate of Chase, as the case may be) as the issuing bank for such
Letter of Credit.
"Lender" has the meaning assigned such term in the opening
paragraph of this Agreement.
"Lender Indebtedness" means any and all amounts owing or to be
owing by the Company to the Administrative Agent, the Issuing Bank or
the Lenders with respect to or in connection with the Loans, any LC
Liabilities, the Notes, this Agreement, or any other Financing
Document.
"Lending Office" means for each Lender the office specified
opposite such Lender's name on the signature pages, or in the
Assignment and Acceptance pursuant to which it became a Lender, with
respect to each Type of Loan, or such other office as such Lender may
designate in writing from time to time to the Company and the
Administrative Agent with respect to such Type of Loan.
"Letters of Credit" has the meaning assigned such term in
Section 2.03(a) and shall include the Outstanding Letters of Credit,
which are hereby deemed to be issued under this Agreement.
"LC Liabilities" means, at any time and in respect of any
Letter of Credit, the sum of (i) the amount available for drawings
under such Letter of Credit as of the date of determination plus (ii)
the aggregate unpaid amount of all Reimbursement Obligations due and
payable as of the date of determination in respect of previous
drawings made under such Letter of Credit.
"Lien" means any interest in Property securing an obligation
owed to, or a claim by, a Person other than the owner of the Property,
whether such interest is based on the common law, statute or contract,
and including but not limited to the lien or security interest arising
from a mortgage, encumbrance, pledge, security agreement, conditional
sale or trust receipt or a lease, consignment or bailment for security
purposes. For the purposes of this Agreement, the Company or any
Subsidiary of the Company shall be deemed to be the owner of any
Property which it has acquired or holds subject to a conditional sale
agreement, financing lease or other arrangement pursuant to which
title to the Property has been retained by or vested in some other
Person for security purposes.
"Loan" means the loans as provided for by Section 2.01.
"Loan Parties" means the Company and the Guarantors and "Loan
Party" means any one of them.
"Majority Lenders" means at any time (a) prior to the
Commitments expiring or being terminated in full, Lenders holding at
least 66-2/3% of the Commitments in effect at such time, or (b)
thereafter, Lenders holding at least 66-2/3% of the sum of the then
unpaid principal amount of the Loans at such time.
"Margin Stock" has the meaning provided in Regulation U and
Regulation X.
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"Material Adverse Effect" means any material and adverse
effect on (i) the assets, liabilities, financial condition or
operations of the Company, individually, or the Company and its
Subsidiaries, taken as a whole, or (ii) the ability of the Company or
the Guarantors to carry out their respective business or meet their
respective obligations under the Notes, this Agreement or the other
Financing Documents to which each such Person is a party, on a timely
basis.
"Maturity Date" means January 1, 2001.
"Maximum Available Amount" means, at any date, an amount equal
to the lesser of (a) the aggregate Commitments as of such date and (b)
the Borrowing Base as of such date.
"Maximum Loan Available Amount" means, at any date, an amount
equal to the difference between (a) Maximum Available Amount as of
such date and (b) the aggregate amount of all LC Liabilities as of
such date.
"Mobil" means Mobil Producing Texas & New Mexico Inc., a
Delaware corporation.
"Mobil Purchase and Sale Agreement" means that certain
Purchase and Sale Agreement dated July 12, 1996, between Mobil, as
seller, and the Company, as purchaser.
"Mortgage" means, collectively (a) the Mortgage, Deed of
Trust, Assignment, Security Agreement, Fixture Filing and Financing
Statement dated as of December 11, 1995, as supplemented and amended
by supplements and amendments to mortgage dated of even date herewith,
granted by the Company to Michael V. Addy, as Trustee, and (b) the
Mortgage, Deed of Trust, Assignment, Security Agreement, Fixture
Filing and Financing Statement dated as of the Closing Date granted by
the Company to Michael V. Addy, as Trustee, each granting a Lien on
certain Oil and Gas Properties of the Company, as security for the
indebtedness defined therein as "secured indebtedness."
"Mortgaged Property" means the Company's and the Guarantors'
Properties described in and subject to the Liens, privileges,
priorities and security interests existing and to exist under the
terms of the Security Instruments, including but not limited to the
Oil and Gas Properties owned by the Company or the Guarantors which
have been or are hereafter mortgaged to the Administrative Agent for
the benefit of the Lenders pursuant to the Security Instruments.
"NGP" means collectively Natural Gas Partners L.P. and Natural
Gas Partners II, L.P., each a Delaware limited partnership.
"Note" means a promissory note of the Company described in
Section 2.05 payable to any Lender and being substantially in the form
of Exhibit A, evidencing the aggregate Indebtedness of the Company to
such Lender resulting from Loans made by such Lender.
"Oil and Gas Properties" means Hydrocarbon Interests; the
properties now or hereafter pooled or unitized with Hydrocarbon
Interests; all presently existing or future unitization, pooling
agreements and declarations of pooled units and the units created
thereby (including, but not limited to, units created under orders,
regulations and rules of any Governmental Authority having
jurisdiction) which may affect all or any portion of the Hydrocarbon
Interests; all
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<PAGE> 18
operating agreements, contracts and other agreements which relate to
any of the Hydrocarbon Interests or the production, sale, purchase,
exchange or processing of Hydrocarbons from or attributable to such
Hydrocarbon Interests; all Hydrocarbons in and under and which may be
produced and saved or attributable to the Hydrocarbon Interests, the
lands covered thereby and all oil in tanks and all rents, issues,
profits, proceeds, products, revenues and other incomes from or
attributable to the Hydrocarbon Interests; all tenements,
hereditaments, appurtenances and Properties in anywise appertaining,
belonging, affixed or incidental to the Hydrocarbon Interests,
Properties, rights, titles, interests and estates described or
referred to above, including any and all Property, real or personal,
now owned or hereafter acquired and situated upon, used, held for use
or useful in connection with the operating, working or development of
any of such Hydrocarbon Interests or Property (excluding drilling
rigs, automotive equipment or other personal property which may be on
such premises for the purpose of drilling a well or for other similar
temporary uses) and including any and all oil wells, gas wells,
injection wells or other wells, buildings, structures, fuel
separators, liquid extraction plants, plant compressors, pumps,
pumping units, field gathering systems, tanks and tank batteries,
fixtures, valves, fittings, machinery and parts, engines, boilers,
meters, apparatus, equipment, appliances, tools, implements, cables,
wires, towers, casing, tubing and rods, surface leases, rights-of-way,
easements and servitudes together with all additions, substitutions,
replacements, accessions and attachments to any and all of the
foregoing.
"Other Taxes" has the meaning provided in Section 2.21(b).
"Outstanding Letters of Credit" shall mean the outstanding
letters of credit issued under and pursuant to the terms of the Prior
Credit Agreement, and being more particularly described on attached
Annex II.
"Parent" means Titan Exploration, Inc., a Delaware
corporation.
"Partners" means the General Partner and the Parent, as
limited partner, or any substitute limited partner (which shall be a
wholly-owned Subsidiary of the Parent).
"Partnership Agreement" means the written partnership
agreement of the Company among the Partners dated March 31, 1995, as
amended from time to time in compliance herewith.
"Payment Office" means the Administrative Agent's office
located at 270 Park Avenue, New York, New York 10017.
"PBGC" means the Pension Benefit Guaranty Corporation, or any
successor thereto.
"Percentage Share" means, as to any Lender, the fraction,
expressed as a percentage, the numerator of which is the amount of
such Lender's Commitment and the denominator of which is the amount of
the aggregate Commitments.
"Permitted Dividends" means those dividends and distributions
that the Company is permitted to declare and pay pursuant to Section
5.03(d).
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<PAGE> 19
"Person" means any individual, partnership, firm, corporation
(including, but not limited to the Company), association, joint
venture, trust or other entity, or any government or political
subdivision or agency, department or instrumentality thereof.
"Plan" means any employee pension benefit plan, as defined in
Section 3(2) of ERISA, which (i) is currently or hereafter sponsored,
maintained or contributed to by the Company, any Subsidiary of the
Company or an ERISA Affiliate, or (ii) was at any time during the six
calendar years preceding the date of this Agreement sponsored,
maintained or contributed to by the Company, any Subsidiary of the
Company or an ERISA Affiliate.
"Prime Rate" means the rate of interest from time to time
announced publicly by Chase as its prime commercial lending rate.
Such rate is set by Chase as a general reference rate of interest,
taking into account such factors as Chase may deem appropriate, it
being understood that many of Chase's commercial or other loans are
priced in relation to such rate, that it is not necessarily the lowest
or best rate actually charged to any customer and that Chase may make
various commercial or other loans at rates of interest having no
relationship to such rate.
"Prior Notes" has the meaning assigned such term in the
opening recitals of this Agreement.
"Property" means any interest in any kind of property or
asset, whether real, personal or mixed, or tangible or intangible.
"Proved Developed Hydrocarbon Reserves" means "proved
developed oil and gas reserves" as specified under Rule 4-10(a)(3) of
Regulation S-X of the Securities and Exchange Commission.
"Proved Hydrocarbon Reserves" means Proved Developed
Hydrocarbon Reserves and Proved Undeveloped Hydrocarbon Reserves.
"Proved Undeveloped Hydrocarbon Reserves" means "proved
undeveloped oil and gas reserves" as specified under Rule 4-10(a)(4)
of Regulation S-X of the Securities and Exchange Commission.
"Quarterly Dates" means the last day of each March, June,
September, and December, in each year, the first of which shall be
December 31, 1996; provided, however, that if any such day is not a
Business Day, such Quarterly Date shall be the next succeeding
Business Day.
"Redetermination Date" has the meaning assigned such term in
Section 2.20(a).
"Register" means the register maintained by the Administrative
Agent at its Payment Office showing the name and address of each
Lender, its Commitment, and the principal amount of the Loans owing to
each Lender from time to time.
"Regulation D", "Regulation U" and "Regulation X" means,
respectively, Regulation D under the Securities and Exchange Act of
1933, as amended or modified from time to time, and
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Regulation U and Regulation X of the Board of Governors of the Federal
Reserve System as from time to time in effect and any successor
thereto.
"Reimbursement Obligations" means, at any date, the
obligations of the Company then outstanding in respect of the Letters
of Credit, to reimburse the Administrative Agent for the account of
the Issuing Bank for the amount paid by the Issuing Bank in respect of
any drawings under the Letters of Credit.
"Reserve Report" means an engineering report meeting the
requirements set forth in Section 5.02(e)(i) (and as to scheduled
redeterminations, provided by the dates set forth in such Section) and
such other reports, data and supplemental information as may from time
to time be reasonably requested by the Administrative Agent in
connection with any redetermination of the Borrowing Base.
"Responsible Officer" means, with respect to any corporation,
the chairman of the board, the president, any vice president, the
chief executive officer or the chief operating officer, or any
equivalent officer (regardless of his or her title), and, in respect
of financial or accounting matters, the chief financial officer, the
vice president of finance, the treasurer, the controller, or any
equivalent officer (regardless of his or her title); and, with respect
to any partnership, the chairman of the board, the president, any vice
president, the chief executive officer or the chief operating officer,
or any equivalent officer (regardless of his or her title), and, in
respect of financial or accounting matters, the chief financial
officer, the vice president of finance, the treasurer, the controller,
or any equivalent officer (regardless of his or her title), of any
general partner. Unless otherwise specified, all references to a
Responsible Officer herein means a Responsible Officer of the Company.
"Required Lenders" means at any time (i) Lenders holding at
least 75% of the sum of the then unpaid principal amount of the Loans
at such time or (ii) if no Loans are outstanding, Lenders holding at
least 75% of the Commitments in effect at such time.
"Scheduled Redetermination Date" has the meaning assigned such
term in Section 2.20(d).
"Security Instruments" means the agreements or instruments
described or referred to in Sections 3.02(d)(i) through (iii) and any
and all other agreements or instruments now or hereafter executed and
delivered by Parent, the Company, any Subsidiary of the Company or any
other Person as security for the payment or performance of the Lender
Indebtedness.
"Standby Letter of Credit" means a letter of credit
denominated in Dollars (i) the terms of which are in the reasonable
judgment of the Issuing Bank for such Letter of Credit standard in the
petroleum industry, (ii) which is used in lieu or in support of
performance guarantees or performance, surety or other similar bonds
(but expressly excluding stay and appeal bonds) arising in the
ordinary course of business, (iii) which is used in lieu or in support
of stay or appeal bonds; provided all such letters of credit used in
lieu or in support of stay or appeal bonds shall not exceed
$10,000,000 in aggregate amount at any time outstanding, (iv) which
supports the payment of insurance premiums for reasonably necessary
casualty insurance carried by the
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<PAGE> 21
Company or any of its consolidated Subsidiaries, or (v) which supports
payment or performance for identified purchases or exchanges of crude
oil, condensate and/or petroleum products.
"Subsidiary" of any Person means (i) a corporation of which a
majority of the outstanding shares of stock of each class having
ordinary voting power is, or (ii) any partnership, association, joint
venture, trust or other entity of which a majority of the equity is,
in the case of either clause (i) or (ii), owned by such Person, by one
or more Subsidiaries of such Person, or by such Person and one or more
of its Subsidiaries.
"Taxes" has the meaning provided in Section 2.21(a).
"Transactions" means the transactions provided for in and
contemplated by this Agreement and the other Financing Documents.
"Type" of Loan means a Base Rate Loan or Eurodollar Loan.
Section 1.02 Accounting Terms and Determinations. Unless
otherwise defined or specified herein, all accounting terms shall be construed
herein, all accounting determinations hereunder shall be made, all financial
statements required to be delivered hereunder shall be prepared and all
financial records shall be maintained in accordance with GAAP applied on a
basis consistent with the Financial Statements.
Section 1.03 Other Definitional Terms. The words "hereof,"
"herein" and "hereunder" and words of similar import when used in this
Agreement shall refer to this Agreement as a whole and not to any particular
provision of this Agreement, and article, section, schedule, exhibit and like
references are to this Agreement unless otherwise specified.
ARTICLE II
AMOUNT AND TERMS OF LOANS
Section 2.01 Commitments.
(a) Loans. Subject to the terms and conditions and
relying on the representations and warranties contained herein, each
Lender severally agrees, on any Business Day, to make Loans (each a
"Loan") to the Company during the period from and including (i) the
Closing Date or (ii) such later date that such Lender becomes a party
to this Agreement as provided in Section 8.07(b), to and up to, but
excluding, the Maturity Date in an aggregate principal amount at any
one time outstanding up to but not exceeding the amount of such
Lender's Commitment as then in effect; provided, however, that the
Aggregate Credit Exposure at any one time outstanding shall not exceed
the Maximum Available Amount in effect at such time; and, provided,
further, the aggregate principal amount of all Loans at any one time
outstanding shall not exceed the Maximum Loan Available Amount in
effect at such time. There may be more than one Borrowing with
respect to Loans on any Business Day. Within the foregoing limits and
subject to the conditions set out in Article III, the Company may
obtain Borrowings of Loans, repay or prepay such Loans, and reborrow
such Loans. Any portion of each Lender's Commitment not utilized on
or before the Maturity Date shall be permanently cancelled.
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(b) Types of Loans. The Loans made pursuant hereto by
each Lender shall, at the option of the Company, be either Base Rate
Loans or Eurodollar Loans and may be continued or converted pursuant
to Section 2.11, provided that, except as otherwise specifically
provided herein, all Loans made pursuant to the same Borrowing shall
be of the same Type.
(c) Commitments. Each Lender's Credit Exposure shall not
exceed at any one time the amount set forth opposite such Lender's
name on Annex I under the caption "Commitment" (as the same may be
reduced pursuant to Section 2.09 or otherwise from time to time
modified pursuant to Section 8.07(b), its "Commitment," and
collectively for all Lenders, the "Commitments").
(d) Amounts of Borrowings, etc. The aggregate principal
amount of each Borrowing (i) of Eurodollar Loans shall be not less
than $3,000,000 and shall be in an integral multiple of $1,000,000,
and (ii) of Base Rate Loans shall be not less than $1,000,000 and
shall be in an integral multiple of $100,000, except that any
Borrowing of Loans that are Base Rate Loans may be in the aggregate
amount of the unused Maximum Loan Available Amount in effect at such
time. Borrowings of more than one Type may be outstanding at the same
time; provided, however, that the Company shall not be entitled to
request any Borrowing that, if made, would result in an aggregate of
more than five separate Borrowings of Eurodollar Loans being
outstanding at any one time. For purposes of the foregoing,
Borrowings having different Interest Periods, regardless of whether
they commence on the same date, shall be considered separate
Borrowings.
Section 2.02 Borrowing Requests.
(a) Borrowing Requests. Whenever the Company desires to
make a Borrowing hereunder, it shall give Advance Notice in the form
of a Borrowing Request, specifying, subject to the provisions hereof,
(i) the aggregate principal amount of the Loans to be made pursuant to
such Borrowing, (ii) the date of Borrowing (which shall be a Business
Day), (iii) whether the Loans being made pursuant to such Borrowing
are to be Base Rate Loans or Eurodollar Loans, and (iv) in the case of
Eurodollar Loans, the Interest Period to be applicable thereto.
(b) Notice by Administrative Agent. The Administrative
Agent shall promptly give each Lender telecopy or telephonic notice
(and, in the case of telephonic notices, confirmed by telecopy or
otherwise in writing) of the proposed Borrowing, of such Lender's
Percentage Share thereof and of the other matters covered by the
Advance Notice. Without in any way limiting the Company's obligation
to confirm in writing any telephonic notice, the Administrative Agent
may act without liability upon the basis of telephonic notice believed
by the Administrative Agent in good faith to be from the Company prior
to receipt of written confirmation. In each such case, the Company
hereby waives the right to dispute the Administrative Agent's record
of the terms of such telephonic notice, absent manifest error.
Section 2.03 Letters of Credit.
(a) Issuance of Letters of Credit. Subject to the terms
and conditions hereof, the Issuing Bank agrees to issue and the
Company shall have the right, in addition to Loans provided for in
Section 2.01, to utilize the Commitments from time to time prior to
the Maturity Date by
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obtaining the issuance of Standby Letters of Credit for the account of
any Loan Party by the Issuing Bank if the Company shall so request in
the notice referred to in Section 2.03(b)(i) (such letters of credit
being collectively referred to as the "Letters of Credit"); provided,
however, that the aggregate amount of all Letters of Credit at any one
time outstanding shall not exceed the lesser of (A) $15,000,000, or
(B) the Maximum Available Amount in effect at such time, minus the
aggregate principal amount of all Loans then outstanding. The Letters
of Credit shall be denominated in Dollars and may be issued to support
the obligations of the Company or any of its Subsidiaries. Upon the
date of the issuance of a Letter of Credit, the Issuing Bank shall be
deemed, without further action by any party hereto, to have sold to
each Lender, and each Lender shall be deemed, without further action
by any party hereto, to have purchased from the Issuing Bank, a
participation, to the extent of such Lender's Percentage Share, in
such Letter of Credit and the related LC Liabilities. No Letter of
Credit issued pursuant to this Agreement shall have an expiry date
later than one year from its date of issuance; provided, however, any
Letter of Credit may give the beneficiary thereof either the right to
draw on such Letter of Credit upon its expiry date or the right to
automatically extend the expiry date thereof for periods of up to one
year per extension; provided, further, however, no Letter of Credit
issued pursuant to this Agreement shall ever have an expiry date
beyond the Maturity Date and no such extension shall extend an expiry
date beyond the Maturity Date. The Company and the Lenders agree
that, as of the Effective Date, the Outstanding Letters of Credit
shall be deemed for all purposes of this Agreement to be Letters of
Credit issued under and pursuant to the terms of this Agreement.
(b) Additional Letter of Credit Provisions. The
following additional provisions shall apply to each Letter of Credit:
(i) The Company shall give the Administrative Agent and the
Issuing Bank at least five Business Days' prior notice (effective upon
receipt), or in each case, such shorter period as may be agreed to by
the Administrative Agent and the Issuing Bank, specifying the date
such Letter of Credit is to be issued (which shall be a Business Day)
by the Issuing Bank and describing (A) the face amount of the Letter
of Credit, (B) the expiry date of the Letter of Credit, (C) the name
and address of the beneficiary, (D) information concerning the
transaction proposed to be supported by such Letter of Credit as the
Administrative Agent or the Issuing Bank may reasonably request, (E)
such other information and documents relating to the Letter of Credit
as the Administrative Agent or the Issuing Bank may reasonably
request, and (F) a precise description of documents and the verbatim
text of any certificate to be presented by the beneficiary, which, if
presented on or prior to the expiry date of the Letter of Credit,
would require the Issuing Bank to make payment under the Letter of
Credit; provided that the Issuing Bank, in its reasonable judgment,
may require changes in such documents and certificates; and provided
further that the Issuing Bank shall not be required to issue any
Letter of Credit that on its terms requires payment thereunder prior
to the next Business Day following receipt by the Issuing Bank of such
documents and certificates. Each such notice shall be accompanied by
the Issuing Bank's Application (which shall be deemed to be subject to
the last sentence of clause (v) below, whether or not expressly stated
in such Application) and by a certificate executed by a Responsible
Officer setting forth calculations evidencing availability for such
Letter of Credit pursuant to Section 2.03(b)(ii) and stating that all
conditions precedent to such issuance have been satisfied. Each
Letter of Credit shall, to the extent not inconsistent with the
express terms hereof or the applicable Application, be subject to the
Uniform Customs and Practice for Documentary Credits (1993 Revision),
International Chamber of Commerce Publication No. 500 (together with
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any subsequent revisions thereof approved by a Congress of the
International Chamber of Commerce and adhered to by the Issuing Bank,
the "UCP"), and shall, as to matters not governed by the UCP, be
governed by, and construed and interpreted in accordance with, the
laws of the State of New York.
(ii) No Letter of Credit may be issued if after giving effect
thereto the Aggregate Credit Exposure would exceed the Maximum
Available Amount. On each day during the period commencing with the
issuance of any Letter of Credit and until such Letter of Credit shall
have expired or have been terminated, the Commitment of each Lender
shall be deemed to be utilized for all purposes hereof in an amount
equal to such Lender's Percentage Share of the amount of the LC
Liabilities related to such Letter of Credit.
(iii) Upon receipt from the beneficiary of any Letter of
Credit of any demand (by draft or otherwise) for payment thereunder
(each such payment by the Issuing Bank is herein called a "drawing"),
the Issuing Bank shall promptly notify the Company and the
Administrative Agent of such demand (provided that the failure of the
Issuing Bank to give such notice shall not affect the Reimbursement
Obligations of the Company hereunder) and the Company shall
immediately, and in any event no later than 12:00 p.m. (New York time)
on the date of such drawing, reimburse the Administrative Agent for
the account of the Issuing Bank for the amount of such drawing,
without presentment, demand, protest or other formalities of any kind
in an amount, in same day funds, equal to the amount of such drawing.
Unless prior to 12:00 p.m. (New York time) on the date of such
drawing, the Company shall have either (i) notified the Issuing Bank
and the Administrative Agent that the Company will on such date and by
12:00 p.m. (New York time) reimburse the Administrative Agent for the
account of the Issuing Bank for the amount of such drawing with funds
other than the proceeds of a Loan (in which case the Company's
obligation to make such reimbursement by such date and time shall be
absolute and unconditional) or (ii) delivered to the Administrative
Agent a Borrowing Request for Loans (which shall be Base Rate Loans
unless there is sufficient Advance Notice to permit the Company to
elect Eurodollar Loans) in an amount equal to such drawing, the
Company will be deemed to have given a Borrowing Request to the
Administrative Agent requesting that the Lenders make Loans which
shall be Base Rate Loans on the date on which such drawing is honored
in an amount equal to the amount of such drawing. Such Loans shall be
subject to satisfaction of the conditions in Article III and to
existence of Maximum Loan Available Amount (after giving effect to the
reduction of the LC Liabilities by virtue of such Loan). Subject to
the preceding sentence, if so requested by the Administrative Agent,
the Lenders shall, on the date of such drawing, make such Loans in an
amount equal to such Lender's Percentage Share of such drawing, the
proceeds of which shall be applied directly by the Administrative
Agent to reimburse the Issuing Bank for the amount of such drawing.
(iv) If the Company fails to reimburse the Issuing Bank as
provided in clause (iii) above (because of the Company's inability to
receive Loans due to a failure to satisfy the conditions of Article
III or for any other reason), the Issuing Bank shall promptly notify
the Administrative Agent and the Administrative Agent shall notify
each Lender of the unreimbursed amount of such drawing and of such
Lender's respective participation therein based on such Lender's
Percentage Share. Each Lender will pay to the Administrative Agent
for the account of the Issuing Bank on the date of such notice an
amount equal to such Lender's Percentage Share of such unreimbursed
drawing on such date (or, if such notice is made after 12:00 p.m., New
York time, on the next
-19-
<PAGE> 25
succeeding Business Day). If any Lender fails to make available to
the Issuing Bank the amount of such Lender's participation in such
Letter of Credit as provided in this clause (iv), the Issuing Bank
shall be entitled to recover such amount on demand from such Lender
together with interest at the Federal Funds Rate for one Business Day
and thereafter at the Base Rate. Nothing in this clause (iv) shall be
deemed to prejudice the right of any Lender to recover from the
Issuing Bank any amounts made available by such Lender to the Issuing
Bank pursuant to this clause (iv) if it is determined by a court of
competent jurisdiction that the payment with respect to a Letter of
Credit by the Issuing Bank was wrongful and such wrongful payment was
the result of gross negligence or willful misconduct on the part of
the Issuing Bank. The Issuing Bank shall pay to the Administrative
Agent, whereupon the Administrative Agent shall forward to each Lender
such Lender's Percentage Share of all amounts received from the
Company for payment, in whole or in part, of the Reimbursement
Obligation in respect of any Letter of Credit, but only to the extent
such Lender has made payment to the Issuing Bank in respect of such
Letter of Credit pursuant to this clause (iv).
(v) The issuance by the Issuing Bank of each Letter of Credit
shall, in addition to the conditions precedent set forth in Article
III, be subject to the conditions precedent that such Letter of Credit
shall be in such form and contain such terms as shall be reasonably
satisfactory to the Issuing Bank, and that the Company shall have
executed and delivered such other instruments and agreements relating
to such Letter of Credit as the Issuing Bank shall have reasonably
requested and that are not inconsistent with the terms of this
Agreement including the Issuing Bank's Application therefor. In the
event of a conflict between the terms of this Agreement and the terms
of any Application, the terms of this Agreement shall control.
(vi) AS BETWEEN THE COMPANY AND THE ISSUING BANK, THE COMPANY
ASSUMES ALL RISKS OF THE ACTS AND OMISSIONS OF OR MISUSE OF THE
LETTERS OF CREDIT ISSUED BY THE ISSUING BANK BY THE RESPECTIVE
BENEFICIARIES OF SUCH LETTERS OF CREDIT. IN FURTHERANCE AND NOT IN
LIMITATION OF THE FOREGOING, THE ISSUING BANK SHALL NOT BE RESPONSIBLE
(EXCEPT TO THE EXTENT ARISING FROM THE ISSUING BANK'S GROSS NEGLIGENCE
OR WILLFUL MISCONDUCT): (A) FOR THE FORM, VALIDITY, SUFFICIENCY,
ACCURACY, GENUINENESS OR LEGAL EFFECT OF ANY DOCUMENT SUBMITTED BY ANY
PERSON IN CONNECTION WITH THE APPLICATION FOR OR ISSUANCE OF SUCH
LETTERS OF CREDIT, EVEN IF IT SHOULD IN FACT PROVE TO BE IN ANY OR ALL
RESPECTS INVALID, INSUFFICIENT, INACCURATE, FRAUDULENT OR FORGED;
PROVIDED, HOWEVER, ISSUING BANK SHALL REMAIN RESPONSIBLE AS AN ISSUER
OF A LETTER OF CREDIT FOR ASSURING THAT PAYMENT ON A LETTER OF CREDIT
IS MADE ONLY ON DOCUMENTS WHICH ON THEIR FACE COMPLY WITH THE
REQUIREMENTS OF THE LETTER OF CREDIT; (B) FOR THE VALIDITY OR
SUFFICIENCY OF ANY INSTRUMENT TRANSFERRING OR ASSIGNING OR PURPORTING
TO TRANSFER OR ASSIGN ANY SUCH LETTER OF CREDIT OR THE RIGHTS OR
BENEFITS THEREUNDER OR PROCEEDS THEREOF, IN WHOLE OR IN PART, WHICH
MAY PROVE TO BE INVALID OR INEFFECTIVE FOR ANY REASON; (C) FOR FAILURE
OF THE BENEFICIARY OF ANY SUCH LETTER OF CREDIT TO COMPLY FULLY WITH
CONDITIONS REQUIRED IN ORDER TO DRAW UPON SUCH LETTER OF CREDIT, TO
THE EXTENT SUCH FAILURE IS NOT THE RESULT OF GROSS NEGLIGENCE OR
WILLFUL MISCONDUCT OF THE ISSUING BANK; (D) FOR ERRORS, OMISSIONS,
INTERRUPTIONS OR DELAYS IN TRANSMISSION OR DELIVERY OF ANY MESSAGES,
BY MAIL, CABLE, TELEGRAPH, TELEX OR OTHERWISE, WHETHER OR NOT THEY ARE
IN CIPHER; (E) FOR ERRORS IN INTERPRETATION OF TECHNICAL TERMS; (F)
FOR ANY LOSS OR DELAY IN THE TRANSMISSION OR OTHERWISE
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<PAGE> 26
OF ANY DOCUMENT REQUIRED IN ORDER TO MAKE A DRAWING UNDER ANY SUCH
LETTER OF CREDIT OR OF THE PROCEEDS THEREOF; (G) FOR THE
MISAPPLICATION BY THE BENEFICIARY OF ANY SUCH LETTER OF CREDIT OF THE
PROCEEDS OF ANY DRAWING UNDER SUCH LETTER OF CREDIT; AND (H) FOR ANY
CONSEQUENCES ARISING FROM CAUSES BEYOND THE CONTROL OF THE ISSUING
BANK, INCLUDING, WITHOUT LIMITATION, THE ACTIONS OF ANY GOVERNMENTAL
AUTHORITY. NONE OF THE ABOVE SHALL AFFECT, IMPAIR, OR PREVENT THE
VESTING OF ANY OF THE ISSUING BANK'S RIGHTS OR POWERS HEREUNDER.
NOTWITHSTANDING ANYTHING TO THE CONTRARY CONTAINED IN THIS CLAUSE
(VI), THE COMPANY SHALL HAVE NO OBLIGATION TO INDEMNIFY THE ISSUING
BANK IN RESPECT OF ANY LIABILITY INCURRED BY THE ISSUING BANK TO THE
EXTENT ARISING OUT OF THE GROSS NEGLIGENCE OR WILLFUL MISCONDUCT OF
THE ISSUING BANK.
(vii) The Issuing Bank will send to the Company and the
Administrative Agent immediately upon issuance of any Letter of
Credit, or an amendment thereto, a true and complete copy of such
Letter of Credit, or such amendment thereto. Upon issuance of any
Letter of Credit or an amendment thereto, the Administrative Agent
shall promptly notify each Lender of the terms of such Letter of
Credit or amendment thereto, of the Issuing Bank for such Letter of
Credit or amendment thereto, and of such Lender's Percentage Share of
the amount of such Letter of Credit or amendment thereto, and the
Administrative Agent shall provide to each Lender a copy of such
Letter of Credit or such amendment thereto. Upon cancellation or
termination of any Letter of Credit, the Issuing Bank shall promptly
notify the Administrative Agent and the Company, and the
Administrative Agent will then promptly notify each Lender, of such
cancellation or termination.
(viii) The obligation of the Company to reimburse the Issuing
Bank for Reimbursement Obligations with regard to the Letters of
Credit issued by it and the obligations of Lenders under clause (iv)
shall be unconditional and irrevocable and shall be paid strictly in
accordance with the terms of this Agreement and under all
circumstances including, without limitation, the following
circumstances:
(A) any lack of validity or enforceability of
any Letter of Credit;
(B) the existence of any claim, set-off, defense
or other right that the Company may have at any time against a
beneficiary or any assignee or transferee of any Letter of
Credit (or any Persons for whom any such assignee or
transferee may be acting), any Lender or any other Person,
whether in connection with this Agreement, the transactions
contemplated herein or any unrelated transaction (including
any underlying transaction between the Company or one of its
Subsidiaries and the beneficiary for which the Letter of
Credit was procured) other than a defense based on the gross
negligence or willful misconduct of the Issuing Bank;
(C) any draft, demand, certificate or any other
document presented under any Letter of Credit is proved to be
forged, fraudulent, invalid or insufficient in any respect or
any statement therein is untrue or inaccurate in any respect;
(D) any adverse change in the condition
(financial or otherwise) of the Company;
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<PAGE> 27
(E) any breach of this Agreement or any other
Financing Document by the Company, Administrative Agent or any
Lender (other than the Issuing Bank);
(F) any other circumstance or happening
whatsoever which is similar to any of the foregoing; provided
that such other occurrence or happening is not the result of
the gross negligence or willful misconduct of the Issuing
Bank; or
(G) the fact that a Default shall have occurred
and be continuing.
(ix) Whenever Cover has been provided for any Letter of
Credit, the Administrative Agent shall continue to hold funds for such
Letter of Credit in its collateral account for so long as the event or
condition requiring such Cover continues, provided that (A) so long as
no Default has occurred which is continuing, the Administrative Agent
shall release to the Company all of such funds whenever such event or
condition ceases to exist or whenever such Letter of Credit has
expired or terminated and all Reimbursement Obligations, if any, with
respect thereto have been fully satisfied, and (B) so long as no
Default has occurred which is continuing, the Administrative Agent
shall release to the Company any excess funds if the LC Liabilities
with respect to such Letter of Credit decrease and the funds held in
such deposit account therefore exceed such LC Liabilities.
Section 2.04 Disbursement of Funds.
(a) Availability. No later than 12:00 p.m. (New York
time) on the date of each Borrowing, each Lender will make available
to the Administrative Agent such Lender's Percentage Share of the
amount (if any) by which the principal amount of the Borrowing
requested to be made on such date exceeds the principal amount of
Loans (if any) maturing or Reimbursement Obligations (if any) due and
owing on such date, in Dollars and in immediately available funds at
the Payment Office. The Administrative Agent will make available to
the Company at the Payment Office the aggregate of the amounts (if
any) so made available by the Lenders by depositing such amounts, in
immediately available funds, to an account of the Company at the
Administrative Agent designated by the Company for such purpose. To
the extent that Loans mature or Reimbursement Obligations are due and
owing on the date of a requested Borrowing of Loans, the Lenders shall
apply the proceeds of the Loans then being made, to the extent
thereof, to the repayment of such maturing Loans or Reimbursement
Obligations, such Loans and repayments intended to be a
contemporaneous exchange.
(b) Funds to the Administrative Agent. Unless the
Administrative Agent shall have been notified by any Lender prior to
the date of a Borrowing that such Lender does not intend to make
available to the Administrative Agent such Lender's Percentage Share
of the Borrowing to be made on such date, the Administrative Agent may
assume that such Lender has made such amount available to the
Administrative Agent on such date, and the Administrative Agent may
make available to the Company a corresponding amount. If such
corresponding amount is not in fact made available to the
Administrative Agent by such Lender on the date of a Borrowing, the
Administrative Agent shall be entitled to recover such corresponding
amount on demand from such Lender together with interest at the
Federal Funds Rate. If such Lender does not pay such corresponding
amount forthwith upon the Administrative Agent's demand therefor, the
Administrative Agent shall promptly notify the Company, and the
Company shall immediately
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<PAGE> 28
pay such corresponding amount to the Administrative Agent together
with interest at the rate specified for the Borrowing which includes
such amount paid. Nothing in this Section shall be deemed to relieve
any Lender from its obligation to fulfill its Commitment hereunder or
to prejudice any rights which the Company may have against any Lender
as a result of any default by such Lender hereunder.
(c) Lenders' Responsibilities. No Lender shall be
responsible for any default by any other Lender in its obligation to
make Loans hereunder, and each Lender shall be obligated to make the
Loans provided to be made by it hereunder, regardless of the failure
of any other Lender to fulfill its Commitment hereunder.
Section 2.05 Notes. The Company's obligation to pay the principal
of, and interest on, the Loans made by each Lender shall be further evidenced
by the Company's issuance, execution and delivery of a Note payable to the
order of each such Lender in the amount of such Lender's Commitment and shall
be dated as of the date of issuance of such Note. The principal amount of each
Note shall be payable on or before the Maturity Date. Each Lender's Note
represents, in part, a renewal, rearrangement and modification of the portion
of the outstanding principal balance owing under the Prior Notes assigned to
such Lender pursuant to the Assignment.
Section 2.06 Interest. In all cases subject to Section 8.13:
(a) Base Rate Loans. Subject to Section 2.06(c), the
Company agrees to pay interest in respect of the unpaid principal
amount of each Base Rate Loan from the date thereof until payment in
full thereof at a rate per annum which shall be, for any day, equal to
the sum of the Applicable Margin plus the Base Rate in effect on such
day, but in no event to exceed the Highest Lawful Rate. The term
"Base Rate" means the higher of (i) the Prime Rate in effect on such
day or (ii) one-half of one percent ( 1/2%) plus the Federal Funds
Rate in effect for such day (rounded upwards, if necessary, to the
nearest 1/16th of 1%), but in no event to exceed the Highest Lawful
Rate. For purposes of this Agreement, any change in the Base Rate due
to a change in the Federal Funds Rate or the Prime Rate shall be
effective on the effective date of such change in the Federal Funds
Rate or the Prime Rate, as the case may be. If for any reason the
Administrative Agent shall have determined (which determination shall
be conclusive and binding, absent manifest error) that it is unable to
ascertain the Federal Funds Rate for any reason, including but not
limited to the inability of the Administrative Agent to obtain
sufficient bids or publications in accordance with the terms hereof,
the Base Rate shall be the Prime Rate until the circumstances giving
rise to such inability no longer exist.
(b) Eurodollar Loans. Subject to Section 2.06(c), the
Company agrees to pay interest in respect of the unpaid principal
amount of each Eurodollar Loan from the date thereof until payment in
full thereof at a rate per annum which shall be the sum of the
Applicable Margin plus the relevant Eurodollar Rate, but in no event
to exceed the Highest Lawful Rate.
(c) Default Interest. Overdue principal and, to the
extent permitted by law, overdue interest in respect of each Loan and
all other amounts owing hereunder shall bear interest for each day
that such amounts are overdue at a rate per annum equal to two percent
(2%) in excess of the Eurodollar Rate plus the Applicable Margin or
the Base Rate, as applicable to such Loan, in effect for each such
day, and all other amounts owing hereunder shall bear interest for
each
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<PAGE> 29
day that such amounts are overdue at a rate per annum equal to two
percent (2%) in excess of the Base Rate, but in no event shall any
such rate exceed the Highest Lawful Rate.
(d) Interest Payment Dates. Interest on each Loan shall
accrue from and including the date of such Loan to but excluding the
date of payment in full thereof. Interest on each Eurodollar Loan
shall be payable on the last day of each Interest Period applicable
thereto and, in the case of an Interest Period in excess of three
months, on each day which occurs every three months after the initial
date of such Interest Period, and on any prepayment (on the amount
prepaid), at maturity (whether by acceleration or otherwise) and,
after maturity, on demand. Interest on Base Rate Loans shall be
payable on each Quarterly Date, commencing on the first of such days
to occur after such Loan is made, at maturity (whether by acceleration
or otherwise) and, after maturity, on demand.
(e) Notice by the Administrative Agent. The
Administrative Agent, upon determining the Eurodollar Rate for any
Interest Period, shall promptly notify by telephone (confirmed in
writing) or in writing the Company and the Lenders thereof.
Section 2.07 Interest Periods. In connection with each Borrowing
of Eurodollar Loans, the Company shall elect an Interest Period to be
applicable to such Borrowing, which Interest Period shall begin on and include,
as the case may be, the date selected by the Company as of the date of the
Borrowing pursuant to Section 2.02(a), or at conversion from one Type of Loan
to another pursuant to Section 2.11(e), or the date of expiration of the then
current Interest Period applicable thereto, and end on but exclude the date
which is either one, two, three, six or 12 months thereafter, as selected by
the Company; provided that:
(a) Business Days. If any Interest Period would
otherwise expire on a day which is not a Business Day, such Interest
Period shall expire on the next succeeding Business Day, provided,
further, that if any Interest Period (other than in respect of a
Borrowing of Eurodollar Loans the Interest Period of which is expiring
pursuant to Section 2.15(b) hereof) would otherwise expire on a day
which is not a Business Day but is a day of the month after which no
further Business Day occurs in such month, such Interest Period shall
expire on the next preceding Business Day;
(b) Month End. Any Interest Period which begins on the
last Business Day of a calendar month (or on a day for which there is
no numerically corresponding day in the calendar month at the end of
such Interest Period) shall, subject to Section 2.07(c) below, end on
the last Business Day of a calendar month;
(c) Payment Limitations. No Interest Period shall extend
beyond any date that any principal payment or prepayment is scheduled
to be due unless the aggregate principal amount of Borrowings which
are Borrowings of Base Rate Loans or which have Interest Periods which
will expire on or before such date, less the aggregate amount of any
other principal payments or prepayments due during such Interest
Period, is equal to or in excess of the amount of such principal
payment or prepayment; and
(d) Maturity Dates. No Interest Period with regard to
Loans shall extend beyond the Maturity Date.
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<PAGE> 30
Section 2.08 Repayment of Loans. The Company will pay to the
Administrative Agent for account of each Lender the outstanding principal
amount of each Loan made by such Lender on or before the Maturity Date.
Section 2.09 Termination or Reduction of Commitments. The Company
may, upon at least 10 Business Days' notice to the Administrative Agent,
terminate entirely at any time the unused portions of the Commitments, or
proportionately reduce from time to time by an aggregate amount of $1,000,000
or any larger multiple thereof, the unused portions of the Commitments,
provided that any such reduction shall apply proportionately to the Commitment
of each Lender. If the Commitments are terminated in their entirety, all
accrued commitment fees with respect thereto shall be payable on the effective
date of such termination. The unused portions of the Commitments once
terminated or reduced may not be reinstated.
Section 2.10 Prepayments.
(a) Mandatory Borrowing Base Prepayments. If, after
giving effect to any reduction of the Maximum Loan Available Amount as
a result of a redetermination or reduction of the Borrowing Base as
provided in Section 2.20, the Aggregate Credit Exposure exceeds the
amount of such redetermined Borrowing Base, the Company shall:
(A) within 90 days of the Company's receipt of
written notice from the Administrative Agent, either (i)
provide additional collateral pursuant to Section 2.24 as
security for the Lender Indebtedness, or (ii) pay or prepay
the Loans or provide Cover for LC Liabilities, or a
combination thereof, in an amount equal to at least 50% of
such excess; and
(B) within 180 days of the Company's receipt of
the written notice referred to in Clause (A) of this Section
2.10(a), either (i) provide additional collateral pursuant to
Section 2.24 as security for the Lender Indebtedness, or (ii)
pay or prepay the Loans or provide cover for LC Liabilities,
or a combination thereof, in an amount equal to the remainder
of such excess.
All prepayments pursuant to this Section 2.10(a) shall be applied
first to Base Rate Loans and second to such Eurodollar Loans as the
Company may designate.
(b) Voluntary Prepayments. The Company may, at its
option, at any time and from time to time, prepay Loans, in whole or
in part, without premium or penalty (other than funding losses, if
any, resulting from such prepayment being made other than on the last
day of an Interest Period with respect to any Eurodollar Loan as
provided in Section 2.18), upon giving, in the case of a Eurodollar
Loan, three Business Days' prior written notice to the Administrative
Agent, and, in the case of a Base Rate Loan, one Business Day's prior
written notice to the Administrative Agent. Such notice shall be
irrevocable and specify the date and amount of prepayment and the Loan
or Loans (including the Type thereof) to which such prepayment is to
be applicable. The payment amount specified in such notice shall be
due and payable on the date specified. Each prepayment of Loans shall
be in the minimum principal amount of $1,000,000 or any larger
multiple thereof or the aggregate balance outstanding on the
applicable Notes. Each prepayment made pursuant to this Section shall
be accompanied by any funding losses resulting
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<PAGE> 31
from such prepayment being made other than on the last day of an
Interest Period with respect to any Eurodollar Loan as provided in
Section 2.18. Each prepayment shall be applied ratably to prepay the
Loans of the several Lenders.
(c) Notice by Administrative Agent. Upon receipt of a
notice of prepayment pursuant to this Section, the Administrative
Agent shall promptly notify each Lender of the contents thereof and of
such Lender's ratable share of such prepayment.
Section 2.11 Continuation and Conversion Options.
(a) Continuation. The Company may elect to continue all
or any part of any Borrowing of Eurodollar Loans beyond the expiration
of the then current Interest Period relating thereto by giving Advance
Notice to the Administrative Agent of such election, specifying the
Eurodollar Loan or portion thereof to be continued and the Interest
Period therefor. In the absence of such a timely and proper election
with regard to Eurodollar Loans, the Company shall be deemed to have
elected to convert such Eurodollar Loan to a Base Rate Loan pursuant
to Section 2.11(d).
(b) Amounts of Continuations. All or part of any
Eurodollar Loan may be continued as provided herein, provided that any
continuation of such Loan shall not be (as to each Loan as continued
for an applicable Interest Period) less than $3,000,000.
(c) Continuation or Conversion Upon Default. If no
Default shall have occurred and be continuing, each Eurodollar Loan
may be continued or converted as provided in this Section. If a
Default shall have occurred and be continuing, the Company shall not
have the option to elect to continue any such Eurodollar Loan pursuant
to Section 2.11(a) or to convert Base Rate Loans pursuant to Section
2.11(e).
(d) Conversion to Base Rate. The Company may elect to
convert any Eurodollar Loan on the last day of the then current
Interest Period relating thereto to a Base Rate Loan by giving Advance
Notice to the Administrative Agent of such election.
(e) Conversion to Eurodollar Rate. The Company may elect
to convert any Base Rate Loan at any time or from time to time to a
Eurodollar Loan by giving Advance Notice to the Administrative Agent
of such election, specifying each Interest Period therefor.
(f) Amounts of Conversions. All or any part of the
outstanding Loans may be converted as provided herein, provided that
any conversion of such Loans shall not result in a Borrowing of
Eurodollar Loans in an amount less than $3,000,000 and in integral
multiples of $1,000,000.
Section 2.12 Fees.
(a) Commitments. The Company shall pay Administrative
Agent for the account of and distribution to each Lender in accordance
with its Percentage Share the following commitment fees:
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<PAGE> 32
(i) A commitment fee, which commitment fee shall
accrue for the period commencing on the Closing Date to and
including the Maturity Date (or such earlier date as the
Commitments shall have been terminated entirely). The
commitment fee payable pursuant to this Section 2.12(a) shall
be the product of the applicable Commitment Fee Rate from the
table below and the average daily excess amount of the
Designated Borrowing Base over the Aggregate Credit Exposure.
Such commitment fees shall be payable in arrears on the
Quarterly Dates, commencing on the first Quarterly Date to
occur after the Closing Date. The rates set forth in the
table below are based upon the Company's Maximum Available
Amount Utilization Percentage as of any day, where the term
"Maximum Available Amount Utilization Percentage" means as of
any day, the fraction, expressed as a percentage, the
numerator of which is the Aggregate Credit Exposure on such
day, and the denominator of which is the Borrowing Base in
effect on such day:
<TABLE>
<CAPTION>
Maximum Available Amount Commitment Fee
Utilization Percentage Rate
------------------------ ---------------
<S> <C>
Greater than 66% 0.375%
Less than or equal to
66% but greater than 33% 0.325%
Less than or equal to
33% but greater than 0% 0.300%
</TABLE>
(ii) An unavailable commitment fee on the daily
average difference between the Designated Borrowing Base and
the lesser of (A) the Commitments or (B) the Borrowing Base
for the period from and including the last Borrowing Base
determination date to the earlier of the date the Commitments
are terminated or the date of the next Borrowing Base
determination at a rate per annum equal to 50% of the
applicable rate per annum outlined in clause (i) above.
(iii) If the Designated Borrowing Base is increased
pursuant to the proviso of Section 2.20(e), an additional
commitment fee for the period beginning on the most recent
regularly scheduled Borrowing Base determination date
(pursuant to Section 2.20) to the date on which the Designated
Borrowing Base is so increased at the applicable rate per
annum set forth in clause (i) above; provided, however, in
cases under this clause (iii), the Company shall receive
credit for applicable amounts already paid pursuant to clause
(ii) above.
(b) Letters of Credit. As consideration for the issuance
of any Letter of Credit, the Company will pay to the Issuing Bank a
fee on the daily average amount available for drawings under each
Letter of Credit, in each case for the period from and including the
date of issuance of such Letter of Credit to and excluding the date of
expiration or termination thereof. The letter of credit fee payable
pursuant to this Section 2.12(b) shall be the product of the
applicable Letter of Credit Fee Rate from the table below and the
average daily amount available for drawings under each Letter of
Credit, provided that each Letter of Credit shall bear a minimum fee
of
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<PAGE> 33
$400. Such letter of credit fees shall be payable in arrears on each
Quarterly Date. The rates set forth in the table below are based upon
the Company's Maximum Available Amount Utilization Percentage as of
any day, where the term "Maximum Available Amount Utilization
Percentage" means as of any day, the fraction, expressed as a
percentage, the numerator of which is the Aggregate Credit Exposure on
such day, and the denominator of which is the Borrowing Base in effect
on such day:
<TABLE>
<CAPTION>
Maximum Available Amount Letter of Credit Fee
Utilization Percentage Rate
------------------------ ---------------------
<S> <C>
Greater than 66% 1.50%
Less than or equal to
66% but greater than 33% 1.25%
Less than or equal to
33% but greater than 0% 1.00%
</TABLE>
In addition to the fees set forth above for the benefit of the
Lenders, the Company shall pay to the Issuing Bank for its own account
(i) a fronting fee in an amount equal to 1/8 of 1% per annum of the
face amount of the Letters of Credit outstanding as consideration for
capital costs incurred for retaining the full amount of each Letter of
Credit issued hereunder on its books, and (ii) with respect to any
amendment or transfer of any Letter of Credit and for each drawing
made thereunder, documentary and processing charges in accordance with
the Issuing Bank's standard schedule for such charges as disclosed to
the Company in a letter of even date herewith, as the case may be.
Such fees shall be due and payable in arrears on each Quarterly Date.
(c) Incremental Borrowing Base Increase. The Company
shall pay Administrative Agent for the account of and distribution to
each Lender in accordance with its Percentage Share a redetermination
fee in an amount equal to 0.100% of each incremental increase in the
Borrowing Base (resulting from a redetermination of the Borrowing Base
pursuant to Section 2.20); provided, however, such redetermination fee
shall be payable only on that portion of such redetermined Borrowing
Base which exceeds the highest previous Borrowing Base of $165,000,000
or more.
Section 2.13 Payments, etc.
(a) Without Setoff, etc. Except as otherwise
specifically provided herein, all payments under this Agreement shall
be made to the Administrative Agent on behalf of the Lenders without
defense, set-off or counterclaim to the Administrative Agent not later
than 12:00 noon (New York time) on the date when due and shall be made
in Dollars in immediately available funds at the Payment Office. The
Administrative Agent will promptly thereafter distribute funds in the
form received relating to the payment of principal or interest or
commitment fees ratably to the Lenders for the account of their
respective Lending Offices, and funds in the form received relating to
the payment of any other amount payable to any Lender to such Lender
for the account of its Lending Office.
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(b) Non-Business Days. Whenever any payment to be made
hereunder or under any Note shall be stated to be due on a day which
is not a Business Day, the due date thereof shall be extended to the
next succeeding Business Day (except as otherwise provided in Section
2.07) and, with respect to payments of principal, interest thereon
shall be payable at the applicable rate during such extension.
(c) Computations. All computations of interest shall be
made on the basis of a year of 360 days (unless such calculation would
result in a usurious rate, in which case interest shall be calculated
on the basis of a year of 365 or 366 days, as the case may be) in the
case of Base Rate Loans when determined by Section 2.06(a)(ii) and in
the case of Eurodollar Loans, and 365 or 366 days (as the case may be)
in the case of Base Rate Loans when determined by Section 2.06(a)(i),
and all computations of fees shall be made on the basis of a year of
360 days (unless such calculation would result in a usurious rate, in
which case interest shall be calculated on the basis of a year of 365
or 366 days, as the case may be), in each case for the actual number
of days (including the first day but excluding the last day) occurring
in the period for which such interest or fees are payable. Each
determination by the Administrative Agent of an interest rate or fee
hereunder shall, except for manifest error, be final, conclusive and
binding for all purposes, provided that such determination shall be
made in good faith in a manner generally consistent with the
Administrative Agent's standard practice. If the Administrative Agent
and the Company determine that manifest error exists, such parties
shall correct such error by way of an adjustment to the payment due on
the next Quarterly Date.
Section 2.14 Interest Rate Not Ascertainable, etc. In the event
that the Administrative Agent shall have determined (which determination shall
be reasonably exercised and shall, absent manifest error, be final, conclusive
and binding upon all parties) that on any date for determining the Eurodollar
Rate for any Interest Period, by reason of any changes arising after the date
of this Agreement affecting the interbank Eurodollar market, or any Lender's
position in such market, adequate and fair means do not exist for ascertaining
the applicable interest rate on the basis provided for in the definition of
Eurodollar Rate, then, and in any such event, the Administrative Agent shall
forthwith give notice (by telephone confirmed in writing) to the Company and to
the Lenders of such determination. Until the Administrative Agent notifies the
Company that the circumstances giving rise to the suspension described herein
no longer exist, the obligations of the Lenders to make Eurodollar Loans shall
be immediately suspended; any Eurodollar Loan that is requested (by
continuation, conversion or otherwise) shall instead be made as a Base Rate
Loan, and any outstanding Eurodollar Loan shall be converted, on the last day
of the then current Interest Period applicable thereto, to a Base Rate Loan.
Section 2.15 Illegality.
(a) Determinations of Illegality. In the event that any
Lender shall have determined (which determination shall be reasonably
exercised and shall, absent manifest error, be final, conclusive and
binding upon all parties) at any time that the making or continuance
of any Eurodollar Loan has become unlawful by compliance by such
Lender in good faith with any applicable law, governmental rule,
regulation, guideline or order (whether or not having the force of law
and whether or not failure to comply therewith would be unlawful),
then, in any such event, the Lender shall give prompt notice (by
telephone confirmed in writing) to the Administrative Agent of such
determination (which notice the Administrative Agent shall promptly
transmit to the Company and the other Lenders).
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(b) Eurodollar Loans Suspended. Upon the giving of the
notice to the Company referred to in Section (a) above, (i) the
Company's right to request (by continuation, conversion or otherwise)
and such Lender's obligation to make Eurodollar Loans shall be
immediately suspended, and any such requested Eurodollar Loan shall
instead be made as a Base Rate Loan, and (ii) if the affected
Eurodollar Loan or Loans are then outstanding, the Company shall
immediately, or if permitted by applicable law, no later than the date
permitted thereby, upon at least one Business Day's written notice to
the Administrative Agent and the affected Lender, convert each such
Eurodollar Loan into a Base Rate Loan, provided that if more than one
Lender is affected at any time, then all affected Lenders must be
treated the same pursuant to this Section.
Section 2.16 Increased Costs.
(a) Eurodollar Regulations, etc. If, by reason of (x)
after the date hereof, the introduction of or any change (including,
but not limited to, any change by way of imposition or increase of
reserve requirements) in or in the interpretation of any law or
regulation, or (y) the compliance with any guideline or request made
after the date hereof by any central bank or other governmental
authority or quasi-governmental authority exercising control over
banks or financial institutions generally (whether or not having the
force of law):
(i) any Lender (or its applicable Lending Office)
shall be subject to any tax, duty or other charge with respect
to its Eurodollar Loans or its obligation to make Eurodollar
Loans, or shall change the basis of taxation of payments to
any Lender of the principal of or interest on its Eurodollar
Loans or its obligation to make Eurodollar Loans (except for
changes in the rate of tax on the overall net income or gross
receipts of such Lender or its applicable Lending Office
imposed by the jurisdiction in which such Lender's principal
executive office or applicable Lending Office is located); or
(ii) any reserve (including, but not limited to,
any imposed by the Board of Governors of the Federal Reserve
System), special deposit or similar requirement against assets
of, deposits with or for the account of, or credit extended
by, any Lender's applicable Lending Office shall be imposed or
deemed applicable or any other condition affecting its
Eurodollar Loans or its obligations to make Eurodollar Loans
shall be imposed on any Lender or its applicable Lending
Office or the interbank Eurodollar market or the secondary
certificate of deposit market;
and as a result thereof there shall be any increase in the cost to
such Lender of agreeing to make or making, funding or maintaining
Eurodollar Loans (except to the extent already included in the
determination of the applicable Eurodollar Rate) or there shall be a
reduction in the amount received or receivable by such Lender or its
applicable Lending Office, then the Company shall from time to time,
upon written notice from and demand by such Lender (with a copy of
such notice and demand to the Administrative Agent), pay to such
Lender, within 30 days after the date specified in such notice and
demand, additional amounts determined by such Lender in a reasonable
manner to be sufficient to indemnify such Lender against such
increased cost. A certificate as to the amount of such increased cost
and the calculation thereof, submitted to the Company and the
Administrative Agent by such Lender, shall, except for manifest error,
be final,
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conclusive and binding for all purposes, provided that the
determination of such amount shall be made in good faith in a manner
generally consistent with such Lender's standard practice.
(b) Costs. If any Lender shall advise the Administrative
Agent that at any time, because of the circumstances described in
clauses (x) or (y) in Section 2.16(a) or any other circumstances
arising after the Effective Date affecting such Lender or the
interbank Eurodollar market or such Lender's position in such market,
the Eurodollar Rate, as determined in good faith by the Administrative
Agent, will not adequately and fairly reflect the cost to such Lender
of funding its Eurodollar Loans, then, and in any such event:
(i) the Administrative Agent shall forthwith give
notice (by telephone confirmed in writing) to the Company and
to the Lenders of such advice; and
(ii) the Company's right to request and such
Lender's obligation to make Eurodollar Loans shall be
immediately suspended, any such Eurodollar Loan that is
requested (by continuation, conversion or otherwise) shall
instead be made as a Base Rate Loan, and any such outstanding
Eurodollar Loan shall be converted, on the last day of the
then current Interest Period applicable thereto, to a Base
Rate Loan.
(c) Capital Adequacy. If, by reason of (i) after the
date hereof, the introduction of or any change (including, but not
limited to, any change by way of imposition or increase of reserve
requirements) in or in the interpretation of any law or regulation, or
(ii) the compliance with any guideline or request made after the date
hereof by any central bank or other governmental authority or
quasi-governmental authority exercising control over banks or
financial institutions generally (whether or not having the force of
law) affects or would affect the amount of capital required to be
maintained by any Lender or any corporation controlling such Lender,
and the amount of such capital is increased by or based upon the
existence of such Lender's Commitment to lend hereunder and other
commitments of this type or of the Letters of Credit (or similar
contingent obligations), then, within 30 days after written request
therefor by such Lender (with a copy of such request to the
Administrative Agent), the Company shall pay to such Lender, from time
to time as specified by such Lender, additional amounts sufficient to
compensate such Lender for the increased cost of such additional
capital in light of such circumstances, to the extent that such Lender
reasonably determines such increase in capital to be allocable to the
existence of such Lender's Commitment to lend hereunder or to the
issuance or maintenance of the Letters of Credit. A certificate as to
such amounts and the calculation thereof, submitted to the Company and
the Administrative Agent by such Lender, shall be conclusive and
binding for all purposes, absent manifest error, provided that the
determination of such amount shall be made in good faith in a manner
generally consistent with such Lender's standard practice.
(d) Issuing Bank. The rights and benefits of the Lenders
under this Section 2.16 shall also apply to the Issuing Bank in its
capacity as such.
(e) Notice. The Company shall not be obligated to
compensate any Lender pursuant to this Section 2.16 for any amounts
attributable to a period more than 90 days prior to the giving of
notice by such Lender to the Company of its intention to seek
compensation under this Section 2.16.
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Section 2.17 Change of Lending Office. Each Lender agrees that it
will use reasonable efforts to designate an alternate Lending Office with
respect to any of its Eurodollar Loans affected by the matters or circumstances
described in Sections 2.14, 2.15 or 2.16 to reduce the liability of the Company
or avoid the results provided thereunder, so long as such designation is not
disadvantageous to such Lender as determined by such Lender in its sole
discretion.
Section 2.18 Funding Losses. The Company shall compensate each
Lender, upon its written request (which request shall set forth the basis for
requesting such amounts and which request shall be reasonably exercised and
shall, absent manifest error, be final, conclusive and binding upon all of the
parties hereto), for all losses, expenses and liabilities (including, but not
limited to, any interest paid by such Lender to lenders of funds borrowed by it
to make or carry its Eurodollar Loans to the extent not recovered by the Lender
in connection with the re-employment of such funds and including loss of
anticipated profits), which the Lender may sustain (i) if for any reason (other
than a default by such Lender) a Borrowing of Eurodollar Loans does not occur
on the date specified therefor in a Borrowing Request (whether or not
withdrawn), (ii) if any repayment (or conversion pursuant to Section 2.15 or
otherwise) of any of its Eurodollar Loans occurs on a date which is not the
last day of an Interest Period applicable thereto, or (iii) if, for any reason,
the Company defaults in its obligation to repay its Eurodollar Loans when
required by the terms of this Agreement.
Section 2.19 Sharing of Payments, etc. If any Lender shall obtain
any payment or reduction (including, but not limited to, any amounts received
as adequate protection of a deposit treated as cash collateral under the
Bankruptcy Code) of any obligation of the Company hereunder (whether voluntary,
involuntary, through the exercise of any right of set-off, or otherwise) in
excess of its ratable share of payments or reductions on account of such
obligations obtained by all the Lenders, such Lender shall forthwith (i) notify
each of the other Lenders and the Administrative Agent of such receipt, and
(ii) purchase from the other Lenders such participations in the affected
obligations as shall be necessary to cause such purchasing Lender to share the
excess payment or reduction, net of costs incurred in connection therewith,
ratably with each of them, provided that if all or any portion of such excess
payment or reduction is thereafter recovered from such purchasing Lender or
additional costs are incurred, the purchase shall be rescinded and the purchase
price restored to the extent of such recovery or such additional costs, but
without interest. The Company agrees that any Lender so purchasing a
participation from another Lender pursuant to this Section may, to the fullest
extent permitted by law, exercise all its rights of payment (including the
right of set-off) with respect to such participation as fully as if such Lender
were the direct creditor of the Company in the amount of such participation.
Section 2.20 Borrowing Base.
(a) Redetermination Date; Initial Borrowing Base. The
Borrowing Base shall be determined in accordance with Section 2.20(b)
by the Determining Lenders and is subject to redetermination in
accordance with Section 2.20(d). Upon any redetermination of the
Borrowing Base, such redetermination shall remain in effect until the
next successive Redetermination Date. "Redetermination Date" means
the date that the redetermined Borrowing Base becomes effective
subject to the notice requirements specified in Section 2.20(f) both
for scheduled redeterminations and unscheduled redeterminations. The
amount of the initial Borrowing Base during the period from and after
the Closing Date until the first scheduled redetermination of the
Borrowing Base, shall be $165,000,000.
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(b) Redetermination. Upon receipt of the Reserve Report
by the Determining Lenders, the Determining Lenders will redetermine
the Borrowing Base. Such redetermination by the Determining Lenders
will be in accordance with its normal and customary procedures for
evaluating oil and gas reserves and other related assets as such exist
at that particular time and will otherwise be in their sole
discretion. The Determining Lenders shall propose such redetermined
Borrowing Base to the Lenders within 30 days following receipt by the
Determining Lenders and the Lenders of the complete Reserve Report.
After having received notice of such proposal by the Determining
Lenders, the Required Lenders shall have 15 days to agree or disagree
with such proposal. If at the end of the 15 days, the Required
Lenders have not communicated their approval or disapproval, such
silence shall be deemed to be an approval and the Determining Lenders'
proposal shall be the new Borrowing Base. If however, the Required
Lenders notify Determining Lenders within 15 days of their
disapproval, the Required Lenders shall, within a reasonable period of
time, agree on a new Borrowing Base. In taking the above actions,
each Determining Lender shall act in accordance with its normal and
customary procedures for evaluating oil and gas reserves and other
related assets as such exist at that particular time and will
otherwise act in their sole discretion.
(c) Exclusion of Certain Property. Without limiting the
provisions of this Section 2.20 with respect to scheduled and
unscheduled Borrowing Base redeterminations, if at any time, any
Determining Lender receives information not previously available to
any of the Determining Lenders which could reasonably cause a
deterioration in the PV10 value (as stated in the most recent Reserve
Report furnished to the Lenders pursuant to Section 5.02(e)) of the BB
Properties (or any part thereof) in an amount equal to or greater than
$10,000,000, or such Property is not assignable, then the Determining
Lenders may exclude any such Property or portion of production
therefrom or any income from such Property from the Borrowing Base
(thereby reducing the Borrowing Base).
(d) Time of Redetermination, etc. So long as any of the
Commitments are in effect and so long as there remains any Credit
Exposure as to any Lender, on or around the first Business Day of each
April, commencing April 1, 1997 (each being a "Scheduled
Redetermination Date"), the Determining Lenders shall redetermine the
amount of the Borrowing Base in accordance with Section 2.20(b). The
Company may from time to time request additional redeterminations of
the Borrowing Base from the Determining Lenders, whereupon the
Determining Lenders shall redetermine the Borrowing Base in accordance
with Section 2.20(b); provided, however, in no event shall the
Determining Lenders be obligated to grant more than two (2) such
requests in any fiscal year of the Company. In the event of any such
unscheduled redetermination, the Determining Lenders shall redetermine
the amount of the Borrowing Base in accordance with Section 2.20(b).
At the reasonable request of the Required Lenders, the Determining
Lenders shall redetermine the Borrowing Base; provided, however, only
one (1) such request may be made in any fiscal year of the Company
(exclusive of any reduction in the Borrowing Base pursuant to Section
2.20(c)). In the event of any such unscheduled redetermination, the
Determining Lenders shall redetermine the amount of the Borrowing Base
in accordance with Section 2.20.
(e) Designated Borrowing Base. Upon the Company's
receipt of written notice (each a "Borrowing Base Notice") from the
Administrative Agent of the amount of the Borrowing Base then in
effect, the Company may accept all or a lesser amount of such
Borrowing Base (the
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"Designated Borrowing Base") by providing written notice to the
Administrative Agent (which notice the Administrative Agent shall
promptly transmit to the Determining Lenders) of the amount of the
Designated Borrowing Base within 5 Business Days following receipt of
a Borrowing Base Notice from the Administrative Agent; provided,
however, the Designated Borrowing Base shall not be less than the
lower of (i) the amount of the Borrowing Base then in effect, or (ii)
$75,000,000, and shall not be greater than the lower of (i) the
Borrowing Base then in effect, or (ii) the aggregate amount of the
Commitments. If the Company does not provide written notice to the
Administrative Agent within 5 Business Days following receipt of a
Borrowing Base Notice, the Designated Borrowing Base shall be equal to
the Borrowing Base as set forth in such Borrowing Base Notice;
provided, however, that during each Borrowing Base period and after
the expiration of such 5 Business Day period, the Company may adjust
the Designated Borrowing Base (subject to the limitations set forth in
the first sentence of this Section 2.20(e)) by providing the
Administrative Agent with written notice (which notice the
Administrative Agent shall promptly transmit to the Determining
Lenders) at least 5 Business Days in advance of the effective date of
a different Designated Borrowing Base. During the period from and
after the Closing Date to and including the effective date of the next
designation of the Designated Borrowing Base in accordance with this
Section 2.20, the amount of the Designated Borrowing Base shall be
$165,000,000.
(f) Notice by Administrative Agent. The Administrative
Agent shall promptly notify in writing the Company of the new
Borrowing Base. Any redetermination of the Borrowing Base shall not
be in effect until written notice is received by the Company.
Section 2.21 Taxes.
(a) Payments Free and Clear. Any and all payments by the
Company under this Agreement or any other Financing Document shall be
made, in accordance with Section 2.13, 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, in the case of each Lender, the Administrative
Agent and the Issuing Bank, taxes imposed on or measured by its income
or receipts, and franchise or similar taxes imposed on it, by (i) any
jurisdiction (or political subdivision thereof) of which the
Administrative Agent, the Issuing Bank or such Lender, as the case may
be, is a citizen or resident or in which such Lender has a permanent
establishment (or is otherwise engaged in the active conduct of its
banking business through an office or a branch) which is such Lender's
applicable Lending Office, (ii) the jurisdiction (or any political
subdivision thereof) in which the Administrative Agent, the Issuing
Bank or such Lender is organized, or (iii) any jurisdiction (or
political subdivision thereof) in which such Lender, the Issuing Bank
or the Administrative Agent 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 so arising out of payments by the Company
being hereinafter referred to as "Taxes"). If the Company shall be
required by law to deduct any Taxes from or in respect of any sum
payable hereunder to the Lenders, the Issuing Bank or the
Administrative Agent (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 2.21) such Lender, the Issuing Bank or the Administrative
Agent (as the case may be) shall receive an amount equal to the sum it
would have received had no such deductions been made, (ii) the Company
shall make such deductions, and (iii) the Company shall
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pay the full amount deducted to the relevant taxing authority or other
Governmental Authority in accordance with applicable law.
(b) Other Taxes. In addition, the Company 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, any Assignment and
Acceptance or any other Financing Document (hereinafter referred to as
"Other Taxes").
(C) INDEMNIFICATION. THE COMPANY WILL INDEMNIFY EACH
LENDER, THE ISSUING BANK AND THE ADMINISTRATIVE AGENT FOR THE FULL
AMOUNT OF TAXES AND OTHER TAXES (INCLUDING, BUT NOT LIMITED TO, ANY
TAXES OR OTHER TAXES IMPOSED BY ANY JURISDICTION ON AMOUNTS PAYABLE
UNDER THIS SECTION 2.21) PAID BY SUCH LENDER OR THE ISSUING BANK OR
THE ADMINISTRATIVE AGENT (ON THEIR BEHALF OR ON BEHALF OF ANY LENDER),
AS THE CASE MAY BE, 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. ANY
PAYMENT PURSUANT TO SUCH INDEMNIFICATION SHALL BE MADE WITHIN 30 DAYS
AFTER THE DATE ANY LENDER, THE ISSUING BANK OR THE ADMINISTRATIVE
AGENT, AS THE CASE MAY BE, MAKES WRITTEN DEMAND THEREFOR. IF ANY
LENDER, THE ISSUING BANK OR THE ADMINISTRATIVE AGENT RECEIVES A REFUND
OR CREDIT IN RESPECT OF ANY TAXES OR OTHER TAXES FOR WHICH SUCH
LENDER, THE ISSUING BANK OR THE ADMINISTRATIVE AGENT HAS RECEIVED
PAYMENT FROM THE COMPANY HEREUNDER IT SHALL PROMPTLY NOTIFY THE
COMPANY OF SUCH REFUND OR CREDIT AND SHALL, WITHIN 30 DAYS AFTER
RECEIPT OF A REQUEST BY THE COMPANY (OR PROMPTLY UPON RECEIPT, IF THE
COMPANY HAS REQUESTED APPLICATION FOR SUCH REFUND OR CREDIT PURSUANT
HERETO), PAY AN AMOUNT EQUAL TO SUCH REFUND OR CREDIT TO THE COMPANY
WITHOUT INTEREST (BUT WITH ANY INTEREST SO REFUNDED OR CREDITED),
PROVIDED THAT THE COMPANY, UPON THE REQUEST OF SUCH LENDER, THE
ISSUING BANK OR THE ADMINISTRATIVE AGENT, AGREES TO RETURN SUCH REFUND
OR CREDIT (PLUS PENALTIES, INTEREST OR OTHER CHARGES) TO SUCH LENDER,
THE ISSUING BANK OR THE ADMINISTRATIVE AGENT IN THE EVENT SUCH LENDER,
THE ISSUING BANK OR THE ADMINISTRATIVE AGENT IS REQUIRED TO REPAY SUCH
REFUND OR CREDIT.
(d) Receipts. Within 30 days after the date of any
payment of Taxes or Other Taxes withheld by the Company in respect of
any payment to any Lender, the Issuing Bank or the Administrative
Agent, the Company will furnish to the Administrative Agent the
original or a certified copy of a receipt evidencing payment thereof.
(e) Survival. Without prejudice to the survival of any
other agreement contained herein, the agreements and obligations
contained in this Section 2.21 shall survive the payment in full of
principal and interest hereunder.
(f) Lender Representations. Each Lender represents that
it is either (i) a corporation organized under the laws of the United
States of America or any state thereof or (ii) entitled to complete
exemption from United States withholding tax imposed on or with
respect to any payments, including fees, to be made to it pursuant to
this Agreement (A) under an applicable
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provision of a tax convention to which the United States of America is
a party or (B) because it is acting through a branch, agency or office
in the United States of America and any payment to be received by it
hereunder is effectively connected with a trade or business in the
United States of America. Each Lender that is not a corporation
organized under the laws of the United States of America or any state
thereof agrees to provide to the Company and the Administrative Agent
on the Effective Date, or on the date of its delivery of the
Assignment and Acceptance pursuant to which it becomes a Lender, and
at such other times as required by United States law or as the Company
or the Administrative Agent shall reasonably request, two accurate and
complete original signed copies of either (A) Internal Revenue Service
Form 4224 (or successor form) certifying that all payments to be made
to it hereunder will be effectively connected to a United States trade
or business (the "Form 4224 Certification") or (B) Internal Revenue
Service Form 1001 (or successor form) certifying that it is entitled
to the benefit of a provision of a tax convention to which the United
States of America is a party which completely exempts from United
States withholding tax all payments to be made to it hereunder (the
"Form 1001 Certification"). In addition, each Lender agrees that if
it previously filed a Form 4224 Certification it will deliver to the
Company and the Administrative Agent a new Form 4224 Certification
prior to the first payment date occurring in each of its subsequent
taxable years; and if it previously filed a Form 1001 Certification,
it will deliver to the Company and the Administrative Agent a new
certification prior to the first payment date falling in the third
year following the previous filing of such certification. Each Lender
also agrees to deliver to the Company and the Administrative Agent
such other or supplemental forms as may at any time be required as a
result of changes in applicable law or regulation in order to confirm
or maintain in effect its entitlement to exemption from United States
withholding tax on any payments hereunder, provided that the
circumstances of the Lender at the relevant time and applicable laws
permit it to do so. If a Lender determines, as a result of any change
in either (i) applicable law, regulation or treaty, or in any official
application thereof or (ii) its circumstances, that it is unable to
submit any form or certificate that it is obligated to submit pursuant
to this Section, or that it is required to withdraw or cancel any such
form or certificate previously submitted, it shall promptly notify the
Company and the Administrative Agent of such fact. If a Lender is
organized under the laws of a jurisdiction outside the United States
of America, unless the Company and the Administrative Agent have
received a Form 1001 Certification or Form 4224 Certification
satisfactory to them indicating that all payments to be made to such
Lender hereunder are not subject to United States withholding tax, the
Company shall withhold taxes from such payments at the applicable
statutory rate, provided that such withholding shall not increase the
amount of payments for the account of such Lender to be made by the
Company pursuant to Section 2.21(a). Each Lender agrees to indemnify
and hold harmless from any United States taxes, penalties, interest
and other expenses, costs and losses incurred or payable by (i) the
Administrative Agent as a result of such Lender's failure to submit
any form or certificate that it is required to provide pursuant to
this Section or (ii) the Company or the Administrative Agent as a
result of their reliance on any such form or certificate which it has
provided to them pursuant to this Section.
(g) Efforts to Avoid or Reduce. Any Lender claiming any
additional amounts payable pursuant to this Section 2.21 shall use
reasonable efforts (consistent with legal and regulatory restrictions)
to file any certificate or document requested by the Company or the
Administrative Agent or to change the jurisdiction of its applicable
Lending Office or to contest any tax imposed if the making of such a
filing or change or contesting such tax would avoid the
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need for or reduce the amount of any such additional amounts that may
thereafter accrue and would not, in the sole determination of such
Lender, be otherwise disadvantageous to such Lender.
Section 2.22 Pro Rata Treatment. Except as required under Section
2.15, 2.16 or 2.18, each Borrowing, each payment or prepayment of principal of
any Borrowing, each payment of interest on the Loans, each payment of the fees,
each reduction of the Commitments, and each refinancing of any Borrowing with,
conversion of any Borrowing to or continuation of any Borrowing as a Borrowing
of any Type shall be allocated ratably and pro rata among the Lenders in
accordance with their respective Percentage Shares. Each Lender agrees that in
computing such Lender's portion of any Borrowing to be made hereunder, the
Administrative Agent may, in its discretion, round each Lender's portion of
such Borrowing to the next higher or lower whole dollar amount.
Section 2.23 Disposition of Proceeds. The Mortgage contains (and
other Security Instruments may contain) an assignment by the Company to the
Administrative Agent of all production and all proceeds attributable thereto
which may be produced from or allocated to the Oil and Gas Properties described
therein and further provides in general for the application of such proceeds to
the satisfaction of the indebtedness, liabilities and obligations described
therein and secured thereby. Notwithstanding such assignments, the
Administrative Agent, the Issuing Bank and the Lenders hereby grant to the
Company a license to receive, collect and use the proceeds attributable to such
production and agree not to notify the purchaser or purchasers of such
production and not to take any other action to cause such proceeds to be
remitted to the Administrative Agent, the Issuing Bank or the Lenders, in each
case unless and until an Event of Default has occurred and is continuing;
provided that so long as no Event of Default has occurred and is continuing,
the Administrative Agent shall execute and deliver a letter in the form of
Exhibit F to such Persons as the Company may direct; provided, further, if the
Administrative Agent, the Issuing Bank or any Lender shall receive any such
proceeds directly from any such purchaser prior to the occurrence and
continuation of an Event of Default, then such Person so receiving such
proceeds shall notify the Company thereof and upon request of the Company and
pursuant to its written instructions shall promptly remit such proceeds to the
Company.
Section 2.24 Additional Collateral. If at any time the Aggregate
Credit Exposure exceeds the Borrowing Base then in effect, and the Company does
not make the mandatory principal prepayment pursuant to Section 2.10(a), the
Company shall, as provided in Section 2.10(a), grant to the Administrative
Agent, as security for the Lender Indebtedness, a first-priority Lien on such
additional Properties of the Company or its Subsidiaries as is acceptable to
the Administrative Agent and the Lenders and having a fair market value equal
to or greater than the amount of such excess. Such Liens will be created and
perfected by and in accordance with the provisions of security agreements,
deeds of trust, mortgages, financing statements or other Security Instruments,
all in form and substance satisfactory to the Administrative Agent and in
sufficient executed (and acknowledged where necessary or appropriate)
counterparts for recording purposes.
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ARTICLE III
CONDITIONS TO BORROWINGS AND TO
PURCHASE, RENEWAL AND REARRANGEMENT
The obligation of each Lender to make a Loan or the Issuing Bank to
issue a Letter of Credit hereunder is subject to the satisfaction of the
following conditions:
Section 3.01 Closing. Unless the Effective Date occurs on the
Closing Date, The Company shall have delivered to the Administrative Agent
(unless waived by the Administrative Agent) at least two (2) Business Days'
advance written notice of the proposed Effective Date, which shall be a
Business Day after the Closing Date, for the delivery of all instruments,
certificates and opinions referred to in Section 3.02 not theretofore
delivered.
Section 3.02 Conditions Precedent to Initial Loan. At the time of
the making by such Lender of its initial Loan hereunder or the issuance by the
Issuing Bank of the initial Letter of Credit (including, but not limited to,
the assumption by the Lenders of the Outstanding Letters of Credit), all
obligations of the Company hereunder to the Administrative Agent or any Lender
incurred prior to such initial Loan or Letter of Credit (including, but not
limited to, the Company's obligation to reimburse the reasonable fees and
disbursements of counsel to the Administrative Agent), shall have been paid in
full, and the Administrative Agent shall have received the following, each
dated as of the Closing Date, in form and substance satisfactory to the
Administrative Agent, with an original thereof for the Administrative Agent and
with sufficient copies thereof for each Lender (except that in the case of the
Notes, the originals thereof will be delivered to the respective Lenders):
(a) Notes. A duly completed and executed Note for each
Lender and in each case payable to the order of the
Administrative Agent for the benefit of such Lender.
(b) Resolutions and Incumbency Certificates.
(i) Certified copies of the resolutions of the
Board of Directors (or equivalent body) of the Company and its
Subsidiaries that are parties to any Financing Document
approving, as appropriate, the Loans, the Notes, this
Agreement and the other Financing Documents, and all other
documents, if any, to which the Company or such Subsidiary is
a party evidencing partnership or corporate authorization, as
the case may be, with respect to such documents;
(ii) a certificate of the Secretary or an
Assistant Secretary or other appropriate officer of the
Company certifying (A) the name, title and true signature of
each officer of such Person authorized to execute the Notes,
this Agreement, Applications and the other Financing Documents
to which it is a party, (B) the name, title and true signature
of each officer of such Person authorized to provide the
certifications required pursuant to this Agreement including,
but not limited to, certifications required pursuant to
Section 5.02, and Borrowing Requests, and (C) that attached
thereto is a true and complete copy of the Partnership
Agreement, as amended to date, and a recent certificate of
valid existence; and
(iii) a certificate of the Secretary or an
Assistant Secretary of each Guarantor and each Subsidiary that
is a party to any Financing Document certifying (x) the name,
title and true signature of each officer of each Guarantor and
each Subsidiary authorized to execute each such Financing
Document to which it is a party, and (y) that attached thereto
is a true and complete copy of the articles of incorporation
and bylaws of such
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Guarantor and such Subsidiary, as amended to date, and recent
certificates of good standing and valid existence.
(c) Opinion of Counsel. An opinion of counsel from
Thompson & Knight, P.C., counsel to the Company and each Guarantor,
addressed to the Administrative Agent, the Issuing Bank and each of
the Lenders and covering such matters the Administrative Agent may
reasonably request.
(d) The Security Instruments.
(i) The Mortgage;
(ii) Financing Statements, as appropriate, to
perfect the security interests created by the Mortgage; and
(iii) The Guaranty Agreements.
(e) Insurance. A certificate of insurance coverage of
the Company evidencing that the Company is carrying insurance in
accordance with Section 5.01(e).
(f) Evidence of Title. The Administrative Agent shall
have completed a due diligence review of evidence of title
satisfactory to the Administrative Agent setting forth the status of
title to Oil and Gas Properties with a value (as determined by the
Administrative Agent) at least equal to 80% of the total value of the
Oil and Gas Properties that will constitute BB Properties.
(g) Environmental Report. The environmental site
assessment report prepared by Highlander Environmental Corporation for
the Company and such other reviews or further assessments that may be
determined to be required by the Administrative Agent, in its sole
discretion, to assess existence of any environmental items which could
reasonably be expected to have a Material Adverse Affect.
(h) Mobil Transaction.
(i) A fully executed copy of the Mobil Purchase
and Sale Agreement; and
(ii) Evidence reasonably satisfactory to the
Administrative Agent that the Company will purchase from Mobil
the assets referred to in the Mobil Purchase and Sale
Agreement concurrently with the funding of the Loan requested
by the Company for that purpose.
(i) Miscellaneous. Such other documents or conditions
precedent which the Administrative Agent may reasonably have requested
or require in its sole discretion.
Section 3.03 Conditions Precedent to Each Loan. At the time of
the making by such Lender of each Loan, including the initial Loan but not
including continuations or conversions pursuant to
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Section 2.11 (before as well as after giving effect to such Loan and to the
proposed use of the proceeds thereof):
(a) Notes. The Company shall have issued, executed and
delivered the Notes;
(b) No Default. There shall exist no Default or Event of
Default;
(c) Representations and Warranties. Except for facts
timely disclosed to the Administrative Agent from time to time in
writing, not materially more adverse to the Company and its
Subsidiaries than those existing on the Effective Date, all
representations and warranties contained herein and in the other
Financing Documents executed and delivered on or after the date hereof
shall be true and correct in all material respects with the same
effect as though such representations and warranties had been made on
and as of the date of such Loan; and
(d) Documentation. The Administrative Agent shall have
received such other documents as the Administrative Agent or any
Lender or special counsel to the Administrative Agent may reasonably
request, all in form and substance satisfactory to the Administrative
Agent.
Each Borrowing Request submitted by the Company, and the acceptance by
the Company of the proceeds of such Borrowing (but not including continuations
or conversions pursuant to Section 2.11), shall constitute a representation and
warranty by the Company, as of the date of the Loans comprising such Borrowing,
that the conditions specified in Sections 3.03(b) and (c) have been satisfied.
Section 3.04 Recordings. Within 10 days after the Closing Date,
the Security Instruments and accompanying financing statements covering the
Mortgaged Property requiring filing or recording, or other notices related
thereto if necessary or appropriate, shall have been duly sent for delivery by
the Administrative Agent or its counsel to the appropriate offices for filing
or recording.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES
In order to induce the Lenders to enter into this Agreement, the
Company represents and warrants to the Lenders (which representations and
warranties will survive the delivery of the Notes) that:
Section 4.01 Existence. (a) The Company is a limited partnership
duly formed and legally existing under the laws of the State of Texas and is
duly qualified in all jurisdictions wherein the Property owned or the business
transacted by it makes such qualification necessary, except where the failure
to be so qualified would not have a Material Adverse Effect.
(b) Each Subsidiary is a corporation duly organized, legally
existing and in good standing under the laws of the jurisdictions in which they
are incorporated and are duly qualified as foreign corporations in all
jurisdictions wherein the Property owned or the business transacted by them
makes such qualifications necessary, except where the failure to be so
qualified would not have a Material Adverse Effect.
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Section 4.02 Power and Authorization. The Company is authorized
and empowered to create and issue the Notes; the Company and each of its
Subsidiaries are duly authorized and empowered to execute, deliver and perform
the Financing Documents, including this Agreement, to which they respectively
are parties; and all partnership or corporate action, as the case may be, on
the Company's part requisite for the due creation and issuance of the Notes and
on the Company's and each of its Subsidiaries' respective part requisite for
the due execution, delivery and performance of the Financing Documents,
including this Agreement, to which the Company and each of its Subsidiaries
respectively are parties has been duly and effectively taken.
Section 4.03 Binding Obligations. This Agreement does, and the
Notes and other Financing Documents to which the Company and each of its
Subsidiaries respectively are parties upon their creation, issuance, execution
and delivery will, when issued and delivered under this Agreement, constitute
valid and binding obligations of the Company and each such Subsidiary that is a
party thereto, respectively, and will be enforceable in accordance with their
respective terms (except that enforcement may be subject to any applicable
bankruptcy, insolvency or similar laws generally affecting the enforcement of
creditors' rights and subject to the general principles of equity).
Section 4.04 No Legal Bar or Resultant Lien. The Notes and the
other Financing Documents, including this Agreement, to which the Company or
any of its Subsidiaries is a party do not and will not violate or create a
default under any provisions of the Partnership Agreement of the Company or the
articles or certificate of incorporation or bylaws or partnership agreements,
as applicable, of the Subsidiaries, or any material contract, agreement,
instrument or Governmental Requirement to which the Company or any of its
Subsidiaries is subject, or result in the creation or imposition of any Lien
upon any Properties of the Company or any of its Subsidiaries, other than those
violations and defaults that would not affect the Company's or such
Subsidiaries' use of such Properties or those permitted by this Agreement.
Section 4.05 No Consent. Except as set forth on Schedule 4.05 or
such filings as are required to perfect a Lien securing the Lender
Indebtedness, the Company's and each of its Subsidiaries' respective execution,
delivery and performance of the Notes and the other Financing Documents,
including this Agreement, to which the Company and each such Subsidiary
respectively are parties do not require notice to or filing or registration
with, or the authorization, consent or approval of or other action by any other
Person, including, but not limited to, any Governmental Authority.
Section 4.06 Financial Information.
(a) Financial Statements. The audited consolidated
balance sheet of the Company and its Consolidated Subsidiaries as of
December 31, 1995, and the related audited consolidated statements of
income, retained earnings and cash flows for the fiscal year ended on
such date, and the unaudited consolidated balance sheet of the Company
and its Consolidated Subsidiaries as of June 30, 1996, and the related
unaudited consolidated statements of income, retained earnings and
cash flows for the six-month period then ended, true copies of which
have been previously delivered to each of the Lenders, fairly present
the consolidated financial condition of the Company and its
Consolidated Subsidiaries as at the date thereof and the consolidated
results of operations for such period, in accordance with GAAP applied
on a consistent basis.
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(b) No Material Adverse Effect. Since December 31, 1995,
there has been no event or occurrence that could reasonably be
expected to have a Material Adverse Effect.
Section 4.07 Investments and Guaranties. At the date of this
Agreement, neither the Company nor any of its Subsidiaries has made investments
in or advances to any Person or guaranties of the obligations of any Person
that is not a Subsidiary of the Company, except those permitted by Section
5.03(e), and those reflected in the Financial Statements or described in
Schedule 4.07.
Section 4.08 Litigation. Except as set forth in Schedule 4.08,
there is no action, suit or proceeding, or any governmental investigation or
any arbitration, in each case pending or, to the knowledge of the Company,
threatened against the Company or any of its Subsidiaries or any material
Property of any thereof before any court or arbitrator or any Governmental
Authority which (i) challenges the validity of this Agreement, any Note, any
Application, the Guaranty Agreement, or any of the other Financing Documents or
(ii) would reasonably be expected to have a Material Adverse Effect.
Section 4.09 Federal Reserve Regulations. Neither the Company nor
any of its Subsidiaries is engaged principally, or as one of its important
activities, in the business of extending credit for the purpose, whether
immediate, incidental or ultimate, of buying or carrying Margin Stock (within
the meaning of Regulation U or X) and no part of the proceeds of any Loan
hereunder will be used to buy or carry any Margin Stock. Neither the Company
nor any Person acting on behalf of the Company has taken any action which would
cause the Notes or any of the Financing Documents, including this Agreement, to
violate Regulation U or X or any other regulation of the Board of Governors of
the Federal Reserve System or to violate Section 7 of the Securities and
Exchange Act of 1934, as amended, (or any successor thereto) or any rule or
regulation thereunder, in each case as now in effect or as the same may
hereinafter be in effect.
Section 4.10 Compliance with ERISA. Neither the Company, any of
its Subsidiaries nor any ERISA Affiliate sponsors, maintains or contributes to,
or has at any time in the six-year period preceding the date of this Agreement
sponsored, maintained or contributed to, any Plan, including, but not limited
to, any Plan which is a "multi-employer plan" as such term is defined in
Section 3(37) or 4001(a)(3) of ERISA. Except as set forth in Schedule 4.10,
each Plan described in such schedule has been terminated with no resulting
liability to the PBGC. No act, omission or transaction has occurred which
could result in imposition on the Company, any of its Subsidiaries or any ERISA
Affiliate (whether directly or directly) of (i) either a civil penalty assessed
pursuant to Sections 502(c) or 502(i) of ERISA or a tax imposed pursuant to
Section 4975 of the Code, or (ii) breach of fiduciary duty liability damages
under Section 409 of ERISA, which in each case would have a Material Adverse
Effect.
Section 4.11 Taxes; Governmental Charges. The Company and its
Subsidiaries have filed all tax returns and reports required to be filed and
have paid all material taxes, assessments, fees and other governmental charges
levied upon any of them or upon any of their respective Properties or income
which are due and payable, including interest and penalties, or have provided
adequate reserves for the payment thereof if required in accordance with GAAP
for the payment thereof, except such interest and penalties as are being
contested in good faith by appropriate actions or proceedings and for which
adequate reserves for the payment thereof as required by GAAP have been
provided.
Section 4.12 Title and Liens. The most recently delivered Reserve
Report reflects, without material error, the aggregate net revenue interest of
the Company and its Subsidiaries in each property
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reported on therein and the aggregate share of the operating expenses
applicable to each such property for which the Company and its Subsidiaries are
liable. The Company and its Subsidiaries have indefeasible title to such
properties, in accordance with customary standards in the oil and gas business
in the relevant area of operations, subject only to defects and irregularities
which do not materially and adversely affect the value of such properties or
the ability of the Company to possess and sell the production therefrom. Such
properties are not subject to any Liens other than those permitted under this
Agreement or the other Financing Documents.
Section 4.13 Defaults. Neither the Company nor any of its
Subsidiaries is in default nor has any event or circumstance occurred which,
but for the passage of time or the giving of notice, or both, would constitute
a default under any loan or credit agreement, indenture, mortgage, deed of
trust, security agreement or other instrument or agreement evidencing or
pertaining to any Indebtedness of the Company or any of its Subsidiaries, or
under any material agreement or instrument to which the Company or any of its
Subsidiaries is a party or by which the Company or any of its Subsidiaries is
bound, except as disclosed to the Lenders in Schedule 4.13 or except for those
defaults which would not reasonably be expected to have a material adverse
effect. No Default hereunder has occurred and is continuing.
Section 4.14 Casualties; Taking of Properties. Since the date of
the Financial Statements, neither the business nor the Properties of the
Company or any of its Subsidiaries have been affected in a manner that has had
or would reasonably be expected to have a Material Adverse Effect as a result
of any fire, explosion, earthquake, flood, drought, windstorm, accident, strike
or other labor disturbance, embargo, requisition or taking of Property or
cancellation of contracts, permits or concessions by any domestic or foreign
government or any agency thereof, riot, activities of armed forces or acts of
God or of any public enemy.
Section 4.15 Compliance with the Law. Neither the Company nor any
of its Subsidiaries:
(a) is in violation of any Governmental Requirement; or
(b) has failed to obtain any license, permit, franchise
or other governmental authorization necessary to the ownership of any
of their respective Properties or the conduct of their respective
business;
which violation or failure would reasonably be expected to have a Material
Adverse Effect.
Section 4.16 No Material Misstatements. No information, exhibit
or report furnished to the Administrative Agent or the Lenders by or at the
direction of the Company or any of its Subsidiaries in connection with the
negotiation of this Agreement, when such statement is considered with all other
written statements furnished to the Lenders in that connection, contained any
material misstatement of fact or omitted to state a material fact or any fact
necessary to make the statement contained therein not misleading.
Section 4.17 Investment Company Act. The Company is not an
"investment company" or a company "controlled" by an "investment company" that
is incorporated in or organized under the laws of the United States or any
"State," as those terms are defined in the Investment Company Act of 1940, as
amended. The execution and delivery by the Company and its Subsidiaries of
this Agreement and the other Financing Documents to which they respectively are
parties and their respective performance of the
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obligations provided for therein, will not result in a violation of the
Investment Company Act of 1940, as amended.
Section 4.18 Public Utility Holding Company Act. The Company is
not a "holding company," or a "subsidiary company" of a "holding company," or
an "affiliate" of a "holding company" or of a "subsidiary company" of a
"holding company," or a "public-utility company" within the meaning of the
Public Utility Holding Company Act of 1935, as amended.
Section 4.19 Subsidiaries. The Company has no Subsidiaries except
those shown in Exhibit B hereto, which exhibit is complete and accurate. The
Company owns 100% of all stock of the Subsidiaries listed in such Exhibit.
Section 4.20 Insurance. Schedule 4.20 attached hereto contains an
accurate and complete description of all material policies of fire, liability,
workmen's compensation, casualty, flood and other forms of insurance owned or
held by the Company and each of its Subsidiaries as of the Closing Date. All
such policies are in full force and effect, all premiums with respect thereto
have been paid in accordance with their respective terms, and no notice of
cancellation or termination has been received with respect to any such policy.
Such policies are sufficient for compliance with all requirements of law and of
all agreements to which the Company or any of its Subsidiaries is a party; are
valid, outstanding and enforceable policies; provide adequate insurance
coverage in at least such amounts and against at least such risks (but
including in any event public liability) as are usually insured against in the
same general area by companies engaged in the same or a similar business for
the assets and operations of the Company and each of its Subsidiaries; and will
not in any way be affected by, or terminate or lapse by reason of, the
transactions contemplated by this Agreement. Schedule 4.20 identifies all
material risks, if any, which the Company and its Subsidiaries and their
respective Board of Directors or officers have designated as being self
insured. Neither the Company nor any of its Subsidiaries has been unable to
obtain any insurance with respect to its assets or operations, nor has its
coverage been limited below usual and customary policy limits during the last
three years.
Section 4.21 Mortgaged Property. The discounted present value of
the Mortgaged Property constitutes at least 80% of the aggregate discounted
present value (as reasonably determined by the Administrative Agent) of all Oil
and Gas Properties described in and covered by the engineering or other written
reports which have previously been delivered to and relied upon by the Lenders
in connection with this Agreement. The Company shall have the right to
designate which Oil and Gas Properties shall constitute Mortgaged Properties,
subject to the requirements in the preceding sentence.
Section 4.22 Gas Imbalances. Except as disclosed to the
Administrative Agent in Schedule 4.22, or as otherwise disclosed to the
Administrative Agent from time to time in order to be taken into account in
determining the Borrowing Base, there are no gas imbalances, take or pay or
other prepayments owed by the Company in excess of $5,000,000 in the aggregate
with respect to any of the Mortgaged Property (or in the case of any of the
Mortgaged Property operated by a Person other than the Company or its
Subsidiaries, to the best of the Company's knowledge) which would require the
Company or its Subsidiaries to deliver Hydrocarbons produced from any of the
Mortgaged Property at some future time without then or thereafter receiving
full payment therefor.
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Section 4.23 Environmental Matters.
(a) Environmental Laws, etc. Neither any Property of the
Company or its Subsidiaries nor the operations conducted thereon
violate any applicable order of any court or Governmental Authority or
Environmental Laws, which violation would reasonably be expected to
have a Material Adverse Effect or which would reasonably be expected
to result in remedial obligations having a Material Adverse Effect
assuming disclosure to the applicable Governmental Authority of all
relevant facts, conditions and circumstances, if any, pertaining to
the relevant Property.
(b) No Litigation. Without limitation of Section 4.23(a)
above, no Property of the Company or its Subsidiaries nor the
operations currently conducted thereon or by any prior owner or
operator of such Property or operation, are in violation of or subject
to any existing, pending or threatened action, suit, investigation,
inquiry or proceeding by or before any court or Governmental Authority
or to any remedial obligations under Environmental Laws, which
violation, action, suit, investigation, inquiry or proceeding would
reasonably be expected to have a Material Adverse Effect or which
would reasonably be expected to result in remedial obligations having
a Material Adverse Effect assuming disclosure to the applicable
Governmental Authority of all relevant facts, conditions and
circumstances, if any, pertaining to the relevant Property.
(c) Notices, Permits, etc. All notices, permits,
licenses or similar authorizations, if any, required to be obtained or
filed by the Company or its Subsidiaries in connection with the
operation or use of any and all Property of the Company or its
Subsidiaries, including but not limited to past or present treatment,
storage, disposal or release of a hazardous substance or solid waste
into the environment, have been duly obtained or filed except to the
extent the failure to obtain or file such notices, permits, licenses
or similar authorizations would not reasonably be expected to have a
Material Adverse Effect or which would not reasonably be expected to
result in remedial obligations having a Material Adverse Effect
assuming disclosure to the applicable Governmental Authority of all
relevant facts, conditions and circumstances, if any, pertaining to
the relevant Property.
(d) Hazardous Substances Carriers. All hazardous
substances or solid waste generated at any and all Property of the
Company or its Subsidiaries have in the past been transported, treated
and disposed of only by carriers maintaining valid permits under RCRA
and any other Environmental Law, except to the extent the failure to
have such substances or waste transported, treated or disposed by such
carriers would not reasonably be expected to have a Material Adverse
Effect, and only at treatment, storage and disposal facilities
maintaining valid permits under RCRA and any other Environmental Law,
which carriers and facilities have been and are operating in
compliance with such permits, except to the extent the failure to have
such substances or waste treated, stored or disposed at such
facilities, or the failure of such carriers or facilities to so
operate, would not reasonably be expected to have a Material Adverse
Effect or which would reasonably be expected to result in remedial
obligations having a Material Adverse Effect assuming disclosure to
the applicable Governmental Authority of all relevant facts,
conditions and circumstances, if any, pertaining to the relevant
Property.
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(e) Hazardous Substances Disposal. The Company and its
Subsidiaries have taken all reasonable steps necessary to determine
and have determined that no hazardous substances or solid waste have
been disposed of or otherwise released and there has been no
threatened release of any hazardous substances on or to any Property
of the Company or its Subsidiaries except in compliance with
Environmental Laws, except to the extent the failure to do so would
not reasonably be expected to have a Material Adverse Effect or which
would not reasonably be expected to result in remedial obligations
having a Material Adverse Effect assuming disclosure to the applicable
Governmental Authority of all relevant facts, conditions and
circumstances, if any, pertaining to the relevant Property.
(f) OPA Requirements. Except to the extent the failure
to so comply would not have a Material Adverse Effect, to the extent
applicable, the Company and its Subsidiaries have complied with all
design, operation and equipment requirements imposed by OPA or
scheduled to be imposed by OPA during the term of this Agreement, and
the Company does not have reason to believe that either it or its
Subsidiaries will not be able to maintain such compliance with OPA
requirements during the term of this Agreement.
(g) No Contingent Liability. The Company and its
Subsidiaries have no material contingent liability in connection with
any release or threatened release of any hazardous substance or solid
waste into the environment which at any one time and from time to time
would reasonably be expected to exceed by more than $5,000,000
applicable insurance coverage, indemnities, or the reserves for the
payment thereof which have been established as required by GAAP, or
which would reasonably be expected to result in remedial obligations
having a Material Adverse Effect assuming disclosure to the applicable
Governmental Authority of all relevant facts, conditions and
circumstances, if any, pertaining to such release or threatened
release.
ARTICLE V
COVENANTS
Section 5.01 Certain Affirmative Covenants. So long as any Lender
has any Commitment hereunder or any Loan remains unpaid or any Credit Exposure
remains outstanding, the Company will at all times comply with the following
covenants:
(a) Maintenance and Compliance, etc. The Company will
and will cause each of its Subsidiaries to (i) except as permitted by
Section 5.03(c), preserve and maintain its partnership or corporate,
as the case may be, existence, rights and franchises, and (ii) observe
and comply in all material respects with all Governmental
Requirements, except where failure to do so could not reasonably be
expected to have a Material Adverse Effect.
(b) Payment of Taxes and Claims, etc. The Company will
pay, and cause each of its Subsidiaries to pay, (i) all taxes,
assessments and governmental charges imposed upon it or upon its
Property, and (ii) all claims (including, but not limited to, claims
for labor, materials, supplies or services) which might, if unpaid,
become a Lien upon its Property, unless, in each case, the validity or
amount thereof is being contested in good faith by appropriate action
or
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proceedings and the Company has established adequate reserves in
accordance with GAAP with respect thereto.
(c) Further Assurances. The Company will and will cause
each of its Subsidiaries to cure promptly any defects in the creation
and issuance of the Notes, and the execution and delivery of the
Financing Documents, including this Agreement. The Company at its
expense will, as promptly as practical, execute and deliver to the
Administrative Agent or the Issuing Bank upon request all such other
and further documents, agreements and instruments (or cause any of its
Subsidiaries to take such action) in compliance with or performance of
the covenants and agreements of the Company or any of its Subsidiaries
in the Financing Documents, including this Agreement, or to further
evidence and more fully describe the collateral, if any, intended as
security for the Notes or other Lender Indebtedness, or to correct any
omissions in the Financing Documents, or more fully to state the
security obligations, if any, set out herein or in any of the
Financing Documents, or to perfect, protect or preserve any Liens
created pursuant to any of the Financing Documents, or to make any
recordings, to file any notices, or obtain any consents, all as may be
necessary or appropriate in connection therewith.
(d) Performance of Obligations. The Company will pay the
Notes according to the reading, tenor and effect thereof; and the
Company will do and perform every act and discharge all of the
obligations provided to be performed and discharged by the Company
under the Financing Documents, including this Agreement, at the time
or times and in the manner specified, and cause each of its
Subsidiaries to take such action with respect to their obligations to
be performed and discharged under the Financing Documents to which
they respectively are parties.
(e) Insurance. The Company and its Subsidiaries will
maintain or cause to be maintained, with financially sound and
reputable insurers, insurance with respect to their respective
Properties and business against such liabilities, casualties, risks
and contingencies and in such types and amounts (including
deductibles, co-insurance and self-insurance) as is customary in the
case of Persons engaged in the same or similar businesses and
similarly situated. Upon request of the Administrative Agent, the
Company will furnish or cause to be furnished to the Administrative
Agent from time to time a summary of the insurance coverage of the
Company and its Subsidiaries in form and substance reasonably
satisfactory to the Administrative Agent and if requested will furnish
the Administrative Agent copies of the applicable policies. In the
case of any fire, accident or other casualty causing loss or damage to
any Properties of the Company, the proceeds of such policies shall be
used, in the Company's sole discretion, (i) to reasonably promptly
repair or replace the damaged Property, or (ii) to prepay the Lender
Indebtedness. The Company will obtain endorsements to the policies
pertaining to all physical Properties in which the Administrative
Agent or the Lenders shall have a Lien under the Financing Documents,
naming the Administrative Agent as a loss payee and containing
provisions that such policies will not be cancelled without 30 days
prior written notice endeavoring to have been given by the insurance
company to the Administrative Agent.
(f) Accounts and Records. The Company will keep and will
cause each of its Subsidiaries to keep proper books of record and
account in which full, true and correct entries will be made of all
financial or business dealings or transactions in relation to their
respective business and activities.
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(g) Right of Inspection. The Company will permit and
will cause each of its Subsidiaries to permit any officer, employee or
agent of the Administrative Agent or any of the Lenders to visit and
inspect any of the Properties of the Company or any of its
Subsidiaries, examine the Company's or any such Subsidiary's books of
record and accounts, take copies and extracts therefrom, and discuss
the affairs, finances and accounts of the Company or any of its
Subsidiaries with the Company's or such Subsidiary's officers,
accountants and auditors, as often and all at such reasonable times
during normal business hours as may be reasonably requested by the
Administrative Agent or any of the Lenders.
(h) Operation and Maintenance of Property and Compliance
with Leases. Subject to Section 5.01(i), the Company will, and will
cause each of its Subsidiaries to, operate its material Properties or
cause its material Properties to be operated in accordance with
prudent industry practice and in compliance with all material terms
and provisions of all applicable leases, contracts and agreements and
in compliance with all applicable proration and conservation laws of
the jurisdiction in which such Properties may be situated, and all
applicable laws, rules and regulations of every other agency and
authority from time to time constituted to regulate the development
and operation of such Properties, and as to any Oil and Gas
Properties, the production and sale of Hydrocarbons and other minerals
therefrom.
(i) Certain Additional Assurances Regarding Maintenance
and Operation of Properties. With respect to those Properties of the
Company or a Subsidiary of the Company which are being operated by
operators other than the Company or such Subsidiary, the Company or
such Subsidiary shall not be obligated, itself, to perform any
undertakings contemplated by the covenants and agreements contained in
Sections 5.01(b), 5.01(e), and 5.01(h) which are performable only by
such operators and are beyond the control of the Company or such
Subsidiary; however, the Company agrees to promptly take and to cause
such Subsidiary to promptly take all reasonable actions available
under any operating agreements or otherwise to bring about the
performance of any such undertakings required to be performed under
such Sections.
(j) Designation of Subsidiaries as Additional Guarantors.
If at any time the Majority Lenders, in their sole discretion, or the
Company, with the approval of the Administrative Agent, designate any
one or more Subsidiaries of the Company to be additional Guarantors,
the Company shall cause any such newly designated Guarantor to
execute, within 30 days of such designation, a guaranty agreement in
substantially the same form as the Guaranty Agreement executed by the
Guarantors in connection with this Agreement.
(k) Payment of Charters and Tariffs. The Company will
pay, and will cause each of its Subsidiaries to pay before or when due
the amount owed for the time charter of any tanker or barge used to
transport feedstocks, blendstocks or refined products, unless in each
case, the validity or amount thereof is being contested in good faith
by appropriate action or proceedings and the Company has established
appropriate reserves in accordance with GAAP.
(l) Environmental Covenant. The Company shall, and shall
cause each of its Subsidiaries to, operate its Property in such a
manner that its Property and all operations conducted thereon will at
all times be in compliance with all Environmental Laws except to the
extent the failure to comply therewith would not reasonably be
expected to have a Material
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Adverse Effect. The Company shall promptly notify the Administrative
Agent in writing of any existing, pending or threatened action,
investigation or inquiry by any Governmental Authority concerning the
Company or any Subsidiary in connection with its Property under any
Environmental Laws which would reasonably be expected to have a
Material Adverse Effect.
Section 5.02 Reporting Covenants. So long as any Lender has any
Commitment hereunder or any Loan remains unpaid or any Credit Exposure remains
outstanding, the Company will furnish to each Lender:
(a) Annual Financial Statements. As soon as available
and in any event within 90 days after the end of each calendar year of
the Company, an audited consolidated balance sheet of the Company and
its Consolidated Subsidiaries as at the end of such year and the
related audited consolidated statements of income, retained earnings
and cash flows of the Company and its Consolidated Subsidiaries for
such calendar year, setting forth in each case in comparative form the
figures for the previous calendar year, all in reasonable detail and
accompanied by a report thereon of independent public accountants of
recognized national standing acceptable to the Administrative Agent,
which such report shall state that such consolidated financial
statements present fairly the consolidated financial condition as at
the end of such calendar year, and the consolidated results of
operations and cash flows for such calendar year, of the Company and
its Consolidated Subsidiaries in accordance with GAAP, applied on a
consistent basis. At the same time, an unaudited consolidating
balance sheet of the Company and its Consolidated Subsidiaries as at
the end of such year and related unaudited consolidating statements of
income for such calendar year, accompanied by a certification thereon
of a Responsible Officer, stating that such consolidating financial
statements form the basis of the Company's consolidated financial
statements and are fairly stated in all material respects when
considered in relation thereto.
(b) Quarterly Financial Statements. As soon as available
and in any event within 45 days after the end of each calendar quarter
of the Company, an unaudited consolidated balance sheet of the Company
and its Consolidated Subsidiaries as at the end of such quarter and
the related unaudited consolidated statements of income, retained
earnings and cash flows of the Company and its Consolidated
Subsidiaries for such calendar quarter and for the portion of the
Company's calendar year ended at the end of such quarter, setting
forth in each case in comparative form the figures for the
corresponding quarter and the corresponding portion of the Company's
previous calendar year, all in reasonable detail and certified by a
Responsible Officer that such financial statements fairly present the
consolidated financial condition as at the end of such calendar
quarter, and the consolidated results of operations and cash flows for
such calendar quarter and such portion of the Company's calendar year,
of the Company and its Consolidated Subsidiaries in accordance with
GAAP (subject to normal, year-end adjustments). At the same time, an
unaudited consolidating balance sheet of the Company and its
Consolidated Subsidiaries at the end of such calendar quarter and
related unaudited consolidating statements of income, for the portion
of the Company's calendar year ended at such quarter accompanied by a
certification from a Responsible Officer that such consolidating
financial statements form the basis of the Company's consolidated
financial statements and are fairly stated in all material respects
when considered in relation thereto.
(c) No Default/Compliance Certificate. Together with the
financial statements required pursuant to subsections (a) and (b)
above, a certificate of a Responsible Officer (i)
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stating that a review of such financial statements during the period
covered thereby and of the activities of the Company and its
Subsidiaries has been made under such Responsible Officer's
supervision with a view to determining whether the Company and its
Subsidiaries have fulfilled all of their obligations under this
Agreement, the other Financing Documents, and the Notes; (ii) stating
that the Company and its Subsidiaries have fulfilled their obligations
under such instruments and that all representations made in this
Agreement continue to be true and correct (or specifying the nature of
any change) in all material respects, or if there shall be a Default
or Event of Default, specifying the nature and status thereof and the
Company's proposed response thereto; and (iii) containing or
accompanied by such financial or other details, information and
material as the Administrative Agent may reasonably request to
evidence such compliance.
(d) Auditors' No Default Certificate; Management Letters.
Together with the financial statements required pursuant to subsection
(a) above and subject to any standards and restrictions imposed by the
Financial Accounting Standards Board or other similar authority, a
certificate of the independent public accountants who audited such
financial statements to the effect that their audit has not disclosed
the existence of an Event of Default or a Default under this
Agreement, or if there exists an Event of Default or a Default
hereunder, specifying the nature thereof; and copies of each
management letter issued to the Company by such accountants promptly
following consideration or review by the Board of Directors of the
Company, or any committee thereof (together with any response thereto
prepared by the Company).
(e) Engineering Reports.
(i) As soon as practicable after December 31st of
each year, commencing December 31, 1996, but in no event later
than March 1st of each year, a report (the "Reserve Report")
in form and substance satisfactory to the Majority Lenders
prepared by Williamson Petroleum Consultants, or Hickman &
Associates, or Netherland & Sewell or other independent
petroleum consultant(s) reasonably acceptable to the Majority
Lenders (the previous acceptability to the Majority Lenders of
an independent petroleum consultant not specified above shall
have no bearing on such consultant's present or future
acceptability), which Reserve Report shall evaluate the
Hydrocarbon reserves included in the Mortgaged Property as of
each such date and which shall, together with any other
information reasonably requested by any Lender, through the
Administrative Agent, set forth the total Proved Hydrocarbon
Reserves by accepted and customary reserve category
attributable to such Mortgaged Property, together with a
projection of the rate of production and future net income
with respect thereto as of each such date.
(ii) Promptly following the Company's receipt of a
written request from the Administrative Agent, a report in
form and substance satisfactory to the Majority Lenders
prepared by the Company evaluating the Hydrocarbon reserves
included in the Mortgaged Property as of such date and which
shall, together with any other information reasonably
requested by any Lender (through the Administrative Agent),
set forth the total Proved Hydrocarbon Reserves by accepted
and customary reserve category attributable to such Mortgaged
Property, together with a projection of the rate of production
and future net income with respect thereto as of each such
date.
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(f) Notice of Certain Events. Promptly after the Company
learns of the receipt or occurrence of any of the following, a
certificate of a Responsible Officer specifying (i) any official
notice of any violation, possible violation, non-compliance or
possible non-compliance, or claim made by any Governmental Authority
pertaining to all or any part of the Properties of the Company or any
of its Subsidiaries which would reasonably be expected to have a
Material Adverse Effect; (ii) any event which constitutes a Default or
Event of Default, together with a detailed statement specifying the
nature thereof and the steps being taken to cure such Default or Event
of Default; (iii) the receipt of any notice from, or the taking of any
other action by, the holder of any promissory note, debenture or other
evidence of indebtedness in excess of $1,000,000 of the Company or any
of its Subsidiaries with respect to a claimed default, together with a
detailed statement specifying the notice given or other action taken
by such holder and the nature of the claimed default and what action
the Company or its Subsidiary is taking or proposes to take with
respect thereto; (iv) any notice of termination or other proceedings
or actions which could reasonably be expected to adversely affect any
of the Financing Documents; (v) the creation, dissolution, merger or
acquisition of any Subsidiary of the Company with material operations;
(vi) any event or condition which violates any Environmental Law and
which would reasonably be expected to have a Material Adverse Effect
or which would reasonably be expected to result in remedial
obligations having a Material Adverse Effect, assuming disclosure to
the applicable Governmental Authority of all relevant facts,
conditions and circumstances, if any, pertaining to such event or
condition; or (vii) any event or condition which would reasonably be
expected to have a Material Adverse Effect.
(g) Communications. Promptly upon the mailing thereof,
copies of all financial statements, reports, notices proxy and other
statements mailed to all of Parent's shareholders or the SEC.
(h) Litigation. Promptly after (i) the occurrence
thereof, notice of the institution of or any material adverse
development in any action, suit or proceeding or any governmental
investigation or any arbitration, before any court or arbitrator or
any governmental or administrative body, agency or official, against
the Company, any Guarantor or any material Property of any thereof; or
(ii) actual knowledge thereof, notice of the threat of any such
action, suit, proceeding, investigation or arbitration, in either case
in which the amount involved is material and is not covered by
insurance or which, if adversely determined, would have a Material
Adverse Effect.
(i) ERISA. Promptly after (i) the Company's obtaining
knowledge of the occurrence thereof, notice that an ERISA Termination
Event or a "prohibited transaction," as such term is defined in
Section 406 of ERISA or Section 4975 of the Code, with respect to any
Plan has occurred, which such notice shall specify the nature thereof,
the Company's proposed response thereto and, where known, any action
taken or proposed by the Internal Revenue Service, the Department of
Labor or the PBGC with respect thereto, and (ii) the Company's
obtaining knowledge thereof, copies of any notice of the PBGC's
intention to terminate or to have a trustee appointed to administer
any Plan.
(j) Other Information. With reasonable promptness, such
other information about the business and affairs and financial
condition of the Company or its Subsidiaries as the
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Administrative Agent or any Lender. acting through the Administrative
Agent, may reasonably request from time to time.
(k) Amendments to Partnership Agreement. If, subject to
the provisions of Section 5.03(r), the Partnership Agreement is
amended or restated, promptly furnish a certified true and complete
copy of the amended or restated Partnership Agreement.
Section 5.03 Certain Negative Covenants. So long as any Lender
has any Commitment hereunder or any Loan remains unpaid or any Credit Exposure
remains outstanding, neither the Company nor any Subsidiary will:
(a) Indebtedness. Create, incur, assume or suffer to
exist, or permit any of its Subsidiaries to create, incur, assume or
suffer to exist, any Indebtedness, other than:
(i) the Lender Indebtedness;
(ii) Indebtedness outstanding on the date hereof
which is set out in the Company's financial statements
referred to in Section 4.06(a) or on Schedule 5.03(a) and any
renewal, extension, refinancing or refunding of such
Indebtedness; provided that (A) the principal amount of such
Indebtedness that renews, extends, refinances or refunds any
such Indebtedness shall not exceed the principal amount of
such renewed, extended, refunded or refinanced Indebtedness,
and (B) the Indebtedness that renews, extends, refinances or
refunds such Indebtedness is scheduled to mature no earlier
than the Indebtedness being renewed, extended, refunded or
refinanced;
(iii) in addition to that described in the other
clauses in this Section 5.03(a), unsecured Indebtedness or
Indebtedness secured by Property purchased or leased with the
proceeds of such Indebtedness (so long as such Property is not
part of the BB Properties), in an aggregate outstanding
principal amount not to exceed $5,000,000 at any time;
(iv) Indebtedness existing in connection with
Hedge Agreements, provided that any Hydrocarbon Swap
Agreements in the aggregate shall not exceed 75% of the
anticipated production from Proved Developed Hydrocarbon
Reserves during the term of the hedge transaction, and any
Interest Rate Swap Agreements in the aggregate shall not
exceed the anticipated outstanding principal balance of the
Indebtedness to be hedged by such agreements; and
(v) unsecured intercompany Indebtedness provided
by any Guarantor to the Company which is subordinated, upon
terms satisfactory to the Majority Lenders, to the payment of
the principal of and interest on the Lender Indebtedness.
(b) Liens. Create, incur, assume or suffer to exist any
Lien on any of its Property now owned or hereafter acquired to secure
any Indebtedness of any Person, other than:
(i) Liens existing on the date hereof and set out
on Schedule 5.03(b);
(ii) Liens securing the Lender Indebtedness;
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(iii) Liens for taxes, assessments or other
governmental charges or levies not yet past due or which are
being contested in good faith by appropriate action or
proceedings and with respect to which adequate reserves are
being maintained;
(iv) Liens of landlords and Liens of carriers,
warehousemen, mechanics, materialmen, repairmen, workmen, and
other similar Liens imposed by law or created in the ordinary
course of business for amounts which are not past due for more
than 90 days or which are being contested in good faith by
appropriate proceedings and with respect to which adequate
reserves in accordance with GAAP are being maintained;
(v) Liens (other than any inchoate Lien imposed
by ERISA) incurred or deposits or pledges made in the ordinary
course of business in connection with workers' compensation,
unemployment insurance and other types of social security, old
age or other similar obligations, or to secure the performance
of tenders, statutory obligations, surety and appeal bonds,
bids, leases, government contracts, performance and
return-of-money bonds and other similar obligations (exclusive
of obligations for the payment of borrowed money);
(vi) easements, rights-of-way, restrictions,
servitudes, permits, reservations, exceptions, conditions,
covenants and other similar charges or encumbrances not
interfering with the ordinary conduct of the business of the
Company or any of its Subsidiaries;
(vii) any Lien securing Indebtedness, neither
assumed nor guaranteed by the Company or any of its
Subsidiaries nor on which it customarily pays interest,
existing upon real estate or rights in or relating to real
estate acquired by the Company for substation, metering
station, pump station, storage, gathering line, transmission
line, transportation line, distribution line or for
right-of-way purposes, and any Liens reserved in leases for
rent and for compliance with the terms of the leases in the
case of leasehold estates, to the extent that any such Lien
referred to in this clause (vii) does not materially impair
the use of the Property covered by such Lien for the purposes
of which such Property is held by the Company or any of its
Subsidiaries;
(viii) Liens reserved in oil, gas and/or mineral
leases for bonus or rental payments and for compliance with
the terms of such leases and Liens reserved in operating
agreements, farm-out and farm-in agreements, exploration
agreements, development agreements and other similar
agreements for compliance with the terms of such agreements;
(ix) defects, irregularities and deficiencies in
title of any rights of way or other Property of the Company or
any Subsidiary which in the aggregate do not materially impair
the use of such rights of way or other Property for the
purposes for which such rights of way and other Property are
held by the Company or any Subsidiary, and defects,
irregularities and deficiencies in title to any Property of
the Company or its Subsidiaries, which defects, irregularities
or deficiencies have been cured by possession under applicable
statutes of limitation;
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(x) royalties, overriding royalties, revenue
interests, net revenue interests, production payments (other
than production payments granted or created by the Company in
connection with the borrowing of money), advance payment
obligations (other than obligations in respect of advance
payment received by the Company in connection with the
borrowing of money) and other similar burdens now existing on
Oil and Gas Properties now owned or, as to Properties
hereafter acquired, at the time of acquisition by the Company
or any of its Subsidiaries;
(xi) Liens arising out of all presently existing
and future division and transfer orders, advance payment
agreements, processing contracts, gas processing plant
agreements, operating agreements, gas balancing or deferred
production agreements, pooling, unitization or communitization
agreements, pipeline, gathering or transportation agreements,
platform agreements, drilling contracts, injection or
repressuring agreements, cycling agreements, construction
agreements, salt water or other disposal agreements, leases or
rental agreements (but only as otherwise permitted by this
Agreement), farm-out and farm-in agreements, exploration and
development agreements, and any and all other contracts or
agreements covering, arising out of, used or useful in
connection with or pertaining to the exploration, development,
operation, production, sale, use, purchase, exchange, storage,
separation, dehydration, treatment, compression, gathering,
transportation, processing, improvement, marketing, disposal
or handling of any Property of the Company or its
Subsidiaries, provided such agreements are entered into in the
ordinary course of business and contain terms customary for
such agreements in the industry;
(xii) Liens on Properties of the Company or its
Subsidiaries (on which a Lien securing the Lender Indebtedness
does not exist) securing Indebtedness described in Sections
5.03(a)(iii); or
(xiii) Liens on Properties of the Company or its
Subsidiaries in favor of the Administrative Agent securing
indebtedness, obligations and liabilities of the Company in
favor of any Lender pursuant to any Hedge Agreement.
(c) Mergers, Sales, etc. Merge into or with or
consolidate with, or permit any of its Subsidiaries to merge into or
with or consolidate with, any other Person, or sell, lease or
otherwise dispose of, or permit any of its Subsidiaries to sell, lease
or otherwise dispose of (whether in one transaction or in a series of
related transactions) all or a material part of its Property to any
other Person; except for:
(i) any merger or consolidation which does not
result in a Change of Control, so long as the Company is the
survivor in each such merger or consolidation, the survivor
assumes all of the Company's obligations and liabilities to
the Lenders, the Issuing Bank and the Administrative Agent
under or in connection with the Lender Indebtedness and the
Financing Documents, pursuant to written agreements in form
and substance satisfactory to the Administrative Agent;
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(ii) any merger or consolidation of one Subsidiary
of the Company with one or more other Subsidiaries of the
Company, and any merger of a Subsidiary of the Company into
the Company; or
(iii) any lease, sale or other transfer of (A)
equipment which is worthless or obsolete; (B) inventory
(including oil and gas and seismic data) sold in the ordinary
course of business; and (C) any Oil and Gas Properties sold,
leased or otherwise transferred for fair market value not to
exceed $10,000,000 in the aggregate in any fiscal year of the
Company;
provided, however, that in each case, immediately thereafter and
giving effect thereto, no event shall occur and be continuing which
constitutes a Default or an Event of Default.
(d) Distribution, etc. Make any distribution of profits
or purchase, redeem or otherwise acquire for value any of the
partnership interests in the Company now or hereafter outstanding,
return any capital to its partners, or make any distribution of its
assets to its partners as such; provided, however, so long as no
Default or Event of Default has occurred and is continuing hereunder,
the Company may make (i) distributions to its Partners for the payment
of cash taxes due and payable by the Partners as a result of their
partnership interests in the Company, and (ii) other distributions to
its Partners not to exceed $2,500,000 in the aggregate in any calendar
year, less the aggregate principal amount of Indebtedness permitted by
Section 5.03(a)(v) which is incurred and outstanding in the same
calendar year.
(e) Investments, Loans, etc. Make or permit any loans to
or investments in any Person, or permit any of its Subsidiaries to
make or permit any loans to or investments in any such Person (it is
hereby agreed to and understood that acquisitions of Oil and Gas
Properties and related assets shall not be deemed an investment in a
Person for purposes of this Agreement), other than:
(i) investments, loans or advances, the material
details of which have been set forth in the Financial
Statements or are disclosed to the Administrative Agent in
Schedule 4.07;
(ii) investments in direct obligations of the
United States of America or any agency thereof maturing within
1 year after acquisition;
(iii) investments in certificates of deposit with
maturities not later than 1 year from the date of deposit
thereof, issued by any Lender or any commercial banks in the
United States having capital and surplus in excess of
$200,000,000, and whose certificates of deposit have at least
the third highest credit rating given by either Standard &
Poor's Ratings Group or Moody's Investors Service, Inc.;
(iv) investments in commercial paper, maturing
within 270 days after acquisition thereof, rated in the
highest or second highest credit rating given by either
Standard & Poor's Ratings Group or Moody's Investors Service,
Inc.;
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(v) money market funds which are approved by the
Administrative Agent, in its discretion;
(vi) investments in the equity interests of any
Person (other than an individual) engaged in the oil and gas
business, provided that no such equity investment shall
violate 5.03(h);
(vii) investments in owner occupied real estate
used, in whole or in part, by the Company or any Subsidiary in
the conduct of its business not to exceed $5,000,000 at any
one time outstanding;
(viii) any other investments not described in the
foregoing clauses (i)-(viii), which in the aggregate do not
exceed $1,000,000;
(ix) loans made to employees of the Company or
Parent for the purposes of funding the exercise of outstanding
options to purchase equity interests in Parent not to exceed
$6,000,000 in the aggregate at any one time outstanding; and
(x) unsecured intercompany loans to any Guarantor
which do not exceed in the aggregate in each calendar year an
amount equal to the difference of (A) $2,500,000 less (B) the
aggregate amount of distributions made pursuant to Section
5.03(d)(ii) during such calendar year.
(f) Lease Payments. Except for (i) oil and gas lease
obligations permitted under Section 5.03(a), and (ii) lease
obligations (excluding Capital Lease Obligations) existing under
leases for oil field equipment and tools rented in the ordinary course
of business for a duration of less than one year; create, incur,
assume or suffer to exist, nor permit any of its Subsidiaries to
create, incur, assume or suffer to exist, any obligation for the
payment of rent or hire of Property of any kind whatsoever (real or
personal), whether directly or as a guarantor, if, after giving effect
thereto, the aggregate amount of all payments required to be made by
the Company and its Subsidiaries on a consolidated basis pursuant to
such leases or lease agreements (excluding Capital Lease Obligations)
would exceed $2,500,000 in any calendar year.
(g) Sales and Leasebacks. Enter into, or permit any of
its Subsidiaries to enter into, any arrangement, directly or
indirectly, with any Person whereby the Company or any such Subsidiary
shall sell or transfer any Property, whether now owned or hereafter
acquired, and whereby the Company or any such Subsidiary shall then or
thereafter rent or lease as lessee such Property or any part thereof
or other Property which the Company or any such Subsidiary intends to
use for substantially the same purpose or purposes as the Property
sold or transferred.
(h) Nature of Business. Permit any material change to be
made in the character of the business of the Company and the
Guarantors, taken as a whole, as carried on at the date hereof, except
as may be permitted pursuant to this Agreement.
(i) ERISA Compliance.
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(i) Engage in, or permit any ERISA Affiliate to
engage in, any transaction in connection with which the
Company, a Subsidiary of the Company or any ERISA Affiliate
could be subjected to either a civil penalty assessed pursuant
to Sections 502(c) or 502(i) of ERISA or a tax imposed by
Section 4975 of the Code, except where such assessment or
imposition would not reasonably be expected to have Material
Adverse Effect;
(ii) Terminate, or permit any ERISA Affiliate to
terminate, any Plan in a manner, or take any other action with
respect to any Plan, which would reasonably be expected to
result in any liability of the Company, a Subsidiary of the
Company or any ERISA Affiliate to the PBGC;
(iii) Fail to make, or permit any ERISA Affiliate
to fail to make, full payment when due of all amounts which,
under the provisions of any Plan, agreement relating thereto
or applicable law, the Company, a Subsidiary of the Company or
any ERISA Affiliate is required to pay as contributions
thereto, except where the failure to make such payments would
not reasonably be expected to have Material Adverse Effect;
(iv) Permit to exist, or allow any ERISA Affiliate
to permit to exist, any accumulated funding deficiency within
the meaning of Section 302 of ERISA or Section 412 of the
Code, whether or not waived, with respect to any Plan, except
where the existence of such a deficiency would not reasonably
be expected to have a Material Adverse Effect;
(v) Contribute to or assume an obligation to
contribute to, or permit any ERISA Affiliate to contribute to
or assume an obligation to contribute to, any "multi-employer
plan" as such term is defined in Section 3(37) or 4001(a)(3)
of ERISA;
(vi) Acquire, or permit any ERISA Affiliate to
acquire, an interest in any Person that causes such Person to
become an ERISA Affiliate with respect to the Company or a
Subsidiary of the Company or with respect to any ERISA
Affiliate of the Company or a Subsidiary of the Company if
such Person sponsors, maintains or contributes to, or at any
time in the six-year period preceding such acquisition has
sponsored, maintained, or contributed to, (1) any
"multi-employer plan" as such term is defined in Section 3(37)
or 4001(a)(3) of ERISA, or (2) any other Plan that is subject
to Title IV of ERISA under which the actuarial present value
of the benefit liabilities under such Plan exceeds the current
value of the assets (computed on a plan termination basis in
accordance with Title IV of ERISA) of such Plan allocable to
such benefit liabilities;
(vii) Fail to pay, or cause to be paid, to the PBGC
in a timely manner, and without incurring any late payment or
underpayment charge or penalty, all premiums required pursuant
to Sections 4006 and 4007 of ERISA, except where such failure
would not reasonably be expected to have a Material Adverse
Effect; or
(viii) Amend, or permit any ERISA Affiliate to
amend, a Plan resulting in an increase in current liability
such that the Company, a Subsidiary of the Company or any
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ERISA Affiliate is required to provide security to such Plan
under Section 401(a)(29) of the Code.
(j) Proceeds of Loans. Use any proceeds of the Loans for
any purpose other than (i) to renew, rearrange and modify the
outstanding principal balance owing under the Prior Notes, (ii) to
acquire proven oil and gas properties, development of oil and gas
properties, and (iii) for general corporate purposes or, until the
acquisition contemplated in the Mobil Purchase and Sale Agreement has
been consummated, use funds borrowed hereunder which cause the
outstanding Loan balance to exceed $35,000,000 for any purpose other
than the consummation of such acquisition. The Letters of Credit
shall be used only for the purposes provided in Section 2.03. Neither
the Company nor any Person acting on behalf of the Company will take
any action which might cause the Notes or any of the Financing
Documents, including this Agreement, to violate Regulation U or X or
any other regulation of the Board of Governors of the Federal Reserve
System or to violate Section 7 of the Securities and Exchange Act of
1934, as amended, (or any successor thereto) or any rule or regulation
thereunder, in each case as now in effect or as the same may
hereinafter be in effect.
(k) Transactions with Affiliates. Except as otherwise
permitted in the this Agreement, enter into any transaction or series
of transactions, or permit any of its Subsidiaries to enter into any
transaction or series of transactions, with Affiliates of the Company
or its Subsidiaries (other than the Parent and its Subsidiaries) which
involve an outflow of money or other Property from the Company or its
Subsidiaries to an Affiliate of the Company or its Subsidiaries,
including but not limited to repayment of Indebtedness, management
fees, compensation, salaries, asset purchase payments or any other
type of fees or payments similar in nature, other than on terms and
conditions substantially as favorable to the Company and its
Subsidiaries as would be obtainable by the Company and its
Subsidiaries in a reasonably comparable arm's-length transaction with
a Person other than such an Affiliate of the Company or its
Subsidiaries. Notwithstanding the foregoing, the restrictions set
forth in this Section 5.03(k) shall not apply to the payment of
reasonable and customary fees to directors of Parent who are not
employees of Parent or to the payment of reasonable financial advisory
and similar fees to equity investors in the Company, who are not
employees (specifically including, the fees payable to NGP under its
existing agreement with the Company and fees payable to First Union
Capital Partners and Enron Capital & Trade Resources Corp., or any of
their respective Affiliates or designees).
(l) Unconditional Purchase Obligations. Enter into or be
a party to, or permit any of its Subsidiaries to enter into or be a
party to, any contract for the purchase of materials, supplies or
other property or services, if such contract requires that payment be
made by it regardless of whether or not delivery is ever made of such
materials, supplies or other property or services.
(m) Change in Management. Permit any change in the
current Chief Executive Officer of either the Parent or General
Partner.
(n) Creation of Subsidiaries. Except for joint ventures
and partnerships entered into in the ordinary course of the Company's
business, create or permit any Subsidiary to create, any new
Subsidiaries without prior written notice to the Administrative Agent.
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(o) Current Ratio. The Company will not permit its ratio
of (i) consolidated current assets to (ii) consolidated current
liabilities (excluding current maturities of the Notes) to be less
than 1.0 to 1.0 at any time. As used in this Section 5.03(o) "current
assets" shall mean all assets of a Person which under GAAP would be
classified as current assets, and "current liabilities" shall mean all
liabilities of a Person which under GAAP would be classified as
current liabilities.
(p) Debt Coverage Ratio. For the period from and after
the Closing Date through December 31, 1997, the Company will not
permit the Debt Ratio as of the end of any fiscal quarter of Parent
(calculated quarterly at the end of each fiscal quarter) to be greater
than 4.50 to 1.00. For the period from and after January 1, 1998,
through the Maturity Date, the Company will not permit the Debt Ratio
as of the end of any fiscal quarter of Parent (calculated quarterly at
the end of each fiscal quarter) to be greater than 3.50 to 1.00. For
purposes of this Section 5.03(p), "Debt Ratio" shall mean the ratio of
(i) Funded Indebtedness of Parent and its Consolidated Subsidiaries at
the end of each fiscal quarter of Parent, to (ii) EBITDA for the four
fiscal quarters ending on such date.
(q) Interest Coverage Ratio. For the period from and
after the Closing Date through December 31, 1997, the Company will not
permit the Interest Coverage Ratio as of the end of any fiscal quarter
of Parent (calculated quarterly at the end of each fiscal quarter) to
be less than 2.50 to 1.00. For the period from and after January 1,
1998, through the Maturity Date, the Company will not permit the
Interest Coverage Ratio as of the end of any fiscal quarter of Parent
(calculated quarterly at the end of each fiscal quarter) to be less
than 3.00 to 1.00. For the purposes of this Section 5.03(q),
"Interest Coverage Ratio" shall mean the ratio of (i) EBITDA for the
four fiscal quarters ending on such date to (ii) cash interest
payments made for such four fiscal quarters of Parent and its
Consolidated Subsidiaries.
(r) Amendments to Partnership Agreement. Amend
materially or restate, or permit any material amendment or restatement
of, the Partnership Agreement without the prior written consent of the
Majority Lenders (which consent will not be unreasonably withheld);
provided, however, the Partnership Agreement may be amended to
substitute the limited partner of the Company with a wholly-owned
Subsidiary of the Parent.
ARTICLE VI
EVENTS OF DEFAULT AND REMEDIES
Upon the occurrence and during the continuance of any of the following
specified events (each an "Event of Default"):
Section 6.01 Payments. (a) The Company shall fail to pay when due
(including, but not limited to, by mandatory prepayment required pursuant to
Section 2.10) any principal of any Loan or any Note, or any Reimbursement
Obligation; or (b) the Company shall fail to pay when due any interest on any
Loan or Note, any fee or any other amount payable hereunder, and such failure
to pay shall continue unremedied for a period of three Business Days;
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Section 6.02 Covenants Without Notice. The Company shall fail to
observe or perform any covenant or agreement contained in Sections 5.02(f)(ii)
or Section 5.03;
Section 6.03 Other Covenants. The Company shall fail to observe
or perform any covenant or agreement contained in this Agreement or contained
in any Financing Document other than this Agreement, other than those referred
to in Sections 6.01 or 6.02, and, if capable of being remedied, such failure
shall remain unremedied for 30 days after the earlier of (i) the Company's
obtaining knowledge thereof, or (ii) written notice thereof shall have been
given to the Company by the Administrative Agent;
Section 6.04 Other Financing Document Obligations. Default in any
material respect is made in the due observance or performance by any Guarantor
or any Subsidiary of the Company of any of the covenants or agreements
contained in any Financing Document to which they are a party, and, if capable
of being remedied, such default continues unremedied 30 days after the earlier
of (i) such Guarantor or Subsidiary, as appropriate, obtaining knowledge
thereof, or (ii) written notice thereof shall have been given to such Guarantor
or Subsidiary, as appropriate, by the Administrative Agent;
Section 6.05 Representations. Any representation, warranty or
statement made or deemed to be made by the Company or any Subsidiary of the
Company or any of such Company's, or Subsidiary's officers herein or in any
other Financing Document, or in any certificate, request or other document
furnished pursuant to or under this Agreement or any other Financing Document,
shall have been incorrect in any material respect as of the date when made or
deemed to be made; provided that, if the incorrect representation, warranty or
statement arises as a result of a defect in the title or condition of any
Property acquired from Mobil, which at the time of acquisition was unknown to
the Company, an Event of Default will not occur if the Company, within 60 days
after such incorrectness is discovered, either (i) corrects the defect which
has caused such representation, warranty or statement to be incorrect, or (ii)
causes other Oil and Gas Properties which have a value at least equivalent to
the defective Property and are otherwise acceptable to the Administrative
Agent, to be substituted as Mortgaged Property in lieu of the defective
Property;
Section 6.06 Non-Payments of Other Indebtedness. The Company or
any of its Subsidiaries shall fail to make any payment or payments of principal
of or interest on any Indebtedness of the Company or such Subsidiary in excess
of $1,000,000 in the aggregate (other than (i) the Lender Indebtedness and (ii)
any trade account subject to a bona fide dispute and the trade creditor has
neither filed a lawsuit nor caused a Lien to be placed upon any Property of the
Company or such Subsidiary) when due (whether at stated maturity, by
acceleration, on demand or otherwise) after giving effect to any applicable
grace period;
Section 6.07 Defaults Under Other Agreements. The Company or any
of its Subsidiaries shall fail to observe or perform any covenant or agreement
contained in any agreement(s) or instrument(s) relating to Indebtedness of
$500,000 or more in the aggregate within any applicable grace period, or any
other event shall occur, if the effect of such failure or other event is to
accelerate the maturity of $500,000 or more in the aggregate of such
Indebtedness; or $1,000,000 or more in the aggregate of any such Indebtedness
shall be, as a result of such failure or other event, required to be prepaid
(other than by a regularly scheduled required prepayment) in whole or in part
prior to its stated maturity;
Section 6.08 Bankruptcy. The Company or any of its Subsidiaries
shall commence a voluntary case concerning itself under Title 11 of the United
States Code entitled "Bankruptcy" as now or hereafter
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in effect, or any successor thereto (the "Bankruptcy Code"); or an involuntary
case is commenced against the Company or any of its Subsidiaries and the
petition is not controverted within 10 days, or is not stayed or dismissed
within 60 days, after commencement of the case; or a custodian (as defined in
the Bankruptcy Code) is appointed for, or takes charge of, all or any
substantial part of the property of the Company or any of its Subsidiaries; or
the Company or any of its Subsidiaries commences any other proceeding under any
reorganization, arrangement, adjustment of debt, relief of debtors,
dissolution, insolvency or liquidation or similar law of any jurisdiction
whether now or hereafter in effect relating to the Company or such Subsidiary
or there is commenced against the Company or any of its Subsidiaries any such
proceeding which remains unstayed or undismissed for a period of 60 days; or
the Company or any of its Subsidiaries is adjudicated insolvent or bankrupt; or
any order of relief or other order approving any such case or proceeding is
entered; or the Company or any of its Subsidiaries suffers any appointment of
any custodian or the like for it or any substantial part of its Property to
continue undischarged or unstayed for a period of 60 days; or the Company or
any of its Subsidiaries makes a general assignment for the benefit of
creditors; or the Company or any of its Subsidiaries shall fail to pay, or
shall state that it is unable to pay, or shall be unable to pay, its debts
generally as they become due; or the Company or any of its Subsidiaries shall
by any act or failure to act indicate its consent to, approval of or
acquiescence in any of the foregoing; or any corporate action is taken by the
Company or any of its Subsidiaries for the purpose of effecting any of the
foregoing;
Section 6.09 ERISA. A Plan shall fail to maintain the minimum
funding standard required by Section 412 of the Code for any plan year or a
waiver of such standard is sought or granted under Section 412(d), or a Plan
is, shall have been or is likely to be, terminated or the subject of
termination proceedings under ERISA, or the Company or an ERISA Affiliate has
incurred or is likely to incur a liability to or on account of a Plan under
Section 515, 4062, 4063, 4064, 4201 or 4204 of ERISA, and there shall result
from any such event or events either a liability or a material risk of
incurring a liability to the PBGC or a Plan, which will have a Material Adverse
Effect;
Section 6.10 Money Judgment. A judgment or order for the payment
of money in excess of $1,000,000 or that would otherwise have a Material
Adverse Effect shall be rendered against the Company or any of it Subsidiaries
and such judgment or order shall continue unsatisfied in accordance with the
terms of such judgment or order (in the case of a money judgment) and in effect
for a period of 30 days during which execution shall not be effectively stayed
or deferred (whether by action of a court, by agreement or otherwise);
Section 6.11 Security Instruments. The material terms of the
Security Instruments after delivery thereof shall for any reason, except to the
extent permitted by the terms thereof, cease to be in full force and effect and
valid, binding and enforceable (except as enforceability may be limited as
stated in Section 4.03) in accordance with their terms, or cease to create a
valid and perfected Lien of the priority contemplated thereby on any of the
collateral purported to be covered thereby, or the Company or any of its
Subsidiaries (or any other Person who may have granted or purported to grant
such Lien) shall so state in writing;
Section 6.12 Mandatory Prepayments. The Company shall fail to
make any mandatory prepayment required by Section 2.10; or
Section 6.13 Change in Control. The occurrence of a Change in
Control, which shall not include any merger or consolidation permitted by
Section 5.03(c);
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then, and in any such event, and at any time thereafter, if any Event of
Default shall then be continuing, the Administrative Agent, upon the written or
telex request of the Majority Lenders, shall, by written notice to the Company,
take any or all of the following actions, without prejudice to the rights of
the Administrative Agent, any Lender or the holder of any Note, to enforce its
claims against the Company and: (i) declare the Commitment and other lending
obligations, if any, terminated, whereupon the Commitment and other lending
obligations, if any, of each Lender shall terminate immediately; or (ii)
declare the entire principal amount of and all accrued interest on all Lender
Indebtedness then outstanding to be due, whereupon the same shall become,
forthwith due and payable without presentment, demand, protest, notice of
protest or dishonor, notice of acceleration, notice of intent to accelerate or
other notice of any kind, all of which are hereby expressly waived by the
Company, and thereupon take such action as it may deem desirable under and
pursuant to the Financing Documents; provided, that, if an Event of Default
specified in Section 6.08 shall occur with respect to the Company, the result
which would occur upon the giving of written notice by the Administrative Agent
to the Company, as specified in clauses (i) and (ii) above, shall occur
automatically without the giving of any such notice.
ARTICLE VII
THE ADMINISTRATIVE AGENT
Section 7.01 Appointment of Administrative Agent. Each Lender and
the Issuing Bank hereby designate The Chase Manhattan Bank, as Administrative
Agent to act as herein specified. Each Lender and the Issuing Bank hereby
irrevocably authorizes the Administrative Agent to take such action on its
behalf under the provisions of this Agreement, the Notes, and the other
Financing Documents and to exercise such powers and to perform such duties
hereunder and thereunder as are specifically delegated to or required of the
Administrative Agent by the terms hereof and thereof and such other powers as
are reasonably incidental thereto. The Administrative Agent may perform any of
its duties hereunder by or through its agents or employees.
Section 7.02 Nature of Duties of Administrative Agent. The
Administrative Agent shall have no duties or responsibilities except those
expressly set forth with respect to the Administrative Agent in this Agreement.
Neither the Administrative Agent, nor any of its respective officers,
directors, employees or agents shall be liable for any action taken or omitted
by it as such hereunder or in connection herewith, unless caused by its or
their gross negligence or willful misconduct. The duties of the Administrative
Agent shall be mechanical and administrative in nature; the Administrative
Agent shall not have by reason of this Agreement a fiduciary relationship in
respect of any Lender; and nothing in this Agreement, expressed or implied, is
intended to or shall be so construed as to impose upon the Administrative Agent
any obligations in respect of this Agreement except as expressly set forth
herein.
Section 7.03 Lack of Reliance on the Administrative Agent.
(a) Independent Investigation. Independently and without
reliance upon the Administrative Agent, each Lender, to the extent it
deems appropriate, has made and shall continue to make (i) its own
independent investigation of the financial condition and affairs of
the Company in connection with the taking or not taking of any action
in connection herewith, and (ii) its own appraisal of the
creditworthiness of the Company, and, except as expressly provided in
this Agreement, the Administrative Agent shall have no duty or
responsibility, either initially or on a continuing basis, to provide
any Lender with any credit or other information with respect
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thereto, whether coming into its possession before the consummation of
the transactions contemplated herein or at any time or times
thereafter.
(b) Administrative Agent Not Responsible. The
Administrative Agent shall not be responsible to any Lender or the
Issuing Bank for any recitals, statements, information,
representations or warranties herein or in any document, certificate
or other writing delivered in connection herewith or for the
execution, effectiveness, genuineness, validity, enforceability,
collectibility, priority or sufficiency of this Agreement, the Notes,
the Letters of Credit or the other Financing Documents or the
financial condition of the Company or be required to make any inquiry
concerning either the performance or observance of any of the terms,
provisions or conditions of this Agreement, the Notes or the other
Financing Documents, or the financial condition of the Company, or the
existence or possible existence of any Default or Event of Default.
Section 7.04 Certain Rights of the Administrative Agent. If the
Administrative Agent shall request instructions from the Majority Lenders with
respect to any act or action (including the failure to act) in connection with
this Agreement, the Notes and the other Financing Documents, the Administrative
Agent shall be entitled to refrain from such act or taking such action unless
and until the Administrative Agent shall have received instructions from the
Majority Lenders; and the Administrative Agent shall not incur liability to any
Person by reason of so refraining. Without limiting the foregoing, no Lender
shall have any right of action whatsoever against the Administrative Agent as a
result of the Administrative Agent acting or refraining from acting under this
Agreement, the Notes and the other Financing Documents in accordance with the
instructions of the Majority Lenders.
Section 7.05 Reliance by Administrative Agent. The Administrative
Agent shall be entitled to rely, and shall be fully protected in relying, upon
any note, writing, resolution, notice, statement, certificate, telex, teletype
or telecopier message, cablegram, radiogram, order or other documentary,
teletransmission or telephone message believed by it to be genuine and correct
and to have been signed, sent or made by the proper Person. The Administrative
Agent may consult with legal counsel (including counsel for the Company),
independent public accountants and other experts selected by it and shall not
be liable for any action taken or omitted to be taken by it in good faith in
accordance with the advice of such counsel, accountants or experts.
Section 7.06 INDEMNIFICATION OF ADMINISTRATIVE AGENT. TO THE
EXTENT THE ADMINISTRATIVE AGENT IS NOT REIMBURSED AND INDEMNIFIED BY THE
COMPANY, EACH LENDER WILL REIMBURSE AND INDEMNIFY THE ADMINISTRATIVE AGENT AS
APPLICABLE, IN PROPORTION TO ITS PERCENTAGE SHARE, FOR AND AGAINST ANY AND ALL
LIABILITIES, OBLIGATIONS, LOSSES, DAMAGES, PENALTIES, ACTIONS, JUDGMENTS,
SUITS, COSTS, EXPENSES (INCLUDING COUNSEL FEES AND DISBURSEMENTS) OR
DISBURSEMENTS OF ANY KIND OR NATURE WHATSOEVER WHICH MAY BE IMPOSED ON,
INCURRED BY OR ASSERTED AGAINST THE ADMINISTRATIVE AGENT IN PERFORMING ITS
DUTIES HEREUNDER, IN ANY WAY RELATING TO OR ARISING OUT OF THIS AGREEMENT AND
BY REASON OF ORDINARY NEGLIGENCE OF THE ADMINISTRATIVE AGENT; PROVIDED THAT NO
LENDER SHALL BE LIABLE TO THE ADMINISTRATIVE AGENT FOR ANY PORTION OF SUCH
LIABILITIES, OBLIGATIONS, LOSSES, DAMAGES, PENALTIES, ACTIONS, JUDGMENTS,
SUITS, COSTS, EXPENSES OR DISBURSEMENTS RESULTING FROM, AS TO THE
ADMINISTRATIVE AGENT, THE ADMINISTRATIVE AGENT'S GROSS NEGLIGENCE OR WILLFUL
MISCONDUCT.
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Section 7.07 The Administrative Agent in its Individual Capacity.
With respect to their obligations under this Agreement, the Loans made by it
and the Notes issued to it, the Administrative Agent shall have the same rights
and powers hereunder as any other Lender or holder of a Note and may exercise
the same as though it were not performing the duties, if any, specified herein;
and the terms "Lenders," "Majority Lenders," "holders of Notes" or any similar
terms shall, unless the context clearly otherwise indicates, include the
Administrative Agent in its individual capacity. The Administrative Agent may
accept deposits from, lend money to, and generally engage in any kind of
banking, trust, financial advisory or other business with the Company or any
affiliate of the Company as if it were not performing the duties, if any,
specified herein, and may accept fees and other consideration from the Company
for services in connection with this Agreement and otherwise without having to
account for the same to the Lenders.
Section 7.08 May Treat Lender as Owner. The Administrative Agent
and the Company may deem and treat each Lender as the owner of such Lender's
Note for all purposes hereof unless and until a written notice of the
assignment or transfer thereof shall have been filed with the Administrative
Agent. Any request, authority or consent of any Person who at the time of
making such request or giving such authority or consent is the owner of a Note
shall be conclusive and binding on any subsequent owner, transferee or assignee
of such Note or any promissory note or notes issued in exchange therefor.
Section 7.09 Successor Administrative Agent.
(a) Administrative Agent Resignation. The Administrative
Agent may resign at any time by giving written notice thereof to the
Lenders, the Issuing Bank and the Company and may be removed at any
time with or without cause by the Majority Lenders. Upon any such
resignation or removal, the Majority Lenders shall have the right,
subject to the reasonable approval of the Company so long as no Event
of Default then exists, to appoint a successor Administrative Agent.
If no successor Administrative Agent shall have been so appointed by
the Majority Lenders, and shall have accepted such appointment, within
30 days after the retiring Administrative Agent's giving of notice of
resignation or the Majority Lenders' removal of the retiring
Administrative Agent, then, upon five days' notice to the Company, the
retiring Administrative Agent may, on behalf of the Lenders, appoint a
successor Administrative Agent, which shall be a bank which maintains
an office in the United States, or a commercial bank organized under
the laws of the United States of America or of any State thereof, or
any Affiliate of such bank, having a combined capital and surplus of
at least $250,000,000.
(b) Rights, Powers, etc. Upon the acceptance of any
appointment as Administrative Agent hereunder by a successor
Administrative Agent, such successor Administrative Agent shall
thereupon succeed to and become vested with all the rights, powers,
privileges and duties of the retiring Administrative Agent, and the
retiring Administrative Agent shall be discharged from its duties and
obligations under this Agreement. After any retiring Administrative
Agent's resignation or removal hereunder as Administrative Agent, the
provisions of this Article VII shall inure to its benefit as to any
actions taken or omitted to be taken by it while it was Administrative
Agent under this Agreement.
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ARTICLE VIII
MISCELLANEOUS
Section 8.01 Notices. All notices, requests and other
communications to any party hereunder shall be in writing (including, telecopy
or similar teletransmission or writing) and shall be given to such party at its
address or telecopy number set forth on the signature pages hereof or such
other address or telecopy number as such party may hereafter specify by notice
to the Administrative Agent and the Company; provided that a copy of all
notices to the Administrative Agent (a) which are Advance Notices shall also be
sent to The Chase Manhattan Bank, 140 East 45th Street, 29th Floor, New York,
New York 10017, Attention: Sandra Miklave, telephone number: 212/622-0005,
telefax number: 212/622-0002, and (b) which are requests for the issuance of a
Letter of Credit by Chase shall also be sent to The Chase Manhattan Bank, 55
Water Street, 17th Floor, New York, New York 10017, Attention: Indirah Toovey,
telephone number: 212/638-8200, telefax number: 212/638-1834, with copies to
The Chase Manhattan Bank, 140 East 45th Street, 29th Floor, New York, New York
10017, Attention: Sandra Miklave, telephone number: 212/622-0005, telefax
number: 212/622-0002, and with copies of all such notices to Chase Securities
Inc., 707 Travis, 5N86, Houston, Texas 77002, Attention: Sandra Aultman. Each
such notice, request or other communication shall be effective (i) if given by
mail, 72 hours after such communication is deposited in the mails with first
class postage prepaid, addressed as aforesaid, or (ii) if given by any other
means (including, but not limited to, by air courier), when delivered at the
address specified in this Section; provided that notices to the Administrative
Agent shall not be effective until received.
Section 8.02 Amendments, etc. Any provision of this Agreement or
any other Financing Document may be amended, modified or waived with the
Company's and the Majority Lenders' prior written consent; provided that (a) no
amendment, modification or waiver which (i) extends the due date or maturity of
the Loans, any mandatory prepayment or the Maturity Date, (ii) except as
otherwise contemplated herein or in one of the other Financing Documents,
releases any material portion of the Collateral, (iii) reduces the principal of
or interest rate applicable to the Loans or the fees or other amounts payable
to the Lenders hereunder or under any other Financing Document, (iv) releases
the Company or any material Guarantor from its respective obligation to pay
principal or interest on the Loans, (v) waives, forgives, defers, extends or
postpones any payment of Lender Indebtedness including interest, fees or any
other amount required hereunder or under any other Financing Document, (vi)
permanently waives any material (in the Administrative Agent's reasonable
judgment) condition precedent for the initial Loan hereunder, (vii) affects
this Section 8.02 or Section 8.04, or (viii) modifies the definition of
"Majority Lenders" or "Required Lenders," shall be effective without consent of
all Lenders; (b) no amendment, modification or waiver which increases the
Commitment of any Lender shall be effective without the consent of such Lender;
(c) no amendment, modification or waiver which modifies the rights, duties or
obligations of the Administrative Agent shall be effective without the consent
of the Administrative Agent; and (d) no amendment, modification or waiver which
modifies the rights, duties or obligations of the Issuing Bank shall be
effective without the consent of the Issuing Bank. Notwithstanding anything in
this Section to the contrary, unless instructed to the contrary by the Majority
Lenders, the Issuing Bank shall extend each Letter of Credit prior to any
expiration date thereof pursuant to the terms of such Letter of Credit or its
related Application if a failure to so extend such Letter of Credit would
result in entitling the beneficiary thereof to draw thereon.
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Section 8.03 No Waiver; Remedies Cumulative. No failure or delay
on the part of the Company or the Administrative Agent or any Lender or any
holder of any Note in exercising any right or remedy under this Agreement or
any other Financing Document and no course of dealing between the Company and
the Administrative Agent or any Lender or any holder of any Note shall operate
as a waiver thereof, nor shall any single or partial exercise of any right or
remedy under the Notes, this Agreement or any other Financing Document preclude
any other or further exercise thereof or the exercise of any other right or
remedy under the Notes, this Agreement or any other Financing Document. The
rights and remedies herein expressly provided are cumulative and not exclusive
of any rights or remedies which the Company, the Administrative Agent or any
Lender would otherwise have. No notice to or demand on the Company not
required under the Notes, this Agreement or any other Financing Document in any
case shall entitle the Company to any other or further notice or demand in
similar or other circumstances or constitute a waiver of the rights of the
Administrative Agent or the Lenders to any other or further action in any
circumstances without notice or demand.
Section 8.04 Payment of Expenses, Indemnities, etc. The Company
agrees to (and shall be liable for):
(a) Expenses. Whether or not the transactions hereby
contemplated are consummated, pay all reasonable out-of-pocket costs
and expenses of the Administrative Agent and the Issuing Bank in the
administration (both before and after the execution hereof and
including advice of counsel as to the rights and duties of the
Administrative Agent and the Lenders with respect thereto) of, and in
connection with the preparation, execution and delivery of, recording
or filing of, preservation of rights under, enforcement of, and, after
a Default, refinancing, renegotiation or restructuring of, this
Agreement, the Notes, and the other Financing Documents and any
amendment, waiver or consent relating thereto (including, but not
limited to, the reasonable fees and disbursements of counsel for the
Administrative Agent and in the case of enforcement for any of the
Lenders) and promptly reimburse the Administrative Agent for all
amounts expended, advanced, or incurred by the Administrative Agent or
the Lenders to satisfy any obligation of the Company or the Guarantors
under this Agreement or any other Financing Document; provided that,
the amount of the legal fees of counsel to the Administrative Agent
and Lenders which are to be reimbursed by the Company in connection
with the preparation of the Financing Documents and the conduct of
title review shall not exceed $____________ plus reasonable expenses
for photocopying, long distance charges, telefaxes, courier deliveries
and filing fees;
(b) INDEMNIFICATION. INDEMNIFY THE ADMINISTRATIVE AGENT,
THE ISSUING BANK AND EACH LENDER, EACH OF THEIR RESPECTIVE OFFICERS,
DIRECTORS, EMPLOYEES, REPRESENTATIVES, AGENTS AND AFFILIATES FROM,
HOLD EACH OF THEM HARMLESS AGAINST, AND PROMPTLY UPON DEMAND PAY OR
REIMBURSE EACH OF THEM FOR, ANY AND ALL ACTIONS, SUITS, PROCEEDINGS
(INCLUDING ANY INVESTIGATIONS, LITIGATION OR INQUIRIES), CLAIMS,
COSTS, LOSSES, LIABILITIES, DAMAGES OR EXPENSES OF ANY KIND OR NATURE
WHATSOEVER 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 COMPANY OR ANY SUBSIDIARY OF THE COMPANY OF THE
PROCEEDS OF ANY OF THE LOANS; OR (II) ANY OTHER ASPECT OF THIS
AGREEMENT, THE NOTES, AND THE FINANCING DOCUMENTS, INCLUDING BUT NOT
LIMITED TO THE REASONABLE FEES AND DISBURSEMENTS
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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 ACTIONS, SUITS, PROCEEDINGS (INCLUDING ANY
INVESTIGATIONS, LITIGATION OR INQUIRIES), CLAIMS, COSTS, LOSSES,
LIABILITIES, DAMAGES OR EXPENSES ARISING BY REASON OF ORDINARY
NEGLIGENCE OF ANY OF THE ADMINISTRATIVE AGENT, THE ISSUING BANK AND
EACH LENDER, EACH OF THEIR RESPECTIVE OFFICERS, DIRECTORS, EMPLOYEES,
REPRESENTATIVES, AGENTS AND AFFILIATES; PROVIDED, HOWEVER, THE
PROVISIONS OF THIS SECTION 8.04(B) SHALL NOT APPLY TO ANY ACTION,
SUITS, PROCEEDINGS, CLAIMS, COSTS, LOSSES, LIABILITIES, DAMAGES, OR
EXPENSES TO THE EXTENT, BUT ONLY TO THE EXTENT, CAUSED BY THE GROSS
NEGLIGENCE OR WILLFUL MISCONDUCT OF THE PARTY SEEKING INDEMNIFICATION;
(c) ENVIRONMENTAL INDEMNIFICATION. INDEMNIFY AND HOLD
HARMLESS FROM TIME TO TIME THE ADMINISTRATIVE AGENT, THE ISSUING BANK
AND THE LENDERS, AND THE RESPECTIVE DIRECTORS, OFFICERS, COUNSEL,
EMPLOYEES, AGENTS, SUCCESSORS AND ASSIGNS OF EACH OF THE FOREGOING
FROM AND AGAINST ANY AND ALL LOSSES, CLAIMS, COST RECOVERY ACTIONS,
ADMINISTRATIVE ORDERS OR PROCEEDINGS, DAMAGES AND LIABILITIES (WHICH
RELATE TO OR ARISE AS A RESULT OF THE LOANS, THE LETTERS OF CREDIT OR
ANY FINANCING DOCUMENT) TO WHICH ANY SUCH PERSON MAY BECOME SUBJECT
AND INCLUDING ANY AND ALL LOSSES, CLAIMS, COST RECOVERY ACTIONS,
ADMINISTRATIVE ORDERS OR PROCEEDINGS, DAMAGES AND LIABILITIES (WHICH
RELATE TO OR ARISE AS A RESULT OF THE LOANS, THE LETTERS OF CREDIT OR
ANY FINANCING DOCUMENT) ARISING BY REASON OF THE ORDINARY NEGLIGENCE
OF THE ADMINISTRATIVE AGENT, THE ISSUING BANK AND THE LENDERS, AND THE
RESPECTIVE DIRECTORS, OFFICERS, COUNSEL, EMPLOYEES, AGENTS, SUCCESSORS
AND ASSIGNS OF EACH OF THE FOREGOING (1) UNDER ANY ENVIRONMENTAL LAW
APPLICABLE TO THE COMPANY OR 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, (2) AS A RESULT OF THE BREACH OR NON-COMPLIANCE BY THE
COMPANY OR ANY OF ITS SUBSIDIARIES WITH ANY ENVIRONMENTAL LAW
APPLICABLE TO THE COMPANY OR ANY OF ITS SUBSIDIARIES, (3) DUE TO PAST
OWNERSHIP BY THE COMPANY OR ANY OF ITS SUBSIDIARIES OF ANY OF THEIR
RESPECTIVE PROPERTIES OR PAST ACTIVITY ON 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, (4) THE PRESENCE, USE, RELEASE, STORAGE,
TREATMENT OR DISPOSAL OF HAZARDOUS SUBSTANCES ON OR AT ANY OF THE
PROPERTIES PRIOR TO OR DURING THE PERIOD OWNED BY THE COMPANY OR
OPERATED BY THE COMPANY OR ANY OF ITS SUBSIDIARIES, OR (5) ANY OTHER
ENVIRONMENTAL, HEALTH OR SAFETY CONDITION IN CONNECTION WITH THIS
AGREEMENT, THE NOTES OR ANY OTHER FINANCING DOCUMENT; PROVIDED,
HOWEVER, NO INDEMNITY SHALL BE AFFORDED UNDER THIS SECTION 8.04(c) IN
RESPECT OF ANY PROPERTY FOR ANY OCCURRENCE ARISING SOLELY AND DIRECTLY
FROM THE ACTS OR OMISSIONS OF THE ADMINISTRATIVE AGENT OR ANY 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); AND
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(d) ENVIRONMENTAL WAIVER. WITHOUT LIMITING THE FOREGOING
PROVISIONS, THE COMPANY DOES HEREBY WAIVE, RELEASE AND COVENANT NOT TO
BRING AGAINST ANY OF THE PERSONS IDENTIFIED IN THIS SECTION 8.04 ANY
DEMAND, CLAIM, COST RECOVERY ACTION OR LAWSUIT WHICH THE COMPANY MAY
NOW OR HEREAFTER HAVE OR ACCRUE (WHICH RELATE TO OR ARISE AS A RESULT
OF THE LOANS, THE LETTERS OF CREDIT OR ANY FINANCING DOCUMENT) ARISING
FROM (1) ANY ENVIRONMENTAL LAW NOW OR HEREAFTER ENACTED (INCLUDING
THOSE APPLICABLE TO THE COMPANY OR ANY OF ITS SUBSIDIARIES) UNLESS THE
ACTS OR OMISSIONS OF ANY SUCH PERSON OR THEIR RESPECTIVE SUCCESSORS
AND ASSIGNS ARE THE SOLE AND DIRECT CAUSE OF THE CIRCUMSTANCES GIVING
RISE TO SUCH DEMAND, COST RECOVERY ACTION OR LAWSUIT, (2) THE
PRESENCE, USE, RELEASE, STORAGE, TREATMENT OR DISPOSAL OF HAZARDOUS
SUBSTANCES ON OR AT ANY OF THE PROPERTIES PRIOR TO OR DURING THE
PERIOD OWNED BY THE COMPANY OR OPERATED BY THE COMPANY OR ANY OF ITS
SUBSIDIARIES, OR (3) THE BREACH OR NON-COMPLIANCE BY THE COMPANY WITH
ANY ENVIRONMENTAL LAW OR ENVIRONMENTAL COVENANT APPLICABLE TO THE
COMPANY OR ANY OF ITS SUBSIDIARIES, UNLESS THE ACTS OR OMISSIONS OF
SUCH PERSON, ITS SUCCESSORS AND ASSIGNS ARE THE SOLE AND DIRECT CAUSE
OF THE CIRCUMSTANCES GIVING RISE TO SUCH DEMAND, CLAIM, COST RECOVERY
ACTION OR LAWSUIT.
If and to the extent that the obligations of the Company under this Section are
unenforceable for any reason, the Company hereby agrees to make the maximum
contribution to the payment and satisfaction of such obligations which is
permissible under applicable law. The Company's obligations under this Section
shall survive any termination of this Agreement and the payment of the Notes.
Section 8.05 Right of Setoff. In addition to and not in
limitation of all rights of offset that any Lender or the Issuing Bank may have
under applicable law, each Lender or other holder of a Note, or any other
Lender Indebtedness shall, upon the occurrence of any Event of Default and at
any time during the continuance thereof and whether or not such Lender, the
Issuing Bank or such holder has made any demand, have the right at any time and
from time to time, without notice to the Company (any such notice being
expressly waived by the Company) to set-off and apply any and all deposits
(general or special, time or demand, provisional or final) at any time held and
other indebtedness at any time owing by any Lender or the Issuing Bank to or
for the credit or the account of the Company against any and all of the Lender
Indebtedness then outstanding.
Section 8.06 Benefit of Agreement.
(a) Benefit of Parties. The Notes, this Agreement and
the other Financing Documents shall be binding upon and inure to the
benefit of and be enforceable by the respective successors and assigns
of the parties hereto, provided that the Company may not assign or
transfer any of its interest hereunder or thereunder without the prior
written consent of the Lenders. In the event that any Lender sells
participations in the Notes or other Lender Indebtedness of the
Company incurred or to be incurred pursuant to this Agreement, to
other banks or entities, each of such other banks or entities shall
have the rights of set-off against such Lender Indebtedness and
similar rights or Liens to the same extent as may be available to the
Administrative Agent or the Lenders.
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(b) Branch Offices, Affiliates. Any Lender may make,
carry or transfer Loans at, to or for the account of, any of its
branch offices or the office of an Affiliate of such Lender.
Section 8.07 Assignments and Participations.
(a) No Company Assignments. The Company may not assign
its rights and obligations hereunder or under the Notes.
(b) Assignment by Lenders. Each Lender may, upon the
written consent of the Administrative Agent and, so long as no Event
of Default exists, the Company (which consents shall not be
unreasonably withheld), assign to one or more Eligible Transferees all
or a portion of its rights and obligations under this Agreement
pursuant to an Assignment and Acceptance Agreement substantially in
the form of Exhibit D (an "Assignment and Acceptance") provided,
however, that (i) any such assignment shall be in the aggregate amount
of at least $10,000,000 or such lesser amount to which the Company has
consented (or if the aggregate amount of any Lender's Loans and
Commitments is less than $10,000,000, then the entire amount of such
Lender's Loans and Commitments), and (ii) the assignee shall pay to
the Administrative Agent a processing and recordation fee of $2,500.
Any such assignment will become effective upon the recording by the
Administrative Agent of such assignment in the Register of the
resultant effects thereof on the Commitment of the assignor and
assignee, and the principal amount outstanding of the Loans owed to
the assignor and assignee, the Administrative Agent hereby agreeing to
effect such recordation no later than five Business Days after its
receipt of an Assignment and Acceptance executed by all parties
thereto. Promptly after receipt of an Assignment and Acceptance
executed by all parties thereto, the Administrative Agent shall send
to the Company a copy of such executed Assignment and Acceptance.
Upon receipt of such executed Assignment and Acceptance, the Company,
will, at its own expense, execute and deliver new Notes to the
assignor and/or assignee, as appropriate, in accordance with their
respective interests as they appear on the Register, whereupon the
Administrative Agent shall redeliver the Note being assigned, as
received from the Assignor, to the Company. Upon the effectiveness of
any assignment pursuant to this subsection, the assignee shall be
deemed automatically to have become a party hereto, if not already a
party hereto, and shall become a "Lender," if not already a "Lender,"
for all purposes of this Agreement and the other Financing Documents.
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). The Administrative Agent
will prepare on the last Business Day of each month during which an
assignment has become effective pursuant to this subsection a new
schedule giving effect to all such assignments effected during such
month, and will promptly provide the same to the Company, the Issuing
Bank and each of the Lenders.
(c) Participations. Each Lender may transfer, grant or
assign participations in all or any part of such Lender's interests
hereunder pursuant to this subsection to any Person, provided that:
(i) such Lender shall remain a "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 this Agreement, the Notes or any Financing Document except
to the extent such amendment or waiver would (x) extend the Maturity
Date or the Final Maturity Date of any of the Commitments or Loans in
which such participant is participating, (y) reduce the interest rate
(other than as a result
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of waiving the applicability of any post-default increases in interest
rates) or fees applicable to any of the Commitments or Loans in which
such participant is participating, or postpone the payment of any
thereof, or (z) release all or substantially all of the collateral or
guaranties (except as expressly provided in the Financing Documents)
supporting any of the Commitments or Loans in which such participant
is participating. In the case of any such participation, the
participant shall not have any rights under this Agreement or any of
the Financing Documents (the participant's rights against the granting
Lender in respect of such participation to be those set forth in the
agreement with such Lender creating such participation), and all
amounts payable by the Company hereunder shall be determined as if
such Lender had not sold such participation, provided that such
participant shall be entitled to receive additional amounts under
Sections 2.16 and 2.18 on the same basis as if it were a Lender. In
addition, each agreement creating any participation must include an
agreement by the participant to be bound by the provisions of Section
8.14. Notwithstanding anything in this Section 8.07(c) to the
contrary, the purchase by each Lender of a participation in the
Letters of Credit on the Effective Date and any subsequent assignment
of all or any part of any such Lender's Percentage Share in any Letter
of Credit and its related LC Liabilities pursuant to Section 8.07(b)
shall not be considered a participation pursuant to this Section
8.07(c).
(d) Registration Statements; Blue Sky Laws.
Notwithstanding any other provisions of this Section 8.07, no transfer
or assignment of the interests or obligations of any Lender hereunder
or any grant of participations therein shall be permitted if such
transfer, assignment or grant would require the Company or any
Guarantor to file a registration statement with the Securities and
Exchange Commission or to qualify the Loans under the "Blue Sky" laws
of any state.
(e) Certain Representations. Each Lender initially party
to this Agreement hereby represents, and each Person that becomes a
Lender pursuant to an assignment permitted by subsection (b) above
will, upon its becoming party to this Agreement, represent that it is
an Eligible Transferee, and that it will make or acquire Loans only
for its own account in the ordinary course of its business; provided,
however, that subject to the preceding Sections 8.07(b) through (d),
the disposition of any promissory notes or other evidences of or
interests in Lender Indebtedness held by such Lender shall at all
times be within its exclusive control.
(f) Assignees Treated as Lenders. The entries in the
Register shall be conclusive in the absence of manifest error and the
Company, the Administrative Agent, the Issuing Bank and the Lenders
may treat each person whose name is recorded in the Register pursuant
to the terms hereof as a Lender hereunder for all purposes of this
Agreement and the other Financing Documents. The Register shall be
available for inspection by the Company and any Lender, at any
reasonable time and from time to time upon reasonable prior notice.
(g) Notwithstanding anything in this Section 8.07 to the
contrary, any Lender may, without the consent of the Company, assign
and pledge all or any of its Notes to any Federal Reserve Bank or the
United States Treasury as collateral security pursuant to Regulation A
of the Board of Governors of the Federal Reserve System and any
operating circular issued by such Federal Reserve System and/or such
Federal Reserve Bank. No such assignment and/or pledge shall release
the assigning and/or pledging Lender from its obligations hereunder.
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Section 8.08 Governing Law; Submission to Jurisdiction; Etc.
(a) GOVERNING LAW. THIS AGREEMENT AND THE RIGHTS AND
OBLIGATIONS OF THE PARTIES HEREUNDER AND UNDER THE NOTES SHALL BE
CONSTRUED IN ACCORDANCE WITH AND BE GOVERNED BY THE LAWS OF THE STATE
OF NEW YORK AND TO THE EXTENT CONTROLLING, LAWS OF THE UNITED STATES
OF AMERICA.
(b) SUBMISSION TO JURISDICTION. ANY LEGAL ACTION OR
PROCEEDING WITH RESPECT TO THIS AGREEMENT, THE NOTES OR THE OTHER
FINANCING DOCUMENTS MAY BE BROUGHT IN THE COURTS OF THE STATE OF TEXAS
OR OF THE UNITED STATES OF AMERICA FOR THE SOUTHERN DISTRICT OF TEXAS,
AND, BY EXECUTION AND DELIVERY OF THIS AGREEMENT, THE COMPANY HEREBY
ACCEPTS FOR ITSELF AND IN RESPECT OF ITS PROPERTY, GENERALLY AND
UNCONDITIONALLY, THE JURISDICTION OF THE AFORESAID COURTS. THE
COMPANY HEREBY IRREVOCABLY WAIVES ANY OBJECTION, INCLUDING, BUT NOT
LIMITED TO, ANY OBJECTION TO THE LAYING OF VENUE OR BASED ON THE
GROUNDS OF FORUM NON CONVENIENS, WHICH IT MAY NOW OR HEREAFTER HAVE TO
THE BRINGING OF ANY SUCH ACTION OR PROCEEDING IN SUCH RESPECTIVE
JURISDICTIONS.
(c) Service of Process. Nothing herein shall affect the
right of the Administrative Agent or any Lender or any holder of a
Note to serve process in any other manner permitted by law or to
commence legal proceedings or otherwise proceed against the Company in
any other jurisdiction.
Section 8.09 Independent Nature of Lenders' Rights. The amounts
payable at any time hereunder to each Lender shall be a separate and
independent debt, and each Lender shall be entitled to protect and enforce its
rights arising out of this Agreement, and it shall not be necessary for any
other Lender to be joined as an additional party in any proceeding for such
purpose.
Section 8.10 Invalidity. In the event that any one or more of the
provisions contained in the Notes, this Agreement or in any other Financing
Document shall, for any reason, be held invalid, illegal or unenforceable in
any respect, such invalidity, illegality or unenforceability shall not affect
any other provision of the Notes, this Agreement or any other Financing
Document.
Section 8.11 Survival of Agreements. All representations and
warranties of Parent, the Company or its Subsidiaries or any other Person
herein or in the other Financing Documents, and all covenants and agreements
herein not fully performed before the Effective Date, shall survive such date
or dates.
Section 8.12 Renewal, Extension or Rearrangement. This Agreement
restates and amends in its entirety, effective as of the Effective Date, the
Prior Credit Agreement. The Notes are given, in part, to renew, rearrange and
modify the indebtedness heretofore evidenced by the Prior Notes. Effective as
of the Effective Date, references to the Prior Credit Agreement and the Prior
Notes in the Mortgage and in the other "Financing Documents" referred to in the
Prior Credit Agreement shall refer to this Agreement and to the Notes. All
provisions of this Agreement and of any other Financing Documents relating to
the Notes or other Lender Indebtedness shall hereafter apply with equal force
and effect to each and all promissory notes hereafter executed which in whole
or in part represent a renewal, extension
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for any period, increase or rearrangement of any part of the Lender
Indebtedness originally represented by the Notes, or of any part of such other
Lender Indebtedness.
Section 8.13 Interest. It is the intention of the parties hereto
to conform strictly to usury laws applicable to the Administrative Agent, the
Issuing Bank and the Lenders (collectively, the "Financing Parties") and the
Transactions. Accordingly, if the Transactions would be usurious as to any
Financing Party under laws applicable to it, then, notwithstanding anything to
the contrary in the Notes, this Agreement or in any other Financing Document or
agreement entered into in connection with the Transactions or as security for
the Notes, it is agreed as follows: (i) the aggregate of all consideration
which constitutes interest under law applicable to any Financing Party that is
contracted for, taken, reserved, charged or received by such Financing Party
under the Notes, this Agreement or under any of such other Financing Documents
or agreements or otherwise in connection with the Transactions shall under no
circumstances exceed the maximum amount allowed by such applicable law, (ii) in
the event that the maturity of the Notes is accelerated for any reason, or in
the event of any required or permitted prepayment, then such consideration that
constitutes interest under law applicable to any Financing Party may never
include more than the maximum amount allowed by such applicable law, and (iii)
excess interest, if any, provided for in this Agreement or otherwise in
connection with the Transactions shall be cancelled automatically by such
Financing Party and, if theretofore paid, shall be credited by such Financing
Party on the principal amount of such Financing Party's Indebtedness (or, to
the extent that the principal amount of such Financing Party's Indebtedness
shall have been or would thereby be paid in full, refunded by such Financing
Party to the Company). The right to accelerate the maturity of the Notes does
not include the right to accelerate any interest which has not otherwise
accrued on the date of such acceleration, and the Financing Parties do not
intend to collect any unearned interest in the event of acceleration. All sums
paid or agreed to be paid to the Financing Parties for the use, forbearance or
detention of sums included in the Lender Indebtedness shall, to the extent
permitted by law applicable to such Financing Party, be amortized, prorated,
allocated and spread throughout the full term of the Notes until payment in
full so that the rate or amount of interest on account of the Lender
Indebtedness does not exceed the applicable usury ceiling, if any. As used in
this Section, the terms "applicable law" or "laws applicable to any Financing
Party" means the law of any jurisdiction whose laws may be mandatorily
applicable notwithstanding other provisions of this Agreement, or law of the
United States of America applicable to any Financing Party and the Transactions
which would permit such Financing Party to contract for, charge, take, reserve
or receive a greater amount of interest than under such jurisdiction's law. To
the extent that Article 5069-1.04 of the Texas Revised Civil Statutes is
relevant to any Financing Party for the purpose of determining the Highest
Lawful Rate, such Financing Party hereby elects to determine the applicable
rate ceiling under such Article by the indicated (weekly) rate ceiling from
time to time in effect, subject to such Financing Party's right subsequently to
change such method in accordance with applicable law.
Section 8.14 Confidential Information. The Administrative Agent
and each Lender agree that all documentation and other information made
available by the Company to the Administrative Agent or such Lender under the
terms of this Agreement shall (except to the extent such documentation or other
information is publicly available or hereafter becomes publicly available other
than by action of the Administrative Agent or such Lender, or was theretofore
known or hereinafter becomes known to the Administrative Agent or such Lender
independent of any disclosure thereto by the Company) be held in the strictest
confidence by the Administrative Agent or such Lender and used solely in the
administration and enforcement of the Loans from time to time outstanding from
such Lender to the Company and in the prosecution of defense of legal
proceedings arising in connection herewith; provided that (i) the
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Administrative Agent or such Lender may disclose documentation and information
to the Administrative Agent and/or to any other Lender which is a party to this
Agreement or any Affiliates thereof and (ii) the Administrative Agent or such
Lender may disclose such documentation or other information to any other bank
or other Person to which such Lender sells or proposes to make an assignment or
sell a participation in its Loans hereunder if such other bank or Person, prior
to such disclosure, agrees in writing to be bound by the terms of the
confidentiality statement customarily employed by the Administrative Agent in
connection with such potential transfers. Notwithstanding the foregoing,
nothing contained herein shall be construed to prevent the Administrative Agent
or a Lender from (a) making disclosure of any information (i) if required to do
so by applicable law or regulation or accepted banking practice, (ii) to any
governmental agency or regulatory body having or claiming to have authority to
regulate or oversee any aspect of such Lender's business or that of such
Lender's corporate parent or affiliates in connection with the exercise of such
authority or claimed authority, (iii) pursuant to any subpoena or if otherwise
compelled in connection with any litigation or administrative proceeding, (iv)
to correct any false or misleading information which may become public
concerning such Person's relationship to the Company, or (v) to the extent the
Administrative Agent or such Lender or its counsel deems necessary or
appropriate to effect or preserve its security for any Lender Indebtedness or
to enforce any remedy provided in the Financing Documents, the Notes or this
Agreement or otherwise available by law; or (b) making, on a confidential
basis, such disclosures as such Lender reasonably deems necessary or
appropriate to its legal counsel or accountants (including outside auditors).
If the Administrative Agent or such Lender is compelled to disclose such
confidential information in a proceeding requesting such disclosure, the
Administrative Agent or such Lender shall seek to obtain assurance that such
confidential treatment will be accorded such information; provided, however,
that the Lender shall have no liability for the failure to obtain such
treatment.
Section 8.15 ENTIRE AGREEMENT. THE NOTES, THIS AGREEMENT AND THE
OTHER FINANCING DOCUMENTS EMBODY THE ENTIRE AGREEMENT AND UNDERSTANDING BETWEEN
THE ADMINISTRATIVE AGENT, THE ISSUING BANK OR THE LENDERS AND THE OTHER
RESPECTIVE PARTIES HERETO AND THERETO AND SUPERSEDE ALL PRIOR AGREEMENTS AND
UNDERSTANDINGS BETWEEN SUCH PARTIES RELATING TO THE SUBJECT MATTER HEREOF AND
THEREOF AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR
SUBSEQUENT AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS
BETWEEN THE PARTIES.
Section 8.16 Attachments. The exhibits, schedules and annexes
attached to this Agreement are incorporated herein and shall be considered a
part of this Agreement for the purposes stated herein, except that in the event
of any conflict between any of the provisions of such exhibits and the
provisions of this Agreement, the provisions of this Agreement shall prevail.
Section 8.17 Counterparts. This Agreement may be executed in any
number of counterparts and by the different parties hereto on separate
counterparts, each of which when so executed and delivered shall be an original
but all of which shall together constitute one and the same instrument.
Section 8.18 Survival of Indemnities. The Company's obligations
under Sections 2.16, 2.18, 2.21 and 8.04 shall survive the payment in full of
the Loans and the LC Liabilities.
Section 8.19 Headings Descriptive. The headings of the several
sections and subsections of this Agreement, and the Table of Contents, are
inserted for convenience only and shall not in any way affect the meaning or
construction of any provision of this Agreement.
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Section 8.20 Satisfaction Requirement. If any agreement,
certificate, instrument or other writing, or any action taken or to be taken,
is by the terms of this Agreement required to be satisfactory to any party, the
determination of such satisfaction shall be made by such party in its sole and
exclusive judgment exercised reasonably and in good faith.
Section 8.21 Effectiveness. This Agreement shall not be effective
until executed by all signatories hereto and delivered to the Administrative
Agent in the State of Texas and accepted by the Administrative Agent in such
state.
Section 8.22 Conflict with Mortgage. In the event of a conflict
between the terms of the Mortgage and the terms of this Agreement, the terms of
this Agreement shall control.
Section 8.23 EXCULPATION PROVISIONS. EACH OF THE PARTIES HERETO
SPECIFICALLY AGREES THAT IT HAS A DUTY TO READ THIS AGREEMENT AND THE OTHER
FINANCING DOCUMENTS AND AGREES THAT IT IS CHARGED WITH NOTICE AND KNOWLEDGE OF
THE TERMS OF THIS AGREEMENT AND THE OTHER FINANCING DOCUMENTS; 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 LEGAL COUNSEL OF ITS CHOICE THROUGHOUT THE NEGOTIATIONS
PRECEDING ITS EXECUTION OF THIS AGREEMENT AND THE OTHER FINANCING DOCUMENTS;
AND HAS RECEIVED THE ADVICE OF ITS ATTORNEYS IN ENTERING INTO THIS AGREEMENT
AND THE OTHER FINANCING DOCUMENTS; AND THAT IT RECOGNIZES THAT CERTAIN OF THE
TERMS OF THIS AGREEMENT AND THE OTHER FINANCING DOCUMENTS RESULT IN ONE PARTY
ASSUMING THE LIABILITY INHERENT IN SOME ASPECTS OF THE TRANSACTION AND
RELIEVING THE OTHER PARTY OF ITS RESPONSIBILITY FOR SUCH LIABILITY. EACH PARTY
HERETO AGREES AND COVENANTS THAT IT WILL NOT CONTEST THE VALIDITY OR
ENFORCEABILITY OF ANY EXCULPATORY PROVISION OF THIS AGREEMENT AND THE OTHER
FINANCING DOCUMENTS ON THE BASIS THAT THE PARTY HAD NO NOTICE OR KNOWLEDGE OF
SUCH PROVISION OR THAT THE PROVISION IS NOT "CONSPICUOUS."
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IN WITNESS WHEREOF, the parties hereto have caused this instrument to
be duly executed as of the date first above written.
COMPANY: TITAN RESOURCES, L.P., a Texas limited
partnership
By: TITAN RESOURCES I, INC., its
General Partner
By: /s/ JACK HIGHTOWER
--------------------------------
Name: Jack Hightower
------------------------------
Title: President
-----------------------------
Address:
500 West Texas, Suite 500
Midland, Texas 79710
Attention: Jack D. Hightower
Telephone No.: 915/682-6612
Telecopier No.: 915/687-3863
with copy to:
Thompson & Knight, P.C.
1700 Pacific Ave., Suite 3300
Dallas, Texas 75201
Attention: Richard Covington
Telephone No.: 214/969-1733
Telecopier No.: 214/969-1751
[Signature Page - 1]
<PAGE> 81
ADMINISTRATIVE AGENTS, ISSUING
BANK AND THE LENDERS: THE CHASE MANHATTAN BANK
Individually, as Issuing Bank and as
Administrative Agent
By: /s/ MARY JO WOODFORD
------------------------------
Name: Mary Jo Woodford
----------------------------
Title: Vice President
---------------------------
Lending Office for Base Rate Loans,
Eurodollar Loans and Address for Notice:
140 East 45th Street
29th Floor
New York, New York 10017
Telephone No.: 212/622-0005
Telecopier No.: 212/622-0002
Attention: Sandra Miklave
with copy to:
Chase Securities Inc.
707 Travis Street, 5N86
Houston, Texas 77002
Telephone No.: 713/216-1303
Telecopier No.: 713/216-4117
Attention: Sandra Aultman
[Signature Page - 2]
<PAGE> 82
FIRST UNION NATIONAL BANK OF NORTH
CAROLINA, Individually and as
Documentation Agent
By: /s/ MICHAEL J. KOLOSOWSKY
----------------------------
Name: Michael J. Kolosowsky
--------------------------
Title: Vice President
-------------------------
Lending Office for Base Rate Loans and
Eurodollar Loans:
301 South College Street
Charlotte, North Carolina 28288
Telephone No.: 704/374-6860
Telecopier No.: 704/374-4092
Attention: Ms. Vicki Crispens
Address for Notice:
c/o First Union Corporation
of North Carolina
1001 Fannin Street, Suite 2255
Houston, Texas 77002-6709
Telephone No.: 713/650-0452
Telecopier No.: 713/650-6354
Attention: Jay M. Chernosky
[Signature Page - 3]
<PAGE> 83
MORGAN GUARANTY TRUST COMPANY
OF NEW YORK, Individually and as
Syndication Agent
By: /s/ CARL J. MEHLDAU, JR.
------------------------------
Name: Carl J. Mehldau, Jr.
----------------------------
Title: Associate
---------------------------
Lending Office for Base Rate Loans, Eurodollar
Loans and Address for Notice:
60 Wall Street
New York, New York 10260
Telephone No.: 212/648-7181
Telecopier No.: 212/648-5023
Attention: Philip McNeal
[Signature Page - 4]
<PAGE> 84
CREDIT LYONNAIS NEW YORK BRANCH
By: /s/ PASCAL POUPELLE
------------------------------
Name: Pascal Poupelle
----------------------------
Title: Senior Vice President
---------------------------
Lending Office for Base Rate Loans and
Eurodollar Loans:
1301 Avenue of the Americas
New York, New York 10019
Address for Notice:
c/o Credit Lyonnais
Houston Representative Office
1000 Louisiana, Suite 5360
Houston, Texas 77002
Telephone No.: 713/753-8705
Telecopier No.: 713/751-0307 or
713/751-0421
Attention: David Dodd
[Signature Page - 5]
<PAGE> 85
BANK ONE, TEXAS, N.A.
By: /s/ WILLIAM MARK CRAUMER
------------------------------
Name: William Mark Craumer
----------------------------
Title: Vice President
---------------------------
Lending Office for Base Rate Loans and
Eurodollar Loans:
1717 Main Street
Dallas, Texas 75201
Address for Notice:
1717 Main Street, 4BOC
Dallas, Texas 75201
Telephone No.: 214/290-2212
Telecopier No.: 214/290-2627
Attention: Mark Cramer
[Signature Page - 6]
<PAGE> 86
BANQUE PARIBAS
By: /s/ BARTON D. SCHOUEST
------------------------------
Name: Barton D. Schouest
----------------------------
Title: Group Vice President
---------------------------
By: /s/ MICHAEL FINZAT
------------------------------
Name: Michael Finzat
----------------------------
Title: Assistant Vice President
---------------------------
Lending Office for Base Rate Loans, Eurodollar
Loans and Address for Notice:
1200 Smith Street, Suite 3100
Houston, Texas 77002
Telephone No.: 713/659-4811
Telecopier No.: 713/659-6915
Attention: Brian Malone
[Signature Page - 7]
<PAGE> 87
UNION BANK OF CALIFORNIA, N.A.
By: /s/ KATIE MURRAY
------------------------------
Name: Katie Murray
----------------------------
Title: Vice President
---------------------------
By: /s/ RANDY OSTERBER
------------------------------
Name: Randy Osterber
----------------------------
Title: Vice President
---------------------------
Lending Office for Base Rate Loans, Eurodollar
Loans and Address for Notice:
4200 Lincoln Plaza
500 North Akard
Dallas, Texas 75201
Telephone No.: 214/922-4200
Telecopier No.: 214/922-4209
Attention: Tony Weber
[Signature Page - 8]
<PAGE> 88
ANNEX I
COMMITMENTS
<TABLE>
<CAPTION>
LENDER COMMITMENT AMOUNT
<S> <C>
The Chase Manhattan Bank $50,000,000
First Union National Bank of North Carolina $50,000,000
Morgan Guaranty Trust Company of New York $50,000,000
Credit Lyonnais New York Branch $25,000,000
Bank One, Texas, N.A. $25,000,000
Banque Paribas $25,000,000
Union Bank of California, N.A. $25,000,000
------------
Total Commitments $250,000,000
</TABLE>
<PAGE> 1
EXHIBIT 11.1
COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
Six Months
Period Ended Ended
December 31, 1995 September 30, 1995
----------------- ------------------
Pro Pro forma
Historical Forma As Adjusted Historical
------------ ------------ ------------ ------------------
(in thousands, except per share amounts)
<S> <C> <C> <C> <C>
PRIMARY:
Net income (loss) $ (1,531) $ (459) $ 5,059 $ 80
==============================================================
Shares as adjusted:
Weighted average common shares outstanding 14,066,215 13,974,134 26,474,134 13,692,776
Incremental shares from outstanding unit/stock
options as determined under the treasury
stock method * * 3,111,350 1,167,258
--------------------------------------------------------------
Shares as adjusted 14,066,215 13,974,134 29,585,484 14,860,034
==============================================================
Net income (loss) per share $ (0.11) $ (0.03) $ 0.17 $ 0.01
==============================================================
FULLY DILUTED:
Net income (loss) $ (1,531) $ (459) $ 5,059 $ 80
==============================================================
Shares as adjusted:
Weighted average common shares outstanding 14,066,215 13,974,134 26,474,134 13,692,776
Incremental shares from outstanding unit/stock
options as determined under the treasury
stock method * * 3,111,350 1,766,647
--------------------------------------------------------------
Shares as adjusted 14,066,215 13,974,134 29,585,484 15,459,423
==============================================================
Net income (loss) per share $ (0.11) $ (0.03) $ 0.17 $ 0.01
==============================================================
<CAPTION>
Nine Months Ended
September 30, 1996
------------------
Pro Pro forma
Historical Forma As Adjusted
------------ ------------ --------------
(in thousands, except per share amounts)
<S> <C> <C> <C>
PRIMARY:
Net income (loss) $ (2,210) $ 260 $ 7,235
=======================================================
Shares as adjusted:
Weighted average common shares outstanding 18,835,477 18,835,477 31,335,477
Incremental shares from outstanding unit/stock
options as determined under the treasury
stock method * 2,196,706 3,076,683
-------------------------------------------------------
Shares as adjusted 18,835,477 21,032,183 34,412,160
=======================================================
Net income (loss) per share $ (0.12) $ 0.01 $ 0.21
=======================================================
FULLY DILUTED:
Net income (loss) $ (2,210) $ 260 $ 7,235
=======================================================
Shares as adjusted:
Weighted average common shares outstanding 18,835,477 18,835,477 31,335,477
Incremental shares from outstanding unit/stock
options as determined under the treasury
stock method * 2,431,248 3,076,683
-------------------------------------------------------
Shares as adjusted 18,835,477 21,266,725 34,412,160
=======================================================
Net income (loss) per share $ (0.12) $ 0.01 $ 0.21
=======================================================
</TABLE>
* - Common stock equivilents were not considered as they would be anti-dilutive
due to a net loss in the period.
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Titan Exploration, Inc.
We consent to the use of our audit report dated March 31, 1996, except as
to Note 1 which is as of September 30, 1996, on the consolidated financial
statements of Titan Exploration, Inc. and subsidiaries as of December 31, 1995,
and for the period from March 31, 1995 (date of inception) through December 31,
1995, our audit report on the 1995 Acquisition for the years ended December 31,
1993 and 1994 and the period ended December 11, 1995, and our audit report on
the 1996 Acquisition for the years ended December 31, 1993, 1994 and 1995 each
included herein and to the reference to our firm under the heading "Experts" in
the Prospectus.
KPMG Peat Marwick LLP
Midland, Texas
November 15, 1996
<PAGE> 1
EXHIBIT 23.2.1
Titan Exploration, Inc.
Midland, Texas
Ladies and Gentlemen:
Re: Registration Statement No. 333-14029
With respect to the subject registration statement, we acknowledge our
awareness of the use therein of our report dated November 4, 1996 related to our
reviews of interim financial information.
Pursuant to Rule 436(c) under the Securities Act of 1933, such report is
not considered part of a registration statement prepared or certified by an
accountant or a report prepared or certified by an accountant within the meaning
of sections 7 and 11 of the Securities Act.
Very truly yours,
KPMG PEAT MARWICK LLP
Midland, Texas
November 15, 1996
