<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 22, 1996
REGISTRATION NO. 333-14029
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------
AMENDMENT NO. 2
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.
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<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 22, 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 Nasdaq Stock
Market's National Market under the symbol "TEXP."
------------------
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
HEREIN.
------------------
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
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, against payment in immediately
available funds.
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 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 NASDAQ NATIONAL MARKET 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% 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 PV-10 attributable to proved reserves 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. 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. Through 1998, subject to
market conditions and drilling and operating results, the Company expects
to spend approximately $22 million to drill 14 proved locations on
Company-operated properties and $21 million to drill 129 unproven
locations, 39 of which are on Company-operated properties and 90 of which
are 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. Through 1998, subject to
market conditions and drilling and operating results, the Company expects
to spend approximately $30 million to drill approximately 40 exploratory
locations on Company-owned properties.
- 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."
Nasdaq National Market Symbol............................ "TEXP"
</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)................................... 134,995 242,039 179,565 280,824
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 day
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 rework 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 June 30, 1996, the posted price
for West Texas Intermediate Crude was $19.50 per Bbl, as posted by the Company's
major purchaser. 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
8
<PAGE> 11
a function of the quality of available data, engineering and geological
interpretation and judgment. Estimates 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
9
<PAGE> 12
can be no assurance that the Company will be successful in these efforts. The
inability of the Company to 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. The Company maintains a $3.0 million key man life
insurance policy on the life of Mr. Hightower, but no other senior management
personnel. 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 an assumed 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
------ ---------- -------- ---------- -------------
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS) (IN THOUSANDS)
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 (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.
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>
PERIOD ENDED NINE MONTHS ENDED
DECEMBER 31, 1995 SEPTEMBER 30, 1996
--------------------------- ---------------------------
HISTORICAL PRO FORMA(1) HISTORICAL PRO FORMA(1)
---------- ------------ ---------- ------------
(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
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
-------------------------------------------------
PRO FORMA
DECEMBER 31, 1995 HISTORICAL PRO FORMA(1) AS ADJUSTED(1)(2)
----------------- ---------- ------------ -----------------
<S> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents.................... $ 6,213 $ 10,803 $ 2,000 $ 2,000
Working capital.............................. 11,905 8,760 (350) (350)
Oil and gas assets, net...................... 42,869 60,168 187,202 187,202
Total assets................................. 57,487 74,824 193,505 193,505
Total debt................................... 20,000 28,000 145,074 22,852
Stockholders' equity......................... 34,585 37,951 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 rework 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 increase lease
operating expenses. The Company anticipates spending at least $1.0 million in
nonrecurring remedial 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, of which $300,000 was 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). See Note 12 of
Notes to Consolidated Financial Statements.
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>
Through 1998, subject to market conditions and drilling and operating
results, the Company expects to spend (i) approximately $22 million to drill 14
proved locations on Company-operated properties, (ii) approximately $21 million
to drill 129 unproven locations, 39 of which are on Company-operated properties
and 90 of which are on Company-owned, but nonoperated, properties, and (iii)
approximately $30 million to drill approximately 40 exploratory locations on
Company-owned properties. See "Risk Factors -- Volatility of Oil and Gas Prices"
and "Risk Factors -- Drilling and Operating Risks."
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 $421,000 per month for a period of
39 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
22
<PAGE> 25
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 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.
23
<PAGE> 26
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."
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% 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 PV-10 attributable to proved reserves 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. 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.
25
<PAGE> 28
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. Through 1998, subject to
market conditions and drilling and operating results, the Company expects
to spend approximately $22 million to drill 14 proved locations on
Company-operated properties and $21 million to drill 129 unproven
locations, 39 of which are on Company-operated properties and 90 of which
are 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. Through 1998, subject to
market conditions and drilling and operating results, the Company expects
to spend approximately $30 million to drill approximately 40 exploratory
locations on Company-owned properties.
- 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.
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
26
<PAGE> 29
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 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
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<PAGE> 30
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 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.
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<PAGE> 31
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 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
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<PAGE> 32
Acquisition as if it had occurred on the day indicated. Summaries of the
September 30, 1996 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).................................... 134,995 242,039 179,565 280,824
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 pro
forma 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 pro forma 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 of oil and $1.38 per Mcf of natural gas.
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>
NINE MONTHS
PERIOD ENDED 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 rework 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.
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
32
<PAGE> 35
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
involved in the management of the Company. The Company plans to employ an
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 14,750 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
33
<PAGE> 36
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 received title opinions relating to properties representing 80%
of the PV-10 of the 1995 Acquisition and 90% of the PV-10 of the 1996
Acquisition. The Company's land department and contract land professionals have
reviewed title records of substantially all its producing properties. The title
investigation performed by the Company prior to acquiring undeveloped properties
is thorough but less rigorous than that conducted prior to drilling, consistent
with industry standards. 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). Presently, the Company keeps in force its leaseholds for
64% of its net acreage by virtue of production on that acreage in paying
quantities. The remaining acreage is held by lease rentals and similar
provisions and requires production in paying quantities prior to expiration of
various time periods to avoid lease termination.
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
34
<PAGE> 37
any, of these regulations on its operations. However, the regulations may
increase transportation costs or 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........ 36 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.
37
<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
In accordance with Section 102(b)(7) of the Delaware General Corporation
Law ("DGCL"), the Company's Certificate of Incorporation includes a provision
eliminating 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 provision does 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."
38
<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 $135,000.
39
<PAGE> 42
Option Grants
The following table contains information about stock option grants to the
Named Executive Officers in the Conversion that were substituted for option
grants to the Named Executive Officers in 1995:
OPTION GRANTS IN THE CONVERSION TO REPLACE GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZED VALUE
AT
INDIVIDUAL GRANTS ASSUMED ANNUAL RATES OF
-------------------------------------------------- STOCK PRICE APPRECIATION
NUMBER OF % OF TOTAL FOR OPTION TERM(1)
SECURITIES OPTIONS EXERCISE -------------------------
UNDERLYING GRANTED TO OR BASE
OPTIONS EMPLOYEES IN PRICE EXPIRATION (DOLLARS IN THOUSANDS)
NAME GRANTED (#) FISCAL YEAR ($/SH) DATE 0% ($) 5% ($) 10% ($)
- ----------------------------- ----------- ------------ -------- ---------- ------ ------ -------
<S> <C> <C> <C> <C> <C> <C> <C>
Jack D. Hightower............ 1,682,491 49.66 2.08 3/31/2001 14,167 18,979 25,103
George G. Staley............. 975,313 28.79 2.08 3/31/2001 8,212 11,002 14,552
Rodney L. Woodard............ 196,313 5.79 2.08 3/31/2001 1,653 2,214 2,929
Thomas H. Moore.............. 210,456 6.21 2.08 3/31/2001 1,772 2,374 3,140
Dan P. Colwell............... 196,313 5.79 2.08 3/31/2001 1,653 2,214 2,929
</TABLE>
- ---------------
(1) Amounts represent hypothetical gains that could be achieved for the options
if they are exercised at the end of the option term. Those gains are based
on assumed rates of stock price appreciation of 0%, 5% and 10% compounded
annually from March 31, 1995, as if such options had been granted on such
date, through the expiration date.
Option Exercises and Year-End Option Values
The following table provides information about the number of shares issued
upon option exercises by the Named Executive Officers during 1995, and the value
realized by the Named Executive Officers. The table also provides information
about the number and value of options that would have been held by the Named
Executive Officers at December 31, 1995 as if the options granted in the
Conversion to substitute for option grants in 1995 had been granted on March 31,
1995.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
SHARES UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
ACQUIRED OPTIONS AT FY-END(#) AT FY-END($)
ON EXERCISE VALUE ---------------------------- ----------------------------
NAME (#) REALIZED($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------ ----------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
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 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").
The Initial Stock 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 Initial Stock Option 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, 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, 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.
41
<PAGE> 44
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 amounts charged by, and in turn received by the Company from,
Staley Operating are determined on the same basis as amounts charged by the
Company to unaffiliated third parties with respect to properties for which the
Company serves as operator. 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 fees charged by the Company to Mr. Hightower are the same as those charged
to unaffiliated third parties that are also party to the operating agreement.
The Company does not consider the property to constitute a material portion of
its assets.
In April 1995, the Company purchased certain oil and gas properties from
Enertex, Inc. ("Enertex"), 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. Because the Company, with
approval of its independent directors, purchased these interests at their cost
to Enertex and Staley, the Company believes that the terms of the 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. Prior to entering into these agreements, the Company reviewed
price swaps offered by other institutions and believes that the terms of the
agreements are no less favorable to it than could have been obtained from
unaffiliated third parties.
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<PAGE> 46
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 entered into the agreements
pursuant to which these sales were made after competitive bidding and believes
that the terms of these sales are no less favorable to it than could have been
obtained from unaffiliated third parties.
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 rental rate of $7.50 per
square foot per year is below the average rental rate of $7.95 per square foot
per year for the remaining occupied space. 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. at a
rate equal to the price of a full-fare ticket on a commercial airline 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."
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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 Initial Stock Option Plan and 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 the Bylaws of the Company 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. The
affirmative vote of the holders of shares of capital stock representing at least
80% of the outstanding voting power shall be required to amend certain
provisions of the Certificate of Incorporation relating to the management of the
Company. 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
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<PAGE> 50
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 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.
The piggyback rights are subject to customary cutback provisions.
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, 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
48
<PAGE> 51
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 Initial Stock Option Plan. Taking into account the
effect of the lock-up agreement with the holders of options, approximately
1,994,417 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 Dealers, Inc. This rule provides generally
that if more than 10% of the net proceeds from the sale of stock, not
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<PAGE> 53
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.
The shares of Common Stock have been approved for listing on The Nasdaq
Stock Market's National Market (the "NNM"), subject to official notice of
issuance, under the symbol "TEXP." In connection with the listing of the Common
Stock on the NNM, the Underwriters will undertake to sell round lots of 100
shares or more to a minimum of 400 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 result,
Ontario purchasers must rely on other remedies that may be available, including
common law rights of
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<PAGE> 54
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 #95/17, 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 Nasdaq National Market, 1735 K Street, N.W.,
Washington, D.C. 20006-1500, 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, regional offices and stock exchange
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.
53
<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 and 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............................. 195 195 125(c) 320
Additional paid-in capital................. 54,180 54,180 122,097(c) 176,277
Deferred compensation...................... (16,424) (16,424) (16,424)
------- -------- --------
Total stockholders' equity......... 37,951 37,951 160,173
------- -------- --------
$ 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) $ .17
====== ======= =======
</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 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 this offering.
(d) To record the use of the net proceeds of this 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............................... 16,823 225,555
Revision of previous estimates....................... 1,533 711
Extensions and discoveries........................... 108 33,724
Production........................................... (2,004) (17,951)
------ -------
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 4,825
Production........................................... (1,311) (12,235)
------ -------
Balance, September 30, 1996............................ 17,843 280,824
====== =======
Proved Developed Reserves at December 31, 1995......... 14,259 145,023
====== =======
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>
SEPTEMBER 30,
1996
DECEMBER 31, -------------
1995
------------ (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 shareholders
of 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."
Prior to the conversion, there was no public market for the General
Partner's common stock, a high degree of common control between the General
Partner and the Partnership existed due to the General Partner's sole authority
over the management of the Partnership, and there was a high degree of
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.
Exploration costs are capitalized pending determination of whether proved
reserves have been found. If no proved reserves are found, previously
capitalized exploration costs are charged to expense.
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 was recorded based on the value of the Company's common stock on
September 30, 1996, and will be amortized to expense over a 39 month period.
Deferred compensation of approximately $17,576,000 (before reduction by amounts
previously amortized to expense under the Plan, as described above) was recorded
at September 30, 1996.
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
--------- --------- --------- -------------
<S> <C> <C> <C> <C>
(IN THOUSANDS)
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
--------- --------- --------- -------------
<S> <C> <C> <C> <C>
(IN THOUSANDS)
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
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 , 1997 (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
Nasdaq National Market Listing Fee........................................ 50,000
Blue Sky Qualification Fees and Expenses.................................. 15,000
Accounting Fees and Expenses.............................................. 200,000
Legal Fees and Expenses................................................... 200,000
Engineering Fees and Expenses............................................. 125,000
Transfer Agent and Registrar Fees......................................... 2,500
Printing and Engraving Expenses........................................... 150,000
Miscellaneous............................................................. 12,477
-------
Total................................................................... $825,000
=======
</TABLE>
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, or
arising out of his status as such, whether or not the corporation would have the
power to indemnify him against such liability.
II-1
<PAGE> 105
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 partnership 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.
II-2
<PAGE> 106
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.
3.1.1 -- Certificate of Amendment of 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.
</TABLE>
<TABLE>
<S> <C>
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.
</TABLE>
II-3
<PAGE> 107
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ---------------------------------------------------------------------------------------------
<S> <C>
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.
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.
</TABLE>
II-4
<PAGE> 108
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ---------------------------------------------------------------------------------------------
<S> <C>
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.
* 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 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-5
<PAGE> 109
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, Titan
Exploration, Inc. has duly caused this Amendment No. 2 to Registration Statement
to be signed on its behalf by the undersigned, thereunto duly authorized, in
Midland, Texas, on November 22, 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 22, 1996
- --------------------------------------------- Executive Officer and
Jack Hightower Chairman of the Board
(principal executive
officer)
/s/ GEORGE G. STALEY* Executive Vice President November 22, 1996
- --------------------------------------------- and Director
George G. Staley
/s/ WILLIAM K. WHITE* Vice President, Finance November 22, 1996
- --------------------------------------------- and Chief Financial
William K. White Officer (principal
financial and
accounting officer)
/s/ DAVID R. ALBIN* Director November 22, 1996
- ---------------------------------------------
David R. Albin
/s/ KENNETH A. HERSH* Director November 22, 1996
- ---------------------------------------------
Kenneth A. Hersh
*By: /s/ JACK HIGHTOWER
- ---------------------------------------------
Jack Hightower
Attorney-in-fact
</TABLE>
II-6
<PAGE> 110
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.
3.1.1 -- Certificate of Amendment of 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> 111
<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> 112
<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.
* Management contract or compensatory plan.
<PAGE> 1
EXHIBIT 1
12,610,000 SHARES
TITAN EXPLORATION, INC.
COMMON STOCK
UNDERWRITING AGREEMENT
Draft of November 21, 1996
CS FIRST BOSTON CORPORATION
Donaldson, Lufkin & Jenrette Securities Corporation
Howard, Weil, Labouisse, Friedrichs Incorporated
J.P. Morgan Securities Inc.
Petrie Parkman & Co., Inc.
As Representatives of the Several Underwriters,
c/o CS First Boston Corporation
Park Avenue Plaza
New York, N.Y. 10055
Dear Sirs:
1. Introductory. Titan Exploration, Inc., a Delaware corporation
("Company"), and the stockholders of the Company identified in Schedule B
hereto (the "Selling Stockholder"), propose to issue and sell 12,610,000 shares
("Firm Securities") of the Company's Common Stock, par value $.01 per share
("Securities"), and the Company also proposes to issue and sell to the
Underwriters, for whom CS First Boston Corporation, Donaldson, Lufkin &
Jenrette Securities Corporation, Howard, Weil, Labouisse, Friedrichs
Incorporated, J.P. Morgan Securities Inc., Petrie Parkman & Co., Inc. are
acting as the representatives (the "Representatives"), at the option of the
Underwriters, an aggregate of not more than 1,891,500 additional shares
("Optional Securities") of its Securities as set forth below. The Firm
Securities and the Optional Securities are herein collectively called the
"Offered Securities." The respective amounts of the Firm Securities to be so
purchased by the several Underwriters are set forth opposite their names in
Schedule A hereto, and the number of Firm Securities to be sold by the Selling
Stockholder is set forth opposite its name in Schedule B hereto. The Company
and the Selling Stockholder are sometimes referred to herein collectively as
the "Sellers."
The Company and the Selling Stockholder hereby agree with the several
Underwriters named in Schedule A hereto ("Underwriters") as follows:
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2. Representations and Warranties of the Company.
(a) The Company represents and warrants to, and agrees
with, the several Underwriters that:
(i) A registration statement (No. 333-14029)
relating to the Offered Securities, including a form of prospectus,
has been filed with the Securities and Exchange Commission
("Commission") and either (A) has been declared effective under the
Securities Act of 1933 ("Act") and is not proposed to be amended or
(B) is proposed to be amended by amendment or post-effective
amendment. If such registration statement ("initial registration
statement") has been declared effective, either (A) an additional
registration statement ("additional registration statement") relating
to the Offered Securities may have been filed with the Commission
pursuant to Rule 462(b) ("Rule 462(b)") under the Act and, if so
filed, has become effective upon filing pursuant to such rule and the
Offered Securities all have been duly registered under the Act
pursuant to the initial registration statement and, if applicable, the
additional registration statement or (B) such an additional
registration statement is proposed to be filed with the Commission
pursuant to Rule 462(b) and will become effective upon filing pursuant
to such rule and upon such filing the Offered Securities will all have
been duly registered under the Act pursuant to the initial
registration statement and such additional registration statement. If
the Company does not propose to amend the initial registration
statement or if an additional registration statement has been filed
and the Company does not propose to amend it, and if any post-
effective amendment to either such registration statement has been
filed with the Commission prior to the execution and delivery of this
Agreement, the most recent amendment (if any) to each such
registration statement has been declared effective by the Commission
or has become effective upon filing pursuant to Rule 462(c) ("Rule
462(c)") under the Act or, in the case of the additional registration
statement, Rule 462(b). For purposes of this Agreement, "Effective
Time" with respect to the initial registration statement or, if filed
prior to the execution and delivery of this Agreement, the additional
registration statement means (A) if the Company has advised the
Representatives that it does not propose to amend such registration
statement, the date and time as of which such registration statement,
or the most recent post-effective amendment thereto (if any) filed
prior to the execution and delivery of this Agreement, was declared
effective by the Commission or has become effective upon filing
pursuant to Rule 462(c), or (B) if the Company has advised the
Representatives that it proposes to file an amendment or
post-effective amendment to such registration statement, the date and
time as of which such registration statement, as amended by such
amendment or post-effective amendment, as the case may be, is declared
effective by the Commission. If an additional registration statement
has not been filed prior to the execution and delivery of this
Agreement but the Company has advised the Representatives that it
proposes to file one, "Effective Time" with respect to such additional
registration statement means the date and time as of which such
registration statement is filed and becomes effective pursuant to Rule
462(b). "Effective Date" with respect to the initial registration
statement or the
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additional registration statement (if any) means the date of the
Effective Time thereof. The initial registration statement, as amended
at its Effective Time, including all information contained in the
additional registration statement (if any) and deemed to be a part of
the initial registration statement as of the Effective Time of the
additional registration statement pursuant to the General Instructions
of the Form on which it is filed and including all information (if
any) deemed to be a part of the initial registration statement as of
its Effective Time pursuant to Rule 430A(b) ("Rule 430A(b)") under the
Act, is hereinafter referred to as the "Initial Registration
Statement." The additional registration statement, as amended at its
Effective Time, including the contents of the initial registration
statement incorporated by reference therein and including all
information (if any) deemed to be a part of the additional
registration statement as of its Effective Time pursuant to Rule
430A(b), is hereinafter referred to as the "Additional Registration
Statement." The Initial Registration Statement and the Additional
Registration Statement are herein referred to collectively as the
"Registration Statements" and individually as a "Registration
Statement." The form of prospectus relating to the Offered
Securities, as first filed with the Commission pursuant to and in
accordance with Rule 424(b) ("Rule 424(b)") under the Act or (if no
such filing is required) as included in a Registration Statement, is
hereinafter referred to as the "Prospectus." No document has been or
will be prepared or distributed in reliance on Rule 434 under the Act.
(ii) If the Effective Time of the Initial
Registration Statement is prior to the execution and delivery of this
Agreement: (A) on the Effective Date of the Initial Registration
Statement, the Initial Registration Statement conformed in all
material respects to the requirements of the Act and the rules and
regulations of the Commission ("Rules and Regulations") and did not
include any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to make the
statements therein not misleading, (B) on the Effective Date of the
Additional Registration Statement (if any), each Registration
Statement conformed, or will conform, in all material respects to the
requirements of the Act and the Rules and Regulations and did not
include, or will not include, any untrue statement of a material fact
and did not omit, or will not omit, to state any material fact
required to be stated therein or necessary to make the statements
therein not misleading and (C) on the date of this Agreement, the
Initial Registration Statement and, if the Effective Time of the
Additional Registration Statement is prior to the execution and
delivery of this Agreement, the Additional Registration Statement each
conforms, and at the time of filing of the Prospectus pursuant to Rule
424(b) or (if no such filing is required) at the Effective Date of the
Additional Registration Statement in which the Prospectus is included,
each Registration Statement and the Prospectus will conform, in all
material respects to the requirements of the Act and the Rules and
Regulations, and neither of such documents includes, or will include,
any untrue statement of a material fact or omits, or will omit, to
state any material fact required to be stated therein or necessary to
make the statements therein not misleading. The preceding sentence
does not apply to statements in or omissions from a Registration
Statement or the Prospectus based upon written information
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furnished to the Company by any Underwriter through the
Representatives specifically for use therein, it being understood and
agreed that the only such information is that described as such in
Section 8(b).
(iii) The Company has been duly incorporated and is
an existing corporation in good standing under the laws of the State
of Delaware, with corporate power and authority to own its properties
and conduct its business as described in the Prospectus; and the
Company is duly qualified to do business as a foreign corporation in
good standing in all other jurisdictions in which its ownership or
lease of property or the conduct of its business requires such
qualification.
(iv) Each corporate subsidiary of the Company has
been duly organized and is an existing corporation in good standing
under the laws of the jurisdiction of its organization. Each of the
Company's subsidiaries that is a limited partnership has been duly
formed and is validly existing as a limited partnership under the laws
of its state of formation. Each subsidiary of the Company has full
power and authority (corporate or partnership, as applicable) to own
its properties and conduct its business as described in the
Prospectus; and each subsidiary of the Company is duly qualified to do
business as a foreign corporation or limited partnership in good
standing in all other jurisdictions in which its ownership or lease of
property or the conduct of its business requires such qualification,
except where the failure to be so qualified would not have a material
adverse effect on the Company and its consolidated subsidiaries
considered as a whole. All of the issued and outstanding shares of
capital stock of each corporate subsidiary of the Company have been
duly authorized and validly issued and are fully paid and
nonassessable and are owned by the Company, directly or through
subsidiaries, free from liens, encumbrances and defects. All of the
partnership interests of each partnership subsidiary of the Company
have been duly and validly authorized and issued in accordance with
the terms of the governing partnership agreement, are fully paid and
(other than the general partner interests) nonassessable and are owned
by the Company, directly or through subsidiaries, free from liens,
encumbrances and defects.
(v) The Offered Securities and all other
outstanding shares of capital stock of the Company, including all
shares to be sold by the Selling Stockholder, have been duly
authorized; all outstanding shares of capital stock of the Company
are, and, when the Offered Securities have been delivered and paid for
in accordance with this Agreement on each Closing Date (as defined
below), such Offered Securities will have been, validly issued, fully
paid and nonassessable and will conform to the description thereof
contained under the caption "Capitalization" in the Prospectus; and
the stockholders of the Company have no preemptive rights with respect
to the Securities.
(vi) Except as disclosed in the Prospectus, there
are no contracts, agreements or understandings between the Company and
any person that would give rise to
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a valid claim against the Company or any Underwriter for a brokerage
commission, finder's fee or other like payment.
(vii) There are no contracts, agreements or
understandings between the Company and any person granting such person
the right to require the Company to file a registration statement
under the Act with respect to any securities of the Company owned or
to be owned by such person or to require the Company to include such
securities in the securities registered pursuant to a Registration
Statement or in any securities being registered pursuant to any other
registration statement filed by the Company under the Act, except for
the Amended and Restated Registration Rights Agreement dated as of
September 30, 1996, among Jack Hightower, Natural Gas Partners, L.P.,
Natural Gas Partners II, L.P., Joint Energy Development Investments
Limited Partnership, First Union Corporation, Selma International
Investment Limited, and the Company; and all rights to require
registration of any Securities under that agreement have been waived
with respect to the offering contemplated hereby and for 180 days
after the date of the initial public offering of the Offered
Securities.
(viii) The Offered Securities have been approved for
listing on the Nasdaq National Market ("NASDAQ") subject to notice of
issuance.
(ix) No consent, approval, authorization, or order
of, or filing with, any governmental agency or body or any court is
required for the consummation of the transactions contemplated by this
Agreement in connection with the issuance and sale of the Offered
Securities by the Company, except such as have been obtained and made
under the Act and such as may be required under state securities or
Blue Sky laws.
(x) The execution, delivery and performance of
this Agreement, and the issuance and sale of the Offered Securities,
will not result in a breach or violation of any of the terms and
provisions of, or constitute a default under, any statute, any rule,
regulation or order of any governmental agency or body or any court,
domestic or foreign, having jurisdiction over the Company or any
subsidiary of the Company or any of their properties, or any agreement
or instrument to which the Company or any such subsidiary is a party
or by which the Company or any such subsidiary is bound or to which
any of the properties of the Company or any such subsidiary is
subject, or the charter or by-laws of the Company or any such
subsidiary, and the Company has full power and authority to authorize,
issue and sell the Offered Securities as contemplated by this
Agreement.
(xi) This Agreement has been duly authorized,
executed and delivered by the Company.
(xii) Except as disclosed in the Prospectus, the
Company and its subsidiaries have good and defensible title to all
their oil and gas properties described as
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being owned by them in the Prospectuses in accordance with standards
generally accepted in the oil and gas industry, free and clear of any
liens, encumbrances, equities, or claims of any nature, except for the
liens for taxes not yet due, liens, claims and encumbrances under gas
sales contracts, operating agreements, unitization and pooling
agreements, and such other agreements as are customarily found in
connection with comparable drilling and producing operations, or in
connection with the acquisition of producing properties, and other
liens, claims, encumbrances and title defects that are, singly and in
the aggregate, not material in amount and do not materially interfere
with the Company's or such subsidiary's use and enjoyment of its oil
and gas properties.
(xiii) The written engineering reports prepared by
Williamson Petroleum Consultants, Inc. ("Williamson"), an oil and gas
engineering consulting firm, as of October 1, 1996, setting forth the
engineering values attributed to the oil and gas properties of the
Company accurately reflect in all material respects the ownership
interests of the Company in the properties therein as of October 1,
1996, except as otherwise disclosed in the Prospectus. The information
furnished to Williamson upon which Williamson based its reports was,
at the time of delivery thereof, complete and accurate in all material
respects. No facts have arisen of which the Company has knowledge that
might cause a reasonable person to believe that any of the information
supplied to Williamson was incorrect or incomplete in any material
respect.
(xiv) Except as disclosed in the Prospectus, the
Company and its subsidiaries possess adequate certificates,
authorities or permits issued by appropriate governmental agencies or
bodies necessary to conduct the business now operated by them, except
for such certificates, authorities or permits the failure of which to
obtain would not have a material adverse effect on the Company or any
of its subsidiaries taken as a whole , and have not received any
notice of proceedings relating to the revocation or modification of
any such certificate, authority or permit that, if determined
adversely to the Company or any of its subsidiaries, would
individually or in the aggregate have a material adverse effect on the
Company and its subsidiaries taken as a whole.
(xv) No labor dispute with the employees of the
Company or any subsidiary exists or, to the knowledge of the Company,
is imminent that might have a material adverse effect on the Company
and its subsidiaries taken as a whole.
(xvi) The Company and its subsidiaries own, possess
or can acquire on reasonable terms, adequate trademarks, trade names
and other rights to inventions, know-how, patents, copyrights,
confidential information and other intellectual property
(collectively, "intellectual property rights") necessary to conduct
the business now operated by them, or presently employed by them, and
have not received any notice of infringement of or conflict with
asserted rights of others with respect to any intellectual property
rights that, if determined adversely to the Company or any of its
subsidiaries, would individually
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or in the aggregate have a material adverse effect on the Company and
its subsidiaries taken as a whole.
(xvii) Except as disclosed in the Prospectus,
neither the Company nor any of its subsidiaries is in violation of any
statute, any rule, regulation, decision or order of any governmental
agency or body or any court, domestic or foreign, relating to the use,
disposal or release of hazardous or toxic substances or relating to
the protection or restoration of the environment or human exposure to
hazardous or toxic substances (collectively, "environmental laws"),
owns or operates any real property contaminated with any substance
that is subject to any environmental laws, is liable for any off-site
disposal or contamination pursuant to any environmental laws, or is
subject to any claim relating to any environmental laws, which
violation, contamination, liability or claim would individually or in
the aggregate have a material adverse effect on the Company and its
subsidiaries taken as a whole; and the Company is not aware of any
pending investigation which might lead to such a claim.
(xviii) There are no pending actions, suits or
proceedings against or affecting the Company, any of its subsidiaries
or any of their respective properties that, if determined adversely to
the Company or any of its subsidiaries, would individually or in the
aggregate have a material adverse effect on the condition (financial
or other), business, properties or results of operations of the
Company and its subsidiaries taken as a whole, or would materially and
adversely affect the ability of the Company to perform its obligations
under this Agreement, or which are otherwise material in the context
of the sale of the Offered Securities; and, to the Company's
knowledge, no such actions, suits or proceedings are threatened or
contemplated.
(xix) The financial statements included in each
Registration Statement and the Prospectus present fairly, in all
material respects, the financial position of the Company and its
consolidated subsidiaries as of the dates shown and their results of
operations and cash flows for the periods shown, and such financial
statements have been prepared in conformity with the generally
accepted accounting principles in the United States applied on a
consistent basis and the schedules included in each Registration
Statement present fairly the information required to be stated
therein; and the assumptions used in preparing the pro forma
financial statements included in each Registration Statement and the
Prospectus provide a reasonable basis for presenting the significant
effects directly attributable to the transactions or events described
therein, the related pro forma adjustments give appropriate effect to
those assumptions, and the pro forma columns therein reflect the
proper application of those adjustments to the corresponding
historical financial statement amounts.
(xx) Except as disclosed in the Prospectus, since
the date of the latest audited financial statements included in the
Prospectus, there has been no material adverse change, nor any
development or event involving a prospective material adverse change,
in
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the condition (financial or other), business, properties or results of
operations of the Company and its subsidiaries taken as a whole, and,
except as disclosed in or contemplated by the Prospectus, there has
been no dividend or distribution of any kind declared, paid or made by
the Company on any class of its capital stock.
(xxi) KPMG Peat Marwick, who have expressed their
opinions on the audited consolidated financial statements of the
Company and related schedules and on the combined statements of
revenue and direct operating expenses of certain acquired property
interests and related schedules included in the Registration
Statement, are independent public accountants as required by the Act
and the applicable published Rules and Regulations.
(xxii) The Company is not and, after giving effect
to the offering and sale of the Offered Securities and the application
of the proceeds thereof as described in the Prospectus, will not be an
"investment company" as defined in the Investment Company Act of 1940.
(xxiii) The Company has obtained and delivered to you
before the date hereof the written agreements of each of its
directors, officers and securityholders (including, without
limitation, its optionholders) that, for a period of 180 days after
the date of the initial public offering of the Offered Securities,
such persons will not offer, sell, contract to sell, pledge or
otherwise dispose of, directly or indirectly, or file with the
Commission a registration statement under the Act relating to, any
additional shares of the Company's Securities or securities
convertible into or exchangeable or exercisable for any shares of the
Company's Securities, or publicly disclose the intention to make any
such offer, sale, pledge, disposal or filing, without the prior
written consent of CS First Boston Corporation ("CS First Boston").
(b) The Selling Stockholder represents and warrants as
follows:
(i) The Selling Stockholder is the lawful owner
of the Shares to be sold by such Selling Stockholder and now has, and
at the Closing Date (as such date is hereinafter defined) will have,
good and marketable title to the Firm Securities to be sold by such
Selling Stockholder, free and clear of any liens, encumbrances,
equities or claims, and full right, power and authority to effect the
sale and delivery of such Firm Securities; and upon the delivery of,
against payment for, such Firm Securities pursuant to this Agreement,
the Underwriters will acquire good and marketable title thereto, free
and clear of any liens, encumbrances, equities or claims.
(ii) The Selling Stockholder has full right, power
and authority to execute and deliver this Agreement and the Custody
Agreement referred to below and to perform its obligations under such
agreements. This Agreement has been duly authorized, executed and
delivered by the Selling Stockholder. The execution and delivery of
this Agreement and the
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Custody Agreement and the consummation by the Selling Stockholder of
the transactions herein and therein contemplated and the fulfillment
by such Selling Stockholder of the terms hereof and thereof will not
require any consent, approval, authorization or other order of any
court, regulatory body, administrative agency or other governmental
body (except as may be required under the Act and state securities
laws or Blue Sky laws) and will not conflict with or result in a
breach of any of the terms and provisions of, or constitute a default
under the organizational documents of the Selling Stockholder, if not
an individual, or any agreement, lease, contract, indenture, mortgage,
deed of trust or other instrument or obligation to which such Selling
Stockholder is a party, or of any order, rule or regulation applicable
to such Selling Stockholder of any court or of any regulatory body or
administrative agency or other governmental body having jurisdiction.
Each of this Agreement and the Custody Agreement is a valid and
binding agreement of such Selling Stockholder, enforceable in
accordance with its terms.
(iii) The Selling Stockholder has not taken,
directly or indirectly, any action designed to, or which has
constituted, or which might reasonably be expected to cause or result
in the stabilization or manipulation of the price of any securities of
the Company, and, other than as permitted by the Act, such Selling
Stockholder has not distributed and will not distribute any prospectus
or offering material in connection with the offering and sale of the
Shares.
(iv) The sale of the Firm Securities by the
Selling Stockholder pursuant hereto is not prompted by any information
concerning the Company which is not set forth in the Registration
Statements. The information pertaining to the Selling Stockholder
under the caption "Principal and Selling Stockholders" in the
Prospectus is complete and accurate in all material respects. If there
is any change in such information with respect to the Selling
Stockholder, the Selling Stockholder will immediately notify you of
such change.
3. Purchase, Sale and Delivery of Offered Securities. On the
basis of the representations, warranties and agreements herein contained, but
subject to the terms and conditions herein set forth, the Sellers agree to sell
to the Underwriters, and the Underwriters agree, severally and not jointly, to
purchase from the Sellers, at a purchase price of $_______ per share, the
respective numbers of shares of Firm Securities set forth opposite the names of
the Underwriters in Schedule A hereto.
Certificates in negotiable form for the total number of the Securities
sold hereunder by the Selling Stockholder have been placed in custody with
__________________ as custodian (the "Custodian") pursuant to the Custody
Agreement executed by the Selling Stockholder for delivery of all Firm
Securities to be sold hereunder by the Selling Stockholder. The Selling
Stockholder specifically agrees that the Firm Securities represented by the
certificates held in custody for the Selling Stockholder under the Custody
Agreement are subject to the interests of the Underwriters hereunder, that the
arrangements made by the Selling Stockholder for such custody are to that
extent
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irrevocable, and that the obligations of the Selling Stockholder hereunder
shall not be terminable by any act or deed of the Selling Stockholder (or by
any other person, firm or corporation including the Company, the Custodian or
the Underwriters) or by operation of law (including the death of an individual
Selling Stockholder or the dissolution of a corporate Selling Stockholder) or
by the occurrence of any other event or events, except as set forth in the
Custody Agreement. If any such event should occur prior to the delivery to the
Underwriters of the Firm Securities hereunder, certificates for the Firm
Securities shall be delivered by the Custodian in accordance with the terms and
conditions of this Agreement as if such event has not occurred. The Custodian
is authorized to receive and acknowledge receipt of the proceeds of sale of the
Securities held by it against delivery of such Securities.
If on the Closing Date, the Selling Stockholder fails to sell the Firm
Securities which such Selling Stockholder has agreed to sell on such date as
set forth in Schedule B hereto, the Company agrees that it will sell or arrange
for the sale of that number of shares of Common Stock to the Underwriters which
represents Firm Securities which such Selling Stockholder has failed to so
sell, as set forth in Schedule B hereto, or such lesser number as may be
requested by the Representatives. In no event shall this Section be construed
to excuse the Selling Stockholder from the full performance of its obligations
under this Agreement.
The Company and the Selling Stockholder will deliver the Firm
Securities to the Representatives for the accounts of the Underwriters, against
payment of the purchase price in Federal (same day) funds by official check or
checks (or wire transfer to an account previously designated to CS First Boston
by the Company at a bank acceptable to CS First Boston) at the office of
Thompson & Knight, P.C., 1700 Pacific Avenue, Suite 3300, Dallas, Texas 75201,
at 9:00 A.M., New York time, on _________ , or at such other time not later
than seven full business days thereafter as CS First Boston and the Company
determine, such time being herein referred to as the "First Closing Date."
Unless the Representatives specify otherwise, the certificates for the Firm
Securities so to be delivered will be in definitive form, in such denominations
and names as CS First Boston reasonably requests, and will be made available
for checking and packaging at the New York City office of CS First Boston at
least 24 hours prior to the First Closing Date.
In addition, upon written notice from CS First Boston given to the
Company from time to time not more than 30 days subsequent to the date of the
Prospectus, the Underwriters may purchase all or less than all of the Optional
Securities at the purchase price per Security to be paid for the Firm
Securities. The Company agrees to sell to the Underwriters the number of shares
of Optional Securities specified in such notice and the Underwriters agree,
severally and not jointly, to purchase such Optional Securities. Such Optional
Securities shall be purchased for the account of each Underwriter in the same
proportion as the number of shares of Firm Securities set forth opposite such
Underwriter's name bears to the total number of shares of Firm Securities
(subject to adjustment by CS First Boston to eliminate fractions) and may be
purchased by the Underwriters only for the purpose of covering over-allotments
made in connection with the sale of the Firm Securities. No Optional Securities
shall be sold or delivered unless the Firm Securities previously
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purchased have been, or simultaneously are, sold and delivered. The right to
purchase the Optional Securities or any portion thereof may be exercised from
time to time and to the extent not previously exercised may be surrendered and
terminated at any time upon notice by CS First Boston to the Company. It is
understood that CS First Boston is authorized to make payment for and accept
delivery of such Optional Securities on behalf of the Underwriters pursuant to
the terms of CS First Boston's instructions to the Company.
Each time for the delivery of and payment for the Optional Securities,
being herein referred to as an "Optional Closing Date," which may be the First
Closing Date (the First Closing Date and each Optional Closing Date, if any,
being sometimes referred to as a "Closing Date"), shall be determined by CS
First Boston but shall be not later than five full business days after written
notice of election to purchase Optional Securities is given. The Company will
deliver the Optional Securities being purchased on each Optional Closing Date
to the Representatives for the accounts of the several Underwriters, against
payment of the purchase price therefor in Federal (same day) funds by official
check or checks (or wire transfer to an account previously designated to CS
First Boston by the Company at a bank acceptable to CS First Boston) at the
office of Thompson & Knight, P.C. previously identified. Unless the
Representatives specify otherwise, the certificates for the Optional Securities
so to be delivered will be in definitive form, in such denominations and names
as CS First Boston reasonably requests, and will be made available for checking
and packaging at the New York City office of CS First Boston at least 24 hours
prior to the Optional Closing Date.
4. Offering by Underwriters. It is understood that the several
Underwriters propose to offer the Offered Securities for sale to the public as
set forth in the Prospectus.
5. Certain Agreements of the Company. The Company agrees with the
several Underwriters that:
(a) If the Effective Time of the Initial Registration
Statement is prior to the execution and delivery of this Agreement, the Company
will file the Prospectus with the Commission pursuant to and in accordance with
subparagraph (1) (or, if applicable and if consented to by CS First Boston,
subparagraph (4)) of Rule 424(b) not later than the earlier of (i) the second
business day following the execution and delivery of this Agreement or (ii) the
fifteenth business day after the Effective Date of the Initial Registration
Statement. The Company will advise CS First Boston promptly of any such filing
pursuant to Rule 424(b). If the Effective Time of the Initial Registration
Statement is prior to the execution and delivery of this Agreement and an
additional registration statement is necessary to register a portion of the
Offered Securities under the Act but the Effective Time thereof has not
occurred as of such execution and delivery, the Company will file the
additional registration statement or, if filed, will file a post- effective
amendment thereto with the Commission pursuant to and in accordance with Rule
462(b) on or prior to 10:00 P.M., New York time, on the date of this Agreement
or, if earlier, on or prior to the time the Prospectus is printed and
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distributed to any Underwriter, or will make such filing at such later date as
shall have been consented to by CS First Boston.
(b) The Company will advise CS First Boston promptly of
any proposal to amend or supplement the initial or any additional registration
statement as filed or the related prospectus or the Initial Registration
Statement, the Additional Registration Statement (if any) or the Prospectus and
will not effect such amendment or supplementation without CS First Boston's
consent; and the Company will also advise CS First Boston promptly of the
effectiveness of each Registration Statement (if its Effective Time is
subsequent to the execution and delivery of this Agreement) and of any
amendment or supplementation of a Registration Statement or the Prospectus and
of the institution by the Commission of any stop order proceedings in respect
of a Registration Statement and will use its best efforts to prevent the
issuance of any such stop order and to obtain as soon as possible its lifting,
if issued.
(c) If, at any time when a prospectus relating to the
Offered Securities is required to be delivered under the Act in connection with
sales by any Underwriter or dealer, any event occurs as a result of which the
Prospectus as then amended or supplemented would include an untrue statement of
a material fact or omit to state any material fact necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading, or if it is necessary at any time to amend the Prospectus
to comply with the Act, the Company will promptly notify CS First Boston of
such event and will promptly prepare and file with the Commission, at its own
expense, an amendment or supplement which will correct such statement or
omission or an amendment which will effect such compliance. Neither CS First
Boston's consent to, nor the Underwriters' delivery of, any such amendment or
supplement shall constitute a waiver of any of the conditions set forth in
Section 7.
(d) As soon as practicable, but not later than the
Availability Date (as defined below), the Company will make generally available
to its security holders an earnings statement covering a period of at least 12
months beginning after the Effective Date of the Initial Registration Statement
(or, if later, the Effective Date of the Additional Registration Statement)
which will satisfy the provisions of Section 11(a) of the Act. For the purpose
of the preceding sentence, "Availability Date" means the 45th day after the end
of the fourth fiscal quarter following the fiscal quarter that includes such
Effective Date, except that, if such fourth fiscal quarter is the last quarter
of the Company's fiscal year, "Availability Date" means the 90th day after the
end of such fourth fiscal quarter.
(e) The Company will furnish to the Representatives
copies of each Registration Statement (six of which will be signed and will
include all exhibits), each related preliminary prospectus, and, so long as
delivery of a prospectus relating to the Offered Securities is required to be
delivered under the Act in connection with sales by any Underwriter or dealer,
the Prospectus and all amendments and supplements to such documents, in each
case in such quantities as CS First Boston requests. The Prospectus shall be so
furnished on or prior to 3:00 P.M., New York time, on
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<PAGE> 13
the business day following the later of the execution and delivery of this
Agreement or the Effective Time of the Initial Registration Statement. All
other documents shall be so furnished as soon as available. The Company will
pay the expenses of printing and distributing to the Underwriters all such
documents.
(f) The Company will arrange for the qualification of the
Offered Securities for sale under the laws of such jurisdictions as CS First
Boston designates and will continue such qualifications in effect so long as
required for the distribution.
(g) During the period of five years hereafter, the
Company will furnish to the Representatives and, upon request, to each of the
other Underwriters, as soon as practicable after the end of each fiscal year, a
copy of its annual report to stockholders for such year; and the Company will
furnish to the Representatives (i) as soon as available, a copy of each report
and any definitive proxy statement of the Company filed with the Commission
under the Securities Exchange Act of 1934 or mailed to stockholders.
(h) The Company will pay all expenses incident to the
performance of its obligations under this Agreement and will reimburse the
Underwriters (if and to the extent incurred by them) for any filing fees and
other reasonable expenses (including fees and disbursements of counsel)
incurred by them in connection with qualification of the Offered Securities for
sale under the laws of such jurisdictions as CS First Boston designates and the
printing of memoranda relating thereto, for the filing fee of the National
Association of Securities Dealers, Inc. relating to the Offered Securities, for
any travel expenses of the Company's officers and employees and any other
expenses of the Company in connection with attending or hosting meetings with
prospective purchasers of the Offered Securities, and for expenses incurred in
distributing preliminary prospectuses and the Prospectus (including any
amendments and supplements thereto) to the Underwriters.
(i) For a period of 180 days after the date of the
initial public offering of the Offered Securities, the Company will not offer,
sell, contract to sell, pledge or otherwise dispose of, directly or indirectly,
or file with the Commission a registration statement under the Act relating to,
any additional shares of its Securities or securities convertible into or
exchangeable or exercisable for any shares of its Securities or securities
convertible into or exchangeable or exercisable for any shares of its
Securities, or publicly disclose the intention to make any such offer, sale,
pledge, disposal or filing, without the prior written consent of CS First
Boston, except issuances of Securities pursuant to the exercise of employee
stock options outstanding on the date hereof.
6. Certain Agreements of the Selling Stockholder. The Selling
Stockholder covenants and agrees with the several Underwriters that:
(a) For a period of 180 days after the date of the
initial public offering of the Offered Securities, the Selling Stockholder will
not offer, sell, contract to sell, pledge or otherwise
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<PAGE> 14
dispose of, directly or indirectly, or file with the Commission a registration
statement under the Act relating to, any additional shares of the Company's
Securities or securities convertible into or exchangeable or exercisable for
any shares of the Company's Securities, or publicly disclose the intention to
make any such offer, sale, pledge, disposal or filing, without the prior
written consent of CS First Boston.
(b) In order to document the Underwriters' compliance
with the reporting and withholding provisions of the Tax Equity and Fiscal
Responsibility Act of 1982 and the Interest and Dividend Tax Compliance Act of
1983 with respect to the transactions herein contemplated, the Selling
Stockholder shall deliver to you prior to or at the Closing Date a properly
completed and executed United States Treasury Department Form W-9 (or other
applicable form or statement specified by Treasury Department regulations in
lieu thereof).
(c) The Selling Stockholder shall not take, directly or
indirectly, any action designed to cause or result in, or that has constituted
or might reasonably be expected to constitute, the stabilization or
manipulation of the price of any securities of the Company, and other than as
permitted by the Act, the Selling Stockholder shall not distribute any
prospectus or other offering material in connection with the offering of the
Shares.
7. Conditions of the Obligations of the Underwriters. The
obligations of the several Underwriters to purchase and pay for the Firm
Securities on the First Closing Date and the Optional Securities to be
purchased on each Optional Closing Date will be subject to the accuracy of the
representations and warranties on the part of the Company and the Selling
Stockholder herein, to the accuracy of the statements of Company officers and
Selling Stockholder made pursuant to the provisions hereof, to the performance
by the Company and the Selling Stockholder of their obligations hereunder and
to the following additional conditions precedent:
(a) The Representatives shall have received a letter,
dated the date of delivery thereof (which, if the Effective Time of the Initial
Registration Statement is prior to the execution and delivery of this
Agreement, shall be on or prior to the date of this Agreement or, if the
Effective Time of the Initial Registration Statement is subsequent to the
execution and delivery of this Agreement, shall be prior to the filing of the
amendment or post- effective amendment to the registration statement to be
filed shortly prior to such Effective Time), of KPMG Peat Marwick confirming
that they are independent public accountants within the meaning of the Act and
the applicable published Rules and Regulations thereunder and stating to the
effect that:
(i) in their opinion the financial statements and
financial statement schedules examined by them and included in the
Registration Statements comply as to form in all material respects
with the applicable accounting requirements of the Act and the related
published Rules and Regulations;
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<PAGE> 15
(ii) they have performed the procedures specified
by the American Institute of Certified Public Accountants for a review
of interim financial information as described in Statement of Auditing
Standards No. 71, Interim Financial Information, on the unaudited
financial statements included in the Registration Statements;
(iii) on the basis of the review referred to in
clause (ii) above, a reading of the latest available interim financial
statements of the Company, inquiries of officials of the Company who
have responsibility for financial and accounting matters and other
specified procedures, nothing came to their attention that caused them
to believe that:
(A) the unaudited financial statements
included in the Registration Statements do not comply as to
form in all material respects with the applicable accounting
requirements of the Act and the related published Rules and
Regulations or any material modifications should be made to
such unaudited financial statements for them to be in
conformity with generally accepted accounting principles;
(B) the unaudited consolidated net
operating income, net income and net income per share amounts
for the nine-month period ended September 30, 1996, included
in the Prospectus do not agree with the amounts set forth in
the unaudited consolidated financial statements for those same
periods or were not determined on a basis substantially
consistent with that of the corresponding amounts in the
audited statements of income;
(C) at the date of the latest available
balance sheet read by such accountants, or at a subsequent
specified date not more than five days prior to the date of
this Agreement, there was any change in the capital stock or
any increase in short-term indebtedness or long-term debt of
the Company and its consolidated subsidiaries or, at the date
of the latest available balance sheet read by such
accountants, there was any decrease in consolidated net
assets, as compared with amounts shown on the latest balance
sheet included in the Prospectus; or
(D) for the period from the closing date
of the latest income statement included in the Prospectus to
the closing date of the latest available income statement read
by such accountants there were any decreases, as compared with
the corresponding period of the previous year, in consolidated
net income,
except in all cases set forth in clauses (B), (C), and (D)
above for changes, increases or decreases which the Prospectus
discloses have occurred or may occur or which are described in
such letter;
(iv) they have compared specified dollar amounts
(or percentages derived from such dollar amounts) and other financial
information contained in the Registration
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<PAGE> 16
Statements (in each case to the extent that such dollar amounts,
percentages and other financial information are derived from the
general accounting records of the Company and its subsidiaries subject
to the internal controls of the Company's accounting system, or are
derived directly or indirectly from the audited or interim financial
statements of certain acquired properties or the pro forma financial
statements or the Company, or are derived directly from such
statements or records by analysis or computation) with the results
obtained from inquiries, a reading of such general accounting records
and other procedures specified in such letter and have found such
dollar amounts, percentages and other financial information to be in
agreement with such results, except as otherwise specified in such
letter;
(v) they have read the unaudited pro forma
condensed consolidated financial statements included in the
Registration Statement and inquired of officials of the Company and of
the companies from whom the properties were acquired for which
information is presented in the Registration Statement about the basis
for their determination of the proforma adjustments, and whether the
unaudited pro forma condensed consolidated financial statements
included in the Registration Statement comply as to form in all
material respects with the applicable accounting requirements of rule
11-02 of Regulation S-X;
(vi) they have proved the arithmetic accuracy of
the application of the pro forma adjustments to the historical amounts
in the unaudited pro forma condensed consolidated financial
statements; and
(vii) on the basis of the review referred to in (v)
and (vi) above, nothing came to their attention that caused them to
believe that the unaudited pro forma condensed consolidated financial
statements included in the Registration Statement do not comply as to
form in all material respects with the applicable accounting
requirements of rule 11-02 of Regulation S-X and that the pro forma
adjustments have not been properly applied to the historical amounts
in the compilation of those statements.
For purposes of this subsection, (A) if the Effective Time of the
Initial Registration Statement is subsequent to the execution and
delivery of this Agreement, "Registration Statements" shall mean the
initial registration statement as proposed to be amended by the
amendment or post-effective amendment to be filed shortly prior to its
Effective Time, (B) if the Effective Time of the Initial Registration
Statement is prior to the execution and delivery of this Agreement but
the Effective Time of the Additional Registration is subsequent to
such execution and delivery, "Registration Statements" shall mean the
Initial Registration Statement and the additional registration
statement as proposed to be filed or as proposed to be amended by the
post-effective amendment to be filed shortly prior to its Effective
Time, and (C) "Prospectus" shall mean the prospectus included in the
Registration Statements.
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<PAGE> 17
(b) If the Effective Time of the Initial Registration
Statement is not prior to the execution and delivery of this Agreement, such
Effective Time shall have occurred not later than 10:00 P.M., New York time, on
the date of this Agreement or such later date as shall have been consented to
by CS First Boston. If the Effective Time of the Additional Registration
Statement (if any) is not prior to the execution and delivery of this
Agreement, such Effective Time shall have occurred not later than 10:00 P.M.,
New York time, on the date of this Agreement or, if earlier, the time the
Prospectus is printed and distributed to any Underwriter, or shall have
occurred at such later date as shall have been consented to by CS First Boston.
If the Effective Time of the Initial Registration Statement is prior to the
execution and delivery of this Agreement, the Prospectus shall have been filed
with the Commission in accordance with the Rules and Regulations and Section
5(a) of this Agreement. Prior to such Closing Date, no stop order suspending
the effectiveness of a Registration Statement shall have been issued and no
proceedings for that purpose shall have been instituted or, to the knowledge of
the Company or the Representatives, shall be contemplated by the Commission.
(c) Subsequent to the execution and delivery of this
Agreement, there shall not have occurred (i) any change, or any development or
event involving a prospective change, in the condition (financial or other),
business, properties or results of operations of the Company or its
subsidiaries which, in the judgment of a majority in interest of the
Underwriters including the Representatives, is material and adverse and makes
it impractical or inadvisable to proceed with completion of the public offering
or the sale of and payment for the Offered Securities; (ii) any downgrading in
the rating of any debt securities of the Company by any "nationally recognized
statistical rating organization" (as defined for purposes of Rule 436(g) under
the Act), or any public announcement that any such organization has under
surveillance or review its rating of any debt securities of the Company (other
than an announcement with positive implications of a possible upgrading, and no
implication of a possible downgrading, of such rating); (iii) any suspension or
limitation of trading in securities generally on the New York Stock Exchange,
or any setting of minimum prices for trading on such exchange, or any
suspension of trading of any securities of the Company on any exchange or in
the over-the counter market; (iv) any banking moratorium declared by U.S.
Federal or New York authorities; or (v) any outbreak or escalation of major
hostilities in which the United States is involved, any declaration of war by
Congress or any other substantial national or international calamity or
emergency if, in the judgment of a majority in interest of the Underwriters
including the Representatives, the effect of any such outbreak, escalation,
declaration, calamity or emergency makes it impractical or inadvisable to
proceed with completion of the public offering or the sale of and payment for
the Offered Securities.
(d) The Representatives shall have received an opinion,
dated on such Closing Date, of Thompson & Knight, P.C., counsel for the
Company, to the effect that:
(i) The Company has been duly incorporated and is
an existing corporation in good standing under the laws of the State
of Delaware, with corporate power and authority to own its properties
and conduct its business as described in the Prospectus;
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<PAGE> 18
and the Company is duly qualified to do business as a foreign
corporation in good standing in all other jurisdictions in which its
ownership or lease of property or the conduct of its business requires
such qualification, except where the failure to be so qualified would
not have a material adverse effect on the business of the Company and
its consolidated subsidiaries considered as a whole;
(ii) Each subsidiary of the Company has been duly
organized and is an existing corporation or limited partnership in
good standing under the laws of the jurisdiction of its organization,
with power and authority (corporate or partnership, as applicable) to
own its properties and conduct its business as described in the
Prospectus; and each subsidiary of the Company is duly qualified to do
business as a foreign corporation or limited partnership in good
standing in all other jurisdictions in which its ownership or lease of
property or the conduct of its business requires such qualification,
except where the failure to be so qualified would not have a material
adverse effect on the business of the Company and its consolidated
subsidiaries considered as a whole; all of the issued and outstanding
shares of capital stock of each corporate subsidiary of the Company
have been duly authorized and validly issued and are fully paid and
nonassessable and are owned by the Company, directly or through
subsidiaries, free from liens, encumbrances and defects; and all of
the partnership interests of each partnership subsidiary of the
Company have been duly and validly authorized and issued in accordance
with the terms of the governing partnership agreement, are fully paid
and (other than the general partner interests) nonassessable and are
owned by the Company, directly or through subsidiaries, free from
liens, encumbrances and defects;
(iii) The Offered Securities delivered on such
Closing Date and all other outstanding shares of the Common Stock of
the Company, including the Shares to be sold by the Selling
Stockholder, have been duly authorized and validly issued, are fully
paid and nonassessable and conform in all material respects to the
description thereof contained in the Prospectus; the stockholders of
the Company have no preemptive rights with respect to the Securities;
and the certificates for the Common Stock, assuming they are in the
form filed with the Commission, are in due and proper form and comply
with the requirements of Delaware law, the Company's certificate of
incorporation and by-laws, and the requirements of the NASDAQ;
(iv) Such counsel do not know of any legal or
governmental proceedings required to be described in a Registration
Statement or the Prospectus which are not described as required or of
any contracts or documents of a character required to be described in
a Registration Statement or the Prospectus or to be filed as exhibits
to a Registration Statement which are not described and filed as
required;
(v) The Company has authorized and outstanding
capital stock as set forth under the caption "Capitalization" in the
Prospectus; and the statements in the Prospectus set forth under the
caption "Description of Capital Stock," insofar as such statements
constitute
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<PAGE> 19
a summary of documents referred to therein or matters of law,
accurately summarize, in all material respects, such documents and
matters;
(vi) Based on current law, the holding periods of
the holders of the Company's unregistered securities for purposes of
Rule 144 under the Act are as stated under the caption "Shares
Eligible for Future Sale" in the Prospectus;
(vii) There are no contracts, agreements or
understandings known to such counsel between the Company and any
person granting such person the right to require the Company to file a
registration statement under the Act with respect to any securities of
the Company owned or to be owned by such person or to require the
Company to include such securities in the securities registered
pursuant to the Registration Statement or in any securities being
registered pursuant to any other registration statement filed by the
Company under the Act, except for the Amended and Restated
Registration Rights Agreement dated as of September 30, 1996, among
Jack Hightower, Natural Gas Partners, L.P., Natural Gas Partners II,
L.P., Joint Energy Development Investments Limited Partnership, First
Union Corporation, Selma International Investment Limited, and the
Company; and all rights to require registration of any Securities
under that agreement have been waived with respect to the offering
contemplated hereby and for 180 days after the date of the initial
public offering of the Offered Securities;
(viii) No consent, approval, authorization or order
of, or filing with, any governmental agency or body or any court is
required for the consummation of the transactions contemplated by this
Agreement in connection with the issuance or sale of the Offered
Securities by the Company, except such as have been obtained and made
under the Act and such as may be required under foreign securities
laws or state securities or Blue Sky laws;
(ix) The execution, delivery and performance of
this Agreement and the issuance and sale of the Offered Securities
will not (a) to such counsel's knowledge, result in a breach or
violation of any of the terms and provisions of, or constitute a
default under, any statute, any rule, regulation or order of any
governmental agency or body or any court having jurisdiction over the
Company or any subsidiary of the Company or any of their properties,
or any agreement or instrument to which the Company or any such
subsidiary is a party or by which the Company or any such subsidiary
is bound or to which any of the properties of the Company or any such
subsidiary is subject (except for such breaches, violations or
defaults that would not have a material adverse affect on the business
of the Company); or (b) result in any violation of the charter,
by-laws or partnership agreement (as applicable) of the Company or any
such subsidiary; and the Company has full corporate power and
authority to authorize, issue and sell the Offered Securities as
contemplated by this Agreement;
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<PAGE> 20
(x) This Agreement has been duly authorized,
executed and delivered by the Sellers;
(xi) The Offered Securities have been approved for
listing on the NASDAQ upon notice of issuance;
(xii) Each Selling Stockholder has full legal
right, power and authority, and any approval required by law (other
than as required by state securities and blue sky laws as to which
such counsel need express no opinion), to sell, assign, transfer and
deliver the Firm Securities to be sold by such Selling Stockholder;
(xiii) The Custody Agreement executed and delivered
by each Selling Stockholder is a valid and binding agreement of each
such Selling Stockholder, enforceable in accordance with its terms;
(xiv) Upon the delivery of and payment for the Firm
Securities as contemplated hereby, each of the Underwriters who has
acquired Firm Securities from the Selling Stockholder in good faith
and without notice of any adverse claim within the meaning of the
Uniform Commercial Code will acquire the Firm Securities being sold by
each Selling Stockholder on the Closing Date, free of any adverse
claim. The owner of such Firm Securities, if other than the Selling
Stockholder, is precluded from asserting against the Underwriters the
ineffectiveness of any authorized endorsement or instruction, assuming
the Underwriters purchased such Firm Securities for value in good
faith and without notice of any adverse claim;
(xv) The Initial Registration Statement was
declared effective under the Act as of the date and time specified in
such opinion, the Additional Registration Statement (if any) was filed
and became effective under the Act as of the date and time (if
determinable) specified in such opinion, the Prospectus either was
filed with the Commission pursuant to the subparagraph of Rule 424(b)
specified in such opinion on the date specified therein or was
included in the Initial Registration Statement or the Additional
Registration Statement (as the case may be), and, to the best of the
knowledge of such counsel, no stop order suspending the effectiveness
of a Registration Statement or any part thereof has been issued and no
proceedings for that purpose have been instituted or are pending or
contemplated under the Act, and each Registration Statement and the
Prospectus, and each amendment or supplement thereto, as of their
respective effective or issue dates, complied as to form in all
material respects with the requirements of the Act and the Rules and
Regulations; and
(xvi) Such counsel have no reason to believe that
any part of a Registration Statement or any amendment thereto, as of
its effective date or as of such Closing Date, contained any untrue
statement of a material fact or omitted to state any material fact
required to be stated therein or necessary to make the statements
therein not misleading or
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<PAGE> 21
that the Prospectus or any amendment or supplement thereto, as of its
issue date or as of such Closing Date, contained any untrue statement
of a material fact or omitted to state any material fact necessary in
order to make the statements therein, in the light of the
circumstances under which they were made, not misleading; it being
understood that such counsel need express no opinion as to the
financial statements or other financial data or reserve engineering
data contained in the Registration Statements or the Prospectus.
(e) The Representatives shall have received from one or
more counsel for the Company an opinion or opinions, dated such Closing Date,
with respect to the title of the Company to the properties that the Company
acquired in the 1996 Acquisition (as defined in the Prospectus), in form and
substance reasonably satisfactory to the Representatives.
(f) The Representatives shall have received from Vinson &
Elkins L.L.P., counsel for the Underwriters, such opinion or opinions, dated
such Closing Date, with respect to the incorporation of the Company, the
validity of the Offered Securities delivered on such Closing Date, the
Registration Statements, the Prospectus and other related matters as the
Representatives may require, and the Company shall have furnished to such
counsel such documents as they request for the purpose of enabling them to pass
upon such matters.
(g) The Representatives shall have received a
certificate, dated such Closing Date, of the President or any Vice-President
and a principal financial or accounting officer of the Company in which such
officers, to the best of their knowledge after reasonable investigation, shall
state that: the representations and warranties of the Company in this Agreement
are true and correct; the Company has complied with all agreements and
satisfied all conditions on its part to be performed or satisfied hereunder at
or prior to such Closing Date; no stop order suspending the effectiveness of
any Registration Statement has been issued and no proceedings for that purpose
have been instituted, to the knowledge of such officer, or are contemplated by
the Commission; the Additional Registration Statement (if any) satisfying the
requirements of subparagraphs (1) and (3) of Rule 462(b) was filed pursuant to
Rule 462(b), including payment of the applicable filing fee in accordance with
Rule 111(a) or (b) under the Act, prior to the time the Prospectus was printed
and distributed to any Underwriter; and, subsequent to the date of the most
recent financial statements in the Prospectus, there has been no material
adverse change, nor any development or event involving a prospective material
adverse change, in the condition (financial or other), business, properties or
results of operations of the Company and its subsidiaries taken as a whole
except as set forth in or contemplated by the Prospectus or as described in
such certificate.
(h) The Representatives shall have received a
certificate, dated such Closing Date, of the Selling Stockholder in which the
Selling Stockholder, to the best of its knowledge after reasonable
investigation, shall state that the representations and warranties of the
Selling Stockholder in this Agreement are true and correct and that the Selling
Stockholder has complied with all agreements and satisfied all conditions on
its part to be performed or satisfied hereunder at or prior to such Closing
Date.
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<PAGE> 22
(i) The Representatives shall have received a letter,
dated such Closing Date, of KPMG Peat Marwick LLP, which meets the requirements
of subsection (a) of this Section, except that the specified date referred to
in such subsection will be a date not more than five days prior to such Closing
Date for the purposes of this subsection.
(j) At the time of execution of this Agreement and at
such Closing Date, the Representatives shall have received a letter of
Williamson, dated respectively the date hereof and the Closing Date,
substantially in the forms heretofore approved by the Representatives.
(k) The Representatives shall have received such other
certificates of the Company, the Selling Stockholder, and the Company's
transfer agent as the Representatives may reasonably request.
The Company will furnish the Representatives with such originals and conformed
copies of such opinions, certificates, letters and documents as the
Representatives reasonably request. CS First Boston may in its sole discretion
waive on behalf of the Underwriters compliance with any conditions to the
obligations of the Underwriters hereunder, whether in respect of an Optional
Closing Date or otherwise.
8. Indemnification and Contribution. (a) The Company agrees to
indemnify and hold harmless each Underwriter against any losses, claims,
damages or liabilities, joint or several, to which such Underwriter may become
subject, under the Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon any
untrue statement or alleged untrue statement of any material fact contained in
any Registration Statement, the Prospectus, or any amendment or supplement
thereto, or any related preliminary prospectus, or arise out of or are based
upon the omission or alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements therein not
misleading, and will reimburse each Underwriter for any legal or other expenses
reasonably incurred by such Underwriter in connection with investigating or
defending any such loss, claim, damage, liability or action as such expenses
are incurred; provided, however, that the Company will not be liable in any
such case to the extent that any such loss, claim, damage or liability arises
out of or is based upon an untrue statement or alleged untrue statement in or
omission or alleged omission from any of such documents in reliance upon and in
conformity with information furnished in writing to the Company by any
Underwriter through the Representatives specifically for use therein, it being
understood and agreed that the only such information furnished by any
Underwriter consists of the information described as such in subsection (c)
below.
(b) The Selling Stockholder agrees to indemnify and hold
harmless each Underwriter and the Company against any losses, claims, damages
or liabilities, joint or several, to which such party may become subject, under
the Act or otherwise, insofar as such losses, claims, damages or liabilities
(or actions in respect thereof) arise out of or are based upon any untrue
statement or alleged untrue statement of any material fact contained in any
Registration Statement,
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<PAGE> 23
the Prospectus, or any amendment or supplemental thereto, or any related
preliminary prospectus, or arise out of or are based upon the omission or
alleged omission to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading, and will reimburse
such party for any legal or other expenses reasonably incurred by such party in
connection with investigating or defending any such loss, claim, damage,
liability or action as such expenses are incurred; provided, however, that the
Selling Stockholder will only be liable for information furnished in writing by
or on behalf of the Selling Stockholder expressly for use in the Registration
Statement or the Prospectus or in any preliminary prospectus, it being
understood and agreed that the only such information furnished by the Selling
Stockholder consists of the following information in the Prospectus furnished
on behalf of the Selling Stockholder: the name, address, number of shares
beneficially owned prior to the offering, and number of shares beneficially
owned after the offering appearing in the table under the caption "Principal
and Selling Stockholders" in the Prospectus. Notwithstanding anything to the
contrary contained in the preceding sentence, the Selling Stockholder will not
be liable in any case to the extent that any such loss, claim, damage or
liability arises out of or is based upon an untrue statement or alleged untrue
statement in or omission or alleged omission from any of such documents in
reliance upon and in conformity with information furnished in writing to the
Company by any Underwriter through the Representatives specifically for use
therein; and provided further, that the indemnification obligation of the
Selling Stockholder shall be limited to the aggregate public offering price of
the shares sold by the Selling Stockholder.
(c) Each Underwriter will severally and not jointly
indemnify and hold harmless the Company and the Selling Stockholder against any
losses, claims, damages or liabilities to which the Company or the Selling
Stockholder may become subject, under the Act or otherwise, insofar as such
losses, claims, damages or liabilities (or actions in respect thereof) arise
out of or are based upon any untrue statement or alleged untrue statement of
any material fact contained in any Registration Statement, the Prospectus, or
any amendment or supplement thereto, or any related preliminary prospectus, or
arise out of or are based upon the omission or the alleged omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein not misleading, in each case to the extent, but only to the
extent, that such untrue statement or alleged untrue statement or omission or
alleged omission was made in reliance upon and in conformity with information
furnished in writing to the Company by such Underwriter through the
Representatives specifically for use therein, and will reimburse any legal or
other expenses reasonably incurred by the Company or the Selling Stockholder in
connection with investigating or defending any such loss, claim, damage,
liability or action as such expenses are incurred, it being understood and
agreed that the only such information furnished by any Underwriter consists of
the following information in the Prospectus furnished on behalf of each
Underwriter: the last paragraph at the bottom of the cover page concerning the
terms of the offering by the Underwriters, the legends concerning
over-allotments, stabilization and transactions by affiliates of the
Underwriters on the inside front cover page, the concession and reallowance
figures appearing in the fourth paragraph under the caption "Underwriting," and
the information contained in the fifth and sixth paragraphs under the caption
"Underwriting."
-23-
<PAGE> 24
(d) Promptly after receipt by an indemnified party under
this Section or Section 10 of notice of the commencement of any action, such
indemnified party will, if a claim in respect thereof is to be made against the
indemnifying party under subsection (a), (b) or (c) above or Section 10, notify
the indemnifying party of the commencement thereof; but the omission so to
notify the indemnifying party will not relieve it from any liability which it
may have to any indemnified party otherwise than under subsection (a), (b) or
(c) above or Section 10. In case any such action is brought against any
indemnified party and it notifies the indemnifying party of the commencement
thereof, the indemnifying party will be entitled to participate therein and, to
the extent that it may wish, jointly with any other indemnifying party
similarly notified, to assume the defense thereof, with counsel satisfactory to
such indemnified party (who shall not, except with the consent of the
indemnified party, be counsel to the indemnifying party), and after notice from
the indemnifying party to such indemnified party of its election so to assume
the defense thereof, the indemnifying party will not be liable to such
indemnified party under this Section or Section 10, as the case may be, for any
legal or other expenses subsequently incurred by such indemnified party in
connection with the defense thereof other than reasonable costs of
investigation. No indemnifying party shall, without the prior written consent
of the indemnified party, effect any settlement of any pending or threatened
action in respect of which any indemnified party is or could have been a party
and indemnity could have been sought hereunder by such indemnified party unless
such settlement includes an unconditional release of such indemnified party
from all liability on any claims that are the subject matter of such action.
(e) If the indemnification provided for in this Section
is unavailable or insufficient to hold harmless an indemnified party under
subsection (a), (b) or (c) above, then each indemnifying party shall contribute
to the amount paid or payable by such indemnified party as a result of the
losses, claims, damages or liabilities referred to in subsection (a), (b) or
(c) above (i) in such proportion as is appropriate to reflect the relative
benefits received by the Sellers on the one hand and the Underwriters on the
other from the offering of the Securities or (ii) if the allocation provided by
clause (i) above is not permitted by applicable law, in such proportion as is
appropriate to reflect not only the relative benefits referred to in clause (i)
above but also the relative fault of the Sellers on the one hand and the
Underwriters on the other in connection with the statements or omissions which
resulted in such losses, claims, damages or liabilities as well as any other
relevant equitable considerations. The relative benefits received by the
Sellers on the one hand and the Underwriters on the other shall be deemed to be
in the same proportion as the total net proceeds from the offering (before
deducting expenses) received by the Sellers bear to the total underwriting
discounts and commissions received by the Underwriters. The relative fault
shall be determined by reference to, among other things, whether the untrue or
alleged untrue statement of a material fact or the omission or alleged omission
to state a material fact relates to information supplied by the Sellers or the
Underwriters and the parties' relative intent, knowledge, access to information
and opportunity to correct or prevent such untrue statement or omission. The
amount paid by an indemnified party as a result of the losses, claims, damages
or liabilities referred to in the first sentence of this subsection (e) shall
be deemed to include any legal or other expenses reasonably incurred by such
indemnified party in connection with investigating or defending any action or
claim
-24-
<PAGE> 25
which is the subject of this subsection (e). Notwithstanding the provisions of
this subsection (e), no Underwriter shall be required to contribute any amount
in excess of the amount by which the total price at which the Securities
underwritten by it and distributed to the public were offered to the public
exceeds the amount of any damages which such Underwriter has otherwise been
required to pay by reason of such untrue or alleged untrue statement or
omission or alleged omission. No person guilty of fraudulent misrepresentation
(within the meaning of Section 11(f) of the Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation. The Underwriters' obligations in this subsection (e) to
contribute are several in proportion to their respective underwriting
obligations and not joint.
(f) The obligations of the Company and the Selling
Stockholder under this Section and Section 10 shall be in addition to any
liability which the Company or the Selling Stockholder may otherwise have and
shall extend, upon the same terms and conditions, to each person, if any, who
controls any Underwriter or the QIU (as hereinafter defined) within the meaning
of the Act; and the obligations of the Underwriters under this Section shall be
in addition to any liability which the respective Underwriters may otherwise
have and shall extend, upon the same terms and conditions, to each director of
the Company, to each officer of the Company who has signed a Registration
Statement to each person, if any, who controls the Company within the meaning
of the Act, and to each Selling Stockholder.
9. Default of Underwriters. If any Underwriter or Underwriters
default in their obligations to purchase Offered Securities hereunder on either
the First or any Optional Closing Date and the aggregate number of share of
Offered Securities that such defaulting Underwriter or Underwriters agreed but
failed to purchase does not exceed 10% of the total number of shares of Offered
Securities that the Underwriters are obligated to purchase on such Closing
Date, CS First Boston may make arrangements satisfactory to the Company and the
Selling Stockholder for the purchase of such Offered Securities by other
persons, including any of the Underwriters, but if no such arrangements are
made by such Closing Date, the non-defaulting Underwriters shall be obligated
severally, in proportion to their respective commitments hereunder, to purchase
the Offered Securities that such defaulting Underwriters agreed but failed to
purchase on such Closing Date. If any Underwriter or Underwriters so default
and the aggregate number of shares of Offered Securities with respect to which
such default or defaults occur exceeds 10% of the total of shares of Offered
Securities that the Underwriters are obligated to purchase on such Closing Date
and arrangements satisfactory to CS First Boston, the Company and the Selling
Stockholder for the purchase of such Offered Securities by other persons are
not made within 36 hours after such default, this Agreement will terminate
without liability on the part of any non- defaulting Underwriter or the
Sellers, except as provided in Section 11 (provided that if such default
occurs with respect to Optional Securities after the First Closing Date, this
Agreement will not terminate as to the Firm Securities or any Optional
Securities purchased prior to such termination). As used in this Agreement, the
term "Underwriter" includes any person substituted for an Underwriter under
this Section. Nothing herein will relieve a defaulting Underwriter from
liability for its default
-25-
<PAGE> 26
10. Qualified Independent Underwriter. The Company hereby confirms
that at its request CS First Boston has without compensation acted as
"qualified independent underwriter" (in such capacity, the "QIU") within the
meaning of Rule 2720 of the Conduct Rules of the National Association of
Securities Dealers, Inc. in connection with the offering of the Offered
Securities. The Company will indemnify and hold harmless the QIU against any
losses, claims, damages or liabilities, joint or several, to which the QIU may
become subject, under the Act or otherwise, insofar as such losses, claims,
damages or liabilities (or actions in respect thereof) arise out of or are
based upon the QIU's acting (or alleged failing to act) as such "qualified
independent underwriter" and will reimburse the QIU for any legal or other
expenses reasonably incurred by the QIU in connection with investigating or
defending any such loss, claim, damage, liability or action as such expenses
are incurred.
11. Survival of Certain Representations and Obligations. The
respective indemnities, agreements, representations, warranties and other
statements of the Company or its officers, of the Selling Stockholder, and of
the several Underwriters set forth in or made pursuant to this Agreement will
remain in full force and effect, regardless of any investigation, or statement
as to the results thereof, made by or on behalf of any Underwriter, the
Company, the Selling Stockholder, or any of their respective representatives,
officers or directors or any controlling person, and will survive delivery of
and payment for the Offered Securities. If this Agreement is terminated
pursuant to Section 9 or if for any reason the purchase of the Offered
Securities by the Underwriters is not consummated, the Company shall remain
responsible for the expenses to be paid or reimbursed by it pursuant to Section
5 and the respective obligations of the Company, the Selling Stockholder and
the Underwriters pursuant to Section 8 and the obligations of the Company
pursuant to Section 10 shall remain in effect, and if any Offered Securities
have been purchased hereunder the representations and warranties in Section 2
and all obligations under Section 5 shall also remain in effect. If the
purchase of the Offered Securities by the Underwriters is not consummated for
any reason other than solely because of the termination of this Agreement
pursuant to Section 9 or the occurrence of any event specified in clause (iii),
(iv) or (v) of Section 7(c), the Company will reimburse the Underwriters for
all out-of-pocket expenses (including fees and disbursements of counsel)
reasonably incurred by them in connection with the offering of the Offered
Securities.
12. Notices. All communications hereunder will be in writing and,
if sent to the Underwriters, will be mailed, delivered or telegraphed and
confirmed to the Representatives, c/o CS First Boston Corporation, Park Avenue
Plaza, New York, N.Y. 10055, Attention: Investment Banking
Department-Transactions Advisory Group, or, if sent to the Company or the
Selling Stockholder, will be mailed, delivered or telegraphed and confirmed to
Titan Exploration, Inc., 500 West Texas, Suite 500, Midland, Texas 79701,
Attention: Jack D. Hightower; provided, however, that any notice to an
Underwriter pursuant to Section 8 will be mailed, delivered or telegraphed and
confirmed to such Underwriter.
-26-
<PAGE> 27
13. Successors. This Agreement will inure to the benefit of and be
binding upon the parties hereto and their respective successors and the
officers and directors and controlling persons referred to in Section 8, and no
other person will have any right or obligation hereunder.
14. Representation of Underwriters. The Representatives will act
for the several Underwriters in connection with this offering, and any action
under this Agreement taken by the Representatives jointly or by CS First Boston
will be binding upon all the Underwriters.
15. Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original, but all such
counterparts shall together constitute one and the same Agreement.
16. APPLICABLE LAW. THIS AGREEMENT SHALL BE GOVERNED BY, AND
CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD
TO PRINCIPLES OF CONFLICTS OF LAWS.
The Company and the Selling Stockholder hereby submit to the
non-exclusive jurisdiction of the Federal and state courts in the Borough of
Manhattan in The City of New York in any suit or proceeding arising out of or
relating to this Agreement or the transactions contemplated hereby.
If the foregoing is in accordance with the Representatives'
understanding of our agreement, kindly sign and return to the Company one of
the counterparts hereof, whereupon it will become a binding agreement between
the Company, the Selling Stockholder and the several Underwriters in accordance
with its terms.
Very truly yours,
TITAN EXPLORATION, INC.
By:
-------------------------------------------
Jack D. Hightower
President and Chief Executive Officer
-27-
<PAGE> 28
SELLING STOCKHOLDER
FIRST UNION CORPORATION
By:
---------------------------------
Name:
-------------------------------
Title:
------------------------------
The foregoing Underwriting Agreement is hereby
confirmed and accepted as of the date first above
written.
CS FIRST BOSTON CORPORATION
Donaldson, Lufkin & Jenrette Securities Corporation
Howard, Weil, Labouisse, Friedrichs Incorporated
J.P. Morgan Securities Inc.
Petrie Parkman & Co., Inc.
By:
----------------------------------
(Authorized Signatory)
-28-
<PAGE> 29
SCHEDULE A
<TABLE>
<CAPTION>
Number of
---------
Underwriter Firm Securities
----------- ---------------
<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>
Schedule A-1
<PAGE> 30
SCHEDULE B
<TABLE>
<CAPTION>
Number of
---------
Selling Stockholder Firm Securities
------------------- ---------------
<S> <C>
First Union Corporation 110,000
-------
Total . . . . . . . . . . . . . . . . 110,000
=======
</TABLE>
Schedule B-1
<PAGE> 1
EXHIBIT 3.1.1
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
OF
TITAN EXPLORATION, INC.
Titan Exploration, Inc., a corporation organized and existing under
and by virtue of the Delaware General Corporation Law (the "CORPORATION"),
DOES HEREBY CERTIFY:
FIRST: That in lieu of a meeting and in accordance with Section
141(f) of the Delaware General Corporation Law, the Board of Directors of the
Corporation has given written consent to the adoption of resolutions setting
forth a proposed amendment to the Certificate of Incorporation of the
Corporation, declaring said amendment to be advisable and directing that said
amendment be considered by the stockholders of the Corporation entitled to vote
thereon. The resolutions setting forth the proposed amendment are as follows:
NOW THEREFORE, BE IT RESOLVED, that, subject to the approval by the
holders of the requisite number of shares of capital stock of the Corporation,
the Certificate of Incorporation of the Corporation be amended as follows:
1. By adding to Article FIFTH a new paragraph (g) as follows:
"(g) Action Taken by Stockholders Without
a Meeting. Any action required or permitted to be
taken at any annual or special meeting of the
stockholders of the Corporation may be taken without
a meeting, without prior notice and without a vote,
but only if a consent or consents in writing, setting
forth the action so taken, shall be signed by the
holder or holders of record of all the outstanding
shares of capital stock of the Corporation then
entitled to vote thereon."
2. By adding to Article EIGHTH, in the penultimate line and
immediately following the phrase "or Article FIFTH," the
following:
" or Article FOURTH, paragraph (b)(iii)"
SECOND: That in lieu of a meeting and a vote of stockholders, the
stockholders of the corporation have given written consent to said amendment in
accordance with the provisions of Section 228 of the General Corporation Law of
the State of Delaware, pursuant to which the necessary number of shares as
required by statute and by the Certificate of Incorporation of the Corporation
were voted in favor of the amendment, and written notice of the adoption of
such amendment has been given as provided in Section 228 of the Delaware
General Corporation Law to every stockholder entitled to such notice.
<PAGE> 2
THIRD: That said amendment was duly adopted in accordance with the
provisions of Section 242 of the Delaware General Corporation Law.
IN WITNESS WHEREOF, Titan Exploration, Inc. has caused this
certificate to be signed by its duly authorized officer on this 8th day of
November, 1996.
TITAN EXPLORATION, INC.
By:/s/ Jack Hightower
---------------------------------
Name:Jack Hightower
Title:President, C.E.O., Chairman
<PAGE> 1
EXHIBIT 4.1
INCORPORATED UNDER THE
LAWS OF THE STATE OF DELAWARE
NUMBER SHARES
C
COMMON STOCK TITAN EXPLORATION, INC. CUSIP 888289 10 5
THIS CERTIFIES THAT ______________________________________ is the owner of
______________________________ FULLY PAID AND NON-ASSESSABLE SHARES OF COMMON
STOCK OF THE PAR VALUE OF $.01 PER SHARE, OF
TITAN EXPLORATION, INC.
transferable on the books of the Corporation by the holder hereof in person or
by duly authorized attorney, upon surrender of this certificate properly
endorsed.
WITNESS the signatures of the Corporation's duly authorized officers.
Dated:
COUNTERSIGNED AND REGISTERED:
FIRST UNION NATIONAL
BANK OF NORTH CAROLINA
PRESIDENT TRANSFER AGENT AND REGISTRAR
BY
SECRETARY AUTHORIZED SIGNATURE
<PAGE> 2
TITAN EXPLORATION, INC.
THE CORPORATION WILL FURNISH WITHOUT CHARGE TO EACH STOCKHOLDER WHO SO
REQUESTS THE POWERS, DESIGNATIONS, PREFERENCES AND RELATIVE, PARTICIPATING,
OPTIONAL OR OTHER SPECIAL RIGHTS OF EACH CLASS OF STOCK OR SERIES THEREOF OF
THE CORPORATION, AND THE QUALIFICATIONS, LIMITATIONS OR RESTRICTIONS OF SUCH
PREFERENCES AND/OR RIGHTS.
The following abbreviations, when used in the inscription on the face
of this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM -- as tenants in common UNIF GIFT MIN ACT -- ______ Custodian _______
TEN ENT -- as tenants by the entireties (Cust) (Minor)
JT TEN -- as joint tenants with right Under Uniform Gifts to Minors
of survivorship and not as Act ________________________
tenants in common (State)
Additional abbreviations may also be used though not on the above list.
For Value Received, ______________________________ hereby sell, assign
and transfer unto
PLEASE INSERT SOCIAL SECURITY NUMBER OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
________________________________________________________________________________
________________________________________________________________________________
Please print or typewrite name and address, including postal zip code,
of assignee
________________________________________________________________________________
__________________________________________________________________________Shares
of the Stock represented by the within Certificate, and do hereby irrevocably
constitute and appoint
________________________________________________________________________________
________________________________________________________________________________
Attorney to transfer the said stock on the books of the within-named
Corporation, with full power of substitution in the premises.
Dated ____________________
NOTICE: THE SIGNATURE(S) TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME(S)
AS WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR WITHOUT
ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATEVER.
X ____________________________________________
X ____________________________________________
THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION
(BANKS, STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH
MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM), PURSUANT TO
S.E.C. RULE 17Ad-15.
SIGNATURE(S) GUARANTEED BY:
<PAGE> 1
EXHIBIT 5
(214) 969-1700
November 22, 1996
Titan Exploration, Inc.
500 West Texas Avenue
Suite 500
Midland, Texas 79701
Dear Sirs:
We have acted as counsel for Titan Exploration, Inc., a Delaware
corporation (the "Company"), in connection with the preparation of the
Company's Registration Statement on Form S-1 (Registration No. 333-14029), as
amended (the "Registration Statement"), filed with the Securities and Exchange
Commission under the Securities Act of 1933, as amended, relating to the
proposed offering of 12,610,000 shares (the "Shares") of the Company's common
stock, par value $.01 per share (the "Common Stock") (including 110,000 shares
being offered by a stockholder of the Company (the "Selling Stockholder")),
together with 1,891,500 additional shares of Common Stock (the "Additional
Shares") subject to the underwriters' over-allotment option as described in the
Registration Statement.
In connection with the foregoing, we have examined the originals or
copies, certified or otherwise authenticated to our satisfaction, of the
Registration Statement and such corporate records of the Company, certificates
of public officials and of officers of the Company, and other agreements,
instruments and documents as we have deemed necessary as a basis for the
opinions hereinafter expressed. Where facts material to the opinions
hereinafter expressed were not independently established by us, we have relied
upon the statements of officers of the Company, where we deemed such reliance
appropriate under the circumstances.
Based upon the foregoing and in reliance thereon, and subject to the
assumptions and qualifications hereinafter specified, it is our opinion that:
1. The Company is a corporation duly incorporated and validly
existing in good standing under the laws of the State of Delaware.
2. Upon (a) the taking of action by the duly authorized Pricing
Committee of the Board of Directors of the Company to determine the price at
which the Shares and Additional Shares are to be sold under the Underwriting
Agreement and (b) the sale of the Shares and the Additional Shares in
accordance with the terms of the Underwriting Agreement for the price so
determined, the Shares and any Additional Shares will be duly authorized by all
necessary corporate action on the part of the Company, validly issued, fully
paid and nonassessable.
We hereby consent to the filing of this opinion as Exhibit 5.1 to the
Registration Statement and to the reference to us under the caption "Legal
Matters" in the prospectus forming a part of the Registration Statement. In
giving this consent, we do not thereby admit that we are within the category
<PAGE> 2
of persons whose consent is required under Section 7 of the Securities Act or
the rules or regulations of the Commission thereunder.
Respectfully submitted,
THOMPSON & KNIGHT,
A Professional Corporation
By: /s/ Joe Dannenmaier
---------------------------------------
Joe Dannenmaier, Attorney
<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 22, 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 22, 1996
