AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 21, 1997
REGISTRATION NO. 333-24641
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
DOMAIN ENERGY CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 1311
(STATE OR OTHER (PRIMARY STANDARD
JURISDICTION INDUSTRIAL 76-0526147
OF INCORPORATION OR CLASSIFICATION CODE (I.R.S. EMPLOYER
ORGANIZATION) NUMBER) IDENTIFICATION NUMBER)
MICHAEL V. RONCA
PRESIDENT AND CHIEF EXECUTIVE OFFICER
1100 LOUISIANA, SUITE 1500 P. O. BOX 2229
HOUSTON, TEXAS 77002 HOUSTON, TEXAS 77252-2229
(713) 757-5662 (713) 757-5662
(ADDRESS, INCLUDING ZIP CODE, AND (NAME, ADDRESS, INCLUDING ZIP CODE
TELEPHONE NUMBER, AND
INCLUDING AREA CODE, OF REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA
PRINCIPAL EXECUTIVE OFFICES) CODE, OF AGENT FOR SERVICE)
------------------------
COPIES TO:
JAMES L. RICE III, ESQ. R. JOEL SWANSON, ESQ.
WEIL, GOTSHAL & MANGES LLP BAKER & BOTTS, L.L.P.
700 LOUISIANA, SUITE 1600 910 LOUISIANA
HOUSTON, TEXAS 77002 HOUSTON, TEXAS 77002
(713) 546-5000 (713) 229-1234
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF THE 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. [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
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PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO OFFERING PRICE AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED BE REGISTERED(1) PER SHARE(1) OFFERING PRICE(2) REGISTRATION FEE
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<S> <C> <C> <C> <C>
Common Stock, $0.01 par
value......................... -- -- $103,500,000 $31,364(3)
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</TABLE>
(1) In accordance with Rule 457(o) under the Securities Act of 1933, as amended,
the number of shares being registered and the proposed maximum offering
price per share are not included in this table.
(2) Estimated solely for the purpose of determining the registration fee.
(3) A registration fee of $31,364 was paid in connection with the initial
filing of this Registration Statement on April 4, 1997 and no additional
filing fee is required.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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<PAGE>
******************************************************************************
* *
* INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A *
* REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED *
* WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT *
* BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE *
* REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT *
* CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR *
* SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH *
* OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR *
* QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. *
* *
******************************************************************************
SUBJECT TO COMPLETION, DATED MAY 21, 1997
6,000,000 SHARES
DOMAIN ENERGY CORPORATION
Common Stock
($.01 par value)
------------------
All of the shares of Common Stock, $.01 par value ("Common Stock"), of Domain
Energy Corporation (the "Company") offered hereby (the "Offering") are
being sold by the Company. Concurrently with consummation of the Offering,
the Company will sell, at a price per share equal to the Price to
Public set forth below, an additional number of shares of Common Stock
to First Reserve Fund VII, Limited Partnership ("Fund VII") such
that the aggregate purchase price paid by Fund VII for such
shares equals $8,681,000. Prior to the Offering, there has been
no public market for the Common Stock of the Company. It is
currently estimated that the initial public offering price
of the Common Stock will be between $13.00 and $15.00
per share. For information relating to the factors
considered in determining the initial public
offering price, see "Underwriting." The Common
Stock has been approved for listing on the New
York Stock Exchange, subject to notice of
issuance, under the
symbol "DXD."
FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED IN CONNECTION WITH
AN INVESTMENT IN THE COMMON STOCK, SEE "RISK FACTORS" ON PAGE 11 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.
UNDERWRITING
DISCOUNTS PROCEEDS
PRICE TO AND TO
PUBLIC COMMISSIONS COMPANY(1)
------------------------------------
Per Share.............................. $ $ $
Total(2)............................... $ $ $
(1) Before deduction of expenses payable by the Company estimated at $1,000,000.
(2) The Company has granted the Underwriters an option, exercisable for 30 days
from the date of this Prospectus, to purchase a maximum of 900,000
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
Company will be $_________. See "Underwriting."
The shares of Common Stock are offered by the several Underwriters when, as
and if issued by the Company, delivered to and accepted by the Underwriters and
subject to their right to reject orders in whole or in part. It is expected that
the shares of Common Stock offered hereby will be ready for delivery on or about
, 1997, against payment in immediately available funds.
CREDIT SUISSE FIRST BOSTON
PAINEWEBBER INCORPORATED
PRUDENTIAL SECURITIES INCORPORATED
MORGAN KEEGAN & COMPANY, INC.
Prospectus dated , 1997
<PAGE>
[The paper version of this Prospectus contains a map of the Gulf of Mexico
and the Gulf Coast of Texas, Louisiana and Mississippi, which indicates the
locations of the Company's oil and gas properties in such region.]
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANS- ACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING OVER-ALLOTMENT OF COMMON STOCK, PURCHASES OF THE COMMON STOCK TO
STABILIZE ITS MARKET PRICE, PURCHASES OF THE COMMON STOCK TO COVER SOME OR ALL
OF A SHORT POSITION IN THE COMMON STOCK MAINTAINED BY THE UNDERWRITERS AND THE
IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE
"UNDERWRITING."
<PAGE>
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. CERTAIN TERMS RELATING TO THE OIL AND GAS BUSINESS ARE
DEFINED IN THE "GLOSSARY" SECTION OF THIS PROSPECTUS. UNLESS THE CONTEXT
INDICATES OTHERWISE, REFERENCES IN THIS PROSPECTUS TO "DOMAIN" OR THE
"COMPANY" ARE TO DOMAIN ENERGY CORPORATION, A DELAWARE CORPORATION, AND ITS
SUBSIDIARIES, WHICH SUBSIDIARIES COMPRISE THE COMPANY'S PREDECESSOR BUSINESS
UNIT. UNLESS THE CONTEXT INDICATES OTHERWISE, THE DISCUSSION IN THIS PROSPECTUS
REFLECTS A 754-FOR-ONE STOCK SPLIT TO BE EFFECTED IMMEDIATELY PRIOR TO
CONSUMMATION OF THE OFFERING AND ASSUMES THAT THE UNDERWRITERS' OVER-ALLOTMENT
OPTION WITH RESPECT TO THE OFFERING IS NOT EXERCISED. UNLESS OTHERWISE
INDICATED, THE PRO FORMA INFORMATION PRESENTED IN THIS PROSPECTUS GIVES EFFECT
TO THE ACQUISITION, THE FUNDS ACQUISITION AND THE MICHIGAN DISPOSITION (AS SUCH
TERMS ARE DEFINED BELOW), THE PURCHASE OF COMMON STOCK BY THE COMPANY'S
EMPLOYEES IN 1997, THE PURCHASE OF COMMON STOCK BY FIRST RESERVE FUND VII,
LIMITED PARTNERSHIP CONCURRENTLY WITH CONSUMMATION OF THE OFFERING AND THE
APPLICATION OF THE NET PROCEEDS OF THE OFFERING AS DESCRIBED IN "USE OF
PROCEEDS." THE ESTIMATES OF THE COMPANY'S PROVED RESERVES AS OF DECEMBER 31,
1996 SET FORTH IN THIS PROSPECTUS ARE BASED ON THE REPORTS OF DEGOLYER AND
MACNAUGHTON AND, IN THE CASE OF THE COMPANY'S WEST DELTA 30 FIELD AND FORMER
MICHIGAN PROPERTIES, OTHER THIRD-PARTY PETROLEUM ENGINEERS. UNLESS OTHERWISE
INDICATED, THE OPERATING AND RESERVE DATA SET FORTH HEREIN DOES NOT INCLUDE THE
RESERVES OR RESERVE VALUE ATTRIBUTABLE TO THE COMPANY'S INDEPENDENT PRODUCER
FINANCE PROGRAM.
THE COMPANY
Domain is an independent oil and gas company engaged in the exploration,
development, production and acquisition of domestic oil and natural gas
properties, principally in the Gulf Coast region. The Company complements these
activities with its Independent Producer Finance Program (the "IPF Program")
pursuant to which it invests in oil and natural gas reserves through the
acquisition of term overriding royalty interests. During 1996, approximately 92%
of the Company's revenue was generated by oil and natural gas sales and
approximately 8% of the Company's revenue was generated by the IPF Program. The
Company's future growth will be driven by development, exploitation and
exploration drilling on its existing properties, by the continuation of an
opportunistic acquisition strategy in the Gulf Coast region and by further
expansion of the IPF Program.
The Company was formed in December 1996 by the management of Tenneco
Ventures Corporation and an affiliate of First Reserve Corporation to acquire
(the "Acquisition") Tenneco Ventures Corporation and certain of its affiliates
(collectively, "Tenneco Ventures"). Senior management of the Company
established Tenneco Ventures in 1992 as a separate business unit of its former
parent, Tenneco Inc. ("Tenneco"), to engage in exploration and production, oil
and gas program management, producer financing and related activities. All of
the Company's executive officers are veterans of the Tenneco organization, and
11 of the Company's 19 technical personnel have Tenneco Oil Company backgrounds.
Approximately 85% of the Company's employees, including all of its management,
have purchased shares of Common Stock in the Company.
During the last four years, the Company has grown primarily through the
opportunistic acquisition of Gulf of Mexico properties and the subsequent
development, exploitation and exploration of these properties, resulting in
substantial increases in its reserves and production. The Company believes that
its acquisition costs, lease operating costs and net general and administrative
costs on a per Mcfe basis are low relative to other companies operating
principally in the Gulf Coast region. From 1994 through 1996, the Company
completed 11 acquisitions aggregating $106.9 million, with an average cost of
proved reserves estimated at the time of acquisition of $0.48 per Mcfe. Eight of
the 11 acquisitions were Gulf Coast region properties. In 1996 the Company
achieved a lease operating expense of $0.44 per Mcfe of production and a net
general and administrative expense (excluding Tenneco overhead allocations) of
$0.12 per Mcfe of production.
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The Company's pro forma estimated net proved reserves as of December 31,
1996 were 153.8 Bcfe, and its pro forma average daily production during 1996 was
85.6 MMcfe, each of which represents a twelvefold increase from levels in 1993.
Approximately 60% of these reserves were natural gas, and approximately 67% of
proved reserves were classified as proved developed producing. On a pro forma
basis as of December 31, 1996, the Company had a PV-10 Reserve Value of $213.0
million, which does not include reserve value attributable to the IPF Program.
Through the IPF Program, the Company complements its exploration and
production activities by providing capital to independent producers in return
for term overriding royalty interests in oil and gas properties owned by such
producers. From inception through December 31, 1996, the IPF Program has
generated an average return on net assets in excess of 20%. In addition, the
Company believes that the IPF Program offers a lower level of reserve,
production and price risk than that associated with working interest ownership.
From inception through December 31, 1996, the Company completed 40 transactions
under its IPF Program. At December 31, 1996, based on Company estimates and
assuming prices of $2.10 per Mcf of natural gas and $21.00 per Bbl of oil, the
net present value attributable to IPF Program assets was $25.4 million.
The Company reported net income of $8.2 million, $1.4 million and $1.0
million in 1996, 1995 and 1994, respectively. Pro forma net income for the year
ended December 31, 1996 was $17.2 million. See "-- Summary Historical and Pro
Forma Combined and Consolidated Financial Data."
The Company generated earnings before interest, taxes and depreciation and
amortization ("EBITDA") plus IPF Program return of capital of $41.6 million in
1996, $27.5 million in 1995 and $8.7 million in 1994. IPF Program return of
capital was $4.6 million in 1996, $2.6 million in 1995 and $3.5 million in 1994.
The Company's 1996 pro forma EBITDA plus IPF Program return of capital was $59.2
million.
The Company's Board of Directors has authorized a capital budget of $125.0
million for 1997. These planned expenditures consist of $29.0 million for
development and exploration expenditures, $36.0 million for IPF Program
investments and $60.0 million for acquisitions in the Company's core operating
area, $30.0 million of which is pending. See " -- Certain Transactions -- The
Funds Acquisition."
BUSINESS STRATEGY
The Company's objective is to maximize shareholder value by growing
reserves, production, cash flow and earnings through the opportunistic
acquisition of Gulf Coast region properties with underexploited value. The
Company applies 3-D seismic and other advanced technologies to development,
exploitation and exploration. These activities are complemented by the continued
expansion of the IPF Program. Fundamental to the execution of the Company's
strategy is its foundation of experienced technical talent strengthened by a
high level of financial, transactional and risk-management expertise resulting,
in part, from the former association of the Company and its employees with
Tenneco. Following the Offering, the Company will be in a strong financial
position to pursue acquisitions and other growth opportunities.
GEOGRAPHIC FOCUS. The Company concentrates its primary oil and gas
activities in the Gulf Coast region, specifically in state and federal waters
off the coast of Texas and Louisiana. The Company believes this region remains
attractive for future development, exploration and acquisition activities. This
is due to the availability of seismic data, significant reserve potential and a
well developed infrastructure of gathering systems, pipelines and platforms with
ready access to drilling services and equipment in the region. In addition, the
Company's relationships with major oil companies and independent producers
operating in the region allow continued access to new opportunities. This
geographic focus has enabled the Company to build and utilize a base of
region-specific geological, geophysical, engineering and production expertise.
The Company's geographic focus allows it to manage a large asset base with
relatively few employees, thus permitting the Company to control expenses and
add Gulf of Mexico production at a relatively low
4
<PAGE>
incremental cost. The Company engages in IPF Program activities throughout the
onshore regions of the United States, with a principal geographic focus in the
Gulf Coast region.
ACQUISITION OF PROPERTIES WITH UNDEREXPLOITED VALUE. The Company employs
an acquisition strategy targeted primarily at purchases of Gulf Coast region
producing properties from major oil companies and large independents. These
properties provide opportunities to increase reserves, production and cash flow
through development and exploitation drilling and lease operating expense
reduction. The Company manages its acquired properties by working proactively
with its joint interest partners to accelerate development, identify
exploitation opportunities and implement cost controls on these properties.
DEVELOPMENT, EXPLOITATION AND EXPLORATION. The Company integrates its
reservoir and production engineering expertise with its geologic and seismic
interpretation abilities to enhance the results of its exploration and
production business. The Company applies workovers, recompletions, secondary
recovery operations and other production enhancement techniques on its existing
properties to increase recoverable reserves, production and cash flow.
Additionally, the Company uses advanced technology in both its development and
exploration activities to reduce drilling risks and finding costs and to
prioritize its drilling prospects based on return potential. The Company
utilizes 3-D seismic data to develop the majority of its drilling opportunities.
Eighty-five percent of the wells in which the Company participated in 1996 were
developed using 3-D seismic data. The Company's ability to integrate geophysics
with detailed geology, reservoir engineering, and production engineering allows
it to identify multiple development and exploratory prospects in mature
producing fields that were not identified through earlier technologies. The
Company currently employs six geoscientists with an average experience level of
more than 16 years and operates two geophysical workstations interpreting 3-D
seismic data over twelve fields and six exploratory programs. The Company
intends to expand its geoscience team in 1997.
The Company has assembled a multiyear inventory of development,
exploitation and exploratory drilling opportunities in the Gulf Coast region and
has identified more than 70 drilling and recompletion opportunities for 1997.
Most of the properties comprising this inventory are located in fields that have
well-established production histories. The Company believes these properties may
yield significant additional recoverable reserves through the application of
advanced exploration and development technologies. The Company participated in
the drilling of nine development wells and 33 exploratory wells in 1996, of
which 78% and 61%, respectively, were successful.
CONTINUED EXPANSION OF THE IPF PROGRAM. The Company has leveraged its
expertise in oil and gas reserve appraisal and evaluation to develop and grow
the IPF Program. The Company believes this program offers an attractive
risk/reward balance and stable earnings. The oil and gas companies that
establish a relationship with the Company through the IPF Program often come to
view the Company as a prospective working interest partner for their drilling or
acquisition projects. Management believes that the investment opportunities,
market information and business relationships generated as a result of the IPF
Program provide the Company with a strategic advantage over other independent
oil and gas companies that are not engaged in this business. As a result of the
Company's efficiency in originating and closing IPF Program transactions in the
$0.5 to $5.0 million range, the Company currently encounters only limited
competition from alternate sources of capital for investment in quality
properties and projects of independent oil and gas companies.
The Company has budgeted $36.0 million for investment in IPF Program
transactions in 1997. The Company closed six IPF Program transactions in the
first quarter of 1997 for an aggregate of $9.2 million. In addition, the Company
is currently evaluating over 30 transactions, all of which satisfy the Company's
initial screening criteria.
CERTAIN TRANSACTIONS
ACQUISITION OF COMMON STOCK BY FUND VII. Concurrently with consummation of
the Offering, First Reserve Fund VII, Limited Partnership, the Company's
principal stockholder, has agreed to purchase, at a
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<PAGE>
price per share equal to the Price to Public set forth on the cover of this
Prospectus, a number of shares of Common Stock such that the aggregate purchase
price paid by Fund VII for such shares equals $8,681,000 (the "Concurrent
Sale"). See "Transactions with Management and First Reserve -- Acquisition of
Common Stock by Fund VII."
THE FUNDS ACQUISITION. The Company previously sponsored and managed two
oil and gas investment programs (collectively, the "Funds") for institutional
investors. The Company has entered into a definitive agreement with the
investors in the Funds to acquire certain property interests from such investors
upon consummation of the Offering (the "Funds Acquisition"). These property
interests are primarily located in the Gulf Coast region and have combined
proved reserves of 33.0 Bcfe. Furthermore, these interests include 18,209 net
undeveloped leasehold acres with 3-D seismic-based exploration potential. The
Company will acquire these property interests at an aggregate cost of $30.0
million, effective January 1, 1997, for a unit cost of $0.65 per Mcfe of net
proved reserves. The Funds Acquisition will provide the Company with a larger
interest in certain of its existing properties, including the West Delta 30
Field in the Gulf of Mexico.
THE MICHIGAN DISPOSITION. The Company recently sold its interests in a
natural gas development project located in northwestern Michigan (the "Michigan
Development Project"). The Company views this transaction (the "Michigan
Disposition") as a disposition of non-core assets and a further enhancement of
its focus on the Gulf Coast region. As a result of the Michigan Disposition, the
Company sold 28.8 Bcfe of proved reserves as of December 31, 1996 (of which 3.3
Bcfe were proved developed producing as of December 31, 1996) and interests in a
pipeline company and a processing company. See "Unaudited Condensed Pro Forma
Financial Statements" and the related notes thereto.
DEVELOPMENT, EXPLOITATION AND EXPLORATION PROJECTS
RABBIT ISLAND FIELD. In 1993 the Company purchased a 25% interest in the
Rabbit Island Field located in Louisiana state waters. The field has produced in
excess of 1.2 Tcf of gas and 46 MMBbls of oil. A 105 square-mile 3-D survey was
interpreted in 1993, and six of seven wells drilled since that time have been
successful, discovering 34.3 Bcfe of gross proved reserves (7.2 Bcfe net to the
Company's interest). The Company, Texaco Exploration and Production Inc.
("Texaco") and Shell Offshore Inc. ("Shell") are conducting a joint field
study to delineate additional exploitation opportunities in this field. This
study is expected to be completed in the third quarter of 1997. The preliminary
results of the study indicate at least 25 potential exploitation opportunities.
WEST DELTA 30. In 1995 the Company purchased a 70% working interest in the
West Delta 30 Field in the Gulf of Mexico from Shell and initiated an integrated
geological, geophysical and 3-D seismic study in the first half of 1996. As a
result of this study, the Company identified eight additional development
drilling locations and three deeper pool prospects that the Company believes
have significant exploratory potential. Based on the Company's proposal, Exxon
Company, U.S.A. ("Exxon"), the operator, is drilling a well to test this
field's deeper exploratory potential and is scheduled to drill a development
well by year-end 1997.
MATAGORDA ISLAND 519. In late 1994 the Company purchased 13 producing
fields in the Gulf of Mexico from Pennzoil Company ("Pennzoil") for $51.3
million (the "Pennzoil Acquisition"), including the Matagorda Island 519
Field. The Company owns working interests of 15.8% and 25% in this field, which
is operated by Amoco Production Company ("Amoco"). Workover operations on two
wells in this field were completed in the first quarter of 1997, increasing
gross production by 10 MMcf per day. Workover operations to recomplete a third
well are in progress. The Company believes that significant development and
exploratory potential remains in the field. Amoco has purchased a 3-D seismic
survey to delineate these opportunities, in which the Company owns a 25% working
interest.
HIGH ISLAND 110/111. The Company purchased its initial interest in this
Texaco-operated field as part of the Pennzoil Acquisition and currently holds a
17% working interest. The Company has identified
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several recompletion zones and two proved undeveloped drilling locations in the
field using 3-D seismic data to reinterpret an internal field study. These wells
are scheduled to be drilled in 1997.
WASSON FIELD. In June 1996 the Company acquired a 34.7% working interest
in the Cornell Unit in the Wasson Field in West Texas. Approximately 1.5 billion
Bbls of oil have been produced from the San Andres reservoir from which the
Cornell Unit produces. The field was initially waterflooded in 1965, and a CO2
flood was initiated in 1985 utilizing the water alternating-gas injection method
of enhanced oil recovery. Because the field has been restored to its original
pressure as the result of tertiary recovery activities, at year-end 1996 the
Company recommended the cessation of CO2 purchases for the next four to five
years. This recommendation was adopted by the unit working interest owners. As a
result, the Company expects to increase its annual cash flow from the field by
$1.9 million. The Company, working with unit operator Exxon, has identified up
to 30 infill drilling locations. Furthermore, pressure tests performed recently
in an adjoining unit indicate that the upper gas-bearing sands may be produced
separately from the oil reservoir. Exxon and the Company plan to test the
feasibility of producing these gas-bearing sands in 1997.
THE OFFERING
Common Stock Offered by the Company
pursuant to the Offering........... 6,000,000 shares
Common Stock to be sold concurrently
with the Offering to Fund VII...... 620,071(1)
Common Stock to be Outstanding after
the Offering and the Concurrent
Sale............................... 14,283,755 shares(2)
Use of Proceeds...................... The net proceeds to the Company of the
Offering and the Concurrent Sale are
expected to be approximately $85.8
million ($97.5 million if the
Underwriters' over-allotment option is
exercised in full) and will be used (i)
to pay the purchase price of the Funds
Acquisition and (ii) to repay $55.8
million of indebtedness outstanding under
the Company's existing credit facilities.
See "Use of Proceeds."
New York Stock Exchange Symbol....... DXD
- ------------
(1) Assumes an initial public offering price of $14.00 per share. The actual
number of shares of Common Stock to be purchased by Fund VII will be
determined by dividing $8,681,000 by the Price to Public set forth on the
cover page of this Prospectus. See "Transactions With Management and First
Reserve_-- Acquisition of Common Stock by Fund VII."
(2) Does not include 849,694 shares of Common Stock reserved for issuance
pursuant to outstanding options under the Amended and Restated 1996 Stock
Purchase and Option Plan for Key Employees of Domain Energy Corporation and
Affiliates (the "Stock Purchase and Option Plan"). See
"Management -- Stock Purchase and Option Plan" and " -- Stock Option
Agreements."
7
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SUMMARY HISTORICAL AND PRO FORMA COMBINED AND CONSOLIDATED FINANCIAL DATA
The following summary historical financial data are derived from the
financial statements of the Company as of and for the periods presented. The
summary historical financial data for the three-month periods ended March 31,
1996 and 1997 are derived from financial statements that are unaudited but
include all adjustments, consisting of normal recurring adjustments, that the
Company considers necessary for a fair presentation of its financial position
and results of operations for these periods. The results for the three months
ended March 31, 1997 are not necessarily indicative of the results for the full
year. The summary unaudited pro forma data are derived from the Unaudited
Condensed Pro Forma Financial Statements of the Company included elsewhere in
this Prospectus. The unaudited pro forma income statement data and other
financial data for the year ended December 31, 1996 give effect to (i) the
Acquisition, (ii) the Michigan Disposition, (iii) the completion of the
Offering, (iv) the completion of the Concurrent Sale and (v) the completion of
the Funds Acquisition, as if all such transactions occurred on January 1, 1996.
The unaudited pro forma income statement data and other financial data for the
three months ended March 31, 1997 give effect to (i) the Michigan Disposition,
(ii) the completion of the Offering, (iii) the completion of the Concurrent Sale
and (iv) the completion of the Funds Acquisition, as if all such transactions
occurred on January 1, 1997. The unaudited pro forma balance sheet data as of
March 31, 1997 give effect to (i) the purchase of Common Stock by the Company's
employees in April 1997, (ii) the Michigan Disposition, (iii) the completion of
the Offering, (iv) the completion of the Concurrent Sale and (v) the completion
of the Funds Acquisition as if all such transactions occurred on March 31, 1997.
The pro forma financial data are not necessarily indicative of actual results of
operations or financial position that would have occurred if these transactions
were completed on the indicated dates or of future results of operations. The
summary historical and pro forma financial data below should be read in
conjunction with "Capitalization," "Unaudited Condensed Pro Forma Financial
Statements," "Management's Discussion and Analysis of Financial Condition and
Results of Operations," and the Combined and Consolidated Financial Statements
of the Company and the related notes thereto included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, THREE MONTHS ENDED
------------------------------------------- MARCH 31,
PREDECESSOR -------------------------------------
------------------------------- PRO FORMA PREDECESSOR SUCCESSOR PRO FORMA
1994 1995 1996 1996 1996 1997 1997
--------- --------- --------- --------- ----------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues:
Oil and natural gas sales(1)........ $ 5,340 $ 34,877 $ 52,889 $70,746 $15,688 $12,960 $19,205
IPF Activities(2)................... 1,417 2,356 4,369 4,369 340 732 732
Other............................... 283 414 64 (45) 115 3 187
--------- --------- --------- --------- ----------- --------- ---------
Total revenues................. 7,040 37,647 57,322 75,070 16,143 13,695 20,134
--------- --------- --------- --------- ----------- --------- ---------
Expenses:
Lease operating..................... 1,790 7,980 10,962 14,437 2,127 3,439 4,925
Production and severance taxes...... 18 710 1,372 1,492 279 424 469
Depreciation, depletion and
amortization...................... 3,101 22,692 22,739 21,605 6,946 2,935 5,488
General and administrative, net..... 52 4,050 8,188 8,480 2,028 1,014 1,050
--------- --------- --------- --------- ----------- --------- ---------
Total operating expenses....... 4,961 35,432 43,261 46,014 11,380 7,812 11,932
--------- --------- --------- --------- ----------- --------- ---------
Income from operations.................. 2,079 2,215 14,061 29,056 4,763 5,883 8,192
Interest expense, net................... -- -- 470 617 -- 1,323 142
--------- --------- --------- --------- ----------- --------- ---------
Income before income taxes.............. 2,079 2,215 13,591 28,439 4,763 4,560 8,050
Income tax provision.................... 1,105 861 5,551 11,193 1,596 1,733 3,059
Minority interest....................... -- -- (157) -- -- (47) --
--------- --------- --------- --------- ----------- --------- ---------
Net income.............................. $ 974 $ 1,354 $ 8,197 $17,246 $ 3,167 $ 2,874 $ 4,991
========= ========= ========= ========= =========== ========= =========
Net income per share(3)................. $ 1.14 $ 0.33
Common stock and common stock
equivalents outstanding............... 15,133 15,133
</TABLE>
(TABLE CONTINUED ON FOLLOWING PAGE)
8
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------- THREE MONTHS ENDED
MARCH 31,
PREDECESSOR -------------------------------------
------------------------------- PRO FORMA PREDECESSOR SUCCESSOR PRO FORMA
1994 1995 1996 1996 1996 1997 1997
--------- --------- --------- --------- ----------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
OTHER FINANCIAL DATA:
Operating income.................... $ 2,079 $ 2,215 $ 13,591 $29,056 $ 4,763 $ 5,883 $ 8,192
Net cash provided by operating
activities........................ $ 12,431 $ 21,290 $ 41,787 $55,748 $ 5,715 $ 8,420 $12,144
Net cash provided by investing
activities........................ (86,669) (39,728) (66,741) -- (10,634) (9,947) --
Net cash provided by financing
activities........................ 84,070 6,971 24,954 -- 5,285 7,199 --
Capital expenditures(4)............. 85,205 49,904 50,617 80,617 4,848 2,694 32,694
OTHER NON-GAAP FINANCIAL DATA:
EBITDA(5)........................... 5,180 24,907 36,957 54,555 11,709 8,865 13,680
IPF Program return of capital(6).... 3,507 2,638 4,618 4,618 517 3,426 3,426
EBITDA plus IPF Program return of
capital........................... 8,687 27,545 41,575 59,173 12,226 12,291 17,106
</TABLE>
AS OF MARCH 31, 1997
----------------------------
HISTORICAL PRO FORMA
----------- ----------
(IN THOUSANDS)
BALANCE SHEET DATA:
Cash and cash equivalents........... $ 6,186 $ 8,704
Property, plant and equipment,
net................................ 88,577 94,815
IPF Program notes receivable........ 27,530 27,530
Total assets........................ 143,125 148,378
Long-term debt (including current
maturities)........................ 98,567 21,057
Stockholders' equity................ 31,758 117,959
- ------------
(1) Oil and natural gas sales increased from $5.3 million in 1994 to $52.9
million in 1996 primarily as a result of the Company's acquisition of
producing properties in 1994 and 1995, results of drilling activities in
1994, 1995 and 1996, and an increase in the net realized price of gas in
1996 relative to 1994 and 1995.
(2) IPF Activities includes income from the Company's IPF Program and the
Company's "GasFund" partnership with a financial investor. See "Business
and Properties -- Producer Investment Activities."
(3) Net income per share has been computed based on the net income shown above
and assuming that the 7,177,681 shares of Common Stock purchased in
connection with the Acquisition, the 486,003 shares of Common Stock
purchased by the Company's employees in 1997, the 849,694 shares of Common
Stock reserved for issuance pursuant to outstanding options under the Stock
Purchase and Option Plan, the 6,000,000 shares of Common Stock to be issued
pursuant to the Offering and the estimated 620,071 shares of Common Stock to
be issued to Fund VII concurrently with consummation of the Offering have
been outstanding since January 1, 1996.
(4) Pro forma capital expenditures data excludes the Acquisition.
(5) EBITDA represents earnings before interest expense, income taxes,
depreciation, depletion and amortization. The Company believes that EBITDA
may provide additional information about the Company's ability to meet its
future requirements for debt service, capital expenditures and working
capital. EBITDA is a financial measure commonly used in the oil and gas
industry and should not be considered in isolation or as a substitute for
net income, operating income, net cash provided by operating activities or
any other measure of financial performance presented in accordance with
generally accepted accounting principles or as a measure of a company's
profitability or liquidity. Because EBITDA excludes some, but not all, items
that affect net income and may vary among companies, the EBITDA calculation
presented above may not be comparable to similarly titled measures of other
companies.
(6) To more accurately reflect the actual cash flow generated by the Company,
IPF Program return of capital is identified separately to allow such cash
receipts to be combined with EBITDA.
9
<PAGE>
SUMMARY OIL AND NATURAL GAS RESERVE DATA
The following table summarizes the estimates of the Company's historical
and pro forma net proved oil and natural gas reserves as of the dates indicated
and the present value attributable to the reserves at such dates. The reserve
and present value data as of December 31, 1994, 1995 and 1996 have been prepared
by DeGolyer and MacNaughton and other third-party petroleum engineers. See
"Business and Properties -- Oil and Natural Gas Reserves." Summaries of the
December 31, 1996 reserve reports and the letters of the third-party petroleum
engineers with respect thereto are included as Appendix A to this Prospectus.
The operating and reserve data set forth below does not include the Company's
term overriding royalty interests and associated reserves acquired through the
IPF Program.
AS OF DECEMBER 31,
-----------------------------------------
PRO FORMA
1994 1995 1996(1) 1996(2)
-------- -------- -------- --------
PROVED RESERVES:
Natural gas (MMcf) ............. 73,399 82,682 81,337 83,418
Oil and condensate (MBbls) ..... 4,109 2,197 11,380 11,736
Total (MMcfe) .................. 98,056 95,865 149,617 153,834
PV-10 Reserve Value (in
thousands) ................... $ 61,812 $103,931 $184,816 $213,030
Percent of proved developed
producing reserves ........... 53.4% 55.0% 63.6% 66.5%
Reserve Life Index (in
years)(3) .................... -- 4.7x 6.0x 4.9x
RESERVE REPLACEMENT DATA:
Finding costs (per Mcfe) ....... $ 0.91 $ 1.13 $ 0.51 $ 0.61
Production replacement
ratio(4) ..................... 3,437.5% 222.6% 392.5% 418.6%
- ------------
(1) Excludes the minority interest attributable to the Michigan Development
Project.
(2) Gives effect to the Michigan Disposition and the Funds Acquisition as if
such transactions were consummated as of January 1, 1996.
(3) Calculated by dividing year-end proved reserves by annual actual or pro
forma production (as applicable) for the most recent year. The Company's
Reserve Life Index for 1994 was 34.7 and is excluded from the above table
because it reflects the Company's completion of a large acquisition in late
1994 and does not reflect production attributable to that acquisition for a
full-year period.
(4) Equals current period reserve additions through acquisitions of reserves,
extensions and discoveries, and revisions to prior estimates divided by the
production for such period.
SUMMARY OPERATING DATA
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, THREE MONTHS ENDED MARCH 31,
---------------------------------------------- ----------------------------------
PRO FORMA PREDECESSOR SUCCESSOR PRO FORMA
1994 1995 1996 1996(1) 1996 1997 1997(2)
---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
PRODUCTION VOLUMES:
Natural gas (MMcf) ......... 2,334 18,065 21,578 25,714 5,828 3,708 5,483
Oil and condensate (MBbls) . 83 424 574 920 116 147 227
Total (MMcfe) .............. 2,832 20,609 25,023 31,234 6,524 4,590 6,845
AVERAGE REALIZED PRICES:(3)
Natural gas (per Mcf) ...... $ 1.76 $ 1.54 $ 1.96 $ 2.06 $ 2.36 $ 2.74 $ 2.67
Oil and condensate (per Bbl) 14.93 16.76 18.60 19.42 16.52 19.02 20.15
EXPENSES (PER MCFE):
Lease operating ............ $ 0.63 $ 0.39 $ 0.44 $ 0.46 $ 0.33 $ 0.75 $ 0.72
Production taxes ........... 0.01 0.03 0.05 0.05 0.04 0.09 0.06
Depreciation, depletion and
amortization ............. 1.03 1.08 0.91 0.67 1.09 0.60 0.78
General and administrative,
net(4) ................... 0.23 0.16 0.12 0.15 0.14 0.15 0.15
</TABLE>
- ------------
(1) Gives effect to the Michigan Disposition and the Funds Acquisition as if
such transactions were consummated as of January 1, 1996.
(2) Gives effect to the Michigan Disposition and the Funds Acquisition as if
such transactions were consummated as of January 1, 1997.
(3) Reflects the actual realized prices received by the Company, including the
results of the Company's hedging activities. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Other
Matters -- Hedging Activities."
(4) Includes production attributable to properties managed for the Funds for the
periods indicated and excludes fees received from investors and overhead
allocations from Tenneco. Including Tenneco allocations, average net general
and administrative expenses per Mcfe for the years ended December 31, 1994,
1995 and 1996 would be $0.23, $0.20 and $0.28, respectively.
10
<PAGE>
RISK FACTORS
THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS. THE WORDS
"ANTICIPATE," "BELIEVE," "EXPECT," "PLAN," "INTEND," "SEEK," "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 ACQUISITIONS, FUTURE DRILLING AND
OPERATIONS, FUTURE CAPITAL EXPENDITURES, FUTURE PRODUCTION OF OIL AND GAS AND
FUTURE NET CASH FLOW. 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 UNDER THIS
CAPTION "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. CONSEQUENTLY, ALL OF THE FORWARD-LOOKING STATEMENTS MADE IN
THIS PROSPECTUS ARE QUALIFIED BY THESE CAUTIONARY STATEMENTS AND THERE CAN BE NO
ASSURANCE THAT THE ACTUAL RESULTS OR DEVELOPMENTS ANTICIPATED BY THE COMPANY
WILL BE REALIZED OR, EVEN IF SUBSTANTIALLY REALIZED, THAT THEY WILL HAVE THE
EXPECTED CONSEQUENCES TO OR EFFECTS ON THE COMPANY OR ITS BUSINESS OR
OPERATIONS. THE FOLLOWING RISK FACTORS SHOULD BE CONSIDERED CAREFULLY IN
ADDITION TO THE OTHER INFORMATION CONTAINED IN THIS PROSPECTUS BEFORE PURCHASING
THE SHARES OF COMMON STOCK OFFERED HEREBY.
VOLATILITY OF OIL AND NATURAL GAS PRICES; MARKETABILITY OF PRODUCTION
The Company's financial condition, profitability, future rate of growth and
ability to borrow funds or obtain additional capital, as well as the carrying
value of its oil and natural gas properties, are substantially dependent upon
prevailing prices of, and demand for, oil and natural gas. The energy markets
have historically been, and are likely to continue to be, volatile, and prices
for oil and natural gas are subject to large fluctuations in response to
relatively minor changes in the supply and demand for oil and natural gas,
market uncertainty and a variety of additional factors beyond the control of the
Company. These factors include the level of consumer product demand, weather
conditions, the actions of the Organization of Petroleum Exporting Countries,
domestic and foreign governmental regulations, political stability in the Middle
East and other petroleum producing areas, the foreign and domestic supply of oil
and natural gas, the price of foreign imports, the price and availability of
alternative fuels and overall economic conditions. A substantial or extended
decline in oil or natural gas prices could have a material adverse effect on the
Company's financial position, results of operations, quantities of oil and
natural gas reserves that may be economically produced, carrying value of its
proved reserves, borrowing capacity and access to capital. In addition, the
marketability of the Company's production depends upon a number of factors
beyond the Company's control, including the availability and capacity of
transportation and processing facilities, the effect of federal and state
regulation of oil and natural gas production and transportation, changes in
supply due to drilling by other producers and changes in demand. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
RISK OF HEDGING ACTIVITIES
The Company's use of energy swap arrangements to reduce its sensitivity to
oil and natural 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, or otherwise, the Company would be required to satisfy
its obligations under potentially unfavorable terms. If the Company enters into
financial instrument contracts for the purpose of hedging prices and the
estimated production volumes are less than the amount covered by these
contracts, the Company would be required to mark-to-market these contracts and
recognize any and all losses within the determination period. Further, under
financial instrument contracts the Company may be at risk for basis
differential, which is the difference in the quoted financial price for contract
settlement and the actual physical point of delivery price. The Company will
from time to time attempt to mitigate basis differential risk by entering into
basis swap contracts. Substantial variations between the assumptions and
estimates used by the Company in its hedging activities and actual results
experienced could materially adversely affect the Company's anticipated profit
margins and its ability to manage risk associated with fluctuations in
11
<PAGE>
oil and natural gas prices. Furthermore, the fixed price sales and hedging
contracts limit the benefits the Company will realize if actual prices rise
above the contract prices.
As of March 31, 1997, on a pro forma basis, approximately 34.6% of the
Company's projected 1997 oil production and approximately 45.3% of its projected
1997 natural gas production were committed to hedging contracts. In addition,
the Company has hedges in place covering a portion of its projected oil
production through the year 2000. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Other Matters -- Hedging
Activities."
RESERVE REPLACEMENT RISKS
The Company's future performance is dependent upon its ability to identify,
acquire and develop additional oil and natural gas reserves that are
economically recoverable. Without successful drilling or acquisition activities,
the Company's reserves and revenues will decline. No assurances can be given
that the Company will be able to identify, acquire or develop additional
reserves at an acceptable cost.
The successful acquisition of producing properties requires an assessment
of recoverable reserves, future oil and natural 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
typically performs, or retains a third party to perform, a review of the subject
properties, which review the Company believes is generally consistent with
industry practices. This review, however, will not reveal all existing or
potential problems, nor will it permit the Company 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, in connection with property acquisitions 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 any properties acquired by the Company will be
successfully developed or produced, and any such properties that are not
successfully developed or produced could have a material adverse effect on the
Company.
Drilling activities are subject to many risks, including the risk that no
commercially productive reservoirs will be encountered. There can be no
assurance that any 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 natural 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. In addition, the Company's
use of 3-D seismic requires greater pre-drilling expenditures than traditional
drilling strategies. 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. There can be no
assurances that any of the Company's future drilling activities will be
successful, and unsuccessful drilling activities by the Company may have a
material adverse effect on the Company. See "Business and
Properties -- Operating Hazards and Drilling Risks."
NON-OPERATOR STATUS
With the exception of the Mustang Island 846/847 Field and the Company's
interests in Michigan, all of the Company's oil and gas properties are operated
by others. As a result, the Company has a limited ability to exercise control
over operations or the associated costs of such operations. The success of the
Company's investment in a drilling or acquisition activity is therefore
dependent upon a number of factors that are outside of the Company's control,
including the competence and financial resources of the operator. Such factors
include the availability of future capital resources of the other participants
for the drilling of wells and the approval of other participants of the drilling
of wells on the properties in which the Company has an interest. The Company's
reliance on the operator and other working interest owners and its limited
12
<PAGE>
ability to control certain costs could have a material adverse effect on the
realization of expected rates of return on the Company's investment in drilling
or acquisition activities.
OPERATING RISKS
The oil and natural gas business involves a variety of operating risks,
including the risk of fire, explosions, blow-outs, pipe failure, abnormally
pressured formations and environmental hazards such as oil spills, gas leaks,
ruptures or discharges of toxic gases. Any of these occurrences could result in
substantial losses to the Company due to injury or loss of life, severe damage
to or destruction of property, natural resources and equipment, pollution or
other environmental damage, clean-up responsibilities, regulatory investigation
and penalties and suspension of operations. Moreover, offshore operations are
subject to a variety of operating risks peculiar to the marine environment,
including hurricanes or other adverse weather conditions, more extensive
governmental regulation (including regulations that may, in certain
circumstances, impose strict liability for pollution damage) and interruption or
termination of operations by governmental authorities based on environmental or
other considerations. The presence of unanticipated pressure or irregularities
in formations, miscalculations or accidents may cause a drilling or production
operation to be unsuccessful, resulting in a total loss of the Company's
investment in such operation. Although the Company maintains insurance coverage
it believes is customary in the industry for companies of similar size, it is
not fully insured against certain of these risks, either because such insurance
is not available or because of the high premium costs. The Company does not
carry business interruption insurance. There can be no assurance that any
insurance obtained by the Company will be adequate to cover any losses or
liabilities, or that such insurance will continue to be available or available
on terms that are acceptable to the Company. See "Business and
Properties -- Operating Hazards and Drilling Risks."
RELIANCE ON ESTIMATES OF OIL AND NATURAL GAS RESERVES
The reserve data set forth in this Prospectus represent only estimates of
DeGolyer and MacNaughton ("DeGolyer"), Netherland, Sewell & Associates, Inc.
("Netherland, Sewell"), and other third-party petroleum engineers. The
estimation of reserve data is a subjective process of estimating the recovery of
underground accumulations of oil and natural gas that cannot be measured in an
exact manner, and the accuracy of any reserve estimate is a function of the
quality of the available data, the assumptions made, and engineering and
geological interpretation and judgment. Estimates of economically recoverable
oil and natural gas reserves and future net cash flows therefrom necessarily
depend upon a number of variable factors and assumptions, including historical
production from the area compared with production from other producing areas,
the assumed effects of regulation by governmental agencies and assumptions
concerning future oil and natural 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. Any such estimates are
therefore inherently imprecise, and estimates by other engineers, or by the same
engineers at a different time, might differ materially from those included
herein. Actual prices, production, development expenditures, operating expenses
and quantities of recoverable oil and natural gas reserves will vary from those
assumed in the estimates, and it is likely that such variances will be
significant. Any significant variance from the assumptions could result in the
actual quantity of the Company's reserves and future net cash flows therefrom
being materially different from the estimates set forth in this Prospectus. In
addition, the Company's estimated reserves may be subject to downward or upward
revision, based upon production history, results of future exploration and
development, prevailing oil and natural gas prices, operating and development
costs and other factors. The Company's properties may also be susceptible to
hydrocarbon drainage from production by other operators on adjacent properties.
See "Business and Properties -- Oil and Natural Gas Reserves."
The present value of future net cash flows set forth in this Prospectus
should not be construed as the current market value or the value at any prior
date of the estimated oil and natural gas reserves attributable to the Company's
properties. In accordance with applicable requirements of the Securities and
Exchange Commission (the "Commission"), the estimated discounted future net
cash flows from estimated proved reserves are based on prices and costs as of
the date of the estimate unless such prices or costs are
13
<PAGE>
contractually determined at such date. Actual future prices and costs may be
materially higher or lower. Actual future net cash flows also will be affected
by factors such as actual production, supply and demand for oil and natural gas,
curtailments or increases in consumption by natural gas purchasers, changes in
governmental regulations or taxation and the impact of inflation on costs. In
addition, the 10% discount factor used to calculate the present value of future
net cash flows 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.
CERTAIN RISKS AFFECTING THE COMPANY'S IPF PROGRAM
The Company's IPF Program involves an up-front cash payment for the
purchase of a term overriding royalty interest pursuant to which the Company
receives an agreed upon share of revenues from identified properties. The
producer's obligation to deliver such revenues is nonrecourse to the producer
insofar as the producer generally is not liable to the Company for any failure
to meet its payment obligation except for such failures attributable to the
producer's failure to operate prudently, title failure or certain other causes
within the control of the producer. Consequently, the Company's ability to
realize successful investments through its producer finance business is subject
to the Company's ability to estimate accurately the volumes of recoverable
reserves from which the applicable production payment is to be discharged and
the operator's ability to recover these reserves. The Company's interest is
believed to constitute a property interest and, therefore, in the event of the
producer's bankruptcy or similar event, outside of the reach of the producer's
creditors; however, such creditor (or the producer as debtor-in-possession or a
trustee for the producer in a bankruptcy proceeding) may argue that the
transaction should be characterized as a loan, in which case the Company may
have only a creditor's claim for repayment of the amounts advanced. As non-
operating interests, the Company's ownership of these production payments should
not expose the Company to liability attendant to the ownership of direct working
interests, such as environmental liabilities and liabilities for personal injury
or death or damage to the property of others, although no assurances can be made
in this regard. Finally, as the producer's obligation is only to deliver a
specified share of revenues, subject to the ability of the burdened reserves to
produce such revenues, the Company bears the risk that future revenues delivered
will be insufficient to amortize the purchase price paid by the Company for the
interest or to provide any investment return thereon.
The Company operates the IPF Program through its indirect wholly-owned
subsidiary, Domain Energy Finance Corporation ("IPF Company"). IPF Company has
a $100.0 million revolving credit facility with a bank (the "IPF Company Credit
Facility") pursuant to which it finances a portion of the IPF Program. The
borrowing base under the facility as of May 7, 1997 was $23.0 million. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources -- IPF Company Credit Facility."
EFFECTS OF LEVERAGE
On a pro forma basis as of March 31, 1997, the Company would have had total
consolidated indebtedness for money borrowed of approximately $21.0 million
(consisting of approximately $8.7 million outstanding under the Company's
revolving credit facility with a group of banks (the "Revolving Credit
Facility") and approximately $12.3 million outstanding under the IPF Company
Credit Facility) and stockholders' equity of approximately $118.0 million. The
Company intends to incur additional indebtedness for money borrowed in the
future, including in connection with the exploration for, and development,
production and acquisition of, oil and natural gas properties. These activities
could cause the Company's leverage to increase, which could have important
consequences to its stockholders, including the following: (i) the Company's
ability to obtain additional financing for working capital, capital
expenditures, acquisitions or general corporate purposes could be impaired in
the future; (ii) a substantial portion of the Company's cash flow from
operations could be required for the payment of principal and interest on its
indebtedness for money borrowed, thereby reducing the funds available to the
Company for its operations and other purposes; (iii) the Company may be
substantially more leveraged than certain of its competitors, which could place
the Company at a competitive disadvantage; and (iv) the Company's substantial
degree
14
<PAGE>
of leverage could hinder its ability to adjust rapidly to changing market
conditions and could make it more vulnerable in the event of a downturn in
general economic conditions or its business. In addition, the Company's
borrowings are and are expected to continue to be at variable rates, which
exposes the Company to the risk of increased interest rates. See
" -- Substantial Capital Requirements" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources -- Revolving Credit Facility."
The Company's ability to make scheduled payments of principal of and to pay
interest on, or to refinance, its indebtedness for money borrowed depends upon
its future performance and successful strategy implementation, which is subject
not only to its own actions but also to general economic, financial,
competitive, legislative, regulatory and other factors beyond its control, as
well as to the prevailing market prices for oil and natural gas. There can be no
assurance that the Company's business will generate sufficient cash flow from
operations or that future credit will be available in an amount sufficient to
enable the Company to service its indebtedness for money borrowed, or make
necessary capital expenditures. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
RESTRICTIVE DEBT COVENANTS
The Revolving Credit Facility contains covenants that, among other things,
restrict the ability of the Company to dispose of assets, incur additional
indebtedness or grant liens on its properties, repay other indebtedness, pay
dividends, enter into certain investments or acquisitions, repurchase or redeem
capital stock, engage in mergers or consolidations, or engage in certain
transactions with subsidiaries and affiliates and that will otherwise restrict
corporate activities. There can be no assurance that such restrictions will not
adversely affect the Company's ability to finance its future operations or
capital needs or engage in other business activities that may be in the
interests of the Company. In addition, the Revolving Credit Facility requires
the Company to maintain a specified minimum tangible net worth and to comply
with certain prescribed financial ratios. The ability of the Company to maintain
such tangible net worth or to comply with such ratios may be affected by events
beyond the Company's control. A breach of any of these covenants or the
inability of the Company to maintain such tangible net worth or to comply with
the required financial ratios could result in a default under the Revolving
Credit Facility. The Company believes that the Company is currently in
compliance with the terms of the Revolving Credit Facility. However, in the
event of any such default, the lenders thereunder (the "Lenders") could elect
to terminate the Company's ability to borrow thereunder, to declare all
borrowings outstanding thereunder, together with accrued interest and other
fees, to be immediately due and payable, and to exercise foreclosure or other
remedies against the Company and its assets. The Revolving Credit Facility is
secured by approximately 80% of the aggregate value of the Company's oil and
natural gas properties and substantially all of the Company's other property
(other than the IPF Program properties), including the capital stock of the
Company's operating subsidiaries. Although the remaining approximately 20% of
the aggregate value of the Company's oil and natural gas properties is not
mortgaged to the Lenders under the Revolving Credit Facility, such properties
are nevertheless subject to the restrictions set forth therein, including a
prohibition on granting any security interests therein. If the indebtedness
under the Revolving Credit Facility were to be accelerated, there can be no
assurance that the assets of the Company would be sufficient to repay such
indebtedness in full. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital
Resources -- Revolving Credit Facility."
The IPF Company Credit Facility restricts the ability of the IPF Company to
dividend cash to its parent, Domain Energy Ventures Corporation, or otherwise
advance cash to the Company. Consequently, cash generated by the IPF Company may
not be available to the Company, whether for repayment of the Revolving Credit
Facility or for other purposes. The IPF Company Credit Facility is secured by
substantially all of IPF Company's oil and gas interests, including the notes
receivable generated therefrom. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources -- IPF Company Credit Facility."
15
<PAGE>
SUBSTANTIAL CAPITAL REQUIREMENTS
Historically, the Company has financed its activities primarily with
internally generated funds and advances from Tenneco. The Company currently has
plans for substantial capital expenditures to continue its exploration,
development, production and acquisition activities. In 1997, excluding
acquisitions, the Company's budget for capital expenditures and IPF Program
investments is $65.0 million. The Company's business plan is dependent upon the
Company's ability to obtain financing beyond its internally generated cash flow,
for exploring for, developing, producing and acquiring oil and natural gas
properties. Management believes that the Company will have sufficient cash
provided by operating activities and borrowings under the Revolving Credit
Facility to fund planned capital expenditures in 1997. The Revolving Credit
Facility limits the amounts the Company may borrow thereunder to amounts
determined by the Lenders in their sole discretion, based upon the Lenders'
projection of the Company's discounted future net revenues from oil and natural
gas properties and other considerations, and restricts the amounts the Company
may borrow under other credit facilities. The Lenders may periodically adjust
the borrowing base under the Revolving Credit Facility and may require that
outstanding borrowings in excess of the borrowing base be repaid within 30 days
of the date such excess occurs. All amounts owed under the Revolving Credit
Facility are due and payable on December 31, 1999. In addition, the borrowing
base under the Revolving Credit Facility is scheduled to be redetermined as of
December 31, 1997 and may be reduced substantially from its March 31, 1997 level
of $63.3 million and all amounts outstanding in excess of such reduced borrowing
base must be paid in full at such date. If revenues or the Company's borrowing
base decrease as a result of lower oil and natural gas prices, operating
difficulties, declines in reserves or otherwise, the Company's ability to expend
the capital necessary to undertake or complete future activities may be
significantly limited. No assurances can be given that the Company will have
adequate funds available to it under the Revolving Credit Facility to carry out
its strategy or that the Company will be able to make any mandatory principal
payments required by the Lenders. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources" and " -- Revolving Credit Facility."
CONTROL BY EXISTING STOCKHOLDERS AND POTENTIAL CONFLICTS OF INTEREST
Upon completion of the Offering and the Concurrent Sale, the Company's
existing stockholders will own approximately 58.0% of the outstanding shares of
Common Stock (approximately 54.6% if the Underwriter's over-allotment option is
exercised in full). First Reserve Fund VII, Limited Partnership, a Delaware
limited partnership ("Fund VII"), the managing general partner of which is
First Reserve Corporation, a Delaware corporation ("First Reserve"),
individually will own approximately 54.6% of the outstanding shares of Common
Stock (approximately 51.4% if the Underwriter's over-allotment option is
exercised in full). As a result of such stock ownership, these stockholders, as
a group, and Fund VII, individually, will be able to elect all members of the
Company's board of directors (the "Board of Directors") and to control the
vote on matters submitted to the Board of Directors or stockholders, including,
without limitation, matters relating to the Company's exploration, development,
capital, operating and acquisition expenditure plans, as well as mergers and
other business combinations, asset sales, financings, issuances of securities
and other significant transactions.
Such concentration of ownership of Common Stock may have an adverse effect
on the market price of the Common Stock. Conflicts of interest may arise in the
future between the Company and First Reserve and its affiliates with respect to,
among other things, potential competitive business activities or business
opportunities, issuances of additional shares of voting securities, the election
of directors or the payment of dividends, if any, by the Company or the exercise
by First Reserve, as managing general partner of Fund VII, of its ability to
control the management and affairs of the Company. There are no contractual or
other restrictions on the ability of First Reserve or its affiliates to engage
in oil and gas exploration and production or to pursue other investment
opportunities in the energy industry. Circumstances could arise in the future in
which the Company and First Reserve or its affiliates engage in activities in
competition with one another.
16
<PAGE>
DEPENDENCE ON KEY PERSONNEL
The Company's operations are dependent upon a relatively small group of
management and technical personnel. The loss of one or more of these individuals
could have a material adverse effect on the Company. The Company in particular
is substantially dependent on the efforts of Michael V. Ronca, its President and
Chief Executive Officer. If Mr. Ronca becomes unable or unwilling to continue in
his present role, the Company's business, operations and prospects would be
adversely affected. In connection with the consummation of the acquisition by
the Company of the capital stock of its operating subsidiaries, Mr. Ronca
entered into an Employment Agreement with the Company (the "Ronca Employment
Agreement"). Under the terms of the Ronca Employment Agreement, Mr. Ronca would
be entitled to terminate his employment (i) upon a "Change of Control," which
is defined therein as the acquisition by any person or entity, or group thereof,
excluding Fund VII and other affiliates of First Reserve of more than 50% of the
outstanding voting stock of the Company, or (ii) otherwise for "Good Reason,"
which is defined therein to include, among other things, material reductions in
Mr. Ronca's duties, responsibilities or base salary. See "Management -- Ronca
Employment Agreement." The Company does not maintain key person life insurance
for Mr. Ronca or any of its other personnel.
COMPETITION
The Company encounters competition from other companies in all areas of its
operations, including the acquisition of producing properties and its IPF
Program. The Company's competitors include major integrated oil and natural gas
companies and numerous independent oil and natural gas companies, individuals
and drilling and income programs and, in the case of its IPF Program, affiliates
of investment, commercial and merchant banking firms and affiliates of large
interstate pipeline companies. Many of its competitors are large,
well-established companies with substantially larger operating staffs and
greater capital resources than the Company and which, in many instances, have
been engaged in the oil and gas business for a much longer time than the
Company. Such companies may be able to pay more for producing oil and natural
gas properties and exploratory prospects and to define, evaluate, bid for and
purchase a greater number of properties and prospects than the Company's
financial or human resources permit. The Company's ability to acquire additional
properties and to discover reserves in the future, as well as its ability to
grow its IPF Program, will be dependent upon its ability to evaluate and select
suitable properties and to consummate transactions in this highly competitive
environment.
GOVERNMENTAL REGULATION AND ENVIRONMENTAL MATTERS
Oil and natural gas operations are subject to various federal, state and
local governmental laws and regulations that may be changed from time to time in
response to economic, political or other conditions. Matters subject to
regulation include discharge permits for drilling operations, drilling and
abandonment bonds, reports concerning operations, the spacing of wells,
unitization and pooling of properties and taxation. From time to time,
regulatory agencies have imposed price controls and limitations on production by
restricting the rate of flow of oil and natural gas wells below actual
production capacity in order to conserve supplies of such resources. In
addition, the production, handling, storage, transportation and disposal of oil
and natural gas, by-products thereof and other substances and materials produced
or used in connection with oil and natural gas operations are subject to
regulation under federal, state and local laws and regulations primarily
relating to protection of human health and the environment. These laws and
regulations have imposed increasingly strict requirements for water and air
pollution control and solid waste management. To date, the Company's
expenditures related to compliance with these laws and regulations have not been
significant, although no assurances can be given that such expenditures will not
be significant in the future. The Company believes that the trend of more
expansive and stricter environmental legislation and regulations, including
regulations that may be promulgated under the Oil Pollution Act of 1990, will
continue, and that such legislation and regulations may result in additional
costs to the Company in the future. Amendments to the Resource Conservation and
Recovery Act to regulate further the handling, transportation, storage and
disposal of oil and natural gas exploration and production wastes have been
17
<PAGE>
considered by Congress and may be adopted. Such legislation, if enacted, could
have a material adverse impact on the Company's operating costs. See "Business
and Properties -- Regulation."
NO PRIOR PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE; DILUTION
Prior to the Offering, there has been no public market for the Common
Stock. The initial public offering price will be determined by negotiations
among the Company, First Reserve and the Underwriters and may not be indicative
of the future market price for the Common Stock. See "Underwriting" for a
discussion of the factors to be considered in determining the initial public
offering price. The Common Stock has been approved for listing on the New York
Stock Exchange, subject to notice of issuance. However, no assurance can be made
that an active trading market for the Common Stock will develop or, if
developed, that it will be sustained. The market price of the Common Stock could
also be subject to significant fluctuation in response to variations in results
of operations and other factors. In addition, Fund VII and certain employees of
the Company acquired their shares of Common Stock at a per share price that is
substantially less than the initial public offering price. Investors in the
Common Stock offered hereby will experience immediate and substantial dilution
in the net tangible book value of their shares of Common Stock. At an assumed
public offering price of $14.00 per share, the dilution to new investors would
be $5.74 per share. These investors will also experience additional dilution
upon the exercise of outstanding options for the Common Stock. See "Dilution."
SHARES ELIGIBLE FOR FUTURE SALE
The Company, each of the Company's directors and executive officers and
Fund VII have agreed not to dispose of any shares of Common Stock without the
prior consent of Credit Suisse First Boston Corporation for a period of 180 days
from the date of this Prospectus other than pursuant to the Offering or in
connection with the Company's employee benefit plans. The shares of Common Stock
held by the Company's officers and by Fund VII are deemed "restricted
securities" within the meaning of Rule 144 under the Securities Act of 1933, as
amended (the "Securities Act"), and may be resold after the 180-day period
only upon registration under the Securities Act or pursuant to an exemption from
registration, including exemptions contained in Rule 144. Pursuant to the terms
of the Securityholders Agreement, dated as of December 31, 1996, among the
Company, Fund VII and the Company's officers who have subscribed for Common
Stock, upon the consummation of the Offering and after expiration of the 180-day
period referred to above, Fund VII will have the right to demand registration of
its shares of Common Stock. See "Transactions With Management and First
Reserve -- Securityholders Agreement." Fund VII has informed the Company that
it has no immediate plans to sell or otherwise dispose of shares of the Common
Stock. As of the date hereof, options exercisable for 849,694 shares of Common
Stock are outstanding under the Amended and Restated 1996 Stock Purchase and
Option Plan for Key Employees of Domain Energy Corporation and Affiliates (the
"Stock Purchase and Option Plan"). Generally, all shares issued upon the
exercise of such options will be freely tradeable under the Securities Act.
Sales of substantial amounts of Common Stock in the public market, or the
perception of the availability of shares for sale, following the Offering could
adversely affect the prevailing market price of the Common Stock. The Company is
unable to make any prediction as to the effect, if any, that the future sales of
Common Stock or the availability of Common Stock for sale will have on the
market price of the Common Stock prevailing from time to time. See "Shares
Eligible for Future Sale."
BLANK CHECK PREFERRED STOCK
The Company's Amended and Restated Certificate of Incorporation (the
"Certificate of Incorporation") authorizes "blank check" preferred stock,
which may have the effect of discouraging unsolicited acquisition proposals. See
"Description of Capital Stock -- Preferred Stock."
18
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company of the Offering and the Concurrent Sale,
calculated at an assumed initial public offering price of $14.00 per share, are
expected to be approximately $85.8 million ($97.5 million if the Underwriters'
over-allotment option is exercised in full), after deducting underwriting
discounts and commissions and estimated Offering expenses. The Company will use
approximately $30.0 million of the net proceeds to consummate the Funds
Acquisition. It is anticipated that the remainder of the proceeds to the Company
of the Offering and the Concurrent Sale will be used to repay $50.8 million of
indebtedness outstanding under the Revolving Credit Facility and $5.0 million of
indebtedness outstanding under the IPF Company Credit Facility. Pending
application of the net proceeds of the Offering, such net proceeds will be
invested in short-term, interest bearing instruments.
In December 1996, the Company entered into the Revolving Credit Facility
under which the borrowing base was $63.3 million as of March 31, 1997. At such
date, borrowings outstanding under the Revolving Credit Facility totalled $59.5
million. The initial borrowings under the Revolving Credit Facility were used to
finance a portion of the costs of the Acquisition. The Revolving Credit Facility
is a three-year revolving credit facility with the entire outstanding principal
amount maturing on December 31, 1999. In addition, the borrowing base under the
Revolving Credit Facility may be redetermined by the Lenders at any time and is
scheduled to be redetermined as of December 31, 1997. Following any such
redetermination, the borrowing base may be reduced substantially from its then
current level. All amounts outstanding in excess of such reduced borrowing base
must be paid in full at such date. Absent a default or an event of default (as
defined therein), outstanding borrowings under the Revolving Credit Facility
accrue interest at LIBOR plus a margin of 1.50% to 2.50% per annum depending on
the total amount drawn or, at the option of the Company, at the greater of (i)
the prime rate and (ii) the federal funds effective rate plus one-half of 1%,
plus a margin of 0.50% to 1.50% depending on the total amount drawn. As of March
31, 1997, the weighted average interest rate applicable to outstanding
borrowings under the Revolving Credit Facility was 8.05% per annum. For a
description of the Revolving Credit Facility, including certain mandatory
prepayment terms, see "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital
Resources -- Revolving Credit Facility."
IPF Company is a party to the IPF Company Credit Facility, which provides
for a maximum $100.0 million revolving line of credit. Borrowings under this
facility are used to finance IPF Company's investment activities under the IPF
Program. The IPF Company Credit Facility matures June 1, 1999 at which time all
amounts owed thereunder are due and payable. The borrowing base under the
facility as of March 31, 1997 was $18.0 million and is subject to a scheduled
redetermination by the lender every six months and such other redeterminations
as the lender may elect to perform each year. Effective as of May 7, 1997, the
borrowing base under the facility was increased to $23.0 million. As of March
31, 1997, approximately $17.3 million was outstanding under the IPF Company
Credit Facility and the weighted average interest rate applicable to such
outstanding amount was 7.857% per annum. So long as no default or event of
default (as defined therein) is outstanding, borrowings under the IPF Company
Credit Facility accrue interest at LIBOR plus a margin of 2.25% or, at the
option of IPF Company, the prime rate published in THE WALL STREET JOURNAL. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources -- IPF Company Credit Facility."
DIVIDEND POLICY
The Company intends to retain its earnings to provide funds for
reinvestment in the Company's businesses, including exploration, development and
production activities, and, therefore, does not anticipate declaring or paying
cash dividends in the foreseeable future. The Company is a holding company that
conducts substantially all of its operations through its subsidiaries. As a
result, the Company's ability to pay dividends on the Common Stock would be
dependent on the cash flows of its subsidiaries. Payment of dividends is also
subject to then existing business conditions and the business results, cash
requirements and financial condition of the Company, and will be at the
discretion of the Board of Directors. In addition, the terms of the Revolving
Credit Facility currently prohibit the payment of dividends by the Company. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
19
<PAGE>
CAPITALIZATION
The following table sets forth (i) the capitalization of the Company as of
March 31, 1997 and (ii) the pro forma capitalization of the Company as of March
31, 1997 after giving effect to the purchase of Common Stock by the Company's
employees in April 1997, the Michigan Disposition, the issuance of 6,000,000
shares of Common Stock in this Offering at an assumed price of $14.00 per share
and the application of the estimated net proceeds therefrom as described under
"Use of Proceeds" and the purchase by Fund VII of 620,071 shares of Common
Stock concurrently with consummation of the Offering. This table should be read
in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Combined and Consolidated
Financial Statements of the Company and the related notes thereto included
elsewhere in this Prospectus.
MARCH 31, 1997
-----------------------------
HISTORICAL PRO FORMA
------------ ------------
(IN THOUSANDS)
Current maturities of long-term debt ......... 32,157 --
Long-term debt ............................... $ 66,410 $ 21,037
Stockholders' equity:
Preferred stock, $.01 par value, no
shares authorized and outstanding;
5,000,000 shares authorized and
none outstanding pro forma ............. -- --
Common stock, $.01 par value,
15,080,000 shares authorized;
7,567,988 shares issued and
outstanding; 25,000,000 shares
authorized and 14,283,755 shares
issued and outstanding pro
forma .................................. 76 143
Additional paid-in capital .............. 29,354 115,488
Notes receivable -- stockholders ........ (546) (546)
Retained earnings ....................... 2,874 2,874
------------ ------------
Total stockholders' equity ................... 31,758 117,959
------------ ------------
Total capitalization ......................... $ 130,325 $ 138,996
============ ============
20
<PAGE>
DILUTION
"Dilution" means the difference between the initial public offering price
per share of Common Stock and the pro forma net tangible book value per share of
Common Stock after giving effect to the Offering. "Net tangible book value per
share" represents the amount of total tangible assets less total liabilities
divided by the total number of shares of Common Stock outstanding. At March 31,
1997, after giving effect to the purchase of Common Stock by the Company's
employees in April 1997, the Company's pro forma net tangible book value was
$32.2 million, or approximately $4.20 per share of Common Stock. Assuming the
sale of 6,000,000 shares pursuant to the Offering at a price of $14.00 per share
and assuming the use of the net proceeds thereof as specified in "Use of
Proceeds" and assuming the sale of 620,071 shares of Common Stock at a price of
$14.00 per share to Fund VII concurrently with consummation of the Offering and
the use of the proceeds thereof to repay outstanding indebtedness under the
Revolving Credit Facility, the pro forma net tangible book value of the Company
at March 31, 1997 would have been $8.26 per share, representing an immediate
increase in pro forma net tangible book value of $4.06 per share to the
Company's existing stockholders and an immediate dilution in pro forma net
tangible book value of $5.74 per share to new investors purchasing shares of
Common Stock in the Offering. The following table illustrates such pro forma per
share dilution at March 31, 1997:
Assumed initial public offering price
per share............................. $ 14.00
Pro forma net tangible book value
per share at March 31, 1997....... $ 4.20
Increase per share attributable to
new investors (including Fund
VII).............................. 4.06
---------
Pro forma net tangible book value
per share after the Offering and
the Concurrent Sale............... 8.26
---------
Dilution per share to new investors..... $ 5.74
=========
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 (assuming an initial
public offering price of $14.00 per share) by Fund VII pursuant to the
Concurrent Sale and by purchasers of shares of Common Stock offered hereby
(before deducting underwriting discounts and commissions and estimated offering
expenses):
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
---------------------- ------------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
------------ ------- --------------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders.... 7,663,684 53.7% $32,031,354 25.7% $ 4.18
New investors (including
Fund VII).............. 6,620,071 46.3% 92,680,094 74.3% 14.00
------------ ------- --------------- -------
Total............... 14,283,755 100.0% $124,711,448 100.0%
============ ======= =============== =======
</TABLE>
The foregoing computations do not include 424,847 shares of Common Stock
issuable upon exercise of outstanding employee stock options at an exercise
price of $4.18 and 424,847 shares of Common Stock issuable upon exercise of
outstanding employee stock options at an exercise price of $.01 per share. See
"Management -- Stock Option Agreements."
21
<PAGE>
UNAUDITED CONDENSED PRO FORMA FINANCIAL STATEMENTS
On December 31, 1996, the Company completed the Acquisition pursuant to
which it acquired all of the outstanding capital stock of its operating
subsidiaries from El Paso Natural Gas Company for an aggregate purchase price of
approximately $95.5 million and the assumption of liabilities of approximately
$31.5 million. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- General." In April 1997 the Company completed the
Michigan Disposition pursuant to which it sold its interests in a natural gas
development project located in northwestern Michigan to Energy Acquisition
Corp., a Colorado corporation. See "Business and Properties -- Certain
Transactions -- The Michigan Disposition." Concurrently with the consummation
of the Offering, the Company expects to complete the Concurrent Sale pursuant to
which, assuming an initial public offering price of $14.00 per share, Fund VII
will purchase 620,071 shares of Common Stock for an aggregate purchase price of
$8,681,000. See "Transactions with Management and First Reserve -- Acquisition
of Common Stock by Fund VII." Upon consummation of the Offering, the Company
expects to complete the Funds Acquisition pursuant to which it will acquire
certain net profits overriding royalty interests owned by three institutional
investors. The Company will acquire these interests for an aggregate cost of
$30.0 million. See "Business and Properties -- Certain Transactions -- The
Funds Acquisition."
The unaudited pro forma consolidated balance sheet as of March 31, 1997
gives effect to (i) the sale of 95,696 shares of Common Stock to the Company's
employees in April 1997 for an aggregate purchase price of $400,000, (ii) the
Michigan Disposition, (iii) the completion of the Offering, (iv) the completion
of the Concurrent Sale and (v) the completion of the Funds Acquisition, as if
all such transactions (the "Transactions") had occurred on March 31, 1997. The
unaudited pro forma consolidated income statement for the year ended December
31, 1996 gives effect to (i) the Acquisition, (ii) the Michigan Disposition,
(iii) the completion of the Offering, (iv) the completion of the Concurrent Sale
and (v) the completion of the Funds Acquisition, as if all such transactions had
occurred on January 1, 1996. The unaudited pro forma consolidated income
statement for the three months ended March 31, 1997 gives effect to (i) the
Michigan Disposition, (ii) the completion of the Offering, (iii) the completion
of the Concurrent Sale and (iv) the completion of the Funds Acquisition, as if
all such transactions had occurred on January 1, 1997. The unaudited condensed
pro forma balance sheet is based on the unaudited Consolidated Balance Sheet of
the Company included elsewhere in this Prospectus. The unaudited condensed pro
forma income statements are based on the historical Combined Statements of
Income of the Company and unaudited financial information related to the Funds
Acquisition.
The pro forma adjustments are based upon available information and certain
assumptions that management of the Company believes are reasonable. Management
of the Company does not believe that any possible deviations will be material to
the pro forma financial statements. The pro forma financial information does not
purport to represent what the Company's financial position or results of
operations would actually have been had the Transactions in fact occurred on
such dates. In addition, the pro forma financial statements are not necessarily
indicative of the results of future operations of the Company and should be read
in conjunction with "Capitalization," "Management's Discussion and Analysis
of Financial Condition and Results of Operations," and the Combined and
Consolidated Financial Statements of the Company and the related notes thereto
included elsewhere in this Prospectus.
22
<PAGE>
DOMAIN ENERGY CORPORATION
UNAUDITED CONDENSED PRO FORMA BALANCE SHEET
MARCH 31, 1997
<TABLE>
<CAPTION>
ADJUSTMENTS
FOR ADJUSTMENTS SUBTOTAL ADJUSTMENTS
EMPLOYEE FOR FOR ADJUSTMENTS FOR ADJUSTMENTS FOR
OFFERING IN MICHIGAN COMPLETED FOR CONCURRENT PENDING FUNDS
HISTORICAL APRIL 1997 DISPOSITION TRANSACTIONS OFFERING SALE ACQUISITION
--------- --------- --------- --------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Cash and cash
equivalents ................... $ 6,186 $ 400(a) $ 2,118(b) $ 8,704 $ 30,000(c) -- $ (30,000)(e)
Restricted certificate of
deposit ....................... 8,000 -- 8,000 -- -- (8,000)(d) --
Accounts receivable ............. 8,577 -- 4,361(b) 12,938 -- (92)(d) --
Notes receivable, current
portion ....................... 8,512 -- -- 8,512 -- -- --
Prepaids and other
current assets ................ 1,472 -- (4)(b) 1,468 -- -- --
--------- --------- --------- --------- --------- --------- ---------
Total current
assets .................... 32,747 400 6,475 39,622 30,000 (8,092) (30,000)
--------- --------- --------- --------- --------- --------- ---------
Notes receivable ................ 19,018 -- -- 19,018 -- -- --
Property, plant and
equipment, net (full
cost method) .................. 88,577 -- (23,762)(b) 64,815 -- -- 30,000(e)
Other assets .................... 2,783 -- 232(b) 3,015 -- --
--------- --------- --------- --------- --------- --------- ---------
Total assets ................ $ 143,125 $ 400 $ (17,055) 126,470 $ 30,000 $ (8,092) $ --
--------- --------- --------- --------- --------- --------- ---------
LIABILITIES AND
STOCKHOLDERS' EQUITY
Accounts payable ................ $ 7,098 $ -- $ -- 7,098 $ -- $-- $ --
-- -- (2,608)(b) (2,608) -- -- --
Accrued expenses ................ 3,182 -- (302)(b) 2,880 -- (92)(d) --
Current maturities of
long-term debt ................ 32,157 -- (7,657)(b) 24,500 (16,500)(e) (8,000)(d) --
--------- --------- --------- --------- --------- --------- ---------
Total current
liabilities ............... 42,437 -- (10,567) 31,870 (16,500) (8,092) --
--------- --------- --------- --------- --------- --------- ---------
Long-term debt .................. 66,410 -- (6,072)(b) 60,338 (30,620)(c) (8,681)(e) --
Deferred taxes .................. 1,548 -- 143(b) 1,691 -- --
--------- --------- --------- --------- --------- --------- ---------
Total liabilities ........... 110,395 -- (16,496) 93,899 (47,120) (16,773) --
--------- --------- --------- --------- --------- --------- ---------
Minority interest ............... 972 -- (559)(b) 413 -- -- --
Common stock
7,567,988 shares issued
and outstanding
historical; 14,283,755
shares issued and
outstanding pro
forma ......................... 76 1(a) -- 77 60(c) 6(d) --
Additional paid-in
capital ....................... 29,354 399(a) -- 29,753 77,060(c) 8,675(d) --
Notes receivable--
shareholders .................. (546) -- -- (546) -- -- --
Retained earnings ............... 2,874 -- -- 2,874 -- -- --
--------- --------- --------- --------- --------- --------- ---------
Total stockholders'
equity .................... 31,758 400 -- 32,158 77,120 8,681 --
--------- --------- --------- --------- --------- --------- ---------
Total liabilities and
stockholders'
equity .................... $ 143,125 $ 400 $ (17,055) 126,470 $ 30,000 $ (8,092) $ --
========= ========= ========= ========= ========= ========= =========
</TABLE>
PRO
FORMA
---------
ASSETS
Cash and cash
equivalents............ $ 8,704
Restricted certificate of
deposit................ --
Accounts receivable...... 12,846
Notes receivable, current
portion................ 8,512
Prepaids and other
current assets......... 1,468
---------
Total current
assets............. 31,530
---------
Notes receivable......... 19,018
Property, plant and
equipment, net (full
cost method)........... 94,815
Other assets............. 3,015
---------
Total assets......... $ 148,378
---------
LIABILITIES AND
STOCKHOLDERS' EQUITY
Accounts payable......... $ 4,490
Accrued expenses......... 2,788
Current maturities of
long-term debt......... --
---------
Total current
liabilities........ 7,278
---------
Long-term debt........... 21,037
Deferred taxes........... 1,691
---------
Total liabilities.... 30,006
---------
Minority interest........ 413
Common stock
7,567,988 shares issued
and outstanding
historical; 14,283,755
shares issued and
outstanding pro
forma.................. 143
Additional paid-in
capital................ 115,488
Notes receivable--
shareholders........... (546)
Retained earnings........ 2,874
---------
Total stockholders'
equity............. 117,959
---------
Total liabilities and
stockholders'
equity............. $ 148,378
=========
The accompanying notes are an integral part of the pro forma financial
statements.
23
<PAGE>
DOMAIN ENERGY CORPORATION
UNAUDITED CONDENSED PRO FORMA INCOME STATEMENT
YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
ADJUSTMENTS ADJUSTMENTS
ADJUSTMENTS FOR SUBTOTAL FOR ADJUSTMENTS FOR
FOR THE MICHIGAN COMPLETED FOR CONCURRENT
HISTORICAL ACQUISITION DISPOSITION TRANSACTIONS OFFERING SALE
---------- ----------- ----------- ------------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
REVENUES
Oil and natural gas sales............... $ 52,889 $ -- $ (615)(j) $52,274 $-- --
IPF Activities.......................... 4,369 -- -- 4,369 -- --
Other................................... 64 -- (115)(j) (51) -- --
---------- ----------- ----------- ------------- ----------- -----------
Total revenues...................... 57,322 -- (730) 56,592 -- --
---------- ----------- ----------- ------------- ----------- -----------
EXPENSES
Production expenses..................... 12,334 -- (788)(j) 11,546 -- --
Depreciation, depletion and
amortization.......................... 22,739 (7,134)(f) (86)(j) 15,519 --
General and administrative.............. 3,361 -- -- 3,361 -- --
Corporate overhead allocation........... 4,827 -- -- 4,827 -- --
---------- ----------- ----------- ------------- ----------- -----------
Total operating expenses............ 43,261 (7,134) (874) 35,253 --
---------- ----------- ----------- ------------- ----------- -----------
Operating income........................ 14,061 7,134 144 21,339 --
---------- ----------- ----------- ------------- ----------- -----------
Interest expense, net................... 470 4,536(g) (687)(g) 4,319 (3,139)(g) (440)(g)
Interest income......................... -- (368)(h) 258(k) (110) -- --
---------- ----------- ----------- ------------- ----------- -----------
Net income before income taxes and
minority interest..................... 13,591 2,966 573 17,130 3,139 440
Income tax expense...................... 5,551 1,127(i) 218(i) 6,896 1,193(i) 167(i)
Minority interest....................... (157) 33 124(j) -- -- --
---------- ----------- ----------- ------------- ----------- -----------
Net income.............................. $ 8,197 $ 1,806 $ 231 $10,234 $ 1,946 $ 273
========== =========== =========== ============= =========== ===========
Net income per share....................
Common stock and common stock
equivalents outstanding...............
</TABLE>
ADJUSTMENTS
FOR
PENDING
FUNDS
ACQUISITION PRO FORMA
----------- ---------
REVENUES
Oil and natural gas sales............... $18,472(l) $70,746
IPF Activities.......................... -- 4,369
Other................................... 6(l) (45)
----------- ---------
Total revenues...................... 18,478 75,070
----------- ---------
EXPENSES
Production expenses..................... 4,383(l) 15,929
Depreciation, depletion and
amortization.......................... 6,086(l) 21,605
General and administrative.............. -- 3,361
Corporate overhead allocation........... 292(l) 5,119
----------- ---------
Total operating expenses............ 10,761 46,014
----------- ---------
Operating income........................ 7,717 29,056
----------- ---------
Interest expense, net................... (13)(g) 727
Interest income......................... -- (110)
----------- ---------
Net income before income taxes and
minority interest..................... 7,730 28,439
Income tax expense...................... 2,937(i) 11,193
Minority interest....................... -- --
----------- ---------
Net income.............................. $ 4,793 $17,246
=========== =========
Net income per share.................... $ 1.14
=========
Common stock and common stock
equivalents outstanding............... 15,133(m)
=========
The accompanying notes are an integral part of the pro forma financial
statements.
24
<PAGE>
DOMAIN ENERGY CORPORATION
UNAUDITED CONDENSED PRO FORMA INCOME STATEMENT
THREE MONTHS ENDED MARCH 31, 1997
<TABLE>
<CAPTION>
ADJUSTMENTS SUBTOTAL ADJUSTMENTS ADJUSTMENTS
FOR FOR ADJUSTMENTS FOR FOR PENDING
MICHIGAN COMPLETED FOR CONCURRENT FUNDS
HISTORICAL DISPOSITION TRANSACTIONS OFFERING SALE ACQUISITION
---------- ----------- ------------ ----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
REVENUES
Oil and natural gas..................... $ 12,960 $ (178)(j) $ 12,782 $ -- -- $ 6,423(l)
IPF Activities.......................... 732 -- 732 -- -- --
Other................................... 3 184(j) 187 -- -- --
---------- ----------- ------------ ----------- ----------- -----------
Total revenues..................... 13,695 6 13,701 -- -- 6,423
---------- ----------- ------------ ----------- ----------- -----------
EXPENSES
Production expenses..................... 3,863 (394)(j) 3,469 -- -- 1,925(l)
Depreciation, depletion and
amortization.......................... 2,935 315(j) 3,250 -- 2,238(l)
General and administrative.............. 792 -- 792 -- -- 36(l)
Stock option compensation............... 222 -- 222 -- -- --
---------- ----------- ------------ ----------- ----------- -----------
Total operating expenses........... 7,812 (79) 7,733 -- 4,199
---------- ----------- ------------ ----------- ----------- -----------
Operating income........................ 5,883 85 5,968 -- 2,224
---------- ----------- ------------ ----------- ----------- -----------
Interest expense, net................... 1,420 (306)(g) 1,114 (753)(g) (105)(g) --
Interest income, net.................... (97) (17)(k) (114) -- -- --
---------- ----------- ------------ ----------- ----------- -----------
Net income before income taxes and
minority interest..................... 4,560 408 4,968 753 105 2,224
Income tax expense...................... 1,733 155(i) 1,888 286(i) 40(i) 845(i)
Minority interest....................... (47) 47(j) -- -- -- --
---------- ----------- ------------ ----------- ----------- -----------
Net income.............................. $ 2,874 $ 206 $ 3,080 $ 467 $ 65 $ 1,379
========== =========== ============ =========== =========== ===========
Net income per share....................
Common stock and common stock
equivalents outstanding...............
</TABLE>
PRO FORMA
---------
REVENUES
Oil and natural gas..................... $19,205
IPF Activities.......................... 732
Other................................... 187
---------
Total revenues..................... 20,124
---------
EXPENSES
Production expenses..................... 5,394
Depreciation, depletion and
amortization.......................... 5,488
General and administrative.............. 828
Stock option compensation............... 222
---------
Total operating expenses........... 11,932
---------
Operating income........................ 8,192
---------
Interest expense, net................... 256
Interest income, net.................... (114)
---------
Net income before income taxes and
minority interest..................... 8,050
Income tax expense...................... 3,059
Minority interest....................... --
---------
Net income.............................. $ 4,991
=========
Net income per share.................... $ 0.33
=========
Common stock and common stock
equivalents outstanding............... 15,133(m)
=========
The accompanying notes are an integral part of the pro forma financial
statements.
25
<PAGE>
DOMAIN ENERGY CORPORATION
NOTES TO CONDENSED PRO FORMA FINANCIAL STATEMENTS
(UNAUDITED)
BASIS OF PRESENTATION
The following pro forma adjustments have been prepared as if the
Transactions had taken place on March 31, 1997 in the case of the pro forma
balance sheet or as of January 1, 1996 or January 1, 1997, as the case may be,
in the case of the pro forma statements of income. The adjustments are based
upon currently available information and certain estimates and assumptions, and
therefore the actual adjustments made to effect the Transactions may differ from
the pro forma adjustments. However, management believes that the assumptions
provide a reasonable basis for presenting the significant effects of the
Transactions as contemplated and that the pro forma adjustments give appropriate
effect to these assumptions and are properly applied in the pro forma financial
information.
PRO FORMA ADJUSTMENTS TO THE BALANCE SHEET
a. Reflects the issuance of 95,696 shares of Common Stock at $4.18 per share
pursuant to a private offering made to the employees of the Company prior
to the Offering. For the sale of such shares the Company received $400,000
in cash.
b. Reflects the sale of the Michigan Development Project on April 9, 1997.
After repayment by the Company and assumption by the buyer of an aggregate
of $13.7 million of long-term debt, the Company received $2.1 million in
cash at closing and will receive an additional $5.4 million from the
payment of an interest-bearing note receivable.
c. Reflects (i) the proceeds from the issuance of 6,000,000 shares of Common
Stock at $14.00 per share pursuant to the Offering and (ii) use of the
proceeds as summarized below (in millions):
Proceeds from the Offering.............. $ 84.0
Offering expenses....................... (6.9)
---------
Net proceeds.................. $ 77.1
=========
Use of proceeds:
Cash for Funds Acquisition......... $ 30.0
Repayment of long-term debt........ 47.1
---------
Net proceeds.................. $ 77.1
=========
d. Reflects (i) the proceeds from the issuance of 620,071 shares of Common
Stock at $14.00 per share pursuant to a sale to Fund VII to be completed
concurrently with consummation of the Offering and (ii) use of the proceeds
of the Concurrent Sale as summarized below (in millions):
Proceeds from Concurrent Sale........... $ 8.7
=========
Use of proceeds:
Repayment of long-term debt........ $ 8.7
=========
e. Reflects the pending acquisition of the oil and gas properties of the Funds
for $30.0 million. The properties to be acquired consist of net profits
overriding royalty interests owned by three institutional investors that
are not affiliated with the Company. See "Business and Properties --
Certain Transactions -- The Funds Acquisition."
PRO FORMA ADJUSTMENTS TO THE INCOME STATEMENTS
f. Reflects the reduction in the depreciation, depletion, and amortization
rate as a result of the allocation of the Acquisition purchase price in
accordance with the purchase method of accounting.
26
<PAGE>
DOMAIN ENERGY CORPORATION
NOTES TO CONDENSED PRO FORMA FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
g. Reflects the adjustments to interest expense computed as follows (in
thousands):
1.Year Ended December 31, 1996
(a) The Acquisition financing:
<TABLE>
<CAPTION>
AMOUNTS OUTSTANDING
---------------------------------
BEFORE AFTER
PAYMENTS PAYMENTS RATE INTEREST
-------- -------- --------- --------
<S> <C> <C> <C> <C>
Revolving Credit Facility........ $ -- $ 61,200 8.00% $ 4,896
IPF Company Credit Facility...... -- 11,212 8.00% 550
Indebtedness to Fund VII......... -- 8,000 4.60% 368
Michigan Senior Debt............. -- 4,606 8.00% 230
Indebtedness to Westshore........ -- 7,657 5.98 89
Amounts capitalized(1)........... (1,127)
Less: Historical interest
expense....................... (470)
--------
$ 4,536
========
(b)Michigan Disposition:
Michigan Senior Debt............. $ 4,606 -- 8.00% (230)
Indebtedness to Westshore........ 7,657 -- 5.98 (89)
Indebtedness to Fund VII......... 8,000 -- 4.60% (368)
--------
$ (687)
========
(c) Repayment of debt using Offering
proceeds:
Revolving Credit Facility........ $ 61,200 19,080 7.00% (3,560)
IPF Company Credit Facility...... 11,212 6,212 8.00% (400)
Amounts capitalized(1)........... 821
--------
$ (3,139)
========
(d) Repayment of debt using proceeds of
Concurrent Sale:
Revolving Credit Facility........ $ 19,080 10,399 7% (571)
Amounts capitalized(1)........... 131
--------
$ (440)
========
(e) Funds Acquisition:
Amounts capitalized(1)........... (13)
Total pro forma interest expense
adjustment.................... $ 257
========
</TABLE>
27
<PAGE>
DOMAIN ENERGY CORPORATION
NOTES TO CONDENSED PRO FORMA FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
2. Three Months Ended March 31, 1997
<TABLE>
<CAPTION>
BALANCE
BEGINNING BALANCE
OF END OF
PERIOD PERIOD RATE INTEREST
-------- -------- --------- --------
<S> <C> <C> <C> <C>
(a)Historical:
Revolving Credit Facility........ $ 61,200 $ 59,500 8.00% $ 1,228
IPF Company Credit Facility...... 11,212 17,338 8.00% 222
Indebtedness to Fund VII......... 8,000 8,000 4.60% 92
Michigan Senior Debt............. 4,606 6,156 8.00% 101
Indebtedness to Westshore........ 7,657 7,657 5.98% 113
Amounts capitalized(1)........... (336)
--------
$ 1,420
========
BEFORE AFTER
PAYMENT PAYMENT RATE INTEREST
-------- -------- --------- --------
(b)Michigan Disposition:
Indebtedness to Fund VII......... $ 8,000 -- 4.60% (92)
Michigan Senior Debt............. 6,156 -- 8.00% (101)
Indebtedness to Westshore........ 7,657 -- 5.98% (113)
--------
$ (306)
========
(c)Repayment of debt using Offering
proceeds:
Revolving Credit Facility........ $ 59,500 17,380 8.00% (905)
IPF Company Credit Facility...... 17,338 12,338 8.00% (98)
Amounts capitalized(1)........... 250
--------
$ (753)
========
(d) Repayment of debt using proceeds of
Concurrent Sale:
Revolving Credit Facility........ $ 17,380 8,699 7.00% (143)
Amounts capitalized(1)........... 38
--------
$ (105)
========
Total pro forma interest expense
adjustment............................ $ (1,164)
========
</TABLE>
- ------------
(1) Amounts capitalized are calculated by capitalizing interest expense related
to costs incurred on properties not subject to amortization at 8%.
h. Reflects the interest income on a certificate of deposit used as collateral
for the Michigan Development Project.
i. The effective rate of 38% is computed using statutory rates, including
state taxes, less the federal income tax benefit derived from state taxes.
j. Reflects the changes in operating income and minority interest items from
the Michigan Disposition.
k. Reflects change in interest income from:
(1) Increase from the note receivable received in the Michigan
Disposition.
(2) Reduction from the Michigan Development Project certificate of
deposit.
l. Reflects the changes in income items from the Funds Acquisition. Revenues
and production expenses were obtained from unaudited historical information
for the Funds. Other pro forma items are calculated on a consolidated
basis. For example, the DD&A adjustment is calculated based on the impact
of the Acquisition on the Company's consolidated DD&A expense rate.
28
<PAGE>
DOMAIN ENERGY CORPORATION
NOTES TO CONDENSED PRO FORMA FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
m. Common stock and common stock equivalents outstanding has been calculated
assuming that the 7,177,681 shares of Common Stock purchased in connection
with the Acquisition, the 486,003 shares of Common Stock purchased by the
Company's employees in 1997, the 849,694 shares of Common Stock reserved
for issuance pursuant to outstanding options under the Stock Purchase and
Option Plan, and the 6,000,000 shares of Common Stock to be issued pursuant
to the Offering and the estimated 620,071 shares of Common Stock to be
issued to Fund VII pursuant to the Concurrent Sale have been outstanding
since January 1, 1996 or, in the case of the three months ended March 31,
1997, January 1, 1997.
29
<PAGE>
SELECTED HISTORICAL COMBINED AND CONSOLIDATED FINANCIAL DATA
The following table sets forth selected historical combined and
consolidated information of the Company for the five years ended and as of
December 31, 1996 and for the three months ended March 31, 1996 and 1997 and as
of March 31, 1997. The results for the three months ended March 31, 1997 are not
necessarily indicative of the results for the full year. The selected combined
and consolidated financial data should be read in conjunction with
"Capitalization," "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Combined and Consolidated
Financial Statements of the Company and the related notes thereto included
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
-------------------------------------------------------- -----------------------
PREDECESSOR PREDECESSOR SUCCESSOR
-------------------------------------------------------- ----------- ---------
1992 1993 1994 1995 1996 1996 1997
--------- --------- ---------- ---------- ---------- ----------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues:
Oil and natural gas sales(1)....... $ 2 $ 1,922 $ 5,340 $ 34,877 $ 52,889 $15,688 $ 12,960
IPF Activities(2).................. -- 200 1,417 2,356 4,369 340 732
Other.............................. -- -- 283 414 64 115 3
--------- --------- ---------- ---------- ---------- ----------- ---------
Total revenues................ 2 2,122 7,040 37,647 57,322 16,143 13,695
--------- --------- ---------- ---------- ---------- ----------- ---------
Expenses:
Lease operating.................... -- 218 1,790 7,980 10,962 2,127 3,439
Production and severance taxes..... -- 2 18 710 1,372 279 424
Depreciation, depletion and
amortization..................... -- 987 3,101 22,692 22,739 6,946 2,935
General and administrative, net.... 332 681 52 2,780 3,361 1,089 792
Corporate overhead allocation...... -- -- -- 1,270 4,827 939 --
Stock option compensation.......... -- -- -- -- -- -- 222
--------- --------- ---------- ---------- ---------- ----------- ---------
Total operating expenses...... 332 1,888 4,961 35,432 43,261 11,380 7,812
--------- --------- ---------- ---------- ---------- ----------- ---------
Income (loss) from operations........... (330) 234 2,079 2,215 14,061 4,763 5,883
Interest expense, net................... 20 -- -- -- 470 -- 1,323
--------- --------- ---------- ---------- ---------- ----------- ---------
Income (loss) before income taxes....... (350) 234 2,079 2,215 13,591 4,763 4,560
Income tax provision (benefit).......... (119) 92 1,105 861 5,551 1,596 1,733
Minority interest....................... -- -- -- -- (157) -- (47)
--------- --------- ---------- ---------- ---------- ----------- ---------
Net income (loss)....................... $ (231) $ 142 $ 974 $ 1,354 $ 8,197 $ 3,167 $ 2,874
========= ========= ========== ========== ========== =========== =========
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
--------------------------------------------------------
PREDECESSOR SUCCESSOR
-------------------------------------------- SUCCESSOR AS OF MARCH 31,
1992 1993 1994 1995 1996 1997
--------- --------- ---------- ---------- ---------- ---------------
BALANCE SHEET DATA:
<S> <C> <C> <C> <C> <C> <C>
Cash and cash equivalents.......... $ 2 $ 1,635 $ 11,467 $ -- $ 736 $ 6,186
Property, plant and equipment,
net.............................. 131 11,544 93,823 111,724 88,648 88,577
IPF Program notes receivable....... -- 4,215 4,023 7,991 21,710 27,530
Total assets....................... 1,403 23,493 117,755 137,096 137,126 143,125
Long-term debt (including current
maturities)...................... -- -- -- -- 92,675 98,567
Parent advances.................... 1,684 19,234 103,303 110,274 -- --
Stockholders' equity............... (309) (168) 806 2,160 27,577 31,758
</TABLE>
- ------------
(1) Oil and natural gas sales increased from $5.3 million in 1994 to $52.9
million in 1996 primarily as a result of the Company's acquisition of
producing properties in 1994 and 1995, results of drilling activities in
1994, 1995 and 1996, and an increase in the net realized price of gas in
1996 relative to 1994 and 1995.
(2) IPF Activities includes income from the Company's IPF Program and the
Company's "GasFund" partnership with a financial investor. See "Business
and Properties -- Producer Investment Activities."
30
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion is intended to assist in understanding the
Company's historical financial position and results of operations as of December
31, 1995 and 1996 and for each year of the three-year period ended December 31,
1996 and as of March 31, 1997, and for the three months ended March 31, 1996 and
1997. The Company's historical financial statements and notes thereto included
elsewhere in this Prospectus contain detailed information that should be
referred to in conjunction with this discussion.
GENERAL
On December 31, 1996, the Company acquired all of the outstanding capital
stock of its operating subsidiaries, Domain Energy Ventures Corporation
("Ventures Corporation") and Domain Energy Production Corporation
("Production Corporation" and, together with Ventures Corporation, the
"Predecessor"). The Company has accounted for the acquisition (the
"Acquisition") using the purchase method of accounting, under which the
purchase price has been allocated to the assets acquired and liabilities assumed
based upon their fair values at the acquisition date.
The Company is an independent oil and gas company engaged in the
exploration, development, production and acquisition of domestic oil and natural
gas properties, principally in the Gulf Coast region. The Company complements
these activities with its IPF Program pursuant to which it invests in oil and
natural gas reserves through the acquisition of term overriding royalty
interests accounted for as notes receivable. As of December 31, 1996, the
Company had estimated net proved reserves of 149.6 Bcfe. Approximately 60% of
the Company's net proved reserves at such date were natural gas and
approximately 64% of proved reserves were classified as proved developed
producing. As of December 31, 1996, the Company had a PV-10 Reserve Value of
$184.8 million, which does not include reserve value attributable to the IPF
Program or the minority interest in the Michigan Development Project.
The Company's selected historical combined and consolidated financial data
included elsewhere in this Prospectus have been derived from the audited
Combined and Consolidated Financial Statements of the Company. The selected
balance sheet data at December 31, 1996 reflects the Acquisition that occurred
on that date. The selected balance sheet and income statement data at other
dates and for other periods reflects the combined financial position and results
of operations of Ventures Corporation and Production Corporation with
intercompany transactions and account balances eliminated.
Prior to the Acquisition, these companies and their subsidiaries were
included in the consolidated federal income tax return of Tenneco, as a result
of which Tenneco will receive all benefit for such entities' historical tax
losses. In connection with the Acquisition, the Company agreed to file an
election under Sections 338(g) and 338(h)(10) of the Internal Revenue Code of
1986, as amended, pursuant to which the Company will allocate the purchase price
paid by the Company among the assets of these companies to determine the basis
of assets acquired in accordance with the principles of Treasury Regulation
1.338(h)(10)-1(f)(1)(ii).
31
<PAGE>
The sources and uses of funds related to financing the Acquisition as of
the closing date were as follows:
(IN MILLIONS)
SOURCES OF FUNDS:
Revolving Credit Facility .............. $61.2
Common Stock purchased by Fund VII ..... 30.0
IPF Company Credit Facility ............ 5.0
-----
$96.2
=====
USES OF FUNDS:
Acquisition purchase price(1) .......... $95.5
Acquisition costs and other expenses ... 0.6
Related corporate purposes ............. 0.1
-----
$96.2
=====
- ------------
(1) In February 1997 the Company paid an additional $500,000 as a post-closing
adjustment to the Acquisition purchase price.
The Company's objective is to maximize shareholder value by growing
reserves, production, cash flow and earnings through the opportunistic
acquisition of Gulf Coast region properties with underexploited value. The
Company applies 3-D seismic and other advanced technologies to development,
exploitation and exploration. These activities are complemented by the continued
expansion of the IPF Program. Fundamental to the execution of the Company's
strategy is its foundation of experienced technical talent strengthened by a
high level of financial, transactional and risk-management expertise, resulting
in part, from the former association of the Company and its employees with
Tenneco.
The Company's revenue, profitability and future rate of growth are
substantially dependent upon prevailing prices for oil and natural gas, which
are dependent upon numerous factors beyond the Company's control, such as
economic, political and regulatory developments and competition from other
sources of energy. The energy markets have historically been highly volatile,
and future decreases in oil or natural gas prices could have a material adverse
effect on the Company's financial position, results of operations, quantities of
oil and natural gas reserves that may be economically produced, and access to
capital.
The Company uses the full cost method of accounting for its investments in
oil and natural gas properties. Under such methodology, all costs of
exploration, development and acquisition of oil and natural gas reserves are
capitalized into a "full cost pool" as incurred and properties in the pool are
depleted and charged to operations using the unit-of-production method based on
a ratio of current production to total proved oil and natural gas reserves. To
the extent that such capitalized costs (net of accumulated depreciation,
depletion, and amortization) less deferred taxes exceed the present value (using
a 10% discount rate) of estimated future net cash flows from proved oil and
natural gas reserves and the lower of cost or fair value of unproved properties,
such excess costs are charged to operations. If a write-down were required, it
would result in a non-cash charge to earnings but would not have an impact on
cash flows.
ACCOUNTING FOR IPF PROGRAM ACTIVITY
Through its IPF Program, the Company acquires term overriding royalty
interests in oil and gas properties owned by independent producers. Because the
capital advanced to a producer for these interests is repaid from an agreed upon
share of cash revenues from the sale of production until the capital advanced
plus a contractual return is paid in full, the Company accounts for the term
overriding royalty interests as notes receivable. Under this accounting method,
the Company recognizes only the interest income portion of payments received
from a producer as revenues on its income statement. The remaining cash receipts
are recorded as a reduction in notes receivable on the Company's balance sheet
and as IPF Program return of capital on the Company's statement of cash flows.
32
<PAGE>
If instead of acquiring dollar-denominated term overriding royalty
interests, the Company were purchasing term overriding royalty interests
requiring delivery of a specified quantity of oil and gas, IPF Program results
would be accounted for differently. Specifically, in 1996, Company EBITDA would
increase by $4.3 million and IPF Program return of capital in the Combined
Statement of Cash Flows would decrease by the same amount. To more accurately
reflect the actual cash flows generated by the Company, IPF Program return of
capital is identified separately to allow such cash receipts to be combined with
EBITDA.
Although, to date, the Company has not incurred any losses on notes
outstanding under the IPF Program, as of December 31, 1996, the Company
established a non-cash reserve for potential future losses of $437,000, which
reserve is netted against IPF Program notes receivable in the Company's balance
sheet.
33
<PAGE>
RESULTS OF OPERATIONS
The Company has experienced significant growth in reserves, production,
cash flow and earnings over the past three years. The following table summarizes
certain operating and financial data, production volumes, average realized
prices and average expenses for the Company's oil and natural gas operations for
the years ended December 31, 1994, 1995 and 1996 and the three months ended
March 31, 1996 and 1997:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------- THREE MONTHS ENDED
MARCH 31,
PREDECESSOR ------------------------
-------------------------------- PREDECESSOR SUCCESSOR
1994 1995 1996 1996 1997
---------- --------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
FINANCIAL DATA (IN THOUSANDS):
Revenues
Natural gas................... $ 4,101 $ 27,772 $ 42,211 $13,772 $ 10,164
Oil and condensate............ 1,239 7,105 10,678 1,916 2,796
IPF Activities(1)............. 1,417 2,356 4,369 340 732
Total revenues..................... 7,040 37,647 57,322 16,143 13,695
Total operating expenses........... 4,961 35,432 43,261 11,380 7,812
---------- --------- --------- ----------- ---------
Operating income................... $ 2,079 $ 2,215 $ 14,061 $ 4,763 $ 5,883
========== ========= ========= =========== =========
Net income......................... $ 974 $ 1,354 $ 8,197 $ 3,167 $ 2,874
Net cash provided by operating
activities....................... 12,431 21,290 41,787 5,715 8,420
Net cash provided by investing
activities....................... (86,669) (39,728) (66,741) (10,634) (9,947)
Net cash provided by financing
activities....................... 84,070 6,971 24,954 5,285 7,199
NON-GAAP FINANCIAL DATA
(IN THOUSANDS):
EBITDA(2).......................... $ 5,180 $ 24,907 $ 36,957 $11,709 $ 8,865
IPF Program return of capital(3)... 3,507 2,638 4,618 517 3,426
EBITDA plus IPF Program return of
capital.......................... 8,687 27,545 41,575 12,226 12,291
PRODUCTION VOLUMES:
Natural gas (MMcf)................. 2,334 18,065 21,578 5,828 3,708
Oil and condensate (MBbls)......... 83 424 574 116 147
Total (MMcfe)...................... 2,832 20,609 25,023 6,524 4,590
AVERAGE REALIZED PRICES:(4)
Natural gas (per Mcf).............. $ 1.76 $ 1.54 $ 1.96 $ 2.36 $ 2.74
Oil and condensate (per Bbl)....... 14.93 16.76 18.60 16.52 19.02
EXPENSES (PER MCFE):
Lease operating.................... $ 0.63 $ 0.39 $ 0.44 $ 0.33 $ 0.75
Production taxes................... 0.01 0.03 0.05 0.04 0.09
Depreciation, depletion and
amortization..................... 1.03 1.08 0.91 1.09 0.60
General and administrative,
net(5)........................... 0.23 0.16 0.12 0.14 0.15
</TABLE>
- ------------
(1) IPF Activities includes income from the Company's IPF Program and the
Company's "GasFund" partnership with a financial investor. See "Business
and Properties -- Producer Investment Activities."
(FOOTNOTES CONTINUED ON FOLLOWING PAGE)
34
<PAGE>
(2) EBITDA represents earnings before interest expense, income taxes,
depreciation, depletion and amortization. The Company believes that EBITDA
may provide additional information about the Company's ability to meet its
future requirements for debt service, capital expenditures and working
capital. EBITDA is a financial measure commonly used in the oil and gas
industry and should not be considered in isolation or as a substitute for
net income, operating income, net cash provided by operating activities or
any other measure of financial performance presented in accordance with
generally accepted accounting principles or as a measure of a company's
profitability or liquidity. Because EBITDA excludes some, but not all, items
that affect net income and may vary among companies, the EBITDA calculation
presented above may not be comparable to similarly titled measures of other
companies.
(3) To more accurately reflect the actual cash flows generated by the Company,
IPF Program return of capital is identified separately to allow such cash
receipts to be combined with EBITDA.
(4) Reflects the actual realized prices received by the Company, including the
results of the Company's hedging activities. See " -- Other
Matters -- Hedging Activities."
(5) Includes production attributable to properties managed for the Funds for the
periods indicated and excludes fees received from investors and overhead
allocations from Tenneco. Including Tenneco allocations, average net general
and administrative expenses per Mcfe for the years ended December 31, 1994,
1995 and 1996 would be $0.23, $0.20 and $0.28, respectively.
THREE MONTHS ENDED MARCH 31, 1997 COMPARED TO THREE MONTHS ENDED MARCH 31,
1996
Oil and natural gas revenues decreased from $15.7 million in the first
quarter of 1996 to $13.0 million in the first quarter of 1997, a decrease of
$2.7 million, or 17.2%. Production volumes for oil and condensate increased from
116 MBbls in the first quarter of 1996 to 147 MBbls in the first quarter of
1997, an increase of 31 MBbls, or 26.7%. Production volumes for natural gas
decreased from 5.8 Bcf in the first quarter of 1996 to 3.7 Bcf in the first
quarter of 1997, a decrease of 2.1 Bcf, or 36.2%. The decrease in natural gas
production was primarily due to the sale of the ATP Partnership and Cage Ranch
properties as well as natural declines in production from the Mustang Island 847
Field, the West Cameron 601 Field, the Eugene Island Field and the Rabbit Island
Field. The decrease in total net production decreased revenues by $4.5 million.
This was partially offset by a 15.3% increase in oil and condensate prices and a
16.1% increase in natural gas prices. Increases in average oil and natural gas
prices were attributable to improved market conditions for oil and natural gas
and improved results from natural gas hedging activities.
As a result of hedging activities, the Company realized an average oil
price of $19.02 per Bbl and an average gas price of $2.74 per Mcf for the first
quarter of 1997, compared to average prices of $21.31 per Bbl and $2.72 per Mcf,
respectively, that otherwise would have been received. For the first quarter of
1996, as a result of hedging activities the Company realized an average oil
price of $16.52 per Bbl and an average gas price of $2.36 per Mcf, compared to
average prices of $17.80 per Bbl and $2.57 per Mcf, respectively, that otherwise
would have been received.
Revenues from IPF Activities increased from $0.3 million in the first
quarter of 1996 to $0.7 million in the first quarter of 1997, an increase of
$0.4 million, or 115.3%. This was the result of increased activities in the IPF
Program. See "Business and Properties -- Producer Investment Activities."
Lease operating expenses increased from $2.1 million in the first quarter
of 1996 to $3.4 million in the first quarter of 1997, an increase of $1.3
million or 61.7%. On an Mcfe basis, lease operating expenses increased from
$0.33 in the first quarter of 1996 to $0.75 in the first quarter of 1997, an
increase of $0.42, or 127.3%. Lease operating expenses were higher in the first
quarter of 1997 as compared to the first quarter of 1996 as a result of two
acquisitions completed by the Company after the first quarter of 1996. The
Company completed the acquisition of the Michigan Development Project in May
1996 and acquired the Wasson Field in June 1996. The Wasson Field, which is in
tertiary recovery, had a relatively low purchase price based on reserves, which
is offset by relatively high lease operating expenses. The Company sold its
interests in the Michigan Development Project in April 1997. See "Business and
Properties -- Certain Transactions -- The Michigan Disposition."
Depreciation, depletion and amortization ("DD&A") expense declined from
$6.9 million in the first quarter of 1996 to $2.9 million in the first quarter
of 1997, a decrease of $4.0 million, or 57.7%. This was the result of lower oil
and gas production volumes and a 44.4% decrease in the DD&A rate. The reduced
DD&A rate was the result of reduced cost basis attributable to the Company's oil
and gas properties purchased in the Acquisition. See "Business and
Properties -- The Company."
35
<PAGE>
General and administrative expense decreased from $1.1 million in the first
quarter of 1996 to $0.8 million in the first quarter of 1997, a decrease of $0.3
million, or 27.3%. This decrease was primarily due to a reduction in the number
of employees.
The corporate overhead allocation decreased from $0.9 million in the first
quarter of 1996 to zero in the first quarter of 1997 due to the Acquisition and
the elimination of Tenneco's allocated overhead.
Stock option compensation increased from zero in the first quarter of 1996
to $0.2 million in the first quarter of 1997 due to the implementation of the
Stock Purchase and Option Plan.
Income tax expense increased from $1.6 million in the first quarter of 1996
to $1.7 million in the first quarter of 1997, an increase of $0.1 million or
8.6%. The effective rate increased in the first quarter of 1997 to 38% from
33.5% in the first quarter of 1996.
Net income was $3.2 million in the first quarter of 1996 compared to $2.9
million in the first quarter of 1997 as a result of the factors described above.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
Oil and natural gas revenues increased from $34.9 million in 1995 to $52.9
million in 1996, an increase of $18.0 million, or 51.6%. Production volumes for
oil and condensate increased from 424 MBbls in 1995 to 574 MBbls in 1996, an
increase of 150 MBbls, or 35.4%. Production volumes for natural gas increased
from 18.1 Bcf in 1995 to 21.6 Bcf in 1996, an increase of 3.5 Bcf, or 19.4%. The
increase in oil and natural gas production was due to new wells being
successfully drilled and completed during 1996, as well as acquisitions of
producing properties. The increase in total net production increased revenues by
$7.9 million. In addition, the Company experienced a 11.0% increase in average
oil and condensate prices and a 27.3% increase in average natural gas prices.
Increases in average oil and natural gas prices were directly attributable to
general improved market conditions.
As a result of hedging activities, the Company realized an average oil
price of $18.60 per Bbl and an average gas price of $1.96 per Mcf for the year
ended December 31, 1996, compared to average prices of $20.81 per Bbl and $2.39
per Mcf, respectively, that otherwise would have been received. These hedging
activities decreased oil and natural gas revenues by approximately $10.7
million. This loss of revenue was the result of hedges made at the direction of
Tenneco in late 1995.
Revenues from IPF Activities increased from $2.4 million in 1995 to $4.4
million in 1996, an increase of $2.0 million, or 85.4%. This increase was the
result of a $1.0 million increase in IPF Program revenues and a $1.0 million
increase in GasFund revenues. See "Business and Properties -- Producer
Investment Activities." IPF Program revenues increased as the result of an
increase in IPF Program investments attributable to a 100% increase in IPF
Program customers at year-end 1996 compared to year-end 1995.
Lease operating expenses increased from $8.0 million in 1995 to $11.0
million in 1996, an increase of $3.0 million, or 37.4%. On an Mcfe basis, lease
operating expenses increased from $0.39 in 1995 to $0.44 in 1996, an increase of
$0.05, or 12.8%. The increase in lease operating expenses was primarily
attributable to increased production volumes. On a per unit basis, the increase
was primarily attributable to the acquisition in June 1996 of an interest in the
Wasson Field, which is undergoing tertiary enhanced recovery and the expenses
associated therewith.
Depreciation, depletion and amortization ("DD&A") expense remained flat
at $22.7 million from 1995 to 1996. This was the result of higher oil and gas
production volumes partially offset by an 15.7% decrease in the DD&A rate. The
reduced DD&A rate was attributable to the acquisition of low cost reserves in
the Wasson Field and the Company's investment in the Michigan Development
Project. See "Business and Properties -- Certain Transactions -- The Michigan
Disposition."
General and administrative expense increased from $2.8 million in 1995 to
$3.4 million in 1996, an increase of $0.6 million, or 21.4%. This increase
reflects a decrease in the reimbursement of overhead paid to the Company by the
investors in the Funds from $1.1 million in 1995 to zero in 1996 partially
offset by an increase in the capitalization of general and administrative
expense in 1996 by $0.5 million as compared to 1995.
36
<PAGE>
The corporate overhead allocation increased from $1.3 million in 1995 to
$4.8 million in 1996, an increase of $3.5 million, or 269%. The increase was due
to approximately $2.0 million in costs related to severance payments, retention
bonuses and other costs associated with the merger of Tenneco with an affiliate
of El Paso Natural Gas Company and a general increase of approximately $1.5
million in the overhead allocation to the Company compared to 1995 based on the
Company's increasing activities and personnel.
Income tax expense increased from $0.9 million in 1995 to $5.6 million in
1996, an increase of $4.7 million, or 545%. This was due to an increase in
income before taxes from $2.2 million in 1995 to $13.6 million in 1996 and an
increase in the effective tax rate from 38.9% in 1995 to 40.8% in 1996.
Net income was $8.2 million in 1996 compared to $1.4 million in 1995, as a
result of the factors described above.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
Oil and natural gas revenues increased from $5.3 million in 1994 to $34.9
million in 1995, an increase of $29.6 million, or 553%. Production volumes for
oil and condensate increased from 83 MBbls in 1994 to 424 MBbls in 1995, an
increase of 341 MBbls, or 411%. Production volumes for natural gas increased
from 2.3 Bcf in 1994 to 18.1 Bcf in 1995, an increase of 15.8 Bcf, or 674%. The
increase in oil and natural gas production was due to increased drilling
activities, as well as the Pennzoil Acquisition and other acquisitions of
producing properties. The increase in total net production increased revenues by
$32.9 million. In addition, the Company experienced a 12.3% increase in average
oil and condensate prices, and a 12.5% decrease in average natural gas prices.
As a result of hedging activities, the Company realized an average oil
price of $16.76 per Bbl for the year ended December 31, 1995, compared to an
average price of $16.31 per Bbl that otherwise would have been received. These
hedging activities increased oil revenues by approximately $0.2 million.
Revenues from IPF Activities increased from $1.4 million in 1994 to $2.4
million in 1995, an increase of $1.0 million, or 66.3%. This increase was
primarily attributable to GasFund loan activity. See "Business and
Properties -- Producer Investment Activities."
Lease operating expenses increased from $1.8 million in 1994 to $8.0
million in 1995, an increase of $6.2 million, or 346%. However, on an Mcfe
basis, lease operating expenses decreased from $0.63 in 1994 to $0.39 in 1995, a
decrease of $0.24, or 38%. The decrease in lease operating cost per Mcfe was
primarily attributable to significant increases in production volumes, following
several substantial asset acquisitions.
DD&A expense increased from $3.1 million in 1994 to $22.7 million in 1995,
an increase of $19.6 million, or 632%. This increase was due to the increase in
oil and gas production volumes and a 5% increase in the DD&A rate.
General and administrative expense increased from $0.1 million in 1994 (net
of $1.8 million of overhead reimbursement paid to the Company by the investors
in the Funds and $1.6 million of capitalized general and administrative expense)
to $2.8 million in 1995, an increase of $2.7 million. The increase was primarily
attributable to increased staffing requirements resulting from acquisitions.
The corporate overhead allocation increased from zero in 1994 to $1.3
million in 1995 as 1995 was the first year Tenneco allocated overhead costs to
the Company based on the Company's increased activities and personnel resulting
from acquisitions.
Income tax expense decreased from $1.1 million in 1994 to $0.9 million in
1995, a decrease of $0.2 million, or 22.1%. This was primarily due to a decrease
in the effective tax rate from 53.2% in 1994 to 38.9% in 1995.
Net income was $1.4 million in 1995 compared to $1.0 million in 1994, as a
result of the factors described above.
37
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Cash flows provided by operating activities from the Predecessor's
operations were $12.4 million, $21.3 million and $41.8 million for each of the
three years in the periods ended December 31, 1994, 1995 and 1996, respectively.
Significant increases in production resulting from oil and gas property
acquisitions over this three year period increased net income. Cash flows from
the Predecessor's operations for the three months ended March 31, 1996 were $5.7
million and for the Company's operations for the three months ended March 31,
1997 were $8.4 million. This increase was primarily attributable to changes in
operating assets and liabilities in 1997 partially offset by production declines
due to the sale of certain properties as well as natural declines in production
from certain fields.
Cash flows used in investing activities by the Predecessor were $86.7
million, $39.7 million and $66.7 million for each of the three years in the
periods ended December 31, 1994, 1995 and 1996, respectively. Property additions
through acquisition, exploration and development activities and increasing IPF
Program activity levels were the primary reasons for the use of funds in
investing activities. Partially offsetting these uses of funds were proceeds
from sales of non-core oil and gas properties of $8.3 million and $1.5 million
in 1995 and 1996, respectively. Cash flows used in investing activities by the
Predecessor for the three months ended March 31, 1996 were $10.6 million and by
the Company for the three months ended March 31, 1997 were $9.9 million. In both
first quarter periods, the uses resulted from expanding acquisition,
exploration, development and IPF Program activities partially offset by the sale
of non-core oil and gas properties.
Cash flows provided by the Predecessor's financing activities were $84.1
million, $7.0 million and $25.0 million for each of the three years in the
periods ended December 31, 1994, 1995 and 1996, respectively. In 1994 and 1995
the cash flows were provided by parent advances. In 1996, $18.5 million was
generated from the IPF Company Credit Facility and $6.5 million was provided by
parent advances. Cash flows provided by the Predecessor's financing activities
for the three months ended March 31, 1996 were $5.3 million, which were provided
by parent advances. Cash flows provided by financing activities for the
Company's operations for the three months ended March 31, 1997 were $7.7
million, consisting of additional net borrowings of $5.9 million and proceeds
from the sale of Common Stock to management of the Company of $1.1 million.
Funding for the Company's exploration and development activities,
acquisitions and IPF Program investments has historically been provided by
operating cash flows, revolving credit borrowings, asset sales and advances from
Tenneco. The Company's Board of Directors has authorized a capital budget of
$125.0 million for 1997 to be spent on exploratory and development drilling, IPF
Program investments and acquisitions of oil and gas properties. The Company
intends to finance these expenditures with a portion of the net proceeds from
this Offering, cash flow from operations and borrowings under its revolving
credit facilities.
As a result of borrowings under the Revolving Credit Facility and the IPF
Company Credit Facility in order to finance a portion of the costs of the
Acquisition, the Company has incurred substantial indebtedness and has minimal
borrowing availability under either of such facilities. As of March 31, 1997,
the Company had total consolidated indebtedness for money borrowed of
approximately $98.6 million. On a pro forma basis as of March 31, 1997, the
Company would have had total consolidated indebtedness for money borrowed of
approximately $21.0 million, resulting in availability for additional borrowings
of $54.6 million and $5.7 million under the Revolving Credit Facility and the
IPF Company Credit Facility, respectively (assuming a borrowing base of $63.3
million and $18.0 million, respectively.)
The borrowing base under the Revolving Credit Facility may be redetermined
by the Lenders at any time and is scheduled to be redetermined based on the
Company's January 1 and June 30 reserve reports. Depending on the price outlook
for oil and natural gas and the levels of the Company's cash flows and capital
expenditures, the borrowing base may be re-set below the amounts outstanding
under the Revolving Credit Facility, and in such case the Company may need to
refinance a portion of the principal amount of such indebtedness prior to its
maturity. The Company believes that cash flow from operations, proceeds
38
<PAGE>
from the Offering and revolving credit borrowings will be adequate to meet
future liquidity needs, including satisfying the Company's financial obligations
and funding its capital investment program.
At December 31, 1996, the Company had a working capital deficit of
approximately $17.9 million, primarily due to current maturities of long-term
debt. At March 31, 1997, on a pro forma basis after giving effect to the April
1997 disposition of the Michigan properties, the Company had a working capital
deficit of only approximately $0.2 million. If consummated after the other
contemplated transactions described in this Prospectus -- the Offering, the
concurrent sale of stock to Fund VII and the Funds Acquisition -- the Company
will have a significant amount of working capital.
REVOLVING CREDIT FACILITY. In connection with the Acquisition, the Company
entered into the $65.0 million Revolving Credit Facility maturing on December
31, 1999 with a group of banks led by The Chase Manhattan Bank (the
"Lenders"). As of March 31, 1997, borrowings outstanding under the Revolving
Credit Facility totalled $59.5 million. The Revolving Credit Facility is secured
by approximately 80% of the aggregate value of the Company's oil and gas
properties and substantially all of the Company's other property (other than IPF
Program properties), including the capital stock of Ventures Corporation and
Production Corporation. Although the remaining approximately 20% of the
aggregate value of the Company's oil and natural gas properties is not mortgaged
to the Lenders thereunder, such properties are nevertheless subject to the
restrictions set forth therein, including a prohibition on granting any security
interests therein. The borrowing base under the facility was $63.3 million as of
March 31, 1997, and is subject to a scheduled redetermination every six months
(and such other redeterminations as the Lenders may elect to perform each year)
by the Lenders at the Lenders' sole discretion and in accordance with their
customary practices and standards in effect from time to time for reserve-based
loans to borrowers similar to the Company. Determination of the borrowing base
may be affected by, among other things, estimates and projections of reserves
and production rates with respect to the Company's oil and natural gas
properties and changes in oil and natural gas prices. The Company's obligations
under the Revolving Credit Facility are guaranteed by its wholly-owned
subsidiaries, Ventures Corporation and Production Corporation.
If the Company's borrowing base is reduced, the amount available to the
Company under the Revolving Credit Facility will be reduced and, to the extent
that the borrowing base is less than the amount then outstanding thereunder, the
Company will be obligated to provide additional collateral or prepay such excess
amount within 30 days following the date on which the excess amount first
occurred. The borrowing base under the Revolving Credit Facility is scheduled to
be redetermined as of December 31, 1997 and may be reduced substantially from
its current level. All amounts outstanding in excess of such reduced borrowing
base must be paid in full at such date. In addition, if at the end of any fiscal
quarter of the Company during 1997 the amount then outstanding thereunder
exceeds $43.3 million (as such amount may be adjusted from time to time pursuant
to the Revolving Credit Facility), the Company will be obligated to prepay the
outstanding indebtedness thereunder in an amount equal to 100% of the Company's
"excess cash flow" (as defined therein) for such fiscal quarter. Excess cash
flow is defined to include a portion of the net proceeds to the Company of the
Offering.
Absent a default or an event of default (as defined therein), borrowings
under the Revolving Credit Facility accrue interest at LIBOR plus a margin of
1.50% to 2.50% per annum depending on the total amount outstanding or, at the
option of the Company, at the greater of (i) the prime rate and (ii) the federal
funds effective rate plus 0.50%, plus a margin of 0.50% to 1.50% depending on
the total amount outstanding. The Company incurs a quarterly commitment fee
ranging from 0.375% to 0.50% per annum on the average unused portion of the
Lenders' aggregate commitment, depending on the total amount outstanding.
The Revolving Credit Facility contains a number of covenants that, among
other things, restrict the ability of the Company to dispose of assets, incur
additional indebtedness or grant liens on its properties, repay other
indebtedness, pay dividends, enter into certain investments or acquisitions,
repurchase or redeem capital stock, engage in mergers or consolidations, or
engage in certain transactions with subsidiaries and affiliates and that will
otherwise restrict corporate activities. In addition, such facility requires
39
<PAGE>
the Company to maintain a specified minimum tangible net worth and to comply
with certain prescribed financial ratios. Further, under such facility, an event
of default is deemed to occur if any person, other than the Company's officers,
Fund VII or any other investment fund, the managing general partner of which is
First Reserve, becomes the beneficial owner, directly or indirectly, of more
than 40% of the outstanding shares of Common Stock.
IPF COMPANY CREDIT FACILITY. IPF Company, an indirect wholly-owned
subsidiary of the Company, has a $100.0 million revolving credit facility with
Compass Bank-Houston pursuant to which it finances a portion of the IPF Program.
The IPF Company Credit Facility matures June 1, 1999 at which time all amounts
owed thereunder are due and payable. The IPF Company Credit Facility is secured
by substantially all of IPF Company's oil and gas interests, including the notes
receivable generated therefrom. IPF Company's obligations under such facility
are nonrecourse to the Company. The borrowing base under the facility as of
March 31, 1997 was $18.0 million and is subject to a scheduled redetermination
by the lender every six months and such other redeterminations as the lender may
elect to perform each year. Effective as of May 7, 1997, the borrowing base
under the facility was increased to $23.0 million. As of March 31, 1997,
approximately $17.3 million was outstanding under the IPF Company Credit
Facility. So long as no default or event of default (as defined therein) is
outstanding, borrowings under the IPF Company Credit Facility accrue interest at
LIBOR plus a margin of 2.25% or, at the option of IPF Company, the prime rate
published in THE WALL STREET JOURNAL.
The IPF Company Credit Facility contains a number of covenants that, among
other things, restrict the ability of IPF Company to incur additional
indebtedness or grant liens on its properties, guarantee indebtedness of any
other person, dispose of assets, make loans in excess of $100,000 other than in
the ordinary course of its business, issue additional shares of capital stock,
engage in certain transactions with affiliates, enter into any new line of
business or amend certain of its material contracts. In addition, such facility
requires IPF Company to maintain a specified minimum tangible net worth.
The IPF Company Credit Facility restricts the ability of IPF Company to
dividend cash to its parent, Ventures Corporation, or otherwise advance cash to
the Company. As of March 31, 1997, IPF Company net assets of approximately $8.0
million were restricted.
CAPITAL EXPENDITURES AND FUTURE OUTLOOK
The following table sets forth the Company's capital expenditures and IPF
Program investments for each of the past three years.
YEAR ENDED DECEMBER 31,
-------------------------------
PREDECESSOR
-------------------------------
1994 1995 1996
--------- --------- ---------
(IN THOUSANDS)
Acquisition of oil and gas properties... $ 65,201 $ 18,393 $ 23,328
Development and exploitation............ 4,883 7,834 7,506
Exploration............................. 15,121 23,677 12,126
IPF Program investments................. 3,315 6,606 18,608
Other................................... -- -- 7,657
--------- --------- ---------
Total.............................. $ 88,520 $ 56,510 $ 69,225
========= ========= =========
The Company's Board of Directors has authorized a capital budget of $125.0
million for 1997. The Company expects that $29.0 million of such capital
expenditures will be spent on completion, development and exploitation
activities on 10 Gulf of Mexico lease-blocks and drilling in connection with six
exploratory programs. In addition, the Company expects to invest $36.0 million
in new IPF Program assets. The balance of projected capital expenditures is
attributable to $60.0 million in acquisitions in the Company's core operating
area, $30.0 million of which will be used to finance the Funds Acquisition. The
Company expects to finance these expenditures with proceeds from the Offering,
cash flow from operations and borrowings under the Company's revolving credit
facilities.
40
<PAGE>
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.
OTHER MATTERS
HEDGING ACTIVITIES. In an effort to achieve more predictable cash flows
and earnings and reduce the effects of the volatility of the price of oil and
natural gas on the Company's operations, the Company has in the past and may in
the future hedge oil and natural gas prices through the use of commodity
futures, options and swap agreements and other hedge devices. While the use of
these hedging arrangements limits the downside risk of adverse price movements,
it may also limit future gains from favorable movements. The Company accounts
for these transactions as hedging activities and, accordingly, gains and losses
are included in oil and natural gas revenues in the period in which the related
production occurs. The Company does not engage in speculative hedges. The
Revolving Credit Facility imposes certain limitations on the Company's ability
to enter into hedging transactions, but such limitations are not expected to
constrain the Company's hedging activities in any material respect.
The annual average oil and natural gas prices received by the Company have
fluctuated significantly over the past three years. The Company's weighted
average natural gas price received per Mcf (including the effects of hedging
transactions) was $1.76, $1.54 and $1.96 during the years ended December 31,
1994, 1995, and 1996, respectively. Hedging transactions resulted in a $0.43
reduction in the Company's weighted average natural gas price received per Mcf
in 1996. The Company's weighted average oil price received per Bbl during the
years ended December 31, 1994, 1995 and 1996 was $14.93, $16.76 and $18.60,
respectively. Hedging transactions resulted in a $2.21 reduction in the
Company's weighted average oil price received per Bbl in 1996.
The following table sets forth the Company's open hedging contracts for oil
and natural gas and the corresponding weighted average prices to be received
under various swap agreements as of March 31, 1997 and, assuming a market price
based on the NYMEX twelve-month strip as of March 31, 1997, the Company's
projected results from hedging activities from April 1997 to 2000.
<TABLE>
<CAPTION>
OIL NATURAL GAS
--------------------- ------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
BBLS PRICE MMBTU PRICE
--------- -------- ----- --------
<S> <C> <C> <C> <C>
April 1997 through December 1997........ 184,240 $17.43 7,030 $2.07
January 1998 through December 2000...... 442,550 $18.37 -- --
Projected Results: April 1997
through December 2000 (in
thousands)............................ $ (1,411) $ 698
</TABLE>
The following table sets forth the increase (decrease) in the Company's oil
and natural gas revenues as a result of hedging transactions and the effects of
hedging transactions on price per Mcf and price per Bbl during the periods
indicated. The Company's hedging transactions in 1995 and 1996 were made at the
direction of the management of Tenneco.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------- -----------------------
PREDECESSOR PREDECESSOR SUCCESSOR
------------------------------- ----------- ---------
1994 1995 1996 1996 1997
--------- --------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Increase (decrease) in natural gas sales
(in thousands)........................ $ -- $ -- $ (9,241) $(1,239) $ 71
Increase (decrease) in oil sales (in
thousands)............................ -- 189 (1,269) (149) (337)
Effect of hedging transactions on
average gas sales price (per Mcf)..... -- -- (0.43) (0.21) 0.02
Effect of hedging transactions on
average oil sales price (per Bbl)..... -- 0.45 (2.21) (1.28) (2.29)
</TABLE>
41
<PAGE>
NATURAL GAS BALANCING. The Company incurs certain gas production volume
imbalances in the ordinary course of business and utilizes the sales method to
account for such imbalances. Under this method, income is recorded based on the
Company's net revenue interest in production taken for delivery. Management does
not believe that the Company had any material gas imbalances as of December 31,
1995 or 1996.
ACCOUNTING PRONOUNCEMENTS. On October 23, 1995, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("SFAS 123"), which establishes a
fair value method for accounting for stock-based compensation plans either
through recognition or disclosure. SFAS 123 encourages, but does not require,
companies to adopt the fair value method of accounting in place of the existing
intrinsic value method of accounting for stock-based compensation. The Company
currently utilizes the intrinsic value method of accounting and will continue to
use this method. When applicable, the Company will disclose the pro forma
adjustments to net income and earnings per share as required by SFAS 123 in the
notes to the Combined and Consolidated Financial Statements of the Company
included elsewhere in this Prospectus.
BUSINESS AND PROPERTIES
THE COMPANY
Domain is an independent oil and gas company engaged in the exploration,
development, production and acquisition of domestic oil and natural gas
properties, principally in the Gulf Coast region. The Company complements these
activities with its Independent Producer Finance Program (the "IPF Program")
pursuant to which it invests in oil and natural gas reserves through the
acquisition of term overriding royalty interests. During 1996, approximately 92%
of the Company's revenue was generated by oil and natural gas sales and
approximately 8% of the Company's revenue was generated by the IPF Program. The
Company's future growth will be driven by development, exploitation and
exploration drilling on its existing properties, by the continuation of an
opportunistic acquisition strategy in the Gulf Coast region and by further
expansion of the IPF Program.
The Company was formed in December 1996 by the management of Tenneco
Ventures Corporation and an affiliate of First Reserve Corporation to acquire
(the "Acquisition") Tenneco Ventures Corporation and certain of its affiliates
(collectively, "Tenneco Ventures"). Senior management of the Company
established Tenneco Ventures in 1992 as a separate business unit of its former
parent, Tenneco Inc. ("Tenneco"), to engage in exploration and production, oil
and gas program management, producer financing and related activities. All of
the Company's executive officers are veterans of the Tenneco organization, and
11 of the Company's 19 technical personnel have Tenneco Oil Company backgrounds.
Approximately 85% of the Company's employees, including all of its management,
have purchased shares of Common Stock in the Company.
During the last four years, the Company has grown primarily through the
opportunistic acquisition of Gulf of Mexico properties and the subsequent
development, exploitation and exploration of these properties, resulting in
substantial increases in its reserves and production. The Company believes that
its acquisition costs, lease operating costs and net general and administrative
costs on a per Mcfe basis are low relative to other companies operating
principally in the Gulf Coast region. From 1994 through 1996, the Company
completed 11 acquisitions aggregating $106.9 million, with an average cost of
proved reserves estimated at the time of acquisition of $0.48 per Mcfe. Eight of
the 11 acquisitions were Gulf Coast region properties. In 1996 the Company
achieved a lease operating expense of $0.44 per Mcfe of production and a net
general and administrative expense (excluding Tenneco overhead allocations) of
$0.12 per Mcfe of production.
The Company's pro forma estimated net proved reserves as of December 31,
1996 were 153.8 Bcfe, and its pro forma average daily production during 1996 was
85.6 MMcfe, each of which represents a twelvefold increase from levels in 1993.
Approximately 60% of these reserves were natural gas, and approximately 67% of
proved reserves were classified as proved developed producing. On a pro forma
basis as of December 31, 1996, the Company had a PV-10 Reserve Value of $213.0
million, which does not include reserve value attributable to the IPF Program.
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<PAGE>
Through the IPF Program, the Company complements its exploration and
production activities by providing capital to independent producers in return
for term overriding royalty interests in oil and gas properties owned by such
producers. From inception through December 31, 1996, the IPF Program has
generated an average return on net assets in excess of 20%. In addition, the
Company believes that the IPF Program offers a lower level of reserve,
production and price risk than that associated with working interest ownership.
From inception through December 31, 1996, the Company completed 40 transactions
under its IPF Program. At December 31, 1996, based on Company estimates and
assuming prices of $2.10 per Mcf of natural gas and $21.00 per Bbl of oil, the
net present value attributable to IPF Program assets was $25.4 million.
The Company reported net income of $8.2 million, $1.4 million and $1.0
million in 1996, 1995 and 1994, respectively. Pro forma net income for the year
ended December 31, 1996 was $17.2 million. See "Prospectus Summary -- Summary
Historical and Pro Forma Combined and Consolidated Financial Data."
The Company generated earnings before interest, taxes and depreciation and
amortization ("EBITDA") plus IPF Program return of capital of $41.6 million in
1996, $27.5 million in 1995 and $8.7 million in 1994. IPF Program return of
capital was $4.6 million in 1996, $2.6 million in 1995 and $3.5 million in 1994.
The Company's 1996 pro forma EBITDA plus IPF Program return of capital was $59.2
million.
The Company's Board of Directors has authorized a capital budget of $125.0
million for 1997. These planned expenditures consist of $29.0 million for
development and exploration expenditures, $36.0 million for IPF Program
investments and $60.0 million for acquisitions in the Company's core operating
area, $30.0 million of which is pending. See " -- Certain Transactions -- The
Funds Acquisition."
The Company's principal executive offices are located at 1100 Louisiana,
Suite 1500, Houston, Texas 77002 and its telephone number is (713) 757-5662. The
mailing address of the Company's principal executive offices is P.O. Box 2229,
Houston, Texas 77252-2229.
BUSINESS STRATEGY
The Company's objective is to maximize shareholder value by growing
reserves, production, cash flow and earnings through the opportunistic
acquisition of Gulf Coast region properties with underexploited value. The
Company applies 3-D seismic and other advanced technologies to development,
exploitation and exploration. These activities are complemented by the continued
expansion of the IPF Program. Fundamental to the execution of the Company's
strategy is its foundation of experienced technical talent strengthened by a
high level of financial, transactional and risk-management expertise resulting,
in part, from the former association of the Company and its employees with
Tenneco. Following the Offering, the Company will be in a strong financial
position to pursue acquisitions and other growth opportunities.
GEOGRAPHIC FOCUS. The Company concentrates its primary oil and gas
activities in the Gulf Coast region, specifically in state and federal waters
off the coast of Texas and Louisiana. The Company believes this region remains
attractive for future development, exploration and acquisition activities. This
is due to the availability of seismic data, significant reserve potential and a
well developed infrastructure of gathering systems, pipelines and platforms with
ready access to drilling services and equipment in the region. In addition, the
Company's relationships with major oil companies and independent producers
operating in the region allow continued access to new opportunities. This
geographic focus has enabled the Company to build and utilize a base of
region-specific geological, geophysical, engineering and production expertise.
The Company's geographic focus allows it to manage a large asset base with
relatively few employees, thus permitting the Company to control expenses and
add Gulf of Mexico production at a relatively low incremental cost. The Company
engages in IPF Program activities throughout the onshore regions of the United
States, with a principal geographic focus in the Gulf Coast region.
ACQUISITION OF PROPERTIES WITH UNDEREXPLOITED VALUE. The Company employs
an acquisition strategy targeted primarily at purchases of Gulf Coast region
producing properties from major oil companies and large independents. These
properties provide opportunities to increase reserves, production and cash flow
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through development and exploitation drilling and lease operating expense
reduction. The Company manages its acquired properties by working proactively
with its joint interest partners to accelerate development, identify
exploitation opportunities and implement cost controls on these properties.
DEVELOPMENT, EXPLOITATION AND EXPLORATION. The Company integrates its
reservoir and production engineering expertise with its geologic and seismic
interpretation abilities to enhance the results of its exploration and
production business. The Company applies workovers, recompletions, secondary
recovery operations and other production enhancement techniques on its existing
properties to increase recoverable reserves, production and cash flow.
Additionally, the Company uses advanced technology in both its development and
exploration activities to reduce drilling risks and finding costs and to
prioritize its drilling prospects based on return potential. The Company
utilizes 3-D seismic data to develop the majority of its drilling opportunities.
Eighty-five percent of the wells in which the Company participated in 1996 were
developed using 3-D seismic data. The Company's ability to integrate geophysics
with detailed geology, reservoir engineering, and production engineering allows
it to identify multiple development and exploratory prospects in mature
producing fields that were not identified through earlier technologies. The
Company currently employs six geoscientists with an average experience level of
more than 16 years and operates two geophysical workstations interpreting 3-D
seismic data over twelve fields and six exploratory programs. The Company
intends to expand its geoscience team in 1997.
The Company has assembled a multiyear inventory of development,
exploitation and exploratory drilling opportunities in the Gulf Coast region and
has identified more than 70 drilling and recompletion opportunities for 1997.
Most of the properties comprising this inventory are located in fields that have
well-established production histories. The Company believes these properties may
yield significant additional recoverable reserves through the application of
advanced exploration and development technologies. The Company participated in
the drilling of nine development wells and 33 exploratory wells in 1996, of
which 78% and 61%, respectively, were successful.
CONTINUED EXPANSION OF THE IPF PROGRAM. The Company has leveraged its
expertise in oil and gas reserve appraisal and evaluation to develop and grow
the IPF Program. The Company believes this program offers an attractive
risk/reward balance and stable earnings. The oil and gas companies that
establish a relationship with the Company through the IPF Program often come to
view the Company as a prospective working interest partner for their drilling or
acquisition projects. Management believes that the investment opportunities,
market information and business relationships generated as a result of the IPF
Program provide the Company with a strategic advantage over other independent
oil and gas companies that are not engaged in this business. As a result of the
Company's efficiency in originating and closing IPF Program transactions in the
$0.5 to $5.0 million range, the Company currently encounters only limited
competition from alternate sources of capital for investment in quality
properties and projects of independent oil and gas companies.
The Company has budgeted $36.0 million for investment in IPF Program
transactions in 1997. The Company closed six IPF Program transactions in the
first quarter of 1997 for an aggregate of $9.2 million. In addition, the Company
is currently evaluating over 30 transactions, all of which satisfy the Company's
initial screening criteria.
CERTAIN TRANSACTIONS
ACQUISITION OF COMMON STOCK BY FUND VII.__Concurrently with consummation of
the Offering, Fund VII, the Company's principal stockholder, has agreed to
purchase, at a price per share equal to the Price to Public set forth on the
cover page of this Prospectus, a number of shares of Common Stock such that the
aggregate purchase price paid by Fund VII for such shares equals $8,681,000 (the
"Concurrent Sale"). See "Transactions with Management and First
Reserve_--Acquisition of Common Stock by Fund VII."
THE FUNDS ACQUISITION. The Company previously sponsored and managed two
oil and gas investment programs (collectively, the "Funds") for institutional
investors. The Company has entered into a definitive agreement with the
investors in the Funds to acquire certain property interests from such investors
upon consummation of the Offering (the "Funds Acquisition"). These property
interests are primarily
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located in the Gulf Coast region and have combined proved reserves of 33.0 Bcfe.
Furthermore, these interests include 18,209 net undeveloped leasehold acres with
3-D seismic based exploration potential. The Company will acquire these reserves
at an aggregate cost of $30.0 million, effective January 1, 1997, for a unit
cost of $0.65 per Mcfe of net proved reserves. The Funds Acquisition will
provide the Company with a larger interest in certain of its existing
properties, including the West Delta 30 Field in the Gulf of Mexico.
THE MICHIGAN DISPOSITION. The Company recently sold its interests in a
natural gas development project located in northwestern Michigan (the "Michigan
Development Project"). The Company views this transaction (the "Michigan
Disposition") as a disposition of non-core assets and a further enhancement of
its focus on the Gulf Coast region. As a result of the Michigan Disposition, the
Company sold 28.8 Bcfe of proved reserves as of December 31, 1996 (of which 3.3
Bcfe were proved developed producing as of December 31, 1996) and interests in a
pipeline company and a processing company. See "Unaudited Condensed Pro Forma
Financial Statements" and the related notes thereto.
The Company retained its interests in Oceana Exploration Company, L.C., a
Michigan exploration company. See "Business and Properties -- Exploration
Programs -- Michigan."
DEVELOPMENT, EXPLOITATION AND EXPLORATION PROJECTS
Set forth below is a description of the development and exploitation
projects that the Company's management expects to pursue during calendar year
1997. While the Company presently intends to complete these projects, the
number, type and timing thereof are subject to change as a result of many
factors, including the availability of capital to fund such projects, initial
test results, results of drilling by third parties on adjacent blocks, weather,
oil and gas prices and other general economic conditions that are beyond the
control of the Company. In addition, because the Company does not operate most
of its properties, it can influence but does not have the ability to control the
initiation and timing of many capital projects. The Company currently
anticipates spending approximately $29.0 million during calendar year 1997 on
development and exploration projects, including those described below. There can
be no assurance that any of these projects can be successfully developed within
budget, or that, once developed, such projects will be commercially productive.
See "Risk Factors -- Volatility of Oil and Natural Gas Prices; Marketability of
Production," "-- Reserve Replacement Risks," "-- Reliance on Estimates of
Oil and Natural Gas Reserves" and "-- Substantial Capital Requirements."
RABBIT ISLAND FIELD. In 1993 the Company purchased a 25% interest in the
Rabbit Island Field located in Louisiana state waters. The field has produced in
excess of 1.2 Tcf of gas and 46 MMBbls of oil. A 105 square-mile 3-D survey was
interpreted in 1993, and six of seven wells drilled since that time have been
successful, discovering 34.3 Bcfe of gross proved reserves (7.2 Bcfe net to the
Company's interest). The Company, Texaco Exploration and Production Inc.
("Texaco") and Shell Offshore Inc. ("Shell") are conducting a joint field
study to delineate additional exploitation opportunities in this field. This
study is expected to be completed in the third quarter of 1997. The preliminary
results of the study indicate at least 25 potential exploitation opportunities.
WEST DELTA 30. In 1995 the Company purchased a 70% working interest in the
West Delta 30 Field in the Gulf of Mexico from Shell and initiated an integrated
geological, geophysical and 3-D seismic study in the first half of 1996. As a
result of this study, the Company identified eight additional development
drilling locations and three deeper pool prospects that the Company believes
have significant exploratory potential. Based on the Company's proposal, Exxon
Company, U.S.A. ("Exxon"), the operator, is drilling a well to test this
field's deeper exploratory potential and is scheduled to drill a development
well by year-end 1997.
MATAGORDA ISLAND 519. In late 1994 the Company purchased 13 producing
fields in the Gulf of Mexico from Pennzoil Company ("Pennzoil") for $51.3
million (the "Pennzoil Acquisition"), including the Matagorda Island 519
Field. The Company owns working interests of 15.8% and 25% in this field, which
is operated by Amoco Production Company ("Amoco"). Workover operations on two
wells in this field were completed in the first quarter of 1997, increasing
gross production by 10 MMcf per day. Workover operations to recomplete a third
well are in progress. The Company believes that significant
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<PAGE>
development and exploratory potential remains in the field. Amoco has purchased
a 3-D seismic survey to delineate these opportunities, in which the Company owns
a 25% working interest.
HIGH ISLAND 110/111. The Company purchased its initial interest in this
Texaco-operated field as part of the Pennzoil Acquisition and currently holds a
17% working interest. The Company has identified several recompletion zones and
two proved undeveloped drilling locations in the field using 3-D seismic data to
reinterpret an internal field study. These wells are scheduled to be drilled in
1997.
WASSON FIELD. In June 1996 the Company acquired a 34.7% working interest
in the Cornell Unit in the Wasson Field in West Texas. Approximately 1.5 billion
Bbls of oil have been produced from the San Andres reservoir from which the
Cornell Unit produces. The field was initially waterflooded in 1965, and a CO2
flood was initiated in 1985 utilizing the water alternating-gas injection method
of enhanced oil recovery. Because the field has been restored to its original
pressure as the result of tertiary recovery activities, at year-end 1996 the
Company recommended the cessation of CO2 purchases for the next four to five
years. This recommendation was adopted by the unit working interest owners. As a
result, the Company expects to increase its annual cash flow from the field by
$1.9 million. The Company, working with unit operator Exxon, has identified up
to 30 infill drilling locations. Furthermore, pressure tests performed recently
in an adjoining unit indicate that the upper gas-bearing sands may be produced
separately from the oil reservoir. Exxon and the Company plan to test the
feasibility of producing these gas-bearing sands in 1997.
PRODUCER INVESTMENT ACTIVITIES
IPF PROGRAM. The Company complements its exploration and production
activities with its IPF Program pursuant to which it invests in oil and natural
gas reserves through the acquisition of term overriding royalty interests. From
inception through December 31, 1996, the IPF Program has generated an average
return on assets employed in excess of 20%. The IPF Program was established in
1993 and is funded by a combination of equity provided by the Company and
third-party debt. The IPF Program enables independent producers to obtain
nonrecourse financing, while maintaining ownership of their properties, through
the sale to the Company of term overriding royalty interests. Transaction sizes
for the program generally have ranged from $0.5 million to $5.0 million. A
strong customer focus has resulted in a large majority of IPF Program customers
having returned for additional funding requests and approximately a 100% average
annual growth in year-end customers over the last two years. From inception
through December 31, 1996, the Company completed 40 transactions under the IPF
Program. At December 31, 1996, based on Company estimates and assuming prices of
$2.10 per Mcf of natural gas and $21.00 per Bbl of oil, the net present value
attributable to IPF Program assets was $25.4 million.
The Company believes that the IPF Program offers a lower level of reserve,
production and price risk than that associated with working interest ownership.
Such risks are mitigated through strict adherence to the Company's IPF Program
underwriting guidelines and the Company structuring its investment to receive an
agreed upon share of revenues from identified properties until a contractual
return is attained. The Company's underwriting guidelines include the
requirement of sufficient reserve value, or collateral coverage, in excess of
the IPF Program investment and the requirement that the IPF Program investments
be structured so as not to bear production expenses. Additionally, because the
Company originates dollar-denominated IPF Program assets, the effect of
commodity price declines on the expected return on these assets is reduced as
compared to working interest ownership. This reduction in price risk occurs
because the Company structures its IPF Program term overriding royalty interests
to result in a contractual return before the overriding royalty interest is
discharged. As a result, IPF Program customers must deliver proceeds from the
sale of oil and gas production until such return is achieved by the Company on
its investment, regardless of the commodity price realized by the customer over
the term of the transaction.
On June 7, 1996, the Company's indirect wholly-owned subsidiary, IPF
Company, entered into the IPF Company Credit Facility pursuant to which it
finances the purchase of term overriding royalty interests under the IPF
Program. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources -- IPF Company Credit
Facility."
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<PAGE>
THE GASFUND. In May 1993, Ventures Corporation and EnCap Ventures 1993
Limited Partnership ("EnCap") finalized a partnership arrangement named the
GasFund ("GasFund"). The GasFund was a financing vehicle that utilized bank
debt supported by limited Company and EnCap credit enhancements, which provided
production-based financing to independent producers for oil and gas projects
generally exceeding $10.0 million.
Currently, there are no existing obligations and no outstanding
transactions associated with the GasFund. As a result of the Company's
assessment that the market to provide financing in amounts greater than $10.0
million is competitive to the point of unattractive returns, and the reduced
credit enhancement capabilities of the Company as a result of the Acquisition,
the Company does not anticipate participating in any future GasFund
transactions.
EXPLORATION PROGRAMS
During 1996 the Company participated in 33 exploration wells with 20
completions, for a 60.6% success rate. In addition to the exploration that the
Company may conduct on its existing properties, the Company intends to continue
participation in exploration activities through various joint venture programs,
including those summarized below.
SOUTH TEXAS -- COX & PERKINS DRILLING PROGRAM. The Cox & Perkins drilling
program is an exploration effort in the expanded Yegua gas trend within Jackson
and Wharton Counties, Texas. The Company holds a 10% working interest in this
program, which utilizes 3-D seismic data to delineate potential structural and
stratigraphic traps within the trend. The program sponsor and operator is Cox &
Perkins Exploration, Inc., a privately-held, independent exploration and
production company. Thirty-one wells have been drilled to date, of which 21 are
productive. Current gross daily production from the wells is approximately 41
MMcf of natural gas and 1,181 Bbls of condensate. One additional development
well is scheduled to be drilled in 1997.
SOUTH TEXAS -- KENEDY RANCH. The Kenedy Ranch program is an exploration
effort to delineate expanded Frio reservoir traps on this large ranch in Kenedy
County along the southern Texas Gulf Coast. Output Exploration Company, Inc.,
Hunt Petroleum Company and the Company have shot a 180 square mile 3-D seismic
survey and acquired 49,000 acres in defining potential drill sites. The program
operator is Hunt Petroleum Company. Interpretation of the seismic data has
identified five primary prospect areas. The first well drilled was a dry hole
and a second well is currently being drilled. The Company holds a 12.5% working
interest in this project.
SOUTH LOUISIANA SALT DOMES. The Company and an affiliate of Shell,
together with the operator, Texaco, are engaged in an effort to delineate the
exploitation and exploration potential of three salt domes in southern
Louisiana, including the Rabbit Island Field. The group is utilizing 3-D seismic
to identify remaining potential. Ten out of 12 wells drilled to date have been
successful, discovering approximately 63.2 Bcfe of gross proved reserves (12.0
Bcfe net to the Company's interest). The Company's net working interest in these
program wells ranges from 7.6% to 25%.
ANADARKO BASIN. The Anadarko Basin seismic program is an exploration
effort within the Morrow Sand trend. The Company and the operator, Brigham
Exploration Company, are utilizing 3-D seismic technology to delineate potential
gas reservoirs in the channel-controlled Upper Morrow Sand. Additional
objectives are present both above and below the main objective. The program
participants hold 35,750 gross acres under lease. Six 3-D seismic surveys have
been shot and the evaluation thereof is in progress. Eight wells have been
drilled to date, of which two are producing and two are nearing completion. The
Company holds a 70% working interest in two of the 3-D areas, a 37.5% working
interest in three of the 3-D areas and a 35% working interest in the remainder.
Three additional wells are currently being drilled or are scheduled to be
drilled in the first half of 1997.
PERMIAN BASIN. The Permian Basin drilling program is an exploration effort
targeting the Wolfcamp and Strawn Formations. The Company and the operator, Rand
Paulson Oil Company, Inc., a privately-held, independent exploration and
production company, combine 3-D seismic technology with detailed, bio-
stratigraphic zonation work to delineate potential traps. Numerous secondary
objectives exist above the
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primary targets. The program participants hold 32,400 gross acres under lease.
To date, the Company has participated in 15 wells, of which five were productive
and three are currently being drilled. Eleven additional leads and prospects are
being evaluated for future drilling opportunities. The Company holds a 50%
working interest in the program.
MICHIGAN. Oceana Exploration Company, L.C., a Texas limited liability
company and 80% owned subsidiary of Ventures Corporation, is obligated to drill,
or cause to be drilled, four exploratory wells in Oceana County, Michigan by the
end of 1997. One such well has been drilled and is awaiting completion and a
second well has been spud. Through this program, the Company is targeting the
Niagaran reef trend, which the Company believes has significant exploratory
potential.
SIGNIFICANT PROPERTIES
The following table sets forth the net proved reserves and the PV-10
Reserve Value attributable to the Company's significant properties as of
December 31, 1996 and on a pro forma basis as of December 31, 1996 after giving
effect to the Funds Acquisition and the Michigan Disposition. The reserve data
set forth below does not include reserves or reserve value attributable to the
IPF Program. At December 31, 1996, the Company estimates that the net present
value attributable to IPF Program assets was $25.4 million.
<TABLE>
<CAPTION>
PRO FORMA
AS OF DECEMBER 31, 1996 AS OF DECEMBER 31, 1996
------------------------------------- -------------------------------------
NET % OF TOTAL PV-10 NET % OF TOTAL PV-10
PROVED NET RESERVE PROVED NET RESERVE
RESERVES PROVED VALUE RESERVES PROVED VALUE
(BCFE) RESERVES (IN MILLIONS) (BCFE) RESERVES (IN MILLIONS)
-------- ---------- ------------- -------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
GULF COAST FIELDS
Matagorda Island 519............... 14.2 9.5% $ 33.6 14.2 9.2% $ 33.6
West Delta 30...................... 11.5 7.7% 18.4 28.8 18.7% 46.1
High Island 110/111................ 5.6 3.7% 8.4 5.6 3.6% 8.4
Eugene Island 372.................. 3.0 2.0% 4.7 3.0 2.0% 4.7
Rabbit Island...................... 3.0 2.0% 10.3 3.0 2.0% 10.3
Main Pass 74....................... 2.5 1.7% 4.7 2.5 1.6% 4.7
Other Gulf Coast................... 30.7 20.6% 61.8 46.4 30.2% 99.8
-------- ---------- ------------- -------- ---------- -------------
70.5 47.2% $ 141.9 103.5 67.3% $ 207.6
OTHER FIELDS
Wasson Field....................... 50.3 33.6% $ 12.6 50.3 32.7% $ 12.6
Michigan Development Project....... 28.8 19.2% $ 36.9 -- -- --
-------- ---------- ------------- -------- ---------- -------------
Total......................... 149.6 100% $ 191.4(1) 153.8 100% $ 220.2(1)
======== ========== ============= ======== ========== =============
</TABLE>
- ------------
(1) Does not reflect losses calculated to be incurred from future hedging
activities. As a result of such losses, PV-10 Reserve Value and pro forma
PV-10 Reserve Value as of December 31, 1996 were $184.8 million and $213.0
million, respectively. In addition, excludes minority interest attributable
to the Michigan Development Project.
MATAGORDA ISLAND 519 FIELD. The Matagorda Island Block 519 Field is
located offshore Texas, approximately 12 miles southeast of Matagorda County, in
approximately 69 feet of water. Amoco discovered the field in 1983 and is the
current operator. Four wells produce gas from lower Miocene Sands at a depth of
approximately 14,800 feet to 17,000 feet. This field is currently producing 59.1
MMcf of gas per day and 157 Bbls of oil per day (7.7 MMcf and 7.4 Bbls net to
the Company's interest). The Company acquired an average 20% working interest in
the field effective October 1, 1994 pursuant to the Pennzoil Acquisition.
WEST DELTA 30 FIELD. The West Delta 30 Field is located offshore
Louisiana, approximately 65 miles south-southeast of New Orleans, in
approximately 50 feet of water. The field was discovered in 1954 and has had
over 200 wells drilled, the last of which was drilled in the early 1990s.
Effective January 1, 1995, the Company acquired 70% of Shell's working interests
in this field, which ranged from 50% to 100%.
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Cumulative production to date is approximately 300 Bcf of gas and 200 MMBbls of
oil and the field currently produces 5.9 MMcf of gas per day and 1,551 Bbls of
oil per day (1.65 MMcf and 434 Bbls net to the Company's interest). Seneca
Resources Corporation and Exxon are the operators of the field. The West Delta
30 Field produces from Pliocene and Miocene Sands at a depth of approximately
6,500 feet to 11,000 feet that are trapped against a salt dome feature.
HIGH ISLAND 110/111 FIELD. High Island Blocks 110 and 111 are located
offshore Texas, approximately 20 miles offshore of Jefferson County, in
approximately 30 feet of water. The field was discovered in 1973 and is
currently operated by Texaco. The 17.7% average working interest owned by the
Company was acquired from Pennzoil in 1994 and Sonat Exploration Company in
1996. Cumulative production to date from this field has been approximately 309
Bcf of gas and 2.6 MMBbls of oil and the field currently produces 9.5 MMcf of
gas per day and 173 Bbls of oil per day (1.4 MMcf and 24.6 Bbls net to the
Company's interest). The High Island 110/111 Field produces from Miocene Sands
at a depth of approximately 7,500 feet to 12,500 feet that are trapped in a
faulted anticline, downthrown to a major listric fault.
EUGENE ISLAND 372 FIELD. Eugene Island Block 372 is located offshore
Louisiana, approximately 168 miles southwest of New Orleans, in approximately
400 feet of water. This field was discovered in 1978 and has produced
approximately 44 Bcf of gas and 1.5 MMBbls of oil from nine wells. Currently,
there are five active wells in this field. The Company acquired its 37.5%
working interest in this field as a result of the Pennzoil Acquisition. The
Eugene Island 372 Field produces from Pleistocene Sands at a depth of
approximately 5,100 feet to 9,900 feet. The reservoir trap is characterized by
complex faulting and highly stratigraphic sands. Unocal Corporation
("Unocal"), the current operator, is in the process of interpreting a new 3-D
seismic survey covering the block and has identified several untested seismic
amplitudes. Work is in progress to evaluate the size and economic viability of
these leads.
RABBIT ISLAND. The Rabbit Island Field is located in Louisiana state
waters, approximately 95 miles southwest of New Orleans in approximately ten
feet of water. This field was discovered in 1939 and has produced in excess of
1.2 Tcf of gas and 46 MMBbls of oil. The field is currently producing 27.4 MMcf
of gas per day and 48 Bbls of oil per day (5.4 MMcf and 9.0 Bbls net to the
Company's interest). Benton Oil & Gas Company of Louisiana ("Benton") earned a
50% working interest in this field from Texaco by acquiring and interpreting a
105 square mile 3-D seismic survey across the field. In 1993, the Company bought
a 25% working interest from Benton. In early 1996, Shell acquired Benton,
leaving Texaco, Shell, and the Company as working interest owners. The
productive interval is Miocene Sands at a depth of approximately 1,600 feet to
12,000 feet. The field is a piercement salt dome with associated radial
faulting.
MAIN PASS 74. Main Pass Block 74 is located in Louisiana state waters,
approximately 85 miles southeast of New Orleans in approximately 75 feet of
water. This field was discovered in 1981 and is currently operated by Exxon.
Cumulative production from this field has been approximately 20 MMBbls of oil
and 41 Bcf of gas. The Company acquired an average working interest of 14.4% in
this field as a result of the Pennzoil Acquisition. All production from the Main
Pass 74 Field has come from Miocene Puma Sand at a depth of approximately 10,000
feet to 10,500 feet. The reservoir trap is a westerly-dipping, stratigraphic
trap. The Company has identified one additional drilling location within the
field, and Exxon has expressed an interest in drilling a horizontal well into
the reservoir.
WASSON FIELD. The Wasson Field is located in Gaines and Yoakum Counties,
Texas, approximately 80 miles northwest of Midland, Texas. In June 1996 the
Company acquired from Kerr-McGee Corporation 34.7% and .17% working interests in
the Cornell and Denver Units at this field, respectively. These two units are
currently producing 41,469 Bbls of oil per day (539 Bbls net to the Company's
interest). The Wasson Field was discovered in 1937. The Cornell and Denver Units
are currently operated by Exxon and Altura Energy, Inc. (a joint venture between
Shell and Amoco), respectively. Approximately 1.5 billion barrels of oil have
been produced from the San Andres reservoir. The San Andres produces in both the
Cornell and Denver Units at depths of approximately 5,500 feet to 6,000 feet.
This field was initially waterflooded in 1965, and a CO2 flood was initiated in
1985 utilizing the water-alternating-gas injection method of enhanced oil
recovery.
49
<PAGE>
OIL AND NATURAL GAS RESERVES
The following table summarizes the estimates of the Company's historical
net proved reserves as of December 31, 1994, 1995 and 1996 and pro forma net
proved reserves as of December 31, 1996, and the present values attributable to
these reserves at such dates. The reserve data and present values as of December
31, 1994 have been estimated by DeGolyer and other third-party petroleum
engineers. The reserve data and present values as of December 31, 1995 have been
estimated by DeGolyer and Netherland, Sewell. The reserve data and present
values as of December 31, 1996 have been estimated by (i) Netherland, Sewell,
with respect to the West Delta 30 Field, (ii) by other third-party petroleum
engineers with respect to the Michigan Development Project and (iii) by DeGolyer
with respect to all of the Company's other oil and natural gas properties. See
"Significant Properties." The pro forma December 31, 1996 reserve data and
present values give effect to the Funds Acquisition and the Michigan
Disposition. Summaries of the December 31, 1996 reserve reports and the letters
of DeGolyer and Netherland, Sewell with respect thereto are included as Appendix
A to this Prospectus. The reserve data set forth below does not include reserves
or reserve value attributable to the IPF Program. At December 31, 1996, the
Company estimates that the net present value attributable to IPF Program assets
was $25.4 million.
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
---------------------------------------------
PRO FORMA
1994 1995 1996(1)(2) 1996(1)
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
PROVED RESERVES:
Natural Gas (MMcf)................. 73,399 82,682 81,337 83,418
Oil and condensate (MBbls)......... 4,109 2,197 11,379 11,736
Total (MMcfe)...................... 98,056 95,865 149,617 153,834
PROVED DEVELOPED PRODUCING RESERVES:
Natural Gas (MMcf)................. 46,544 45,386 39,266 44,292
Oil and condensate (MBbls)......... 967 1,219 9,304 9,673
Total (MMcfe)...................... 52,346 52,700 95,089 102,332
PV-10 Reserve Value (in thousands)...... $ 61,812 $ 103,931 $ 184,816 $ 213,030
Standardized measure of discounted
future net cash flows (in
thousands)............................ $ 68,492 $ 98,999 $ 157,177 --
</TABLE>
- ------------
(1) The present values as of December 31, 1996 were prepared using a weighted
average sales price of $22.50 per Bbl of oil and $3.38 per Mcf of natural
gas. The pro forma present values as of December 31, 1996 were prepared
using a weighted average sales price of $23.63 per Bbl of oil and $3.59 per
Mcf of natural gas. By comparison, the present values as of December 31,
1995 were prepared using a weighted average sales price of $18.76 per Bbl of
oil and $3.30 per Mcf of natural gas.
(2) Except for the standardized measure calculation, excludes minority interest
attributable to the Michigan Development Project.
The estimation of reserve data is a subjective process of estimating the
recovery of underground accumulations of oil and natural gas that cannot be
measured in an exact manner, and the accuracy of any reserve estimate is a
function of the quality of the available data, the assumptions made, and
engineering and geological interpretation and judgment. Estimates of
economically recoverable oil and natural gas reserves and future net cash flows
therefrom necessarily depend upon a number of variable factors and assumptions,
including historical production from the area compared with production from
other producing areas, the assumed effects of regulation by governmental
agencies and assumptions concerning future oil and natural 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.
Any such estimates are therefore inherently imprecise, and estimates by other
engineers, or by the same engineers at a different time, might differ materially
from those included herein. Actual prices, production, development expenditures,
operating expenses and quantities of recoverable oil and natural gas reserves
will vary from those assumed in the estimates and it is likely that such
variances will be significant. Any significant variance
50
<PAGE>
from the assumptions could result in the actual quantity of the Company's
reserves and future net cash flow therefrom being materially different from the
estimates set forth in this Prospectus. In addition, the Company's estimated
reserves may be subject to downward or upward revision, based upon production
history, results of future exploration and development, prevailing oil and
natural gas prices, operating and development costs and other factors.
Estimates with respect to proved undeveloped 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.
The present value of future net cash flows shown above should not be
construed as the current market value, or the market value as of December 31,
1996, or any prior date, of the estimated oil and natural gas reserves
attributable to the Company's properties. In accordance with applicable
requirements of the Commission, the estimated discounted future net cash flows
from estimated proved reserves are based on prices and costs as of the date of
the estimate unless such prices or costs are contractually determined at such
date. Actual future prices and costs may be materially higher or lower. Actual
future net cash flows also will be affected by factors such as actual
production, supply and demand for oil and natural gas, curtailments or increases
in consumption by natural gas purchasers, changes in governmental regulations or
taxation and the impact of inflation on costs.
The Company's PV-10 Reserve Value as of December 31, 1996 was prepared
using a weighted average sales price of $22.50 per Bbl of oil and $3.38 per Mcf
of natural gas. These prices were substantially higher than prices used by the
Company to calculate PV-10 Reserve Value in recent years. The Company estimates
that a substantial decline in prices relative to year-end 1996 would cause a
substantial decline in the Company's PV-10 Reserve Value. For example, compared
to the pro forma data set forth in the above table as of December 31, 1996, a
$0.10 per Mcf decline in natural gas prices, holding all other variables
constant, would decrease the Company's pro forma December 31, 1996 PV-10 Reserve
Value by approximately $6.4 million, or 2.8%, and a $1.00 per Bbl decline in oil
and condensate prices would decrease the Company's PV-10 Reserve Value by
approximately $4.0 million, or 1.8%. While the foregoing calculations should
assist the reader in understanding the effect of a decline in oil or natural gas
prices on the Company's PV-10 Reserve Value, such calculations assume that
quantities of recoverable reserves are constant and therefore would not be
accurate if prices decreased to a level at which reserves would no longer be
economically recoverable.
In accordance with methodology approved by the Commission, specific
assumptions were applied in the estimates of future net cash flows. Under this
methodology, estimated future net cash flows are determined by reducing
estimated future gross cash flows to the Company for oil and natural gas sales
by the estimated costs to develop and produce the underlying reserves, including
future capital expenditures, operating costs, transportation costs, royalty and
overriding royalty burdens. Estimated future production costs were based on
actual annual production costs incurred during the reported period. A portion of
the Company's proved reserves are undeveloped, and future development costs
thereon were calculated based on a continuation of present economic conditions.
Future net cash flows were discounted at 10% per annum to arrive at
discounted future net cash flows. The 10% discount factor used to calculate
present value is required by the Commission, but such rate is not necessarily
the most appropriate discount rate. Present value of future net cash flows,
irrespective of the discount rate used, is materially affected by assumptions as
to timing of future natural gas and oil prices and production, which may prove
to be inaccurate. In addition, the calculations of estimated net revenues do not
take into account the effect of certain cash outlays, including among other
things, general and administrative costs, interest expense and dividends.
The Company's estimated proved reserves have not been filed with or
included in reports to any federal authority or agency.
51
<PAGE>
PRODUCTION, PRICES AND OPERATING EXPENSES
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------- ------------------------
PREDECESSOR PREDECESSOR SUCCESSOR
------------------------------- ----------- ---------
1994 1995 1996 1996 1997
--------- --------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
PRODUCTION VOLUMES:
Natural gas (MMcf)................. 2,334 18,065 21,578 5,828 3,708
Oil and liquids (MBbls)............ 83 424 574 116 147
Total (MMcfe)...................... 2,832 20,609 25,023 6,524 4,590
AVERAGE REALIZED PRICES:(1)
Natural gas (per Mcf).............. $ 1.76 $ 1.54 $ 1.96 $ 2.36 $ 2.74
Oil and liquids (per Bbl).......... 14.93 16.76 18.60 16.52 19.02
EXPENSES (PER MCFE):
Lease operating expense............ $ 0.63 $ 0.39 $ 0.44 $ 0.33 $ 0.75
Production taxes................... 0.01 0.03 0.05 0.04 0.09
Depreciation, depletion and
amortization..................... 1.03 1.08 0.91 1.09 0.60
General and administrative,
net(2)........................... 0.23 0.16 0.12 0.14 0.15
</TABLE>
- ------------
(1) Reflects the actual realized prices received by the Company, including the
results of the Company's hedging activities. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Other
Matters -- Hedging Activities."
(2) Includes production attributable to properties managed for the Funds for the
periods indicated and excludes fees received from investors and overhead
allocations from Tenneco. Including Tenneco allocations, average net general
and administrative expenses per Mcfe for the years ended December 31, 1994,
1995, and 1996 would be $0.23, $0.20 and $0.28, respectively.
PRODUCTIVE WELLS
The following table sets forth the number of productive oil and natural gas
wells in which the Company owned an interest as of March 31, 1997.
TOTAL PRODUCTIVE
WELLS
--------------------
GROSS NET
--------- ---------
OFFSHORE
Natural gas............................. 67.0 18.9
Oil..................................... 35.0 7.4
--------- ---------
Total.............................. 102.0 26.3
ONSHORE
Natural gas............................. 43.0 10.0
Oil..................................... 838.0(1) 25.6(1)
--------- ---------
Total.............................. 881.0 35.6
TOTAL OFFSHORE AND ONSHORE
Natural gas............................. 110.0 28.9
Oil..................................... 873.0(1) 33.0(1)
--------- ---------
Total.............................. 983.0 61.9
========= =========
- ------------
(1) Includes 756 gross wells in the Wasson Field (Denver Unit) in which the
Company holds a 0.17% working interest.
52
<PAGE>
Productive wells consist of producing wells and wells capable of
production, including natural gas wells awaiting pipeline connections to
commence deliveries and oil wells awaiting connection to production facilities.
In wells with multiple completions mechanically isolated zones are counted as
individual wells.
ACREAGE DATA
The following table sets forth the approximate developed and undeveloped
acreage in which the Company held a leasehold mineral or other interest as of
March 31, 1997. 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 natural gas, regardless of whether or not such
acreage contains proved reserves.
TOTAL ACREAGE DEVELOPED UNDEVELOPED
-------------------- ACREAGE ACREAGE
AREA (GROSS) (NET) (NET) (NET)
- ------------------------------ --------- --------- --------- -----------
Onshore:
Alabama.................. 18,571 2,889 2,889 --
Louisiana................ 9,630 3,843 1,058 2,785
Michigan................. 10,419 9,058 1,512 7,546
Mississippi.............. 4,292 953 626 327
New Mexico............... 32,203 12,750 168 12,582
Texas.................... 102,837 16,464 2,493 13,971
--------- --------- --------- -----------
Total Onshore................. 177,952 45,957 8,746 37,211
--------- --------- --------- -----------
Offshore:
Louisiana................ 158,776 42,283 29,333 12,950
Texas.................... 74,795 23,512 20,392 3,120
--------- --------- --------- -----------
Total Offshore................ 233,571 65,795 49,725 16,070
--------- --------- --------- -----------
Total......................... 411,523 111,752 58,741 53,281
========= ========= ========= ===========
The Company will acquire an aggregate of 15,062 developed and 18,209
undeveloped net leasehold acres pursuant to the Funds Acquisition and has
disposed of 1,892 of the gross leasehold acres and 1,512 of the net developed
leasehold acres set forth above in Michigan pursuant to the Michigan
Disposition.
53
<PAGE>
DRILLING ACTIVITIES
The following table sets forth the drilling activity of the Company on its
properties for the years ended December 31, 1994, 1995 and 1996 and the three
months ended March 31, 1997.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------- THREE MONTHS
ENDED
1994 1995 1996 MARCH 31, 1997
------------- ------------- ------------- --------------
GROSS NET GROSS NET GROSS NET GROSS NET
----- --- ----- --- ----- --- ----- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C>
OFFSHORE DRILLING ACTIVITY:
Development:
Productive...................... 3.0 0.8 2.0 0.5 5.0 1.5 -- --
Non-productive.................. -- -- -- -- -- -- -- --
----- --- ----- --- ----- ---
Total...................... 3.0 0.8 2.0 0.5 5.0 1.5 -- --
Exploratory:
Productive...................... 2.0 0.9 4.0 1.3 2.0 0.6 -- --
Non-productive.................. 4.0 0.5 4.0 0.9 1.0 0.2 -- --
----- --- ----- --- ----- ---
Total...................... 6.0 1.4 8.0 2.2 3.0 0.8 -- --
ONSHORE DRILLING ACTIVITY:
Development:
Productive...................... -- -- 4.0 0.7 2.0 0.3 -- --
Non-productive.................. -- -- 1.0 0.1 2.0 0.6 -- --
----- --- ----- --- ----- ---
Total...................... -- -- 5.0 0.8 4.0 0.9 -- --
Exploratory:
Productive...................... 12.0 1.7 15.0 1.8 18.0 2.0 4.0 1.0
Non-productive.................. 14.0 2.7 25.0 4.6 12.0 1.7 5.0 1.3
----- --- ----- --- ----- --- ----- ---
Total...................... 26.0 4.4 40.0 6.4 30.0 3.7 9.0 2.3
</TABLE>
The information contained in the foregoing table should not be considered
indicative of future performance, nor should it be assumed that there is
necessarily any correlation between the number of productive wells drilled and
the oil and natural gas reserves generated therefrom.
From January 1, 1997 through May 15, 1997, the Company participated in
drilling activities on 23 gross wells. Of the 23 (7.6 net) wells, 10 (3.4 net)
are being completed, or have been completed, as commercial producers, 6 (1.6
net) were dry holes, and 7 (2.6 net) are currently being drilled.
OIL AND GAS MARKETING
The Company's production is priced based on short-term spot prices and is
marketed to third parties consistent with industry practices. The Company is
aided by the presence of multiple delivery points near its production in the
Gulf Coast region. From time to time, the Company has hedged a portion of its
oil and gas production to achieve more predictable cash flows and to reduce its
exposure to fluctuations in oil and gas prices. Despite the measures taken by
the Company to attempt to control price risk, the revenues generated by the
Company's operations are highly dependent upon the prices of, and demand for,
oil and natural gas. The price received by the Company for its oil and natural
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
natural gas-producing and oil-producing countries, the actions of OPEC and
domestic government regulation, legislation and policies. Decreases in the
prices of oil and natural gas could have a material 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 natural gas production,
market, transportation economic and regulatory factors may in the future
materially adversely affect the Company's ability to sell its oil or natural gas
production. See "Risk Factors -- Volatility of Oil
54
<PAGE>
and Natural Gas Prices; Marketability of Production" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
COMPETITION
The Company encounters competition from other companies in all areas of its
operations, including the acquisition of producing properties and its IPF
Program. The Company's competitors include major integrated oil and gas
companies and numerous independent oil and gas companies, individuals and
drilling and income programs and, in the case of its IPF Program, affiliates of
investment, commercial and merchant banking firms and affiliates of large
interstate pipeline companies. Many of its competitors are large, well-
established companies with substantially larger operating staffs and greater
capital resources than the Company's and which, in many instances, have been
engaged in the oil and gas business for a much longer time than the Company.
Such companies may be able to pay more for productive natural gas and oil
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, and to grow its IPF Program,
will be dependent upon its ability to evaluate and select suitable properties
and to consummate transactions in this highly competitive environment.
REGULATION
The availability of a ready market for oil and natural gas production
depends upon numerous factors beyond the Company's control. These factors
include regulation of oil and natural gas production, federal, state and local
laws and regulations governing environmental quality and pollution control,
state limits on allowable rates of production by a well or proration unit, the
supply of oil and natural gas available for sale, the availability of adequate
pipeline and other transportation and processing facilities and the marketing of
competitive fuels. For example, a productive natural gas well may be "shut-in"
because of an oversupply of natural gas or the lack of an available natural gas
pipeline in the areas in which the Company conducts its operations. Federal,
state and local laws and regulations generally are intended to prevent waste of
oil and natural gas, protect rights to produce oil and natural gas between
owners in a common reservoir, control the amount of oil and natural gas produced
by assigning allowable rates of production and control contamination of the
environment.
REGULATION OF OIL AND NATURAL GAS EXPLORATION AND PRODUCTION. The
Company's exploration and production operations are subject to various types of
regulation at the federal, state and local levels. Such regulation includes
requiring permits for the drilling of wells, maintaining bonding requirements in
order to drill or operate wells, and regulating the location of wells, the
method of drilling and casing wells, the surface use and restoration of
properties upon which wells are drilling and the plugging and abandonment of
wells. The Company's operations are also subject to various conservation laws
and regulations. These include the regulation of the size of drilling and
spacing units or proration units and the density of wells that may be drilled
and unitization or pooling of oil and gas properties. In this regard, some
states allow the forced pooling or integration of tracts to facilitate
exploration while other states rely on voluntary pooling of lands and leases. In
addition, state conservation laws establish maximum rates of production from oil
and natural gas wells, generally prohibit the venting or flaring of natural gas
and impose certain requirements regarding the ratability of production. The
effect of these regulations is to limit the amounts of oil and natural gas the
Company's operator or the Company can produce from its wells, and to limit the
number of wells the Company can drill or the locations thereof. In addition,
numerous departments and agencies, both federal and state, are authorized by
statute to issue rules and regulations binding on the oil and gas industry and
its individual members, some of which carry substantial penalties for failure to
comply. The regulatory burden on the oil and gas industry increases the
Company's cost of doing business and, consequently, affects its profitability.
Inasmuch as such laws and regulations are frequently expanded, amended or
reinterpreted, the Company is unable to predict the future cost or impact of
complying with such regulations.
55
<PAGE>
NATURAL GAS MARKETING AND TRANSPORTATION. Federal legislation and
regulatory controls in the United States have historically affected the price of
the natural gas produced by the Company and the manner in which such production
is marketed. The transportation and sale for resale of natural gas in interstate
commerce are regulated pursuant to the Natural Gas Act of 1938 (the "NGA"),
the Natural Gas Policy Act of 1978 (the "NGPA") and the Federal Energy
Regulatory Commission (the "FERC"). Although maximum selling prices of natural
gas were regulated in the past, on July 26, 1989, the Natural Gas Wellhead
Decontrol Act of 1989 ("Decontrol Act") was enacted, which amended the NGPA to
remove completely by January 1, 1993 price and nonprice controls for all "first
sales" of domestic natural gas, which include all sales by the Company of its
production; consequently, sales of the Company's natural gas production
currently may be made at market prices, subject to applicable contract
provisions. The FERC's jurisdiction over natural gas transportation was
unaffected by the Decontrol Act.
The FERC also regulates interstate natural gas transportation rates and
service conditions, which affect the marketing of natural gas produced by the
Company, as well as the revenues received by the Company for sales of such
natural gas. Since the latter part of 1985, the FERC has endeavored to make
interstate natural gas transportation more accessible to natural gas buyers and
sellers on an open and nondiscriminatory basis. The FERC's efforts have
significantly altered the marketing and pricing of natural gas. Commencing in
April 1992, the FERC issued Order Nos. 636, 636-A, 636-B and 636-C
(collectively, "Order No. 636"), which, among other things, require interstate
pipelines to "restructure" to provide transportation separate or "unbundled"
from the pipelines' sales of natural gas. Also, Order No. 636 requires pipelines
to provide open-access transportation on a basis that is equal for all natural
gas supplies. Order No. 636 has been implemented through negotiated settlements
in individual pipeline service restructuring proceedings. In many instances, the
result of the Order No. 636 and related initiatives has been to reduce
substantially or bring to an end the interstate pipelines' traditional role as
wholesalers of natural gas in favor of providing only storage and transportation
services. The FERC has issued final orders in virtually all pipeline
restructuring proceedings, and has now commenced a series of one year reviews to
determine whether refinements are required regarding individual pipeline
implementations of Order No. 636.
In May 1995, the FERC issued a policy statement on how interstate gas
pipelines can recover the costs of new pipeline facilities. While this policy
statement affects the Company only indirectly, in its present form the new
policy should enhance competition in natural gas markets and facilitate
construction of gas supply laterals. However, requests for rehearing of this
policy statement are currently pending. The Company cannot predict what action
the FERC will take on these requests.
Commencing in May 1994, the FERC issued a series of orders in individual
cases that delineate a new gathering policy in light of the interstate pipeline
industry's restructuring under Order No. 636. As a general matter, gathering is
exempt from the FERC's jurisdiction; however, the courts have held that where
the gathering is performed by the interstate pipelines in association with the
pipeline's jurisdictional transportation activities, the FERC retains regulatory
control over the associated gathering services to prevent abuses. Among other
matters, the FERC slightly narrowed its statutory tests for establishing
gathering status and reaffirmed that, except in situations in which the gatherer
acts in concert with an interstate pipeline affiliate to frustrate the FERC's
transportation policies, the FERC does not generally have jurisdiction over
natural gas gathering facilities and services. In the FERC's opinion, such
facilities and services are more properly regulated by state authorities. In
addition, the FERC has approved several transfers proposed by interstate
pipelines of gathering facilities to unregulated independent or affiliated
gathering companies. Certain of the FERC's orders delineating its new gathering
policy recently were the subject of an opinion issued by the United States Court
of Appeals for the District of Columbia Circuit. That opinion generally upheld
the FERC's policy of approving the interstate pipeline's proposed "spindown"
of its gathering facilities to an unregulated affiliate company, but remanded to
the FERC that portion of the FERC's orders imposing so-called "default
contracts" by which the unregulated affiliate was obligated to continue
existing gathering services to customers under "default contracts" for up to
two years after spindown. It remains unclear whether the FERC will attempt to
reimpose such conditions or will otherwise act in response to producer requests
for additional protection against perceived monopolistic action by
pipeline-related gatherers. In
56
<PAGE>
addition, in February 1996, the FERC issued a policy statement that, among other
matters, reaffirmed, with some clarifications, its long-standing test for
determining whether particular pipeline facilities perform a jurisdictional
transmission function or nonjurisdictional gathering function. While changes to
the FERC's gathering policy affect the Company only indirectly, such changes
could affect the price and availability of capacity on certain gathering
facilities, and thus access to certain interstate pipelines, which, in turn,
could affect the price of gas at the wellhead and in markets in which the
Company competes. However, the Company does not believe that it will be affected
by these changes to the FERC's gathering policy materially differently than
other natural gas producers with which it competes.
Proposals and proceedings that might affect the natural gas industry are
considered from time to time by Congress, the FERC, state regulatory bodies and
the courts. The Company cannot predict when or if any such proposals might
become effective, or their effect, if any, on the Company's operations. The
natural gas industry historically has been very heavily regulated; therefore,
there is no assurance that the less stringent regulatory approach recently
pursued by the FERC and Congress will continue indefinitely into the future.
FEDERAL OFFSHORE LEASING. Certain of the Company's operations are
conducted on federal oil and gas leases administered by the Minerals Management
Service ("MMS"). The MMS issues such leases through competitive bidding. These
leases contain relatively standardized terms and require compliance with
detailed MMS regulations and orders pursuant to the Outer Continental Shelf
Lands Act ("OCSLA") (which are subject to change by the MMS). For offshore
operations, lessees must obtain MMS approval for exploration plans and
development and production plans prior to the commencement of such operations.
In addition to permits required from other agencies (such as the Coast Guard,
the Army Corps of Engineers and the Environmental Protection Agency), lessees
must obtain a permit from the MMS prior to the commencement of drilling. The MMS
has promulgated regulations requiring offshore production facilities located on
the Outer Continental Shelf ("OCS") to meet stringent engineering and
construction specifications. The MMS also has issued regulations restricting the
flaring or venting of natural gas and prohibiting the flaring of liquid
hydrocarbons and oil without prior authorization. Similarly, the MMS has
promulgated other regulations governing the plugging and abandonment of wells
located offshore and the removal of all production facilities. To cover the
various obligations of lessees on the OCS, the MMS generally requires that
lessees post substantial bonds or other acceptable assurances that such
obligations will be met. The cost of such bonds or other security can be
substantial and there is no assurance that the Company can obtain bonds or other
security in all cases. See " -- Environmental Matters."
The OCSLA requires that all pipelines operating on or across the OCS
provide open-access, non-discriminatory service. Although the FERC has opted not
to impose the regulations of Order No. 509, which implements these requirements
of the OCSLA, on gatherers and other non-jurisdictional entities, the FERC has
retained the authority to exercise jurisdiction over those entities if necessary
to permit non-discriminatory access to services on the OCS. If the FERC were to
apply Order No. 509 to gatherers in the OCS, eliminate the exemption of
gathering lines, and redefine its jurisdiction over gathering lines, the result
would be a reduction in available pipeline space for existing shippers in the
Gulf of Mexico and elsewhere.
OIL SALES AND TRANSPORTATION RATES. Sales of crude oil, condensate and gas
liquids by the Company are not regulated and are made at market prices. The
price the Company receives from the sale of these products is affected by the
cost of transporting the products to market. Effective as of January 1, 1995,
the FERC implemented regulations establishing an indexing system for
transportation rates for oil pipelines, which, subject to certain conditions and
limitations, would generally index such rates to inflation. The Company is not
able to predict with certainty what effect, if any, these regulations will have
on it, but other factors being equal, under certain conditions the regulations
may cause increased transportation costs and may reduce wellhead prices for such
commodities.
ENVIRONMENTAL MATTERS
The Company's operations are subject to federal, state and local laws and
regulations governing the discharge of materials into the environment or
otherwise relating to environmental protection. These laws and regulations may
require the acquisition of a permit before drilling commences, restrict the
types,
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quantities and concentration of various substances that can be released into the
environment in connection with drilling and production activities, limit or
prohibit drilling activities on certain lands lying within wilderness, wetlands
and other protected areas, require remedial measures to prevent pollution from
former operations, such as pit closure and plugging abandoned wells, and impose
substantial liabilities for pollution resulting from the Company's operations.
In addition, these laws, rules and regulations may restrict the rate of oil and
natural gas production below the rate that would otherwise exist. The regulatory
burden on the oil and gas industry increases the cost of doing business and
consequently affects its profitability. Changes in environmental laws and
regulations occur frequently, and any changes that result in more stringent and
costly waste handling, disposal and clean-up requirements could have a
significant impact on the operating costs of the Company, as well as the oil and
gas industry in general. Management believes that the Company is in substantial
compliance with current applicable environmental laws and regulations and that
continued compliance with existing requirements will not have a material adverse
impact on the Company.
The Comprehensive Environmental Response, Compensation and Liability Act
("CERCLA"), also known as the "Superfund" law, imposes liability, without
regard to fault or the legality of the original conduct, on certain classes of
persons who are considered to be responsible for the release of a "hazardous
substance" into the environment. These persons include the owner or operator of
the disposal site or sites where the release occurred and companies that
disposed or arranged for the disposal of the hazardous substances. Under CERCLA,
such persons may be subject to joint and several liability for the costs of
cleaning up the hazardous substances that have been released into the
environment (including pre-remedial investigations and post-remedial
monitoring), for damages to natural resources. In some instances, neighboring
landowners and other third parties file claims based on common law theories of
tort liability for personal injury and property damage allegedly caused by the
release of hazardous substances at a CERCLA site.
The Oil Pollution Act of 1990 (the "OPA") and regulations thereunder
impose a variety of requirements on "responsible parties" related to the
prevention of oil spills and liability for damages resulting from such spills in
"waters of the United States." A "responsible party" includes the owner or
operator of a facility or vessel, or the lessee or permittee of the area in
which an offshore facility is located. The term "waters of the United States"
has been broadly defined to include not only the waters of the Gulf of Mexico
but also inland waterbodies, including wetlands, playa lakes and intermittent
streams. A 1996 amendment to the OPA also requires owners and operators of
"offshore facilities" (including those located in coastal inland waters, such
as bays or estuaries) to establish $35.0 million in financial responsibility to
cover environmental cleanup and restoration costs likely to be incurred in
connection with an oil spill. Offshore facilities are facilities used for
exploring for, drilling for or producing oil or transporting oil from facilities
engaged in oil exploration, drilling or production. If it is determined that an
increase in the amount of financial responsibility required is warranted, the
President has the authority to raise such to an amount not exceeding $150.0
million. In any event, the impact of any adjustment to the annual required
financial responsibility is not expected to be any more burdensome to the
Company than it will be to other similarly situated companies involved in oil
and gas exploration and production.
OPA imposes a variety of additional requirements on responsible parties for
vessels or oil and gas facilities related to the prevention of oil spills and
liability for damages resulting from such spills in waters of the United States.
OPA assigns liability to each responsible party for oil spill removal costs and
a variety of public and private damages from oil spills. OPA establishes a
liability limit for offshore facilities of all removal costs plus $75.0 million.
A party cannot take advantage of liability limits if the spill is caused by
gross negligence or willful misconduct or resulted from violation of a federal
safety, construction or operating regulation. If a party fails to report a spill
or to cooperate fully in the cleanup, liability limits likewise do not apply.
Few defenses exist to the liability for oil spills imposed by OPA. OPA also
imposes other requirements on facility operators, such as the preparation of an
oil spill contingency plan. Failure to comply with ongoing requirements or
inadequate cooperation in a spill event may subject a responsible party to civil
or criminal enforcement actions. As of the date hereof, the Company is not the
subject of any civil or criminal enforcement actions under the OPA and is in
substantial compliance with the requirements of the OPA.
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In addition, the OCSLA authorizes regulations relating to safety and
environmental protection applicable to lessees and permittees operating in the
OCS. Specific design and operational standards may apply to OCS vessels, rigs,
platforms, vehicles and structures. Violations of lease conditions or
regulations issued pursuant to OCSLA can result in substantial civil and
criminal penalties, as well as potential court injunctions curtailing operations
and the cancellation of leases. Such enforcement liabilities can result from
either governmental or private prosecution. As of the date hereof, the Company
is not the subject of any civil or criminal enforcement actions under the OCSLA
and is in substantial compliance with the requirements under the OCSLA.
The Clean Water Act ("CWA") imposes restrictions and strict controls
regarding the discharge of produced waters and other oil and gas wastes into
navigable waters. Permits must be obtained to discharge pollutants into state
and federal waters. The CWA provides for civil, criminal and administrative
penalties for any unauthorized discharges of oil and other hazardous substances
in reportable quantities and, along with the OPA, imposes substantial potential
liability for the costs of removal, remediation and damages. State laws for the
control of water pollution also provide civil, criminal and administrative
penalties and liabilities in the case of a discharge of petroleum or its
derivatives into state waters. The U.S. Environmental Protection Agency
("EPA") issued general permits prohibiting the discharge of produced water and
produced sand derived from oil and gas point source facilities into coastal
waters in Louisiana and Texas, which became effective as of January 1, 1997.
Although the costs of compliance with zero discharge mandates under federal or
state law may be significant, the entire industry will experience similar costs
and the Company believes that these costs will not have a material adverse
impact on the Company's financial condition and operations. Certain oil and gas
exploration and production facilities are required to obtain permits for their
storm water discharges and costs may be associated with treatment of wastewater,
or developing storm water pollution prevention plans. In addition, the Coastal
Zone Management Act authorizes state implementation and development of
management measures for nonpoint source pollution designed to restore and
protect coastal waters.
OPERATING HAZARDS AND DRILLING RISKS
The oil and natural gas business involves a variety of operating risks,
including the risk of fire, explosions, blow-outs, pipe failure, abnormally
pressured formations and environmental hazards such as oil spills, gas leaks,
ruptures or discharges of toxic gases. Any of these occurrences could result in
substantial losses to the Company due to injury or loss of life, severe damage
to or destruction of property, natural resources and equipment, pollution or
other environmental damage, clean-up responsibilities, regulatory investigation
and penalties and suspension of operations. Moreover, offshore operations are
subject to a variety of operating risks peculiar to the marine environment, such
as hurricanes or other adverse weather conditions, to more extensive
governmental regulation, including regulations that may, in certain
circumstances, impose strict liability for pollution damage, and to interruption
or termination of operations by governmental authorities based on environmental
or other considerations. The presence of unanticipated pressure or
irregularities in formations, miscalculations or accidents may cause such
activity to be unsuccessful, resulting in a total loss of the Company's
investment in such activity. Although the Company maintains insurance coverage
considered to be customary in the industry, it is not fully insured against
certain of these risks, either because such insurance is not available or
because of the high premium costs. The Company does not carry business
interruption insurance. There can be no assurance that any insurance obtained by
the Company will be adequate to cover any losses or liabilities, or that such
insurance will continue to be available or available on terms which are
acceptable to the Company. See "Risk Factors -- 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
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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.
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 participation in drilling
programs will be successful or that unsuccessful drilling efforts will not have
a material adverse effect on the Company.
ABANDONMENT COSTS
The Company is responsible for the payment of abandonment costs on its oil
and natural gas properties pro rata to its working interest. The Company accrues
for its expected future abandonment liabilities as a component of depletion,
depreciation and amortization as the properties are produced. As of December 31,
1996, total pro forma undiscounted abandonment costs estimated to be incurred
through the year 2006 were approximately $16.6 million for properties in federal
and state waters. The Company does not consider abandonment costs estimated to
be incurred on its onshore properties to be significant at this time. Estimates
of abandonment costs and their timing may change due to many factors, including
actual drilling and production results, inflation rates, and changes in
environmental laws and regulations.
The MMS requires lessees of OCS properties to post bonds in connection with
the plugging and abandonment of wells located offshore on the federal OCS and
the removal of all production facilities. Operators in the OCS waters of the
Gulf of Mexico are currently required to post an area-wide bond of $3.0 million
or $500,000 per producing lease, which the Company has provided. Under certain
circumstances, the MMS has the authority to suspend or terminate operations on
federal leases for failure to comply with the applicable bonding requirements or
other regulations applicable to plugging and abandonment. Any such suspensions
or terminations of the Company's operations could have a material adverse effect
on the Company's financial condition and results of operations.
TITLE TO PROPERTIES
The Company believes it has satisfactory title to all of its producing
properties in accordance with standards generally accepted in the oil and gas
industry. Prior to completing an acquisition of producing oil and natural gas
leases, the Company obtains title opinions on the most significant leases.
However, as is customary in the oil and gas industry, the Company makes only a
cursory review of title to farmout acreage and to undeveloped oil and natural
gas properties upon execution of the contracts pursuant to which the Company
acquires rights thereto. Prior to the commencement of drilling operations, a
thorough title examination is conducted and curative work is performed with
respect to significant defects. To the extent title opinions or other
investigations reflect title defects affecting farmout acreage or undeveloped
properties, the Company, rather than the seller of the undeveloped property, is
typically responsible for curing any such title defects at its expense. If the
Company were unable to remedy or cure any title defect of a nature such that it
would not be prudent to commence drilling operations on the property, the
Company could suffer a loss of its entire investment in the property. The
Company has obtained title opinions on substantially all of its producing
properties and believes that it has satisfactory title to such properties in
accordance with standards generally accepted in the oil and gas industry.
The Company's oil and natural gas properties are subject to customary
royalty interests, 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. Approximately 80% of the aggregate value of the Company's oil and
natural gas properties (other than the IPF Program properties) are and will
continue to be mortgaged to secure borrowings under the Revolving Credit
Facility. Although the remaining approximately 20% of the
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aggregate value of the Company's oil and natural gas properties are not
mortgaged to the Lenders under the Revolving Credit Facility, such properties
are nevertheless subject to the restrictions set forth therein, including a
prohibition on granting any security interests therein.
EMPLOYEES
On March 31, 1997, the Company employed 38 full-time persons and four
full-time contractors. The Company believes that its relationships with its
employees are good. None of the Company's employees are covered by a collective
bargaining agreement.
OFFICES
The Company currently leases approximately 31,000 square feet of office
space in Houston, Texas, where its principal offices are located.
LEGAL PROCEEDINGS
Various claims have been filed naming joint working interest owners of the
Company in the ordinary course of business, particularly claims alleging
personal injuries, for which the Company would be responsible for its pro rata
share of any uninsured damages or settlement costs. In addition, MarkWest
Michigan, Inc. ("MarkWest"), the Company's former partner in the Michigan
Development Project, has notified the Company that it believes that it had a
preferential purchase right with respect to a portion of the interest in the
project that the Company sold to a third party pursuant to the Michigan
Disposition. On April 29, 1997, MarkWest filed a demand for arbitration with the
American Arbitration Association seeking to enforce its alleged preferential
purchase right and claiming that the sale by the Company to the third party
should be declared void. The Company believes that MarkWest's claim has no
merit. On May 13, 1997, the Company filed an action in the District Court of
Harris County, Texas (234th Judicial District) against MarkWest seeking to stay
the arbitration proceedings initiated by MarkWest on the basis that the Company
was never a party to the agreement under which MarkWest alleges it has the right
to arbitrate its dispute with the Company.
No pending or threatened claims, actions or proceedings against the Company
are expected to have a material adverse effect on the Company's financial
condition or results of operations.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The Company's Board of Directors currently has four members. Following the
Offering, the Company intends to increase the size of its Board of Directors to
six persons. The two individuals to be nominated for appointment to the Board of
Directors following the Offering are William P. Nicoletti and Gary K. Wright,
neither of whom are employees of or otherwise affiliated with the Company, Fund
VII or First Reserve. The new directors will be elected by the current
directors. All directors are elected annually to serve until the next annual
meeting of stockholders or until their successors are duly elected and
qualified. The officers of the Company are elected by, and serve until their
successors are elected by, the Board of Directors.
The following table sets forth certain information concerning the directors
and executive officers of the Company as of April 30, 1997.
NAME AGE POSITION
- ---------------------------------- --- -------------------------------------
Michael V. Ronca.................. 43 President and Chief Executive Officer
and Director
Herbert A. Newhouse............... 52 Executive Vice President
Catherine L. Sliva................ 38 Executive Vice President and
Secretary
Rick G. Lester.................... 45 Vice President, Chief Financial
Officer and Treasurer
Jonathan S. Linker................ 48 Director and Chairman of the Board
William E. Macaulay............... 51 Director
Steven H. Pruett.................. 35 Director
William P. Nicoletti*............. 51 Director
Gary K. Wright*................... 52 Director
- ------------
* To be nominated for appointment to the Board of Directors following the
Offering.
Michael V. Ronca has been the President and Chief Executive Officer of the
Company and has served as a Director of the Company since its inception in 1996.
Mr. Ronca has been the President of Ventures Corporation since its inception in
1993. Prior to starting Ventures Corporation, Mr. Ronca served as Executive
Director, Investor Relations for Tenneco where he was responsible for the
development, implementation and management of a global investor relations
program. Mr. Ronca, who was an employee of Tenneco for over 20 years, moved to
Houston in 1984 to assume the position of administrative assistant to the
chairman and chief executive officer of Tenneco Inc. In this capacity he focused
on acquisition and disposition analysis, strategic planning and operational
issues. Mr. Ronca graduated from Villanova University in 1975 with a bachelor of
science degree in Finance and Marketing and later earned a master of business
administration degree from Drexel University.
Herbert A. Newhouse has been Executive Vice President of the Company since
its inception in 1996. Mr. Newhouse is responsible for exploration, production
and evaluation activities for the Company, including geological, geophysical and
engineering technical evaluations. Mr. Newhouse joined Ventures Corporation in
1995 as Vice President. He has more than 28 years operational and managerial
experience in oil and gas exploration and production, most recently having
served as Vice President of Production for North Central Oil Corporation for the
six years prior to 1995. Before joining North Central, Mr. Newhouse spent 17
years with the exploration and production division of Tenneco Oil Company
("Tenneco Oil"), rising to the position of Division Production Manager
responsible for drilling, production, development geology and reservoir
engineering. He graduated from Ohio State University in 1968, with a bachelor of
science degree in Chemical Engineering.
Catherine L. Sliva has been the Executive Vice President and Secretary of
the Company since its inception in 1996 and is principally responsible for the
IPF Program, strategic planning and analysis, and investor relations. Ms. Sliva
has been with Ventures Corporation since its inception in 1990. Ms. Sliva has 17
years experience in offshore and onshore petroleum engineering and economics and
is experienced in
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production finance, acquisition evaluations, reservoir management, field
development, economic analysis, coordination of budgets and formulation of
corporate goals and strategies. A registered professional petroleum engineer,
Ms. Sliva is a graduate of Texas A&M University, where she received a bachelor
of science degree in Petroleum Engineering in 1980. Ms. Sliva joined Tenneco Oil
in the Gulf Coast division in 1980. She remained in the Gulf Coast division for
five years, advancing to Senior Petroleum Engineer. In 1985, Ms. Sliva became a
member of the Economic Planning and Analysis Group at Tenneco Oil. She evaluated
Tenneco Oil's exploration results, conducted an analysis of Tenneco Oil's
competitors and evaluated each division's profitability, including operating
results, manpower efficiencies, capital investment levels and results.
Rick G. Lester has been Vice President, Chief Financial Officer, Treasurer
and Assistant Secretary of the Company since its inception in 1996 with overall
responsibility for its accounting, financial analysis, financing and banking
activities. Mr. Lester joined Ventures Corporation in 1991. Mr. Lester has 22
years experience in the financial area, including accounting, tax, corporate
finance, and planning and analysis. He received his bachelor of business
administration degree in Accounting from the University of Oklahoma in 1974 and
his Texas CPA certificate in 1977, and is a member of the AICPA and the Texas
Society of CPAs. Mr. Lester joined Tenneco Oil in 1981 and was responsible at
various times for managing several operational accounting groups and the tax
planning group. In 1988, Mr. Lester became Manager, Corporate Finance with
Tenneco where he was responsible for developing financing plans and negotiating
credit agreements for its U.S. and Canadian finance companies and for other
special projects including the review of its world-wide finance and stock
repurchase programs.
Jonathan S. Linker has served as a Director of the Company since its
inception in 1996. Mr. Linker has been a Managing Director of First Reserve
since 1996, the President and a director of IDC Energy Corporation since 1987,
and a Vice President and director of Sunset Production Corporation since 1988.
First Reserve Corporation is an investment management firm specializing in
making private equity investments in energy companies. IDC Energy Corporation
and Sunset Production Corporation are small, privately-held oil and gas
companies. Mr. Linker also serves as a director of Hugoton Energy Corporation,
an independent oil and gas exploration and production company. Mr. Linker earned
a bachelor of arts degree in Geology from Amherst College, a master of arts
degree in Geology from Harvard University and a master of business
administration degree from the Harvard Business School.
William E. Macaulay has served as a Director of the Company since March
1997. Mr. Macaulay has been the President and Chief Executive Officer of First
Reserve since 1983. Mr. Macaulay serves as a director of Weatherford Enterra,
Inc., an oilfield service company, Maverick Tube Corporation, a manufacturer of
steel pipe and casing, TransMontaigne Oil Company, an oil products distribution
and refining company, National-Oilwell, Inc., a manufacturer and distributor of
equipment and products used in oil and gas drilling and production, and Hugoton
Energy Corporation. Mr. Macaulay earned a bachelor of arts degree in Economics
from City University of New York and a master of business administration degree
in Finance from the Wharton School at the University of Pennsylvania.
Steven H. Pruett has served as a Director of the Company since March 1997.
Mr. Pruett has been a Vice President of First Reserve since 1995. Mr. Pruett has
been the President and Chief Executive Officer of First Reserve Oil & Gas Co.
since 1996. First Reserve Oil & Gas Co. is a privately-held company engaged in
the acquisition and development of oil and gas properties in the Midcontinent
Region and the Permian Basin. Prior to joining First Reserve, Mr. Pruett worked
for Credit Suisse First Boston as an investment banker in the Natural Resources
Group in New York and Houston from 1994 to 1995. Mr. Pruett worked for Amoco
Production Company in Planning and Economics from 1991 to 1994, following his
graduation from the Harvard Business School with a master of business
administration degree in 1991. After earning a bachelor of science degree in
Petroleum Engineering from the University of Texas at Austin in 1984, Mr. Pruett
was a Petroleum Engineer for ARCO Oil and Gas Company from 1984 to 1989.
William P. Nicoletti will be nominated for appointment to the Board of
Directors following the Offering. Mr. Nicoletti has been Managing Director of
Nicoletti & Company Inc., a New York based private investment banking firm,
since 1991. Prior to founding Nicoletti & Company Inc., Mr. Nicoletti was
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a Managing Director and Head of the Energy and Natural Resources Group of
PaineWebber Incorporated. Mr. Nicoletti serves as Chairman of the Board of
Directors of Amerac Energy Corporation, an independent oil and gas company, and
is a director of Star Gas Corporation, a propane distribution company, and
StatesRail, Inc., a short line railroad holding company. Mr. Nicoletti earned a
bachelor of science degree in Mathematics from Seton Hall University and a
master of business administration degree in Finance from the Columbia University
Graduate School of Business.
Gary K. Wright will be nominated for appointment to the Board of Directors
following the Offering. Mr. Wright joined Texas Commerce Bank -- Houston in 1973
and is currently Manager of its Corporate Banking Department, with
responsibility for relationships with the bank's Energy and National Brands
Group. Mr. Wright is also Managing Director of the Global Oil and Gas Group for
The Chase Manhattan Bank and is the senior banker for the group in the
Southwest. Mr. Wright earned a bachelor of science degree in Petroleum
Engineering from Louisiana State University and a law degree from Loyola
University Law School.
COMMITTEES OF THE BOARD OF DIRECTORS
Following the Offering the Company will have an Audit Committee and a
Compensation Committee.
AUDIT COMMITTEE. The Board of Directors intends to name directors to an
Audit Committee after consummation of the Offering. The Audit Committee will
have responsibility for, among other things, (i) recommending the selection of
the Company's independent accountants, (ii) reviewing and approving the scope of
the independent accountants' audit activity and extent of non-audit services,
(iii) reviewing with management and the independent accountants the adequacy of
the Company's basic accounting systems, (iv) reviewing with management and the
independent accountants the Company's financial statements and exercising
general oversight of the Company's financial reporting process and (v) reviewing
the Company's litigation and other legal matters that may affect the Company's
financial condition and monitoring compliance with the Company's business ethics
and other policies.
COMPENSATION COMMITTEE. The Compensation Committee consists of Messrs.
Ronca, Linker and Pruett, and following the Offering, one of the independent
directors to be appointed to the Board of Directors will become a member of the
Compensation Committee. This committee has general supervisory power over, and
the power to grant options under, the Stock Purchase and Option Plan. The
Compensation Committee additionally has responsibility for, among other things,
(i) reviewing the recommendations of the Chief Executive Officer as to
appropriate compensation of the Company's principal executive officers and
certain other key personnel and establishing the compensation of such key
personnel and the Chief Executive Officer, (ii) examining periodically the
general compensation structure of the Company and (iii) supervising the employee
benefit plans and compensation plans of the Company.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During the Company's fiscal year ended December 31, 1996, the Company had
no compensation committee or other committee of the Board of Directors
performing similar functions. Decisions concerning compensation of Mr. Ronca
were made during such fiscal year by the Compensation Committee of the board of
directors of Tenneco, the former indirect parent of the Company's operating
subsidiaries. Decisions concerning compensation of the other executive officers
of the Company were made during fiscal year 1996 by the compensation committee
of Tennessee Gas Pipeline Company, the former parent of the Company's operating
subsidiaries. Mr. Ronca served as a member of the compensation committee of
Tennessee Gas Pipeline Company during fiscal year 1996.
RONCA EMPLOYMENT AGREEMENT
In connection with the Acquisition, the Company entered into a three-year
employment agreement with Mr. Ronca on December 31, 1996 pursuant to which Mr.
Ronca serves as the Company's President and Chief Executive Officer. Under the
Ronca Employment Agreement, Mr. Ronca receives an annual base salary of $180,000
and is entitled to receive an annual cash bonus based on the satisfaction of
performance criteria determined by the Board of Directors, in target and maximum
amounts equal to 50% and 90%,
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respectively, of such base salary. The Ronca Employment Agreement also provides
that Mr. Ronca will receive $20,000 annually to be used, at his discretion, for
perquisites and other fringe benefits associated with his position as President
and Chief Executive Officer of the Company. Mr. Ronca is additionally entitled
to participate in all other employee compensation and welfare benefit plans and
programs available to the Company's other senior executive officers, including
health, dental, group life, disability and retirement plans, and expense
reimbursement. In the event Mr. Ronca's employment is terminated prior to
December 31, 1999 and under certain circumstances, including an election by Mr.
Ronca to terminate his employment following a Change of Control (as therein
defined) or for Good Reason (as therein defined), he would be entitled under
such employment agreement to receive up to the full amount of the base salary he
would have received thereunder for the remaining term thereof had his employment
not been so terminated. Under the Ronca Employment Agreement, a "Change of
Control" is defined as the acquisition by any person or entity, or group
thereof, excluding Fund VII and other affiliates of First Reserve of more than
50% of the outstanding voting stock of the Company, and "Good Reason" is
defined to include, among other things, material reductions in Mr. Ronca's
duties, responsibilities or base salary.
COMPENSATION OF DIRECTORS
Prior to the Offering, directors of the Company have not received
compensation for their services in such capacity. The Company anticipates that,
after consummation of the Offering, directors who are employees of the Company
will not be paid any fees or additional compensation for service as members of
the Board of Directors or any committee thereof and that the Company will enter
into customary arrangements respecting fees and other compensation (including
expense reimbursement) for other directors of the Company.
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth certain information with respect to the
compensation of the Company's chief executive officer and for each of its other
executive officers (the "named executive officers") during fiscal year 1996.
ANNUAL
COMPENSATION(1)
NAME AND --------------------- ALL OTHER
PRINCIPAL POSITION SALARY BONUS COMPENSATION(2)
- ----------------------------------- -------- -------- ----------------
Michael V. Ronca................... $185,120 $160,000 $9,500
President and Chief Executive
Officer
Herbert A. Newhouse................ 150,800 70,000 9,500
Executive Vice President
Catherine L. Sliva................. 98,040 38,400 7,843
Executive Vice President and
Secretary
Rick G. Lester..................... 114,060 39,200 9,125
Vice President, Chief Financial
Officer and Treasurer
- ------------
(1) Does not include the value of perquisites and other personal benefits,
securities or property because the aggregate amount of such compensation, if
any, does not exceed the lesser of $50,000 or 10 percent of the total amount
of annual salary and bonus for the named executive officers.
(2) Represents contributions of Tenneco under its 401(k) plan. Does not include
options to acquire shares of common stock of Tenneco granted to Mr. Ronca,
Mr. Newhouse, Ms. Sliva and Mr. Lester or restricted stock awards made to
Mr. Ronca and Mr. Newhouse, all of which were granted or awarded in January
1996 as compensation for performance in 1995.
STOCK PURCHASE AND OPTION PLAN
The Company recently adopted the Amended and Restated 1996 Stock Purchase
and Option Plan for Key Employees of Domain Energy Corporation and Affiliates
(the "Stock Purchase and Option Plan"). The objectives of the Stock Purchase
and Option Plan are (i) to attract and retain management personnel
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with the training, experience and ability to enable them to make a substantial
contribution to the success of the Company's business, (ii) to motivate
management personnel by means of growth-related incentives to achieve long range
goals and (iii) to further the alignment of interests of participants with those
of the Company's stockholders through opportunities for increased stock or
stock-based ownership in the Company.
The Stock Purchase and Option Plan authorizes the issuance of options to
acquire up to 867,091 shares of Common Stock, and the Company has reserved
867,091 shares of Common Stock for issuance in connection therewith. The Stock
Purchase and Option Plan will be administered by the Compensation Committee of
the Board of Directors. Pursuant to the Stock Purchase and Option Plan, the
Company may grant to employees, directors or other persons having a unique
relationship with the Company or its affiliates, singly or in combination,
Incentive Stock Options, Other Stock Options, Stock Appreciation Rights,
Restricted Stock, Purchase Stock, Dividend Equivalent Rights, Performance Units,
Performance Shares or Other Stock-Based Grants, in each case as such terms are
defined therein. See " -- Stock Option Agreements." The terms of any such
grant will be determined by the Compensation Committee and set forth in a
separate grant agreement. The exercise price will be at least equal to 100% of
fair market value of the Common Stock on the date of grant in the case of
Incentive Stock Options and the exercise price of Other Stock Options will be at
least equal to 50% of fair market value of the Common Stock on the date of
grant, provided that options to purchase up to 433,546 shares of Common Stock
may be granted with an exercise price equal to $.01 per share, which is the par
value of the Common Stock. Non-Qualified Stock Options and Other Stock Options
may be exercisable for up to ten years. The Compensation Committee may provide
that an optionee may pay for shares upon exercise of an option: (i) in cash;
(ii) in already-owned shares of Common Stock; (iii) by payment through a cash or
margin arrangement with a broker; (iv) in shares otherwise issuable upon
exercise of the option; or (v) by any combination of (i) through (iv) as
authorized by the Compensation Committee. In the event of certain extraordinary
transactions, including a merger, consolidation, a sale or transfer of all or
substantially all assets or an acquisition of all or substantially all the
Common Stock, vesting of such options will generally be accelerated. The Stock
Purchase and Option Plan will terminate on December 31, 2006.
STOCK OPTION AGREEMENTS
On February 21, 1997 (the "Grant Date"), the Company granted to the
following persons the following options under the Stock Purchase and Option
Plan, pursuant to separate Non-Qualified Stock Option Agreements between the
Company and each of such persons (collectively, as amended, the "Stock Option
Agreements"): (i) an option to purchase up to 339,300 shares of Common Stock to
Michael V. Ronca, the President and Chief Executive Officer of the Company, (ii)
an option to purchase up to 113,100 shares of Common Stock to Herbert A.
Newhouse, an Executive Vice President of the Company, (iii) an option to
purchase up to 113,100 shares of Common Stock to Catherine L. Sliva, an
Executive Vice President and the Secretary of the Company, (iv) an option to
purchase up to 50,266 shares of Common Stock to Rick G. Lester, a Vice
President, the Chief Financial Officer and the Treasurer of the Company, (v) an
option to purchase up to 50,266 shares of Common Stock to Douglas H. Woodul, the
Vice President -- Production of the Company, (vi) an option to purchase up to
50,266 shares of Common Stock to Steven M. Curran, the Vice
President -- Exploration of the Company, (vii) an option to purchase up to
18,850 shares of Common Stock to Dean R. Bouillion, the Vice President -- Land
of the Company, and (viii) an option to purchase up to 18,850 shares of Common
Stock to Lucynda S. Herrin, an Assistant Controller of the Company. In addition,
the Company has granted options to purchase an aggregate of 95,696 shares of
Common Stock to other employees of the Company. Under the terms of the Stock
Option Agreements, 50% of the options granted to each such person are designated
as time options (collectively, the "Time Options"), with an exercise price
equal to $4.18 per share, and 50% are designated as performance options
(collectively, the "Performance Options"), with an exercise price equal to
$.01 per share. The Time Options become exercisable as to 20% of the shares of
Common Stock subject thereto on the first anniversary of the Grant Date and are
thereafter exercisable as to an additional 20% of such shares upon each
anniversary thereafter. The Performance Options become exercisable at any time
following the
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<PAGE>
second anniversary of the Grant Date, when the Investment Return Hurdle (as such
term is defined below) is met; provided that the Performance Options become
exercisable as to 100% of the shares of Common Stock subject thereto on the
ninth anniversary of the Grant Date.
The following terms have the following meanings under the Stock Option
Agreements:
"EQUITY VALUE" means the sum of:
(i) all amounts actually received by the FRC Entities from time to time
on a cumulative basis through the date of determination of (A) cash
(x) through any cash dividend or other distribution on account of the
Investor Stock or (y) in connection with either (1) any disposition
(whether by way of redemption, repurchase, repayment, merger or
otherwise) of all or any part of the Investor Stock or of securities
or other non-cash property previously received by way of a dividend
or other distribution on account of the Investor Stock, but only to
the extent Investor Stock or other securities or non-cash property is
so disposed and excluding any disposition to one or more other FRC
Entities, (2) a disposition of any or all of the assets of the
Company or any of its subsidiaries, or (3) a recapitalization of the
Company or its subsidiaries, or (B) securities or any other non-cash
property (valued at their fair market value) in connection with
either (x) any disposition (whether by sale, merger or otherwise) of
all or any part of the Investor Stock to a third party, but only to
the extent Investor Stock is so disposed and excluding any
disposition to one or more other FRC Entities, or (y) any disposition
of any or all of the assets of the Company or any of its subsidiaries
(it being understood that for purposes of this clause (i), the terms
"disposition," "dispose," and "disposed" shall not include the
creation of a pledge, lien or other similar encumbrance unless and
until foreclosed upon); PROVIDED, that when determining the amount
actually received by the FRC Entities after delivery of a notice that
the options will be terminated upon the merger of the Company, the
exchange of all or substantially all of its assets for the securities
of another Company, a Change of Control, or the recapitalization,
reclassification, liquidation or dissolution of the Company, the
amount actually received will be deemed to include any amounts to be
received by the FRC Entities pursuant to the transaction giving rise
to the termination of the options (to the extent such amounts would
otherwise qualify as amounts received pursuant to clauses (A) and (B)
above); plus, if applicable,
(ii) to the extent the Equity Value is being determined prior to the fifth
anniversary of the Grant Date, an amount with respect to each unsold
share of Common Stock then owned by the FRC Entities equal to the
Trading Value (as therein defined) thereof as of such date.
"FRC ENTITIES" means investment funds or other entities for which First
Reserve acts as a general and/or managing partner or in respect of which First
Reserve provides investment advice, either directly or through entities
controlled by it.
"INVESTMENT" means $30.0 million invested by the FRC Entities in Investor
Stock on the closing date of the Acquisition, plus the amount of any additional
cash invested by the FRC Entities in Investor Stock after such closing date.
Expressly excluded from such term is the $8.0 million loan made by Fund VII to
Domain Energy Guarantor Corporation and evidenced by the Subordinated Promissory
Note dated December 31, 1996. See "Transactions With Management and First
Reserve -- Indebtedness to Fund VII."
"INVESTMENT RETURN HURDLE" will be satisfied when the Equity Value with
respect to the Investor Stock is equal to or greater than, as of the date of
determination, the amount determined by increasing the Investment at a
compounded annual rate of 25% commencing on the date of any cash investment by
the FRC Entities (as to that portion of the Investment made on such date)
through and including such date of determination.
"INVESTOR STOCK" means issued and outstanding shares of capital stock of
any class or series of the Company, so long as such shares were originally
acquired by the FRC Entities from the Company.
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401(K) PLAN
The Company has offered its employees an employee 401(k) savings plan (the
"401(k) Plan"), which became effective upon inception of the Company. The
401(k) Plan covers all employees and entitles each to contribute up to 15% of
his or her annual compensation subject to maximum limitations imposed by the
Internal Revenue Code. The 401(k) Plan allows for employer matching of up to 8%
of the employee's contributions based on years of participation in the plan,
including years of participation in the 401(k) plan previously offered by
Tenneco.
LIMITATION OF DIRECTORS' LIABILITY; INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company's Certificate of Incorporation provides that no director of the
Company shall be liable to the Company or its stockholders for monetary damages
for breach of fiduciary duty or the duty of care as a director, except for
liability for breach of the director's duty of loyalty, acts not in good faith,
intentional misconduct or knowing violations of law, unlawful payment of
dividends or stock purchases or redemptions, or transactions in which the
director derived an improper personal benefit. The Certificate of Incorporation
also provides for the indemnification of officers and directors to the fullest
extent permitted by Delaware law. The Company also maintains directors' and
officers' liability insurance coverage.
Generally, Section 145 of the Delaware General Corporation Law, as amended
(the "DGCL"), provides that a corporation may indemnify any person who is or
was a party or is threatened to be made a party to any threatened, pending or
completed action, including any action by or in the right of the corporation
(unless such person was adjudged liable to the corporation, in which event
indemnification is permitted if, but only to the extent that, the court in which
such action was brought determined such indemnification is fair and reasonable)
by reason of the fact that such person is or was a director, officer, employee
or agent of the corporation, or is or was serving in such capacity for another
corporation or entity at the request of the corporation, if he 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 his conduct was unlawful. Such
indemnification may include all expenses (including attorneys' fees) and, in the
case of any action other than an action by or in the right of the corporation,
all judgments, fines and amounts paid in settlement, to the extent such
expenses, judgments, fines and amounts were actually paid and reasonably
incurred by the indemnified party in connection with such action.
TRANSACTIONS WITH MANAGEMENT AND FIRST RESERVE
SECURITYHOLDERS AGREEMENT
The Company, Fund VII and the Company's officers who have purchased Common
Stock (the "Management Investors") are parties to Securityholders Agreement
dated as of December 31, 1996 (the "Securityholders Agreement"). The
Securityholders Agreement contains provisions governing the management of the
Company, voting of shares, election of directors and restrictions on transfer of
shares, all of which terminate automatically upon the completion of the
Offering. In addition, the Securityholders Agreement provides Fund VII, after
the Offering, the right on four occasions to require the Company to register all
or part of Fund VII's registrable shares of Common Stock under the Securities
Act, and the Company is required to use its reasonable best efforts to effect
such registration, subject to certain conditions and limitations. Upon the
Company's receipt of a demand from Fund VII to register all or part of its
registrable shares, the Company is required to notify the other parties to the
Securityholders Agreement of the demand, and such parties shall, subject to
certain conditions and limitations, have the right to include the registrable
shares held by them in such registration. The Securityholders Agreement also
provides all the parties thereto with piggyback registration rights on any
offering by the Company of any of its securities to the public except a
registration on Forms S-4 or S-8 under the Securities Act; provided, however,
that until two years after the date of the Offering, the Management Investors
will not have piggyback registration rights with respect to any registration in
which Fund VII or any of its permitted transferees are not participating. The
Company will bear the expenses of all registrations under the Securityholders
Agreement.
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Fund VII has waived its registration rights with respect to a Registration
Statement filed by the Company with respect to the Offering.
MANAGEMENT INVESTOR SUBSCRIPTION AGREEMENTS AND RELATED TRANSACTIONS
Shortly before the Offering, each of the Management Investors entered into
a Management Investor Subscription Agreement with the Company pursuant to which
the Management Investors purchased an aggregate of 390,307 shares of Common
Stock. To facilitate such purchases, the Company loaned the Management Investors
the following amounts: (i) Mr. Ronca ($249,200), (ii) Mr. Newhouse ($87,000),
(iii) Ms. Sliva ($35,445), (iv) Mr. Lester ($50,011), (v) Mr. Woodul ($49,763),
(vi) Mr. Curran ($50,376) and (vii) Ms. Herrin ($24,231). All such indebtedness
of such persons accrues interest at the rate of 8% per annum, payable
semiannually; provided that each Management Investor may elect to satisfy his or
her semiannual interest payment obligation by increasing the principal amount of
the indebtedness owed to the Company by the amount of interest otherwise
payable. As security for such loans made by the Company, each Management
Investor pledged to the Company, and granted a first priority security interest
in, the shares of Common Stock purchased by such Management Investor pursuant to
its respective Management Investor Subscription Agreement and is required to
pledge, and grant a first priority security interest in, all other shares of
Common Stock that each such person may subsequently acquire, including, without
limitation, upon exercise of options to purchase shares of Common Stock. As of
April 30, 1997, the outstanding indebtedness of each Management Investor to the
Company was equal to the original principal amount loaned to such Management
Investor as indicated above plus interest accrued thereon.
FIRST RESERVE TRANSACTION FEE
For financial advisory services rendered in connection with the
Acquisition, the Company agreed to pay First Reserve a fee of $500,000.
INDEBTEDNESS TO FUND VII
Prior to the Acquisition, Tennessee Gas Pipeline Company ("TGPL"), the
former wholly-owning parent of Ventures Corporation, was a guarantor with
respect to certain indebtedness (the "Michigan Senior Debt") of a partnership
formed to participate in the Michigan Development Project in which Ventures
Corporation was at the time a general partner. In connection with the
Acquisition, the Company formed Domain Energy Guarantor Corporation, a Delaware
corporation ("Guarantor Corporation"), for the sole purpose of assuming the
obligations of TGPL under such guaranty. As security for its obligations under
the guaranty, Guarantor Corporation purchased an $8.0 million certificate of
deposit issued by the lender in respect of the Michigan Senior Debt and assigned
and pledged such certificate to the lender.
To enable Guarantor Corporation to purchase the $8.0 million certificate
pledged as collateral for its guaranty of the Michigan Senior Debt, Fund VII
loaned Guarantor Corporation $8.0 million evidenced by a Subordinated Promissory
Note dated December 31, 1996 (the "Note"). The full principal amount of the
Note matures on December 31, 1999. Interest accrues on the Note at a rate per
annum equal to the interest rate per annum earned by Guarantor Corporation on
the $8.0 million certificate and is payable quarterly. The obligations of
Guarantor Corporation under the Note are expressly made subordinate and subject
in right of payment to the prior payment in full of the Michigan Senior Debt.
Upon consummation of the Michigan Disposition, the Michigan Senior Debt was
repaid in full and the pledge of the $8.0 million certificate was released.
ACQUISITION OF COMMON STOCK BY FUND VII
Pursuant to the Subscription Agreement dated December 31, 1996 (the "First
Reserve Subscription Agreement"), between the Company and Fund VII, the Company
granted to Fund VII an option (the "First Reserve Option") to acquire
1,914,048 shares of Common Stock for an aggregate purchase price of $8.0 million
plus any cash interest payment on the Note actually received by Fund VII (the
"Option Price"). The Option Price could be paid by Fund VII (i) prior to the
date on which the Note has been paid in full, by delivery to the Company of the
Note together with the payment in cash of any principal or interest payments
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on the Note previously received by Fund VII and (ii) after the date on which the
Note has been paid in full, by payment of the Option Price in cash. In
connection with the Offering, the Company and Fund VII have agreed to
restructure the terms of the First Reserve Option as set forth below.
The Company and Fund VII have agreed that concurrently with consummation of
the Offering, Fund VII will purchase, at a price per share equal to the Price to
Public set forth on the cover page of this Prospectus, a number of shares of
Common Stock such that the aggregate purchase price paid by Fund VII for such
shares equals $8,681,000. The amount of $8,681,000 represents the sum of (i) the
outstanding principal balance of the Note plus estimated accrued interest
thereon through June 15, 1997 (the date on which the Company expects the
Offering to be consummated) and (ii) $500,000 to be paid in cash by Fund VII.
See "-- Indebtedness to Fund VII."
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
The following table sets forth certain information as of the date of this
Prospectus concerning the persons known by the Company to be beneficial owners
of more than five percent of the Company's outstanding Common Stock, the members
of the Board of Directors of the Company, the named executive officers listed in
the Summary Compensation Table above and all directors and executive officers of
the Company as a group.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP
-------------------------------------------------
PRIOR TO OFFERING SUBSEQUENT TO OFFERING
----------------------- -----------------------
NAME OF BENEFICIAL OWNER SHARES PERCENT SHARES PERCENT
- ---------------------------------------- ----------- ------- ----------- -------
<S> <C> <C> <C> <C>
First Reserve Corporation(1)............ 7,177,681 93.7% 7,797,752(4) 54.6%
475 Steamboat Road
Greenwich, Connecticut 06830
William E. Macaulay(2).................. 7,177,681(3) 93.7 7,797,752(4) 54.6
475 Steamboat Road
Greenwich, Connecticut 06830
John A. Hill(2)......................... 7,177,681(3) 93.7 7,797,752(4) 54.6
475 Steamboat Road
Greenwich, Connecticut 06830
Michael V. Ronca........................ 179,442 2.3 179,442 1.3
Herbert A. Newhouse..................... 59,813 * 59,813 *
Catherine L. Sliva...................... 39,955 * 39,955 *
Rick G. Lester.......................... 29,913 * 29,913 *
Jonathan S. Linker...................... -- -- -- --
Steven H. Pruett........................ -- -- -- --
William P. Nicoletti.................... -- -- -- --
Gary K. Wright.......................... -- -- -- --
All directors and executive officers as
a group (9 persons)................... 7,486,804(3) 97.7 8,106,875(4) 56.8
</TABLE>
- ------------
* Less than 1%.
(1) Shares of Common Stock shown as owned by First Reserve Corporation are owned
of record by Fund VII, of which First Reserve Corporation is the sole
general partner and as to which it possesses sole voting and investment
power.
(2) Messrs. Macaulay and Hill may be deemed to share beneficial ownership of the
shares shown as beneficially owned by First Reserve Corporation as a result
of Messrs. Macaulay and Hill's ownership of common stock of First Reserve
Corporation. Messrs. Macaulay and Hill disclaim beneficial ownership of such
shares.
(3) Includes 7,177,681 shares beneficially owned by First Reserve Corporation.
(4) Includes 7,177,681 shares beneficially owned by First Reserve Corporation
and 620,071 shares to be purchased (assuming an initial public offering
price of $14.00 per share) by Fund VII concurrently with consummation of the
Offering.
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DESCRIPTION OF CAPITAL STOCK
THE FOLLOWING SUMMARY DESCRIPTION OF THE COMPANY'S CAPITAL STOCK IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE COMPANY'S CERTIFICATE OF
INCORPORATION, A COPY OF WHICH HAS BEEN INCLUDED AS AN EXHIBIT TO THE
REGISTRATION STATEMENT OF WHICH THIS PROSPECTUS IS A PART. ALL CAPITALIZED TERMS
USED AND NOT DEFINED BELOW HAVE THE RESPECTIVE MEANINGS ASSIGNED TO THEM IN THE
CERTIFICATE OF INCORPORATION.
COMMON STOCK
The Company is authorized to issue up to 25,000,000 shares of Common Stock,
$.01 par value per share. As of the date of this Prospectus, there were
7,663,684 shares of Common Stock issued and outstanding. Immediately after
completion of the Offering, 14,283,755 shares of Common Stock will be issued and
outstanding.
Holders of Common Stock are entitled to one vote for each share held, are
not entitled to cumulative voting for the purpose of electing directors and have
no preemptive or similar right to subscribe for, or to purchase, any shares of
Common Stock or other securities to be issued by the Company in the future.
Accordingly, the holders of more than 50% in voting power of the shares of
Common Stock voting generally for the election of directors will be able to
elect all of the Company's directors. Immediately after completion of the
Offering and the concurrent sale to Fund VII, Fund VII will own 58.0% of the
outstanding shares of Common Stock of the Company (or 54.6% if the
over-allotment option is exercised in full) and will be in a position to control
actions that require the consent of stockholders, including the election of
directors, payment of dividends, amendment of the Certificate of Incorporation
and mergers or a sale of substantially all of the assets of the Company.
Holders of shares of Common Stock have no exchange, conversion or
preemptive rights and such shares are not subject to redemption. All outstanding
shares of Common Stock are, and upon issuance the shares of Common Stock offered
hereby will be, duly authorized, validly issued, fully paid and nonassessable.
Subject to the prior rights, if any, of holders of any outstanding class or
series of capital stock having a preference in relation to the Common Stock as
to distributions upon the dissolution, liquidation and winding-up of the Company
and as to dividends, holders of Common Stock are entitled to share ratably in
all assets of the Company which remain after payment in full of all debts and
liabilities of the Company, and to receive ratably such dividends, if any, as
may be declared by the Company's Board of Directors from time to time out of
funds and other assets legally available therefor. See "Dividend Policy" and
"Capitalization."
PREFERRED STOCK
The Board of Directors is authorized, without action by the holders of
Common Stock, to issue up to 5,000,000 shares of preferred stock, $.01 par value
(the "Preferred Stock"), in one or more series, to establish the number of
shares to be included in each such series and to fix the designations,
preferences, relative, participating, optional and other special rights of the
shares of each such series and the qualifications, limitations and restrictions
thereof. Such matters may include, among others, voting rights, conversion and
exchange privileges, dividend rates, redemption rights, sinking fund provisions
and liquidation rights that could be superior and prior to the Common Stock.
The issuance of one or more series of the Preferred Stock could, under
certain circumstances, adversely affect the voting power of the holders of the
Common Stock and could have the effect of discouraging or making more difficult
any attempt by a person or group to effect a change in control of the Company.
DELAWARE BUSINESS COMBINATION STATUTE
The Company is a Delaware corporation and is subject to Section 203 of the
DGCL ("Section 203"). In general, Section 203 prevents an "interested
stockholder" (defined generally as a person owning 15% or more of a
corporation's outstanding voting stock) from engaging in a "business
combination" (as therein defined) with a Delaware corporation for three years
following the time that such person became an interested stockholder, unless (i)
before such person became an interested stockholder, the board of
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<PAGE>
directors of the corporation approved the business combination in question or
the transaction which resulted in such person becoming an interested
stockholder, (ii) upon consummation of the transaction that resulted in the
interested stockholder's becoming such, the interested stockholder owns at least
85% of the voting stock of the corporation outstanding at the time such
transaction commenced (excluding stock held by directors who are also officers
of the corporation and by employee stock plans that do not provide employees
with rights to determine confidentially whether shares held subject to the plan
will be tendered in a tender or exchange offer), or (iii) at or following the
transaction in which such person became an interested stockholder, the business
combination is approved by the board of directors of the corporation and
authorized at a meeting of stockholders by the affirmative vote of the holders
of not less than 66 2/3% of the outstanding voting stock of the corporation not
owned by the interested stockholder. Under Section 203, the restrictions
described above 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 corporation and a person who
had not been an interested stockholder during the preceding three years or who
became an interested stockholder with the approval of the corporation's
directors or at a time when the restrictions imposed by Section 203 did not
apply in accordance with the terms thereof, and which transactions are approved
or not opposed by a majority of the members of the board of directors then in
office who were directors prior to any person becoming an interested stockholder
during the previous three years or were recommended for election or elected to
succeed such directors by a majority of such directors. Fund VII is not subject
to the restrictions contained in Section 203 because the transaction that
resulted in Fund VII becoming an interested stockholder (i.e., the sale of
shares of Common Stock to Fund VII to finance the Acquisition pursuant to the
First Reserve Subscription Agreement) was approved by the Board of Directors.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is ChaseMellon
Shareholder Services, L.L.C.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering and the Concurrent Sale, the Company will
have outstanding an aggregate of 14,283,755 shares of Common Stock. All of the
6,000,000 shares sold in the Offering (6,900,000 shares if the over-allotment
option granted to the Underwriters is exercised in full) will be freely
tradeable without restriction or further registration under the Securities Act,
except for any shares purchased by "affiliates" of the Company, as that term
is defined in Rule 144 under the Securities Act (whose sales would be subject to
certain limitations and restrictions described below).
The 7,663,684 shares of Common Stock held by the Company's existing
stockholders were, and the 620,071 shares of Common Stock to be purchased by
Fund VII concurrently with consummation of the Offering will be, issued and sold
by the Company in reliance on an exemption from the registration requirements of
the Securities Act. The outstanding shares of Common Stock held by such
stockholders after the Offering will be subject to the "lock-up" agreement
described below. After expiration of such lock-up agreement 180 days after the
date of this Prospectus, the Common Stock then owned by such stockholders may be
resold only upon registration under the Securities Act or pursuant to an
exemption from such registration requirements, including exemptions contained in
Rule 144. The Securityholders Agreement provides Fund VII, after the Offering,
the right on four occasions to require the Company to register all or part of
Fund VII's registrable shares of Common Stock (which includes the Common Stock
to be purchased in the Concurrent Sale) under the Securities Act, and the
Company is required to use its reasonable best efforts to effect such
registration, subject to certain conditions and limitations. Upon the Company's
receipt of a demand from Fund VII to register all or part of its registrable
shares, the Company is required to notify the other parties to the
Securityholders Agreement of the demand and such parties shall, subject to
certain conditions and limitations, have the right to include the registrable
shares held by them in such registration. The Securityholders Agreement also
provides all the parties thereto with piggyback registration rights on any
offering by the Company of any of its securities to the public except a
registration on Forms S-4 or S-8 under the Securities Act; provided, however,
that until two years after the date of the
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<PAGE>
Offering, the Management Investors will not have piggyback registration rights
with respect to any registration in which Fund VII or any of its permitted
transferees are not participating. Fund VII has waived its registration rights
with respect to a Registration Statement filed by the Company with respect to
the Offering and has informed the Company that it has no immediate plans to sell
or otherwise dispose of shares of the Common Stock.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated) who has beneficially owned shares of a public
company for at least one year (including the holding period of any prior owner
except an affiliate) that were not acquired in a public offering is entitled to
sell in "broker's transactions" or to market makers, within any three-month
period, a number of shares that does not exceed the greater of (i) 1% of the
number of shares of Common Stock then outstanding (approximately 142,837 shares
immediately after the Offering) or (ii) generally, the average weekly trading
volume in the Common Stock during the four calendar weeks preceding the required
filing of a Form 144 with respect to such sale. Sales under Rule 144 are
generally subject to the availability of current public information about the
Company. Under Rule 144(k), a person who is not deemed to have been an affiliate
of the Company at any time during the 90 days preceding a sale, and who has
beneficially owned the shares proposed to be sold for at least two years, is
entitled to sell such shares without having to comply with the manner of sale,
public information, volume limitation or notice filing provisions of Rule 144.
As soon as practicable following the Offering, the Company intends to file
a registration statement on Form S-8 under the Securities Act covering 867,091
shares of Common Stock reserved for issuance pursuant to its Stock Purchase and
Option Plan. Shares of Common Stock issued upon exercise of the stock options
granted under the Stock Purchase and Option Plan after the effective date of
such registration statement will be freely tradeable, except for any such shares
acquired by an "affiliate" of the Company, as that term is defined in Rule 144
under the Securities Act.
The Company, each of the Company's directors and executive officers and
Fund VII have agreed not to sell, offer to sell, contract to sell, grant any
option for the sale of or otherwise dispose of, directly or indirectly, any
shares of Common Stock or any securities convertible into or exercisable or
exchangeable for any Common Stock owned by any of them prior to the expiration
of 180 days from the date of this Prospectus, except (i) for shares of Common
Stock offered hereby, (ii) with the prior written consent of PaineWebber
Incorporated, and (iii) for the issuance of shares pursuant to employee benefit
plans of the Company, provided that the Company has agreed not to grant options
to purchase shares of Common Stock at a price less than the Offering price.
Prior to the Offering, there has been no public market for the Common
Stock, and no prediction can be made as to the effect, if any, that future sales
of shares or the availability of shares for sale will have on the market price
for Common Stock prevailing from time to time. Sales of substantial amounts of
Common Stock in the public market, or the perception of the availability of
shares for sale, could adversely affect the prevailing market price of the
Common Stock and could impair the Company's ability to raise capital through the
sale of its equity securities.
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UNDERWRITING
Under the terms and subject to the conditions contained in an Underwriting
Agreement dated June __, 1997 (the "Underwriting Agreement"), the underwriters
named below (the "Underwriters"), for whom Credit Suisse First Boston
Corporation, PaineWebber Incorporated, Prudential Securities Incorporated and
Morgan Keegan & Company, Inc. are acting as representatives (the
"Representatives"), have severally but not jointly agreed to purchase from the
Company the following respective numbers of Shares:
NUMBER
UNDERWRITER OF SHARES
- ---------------------------------------- ---------
Credit Suisse First Boston
Corporation...........................
PaineWebber Incorporated................
Prudential Securities Incorporated......
Morgan Keegan & Company, Inc............
---------
Total.............................. 6,000,000
=========
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 of the shares 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 non-defaulting 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
900,000 additional shares of Common Stock (the "Option Shares") 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, if any, in the sale of the shares offered hereby.
To the extent that this option to purchase is exercised, each Underwriter will
become obligated, subject to certain conditions, to purchase approximately the
same percentage of Option Shares as the number of shares set forth next to such
Underwriter's name in the preceding table bears to the sum of the total number
of shares in such table 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 offered hereby 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 dicount of $_____
per share on sales to other dealers. After the initial public offering, the
public offering price and concession and discount to dealers may be changed by
the Representatives.
The Company has 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 thereto.
The Company, each of the Company's directors and executive officers and
Fund VII have agreed not to sell, offer to sell, contract to sell, grant any
option for the sale of or otherwise dispose of, directly or indirectly, any
shares of Common Stock or any securities convertible into or exercisable or
exchangeable for any Common Stock owned by any of them prior to the expiration
of 180 days from the date of this Prospectus, except (i) for shares of Common
Stock offered hereby, (ii) with the prior written consent of
74
<PAGE>
Credit Suisse First Boston Corporation and (iii) for the issuance of shares
pursuant to employee benefit plans of the Company, provided that the Company has
agreed not to grant options to purchase shares of Common Stock at a price less
than the Offering price.
In connection with the Acquisition, the Company paid PaineWebber
Incorporated a fee of $2.1 million for financial advisory services.
The Representatives have informed the Company that they do not expect
discretionary sales by the Underwriters to exceed 5% of the number of shares
offered hereby.
The Common Stock has been approved for listing on the New York Stock
Exchange subject to notice of issuance. To satisfy one of the requirements for
listing of the Common Stock on the New York Stock Exchange, the Underwriters
have undertaken to sell lots of 100 or more shares to a sufficient number of
persons to establish a minimum of 2,000 round lot beneficial holders after the
Offering.
Prior to the Offering, there has been no public market for the Common
Stock. The initial public offering price for the shares offered hereby will be
determined by negotiations among the Company, First Reserve and the
Representatives. In determining such price, consideration will be given to
various factors, including market conditions for initial public offerings, the
history of and prospects for the Company's business, the Company's past and
present operations, its past and present earnings and current financial
position, an assessment of the Company's management, the market of securities of
companies in businesses similar to those of the Company, the general condition
of the securities markets and other relevant factors. There can be no assurance
that the initial public offering price will correspond to the price at which the
Common Stock will trade in the public market subsequent to the Offering or that
an active trading market for the Common Stock will develop and continue after
the Offering.
The Representatives, on behalf of the Underwriters, may engage in
over-allotment, stabilizing transactions, syndicate covering transactions and
penalty bids in accordance with Regulation M under the Securities Exchange Act
of 1934 (the "Exchange Act"). Over-allotment involves syndicate sales in
excess of the offering size, which creates a syndicate short position.
Stabilizing transactions permit bids to purchase the underlying security so long
as the stabilizing bids do not exceed a specified maximum. Syndicate covering
transactions involve purchases of the Common Stock in the open market after the
distribution has been completed in order to cover syndicate short positions.
Penalty bids permit the Representatives to reclaim a selling concession from a
syndicate member when the Common Stock originally sold by such syndicate member
is purchased in a syndicate covering transaction to cover syndicate short
positions. Such stabilizing transactions, syndicate covering transactions and
penalty bids may cause the price of the Common Stock to be higher than it would
otherwise be in the absence of such transactions. These transactions may be
effected on the New York Stock Exchange or otherwise and, if commenced, may be
discontinued at any time.
NOTICE TO CANADIAN RESIDENTS
RESALE RESTRICTIONS
The distribution of the 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 Common Stock are effected. Accordingly, any resale of the 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. Purchasers are advised to seek legal advice prior to any resale of
the Common Stock.
REPRESENTATIONS OF PURCHASERS
Each purchaser of 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
75
<PAGE>
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 OF ACTION (ONTARIO PURCHASERS)
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 action for damages or rescission or rights of action under
the civil liability provisions of the U.S. federal securities laws.
ENFORCEMENT OF LEGAL RIGHTS
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 Canadian 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 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
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 Common Stock acquired on the same date
and under the same prospectus exemption.
TAXATION AND ELIGIBILITY FOR INVESTMENT
Canadian purchasers of Common Stock should consult their own legal and tax
advisors with respect to the tax consequences of an investment in the Common
Stock in their particular circumstances and with respect to the eligibility of
the Common Stock for investment by the purchaser under relevant Canadian
legislation.
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed on
for the Company by Weil, Gotshal & Manges LLP, Houston, Texas and for the
Underwriters by Baker & Botts, L.L.P., Houston, Texas.
EXPERTS
The consolidated financial statements of the Company as of December 31,
1996 and for the period from December 30, 1996 (date of incorporation) to
December 31, 1996, and the combined financial statements of the Predecessor as
of December 31, 1995, and for each of the years in the three-year-period ended
December 31, 1996, have been audited by Deloitte & Touche LLP, independent
auditors, as stated in their report appearing herein, and are included in
reliance upon the report of such firm given upon their authority as experts in
accounting and auditing.
The reserve reports and estimates of the Company's net proved oil and
natural gas reserves included herein have, to the extent described herein, been
prepared by DeGolyer and Netherland, Sewell. Summaries of these estimates and
the audit letters of DeGolyer and Netherland, Sewell have been included in this
Prospectus as Appendix A in reliance upon such firms as experts with respect to
such matters.
76
<PAGE>
AVAILABLE INFORMATION
As a result of the Offering, the Company will be subject to the
informational requirements of the Securities Exchange Act of 1934, as amended,
and in accordance therewith will file reports and other information with the
Commission. The reports and other information filed by the Company with the
Commission can be inspected and copies can be obtained at the public reference
facilities maintained by the Commission at Judiciary Plaza, Room 1024, 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the Regional Offices of the
Commission at 7 World Trade Center, New York, New York 10048 and Northwestern
Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661.
Copies of such material also can be obtained from the Public Reference Section
of the Commission, 450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed
rates. In addition, the Commission maintains a site on the World Wide Web at
http://www.sec.gov that contains reports, proxy and information statements and
other information regarding registrants that file electronically with the
Commission.
The Company has filed with the Commission a Registration Statement on Form
S-1 under the Securities Act with respect to the Common Stock offered hereby.
This Prospectus does not contain all of the information set forth in the
Registration Statement, certain portions of which are omitted as permitted by
the rules and regulations of the Commission. Such additional information may be
obtained at the locations listed above. Statements made in this Prospectus
concerning the contents of any contract, agreement or other document filed as an
exhibit to the Registration Statement are summaries of the terms of such
contract, agreement or document and are not necessarily complete. Reference is
made to each such exhibit for a more complete description of the matters
involved.
The Company intends to furnish its stockholders with annual reports
containing audited financial statements and an opinion expressed by independent
auditors and with quarterly reports for the first three quarters of each fiscal
year containing unaudited summary financial information.
77
<PAGE>
GLOSSARY
The following are definitions of certain terms used in this Prospectus.
BBL. One barrel of crude oil, condensate or other liquids equal to 42 U.S.
gallons.
BCF. Billion cubic feet.
BCFE. Billion cubic feet of natural gas equivalent.
BTU. British thermal unit, which is the heat required to raise the
temperature of a one-pound mass of water from 58.5 degrees Fahrenheit to 59.5
degrees Fahrenheit under specific conditions.
DEVELOPED ACREAGE. The number of acres which are allocated or assignable
to producing wells or wells capable of production.
DEVELOPMENT WELL. A well drilled within the proved area of an oil or gas
reservoir to the depth of a stratigraphic horizon known to be productive in an
attempt to recover proved undeveloped reserves.
EXPLORATORY WELL. 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.
FARMOUT. An assignment of an interest in a drilling location and related
acreage conditional upon the drilling of a well or the establishment of
production on that location. The assignor usually retains an overriding royalty
interest or a working interest after payout in the lease.
FINDING COSTS. Expressed in terms of dollars per Mcfe, calculated by
dividing the amount of total capital expenditures for oil and gas activities by
the amount of estimated net proved reserves added during the same period
(including the effect on proved reserves of reserve revisions).
GROSS ACRES OR GROSS WELLS. The number of acres or wells in which the
Company has a working interest.
LEASE OPERATING EXPENSE. Costs incurred to operate and maintain wells and
related equipment and facilities including applicable operating costs of support
equipment and facilities and other costs of operating and maintaining those
wells and related equipment and facilities.
MBBL. One thousand barrels.
MCF. One thousand cubic feet.
MCFE. One thousand cubic feet of natural gas equivalent.
MMBBL. One million barrels.
MMBTU. One million Btus.
MMCF. One million cubic feet.
MMCFE. One million cubic feet of natural gas equivalent.
NATURAL GAS EQUIVALENT. Cubic feet of natural gas equivalent, determined
using the ratio of one Bbl of crude oil, condensate or natural gas liquids to
six Mcf of natural gas.
NET ACRES OR NET WELLS. The sum of the fractional working interests owned
in gross acres or gross wells.
NET PROFITS INTEREST. An interest in an oil and gas property entitling the
owner to a share of the gross revenues from oil and gas production less all
operating, production, development, transportation, transmission and marketing
expenses, production, sales and ad valorem taxes attributable to such
production.
OVERRIDING ROYALTY INTEREST. A royalty interest which is carved out of a
lessee's working interest under an oil and gas lease.
PRODUCTION PAYMENT. A share of the oil or natural gas produced from a
specified tract of land, free of the costs of production at the surface,
terminating when a specified sum from the sale of such oil or natural gas has
been realized.
78
<PAGE>
PRODUCTIVE WELL. A well that is producing oil and gas or that is capable
of production.
PROVED DEVELOPED NONPRODUCING RESERVES. Proved developed reserves expected
to be recovered from zones behind casing in existing wells.
PROVED DEVELOPED PRODUCING RESERVES. Proved developed reserves that are
expected to be recovered from completion intervals currently open in existing
wells and able to produce to market.
PROVED DEVELOPED RESERVES. Proved reserves that can be expected to be
recovered from completion intervals currently open in existing wells and able to
produce to market.
PROVED RESERVES. 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.
PROVED UNDEVELOPED RESERVES. Proved 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.
PV-10 RESERVE VALUE. The pre-tax present value, discounted at 10% per
annum, of future net cash flows from estimated proved reserves, calculated
holding prices and costs constant at amounts in effect on the date of the
estimate (unless such prices or costs are subject to change pursuant to
contractual provisions). The difference between the PV-10 Reserve Value and the
standardized measure of discounted future net cash flows is the present value of
income taxes applicable to such future net cash flows.
RECOMPLETION. The completion for production of an existing well bore in
another formation from that in which the well has been previously completed.
RESERVE LIFE INDEX. Calculated by dividing year-end proved reserves by
annual production for the most recent year.
ROYALTY INTEREST. An interest in an oil and gas property entitling the
owner to a share of oil or gas production free of costs of production.
SPUD. To start (or restart) the drilling of a new well.
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS. The present
value, discounted at 10% per annum, of future net cash flows from estimated
proved reserves, calculated holding prices and costs constant at amounts in
effect on the date of the estimate (unless such prices or costs are subject to
change pursuant to contractual provisions) and in all instances in accordance
with the Commission's rules for inclusion of oil and gas reserve information in
financial statements filed with the Commission.
TCF. One trillion cubic feet.
TERM OVERRIDING ROYALTY INTEREST. An overriding royalty interest with a
fixed duration.
UNDEVELOPED ACREAGE. Lease acreage on which wells have not been
participated in or completed to a point that would permit the production of
commercial quantities of oil and gas regardless of whether such acreage contains
proved reserves.
WATERFLOOD. The injection of water into a reservoir to fill pores vacated
by produced fluids, thus maintaining reservoir pressure and assisting
production.
WORKING INTEREST. A cost bearing interest which gives the owner the right
to drill, produce and conduct oil and gas operations on the property, as well as
a right to a share of production therefrom.
WORKOVER. Operations on a producing well to restore or increase
production.
79
<PAGE>
INDEX TO FINANCIAL STATEMENTS
PAGE
----
Independent Auditors' Report......... F-2
Combined and Consolidated Balance
Sheets as of December 31, 1995 and
1996, respectively................. F-3
Combined Statements of Income for the
years ended December 31, 1994, 1995
and 1996........................... F-4
Combined and Consolidated Statements
of Stockholder's Equity for the
years ended December 31, 1994, 1995
and 1996 and the period from
December 30, 1996 (date of
incorporation) to December 31,
1996, respectively................. F-5
Combined and Consolidated Statements
of Cash Flows for the years ended
December 31, 1994, 1995 and 1996
and the period from December 30,
1996
(date of incorporation) to December
31, 1996, respectively............. F-6
Notes to the Combined and
Consolidated Financial
Statements......................... F-7
Consolidated Balance Sheets as of
December 31, 1996 and March 31,
1997 (Unaudited)................... F-22
Combined and Consolidated Statements
of Income for the three months
ended
March 31, 1996 and 1997,
respectively (Unaudited)........... F-23
Consolidated Statement of
Stockholders' Equity for the three
months ended
March 31, 1997 (Unaudited)......... F-24
Combined and Consolidated Statements
of Cash Flows for the three months
ended March 31, 1996 and 1997,
respectively (Unaudited)........... F-25
Notes to the Combined and
Consolidated Financial Statements
(Unaudited)........................ F-26
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders of
Domain Energy Corporation
We have audited the accompanying consolidated balance sheet of Domain Energy
Corporation and subsidiaries (the "Company"), the Successor, as of December
31, 1996 and the related statement of stockholder's equity and cash flows from
December 30, 1996 (date of incorporation) to December 31, 1996. We have also
audited the accompanying combined balance sheet of Tenneco Ventures Corporation
and Tenneco Gas Production Corporation (the "Tenneco Entities"), the
Predecessor, as of December 31, 1995 and the related combined statements of
income, stockholder's equity and cash flows for each of the three years in the
period ended December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the consolidated financial position of the Company and its
subsidiaries as of December 31, 1996 and the combined financial position of the
Tenneco Entities as of December 31, 1995 and the combined results of their
operations and their combined cash flows for each of the three years in the
period ended December 31, 1996 in conformity with generally accepted accounting
principles.
April 3, 1997 (June __, 1997 as to Note 7)
Houston, Texas
The accompanying consolidated financial statements reflect the 754-for-one
stock split to be effected immediately before consummation of the Offering. The
above opinion is in the form which will be signed by Deloitte & Touche LLP upon
consummation of such stock split, which is described in Note 7 of Notes to the
Combined and Consolidated Financial Statements, and assuming that from April 3,
1997 to the date of such stock split, no other events shall have occurred that
would affect the accompanying consolidated financial statements and notes
thereto.
DELOITTE & TOUCHE LLP
Houston, Texas
May 21, 1997
F-2
<PAGE>
DOMAIN ENERGY CORPORATION
COMBINED AND CONSOLIDATED BALANCE SHEETS
(NOTE 1)
(IN THOUSANDS, EXCEPT SHARE DATA)
AS OF DECEMBER 31,
---------------------------
PREDECESSOR SUCCESSOR
1995 1996
------------ -------------
ASSETS
Cash and cash equivalents............ $ -- $ 736
Restricted certificate of deposit.... -- 8,000
Accounts receivable.................. 13,219 13,404
IPF Program notes receivable, current
portion............................ 2,247 7,874
Prepaid and other current assets..... 1,608 1,525
------------ -------------
Total current assets............ 17,074 31,539
IPF Program notes receivable......... 5,744 13,836
Oil and natural gas properties, full
cost method.......................... 137,975 88,648
Less: Accumulated depreciation,
depletion and amortization........... (26,251) --
Investments and other assets......... 2,554 3,103
------------ -------------
Total assets.................... $137,096 $ 137,126
============ =============
LIABILITIES
Accounts payable..................... $ 11,265 $ 15,823
Accrued expenses..................... 48 65
Current maturities of long-term
debt............................... -- 33,557
------------ -------------
Total current liabilities....... 11,313 49,445
Long-term debt....................... -- 59,118
Deferred income taxes................ 13,349 --
Parent advances...................... 110,274 --
------------ -------------
Total liabilities............... 134,936 108,563
Minority interest.................... -- 986
Commitments and contingencies
STOCKHOLDER'S EQUITY
Common stock:
Predecessor -- $5.00 par value,
400 shares authorized, issued
and outstanding at December 31,
1995.
Successor -- $.01 par value,
15,080,000 shares authorized
and 7,177,681 issued and
outstanding at December 31,
1996........................... $ 2 $ 72
Additional paid-in capital........... -- 27,505
Retained earnings.................... 2,158 --
------------ -------------
Total stockholder's equity...... 2,160 27,577
------------ -------------
Total liabilities and
stockholder's equity............ $137,096 $ 137,126
============ =============
The accompanying notes are an integral part
of the combined and consolidated financial statements.
F-3
<PAGE>
DOMAIN ENERGY CORPORATION
COMBINED STATEMENTS OF INCOME
(IN THOUSANDS)
PREDECESSOR
-------------------------------
YEAR ENDED DECEMBER 31,
-------------------------------
1994 1995 1996
--------- --------- ---------
REVENUES:
Oil and natural gas sales............... $ 5,340 $ 34,877 $ 52,889
IPF Activities.......................... 1,417 2,356 4,369
Other................................... 283 414 64
--------- --------- ---------
Total revenues................ 7,040 37,647 57,322
--------- --------- ---------
EXPENSES:
Lease operating......................... 1,790 7,980 10,962
Production and severance taxes.......... 18 710 1,372
Depreciation, depletion and
amortization.......................... 3,101 22,692 22,739
General and administrative.............. 52 2,780 3,361
Corporate overhead allocation........... -- 1,270 4,827
--------- --------- ---------
Total operating expenses...... 4,961 35,432 43,261
Income from operations.................. 2,079 2,215 14,061
Interest expense........................ -- -- 470
--------- --------- ---------
Income before income taxes.............. 2,079 2,215 13,591
Income tax provision.................... 1,105 861 5,551
Minority interest....................... -- -- (157)
--------- --------- ---------
Net income.............................. $ 974 $ 1,354 $ 8,197
========= ========= =========
The accompanying notes are an integral part
of the combined and consolidated financial statements.
F-4
<PAGE>
DOMAIN ENERGY CORPORATION
COMBINED AND CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
PREDECESSOR
--------------------------------------------------------
ADDITIONAL RETAINED TOTAL
COMMON PAID IN EARNINGS STOCKHOLDER'S
STOCK CAPITAL (DEFICIT) EQUITY
------ ---------- -------- --------------
<S> <C> <C> <C> <C>
Balance at January 1, 1994.............. $ 2 -- $ (170) $ (168)
Net income.............................. -- -- 974 974
------ ---------- -------- --------------
Balance at December 31, 1994............ 2 -- 804 806
Net income.............................. -- -- 1,354 1,354
------ ---------- -------- --------------
Balance at December 31, 1995............ 2 -- 2,158 2,160
Net income.............................. -- -- 8,197 8,197
------ ---------- -------- --------------
Balance at December 31, 1996
(prior to the Acquisition)............ $ 2 $ -- $ 10,355 $ 10,357
====== ========== ======== ==============
SUCCESSOR
--------------------------------------------------------
ADDITIONAL TOTAL
COMMON PAID IN RETAINED SHAREHOLDER'S
STOCK CAPITAL EARNINGS EQUITY
------ ---------- -------- --------------
Balance at December 30, 1996 (date of
incorporation)........................ $-- $ -- $ -- $--
Issuance of Common Stock, net of
costs................................. 72 27,505 -- 27,577
------ ---------- -------- --------------
Balance at December 31, 1996............ $ 72 $ 27,505 $ -- $ 27,577
====== ========== ======== ==============
</TABLE>
The accompanying notes are an integral part
of the combined and consolidated financial statements.
F-5
<PAGE>
DOMAIN ENERGY CORPORATION
COMBINED AND CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
PREDECESSOR SUCCESSOR
---------------------------------- ------------------------
FOR THE PERIOD FROM
YEAR ENDED DECEMBER 31, DECEMBER 30, 1996
---------------------------------- (DATE OF INCORPORATION)
1994 1995 1996 TO DECEMBER 31, 1996
---------- ---------- ---------- ------------------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.............................. $ 974 $ 1,354 $ 8,197 $-
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation, depletion and
amortization..................... 3,101 22,692 22,739 --
Deferred income taxes.............. 9,956 1,781 7,704 --
Minority interest.................. -- -- 904 --
Allowance for doubtful IPF
investments...................... -- -- 437
Changes in operating assets and
liabilities:
Decrease (increase) in accounts
receivable....................... (713) (6,731) (1,598) --
Decrease (increase) in prepaid and
other current assets............. (441) (956) 83 --
Increase (decrease) in accounts payable
and accrued expenses.................. (446) 3,150 3,321 --
---------- ---------- ---------- -------------
Net cash provided by operating
activities............................ 12,431 21,290 41,787 --
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of the Tenneco Entities..... -- -- -- (95,464)
Purchase of restricted certificate of
deposit............................... -- -- -- (8,000)
Investment in oil and natural gas
properties............................ (85,433) (44,118) (54,456) --
Proceeds from sale of oil and gas
properties............................ -- 8,275 1,546 --
IPF Program investments of capital
(notes receivable).................... (3,315) (6,606) (19,045) --
IPF Program return of capital (notes
receivable)........................... 3,507 2,638 4,618 --
Investment and other assets............. (1,428) 83 596 --
---------- ---------- ---------- -------------
Net cash used in investing activities... (86,669) (39,728) (66,741) (103,464)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from debt borrowings........... -- -- 19,231 74,200
Repayment of debt borrowings............ -- -- (756) --
Advances from Parent, net............... 84,070 6,971 6,479 --
Issuance of common stock................ -- -- -- 30,000
---------- ---------- ---------- -------------
Net cash provided by financing
activities............................ 84,070 6,971 24,954 104,200
Increase (decrease) in cash and cash
equivalents........................... 9,832 (11,467) -- --
Cash and cash equivalents, beginning of
period................................ 1,635 11,467 -- --
---------- ---------- ---------- -------------
Cash and cash equivalents, end of period
(Predecessor -- before Acquisition)... $ 11,467 $ -- $ -- $ 736
========== ========== ========== =============
</TABLE>
The accompanying notes are an integral part
of the combined and consolidated financial statements.
F-6
<PAGE>
DOMAIN ENERGY CORPORATION
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION, BASIS OF PRESENTATION AND NATURE OF OPERATIONS
For the years ended December 31, 1994 and 1995 and for the period from
January 1, 1996 through December 11, 1996, Tenneco Ventures Corporation
("Ventures") and Tenneco Gas Production Corporation ("Production" and,
together with Ventures, the "Tenneco Entities") were indirect subsidiaries of
Tenneco, Inc. ("Tenneco"). As a result of a merger between Tenneco and a
subsidiary of El Paso Natural Gas Company ("El Paso"), Ventures and Production
became wholly owned indirect subsidiaries of El Paso for the period from
December 12, 1996 to December 31, 1996. On December 31, 1996, Domain Energy
Corporation ("Domain") acquired all of the outstanding common stock of
Ventures and Production (the "Acquisition"). Domain was incorporated in
Delaware in December 1996 to acquire such common stock and had no operations
prior to the Acquisition.
Unless otherwise indicated, references to the Company are to Domain and its
subsidiaries at and subsequent to December 31, 1996 and to the combined
activities of the Tenneco Entities prior to December 31, 1996. References to the
Parent are to Tenneco or its affiliates prior to December 11, 1996 and to El
Paso from December 12, 1996 to December 31, 1996.
The Company was capitalized on December 31, 1996 with the issuance of
7,177,681 shares of common stock for $30.0 million and borrowings of $66.2
million under its credit facilities. The Company completed the Acquisition for a
total cash purchase price of approximately $95.5 million and the assumption of
liabilities of approximately $31.5 million. The Company has accounted for the
Acquisition using the purchase method of accounting. The assets and liabilities
of the Tenneco Entities have been recorded in the Company's balance sheet at
December 31, 1996 at their estimated fair market values, summarized as follows
(in thousands):.
ASSETS:
Accounts receivable -- trade.... $ 13,404
IPF Program notes receivable.... 21,710
Oil and gas properties.......... 88,648
Other assets.................... 3,238
----------
Total assets............... $ 127,000
==========
LIABILITIES:
Accounts payable................ (13,030)
Long-term debt.................. (18,475)
----------
Total liabilities.......... $ (31,505)
==========
The financial statements of the Tenneco Entities at December 31, 1995 and
for each of the years ended December 31, 1994, 1995 and 1996 have been combined
to reflect their combined historical financial position and historical results
of operations.
The following unaudited pro forma summary presents the consolidated results
of operations of the Company for the years ended December 31, 1995 and 1996 as
if the Acquisition had occurred at the beginning of 1995 (in thousands):
1995 1996
--------- ---------
Revenues................................ $ 37,647 $ 57,322
Net income.............................. $ 3,824 $ 10,003
The Company is an independent oil and gas company engaged in the
exploration, development, production and acquisition of domestic oil and natural
gas properties, principally in the Gulf Coast region. The Company complements
these activities with its Independent Producer Finance Program (the "IPF
F-7
<PAGE>
DOMAIN ENERGY CORPORATION
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Program") pursuant to which it invests in oil and natural gas reserves through
the acquisition of term overriding royalty interests.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION AND COMBINATION -- The consolidated balance
sheet at December 31, 1996 includes the accounts of the Company and its
majority-owned subsidiaries. The Company sponsored and managed two oil and gas
investment programs for unaffiliated institutional investors (the "Funds").
The Company has a 10% interest in one program and a 30% interest in the other.
The Funds own interests in oil and gas properties. The Company accounts for its
interests in the Funds using the pro rata method of consolidation.
Included in the consolidated financial statements are the accounts of
Michigan Production Company, L.L.C. ("MPC"), of which the Company owns 35% of
the voting capital stock. The Company fully consolidates the activities of MPC
as it receives 80% of the profit distributions, manages the operating activities
of MPC and believes that it exercises control. The Company also owns 28% of the
voting capital stock of Michigan Energy Company, L.L.C. ("MEC"), which is
accounted for using the equity method of accounting as the Company exercises
significant influence over the activities of MEC but does not control MEC.
The combined financial statements of the Tenneco Entities include their
combined accounts and the combined accounts of their majority-owned
subsidiaries. All significant intercompany accounts and transactions have been
eliminated.
OIL AND GAS PROPERTIES -- Investments in oil and gas properties are
accounted for using the full cost method of accounting. All costs associated
with the acquisition, exploration, exploitation and development of oil and gas
properties are capitalized. General and administrative costs of $2.1 million and
$2.6 million were included in capitalized costs for the years ended December 31,
1995 and 1996, respectively. Such capitalized costs include payroll and other
related costs attributable to the Company's acquisition and exploration
activities. Costs related to production, development, and the IPF program are
expensed within the presented year and not capitalized.
Oil and gas properties are amortized using the unit-of-production method
using estimates of proved reserve quantities. Investments in unproved properties
are not amortized until proved reserves associated with the projects can be
determined or until impairment occurs. If the results of the assessment indicate
that the properties are impaired, the amount of impairment is added to the
proved oil and gas property costs to be amortized. The amortizable base includes
future development costs and, where significant, dismantlement, restoration, and
abandonments costs, net of estimated salvage values. The depletion rate per Mcfe
for the years ended December 31, 1994, 1995 and 1996 was $1.03, $1.08 and $0.91,
respectively.
Sales of proved and unproved properties are accounted for as adjustments of
capitalized costs with no gain or loss recognized, unless such adjustments would
significantly alter the relationship between capitalized costs and proved
reserves. Abandonments of properties are accounted for as adjustments of
capitalized costs with no loss recognized.
In addition, the total capitalized costs of oil and gas properties are
subject to a "ceiling test", which limits such costs to the estimated present
value, discounted at a 10% interest rate, of future net cash flows from proved
reserves, based on current economic and operating conditions, plus the cost of
unproved prospects. If capitalized costs exceed this limit, the excess is
charged to depreciation, depletion and amortization.
INDEPENDENT PRODUCER FINANCE PROGRAM -- Through its IPF Program, the
Company acquires term overriding royalty interests in oil and gas properties
owned by independent producers. Because the funds advanced to a producer for
these interests are repaid from an agreed upon share of cash proceeds from the
F-8
<PAGE>
DOMAIN ENERGY CORPORATION
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
sale of production until the amount advanced plus interest is paid in full, the
Company accounts for the term overriding royalty interests as notes receivable.
Under this accounting method, the Company recognizes only the interest income
portion of payments received from a producer as revenues on its income
statement. The remaining cash receipts are recorded as a reduction in notes
receivable on the Company's balance sheet and as IPF Program return of capital
on the Company's statement of cash flows. The Company records an impairment for
its investments on a case-by-case basis when it determines repayment to be
doubtful.
INCOME TAXES -- Through December 31, 1996, the Company's taxable income is
included in a consolidated United States income tax return with the Parent. The
intercompany tax allocation policy between the Company and the Parent provided
that each member of the consolidated group compute a provision for income taxes
on a separate return basis. The Company records its income taxes utilizing an
asset and liability approach which requires recognition of deferred tax assets
and liabilities for the expected future tax consequences of temporary
differences between the book carrying amounts and the tax basis of assets and
liabilities. All current amounts due to or from the Parent are included in
Parent advances on the combined balance sheet.
OIL AND GAS HEDGING ACTIVITIES -- The Company periodically uses derivative
financial instruments to manage price risks related to oil and natural gas sales
and not for speculative purposes. For book purposes, gains and losses related to
the hedging of anticipated transactions are recognized as income when the hedged
transaction occurs.
The Company primarily utilizes price swap agreements with major energy
companies to accomplish its hedging objectives. The price swap agreements
generally provide for the Company to receive or make counter-party payments on
the differential between a fixed price and a variable indexed price. Total oil
and natural gas sales hedged during the years ended December 31, 1996 and 1995
were 258,710 Bbls and 16,025 MMcf and 65,840 Bbls and -0-MMcf, respectively.
There were no hedging transactions in 1994. Gains (losses) realized by the
Company under such hedging arrangements, and reported as an increase (reduction)
of revenues, were ($10.7 million) and $0.2 million for the years ended December
31, 1996 and 1995, respectively. The following table sets forth the Company's
open hedging contracts for oil and natural gas under various price swap
agreements with major energy companies as of December 31, 1996:
<TABLE>
<CAPTION>
CRUDE OIL NATURAL GAS
------------------------------ ----------------------------
WEIGHTED AVERAGE WEIGHTED AVERAGE
BBLS FIXED SALES PRICE MMBTU FIXED SALES PRICE
--------- ------------------ ------ ------------------
<S> <C> <C> <C> <C>
Jan 1997 -- Dec 1997............ 244,540 $17.37 4,270 $ 2.58
Jan 1998 -- Dec 2000............ 442,550 $18.37 -- --
</TABLE>
REVENUE RECOGNITION -- The Company recognizes oil and gas revenue from its
interests in producing wells as oil and gas is sold from those wells. Oil and
gas sold in production operations is not significantly different from the
Company's share of production. The Company recognizes financing revenues from
its producer financing activities using the effective interest rate method.
The Company utilizes the sales method to account for gas production volume
imbalances. Under this method, income is recorded based on the Company's net
revenue interest in production taken for delivery. Management does not believe
that the Company had any material natural gas imbalances at December 31, 1996 or
1995.
FINANCIAL INSTRUMENTS -- The Company's financial instruments consist of
cash, accounts and notes receivable, payables, long-term debt and oil and
natural gas commodity hedges. The carrying amount of cash, accounts receivable
and payables approximates fair value because of the short-term nature of these
items. Based on current industry and other conditions, management believes that
the carrying value of its IPF Program notes receivable approximates, at a
minimum, their fair value. The carrying value of long-term
F-9
<PAGE>
DOMAIN ENERGY CORPORATION
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
debt approximates fair value because the individual borrowings bear interest at
floating market rates. Assuming a market price based on the twelve-month strip
as of December 31, 1996, the Company's projected losses from these open hedge
contracts was approximately $2.7 million as of December 31, 1996. Considerable
judgment is required in developing these estimates and, accordingly, no
assurance can be given that the estimated values presented herein are indicative
of amounts that would be realized in a full market exchange.
USE OF ESTIMATES -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenue and expenses during
the reporting periods. Actual results could differ from these estimates.
Significant estimates include depreciation, depletion and amortization of proved
producing oil and natural gas properties; estimates of proved oil and natural
gas reserve volumes; and discounted future net cash flows.
CONCENTRATION OF RISK -- Substantially all of the Company's accounts and
notes receivable result from oil and natural gas sales, joint interest billings
and lending activities to third parties in the oil and natural gas industry.
This concentration of customers, joint interest owners and borrowers may impact
the Company's overall credit risk in that these entities may be similarly
affected by changes in economic and other conditions.
STATEMENTS OF CASH FLOWS -- The statements of cash flows are presented
using the indirect method and consider all highly liquid investments with
maturities at the time of purchase of three months or less to be cash
equivalents.
Supplemental cash flow information may be summarized as follows (in
thousands):
<TABLE>
<CAPTION>
PREDECESSOR SUCCESSOR
---------------------------------- ---------
1994 1995 1996 1996
---------- ---------- ---------- ---------
<S> <C> <C> <C>
Interest expense paid................ $ -- $ -- $ 307 --
Income taxes paid to Parent.......... -- -- -- --
The Acquisition:
Total cash consideration........ $ -- $ -- $ -- $ 95,500
Fair value of assets acquired... -- -- -- 127,000
Liabilities assumed............. -- -- -- 31,500
</TABLE>
EMPLOYEE STOCK-BASED COMPENSATION -- In October 1995, Financial Accounting
Standards Board Statement No. 123, "Accounting for Stock Based Compensation"
("SFAS 123") was issued. Under SFAS No. 123, the Company is permitted to
either record expenses for stock options and other stock-based employee
compensation plans based on their fair value at the date of grant or to apply
the existing standard, Accounting Principles Board Opinion No. 25 ("APB 25")
and recognize compensation expense, if any, based on the intrinsic value of the
equity instrument at the measurement date. The Company has elected to continue
to follow APB 25. When applicable, the Company will disclose pro forma net
income and earnings per share computed as if the Company utilized SFAS 123.
3. NOTES RECEIVABLE -- INDEPENDENT PRODUCER FINANCING
At December 31, 1996 and 1995, the Company had total outstanding notes
receivable related to its IPF Program of $21.7 million and $8.0 million,
respectively. The notes receivable result from the Company's purchase of a
production payment in the form of a term overriding royalty interest in exchange
for an agreed upon share of revenues from identified properties until the amount
invested and a specified rate of return on investment is paid in full. During
1995 and 1996, the Company realized returns from the IPF Program of 21.0% and
22.7%, respectively. The weighted average returns expected by the Company on the
notes receivable outstanding at December 31, 1995 and December 31, 1996 were
21.5% and 20.9%,
F-10
<PAGE>
DOMAIN ENERGY CORPORATION
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
respectively. While the independent producer's obligation to deliver such
revenues is nonrecourse to the producer, management believes that the Company's
overriding royalty interest constitutes a property interest and therefore, such
property interest and the underlying oil and gas reserves effectively serves as
security for the notes receivable. Based on reserve data available, the Company
has estimated that $7.9 million and $2.2 million of notes receivable at December
31, 1996 and 1995 will be repaid in the next twelve months and has classified
such amounts as current assets.
In fiscal 1996, the Company established an allowance for doubtful accounts
of approximately $0.4 million related to its IPF Program, which is the balance
of such account at December 31, 1996. No other allowance activity occurred
during the three years ended December 31, 1996. Based on the December 31, 1996
notes receivable balance, expected principal payments in each of the next five
years are as follows (in thousands):
1997.................................... $ 7,874
1998.................................... $ 4,689
1999.................................... $ 2,902
2000.................................... $ 1,995
2001.................................... $ 1,527
4. UNEVALUATED PROPERTY
Oil and natural gas properties not subject to amortization consist of the
cost of undeveloped leaseholds, exploratory and developmental wells in progress,
and secondary recovery projects before the assignment of proved reserves. These
costs are reviewed periodically by management for impairment, with the
impairment provision included in the cost of oil and natural gas properties
subject to amortization. Factors considered by management in its impairment
assessment include drilling results by the Company and other operators, the
terms of oil and gas leases not held by production, production response to
secondary recovery activities and available funds for exploration and
development. The following table summarizes the cost of the properties not
subject to amortization for the year cost was incurred (in thousands):
DECEMBER 31,
--------------------
1995 1996
--------- ---------
Year cost incurred:
Remainder
1993....................... $ 4,219 $ --
1994....................... 23,364 --
1995....................... 10,334 --
1996....................... -- 20,319
--------- ---------
$ 37,917 $ 20,319
========= =========
5. LONG-TERM DEBT
At December 31, 1995 and 1996, notes payable and long-term debt consisted
of the following (in thousands):
DECEMBER 31,
---------------------
1995 1996
--------- ----------
Revolving Credit Facility............ $ -- $ 61,200
Michigan Senior Debt................. -- 4,606
Indebtedness to Fund VII............. -- 8,000
Indebtedness to Westshore............ -- 7,657
IPF Company Credit Facility.......... -- 11,212
--------- ----------
Long-term debt....................... $ -- $ 92,675
Less current maturities.............. -- (33,557)
--------- ----------
$ -- $ 59,118
========= ==========
F-11
<PAGE>
DOMAIN ENERGY CORPORATION
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
REVOLVING CREDIT FACILITY -- In connection with the Acquisition, the
Company entered into a $65.0 million revolving credit facility maturing on
December 31, 1999 (the "Revolving Credit Facility") with a group of banks led
by The Chase Manhattan Bank. The Revolving Credit Facility is secured by
approximately 80% of the aggregate value of the Company's oil and gas properties
and substantially all of the Company's other property (other than IPF Program
related properties), including the capital stock of Ventures and Production and
is also guaranteed by Ventures and Production. Amounts available under the
Revolving Credit Facility are subject to a borrowing base with scheduled
redeterminations every six months (and such other redeterminations as the lender
may elect to perform) by the lenders at the lenders' sole discretion and in
accordance with their customary practices and standards in effect from time to
time for reserve-based loans to borrowers similar to the Company. The borrowing
base under the Revolving Credit Facility at December 31, 1996 was $65.0 million.
On December 31, 1997, the Company is required to reduce its outstanding
indebtedness under the Revolving Credit Facility to $43.3 million. In addition,
if at the end of any fiscal quarter of the Company during 1997 the amount then
outstanding thereunder exceeds $43.3 million (as such amount may be adjusted
from time to time pursuant to the Revolving Credit Facility), the Company will
be obligated to prepay the outstanding indebtedness thereunder in an amount
equal to 100% of the Company's "excess cash flow" (as defined therein) for
such fiscal quarter. Excess cash flow is defined to include a portion of the net
proceeds to the Company of the Offering.
Absent a default or an event of default, borrowings under the Revolving
Credit Facility accrue interest at LIBOR plus a margin of 1.50% to 2.50% per
annum depending on the total amount outstanding or, at the option of the
Company, at the greater of (i) the prime rate and (ii) the federal funds
effective rate plus 0.50%, plus a margin of 0.50% to 1.50% depending on the
total amount outstanding. The Company also incurs a quarterly commitment fee
ranging from 0.375% to 0.50% per annum on the average unused portion of the
lenders' aggregate commitment depending on the total amount outstanding. The
interest rate on the amounts outstanding at December 31, 1996 was 9.75%.
The Revolving Credit Facility contains a number of covenants that, among
other things, restrict the ability of the Company to dispose of assets, incur
additional indebtedness, pay dividends, enter into certain investments or
acquisition, repurchase or redeem capital stock, engage in mergers or
consolidations, or engage in certain transactions with subsidiaries and
affiliates and that will otherwise restrict corporate activities. In addition,
such facility requires the Company to maintain a specified minimum tangible net
worth and to comply with certain prescribed financial ratios. Further, under
such facility, an event of default is deemed to occur if any person, other than
the Company's officers, Fund VII or any other investment fund, the managing
general partner of which is First Reserve, becomes the beneficial owner,
directly or indirectly, of more than 40% of the outstanding shares of Common
Stock.
IPF COMPANY CREDIT FACILITY -- IPF Company, an indirect wholly-owned
subsidiary of the Company, has a $20.0 million revolving credit facility with
Compass Bank-Houston (the "IPF Company Credit Facility") pursuant to which it
finances a portion of the IPF Program. The IPF Company Credit Facility matures
June 1, 1998 at which time all amounts owed thereunder are due and payable. The
IPF Company Credit Facility is secured by substantially all of IPF Company's oil
and gas term overriding royalty interests, including the notes receivable
generated therefrom. The borrowing base under the facility as of March 31, 1997
was $18.0 million and is subject to a scheduled redetermination by the lender
every six months and such other redeterminations as the lender may elect to
perform each year. Absent a default or an event of default (as defined therein),
borrowings under the IPF Company Credit Facility accrue interest at LIBOR plus a
margin of 2.25% or, at the option of the IPF Company, the prime rate published
in THE WALL STREET JOURNAL. The interest rate on the amounts outstanding as of
December 31, 1996 was 7.81%.
The IPF Company Credit Facility contains a number of covenants that, among
other things, restrict the ability of IPF Company to incur additional
indebtedness or grant liens on its properties, guarantee indebtedness of any
other person, dispose of assets, make loans in excess of $100,000 other than in
the
F-12
<PAGE>
DOMAIN ENERGY CORPORATION
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ordinary course of its business, issue additional shares of capital stock,
engage in certain transactions with affiliates, enter into any new line of
business or amend certain of its material contracts. In addition, such facility
requires IPF Company to maintain a specified minimum tangible net worth.
The IPF Company Credit Facility restricts the ability of IPF Company to
dividend cash to its parent, Ventures, or otherwise advance cash to the Company.
At December 31, 1996, IPF Company net assets of approximately $8.0 million were
restricted.
MICHIGAN SENIOR DEBT -- To finance the Company's Michigan Development
Project, MPC and MEC entered into a $30.0 million Credit Agreement with Bank of
America Illinois (the "Bank of America Facility") in May 1996. As of December
31, 1996, the two companies had collectively borrowed $11.5 million under the
facility of which $4.6 million was borrowed by MPC. The Bank of America Facility
is secured by the assets of MPC and MEC, but has no recourse to the assets of
the Company. Advances under the facility bear interest at LIBOR plus 2.0%, or,
at the option of the companies, at the higher of (i) the Bank of America prime
rate or (ii) the federal funds rate plus .50%. A commitment fee of .25% is
payable quarterly. Additionally, Bank of America is entitled to receive a net
profits interest from MPC and MEC of 10% until the bank receives a rate of
return of 14%, after which the net profits interests reduce to 2%. In 1996 the
bank received no payments pursuant to the net profits interests. The interest
rate on the amounts outstanding as of December 31, 1996 was 7.53%.
Bank of America will redetermine the borrowing base semi-annually beginning
on September 1, 1997. Certain financial covenants become effective after
September 1, 1997, including the maintenance of (i) tangible net worth in excess
of $3.0 million, (ii) a current ratio greater than 1:1, and (iii) cash flow
coverage greater than 1:1 until September 1, 1998 and greater than 3:1 after
September 1, 1998.
INDEBTEDNESS TO FUND VII -- Prior to the Acquisition, Tennessee Gas
Pipeline Company ("TGPL"), the former wholly-owning parent of Ventures, was a
guarantor with respect to certain indebtedness (the "Michigan Senior Debt") of
a partnership formed to participate in a development project in Michigan in
which Ventures was at the time a general partner. In connection with the
Acquisition, the Company formed Domain Energy Guarantor Corporation ("Guarantor
Corporation"), for the sole purpose of assuming the obligations of TGPL under
such guaranty. As security for its obligations under the guaranty, Guarantor
Corporation purchased an $8.0 million certificate of deposit issued by the
lender in respect of the Michigan Senior Debt and assigned and pledged such
certificate to the lender.
To enable Guarantor Corporation to purchase the $8.0 million certificate
pledged as collateral for its guaranty of the Michigan Senior Debt, First
Reserve Fund VII, Limited Partnership ("Fund VII"), the Company's sole
stockholder at December 31, 1996, loaned Guarantor Corporation $8.0 million
evidenced by a Subordinated Promissory Note dated December 31, 1996 (the
"Note"). The full principal amount of the Note matures on December 31, 1999.
Interest accrues on the Note at a rate per annum equal to the interest rate per
annum earned by Guarantor Corporation on the $8.0 million certificate and is
payable quarterly. The obligations of Guarantor Corporation under the Note are
expressly made subordinate and subject in right of payment to the prior payment
in full of the Michigan Senior Debt. As the Company expects that in 1997 the
Michigan properties will be sold, the Michigan Senior Debt will be repaid, the
restrictions on the certificate of deposit will be removed, and the Note will be
repaid, the Note has been classified at December 31, 1996 as current maturities
of long-term debt. The interest rate on the amounts outstanding as of December
31, 1996 was 4.6%
WESTSHORE LOAN AGREEMENT -- Effective October 1, 1996, Westshore Processing
Company, L.L.C. ("Westshore") and MPC entered into a non-recourse loan
agreement. This agreement provides term financing from Westshore to MPC for
construction of a 10-inch diameter natural gas pipeline expected to be completed
on or about June 30, 1997. The note accrues interest at an annual rate of 5.98%,
compounded semi-annually, with all outstanding principal and interest due and
payable upon completion of the pipeline.
F-13
<PAGE>
DOMAIN ENERGY CORPORATION
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company at December 31, 1996 had outstanding debt under this agreement in
the amount of $7.7 million.
6. RELATED PARTY TRANSACTIONS
CORPORATE OVERHEAD ALLOCATION -- Prior to the Acquisition, the Company paid
an affiliate of the Parent for various administrative support services.
Management of the Company believes that given the circumstances, the allocations
were reasonable. Included in the 1996 allocation was approximately $2.0 million
of costs that were directly related to severance payments, retention bonuses and
other costs associated with the merger of Tenneco with an affiliate of El Paso
Natural Gas Company. In addition to the $2.0 million related to the merger, the
Parent made a general increase in the overhead allocation to the Company
compared to 1995 based on the Company's increasing activities and personnel.
Prior to the Acquisition, the Parent also advanced various amounts to the
Company for working capital and capital expenditure requirements. The Parent did
not charge the Company any interest expense on the funds utilized by the
Company. The average amounts of advances outstanding from the Parent were
approximately $31.6 million, $107.7 million and $118.5 million for the years
ended December 31, 1994, 1995 and 1996, respectively. A summary of the activity
in the advances from Parent account follows (in thousands):
1994 1995 1996
---------- ---------- ----------
Beginning balance, January 1,........ $ 19,234 $ 103,303 $ 110,274
Cash advances, net................... 93,937 5,545 1,737
Corporate overhead allocation........ -- 1,270 4,827
Other allocations (accrued taxes).... (9,868) 156 4,734
Acquisition.......................... -- -- (121,572)
---------- ---------- ----------
Ending balance, December 31.......... $ 103,303 $ 110,274 $ --
========== ========== ==========
In connection with the Acquisition, the Company agreed to pay First Reserve
Corporation ("First Reserve"), the managing partner of Fund VII, a fee of
$500,000 for financial advisory services rendered in connection with the
Acquisition.
7. STOCKHOLDERS' EQUITY
COMMON STOCK -- Immediately prior to the Offering the Company will be
authorized to issue up to 25,000,000 shares of Common Stock, $.01 par value per
share. As of December 31, 1996, after giving effect to the 754-for-one stock
split to be effected immediately before consummation of the Offering, there were
7,177,681 shares of Common Stock issued and outstanding. Holders of Common Stock
are entitled to one vote for each share held and are not entitled to cumulative
voting for the purpose of electing directors and have no preemptive or similar
right to subscribe for, or to purchase, any shares of Common Stock or other
securities to be issued by the Company in the future. Accordingly, the holders
of more than 50% in voting power of the shares of Common Stock voting generally
for the election of directors will be able to elect all of the Company's
directors.
PREFERRED STOCK -- Immediately prior to the Offering the Board of Directors
will be authorized, without action by the holders of Common Stock, to issue up
to 5,000,000 shares of preferred stock, $.01 par value per share (the
"Preferred Stock"), in one or more series, to establish the number of shares
to be included in each such series and to fix the designations, preferences,
relative, participating, optional and other special rights of the shares of each
such series and the qualifications, limitations and restrictions thereof. Such
matters may include, among others, voting rights, conversion and exchange
privileges, dividend rates, redemption rights, sinking fund provisions and
liquidation rights that could be superior and
F-14
<PAGE>
DOMAIN ENERGY CORPORATION
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
prior to the Common Stock. As of December 31, 1996, no shares of preferred stock
were issued and outstanding.
STOCK PURCHASE AND OPTION PLAN -- The Company recently adopted the Amended
and Restated 1996 Stock Purchase and Option Plan for Key Employees of Domain
Energy Corporation and Affiliates (the "Stock Purchase and Option Plan"). The
Stock Purchase and Option Plan authorizes the issuance of options to acquire up
to 867,091 shares of Common Stock and the Company has reserved 867,091 shares of
Common Stock for issuance in connection therewith. The Stock Purchase and Option
Plan will be administered by the Compensation Committee of the Board of
Directors. Pursuant to the Stock Purchase and Option Plan, the Company may grant
to employees, directors or other persons having a unique relationship with the
Company or its affiliates, singly or in combination, Incentive Stock Options,
Other Stock Options, Stock Appreciation Rights, Restricted Stock, Purchase
Stock, Dividend Equivalent Rights, Performance Units, Performance Shares or
Other Stock-Based Grants, in each case as such terms are defined therein. The
terms of any such grant will be determined by the Compensation Committee and set
forth in a separate grant agreement. The exercise price will be at least equal
to 100% of fair market value of the Common Stock on the date of grant in the
case of Incentive Stock Options and the exercise price of Other Stock Options
will be at least equal to 50% of fair market value of the Common Stock on the
date of grant, provided that options to purchase up to 433,546 shares of Common
Stock may be granted with an exercise price equal to $.01 per share, which is
the par value of the Common Stock. Non-Qualified Stock Options and Other Stock
Options may be exercisable for up to ten years.
On February 21, 1997 (the "Grant Date"), the Company granted to the
officers of the Company, pursuant to separate Non-Qualified Stock Option
Agreements (collectively, as amended, the "Stock Option Agreements") between
the Company and each of such persons, options to purchase a total of 753,998
shares of Common Stock under the Stock Purchase and Option Plan. In addition,
the Company has granted options to purchase an aggregate of 95,696 shares of
Common Stock to other employees of the Company. Under the terms of the Stock
Option Agreements, 50% of the options granted to each such person are designated
as time options (collectively, the "Time Options"), with an exercise price
equal to $4.18 per share, and 50% are designated as performance options
(collectively, the "Performance Options"), with an exercise price equal to
$.01 per share. The Time Options become exercisable as to 20% of the shares of
Common Stock subject thereto on the first anniversary of the Grant Date and are
exercisable as to an additional 20% of such shares upon each anniversary of the
Grant Date thereafter. The Performance Options become exercisable at any time
following the second anniversary of the Grant Date, when the Investment Return
Hurdle (as such term is defined) is met; provided that the Performance Options
become exercisable as to 100% of the shares of Common Stock subject thereto on
the ninth anniversary of the Grant Date.
Pursuant to APB 25, the Company will recognize stock option expense based
on the vesting schedule of options granted as follows
1997 .......... $887,856
1998 .......... $887,856
MANAGEMENT INVESTOR SUBSCRIPTION AGREEMENTS AND RELATED TRANSACTIONS -- On
February 21, 1997, each of the Company's officers (the "Management Investors")
entered into a Management Investor Subscription Agreement with the Company
pursuant to which the Management Investors purchased an aggregate of 390,307
shares of Common Stock at $4.18 per share. To facilitate such purchases, the
Company loaned the Management Investors an aggregate of approximately $546,000.
All such indebtedness of such persons accrues interest at the rate of 8% per
annum, payable semiannually; provided that each Management Investor may elect to
satisfy his or her semiannual interest payment obligation by increasing the
principal amount of the indebtedness owed to the Company by the amount of
interest otherwise payable. As security for such loans made by the Company, each
Management Investor pledged to the Company, and granted a first priority
security interest in, the shares of Common Stock purchased by such Management
Investor pursuant to its respective Management Investor Subscription Agreement
and is required to pledge, and grant a first priority security interest in, all
other shares of Common Stock that each such person may subsequently acquire,
including, without limitation, upon exercise of options to purchase shares of
Common
F-15
<PAGE>
DOMAIN ENERGY CORPORATION
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Stock. In addition, in April 1997, other employees of the Company purchased
95,696 shares of Common Stock at an average price of $4.18 per share.
OPTION TO ACQUIRE COMMON STOCK -- Pursuant to the Subscription Agreement,
dated December 31, 1996 (the "First Reserve Subscription Agreement"), between
the Company and Fund VII, the Company granted to Fund VII an option (the "First
Reserve Option") to acquire 1,914,048 shares of Common Stock for an aggregate
purchase price of $8.0 million plus any cash interest payment on the Note (see
Note 5) actually received by Fund VII (the "Option Price"). The Option Price
could be paid by Fund VII (i) prior to the date on which the Note has been paid
in full, by delivery to the Company of the Note together with the payment in
cash of any principal or interest payments on the Note previously received by
Fund VII and (ii) after the date on which the Note has been paid in full, by
payment of the Option Price in cash. In connection with the Offering, the
Company and Fund VII have agreed to restructure the terms of the First Reserve
Option as set forth below.
The Company and Fund VII have agreed that concurrently with consummation of
the Offering, Fund VII will purchase at a price per share equal to the Price to
Public set forth on the cover page of this Prospectus, a number of shares of
Common Stock such that the aggregate purchase price paid by Fund VII for such
shares equals $8,681,000. The amount of $8,681,000 represents the sum of (i) the
outstanding principal balance of the Note plus estimated accrued interest
thereon through June 15, 1997 (the date on which the Company expects the
Offering to be consummated) and (ii) $500,000 in cash to be paid by Fund VII.
8. INCOME TAXES
The provision for income taxes consists of the following (in thousands):
YEAR ENDED DECEMBER 31,
-------------------------------
1994 1995 1996
--------- --------- ---------
Federal:
Current......................... $ (7,082) $ (518) $ (2,965)
Deferred........................ 7,606 1,241 6,838
State:
Current......................... (1,798) (14) 657
Deferred........................ 2,379 152 1,021
--------- --------- ---------
Income tax expense................... $ 1,105 $ 861 $ 5,551
========= ========= =========
The following table sets forth a reconciliation of the statutory federal
income tax with the Company's effective taxes allocated by the Parent (in
thousands):
1994 1995 1996
--------- --------- ---------
Income before income taxes........... $ 2,079 $ 2,215 $ 13,591
--------- --------- ---------
Income tax computed at statutory
rates.............................. $ 727 $ 775 $ 4,757
State taxes, net of federal
benefit............................ 378 89 950
Other................................ -- (3) (156)
--------- --------- ---------
Income tax expense................... $ 1,105 $ 861 $ 5,551
========= ========= =========
Deferred income taxes reflect the tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts calculated for income tax purposes.
The Company's deferred tax liability as of December 31, 1995 was
$13,349,000. This amount represents the temporary difference in the tax and book
basis of the Company's oil and natural gas properties and investments.
F-16
<PAGE>
DOMAIN ENERGY CORPORATION
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
As of December 31, 1996, the Company had no deferred tax liability. As a
result of the Acquisition and the corresponding election made by El Paso and the
Company to step-up the tax basis in the assets acquired, there are no temporary
differences in the carrying amounts of assets and liabilities for financial
reporting and income tax purposes.
9. COMMITMENTS AND CONTINGENCIES
From time to time, the Company is a party to certain lawsuits and claims
arising in the ordinary course of business. While the outcome of lawsuits and
claims cannot be predicted with certainty, management does not expect these
matters to have a materially adverse effect on the Company's financial
condition, results of operations or cash flow.
401(K) PLAN -- Effective December 31, 1996, the Company has offered its
employees an employee 401(k) savings plan (the "401(k) Plan"). The 401(k) Plan
covers all employees and entitles each to contribute up to 15% of his or her
annual compensation subject to maximum limitations imposed by the Internal
Revenue Code. The 401(k) Plan allows for employer matching of up to 8% of the
employee's contributions based on years of participation in the plan, including
years of participation in the 401(k) plan previously offered by Tenneco.
10. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
QUARTER ENDED
------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1995 1995 1995 1995(1)
--------- -------- ------------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Revenues............................. $ 6,499 $ 7,546 $ 7,681 $ 15,921
Operating income (loss).............. (115) 757 (208) 1,781
Net income........................... (76) 453 (124) 1,101
</TABLE>
<TABLE>
<CAPTION>
QUARTER ENDED
------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1996 1996 1996 1996(1)
--------- -------- ------------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Revenues............................. $16,143 $ 14,815 $14,151 $ 12,213
Operating income (loss).............. 4,764 6,763 2,755 (221)
Net income........................... 3,167 4,235 1,596 (801)
</TABLE>
- ------------
(1) The fourth quarter 1995 includes a charge for corporate overhead of $1.3
million. Fourth quarter 1995 was the quarter in which the Parent provided
such services and charged them to the Company. The fourth quarter 1996
includes $2.1 million of corporate overhead which is $1.2 million greater
than the average of the first three quarters. This amount includes costs
related to the merger between Tenneco and an affiliate of El Paso.
F-17
<PAGE>
DOMAIN ENERGY CORPORATION
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. SUPPLEMENTARY FINANCIAL INFORMATION ON OIL AND NATURAL GAS EXPLORATION,
DEVELOPMENT AND PRODUCTION ACTIVITIES (UNAUDITED)
This footnote provides unaudited information required by SFAS No. 69,
"Disclosures About Oil and Gas Producing Activities."
CAPITALIZED COSTS -- Capitalized costs and accumulated depreciation,
depletion and amortization relating to the Company's oil and gas producing
activities, all of which are conducted within the continental United States, are
summarized below (in thousands):
YEAR ENDED DECEMBER
31,
---------------------
1995 1996
---------- ---------
Proved producing oil and gas
properties......................... $ 100,058 $ 68,329
Unevaluated properties............... 37,917 20,319
---------- ---------
137,975 88,648
Less: Accumulated depreciation,
depletion and amortization......... (26,251) --
---------- ---------
Net capitalized costs................ $ 111,724 $ 88,648
========== =========
COSTS INCURRED -- Costs incurred in oil and gas property acquisition,
exploration and development activities are summarized below (in thousands):
YEAR ENDED DECEMBER 31,
-------------------------------
1994 1995 1996
--------- --------- ---------
Property acquisition costs:
Unproved........................ $ 1,967 $ 3,207 $ 732
Proved.......................... 63,234 15,186 22,596
Exploration costs.................... 15,121 23,677 12,126
Development costs.................... 4,883 7,834 15,163
--------- --------- ---------
Total costs incurred................. $ 85,205 $ 49,904 $ 50,617
========= ========= =========
RESERVES -- Proved reserves are estimated quantities of 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 proved reserves that can
reasonably be expected to be recovered through existing wells with existing
equipment and operating methods.
Proved oil and natural gas reserve quantities and the related discounted
future net cash flows before income taxes for the periods presented are based on
estimates prepared by DeGolyer and MacNaughton, Netherland, Sewell & Associates,
Inc., and other third-party independent petroleum engineers. Such estimates have
been prepared in accordance with guidelines established by the Securities and
Exchange Commission.
F-18
<PAGE>
DOMAIN ENERGY CORPORATION
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company's net ownership interests in estimated quantities of proved oil
and natural gas reserves and changes in net proved reserves, all of which are
located in the continental United States, are summarized below. These quantities
include the minority interest in the Michigan properties which are consolidated.
OIL, CONDENSATE AND NATURAL GAS LIQUIDS
(BBLS)
---------------------------------------
1994 1995 1996
----------- ------------ ------------
Proved developed and undeveloped
reserves:
Beginning of year............... 419,253 4,109,442 2,197,181
Revisions of previous
estimates..................... (130,555) (704,308) 364,473
Purchases of oil and gas
properties.................... 3,713,694 1,713,328 10,151,444
Extensions and discoveries...... 190,050 179,224 180,286
Sales of oil and gas
properties.................... -- (2,676,505) (127,305)
Production...................... (83,000) (424,000) (574,175)
----------- ------------ ------------
End of year..................... 4,109,442 2,197,181 12,191,904
=========== ============ ============
Proved developed reserves at end of
year............................... 3,124,873 1,701,656 10,736,321
Minority interest:
Proved developed and
undeveloped, end of year...... -- -- 812,000
Proved developed, end of year... -- -- 378,000
<TABLE>
<CAPTION>
NATURAL GAS (MCF)
--------------------------------------------
1994 1995 1996
------------ -------------- --------------
<S> <C> <C> <C>
Proved developed and undeveloped
reserves:
Beginning of year............... 10,073,576 73,398,877 82,682,38
Revisions of previous
estimates..................... (4,525,096) 5,769,806 (2,849,719)
Purchases of oil and gas
properties.................... 64,489,577 19,898,227 31,795,351
Extensions and discoveries...... 5,694,820 13,083,241 4,743,646
Sales of oil and gas
properties.................... -- (11,402,771) (3,218,665)
Production...................... (2,334,000) (18,065,000) (21,577,575)
------------ -------------- --------------
End of year..................... 73,398,877 82,682,380 91,575,418
============ ============== ==============
Proved developed reserves at end of
year............................... 58,005,413 65,178,731 75,466,820
============ ============== ==============
Minority interest:
Proved developed and
undeveloped, end of year...... -- -- 10,238,000
Proved developed, end of year... -- -- 9,096,000
</TABLE>
F-19
<PAGE>
<TABLE>
<CAPTION>
DOMAIN ENERGY CORPORATION
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
TOTAL (MMCFE)
--------------------------------------------
1994 1995 1996
------------ -------------- --------------
<S> <C> <C> <C>
Proved developed and undeveloped
reserves:
Beginning of year............... 12,589,094 98,055,529 95,865,466
Revisions of previous
estimates..................... (5,308,426) 1,543,958 (662,875)
Purchases of oil and gas
properties.................... 86,771,741 30,178,195 92,704,015
Extensions and discoveries...... 6,835,120 14,158,585 5,825,362
Sales of oil and gas
properties.................... -- (27,461,801) (3,982,495)
Production...................... (2,832,000) (20,609,000) (25,022,625)
============ ============== ==============
End of year..................... 98,055,529 95,865,466 164,726,848
============ ============== ==============
Proved developed reserves at end of
year............................... 76,754,651 75,388,667 139,884,746
============ ============== ==============
Minority interest:
Proved developed and
undeveloped, end of year...... -- -- 15,110,000
Proved developed, end of year... -- -- 11,364,000
</TABLE>
STANDARDIZED MEASURE -- The table of the Standardized Measure of Discounted
Future Net Cash Flows relating to the Company's ownership interests in proved
oil and gas reserves as of year end is shown below (in thousands):
AS OF DECEMBER 31,
----------------------------------
1994 1995 1996
---------- ---------- ----------
Future cash inflows.................. $ 170,237 $ 210,818 $ 552,026
Future oil and natural gas operating
expenses........................... (47,895) (43,204) (253,230)
Future development costs............. (40,622) (38,680) (32,922)
Future income tax expenses........... (852) (14,422) (67,346)
---------- ---------- ----------
Future net cash flows................ 80,868 114,512 198,528
10% annual discount for estimated
timing of cash flows............... (12,376) (15,513) (41,351)
---------- ---------- ----------
Standardized measure of discounted
future net cash flows.............. $ 68,492 $ 98,999 $ 157,177
========== ========== ==========
The table of Standardized Measure of Discounted Future Net Cash Flows
includes the consolidation of the Michigan properties for 1996. The minority
interest's share of standardized measure of future net cash flows is
approximately $14,400.
Future cash flows are computed by applying year end prices of oil and
natural gas to year end quantities of proved oil and natural gas reserves.
Future operating expenses and development costs are computed primarily by the
Company's petroleum engineers by estimating the expenditures to be incurred in
developing and producing the Company's proved oil and natural gas reserves at
the end of the year, based on year end costs and assuming continuation of
existing economic conditions.
Future income taxes are based on year end statutory rates, adjusted for
operating loss carryforwards and tax credits. A discount factor of 10% was used
to reflect the timing of future net cash flows. The standardized measure of
discounted future net cash flows is not intended to represent the replacement
cost or fair market value of the Company's oil and gas properties.
The standardized measure of discounted future net cash flows does not
purport, nor should it be interpreted, to present the fair value of the
Company's oil and natural gas reserves. An estimate of fair value would also
take into account, among other things, the recovery of reserves not presently
classified as
F-20
<PAGE>
DOMAIN ENERGY CORPORATION
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
proved, anticipated future changes in prices and costs, and a discount factor
more representative of the time value of money, and the risks inherent in
reserve estimates.
CHANGE IN STANDARDIZED MEASURE -- Changes in standardized measure of future
net cash flows relating to proved oil and gas reserves are summarized below (in
thousands):
1994 1995 1996
---------- ---------- ----------
Changes due to current year
operations:
Sales of oil & gas, net of
production costs.............. $ (3,532) $ (26,200) $ (40,530)
Sales of reserves in place...... -- (20,027) (4,639)
Extensions & discoveries........ 4,977 18,595 7,941
Purchase of reserves in place... 54,134 21,143 68,737
Future development costs
incurred...................... 4,883 7,834 7,270
Changes due to revisions in
standardized variables
Price & production costs........ (8,793) 23,926 50,846
Revisions of previous quantity
estimates..................... (10,008) (950) (372)
Estimated future development
costs......................... (4,535) (8,825) (1,187)
Income taxes.................... 8,185 (11,613) (37,069)
Accretion of discount........... 1,211 6,181 10,393
Production rates (timing) and
other......................... 11,363 20,443 (3,212)
---------- ---------- ----------
Net increase......................... 57,885 30,507 58,178
Beginning of year.................... 10,607 68,492 98,999
---------- ---------- ----------
End of year.......................... $ 68,492 $ 98,999 $ 157,177
========== ========== ==========
Sales of oil and natural gas, net of oil and natural gas operating
expenses, are based on historical pre-tax results. Sales of oil and gas
properties, extensions and discoveries, purchases of minerals in place and the
changes due to revisions in standardized variables are reported on a pre-tax
discounted basis.
F-21
<PAGE>
DOMAIN ENERGY CORPORATION
CONSOLIDATED BALANCE SHEETS
(NOTE 1)
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
SUCCESSOR
-------------------------
DECEMBER 31, MARCH 31,
1996 1997
------------ ---------
ASSETS
Cash and cash equivalents............ $ 736 $ 6,186
Restricted certificate of deposit.... 8,000 8,000
Accounts receivable.................. 13,404 8,577
IPF Program notes receivable, current
portion............................ 7,874 8,512
Prepaid and other current assets..... 1,525 1,472
------------ ---------
Total current assets............ 31,539 32,747
IPF Program notes receivable......... 13,836 19,018
Oil and natural gas properties, full
cost method........................ 88,648 91,343
Less: Accumulated depreciation,
depletion and amortization......... -- (2,766)
Investments and other assets......... 3,103 2,783
------------ ---------
Total assets.................... $137,126 $ 143,125
============ =========
LIABILITIES
Accounts payable..................... $ 15,823 $ 7,098
Accrued expenses..................... 65 3,182
Current maturities of long-term
debt............................... 33,557 32,157
------------ ---------
Total current liabilities....... 49,445 42,437
Long-term debt....................... 59,118 66,410
Deferred income taxes................ -- 1,548
------------ ---------
Total liabilities............... 108,563 110,395
Minority interest.................... 986 972
STOCKHOLDERS' EQUITY
Common stock:
$0.01 par value, 15,080,000
shares authorized and 7,177,681
and 7,567,988 issued and
outstanding at December 31,
1996 and March 31, 1997,
respectively................... 72 76
Additional paid-in capital........... 27,505 29,354
Notes receivable -- stockholders..... -- (546)
Retained earnings.................... -- 2,874
------------ ---------
Total stockholders' equity...... 27,577 31,758
------------ ---------
Total liabilities and
stockholders' equity............ $137,126 $ 143,125
============ =========
The accompanying notes are an integral part of the
combined and consolidated financial statements.
F-22
<PAGE>
DOMAIN ENERGY CORPORATION
COMBINED AND CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS)
(UNAUDITED)
THREE MONTHS ENDED MARCH
31,
------------------------
PREDECESSOR SUCCESSOR
1996 1997
------------ ----------
REVENUES
Oil and natural gas.................. $ 15,688 $ 12,960
IPF Activities....................... 340 732
Other................................ 115 3
------------ ----------
Total revenues............. 16,143 13,695
------------ ----------
EXPENSES
Lease operating...................... 2,127 3,439
Production and severance taxes....... 279 424
Depreciation, depletion and
amortization....................... 6,946 2,935
General and administrative........... 1,089 792
Corporate overhead allocation........ 939 --
Stock option compensation............ -- 222
------------ ----------
Total operating expenses... 11,380 7,812
Income from operations............... 4,763 5,883
Interest expense..................... -- 1,323
------------ ----------
Income before income taxes........... 4,763 4,560
Income tax provision................. 1,596 1,733
Minority interest.................... -- (47)
------------ ----------
Net income........................... $ 3,167 $ 2,874
============ ==========
The accompanying notes are an integral part of the
combined and consolidated financial statements.
F-23
<PAGE>
DOMAIN ENERGY CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
ADDITIONAL NOTES TOTAL
COMMON PAID IN RECEIVABLE -- RETAINED STOCKHOLDERS'
STOCK CAPITAL STOCKHOLDERS EARNINGS EQUITY
------- ---------- ------------- -------- -------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1996......... $ 72 $ 27,505 $-- $-- $27,577
Sale of common stock to employees.... 4 1,849 (546) -- 1,307
Net income........................... -- -- -- 2,874 2,874
------- ---------- ------------- -------- -------------
Balance at March 31, 1997............ $ 76 $ 29,354 $ (546) $2,874 $31,758
======= ========== ============= ======== =============
</TABLE>
The accompanying notes are an integral part of the
combined and consolidated financial statements.
F-24
<PAGE>
DOMAIN ENERGY CORPORATION
COMBINED AND CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
-----------------------
PREDECESSOR SUCCESSOR
1996 1997
----------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income........................... $ 3,167 $ 2,874
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation, depletion and
amortization................... 6,946 2,935
Stock option compensation....... -- 222
Deferred income taxes........... 574 1,548
Minority interest............... -- (14)
Changes in operating assets and
liabilities:
Decrease (increase) in accounts
receivable..................... (6,302) 4,893
Decrease (increase) in prepaid
and other current assets....... (117) 53
Increase (decrease) in accounts
payable and accrued expenses... 1,447 (4,091)
----------- ---------
Net cash provided by operating
activities......................... 5,715 8,420
CASH FLOWS FROM INVESTING ACTIVITIES:
Investments in oil and natural gas
properties......................... (9,306) (5,978)
Proceeds from sale of oil and gas
properties......................... 412 1,700
IPF Program investments of capital
(notes receivable)................. (2,314) (9,246)
IPF Program return of capital (notes
receivable)........................ 517 3,426
Investment and other assets.......... 57 151
----------- ---------
Net cash used in investing
activities......................... (10,634) (9,947)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from debt borrowings........ -- 10,845
Repayments of debt borrowings........ -- (4,953)
Advances from Parent, net............ 5,285 --
Sale of common stock................. -- 1,085
----------- ---------
Net cash provided by financing
activities......................... 5,285 6,977
Increase in cash and cash
equivalents........................ 366 5,450
Cash and cash equivalents, beginning
of period.......................... 0 736
----------- ---------
Cash and cash equivalents, end of
period............................. $ 366 $ 6,186
=========== =========
The accompanying notes are an integral part of the
combined and consolidated financial statements.
F-25
<PAGE>
DOMAIN ENERGY CORPORATION
NOTES TO THE COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The financial statements included herein have been prepared by Domain
Energy Corporation (the "Company"), without audit pursuant to the rules and
regulations of the Securities and Exchange Commission, and reflect all
adjustments which are, in the opinion of management, necessary to present a fair
statement of the results for the interim periods on a basis consistent with the
annual audited financial statements. All such adjustments are of a normal
recurring nature. The results of operations for the interim periods are not
necessarily indicative of the results to be expected for an entire year. Certain
information, accounting policies and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been omitted pursuant to such rules and regulations, although
the Company believes that the disclosures are adequate to make the information
presented not misleading. These financial statements should be read in
conjunction with the Company's audited annual financial statements included
herein at pages F-2 through F-20.
2. STOCKHOLDERS' EQUITY
STOCK PURCHASE AND OPTION PLAN -- The Company recently adopted the Amended
and Restated 1996 Stock Purchase and Option Plan for Key Employees of Domain
Energy Corporation and Affiliates (the "Stock Purchase and Option Plan"). The
Stock Purchase and Option Plan authorizes the issuance of options to acquire up
to 867,091 shares of Common Stock and the Company has reserved 867,091 shares of
Common Stock for issuance in connection therewith. The Stock Purchase and Option
Plan will be administered by the Compensation Committee of the Board of
Directors. Pursuant to the Stock Purchase and Option Plan, the Company may grant
to employees, directors or other persons having a unique relationship with the
Company or its affiliates, singly or in combination, Incentive Stock Options,
Other Stock Options, Stock Appreciation Rights, Restricted Stock, Purchase
Stock, Dividend Equivalent Rights, Performance Units, Performance Shares or
Other Stock-Based Grants, in each case as such terms are defined therein. The
terms of any such grant will be determined by the Compensation Committee and set
forth in a separate grant agreement. The exercise price will be at least equal
to 100% of fair market value of the Common Stock on the date of grant in the
case of Incentive Stock Options and the exercise price of Other Stock Options
will be at least equal to 50% of fair market value of the Common Stock on the
date of grant, provided that options to purchase up to 433,546 shares of Common
Stock may be granted with an exercise price equal to $.01 per share, which is
the par value of the Common Stock. Non-Qualified Stock Options and Other Stock
Options may be exercisable for up to ten years.
On February 21, 1997 (the "Grant Date"), the Company granted to the
officers of the Company, pursuant to separate Non-Qualified Stock Option
Agreements (collectively, as amended, the "Stock Option Agreements") between
the Company and each of such persons, options to purchase a total of 753,998
shares of Common Stock under the Stock Purchase and Option Plan. In addition,
the Company has granted options to purchase an aggregate of 95,696 shares of
Common Stock to other employees of the Company. Under the terms of the Stock
Option Agreements, 50% of the options granted to each such person are designated
as time options (collectively the "Time Options"), with an exercise price
equal to $4.18 per share, and 50% are designated as performance options
(collectively, the "Performance Options"), with an exercise price equal to
$.01 per share. The Time Options become exercisable as to 20% of the shares of
Common Stock subject thereto on the first anniversary of the Grant Date and are
exercisable as to an additional 20% of such shares upon each anniversary of the
Grant Date thereafter. The Performance Options become exercisable at any time
following the second anniversary of the Grant Date, when the Investment Return
Hurdle (as such term is defined) is met; provided that the Performance Options
become exercisable as to 100% of the shares of Common Stock subject thereto on
the ninth anniversary of the Grant Date.
MANAGEMENT INVESTOR SUBSCRIPTION AGREEMENTS AND RELATED TRANSACTIONS -- On
February 21, 1997, each of the Company's officers (the "Management Investors")
entered into a Management Investor Subscription Agreement with the Company
pursuant to which the Management Investors purchased an
F-26
<PAGE>
DOMAIN ENERGY CORPORATION
NOTES TO THE COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
aggregate of 390,307 shares of Common Stock at an average price of $4.18 per
share. To facilitate such purchases, the Company loaned the Management Investors
an aggregate of approximately $546,000. All such indebtedness of such person
accrues interest at the rate of 8% per annum, payable semiannually; provided
that each Management Investor may elect to satisfy his or her semiannual
interest payment obligation by increasing the principal amount of the
indebtedness owed to the Company by the amount of interest otherwise payable. As
security for such loans made by the Company, each Management Investor pledged to
the Company, and granted a first priority security interest in, the shares of
Common Stock purchased by such Management Investor pursuant to its respective
Management Investor Subscription Agreement and is required to pledge, and grant
a first priority security interest in, all other shares of Common Stock that
each such person may subsequently acquire, including, without limitation, upon
exercise of options to purchase shares of Common Stock. In addition, in April
1997, other employees of the Company purchased 95,696 shares of Common Stock at
an average price of $4.18 per share.
OPTION TO ACQUIRE COMMON STOCK -- Pursuant to the Subscription Agreement,
dated December 31, 1996 (the "First Reserve Subscription Agreement"), between
the Company and Fund VII, the Company granted to Fund VII an option (the "First
Reserve Option") to acquire 1,914,048 shares of Common Stock for an aggregate
purchase price of $8.0 million plus any cash interest payment on the Note (see
Note 5) actually received by Fund VII (the "Option Price"). The Option Price
may be paid by Fund VII (i) prior to the date on which the Note has been paid in
full, by delivery to the Company of the Note together with the payment in cash
of any principal or interest payments on the Note previously received by Fund
VII and (ii) after the date on which the Note has been paid in full, by payment
of the Option Price in cash. In connection with the Offering, the Company and
Fund VII have agreed to restructure the terms of the First Reserve Option as set
forth below.
The Company and Fund VII have agreed that concurrently with consummation of
the Offering, Fund VII will purchase, at a price per share equal to the Price to
Public set forth on the cover page of this Prospectus, a number of shares of
Common Stock such that the aggregate purchase price paid by Fund VII for such
shares equals $8,681,000. The amount of $8,681,000 represents the sum of (i) the
outstanding principal balance of the note plus estimated accrued interest
thereon through June 15, 1997 (the date on which the Company expects the
Offering to be consummated) and (ii) $500,000 in cash to be paid by Fund VII.
3. SALE OF NON-CORE ASSETS
On April 9, 1997, the Company sold its interest in a natural gas
development project located in northwest Michigan (the "Michigan Development
Project"). The aggregate sale price approximated the Company's carrying value.
After repayment by the Company and assumption by the buyer of an aggregate of
$13.7 million of long-term debt, the Company received $2.1 million in cash and
will receive an additional $5.4 million from the payment of an interest-bearing
note receivable.
F-27
<PAGE>
DEGOLYER AND MACNAUGHTON
ONE ENERGY SQUARE
DALLAS, TEXAS 75206
APPRAISAL REPORT
AS OF
DECEMBER 31, 1996
ON
CERTAIN INTERESTS
OWNED BY
DOMAIN ENERGY VENTURES CORPORATION
AND
DOMAIN ENERGY PRODUCTION CORPORATION
PROVED RESERVES
FOREWARD
SCOPE OF INVESTIGATION
This report presents an appraisal, as of December 31, 1996, of the extent
and value of the proved crude oil, condensate, and natural gas reserves of
certain property interests owned by (i) Domain Energy Ventures Corporation
(Domain), (ii) the Matrix Limited Partnership owned by Domain, and (iii) Domain
Energy Production Corporation through the Investment Fund I (DEPC Fund I) and
the Investment Fund II (DEPC Fund II). DEPC Fund I is composed of four
investors, one of which is Domain Energy Corporation. Domain Energy Corporation
is the managing partner for DEPC Fund I and its ownership interest is 10 percent
of the total working interest owned by DEPC Fund I. The other investors
participate as net profits interest owners in the remaining 90 percent of the
total working interest taken by DEPC Fund I. The interests evaluated herein are
the total of Domain Energy Corporation's 10 percent and the 90 percent owned by
the other three Participants in DEPC Fund I. DEPC Fund II is composed of four
investors, one of which is Domain Energy Corporation. Domain Energy Corporation
is the managing partner for DEPC Fund II and its ownership interest is 30
percent of the total working interest owned by DEPC Fund II. The other investors
participate as net profits interest owners in the remaining 70 percent of the
total working interest taken by DEPC Fund II. The interest evaluated herein are
the total of Domain Energy Corporation's 30 percent and the 70 percent owned by
the other three participants in DEPC Fund II. Those properties consist of
certain productive leasehold interests located in Alabama, Louisiana,
Mississippi, and Texas and offshore from Alabama, Louisiana, and Texas.
This report estimates values for proved reserves using initial prices and
costs based on data provided by Domain with no increases in the future based on
inflation. A detailed explanation of the future price and cost assumptions is
included in the Valuation of Reserves section of this report.
Reserves estimated in this report are expressed as gross and net reserves.
Gross reserves are defined as the total estimated petroleum remaining to be
produced from these properties after December 31, 1996. Net reserves are defined
as that portion of the gross reserves attributable to the interests of Domain,
DEPC Fund I, or DEPC Fund II after deducting royalties and interests owned by
others.
Values of the net reserves in this report are expressed in terms of
estimated future gross revenue, future net revenue, and present worth. Future
gross revenue is that revenue which will accrue from the production and sale of
the estimated production taxes, operating expenditures, and capital costs from
the future gross revenue. Operating expenditures include field operating costs,
ad valorem taxes, and the estimated expenses of direct supervision but do not
include that portion of general administrative costs sometimes allocated to
production. Future income tax expenses were not taken into account in the
preparation of these estimates. Present worth is defined as future net revenue
discounted at a specified arbitrary discount rate compounded
A-1
<PAGE>
DEGOLYER AND MACNAUGHTON
monthly over the expected period of realization. This report shows present worth
values using a discount rate of 10 percent.
Estimates of oil, condensate, and gas reserves and future net revenue
should be regarded only as estimates that may change as further production
history and additional information become available. Not only are such reserves
and revenue estimates based on that information which is currently available,
but such estimates are also subject to the uncertainties inherent in the
application of judgmental factors in interpreting such information.
AUTHORITY
This report was prepared at the request of Mr. Douglas H. Woodul, Vice
President -- Production, Domain.
SOURCE OF INFORMATION
Information used in the preparation of this report was obtained from the
Domain files, from records on file with the appropriate regulatory agencies, and
from public sources. In the preparation of this report we have relied, without
independent verification, upon such information furnished by Domain with respect
to property interests, production from such properties, current costs of
operation and development, current prices for production, agreements relating to
current and future operations and sale of production, and various other
information and data that were accepted as represented. A field examination of
the properties was not considered necessary for the purposes of this report.
A-2
<PAGE>
DEGOLYER AND MACNAUGHTON
CLASSIFICATION OF RESERVES
Petroleum reserves included in this report are classified as proved and are
judged to be economically producible in future years from known reservoirs under
existing economic and operating conditions and assuming continuation of current
regulatory practices using conventional production methods and equipment. In the
analyses of production-decline curves, reserves were estimated only to the limit
of economic rates of production under existing economic and operating conditions
using prices and costs as of the date the estimate is made, including
consideration of changes in existing prices provided only by contractual
arrangements but not including escalations based upon future conditions. The
petroleum reserves are classified as follows:
PROVED -- Reserves that have been proved to a high degree of certainty
by analysis of the producing history of a reservoir and/or by volumetric
analysis of adequate geological and engineering data. Commercial
productivity has been established by actual production, successful testing,
or in certain cases by favorable core analyses and electrical-log
interpretation when the producing characteristics of the formation are
known from nearby fields. Volumetrically, the structure, areal extent,
volume, and characteristics of the reservoir are well defined by a
reasonable interpretation of adequate subsurface well control and by known
continuity of hydrocarbon-saturated material above known fluid contacts, if
any, or above the lowest known structural occurrence of hydrocarbons.
DEVELOPED -- Reserves that are recoverable from existing wells with
current operating methods and expenses.
Developed reserves include both producing and nonproducing reserves.
Estimates of producing reserves assume recovery by existing wells producing
from present completion intervals with normal operating methods and
expenses. Developed nonproducing reserves are in reservoirs behind the
casing or at minor depths below the producing zone and are considered
proved by production from other wells in the field, by successful
drill-stem tests, or by core analyses from the particular zones.
Nonproducing reserves require only moderate expense to be brought into
production.
UNDEVELOPED -- Reserves that are recoverable from additional wells yet
to be drilled.
Undeveloped reserves are those considered proved for production by
reasonable geological interpretation of adequate subsurface control in
reservoirs that are producing or proved by other wells but are not
recoverable from existing wells. This classification of reserves requires
drilling of additional wells, major deepening of existing wells, or
installation of enhanced recovery or other facilities.
Reserves recovered by enhanced recovery methods, such as injection of
external fluids to provide energy not inherent in the reservoirs, may be
classified as proved developed or proved undeveloped reserves depending upon the
extent to which such enhanced recovery methods are in operation. These reserves
are considered to be proved only in cases where a successful fluid injection
program is in operation, a pilot program indicates successful fluid injection,
or information is available concerning the successful application of such
methods in the same reservoir and it is reasonably certain that the program will
be implemented.
A-3
<PAGE>
DEGOLYER AND MACNAUGHTON
ESTIMATION OF RESERVES
Estimates of reserves were prepared by the use of standard geological and
engineering methods generally accepted by the petroleum industry. The method or
combination of methods used in the analysis of each reservoir was tempered by
experience with similar reservoirs, stage of development, quality and
completeness of basic data, and production history.
When applicable, the volumetric method was used to estimate the original
oil in place (OOIP) and original gas in place (OGIP). Structure maps were
prepared to delineate each reservoir, and isopach maps were constructed to
estimate reservoir volumes. Electrical logs, radioactivity logs, core analyses,
and other available data were used to prepare these maps as well as to calculate
representative values for porosity and water saturation. When adequate data were
available and when circumstances justified, material balance and other
engineering methods were used to estimate OOIP or OGIP.
Estimates of ultimate recovery were obtained after applying recovery
factors to OOIP or OGIP. These recovery factors were based on consideration of
the type of energy inherent in the reservoirs, analyses of the petroleum, the
structural positions of the properties, and the production histories. When
applicable, material balance and other engineering methods were used to estimate
recovery factors. An analysis of reservoir performance, including production
rate, reservoir pressure, and gas-oil ratio behavior, was used in the
calculation of reserves.
For depletion-type reservoirs or those whose performance disclosed a
reliable decline in producing-rate trends or other diagnostic characteristics,
reserves were estimated by the application of appropriate decline curves or
other performance relationships. In the analyses of production-decline curves,
reserves were estimated only to the limits of economic production based on
current economic conditions.
In certain cases, when the previously named methods could not be used,
reserves were estimated by analogy with similar wells or reservoirs for which
more complete data were available.
Future oil and gas producing rates estimated for this report are based on
production rates considering the most recent data available or, in certain
cases, are based on estimates provided by Domain. The rates used for future
production are estimated to be within the capacity of a well or reservoir to
produce.
Data available from wells drilled on the appraised properties through
December 31, 1996, were used in estimating gross ultimate recovery. Gross
production estimated to December 31, 1996, when applicable, was deducted from
gross ultimate recovery to arrive at estimates of gross reserves. This required
that production rates be estimated for up to 5 months since production data were
available only through July 1996 in certain fields.
Gas reserves are expressed as salable reserves at a temperature of 60
degrees Fahrenheit (F) and at the legal pressure bases of the states or areas in
which the reserves are located. Condensate reserves estimated herein are those
to be obtained by normal separator recovery.
A-4
<PAGE>
DEGOLYER AND MACNAUGHTON
The proved reserves, as of December 31, 1996, of the properties appraised
are estimated as follows, expressed in barrels (bbl) and thousands of cubic feet
(Mcf):
<TABLE>
<CAPTION>
GROSS RESERVES NET RESERVES
---------------------------- -------------------------
OIL AND OIL AND
CONDENSATE GAS CONDENSATE GAS
(BBL) (MCF) (BBL) (MCF)
----------- -------------- ---------- ------------
<S> <C> <C> <C> <C>
DOMAIN
Proved
Developed............. 275,866,767 410,903,065 7,740,848 46,979,647
Undeveloped........... 268,052 40,304,512 46,463 9,744,742
----------- -------------- ---------- ------------
Total Proved............... 276,134,819 451,207,577 7,787,311 56,724,389
MATRIX LIMITED PARTNERSHIP
Proved
Developed............. 36,473 38,804,681 7,685 3,940,863
Undeveloped........... 3,333 2,564,000 178 137,217
----------- -------------- ---------- ------------
Total Proved............... 39,806 41,368,681 7,863 4,078,080
DEPC FUND I
Proved
Developed............. 359,641 86,955,018 49,983 14,317,813
Undeveloped........... 70,875 11,120,000 15,571 2,620,854
----------- -------------- ---------- ------------
Total Proved............... 430,516 98,075,018 65,554 16,938,667
DEPC FUND II
Proved
Developed............. 0 888,744 0 149,922
Undeveloped........... 0 0 0 0
----------- -------------- ---------- ------------
Total Proved............... 0 888,744 0 149,922
</TABLE>
A-5
<PAGE>
DEGOLYER AND MACNAUGHTON
VALUATION OF RESERVES
Revenue values in this report were estimated using the initial prices and
costs, as of December 31, 1996, provided by Domain. Future prices were estimated
using guidelines established by the Securities and Exchange Commission (SEC) and
the Financial Accounting Standards Board (FASB). The initial and future prices
and producing rates used in this report have been reviewed by Domain and it has
represented that the gas prices and rates used herein are those that Domain
could reasonably expect to receive.
In this report, values for proved reserves are based on projections of
estimated future production and revenue prepared for these properties. The
assumptions used for estimating future prices and costs are as follows:
DOMAIN
OIL AND CONDENSATE PRICES
Initial oil and condensate prices furnished by Domain range from $19.23 to
$24.71 per barrel and are held constant for the producing lives of the
properties.
NATURAL GAS PRICES
Initial gas prices, also furnished by Domain, range from $1.59 to $4.1403
per thousand cubic feet of gas and are held constant for the producing lives of
the properties.
MATRIX LIMITED PARTNERSHIP
OIL AND CONDENSATE PRICES
Initial oil and condensate prices furnished by Domain range from $20.98 to
$23.39 per barrel and are held constant for the producing lives of the
properties.
NATURAL GAS PRICES
Initial gas prices, also furnished by Domain, range from $2.50 to $3.9129
per thousand cubic feet of gas and are held constant for the producing lives of
the properties.
DEPC FUND I
OIL AND CONDENSATE PRICES
Initial oil and condensate prices furnished by Domain range from $22.85 to
$24.71 per barrel and are held constant for the producing lives of the
properties.
NATURAL GAS PRICES
Initial gas prices, also furnished by Domain, range from $1.641 to $4.0122
per thousand cubic feet of gas and are held constant for the producing lives of
the properties.
DEPC FUND II
OIL AND CONDENSATE PRICES
No oil or condensate reserves are assigned, therefore no price was
furnished.
NATURAL GAS PRICES
The initial gas price furnished by Domain is $1.641 per thousand cubic feet
of gas and are held constant for the producing life of the property.
A-6
<PAGE>
DEGOLYER AND MACNAUGHTON
For all properties, assumptions used for estimating operating and capital
costs are as follows:
OPERATING AND CAPITAL COSTS
Initial estimates of operating costs are based on data furnished by Domain
and are used for the lives of the properties with no increases in the future
based on inflation. Future capital expenditures are estimated using 1996 values
and are not adjusted for inflation.
The estimated future revenue to be derived from the production and sale of
the net proved reserves of the properties appraised herein under the economic
assumptions furnished by Domain is summarized as follows:
<TABLE>
<CAPTION>
PROVED PROVED TOTAL
DEVELOPED UNDEVELOPED PROVED
($) ($) ($)
----------- ----------- --------------
<S> <C> <C> <C>
DOMAIN
Future Gross Revenue............... 340,203,048 37,704,437 377,907,485
Production Taxes................... 13,483,172 149,489 13,632,661
Operating Costs and Ad Valorem
Taxes............................ 185,033,938 3,267,082 188,301,020
Capital Costs...................... 11,954,105 8,535,145 20,489,250
Future Net Revenue*................ 129,731,833 25,752,721 155,484,554
Present Worth at 10 Percent*....... 108,460,234 14,303,791 122,764,025
MATRIX LIMITED PARTNERSHIP
Future Gross Revenue............... 12,957,212 541,077 13,498,289
Production Taxes................... 0 0 0
Operating Costs and Ad Valorem
Taxes............................ 1,758,862 93,600 1,852,462
Capital Costs...................... 910,967 97,500 1,008,467
Future Net Revenue*................ 10,287,383 349,977 10,637,360
Present Worth at 10 Percent*....... 9,327,934 244,630 9,572,564
DEPC FUND I
Future Gross Revenue............... 53,972,978 9,809,858 63,782,836
Production Taxes................... 387,065 171,027 558,092
Operating Costs and Ad Valorem
Taxes............................ 3,297,374 517,507 3,814,881
Capital Costs...................... 1,882,791 1,891,348 3,774,139
Future Net Revenue*................ 48,405,748 7,229,976 55,635,724
Present Worth at 10 Percent*....... 36,128,387 5,484,908 41,613,295
DEPC FUND II
Future Gross Revenue............... 246,021 0 246,021
Production Taxes................... 18,452 0 18,452
Operating Costs and Ad Valorem
Taxes............................ 38,940 0 38,940
Capital Costs...................... 0 0 0
Future Net Revenue*................ 188,629 0 188,629
Present Worth at 10 Percent*....... 173,247 0 173,247
</TABLE>
- ------------
* Future income tax expenses were not taken into account in the preparation of
these estimates.
A-7
<PAGE>
DEGOLYER AND MACNAUGHTON
In our opinion, the information relating to estimated proved reserves,
estimated future net revenue from proved reserves, and present worth of
estimated future net revenue from proved reserves of oil, condensate, and gas
contained in this report has been prepared in accordance with Paragraphs 10-13,
15 and 30(a)-(b) of Statement of Financial Account Standards No. 69 (November
1982) of the FASB and Rules 4-10(a) (1)-(13) of Regulation S-X and Rule 302(b)
of Regulation S-K of the SEC; provided, however, (i) certain estimated data have
not been provided with respect to changes in reserves information and (ii)
future income tax expenses have not been taken into account in estimating the
future net revenue and present worth values set forth herein.
To the extent the above-enumerated rules regulations, and statements
require determinations of an accounting or legal nature or information beyond
the scope of our report, we are necessarily unable to express an opinion as to
whether the above-described information is in accordance therewith or sufficient
therefor.
A-8
<PAGE>
DEGOLYER AND MACNAUGHTON
SUMMARY AND CONCLUSIONS
Evaluated herein are certain interests owned by Domain, the Matrix Limited
Partnership, and Domain Energy Production Corporation through DEPC Fund I and
DEPC Fund II. The appraised properties are located in Alabama, Louisiana,
Mississippi, and Texas and offshore from Alabama, Louisiana, and Texas. The net
proved reserves, as of December 31, 1996, of the property interests owned by
Domain are estimated as follows, expressed in barrels (bbl) and thousands of
cubic feet (Mcf):
OIL AND
CONDENSATE GAS
(BBL) (MCF)
---------- ------------
Net Proved Reserves.................. 7,787,311 56,724,389
Revenue and costs attributable to the production and sale of Domain's net
proved reserves as of December 31, 1996, of the properties evaluated, under the
aforementioned assumptions concerning future prices and costs, are estimated as
follows:
<TABLE>
<CAPTION>
PROVED PROVED TOTAL
DEVELOPED UNDEVELOPED PROVED
($) ($) ($)
-------------- ----------- --------------
<S> <C> <C> <C>
DOMAIN
Future Gross Revenue............... 340,203,048 37,704,437 377,907,485
Production Taxes................... 13,483,172 149,489 13,632,661
Operating Costs and Ad Valorem
Taxes............................ 185,033,938 3,267,082 188,301,020
Capital Costs...................... 11,954,105 8,535,145 20,489,250
Future Net Revenue*................ 129,731,833 25,752,721 155,484,554
Present Worth at 10 Percent*....... 108,460,234 14,303,791 122,764,025
</TABLE>
* Future income tax expenses were not taken into account in the preparation of
these estimates.
The net proved reserves, as of December 31, 1996, of the properties owned
by the Matrix Limited Partnership are estimated as follows:
OIL AND
CONDENSATE GAS
(BBL) (MCF)
---------- -----------
Net Proved Reserves.................. 7,863 4,078,080
Revenue and costs attributable to the production and sale of Matrix Limited
Partnership's net proved reserves as of December 31, 1996, of the properties
evaluated, under the aforementioned assumptions concerning future prices and
costs, are estimated as follows:
PROVED PROVED TOTAL
DEVELOPED UNDEVELOPED PROVED
($) ($) ($)
------------ ----------- ------------
MATRIX LIMITED PARTNERSHIP
Future Gross Revenue........... 12,957,212 541,077 13,498,289
Production Taxes............... 0 0 0
Operating Costs and Ad Valorem
Taxes........................ 1,758,862 93,600 1,852,462
Capital Costs.................. 910,967 97,500 1,008,467
Future Net Revenue*............ 10,287,383 349,977 10,637,360
Present Worth at 10 Percent*... 9,327,934 244,630 9,572,564
* Future income tax expenses were not taken into account in the preparation of
these estimates.
A-9
<PAGE>
DEGOLYER AND MACNAUGHTON
The net proved reserves, as of December 31, 1996, of the properties owned
by Domain Energy Production Corporation through DEPC Fund I are estimated as
follows:
OIL AND
CONDENSATE GAS
(BBL) (MCF)
---------- ------------
Net Proved Reserves.................. 65,554 16,938,667
Revenue and costs attributable to the production and sale of the net proved
reserves, as of December 31, 1996, of the DEPC Fund I properties, under the
aforementioned assumptions concerning future prices and costs, are estimated as
follows:
PROVED PROVED TOTAL
DEVELOPED UNDEVELOPED PROVED
($) ($) ($)
------------ ----------- ------------
DEPC FUND I
Future Gross Revenue............ 53,972,978 9,809,858 63,782,836
Production Taxes................ 387,065 171,027 558,092
Operating Costs and Ad Valorem
Taxes......................... 3,297,374 517,507 3,814,881
Capital Costs................... 1,882,791 1,891,348 3,774,139
Future Net Revenue*............. 48,405,748 7,229,976 55,635,724
Present Worth at 10 Percent*.... 36,128,387 5,484,908 41,613,295
* Future income tax expenses were not taken into account in the preparation of
these estimates.
The net proved reserves, as of December 31, 1996, of the properties owned
by Domain Energy Production Corporation through DEPC Fund II are estimated as
follows:
OIL AND
CONDENSATE GAS
(BBL) (MCF)
---------- ---------
Net Proved Reserves.................. 0 149,922
Revenue and costs attributable to the production and sale of the net proved
reserves, as of December 31, 1996, of the DEPC Fund II properties, under the
aforementioned assumptions concerning future prices and costs, are estimated as
follows:
PROVED PROVED TOTAL
DEVELOPED UNDEVELOPED PROVED
($) ($) ($)
--------- ----------- ---------
DEPC FUND II
Future Gross Revenue............... 246,021 0 246,021
Production Taxes................... 18,452 0 18,452
Operating Costs and Ad Valorem
Taxes............................ 38,940 0 38,940
Capital Costs...................... 0 0 0
Future Net Revenue*................ 188,629 0 188,629
Present Worth at 10 Percent*....... 173,247 0 173,247
* Future income tax expenses were not taken into account in the preparation of
these estimates.
A-10
<PAGE>
DEGOLYER AND MACNAUGHTON
Gas reserves estimated herein are expressed at a temperature base of 60F
and at the legal pressure bases of the states or areas in which the reserves are
located.
Submitted,
/s/ DeGOLYER and MacNAUGHTON
DeGOLYER and MacNAUGHTON
SIGNED: March 26, 1997 /s/JAMES W. HAIL, JR., P.E.
James W. Hail, Jr., P.E.
Senior Vice President
DeGolyer and MacNaughton
A-11
<PAGE>
March 26, 1997
Mr. Herb A. Newhouse
Domain Energy Corporation
1100 Louisiana, Suite 1500
Houston, Texas 77002
Dear Mr. Newhouse:
In accordance with your request, we have estimated the proved reserves
and future revenue, as of December 31, 1996, to the Domain Energy Ventures
Corporation (Domain) interest and the Domain Energy Production Corporation Fund
II (DEPC Fund) interest in certain oil and gas properties located in the West
Delta 30 Field Area, federal waters offshore Louisiana. This letter summarizes
the results of our reports dated February 24, 1997, and February 26, 1997. This
report has been prepared using constant prices and costs and conforms to the
guidelines of the Securities and Exchange Commission (SEC).
We estimate the net reserves and future net revenue to the Domain
interest, as of December 31, 1996, to be:
<TABLE>
<CAPTION>
Net Reserves Future Net Revenue
------------------------------ ----------------------------------
Oil Gas Present Worth
Category (Barrels) (MCF) Total at 10%
- ---------------------- ------------- ------------ --------------- ---------------
<S> <C> <C> <C> <C>
Proved Developed
Producing 92,463 129,699 $ 3,600 $ 103,100
Non-Producing 167,675 892,194 3,778,900 3,179,700
Proved Undeveloped 108,610 876,744 4,408,600 3,315,500
------------- ------------ --------------- ---------------
Total Proved 368,748 1,898,637 $ 8,191,100 $ 6,598,300
</TABLE>
We estimate the net reserves and future net revenue to the DEPC Fund
interest, as of December 31, 1996, to be:
<TABLE>
<CAPTION>
Net Reserves Future Net Revenue
------------------------------ ----------------------------------
Oil Gas Present Worth
Category (Barrels) (MCF) Total at 10%
- ---------------------- ------------- ------------ --------------- ---------------
<S> <C> <C> <C> <C>
Proved Developed
Producing 554,797 778,206 $ 6,000 $ 610,400
Non-Producing 1,006,060 5,353,157 22,593,100 19,019,700
Proved Undeveloped 651,665 5,260,459 26,365,500 19,825,300
------------- ------------ --------------- ---------------
Total Proved 2,212,522 11,391,822 $48,964,600 $39,455,400
</TABLE>
The oil reserves shown include crude oil and condensate. Oil volumes are
expressed in barrels which are equivalent to 42 United States gallons. Gas
volumes are expressed in thousands of standard cubic feet (MCF) at the contract
temperature and pressure bases.
A-12
<PAGE>
The estimated reserves and future revenue shown are for proved developed
producing, proved developed non-producing, and proved undeveloped reserves. In
accordance with SEC guidelines, our estimates do not include any value for
probable or possible reserves which may exist for these properties. Our
estimates do not include any value which could be attributed to interests in
undeveloped acreage beyond those tracts for which undeveloped reserves have been
estimated.
Future gross revenue is Domain and DEPC Fund's share of the gross
(8/8ths) revenue from the properties. Future net revenue is after deducting
future capital costs, operating expenses, any applicable payments to net profits
interests, and abandonment costs, but before consideration of federal income
taxes. In accordance with SEC guidelines, the future net revenue has been
discounted at an annual rate of 10 percent to determine its "present worth." The
present worth is shown to indicate the effect of time on the value of money and
should not be construed as being the fair market value of the properties.
For the purposes of this report, a field inspection of the properties
has not been performed nor has the mechanical operation or condition of the
wells and their related facilities been examined. We have not investigated
possible environmental liability related to the properties; therefore, our
estimates do not include any costs which may be incurred due to such possible
liability. Also, our estimates do not include any salvage value for the lease
and well equipment, but do include our estimates of the costs to abandon the
wells, platforms, and production facilities. Abandonment costs are included with
other capital investments.
The oil and gas prices used in this report are the actual prices
received on December 31, 1996. Oil and gas prices are held constant in
accordance with SEC guidelines.
Lease and well operating costs are based on operating expense records of
Domain Energy Corporation. These costs include the per-well overhead expenses
allowed under joint operating agreements along with costs estimated to be
incurred at and below the district and field levels. Headquarters general and
administrative overhead expenses of Domain Energy Corporation are not included.
Lease and well operating costs are held constant in accordance with SEC
guidelines. Capital costs are included as required for workovers, new
development wells, and production equipment.
We have made no investigation of potential gas volume and value
imbalances which may have resulted from overdelivery or underdelivery to the
Domain or the DEPC Fund interests. Therefore, our estimates of reserves and
future revenue do not include adjustments for the settlement of any such
imbalances; our projections are based on Domain and the DEPC Fund receiving
their net revenue interest share of estimated future gross gas production.
A-13
<PAGE>
The reserves included in this report are estimates only and should not
be construed as exact quantities. They may or may not be recovered; if
recovered, the revenues therefrom and the costs related thereto could be more or
less than the estimated amounts. A substantial portion of these reserves are for
behind pipe zones and undeveloped locations. Therefore, these reserves are based
on estimates of reservoir volumes and recovery efficiencies along with analogies
to similar production. As such reserve estimates are usually subject to greater
revision than those based on substantial production and pressure data, it may be
necessary to revise these estimates up or down in the future as additional
performance data become available. The sales rates, prices received for the
reserves, and costs incurred in recovering such reserves may vary from
assumptions included in this report due to governmental policies and
uncertainties of supply and demand. Also, estimates of reserves may increase or
decrease as a result of future operations.
In evaluating the information at our disposal concerning this report, we
have excluded from our consideration all matters as to which legal or
accounting, rather than engineering and geological, interpretation may be
controlling. As in all aspects of oil and gas evaluation, there are
uncertainties inherent in the interpretation of engineering and geological data;
therefore, our conclusions necessarily represent only informed professional
judgments.
The titles to the properties have not been examined by Netherland,
Sewell & Associates, Inc., nor has the actual degree or type of interest owned
been independently confirmed. The data used in our estimates were obtained from
Domain Energy Ventures Corporation, Domain Energy Corporation, other interest
owners, various operators of the properties, and the nonconfidential files of
Netherland, Sewell & Associates, Inc. and were accepted as accurate. We are
independent petroleum engineers, geologists, and geophysicists; we do not own an
interest in these properties and are not employed on a contingent basis. Basic
geologic and field performance data together with our engineering work sheets
are maintained on file in our office.
Very truly yours,
/s/ CLARENCE NETHERLAND
A-14
<PAGE>
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 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 ANY PERSON 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
PAGE
----
Prospectus Summary...................... 3
Risk Factors............................ 11
Use of Proceeds......................... 19
Dividend Policy......................... 19
Capitalization.......................... 20
Dilution................................ 21
Unaudited Condensed Pro Forma Financial
Statements............................ 22
Selected Historical Financial Data...... 30
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................ 31
Business and Properties................. 42
Management.............................. 62
Transactions with Management and First
Reserve............................... 68
Security Ownership of Certain Beneficial
Owners and Management................. 70
Description of Capital Stock............ 71
Shares Eligible for Future Sale......... 72
Underwriting............................ 74
Notice to Canadian Residents............ 75
Legal Matters........................... 76
Experts................................. 76
Available Information................... 77
Glossary................................ 78
Index to Financial Statements........... F-1
Reports of Independent Petroleum
Engineers............................. A-1
------------------
UNTIL , 1997 (25 DAYS AFTER THE COMMENCEMENT OF THE 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.
DOMAIN ENERGY
CORPORATION
6,000,000 Shares
Common Stock
($.01 par value)
PROSPECTUS
CREDIT SUISSE FIRST BOSTON
PAINEWEBBER INCORPORATED
PRUDENTIAL SECURITIES INCORPORATED
MORGAN KEEGAN & COMPANY, INC.
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following are the estimated expenses of the issuance and distribution
of the securities being registered payable by the Company.
Securities and Exchange Commission
Registration Fee................... $ 31,364
NASD filing fee...................... 10,850
New York Stock Exchange listing
fee................................ 100,000
Printing and engraving expenses...... 150,000
Blue Sky filing fees and expenses.... 10,000
Accountants' fees.................... 225,000
Counsel fees......................... 400,000
Transfer agent and registrar fees.... 5,000
Miscellaneous........................ 67,786
------------
Total........................... $ 1,000,000
============
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 102 of the DGCL allows a corporation to eliminate the personal
liability of directors of a corporation to the corporation or to any of its
stockholders for monetary damage for a breach of his fiduciary duty as a
director, except in the case where the director breached his duty of loyalty,
failed to act in good faith, engaged in intentional misconduct or knowingly
violated a law, authorized the payment of a dividend or approved a stock
repurchase in violation of Delaware corporate law or obtained an improper
personal benefit. The Company's Certificate of Incorporation, a copy of which is
filed as Exhibit 3.1, contains a provision which, in substance, eliminates
directors' personal liability as set forth above.
Section 145 of the DGCL provides that a corporation may 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, whether civil,
criminal, administrative or investigative, by reason of the fact that he is or
was a director, officer, employee or agent of the corporation or is or was
serving at its request in such capacity in another corporation or business
association against expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by him in connection
with such action, suit or proceeding if he 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 his conduct was unlawful. The Company's Certificate
of Incorporation, a copy of which is filed as Exhibit 3.1, contains a provision
which, in substance, provides for indemnification as set forth above.
The Company has purchased directors' and officers' liability insurance,
which will indemnify the directors and officers of the Company against damages
arising out of certain kinds of claims that might be made against them based on
their negligent acts or omissions while acting in their capacity as such.
The form of Underwriting Agreement filed as Exhibit 1.1 to this
Registration Statement contains certain provisions for indemnification of
directors and officers of the Company and the Underwriters against civil
liabilities under the Securities Act.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
On December 31, 1996, the Company sold 7,177,681 shares of Common Stock at
$4.1796 per share to Fund VII and, through a wholly-owned subsidiary of the
Company, issued an $8.0 million promissory note in favor of Fund VII, which, at
the time of issuance, was convertible, at the option of Fund VII, into
II-1
<PAGE>
1,914,048 shares of the Company's Common Stock. The Company relied on Section
4(2) of the Securities Act in effecting these transactions.
On February 21, 1997 the Company sold an aggregate of 390,307 shares of
Common Stock at $4.1796 per share to eight members of the Company's management.
The Company relied on Section 4(2) of the Securities Act in effecting these
transactions.
On April 3, 1997 the Company sold an aggregate of 95,696 shares of Common
Stock at $4.1796 per share to 26 employees of the Company. The Company relied on
an exemption under Section 4(2) of the Securities Act in effecting these
transactions.
ITEM 16. EXHIBITS AND FINANCIAL SCHEDULES.
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ------------------------ ------------------------------------------------------------------------------------------
<C> <S>
1.1 -- Form of Underwriting Agreement*
3.1 -- Form of Amended and Restated Certificate of Incorporation of the Company**
3.2 -- Form of Second Amended and Restated By-Laws of the Company**
4.1 -- Securityholders Agreement, dated as of December 31, 1996, among the Company and its
Securityholders**
5.1 -- Opinion of Weil, Gotshal & Manges LLP regarding legality of the securities being
registered*
10.1 -- Stock Purchase Agreement, dated as of December 24, 1996, between El Paso Natural Gas
Company and Teleo Ventures, Inc.**
10.2 -- Assignment and Assumption Agreement, dated as of December 31, 1996, between Teleo
Ventures, Inc. and the Company**
10.3 -- Credit Agreement, dated as of June 7, 1996, between Domain Energy Finance Corporation
(formerly known as Tenneco Ventures Finance Corporation) and Compass Bank -- Houston**
(including the First Amendment and the Second Amendment thereto)
10.4 -- Subscription Agreement, dated as of December 31, 1996, between First Reserve Fund VII,
Limited Partnership and the Company**
10.5 -- Amended and Restated Management Investor Subscription Agreement, dated effective as of
December 31, 1996, between Michael V. Ronca and the Company**
10.6 -- Management Investor Subscription Agreement, dated as of February 21, 1997, between Herbert
A. Newhouse and the Company, with similar agreements with Catherine L. Sliva, Rick G.
Lester, Douglas H. Woodul, Steven M. Curran, Dean R. Bouillion and Lucynda S. Herrin**
10.7 -- Promissory Note, dated February 21, 1997, by Michael V. Ronca in favor of the Company,
with similar Promissory Notes by Herbert A. Newhouse, Catherine L. Sliva, Rick G. Lester,
Douglas H. Woodul, Steven M. Curran and Lucynda S. Herrin**
10.8 -- Pledge Agreement, dated as of February 21, 1997, between the Company and Michael V. Ronca,
with similar agreements with Herbert A. Newhouse, Catherine L. Sliva, Rick G. Lester,
Douglas H. Woodul, Steven M. Curran and Lucynda S. Herrin**
10.9 -- Employment Agreement, dated as of December 31, 1996, between Michael V. Ronca and the
Company**
10.10 -- Credit Agreement, dated as of December 31, 1996, among the Company, Ventures Corporation,
Production Corporation, The Chase Manhattan Bank, Compass Bank, Toronto Dominion (Texas),
Inc. and The Chase Manhattan Bank as Administrative Agent**
10.11 -- Amended and Restated 1996 Stock Purchase and Option Plan for Key Employees of Domain
Energy Corporation and Affiliates**
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
<C> <S>
10.12 -- Amended and Restated Non-Qualified Stock Option Agreement, dated as of April 3, 1997,
between the Company and Michael V. Ronca, with similar agreements with Herbert A.
Newhouse, Catherine L. Sliva, Rick G. Lester, Douglas H. Woodul, Steven M. Curran, Dean R.
Bouillion and Lucynda S. Herrin
10.13-- Purchase Agreement, dated as of April 30, 1997, among Production Corporation, as
Purchaser, each of GE APPL Corp., GTPT Corporation and Zeta MT Holding, Inc., as Sellers,
and NationsBank of Texas, N.A., as QPAM
21.1 -- List of Subsidiaries of the Company
23.1 -- Consent of Deloitte & Touche LLP
23.2 -- Consent of Weil, Gotshal & Manges LLP (included in Exhibit 5.1)*
23.3 -- Consent of DeGolyer**
23.4 -- Consent of Netherland, Sewell**
23.5-- Consent of William P. Nicoletti as nominee for director
23.6-- Consent of Gary K. Wright as nominee for director
24.1 -- Power of Attorney**
27.1 -- Financial Data Schedule
</TABLE>
- ------------
* To be filed by amendment.
** Previously filed.
(b) Financial Statements Schedules
SCHEDULE NO. DESCRIPTION
----------- -----------
I Condensed Balance Sheet
ITEM 17. UNDERTAKINGS.
The undersigned registrant hereby undertakes to provide to the
Underwriters, at the closing specified in the Underwriting Agreement,
certificates in such denominations and registered in such names as required by
the Underwriters to permit prompt delivery to each purchaser.
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 provisions described in Item 14, 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 in the successful defense of any action, suit or proceeding) is asserted
by such director, officer or controlling person of the registrant 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.
The undersigned registrant 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.
II-3
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THE
REGISTRANT HAS DULY CAUSED THIS AMENDMENT NO. 1 TO REGISTRATION STATEMENT ON
FORM S-1 TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY
AUTHORIZED, IN THE CITY OF HOUSTON, STATE OF TEXAS ON MAY 21, 1997.
DOMAIN ENERGY CORPORATION
By: /s/RICK G. LESTER
Name: Rick G. Lester
Title: Vice President and Chief
Financial Officer
PURSUANT TO THE SECURITIES ACT OF 1933, AS AMENDED, THIS REGISTRATION
STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE
DATES INDICATED.
NAME TITLE DATE
---- ----- ----
/s/MICHAEL V. RONCA* President, Chief Executive Officer May 21, 1997
MICHAEL V. RONCA and Director (principal executive
officer)
/s/RICK G. LESTER Vice President and Chief Financial May 21, 1997
RICK G. LESTER Officer (principal financial and
accounting officer)
/s/JONATHAN S. LINKER* Director May 21, 1997
JONATHAN S. LINKER
/s/STEVEN H. PRUETT* Director May 21, 1997
STEVEN H. PRUETT
*By:/s/RICK G. LESTER
RICK G. LESTER
ATTORNEY-IN-FACT
II-4
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholder
Domain Energy Corporation
We have audited the consolidated balance sheet of Domain Energy Corporation and
subsidiaries (the "Company") as of December 31, 1996 and have issued our
report thereon dated April 3, 1997 (included elsewhere in the Registration
Statement). Our audit also included the financial statement schedule listed in
Item 16 of this Registration Statement. This financial statement schedule is the
responsibility of the Company's management. Our responsibility is to express an
opinion based on our audit. In our opinion, such financial statement schedule,
when considered in relation to the basic consolidated balance sheet taken as a
whole, presents fairly in all material respects the information set forth
therein.
Houston, Texas
April 3, 1997
The accompanying financial statements reflect the 754-for-one stock split
to be effected immediately before consummation of the Offering. The above
opinion is in the form which will be signed by Deloitte & Touche LLP upon
consummation of such stock split, which is described in Note 7 of Notes to the
Combined and Consolidated Financial Statements, and assuming that, from April 3,
1997 to the date of such stock split, no other events should have occurred that
would affect the accompanying financial statements and notes thereto or the
financial statement schedule listed in Item 16.
DELOITTE & TOUCHE LLP
Houston, Texas
May 21, 1997
S-1
<PAGE>
DOMAIN ENERGY CORPORATION
CONDENSED BALANCE SHEET
SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT
DECEMBER 31, 1996
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
Investments in subsidiaries.......... $ 88,777
=========
LIABILITIES
Long-term debt....................... $ 61,200
STOCKHOLDERS' EQUITY
Common stock:
$0.01 par value, 15,080,000
shares authorized and 7,177,681
issued and
outstanding at December 31,
1996........................... 72
Additional paid-in capital........... 27,505
Retained earnings.................... --
Total stockholder's
equity.............. 27,577
---------
Total liabilities and
stockholder's
equity.............. $ 88,777
=========
The notes to the consolidated balance sheet appearing on pages F-7 through
F-20, to the extent applicable, are incorporated herein by reference.
S-2
EXHIBIT 10.3
FIRST AMENDMENT TO
CREDIT AGREEMENT
between
DOMAIN ENERGY FINANCE CORPORATION
and
COMPASS BANK
Effective as of
December 9, 1996
<PAGE>
TABLE OF CONTENTS
PAGE
ARTICLE I. DEFINITIONS............................................... 1
1.01 Terms Defined Above............................................ 1
1.02 Terms Defined in Agreement..................................... 1
1.03 References..................................................... 1
1.04 Articles and Sections.......................................... 1
1.05 Number and Gender.............................................. 2
ARTICLE II. AMENDMENTS............................................... 2
2.01 Amendment of Section 2.7....................................... 2
2.02 Amendment of Section 6.12..................................... 3
ARTICLE III. CONDITIONS.............................................. 3
3.01 Receipt of Documents........................................... 3
3.02 Accuracy of Representations and Warranties..................... 3
3.03 Matters Satisfactory to Lender................................. 4
ARTICLE IV. REPRESENTATIONS AND WARRANTIES........................... 4
ARTICLE V. RATIFICATION.............................................. 4
ARTICLE VI. MISCELLANEOUS............................................ 4
6.01 Scope of Amendment............................................. 4
6.02 Agreement as Amended........................................... 4
6.03 Parties in Interest............................................ 4
6.04 Rights of Third Parties........................................ 4
6.05 ENTIRE AGREEMENT............................................... 4
6.06 GOVERNING LAW.................................................. 5
6.07 JURISDICTION AND VENUE......................................... 5
i
<PAGE>
FIRST AMENDMENT TO CREDIT AGREEMENT
This FIRST AMENDMENT TO CREDIT AGREEMENT (this "FIRST
AMENDMENT") is made and entered into effective as of December 9, 1996, between
TENNECO VENTURES FINANCE CORPORATION, a Delaware corporation, (the "BORROWER")
and COMPASS BANK, a Texas state chartered banking institution (the "LENDER").
W I T N E S S E T H:
WHEREAS, the above named parties did execute and exchange
counterparts of that Credit Agreement dated June 7, 1996 (the "AGREEMENT"), to
which reference is here made for all purposes;
WHEREAS, the parties subject to and bound by the Agreement are
desirous of amending the Agreement in the particulars hereinafter set forth;
NOW, THEREFORE, in consideration of the mutual covenants and
agreements of the parties to the Agreement, as set forth therein, and the mutual
covenants and agreements of the parties hereto, as set forth in this First
Amendment, the parties hereto agree as follows:
ARTICLE I.
DEFINITIONS
1.01 TERMS DEFINED ABOVE. As used herein, each of the terms
"AGREEMENT," "BORROWER," "FIRST AMENDMENT," and "LENDER" shall have the meaning
assigned to such term hereinabove.
1.02 TERMS DEFINED IN AGREEMENT. As used herein, each term defined
in the Agreement shall have the meaning assigned thereto in the Agreement,
unless expressly provided herein to the contrary.
1.03 REFERENCES. References in this First Amendment to Article or
Section numbers shall be to Articles and Sections of this First Amendment,
unless expressly stated herein to the contrary. References in this First
Amendment to "hereby," "herein," "hereinafter," "hereinabove," "hereinbelow,"
"hereof," and "hereunder" shall be to this First Amendment in its entirety and
not only to the particular Article or Section in which such reference appears.
1.04 ARTICLES AND SECTIONS. This First Amendment, for convenience
only, has been divided into Articles and Sections and it is understood that the
rights, powers, privileges, duties, and other legal relations of the parties
hereto shall be determined from this First
<PAGE>
Amendment as an entirety and without regard to such division into Articles and
Sections and without regard to headings prefixed to such Articles and Sections.
1.05 NUMBER AND GENDER. Whenever the context requires, reference
herein made to the single number shall be understood to include the plural and
likewise the plural shall be understood to include the singular. Words denoting
sex shall be construed to include the masculine, feminine, and neuter, when such
construction is appropriate, and specific enumeration shall not exclude the
general, but shall be construed as cumulative. Definitions of terms defined in
the singular and plural shall be equally applicable to the plural or singular,
as the case may be.
ARTICLE II.
AMENDMENTS
The Borrower and the Lender hereby amend the Agreement in the
following particulars:
2.01 AMENDMENT OF SECTION 2.7. Section 2.7 of the Agreement is
hereby amended as follows:
"2.7 BORROWING BASE DETERMINATIONS. (a) The Borrowing Base as
of the Closing Date is acknowledged by the Borrower and the
Lender to be $18,000,000."
2.02 AMENDMENT OF SECTION 6.12. Section 6.12 of the Agreement is
hereby amended as follows:
"6.12 TANGIBLE NET WORTH. Permit Tangible Net Worth as of the close
of any fiscal quarter to be less than $10,000,000, plus 100% of
equity raised for all fiscal periods ending subsequent to September
30, 1996."
ARTICLE III.
CONDITIONS
The obligation of the Lender to amend the Agreement as provided
herein is subject to the fulfillment of the following conditions precedent:
3.01 RECEIPT OF DOCUMENTS. The Lender shall have received, reviewed,
and approved the following documents and other items, appropriately executed
when necessary and in form and substance satisfactory to the Lender:
2
<PAGE>
(a) multiple counterparts of this First Amendment and the Note, as
requested by the Lender;
(b) Mortgage, Deed of Trust, Indenture, Security Agreement,
Financing Statement and Assignment of Production; and
(c) such other agreements, documents, items, instruments, opinions,
certificates, waivers, consents, and evidence as the Lender may
reasonably request.
3.02 ACCURACY OF REPRESENTATIONS AND WARRANTIES. The representations
and warranties contained in Article IV of the Agreement and this First Amendment
shall be true and correct.
3.03 MATTERS SATISFACTORY TO LENDER. All matters incident to the
consummation of the transactions contemplated hereby shall be satisfactory to
the Lender.
ARTICLE IV.
REPRESENTATIONS AND WARRANTIES
The Borrower hereby expressly re-makes, in favor of the Lender, all
of the representations and warranties set forth in Article IV of the Agreement,
and represents and warrants that all such representations and warranties remain
true and unbreached.
ARTICLE V.
RATIFICATION
Each of the parties hereto does hereby adopt, ratify, and confirm
the Agreement and the other Loan Documents, in all things in accordance with the
terms and provisions thereof, as amended by this First Amendment.
ARTICLE VI.
MISCELLANEOUS
6.01 SCOPE OF AMENDMENT. The scope of this First Amendment is
expressly limited to the matters addressed herein and this First Amendment shall
not operate as a waiver of any past, present, or future breach, Default, or
Event of Default under the Agreement, except to the extent, if any, that any
such breach, Default, or Event of Default is remedied by the effect of this
First Amendment.
3
<PAGE>
6.02 AGREEMENT AS AMENDED. All references to the Agreement in any
document heretofore or hereafter executed in connection with the transactions
contemplated in the Agreement shall be deemed to refer to the Agreement as
amended by this First Amendment.
6.03 PARTIES IN INTEREST. All provisions of this First Amendment
shall be binding upon and shall inure to the benefit of the Borrower, the Lender
and their respective successors and assigns.
6.04 RIGHTS OF THIRD PARTIES. All provisions herein are imposed
solely and exclusively for the benefit of the Lender and the Borrower, and no
other Person shall have standing to require satisfaction of such provisions in
accordance with their terms and any or all of such provisions may be freely
waived in whole or in part by the Lender at any time if in its sole discretion
it deems it advisable to do so.
6.05 ENTIRE AGREEMENT. THIS FIRST AMENDMENT CONSTITUTES THE ENTIRE
AGREEMENT BETWEEN THE PARTIES HERETO WITH RESPECT TO THE SUBJECT HEREOF AND
SUPERSEDES ANY PRIOR AGREEMENT, WHETHER WRITTEN OR ORAL, BETWEEN SUCH PARTIES
REGARDING THE SUBJECT HEREOF. FURTHERMORE IN THIS REGARD, THIS FIRST AMENDMENT,
THE AGREEMENT, THE NOTE, THE SECURITY INSTRUMENTS, AND THE OTHER WRITTEN
DOCUMENTS REFERRED TO IN THE AGREEMENT OR EXECUTED IN CONNECTION WITH OR AS
SECURITY FOR THE NOTE REPRESENT, COLLECTIVELY, THE FINAL AGREEMENT AMONG THE
PARTIES THERETO AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR,
CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO
UNWRITTEN ORAL AGREEMENTS AMONG THE PARTIES.
6.06 GOVERNING LAW. THIS FIRST AMENDMENT, THE AGREEMENT AND THE NOTE
SHALL BE DEEMED TO BE CONTRACTS MADE UNDER AND SHALL BE CONSTRUED IN ACCORDANCE
WITH AND GOVERNED BY THE LAWS OF THE STATE OF TEXAS. THE PARTIES ACKNOWLEDGE AND
AGREE THAT THIS AGREEMENT AND THE NOTE AND THE TRANSACTIONS CONTEMPLATED HEREBY
BEAR A NORMAL, REASONABLE, AND SUBSTANTIAL RELATIONSHIP TO THE STATE OF TEXAS.
6.07 JURISDICTION AND VENUE. ALL ACTIONS OR PROCEEDINGS WITH RESPECT
TO, ARISING DIRECTLY OR INDIRECTLY IN CONNECTION WITH, OUT OF, RELATED TO, OR
FROM THIS FIRST AMENDMENT, THE AGREEMENT OR ANY OTHER LOAN DOCUMENT MAY BE
LITIGATED IN COURTS HAVING SITUS IN HARRIS COUNTY, TEXAS. EACH OF THE BORROWER
AND THE LENDER HEREBY SUBMITS TO THE JURISDICTION OF ANY LOCAL, STATE, OR
FEDERAL COURT LOCATED IN HARRIS COUNTY, TEXAS, AND HEREBY WAIVES ANY RIGHTS IT
MAY HAVE TO TRANSFER OR
4
<PAGE>
CHANGE THE JURISDICTION OR VENUE OF ANY LITIGATION BROUGHT AGAINST IT BY THE
BORROWER OR THE LENDER IN ACCORDANCE WITH THIS SECTION.
IN WITNESS WHEREOF, this First Amendment to Credit Agreement is
executed effective the date first hereinabove written.
BORROWER:
TENNECO VENTURES FINANCE
CORPORATION
By: /s/ CATHERINE L. SLIVA
Catherine L. Sliva
Vice President
LENDER:
COMPASS BANK
By: /s/ DOROTHY MARCHAND WILSON
Dorothy Marchand Wilson
Vice President
5
<PAGE>
SECOND AMENDMENT TO
CREDIT AGREEMENT
between
DOMAIN ENERGY FINANCE CORPORATION
and
COMPASS BANK
Effective as of
May 7, 1997
<PAGE>
TABLE OF CONTENTS
PAGE
ARTICLE I. DEFINITIONS............................................... 1
1.01 Terms Defined Above............................................ 1
1.02 Terms Defined in Agreement..................................... 1
1.03 References..................................................... 1
1.04 Articles and Sections.......................................... 2
1.05 Number and Gender.............................................. 2
ARTICLE II. AMENDMENTS............................................... 2
2.01 Substitution of Name........................................... 2
2.02 Amendment of Section 1.2....................................... 2
2.03 Amendment of Section 2.7....................................... 2
2.04 Amendment of Section 2.12...................................... 2
2.05 Amendment of Exhibit A......................................... 3
ARTICLE III. CONDITIONS.............................................. 3
3.01 Receipt of Documents........................................... 3
3.02 Accuracy of Representations and Warranties..................... 3
3.03 Matters Satisfactory to Lender................................. 3
ARTICLE IV. REPRESENTATIONS AND WARRANTIES........................... 3
ARTICLE V. RATIFICATION.............................................. 4
ARTICLE VI. MISCELLANEOUS............................................ 4
6.01 Scope of Amendment............................................. 4
6.02 Agreement as Amended........................................... 4
6.03 Parties in Interest............................................ 4
6.04 Rights of Third Parties........................................ 4
6.05 ENTIRE AGREEMENT............................................... 4
6.06 GOVERNING LAW.................................................. 5
6.07 JURISDICTION AND VENUE......................................... 5
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SECOND AMENDMENT TO CREDIT AGREEMENT
This SECOND AMENDMENT TO CREDIT AGREEMENT (this "SECOND AMENDMENT")
is made and entered into effective as of May 7, 1997, between DOMAIN ENERGY
FINANCE CORPORATION, a Delaware corporation, successor to Tenneco Ventures
Finance Corporation (the "BORROWER") and COMPASS BANK, a Texas state chartered
banking institution (the "LENDER").
W I T N E S S E T H:
WHEREAS, the above named parties did execute and exchange
counterparts of that Credit Agreement dated June 7, 1996, as amended by First
Amendment to Credit Agreement dated effective as of December 9, 1996 (the
"AGREEMENT"), to which reference is here made for all purposes;
WHEREAS, the parties subject to and bound by the Agreement are
desirous of amending the Agreement in the particulars hereinafter set forth;
NOW, THEREFORE, in consideration of the mutual covenants and
agreements of the parties to the Agreement, as set forth therein, and the mutual
covenants and agreements of the parties hereto, as set forth in this Second
Amendment, the parties hereto agree as follows:
ARTICLE I.
DEFINITIONS
1.01 TERMS DEFINED ABOVE. As used herein, each of the terms
"AGREEMENT," "BORROWER," "SECOND AMENDMENT," and "LENDER" shall have the meaning
assigned to such term hereinabove.
1.02 TERMS DEFINED IN AGREEMENT. As used herein, each term defined
in the Agreement shall have the meaning assigned thereto in the Agreement,
unless expressly provided herein to the contrary.
1.03 REFERENCES. References in this Second Amendment to Article or
Section numbers shall be to Articles and Sections of this Second Amendment,
unless expressly stated herein to the contrary. References in this Second
Amendment to "hereby," "herein," "hereinafter," "hereinabove," "hereinbelow,"
"hereof," and "hereunder" shall be to this Second Amendment in its entirety and
not only to the particular Article or Section in which such reference appears.
<PAGE>
1.04 ARTICLES AND SECTIONS. This Second Amendment, for convenience
only, has been divided into Articles and Sections and it is understood that the
rights, powers, privileges, duties, and other legal relations of the parties
hereto shall be determined from this Second Amendment as an entirety and without
regard to such division into Articles and Sections and without regard to
headings prefixed to such Articles and Sections.
1.05 NUMBER AND GENDER. Whenever the context requires, reference
herein made to the single number shall be understood to include the plural and
likewise the plural shall be understood to include the singular. Words denoting
sex shall be construed to include the masculine, feminine, and neuter, when such
construction is appropriate, and specific enumeration shall not exclude the
general, but shall be construed as cumulative. Definitions of terms defined in
the singular and plural shall be equally applicable to the plural or singular,
as the case may be.
ARTICLE II.
AMENDMENTS
The Borrower and the Lender hereby amend the Agreement in the
following particulars:
2.01 SUBSTITUTION OF NAME. Domain Energy Finance Corporation shall
be substituted for Tenneco Ventures Finance Corporation.
2.02 AMENDMENT OF SECTION 1.2. Section 1.2 of the Agreement is
hereby amended as follows:
The following definition is amended to read as follows:
"FINAL MATURITY" shall mean June 1, 1999.
2.03 AMENDMENT OF SECTION 2.7. Section 2.7 of the Agreement is
hereby amended as follows:
"2.7 BORROWING BASE DETERMINATIONS. (a) The Borrowing Base as
of the Closing Date is acknowledged by the Borrower and the
Lender to be $23,000,000."
2.04 AMENDMENT OF SECTION 2.12. Section 2.12 of the Agreement is
hereby amended as follows:
"2.10 FACILITY FEE. In addition to the interest on the Note and the
other fees payable hereunder and to compensate the Lender for the
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costs of the extension of credit hereunder, the Borrower shall pay
to the Lender on the date this Second Amendment is executed, in
immediately available funds, a facility fee in the amount of
$12,500."
2.05 AMENDMENT OF EXHIBIT I. Exhibit I, i.e. the Note, is as set
forth on Exhibit I to this Second Amendment.
ARTICLE III.
CONDITIONS
The obligation of the Lender to amend the Agreement as provided
herein is subject to the fulfillment of the following conditions precedent:
3.01 RECEIPT OF DOCUMENTS. The Lender shall have received, reviewed,
and approved the following documents and other items, appropriately executed
when necessary and in form and substance satisfactory to the Lender:
(a) multiple counterparts of this Second Amendment and the Note, as
requested by the Lender;
(b) Ratification and Amendment to Mortgage, Deed of Trust,
Indenture, Security Agreement, Financing Statement and Assignment of
Production; and
(c) such other agreements, documents, items, instruments, opinions,
certificates, waivers, consents, and evidence as the Lender may
reasonably request.
3.02 ACCURACY OF REPRESENTATIONS AND WARRANTIES. The representations
and warranties contained in Article IV of the Agreement and this Second
Amendment shall be true and correct.
3.03 MATTERS SATISFACTORY TO LENDER. All matters incident to the
consummation of the transactions contemplated hereby shall be satisfactory to
the Lender.
ARTICLE IV.
REPRESENTATIONS AND WARRANTIES
The Borrower hereby expressly re-makes, in favor of the Lender, all
of the representations and warranties set forth in Article IV of the Agreement,
and represents and warrants that all such representations and warranties remain
true and unbreached.
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<PAGE>
ARTICLE V.
RATIFICATION
Each of the parties hereto does hereby adopt, ratify, and confirm
the Agreement and the other Loan Documents, in all things in accordance with the
terms and provisions thereof, as amended by this Second Amendment.
ARTICLE VI.
MISCELLANEOUS
6.01 SCOPE OF AMENDMENT. The scope of this Second Amendment is
expressly limited to the matters addressed herein and this Second Amendment
shall not operate as a waiver of any past, present, or future breach, Default,
or Event of Default under the Agreement, except to the extent, if any, that any
such breach, Default, or Event of Default is remedied by the effect of this
Second Amendment.
6.02 AGREEMENT AS AMENDED. All references to the Agreement in any
document heretofore or hereafter executed in connection with the transactions
contemplated in the Agreement shall be deemed to refer to the Agreement as
amended by this Second Amendment.
6.03 PARTIES IN INTEREST. All provisions of this Second Amendment
shall be binding upon and shall inure to the benefit of the Borrower, the Lender
and their respective successors and assigns.
6.04 RIGHTS OF THIRD PARTIES. All provisions herein are imposed
solely and exclusively for the benefit of the Lender and the Borrower, and no
other Person shall have standing to require satisfaction of such provisions in
accordance with their terms and any or all of such provisions may be freely
waived in whole or in part by the Lender at any time if in its sole discretion
it deems it advisable to do so.
6.05 ENTIRE AGREEMENT. THIS SECOND AMENDMENT CONSTITUTES THE ENTIRE
AGREEMENT BETWEEN THE PARTIES HERETO WITH RESPECT TO THE SUBJECT HEREOF AND
SUPERSEDES ANY PRIOR AGREEMENT, WHETHER WRITTEN OR ORAL, BETWEEN SUCH PARTIES
REGARDING THE SUBJECT HEREOF. FURTHERMORE IN THIS REGARD, THIS SECOND AMENDMENT,
THE AGREEMENT, THE NOTE, THE SECURITY INSTRUMENTS, AND THE OTHER WRITTEN
DOCUMENTS REFERRED TO IN THE AGREEMENT OR EXECUTED IN CONNECTION WITH OR AS
SECURITY FOR THE NOTE REPRESENT, COLLECTIVELY, THE FINAL AGREEMENT AMONG THE
PARTIES THERETO AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR,
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<PAGE>
CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO
UNWRITTEN ORAL AGREEMENTS AMONG THE PARTIES.
6.06 GOVERNING LAW. THIS SECOND AMENDMENT, THE AGREEMENT AND THE
NOTE SHALL BE DEEMED TO BE CONTRACTS MADE UNDER AND SHALL BE CONSTRUED IN
ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF TEXAS. THE PARTIES
ACKNOWLEDGE AND AGREE THAT THIS AGREEMENT AND THE NOTE AND THE TRANSACTIONS
CONTEMPLATED HEREBY BEAR A NORMAL, REASONABLE, AND SUBSTANTIAL RELATIONSHIP TO
THE STATE OF TEXAS.
6.07 JURISDICTION AND VENUE. ALL ACTIONS OR PROCEEDINGS WITH RESPECT
TO, ARISING DIRECTLY OR INDIRECTLY IN CONNECTION WITH, OUT OF, RELATED TO, OR
FROM THIS SECOND AMENDMENT, THE AGREEMENT OR ANY OTHER LOAN DOCUMENT MAY BE
LITIGATED IN COURTS HAVING SITUS IN HARRIS COUNTY, TEXAS. EACH OF THE BORROWER
AND THE LENDER HEREBY SUBMITS TO THE JURISDICTION OF ANY LOCAL, STATE, OR
FEDERAL COURT LOCATED IN HARRIS COUNTY, TEXAS, AND HEREBY WAIVES ANY RIGHTS IT
MAY HAVE TO TRANSFER OR CHANGE THE JURISDICTION OR VENUE OF ANY LITIGATION
BROUGHT AGAINST IT BY THE BORROWER OR THE LENDER IN ACCORDANCE WITH THIS
SECTION.
IN WITNESS WHEREOF, this Second Amendment to Credit Agreement is
executed effective the date first hereinabove written.
BORROWER:
DOMAIN ENERGY FINANCE
CORPORATION
By: /s/ CATHERINE L. SLIVA
Catherine L. Sliva
Executive Vice President
5
<PAGE>
LENDER:
COMPASS BANK
By: /s/ DOROTHY MARCHAND WILSON
Dorothy Marchand Wilson
Senior Vice President
6
<PAGE>
EXHIBIT I
[FORM OF NOTE]
PROMISSORY NOTE
$100,000,000 Houston, Texas May 7, 1997
FOR VALUE RECEIVED and WITHOUT GRACE, the undersigned ("Maker")
promises to pay to the order of COMPASS BANK ("Payee"), at its banking quarters
in Houston, Harris County, Texas, the sum of ONE HUNDRED MILLION DOLLARS
($100,000,000), or so much thereof as may be advanced against this Note pursuant
to the Credit Agreement dated of June 7, 1996, as amended by and between Maker
and Payee (as amended, restated, or supplemented from time to time, the "Credit
Agreement"), together with interest at the rates and calculated as provided in
the Credit Agreement.
Reference is hereby made to the Credit Agreement for matters
governed thereby, including, without limitation, certain events which will
entitle the holder hereof to accelerate the maturity of all amounts due
hereunder. Capitalized terms used but not defined in this Note shall have the
meanings assigned to such terms in the Credit Agreement.
This Note is issued pursuant to, is the "Note" under, and is payable
as provided in the Credit Agreement. Subject to compliance with applicable
provisions of the Credit Agreement, Maker may at any time pay the full amount or
any part of this Note without the payment of any premium or fee, but such
payment shall not, until this Note is fully paid and satisfied, excuse the
payment as it becomes due of any payment on this Note provided for in the Credit
Agreement.
Without being limited thereto or thereby, this Note is secured by
the Security Instruments.
THIS NOTE SHALL BE GOVERNED AND CONTROLLED BY THE LAWS OF THE STATE
OF TEXAS WITHOUT GIVING EFFECT TO PRINCIPLES THEREOF RELATING TO CONFLICTS OF
LAW; PROVIDED, HOWEVER, THAT VERNON'S TEXAS CIVIL STATUTES, ARTICLE 5069,
CHAPTER 15 (WHICH REGULATES CERTAIN REVOLVING CREDIT LOAN ACCOUNTS AND REVOLVING
TRIPARTY ACCOUNTS) SHALL NOT APPLY TO THIS NOTE.
DOMAIN ENERGY FINANCE
CORPORATION
By:
Catherine L. Sliva
Executive Vice President
I-i
EXHIBIT 10.12
AMENDED AND RESTATED
NON-QUALIFIED STOCK OPTION AGREEMENT
THIS AGREEMENT, dated as of April 3, 1997, is made by and between
Domain Energy Corporation, a Delaware corporation hereinafter referred to as the
"Corporation", and Michael V. Ronca, an employee of the Corporation or a
Subsidiary (as defined below) or Affiliate (as defined below) of the
Corporation, hereinafter referred to as "Optionee".
WHEREAS, the Corporation wishes to afford the Optionee the
opportunity to purchase shares of its Common Stock, par value $.01 per share
(the "Common Stock");
WHEREAS, the Corporation wishes to carry out the Plan (as
hereinafter defined), the terms of which are hereby incorporated by reference
and made a part of this Agreement; and
WHEREAS, the Committee (as hereinafter defined), appointed to
administer the Plan, has determined that it would be to the advantage and best
interest of the Corporation and its stockholders to grant the Option (as
hereinafter defined) provided for herein to the Optionee, and has advised the
Corporation thereof and instructed the undersigned officers to issue said
Options;
NOW, THEREFORE, in consideration of the mutual covenants herein
contained and other good and valuable consideration, receipt of which is hereby
acknowledged, the parties hereto do hereby agree as follows:
ARTICLE I
DEFINITIONS
Whenever the following terms are used in this Agreement, they shall
have the meaning specified in the Plan or below unless the context clearly
indicates to the contrary.
SECTION 1.1 - AFFILIATE
"Affiliate" shall mean, with respect to the Corporation, any
corporation directly or indirectly controlling, controlled by, or under common
control with, the Corporation or any other entity designated by the Board of
Directors of the Corporation in which the Corporation or an Affiliate has an
interest.
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EXHIBIT 10.12
SECTION 1.2 - CAUSE
"Cause" shall mean, except as otherwise provided in an employment
agreement between the Corporation and the Optionee, (a) the commission of an act
of fraud or embezzlement or other willful misconduct against the Corporation or
its Affiliates (including the unauthorized disclosure of confidential or
proprietary information of the Corporation or any of its Subsidiaries which
results in material financial loss to the Corporation or any of its Affiliates),
(b) the commission by the Optionee of a felony, or (c) the willful failure to
render services to the Corporation or any of its Affiliates in accordance with
his employment which failure amounts to a material neglect of duties to the
Corporation or any of its Affiliates. A termination of Optionee by the
Corporation for Cause shall be made by delivery to Optionee of a resolution
adopted by the Board of Directors (after 30 days prior written notice to
Optionee and reasonable opportunity for Optionee to be heard before the Board
prior to such vote) finding that in the good faith business judgment of the
Board, Optionee was guilty of conduct set forth in any of clauses (a) through
(c) above and specifying the particulars thereof.
SECTION 1.3 - CHANGE OF CONTROL
"Change of Control" shall mean the occurrence of either (a) the
purchase or other acquisition by any person, entity or group (within the meaning
of section 13(d) or 14(d) of the Securities Exchange Act of 1934, as amended, or
any comparable successor provisions) of persons or entities (a "Group"), other
than the FRC Entities, of (i) ownership of fifty percent (50%) or more of the
combined voting power of the Corporation's then outstanding voting securities
entitled to vote generally or (ii) all or substantially all of the direct and
indirect assets of the Corporation and its Subsidiaries or (b) any merger,
consolidation, reorganization or other business combination of the Corporation
with or into any other entity which results in a person, entity or Group other
than First Reserve or any of its Affiliates owning fifty percent (50%) or more
of the combined voting power of the surviving or resulting corporation's then
outstanding voting securities entitled to vote generally.
SECTION 1.4 - CLOSING DATE
"Closing Date" shall have the same meaning as in the Securityholders
Agreement.
SECTION 1.5 - COMMITTEE
"Committee" shall mean the Compensation Committee of the
Corporation.
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<PAGE>
EXHIBIT 10.12
SECTION 1.6 - COMMON STOCK
"Common Stock" shall mean the Corporation's common stock, par value
$.01 per share.
SECTION 1.7 - EQUITY VALUE
"Equity Value" shall mean the sum of:
(i) all amounts actually received by Investors from time to
time on a cumulative basis through the date of determination of (A) cash
(x) through any cash dividend or other distribution on account of the
Investor Stock or (y) in connection with either (1) any disposition
(whether by way of redemption, repurchase, repayment, merger or otherwise)
of all or any part of the Investor Stock or of securities or other
non-cash property previously received by way of a dividend or other
distribution on account of the Investor Stock, but only to the extent
Investor Stock or other securities or non-cash property is so disposed and
excluding any disposition to one or more other Investors, (2) a
disposition of any or all of the assets of the Corporation or any of its
Subsidiaries, or (3) a recapitalization of the Corporation or its
Subsidiaries, or (B) securities or any other non-cash property (valued at
their fair market value) in connection with either (x) any disposition
(whether by sale, merger or otherwise) of all or any part of the Investor
Stock to a third party, but only to the extent Investor Stock is so
disposed and excluding any disposition to one or more other Investors, or
(y) any disposition of any or all of the assets of the Corporation or any
of its Subsidiaries (it being understood that for purposes of this clause
(i), the terms "disposition," "dispose," and "disposed" shall not include
the creation of a pledge, lien or other similar encumbrance unless and
until foreclosed upon); PROVIDED, that when determining the amount
actually received by Investors after delivery of a notice that the Option
will be terminated pursuant to Section 3.2(e), the amount actually
received will be deemed to include any amounts to be received by the
Investors pursuant to the transaction giving rise to the termination of
the Option (to the extent such amounts would otherwise qualify as amounts
received pursuant to clauses (A) and (B) above; plus, if applicable,
(ii) to the extent that a Public Offering has occurred and the
Equity Value is being determined prior to the fifth anniversary of the
Grant Date, an amount with respect to each unsold share of Common Stock
then owned by the Investors equal to the Trading Value thereof as of such
date.
SECTION 1.8 - FRC ENTITIES
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EXHIBIT 10.12
"FRC Entities" shall mean investment funds or other entities for
which First Reserve Corporation acts as a general and/or managing partner or in
respect of which First Reserve Corporation provides investment advice, either
directly or through entities controlled by it.
SECTION 1.9 - FIRST RESERVE OPTION
"First Reserve Option" shall mean the "Option" as defined in the
First Reserve Subscription Agreement.
SECTION 1.10 - FIRST RESERVE OPTION SHARES
"First Reserve Option Shares" shall mean the "Option Shares" as
defined in the First Reserve Subscription Agreement.
SECTION 1.11 - FIRST RESERVE OPTION SHARES INVESTMENT RETURN
"First Reserve Option Shares Investment Return" shall mean an amount
equal to (x) the Return Rate on (y) $8,000,000 plus all previously credited
First Reserve Option Shares Investment Return. The First Reserve Option Shares
Investment Return shall begin to accrue on December 31, 1996 and shall be
credited monthly in arrears on the last business day of each month commencing
January 31, 1997. The "Return Rate" equals an annual rate per annum equal to the
product of (i) 1 MINUS the Applicable Tax Rate multiplied by (ii) the lower of
(A) 8% and (B) the weighted average annual interest rate paid by the Corporation
under its principal credit facility during the fiscal quarter immediately
preceding the date on which the First Reserve Option Shares Investment Return is
being credited as "Investment." The "Applicable Tax Rate" equals the estimated
effective (i.e. actual average) federal income tax rate on gross taxable income
(expressed as a decimal) for the fiscal year immediately preceding the date on
which the First Reserve Option Shares is being credited as "Investment,"
PROVIDED that for any determination made prior to January 31, 1998, the
"Applicable Tax Rate" will equal the estimated effective federal income tax rate
on gross taxable income (expressed as a decimal) for 1997. The Return Rate shall
be determined in good faith by the Committee.
SECTION 1.12 - FIRST RESERVE SUBSCRIPTION AGREEMENT
"First Reserve Subscription Agreement" shall mean the Subscription
Agreement, dated as of December 31, 1996, between the Company and First Reserve
Fund VII, Limited Partnership, as amended, supplemented or otherwise modified
from time to time.
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EXHIBIT 10.12
SECTION 1.13 - GOOD REASON
"Good Reason" shall mean, except as otherwise provided in an
employment agreement between the Corporation and the Optionee, (i) any material
reduction by the Corporation of Optionee's authority, duties or responsibilities
(except in connection with the termination of Optionee's employment for Cause,
as a result of Permanent Disability, or as a result of Optionee's death or
Retirement) (ii) any reduction by the Corporation in Optionee's base salary, or
(iii) the Corporation's moving Optionee's place of employment outside the
Houston, Texas metropolitan area.
SECTION 1.14 - GRANT DATE
"Grant Date" shall mean February 21, 1997.
SECTION 1.15 - INVESTMENT
"Investment" shall mean $30 million invested by Investors in
Investor Stock on the Closing Date, plus the amount of any additional cash
invested by Investors in Investor Stock after the Closing Date. It is understood
and agreed that (i) the $8 million Subordinated Promissory Note purchased by the
FRC Entities from Domain Energy Guarantor Corporation, a Delaware corporation,
shall not constitute "Investment" and (ii) in the event that the First Reserve
Option is exercised, the "Investment" attributable thereto shall be deemed an
amount equal to all credited First Reserve Option Shares Investment Return and
no other "Investment" shall be deemed made in respect of the First Reserve
Option Shares.
SECTION 1.16 - INVESTMENT RETURN HURDLE
"Investment Return Hurdle" shall be deemed satisfied when the
Equity Value with respect to the Investor Stock is equal to or greater than, as
of the date of determination, the amount determined by increasing the Investment
at a compounded annual rate of 25% commencing on the date of any cash investment
by Investors (as to that portion of the Investment made on such date) through
and including such date of determination. By way of example, if the Investment
is $100 and no additional Investment is made, on the one year anniversary of the
Investment the Investment Return Hurdle will equal $125, and on the two year
anniversary of the Investment, the Investment Return Hurdle will equal $156.25.
SECTION 1.17 - INVESTORS
"Investors" shall mean the FRC Entities.
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EXHIBIT 10.12
SECTION 1.18 - INVESTOR STOCK
"Investor Stock" shall mean issued and outstanding shares of capital
stock of any class or series of the Corporation, so long as such shares were
originally acquired by Investors from the Corporation.
SECTION 1.19 - OPTION
"Option" shall mean the non-qualified option to purchase Common
Stock granted under this Agreement, and shall include the Time Option and the
Performance Option.
SECTION 1.20 - PERFORMANCE OPTION
"Performance Option" shall mean that portion of the Option with
respect to which the exercisability thereof is governed by Section 3.1(b)
hereof. It is understood that the Performance Options are not intended to be
stock options within the meaning of Section 422 of the Internal Revenue Code of
1986, as amended.
SECTION 1.21 - PERMANENT DISABILITY
The Optionee shall be deemed to have a "Permanent Disability" if the
Optionee is unable to engage in the activities required by the Optionee's job by
reason of any medically determined physical or mental impairment which can be
expected to result in death or which has lasted or can be expected to last for a
continuous period of not less than 12 months.
SECTION 1.22 - PLAN
"Plan" shall mean the 1996 Stock Purchase and Option Plan for Key
Employees of Domain Energy Corporation and Affiliates, as amended from time to
time.
SECTION 1.23 - PRONOUNS
The masculine pronoun shall include the feminine and neuter, and the
singular the plural, where the context so indicates.
SECTION 1.24 - PUBLIC OFFERING
"Public Offering" shall mean the sale of shares of Common Stock to
the public subsequent to the date hereof pursuant to a registration statement
under the Securities Act of
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EXHIBIT 10.12
1933, as amended, which has been declared effective by the Securities and
Exchange Commission (other than a registration on Form S-8 or other successor
form.)
SECTION 1.25 - RETIREMENT
"Retirement" shall mean the voluntary termination of employment by
the Optionee at age 62 or over (or such other age as may be approved by the
Board of Directors of the Corporation ) after having been employed by the
Corporation for at least three years after the date hereof.
SECTION 1.26 - SECRETARY
"Secretary" shall mean the Secretary of the Corporation.
SECTION 1.27 - SECURITYHOLDERS AGREEMENT
"Securityholders Agreement" shall mean the Securityholders Agreement
dated as of December 31, 1996 among the Corporation, the FRC Entities and the
individuals and trusts signatory thereto.
SECTION 1.28 - SUBSIDIARY
"Subsidiary" shall mean any corporation in an unbroken chain of
corporations beginning with the Corporation if each of the corporations, or
group of commonly controlled corporations (other than the last corporation in
the unbroken chain), then owns stock possessing 50% or more of the total
combined voting power of all classes of stock in one of the other corporations
in such chain.
SECTION 1.29 - TIME OPTION
"Time Option" shall mean that portion of the Option with respect to
which the exercisability thereof is governed by Section 3.1(a) hereof.
SECTION 1.30 - TRADING VALUE
"Trading Value" shall mean with respect to the Common Stock of the
Corporation, if on the date as of which Trading Value is being determined (A)
such class of capital stock is listed on a national securities exchange, the
last sale price, regular way, of such security on the principal national
securities exchange on which such security is at the time listed, or if there
have been no sales on any such exchange on any such day, the
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EXHIBIT 10.12
average of the last reported closing bid and lowest asked prices on such
exchange at the end of such day, or (B) if such class of capital stock is not so
listed, the average of the last reported closing bid and asked prices quoted on
the National Association of Securities Dealers Automated Quotations System or
(C) if such class of capital stock is not so quoted, the average of the last
reported closing bid and asked prices on such day in the domestic
over-the-counter market as reported by the National Quotation Bureau,
Incorporated, or any similar successor organization, in each such case of
clauses (A)-(C) averaged over a period of 20 days consisting of the day as of
which Trading Value is being determined and the latest 19 consecutive trading
days prior to such day.
ARTICLE II
GRANT OF OPTION
SECTION 2.1 - GRANT OF OPTION
For good and valuable consideration, on and as of the date hereof
the Corporation irrevocably grants to the Optionee an Option to purchase, from
time to time, any part or all of an aggregate number of shares of Common Stock
set forth on the signature page hereof, upon the terms and conditions set forth
in this Agreement.
SECTION 2.2 - EXERCISE PRICE
Subject to Section 2.4, (a) the exercise price of the shares of
Common Stock covered by the Time Option shall be $3,151.4354 per share, without
commission or other charge and the exercise price of the shares of Common Stock
covered by the Performance Option shall be $.01 per share, without commission or
other charge.
SECTION 2.3 - CONSIDERATION TO THE CORPORATION
In consideration of the granting of the Option by the Corporation,
the Optionee agrees to render faithful and efficient services to the Corporation
or a Subsidiary or Affiliate thereof, with such duties and responsibilities as
the Corporation shall from time to time prescribe or as may be set forth in an
employment agreement between the Corporation and the Optionee. Nothing in this
Agreement or in the Plan shall confer upon the Optionee any right to continue in
the employ of the Corporation or any Subsidiary or Affiliate thereof or shall
interfere with or restrict in any way the rights of the Corporation and its
Subsidiaries or Affiliates, which are hereby expressly reserved, to terminate
the employment of the Optionee at any time for any reason whatsoever, with or
without Cause, subject to the terms of any applicable written agreement between
or among the Optionee and the Corporation or any of
8
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EXHIBIT 10.12
its stockholders, including without limitation the Securityholders Agreement and
any employment agreement between the Optionee and the Corporation.
SECTION 2.4 - ADJUSTMENTS IN OPTION PURSUANT TO MERGER, CONSOLIDATION, ETC.
Subject to Section 9 of the Plan, in the event that the outstanding
shares of the Common Stock subject to the Option are, from time to time, changed
into or exchanged for a different number or kind of shares of the Corporation or
other securities of the Corporation or other entity by reason of a merger,
consolidation, recapitalization, Change of Control, reclassification, stock
split, stock dividend, combination of shares, or otherwise, the Committee shall
make an appropriate and equitable adjustment in the number and kind of shares
and/or the amount of consideration as to which or for which, as the case may be,
such Option, or portions thereof then unexercised, shall be exercisable. In the
event that the Corporation shall acquire Substantial Assets (as such term is
defined in the Securityholders Agreement) outside the oil and gas exploration
and production business and such acquisition has not been approved by the Chief
Executive Officer of the Corporation (either in his capacity as Chief Executive
Officer or as a director of the Corporation) if the Committee concludes that the
acquisition of such Substantial Assets is anticipated to have an adverse effect
on the ability of the Corporation to achieve the Investment Return Hurdle, then
the Committee shall make an appropriate and equitable adjustment to the
Investment Return Hurdle so that the Optionee is not adversely affected by such
acquisition of Substantial Assets. Any such adjustment made by the Committee
shall be final and binding upon the Optionee, the Corporation and all other
interested persons.
ARTICLE III
PERIOD OF EXERCISABILITY
SECTION 3.1 - COMMENCEMENT OF EXERCISABILITY
(a) That portion of the Option constituting the Time Option shall
become exercisable as to 20% of the shares of Common Stock subject to the Time
Option on the first anniversary of the Grant Date and shall thereafter become
exercisable as to an additional 20% of such shares upon each anniversary
thereafter. Notwithstanding the foregoing, the Time Option shall become
exercisable as to 100% of the shares of Common Stock subject to the Time Option
immediately upon (i) a Change of Control, (ii) the receipt of any notice that
the Time Option will be terminated pursuant to Section 3.2(e), or (iii)
termination of Optionee's employment for the reasons set forth in Section
3.1(c).
9
<PAGE>
EXHIBIT 10.12
(b) That portion of the Option constituting the Performance Option
shall become exercisable at any time following the second anniversary of the
Grant Date, when the Investment Return Hurdle is met. Notwithstanding the
foregoing, the Performance Option shall become exercisable as to 100% of the
shares of Common Stock subject to the Performance Option on the ninth
anniversary of the Grant Date.
(c) In the event Optionee's employment is terminated (i) by reason
of death, Permanent Disability (as defined below) or Retirement or (ii) by the
Corporation without Cause or by the Optionee for Good Reason, then the
Optionee's Time Option shall become fully exercisable, but if the Performance
Option is not exercisable as of the Optionee's termination of employment, it
shall be immediately cancelled.
SECTION 3.2 - EXPIRATION OF OPTION
Except as otherwise provided in the Securityholders Agreement
(including, without limitation, the Optionee's rights to put the Option to the
Corporation thereunder), the Option may not be exercised to any extent by the
Optionee after the first to occur of the following events:
(a) The tenth anniversary of the Grant Date; or
(b) The first anniversary of the date of the Optionee's termination
of employment by reason of death, Permanent Disability or Retirement; or
(c) The first business day which is 90 calendar days after
termination of employment of the Optionee by the Corporation without Cause
or by Optionee for Good Reason; or
(d) The date of an Optionee's termination of employment by the
Corporation with Cause or by Optionee without Good Reason; or
(e) If the Committee so determines pursuant to Section 9 of the
Plan, the effective date of either the merger or consolidation of the
Corporation into another Person (unless the consideration received by the
stockholders of the Corporation in such merger or consolidation consists
entirely of common stock of the surviving corporation), the exchange of
all or substantially all of the assets of the Corporation for the
securities of another corporation, a Change of Control, or the
recapitalization, reclassification, liquidation or dissolution of the
Corporation. At least ten (10) days prior to the effective date of any of
the events set forth in such Section 9 of the Plan, the Committee shall
give the Optionee notice of such event if the Option has then neither been
fully exercised nor become unexercisable under this Section 3.2.
10
<PAGE>
EXHIBIT 10.12
ARTICLE IV
EXERCISE OF OPTION
SECTION 4.1 - PERSON ELIGIBLE TO EXERCISE
During the lifetime of the Optionee, only he may exercise the Option
or any portion thereof. After the death of the Optionee, any exercisable portion
of the Option may, prior to the time when the Option becomes unexercisable under
Section 3.2, be exercised by his personal representative or by any person
empowered to do so under the Optionee's will or under the then applicable laws
of descent and distribution.
SECTION 4.2 - PARTIAL EXERCISE AND PERIODS OF UNEXERCISABILITY
Any exercisable portion of the Option or the entire Option, if then
wholly exercisable, may be exercised in whole or in part at any time and from
time to time prior to the time when the Option or portion thereof becomes
unexercisable under Section 3.2; provided, however, that any partial exercise
shall be for whole shares of Common Stock only.
SECTION 4.3 - MANNER OF EXERCISE
The Option, or any exercisable portion thereof, may be exercised
solely by delivering to the Secretary or his office all of the following prior
to the time when the Option or such portion becomes unexercisable under Section
3.2:
(a) Notice in writing signed by the Optionee or the other person
then entitled to exercise the Option or portion thereof, stating that the
Option or portion thereof is thereby exercised, such notice complying with
all applicable rules established by the Committee;
(b) Payment for the shares with respect to which such Option or
portion thereof is exercised (i) by cash or check on the date of exercise
(such cash or check may be delivered on behalf of a Optionee by a stock
broker designated by the Corporation to whom the Optionee has submitted an
irrevocable notice of election, on forms approved by the Corporation, to
sell shares of Common Stock deliverable upon exercise of an Option), (ii)
through the delivery of shares of Common Stock having a Fair Market Value
(as defined in the Plan) equal to the full amount of the exercise price,
(iii) by the withholding by the Corporation from the shares of Common
Stock issuable upon any exercise of the Option that number of shares
having a Fair Market
11
<PAGE>
EXHIBIT 10.12
Value equal to such exercise price pursuant to a written election
delivered to the Committee prior to the date of exercise, or (iv) by a
combination of such methods;
(c) A written representation and agreement, in a form satisfactory
to the Committee, signed by the Optionee or other person then entitled to
exercise such Option or portion thereof, stating that the shares of stock
are being acquired for his own account, for investment and without any
present intention of distributing or reselling said shares or any of them
except as may be permitted under the Securities Act of 1933, as amended
(the "Act"), and then applicable rules and regulations thereunder, and
that the Optionee or other person then entitled to exercise such Option or
portion thereof will indemnify the Corporation against and hold it free
and harmless from any loss, damage, expense or liability resulting to the
Corporation if any sale or distribution of the shares by such person is
contrary to the representation and agreement referred to above; provided,
however, that the Committee may, in its absolute discretion, take whatever
additional actions it deems appropriate to ensure the observance and
performance of such representation and agreement and to effect compliance
with the Act and any other federal or state securities laws or
regulations;
(d) Full payment to the Corporation of all amounts which, under
federal, state or local law, it is required to withhold upon exercise of
the Option, which payment shall be (i) by cash or check or (ii) by
electing, pursuant to a written notice delivered to the Committee prior to
the date of exercise, to have shares of Common Stock (having an aggregate
Fair Market Value on the date of exercise sufficient to satisfy the
applicable tax withholding requirements) withheld from the shares
deliverable upon such exercise;
(e) An executed Securityholders Agreement, or appropriate proof that
a Securityholders Agreement has been previously executed by the Optionee;
and
(f) In the event the Option or portion thereof shall be exercised
pursuant to Section 4.1 by any person or persons other than the Optionee,
appropriate proof of the right of such person or persons to exercise the
Option.
Without limiting the generality of the foregoing, the Committee may require an
opinion of counsel acceptable to it to the effect that any subsequent transfer
of shares acquired on exercise of an Option does not violate the Act, and may
issue stop-transfer orders covering such shares. Share certificates evidencing
stock issued on exercise of this Option shall bear an appropriate legend
referring to the provisions of subsection (c) above and the agreements herein.
The written representation and agreement referred to in subsection (c) above
shall, however, not be required if the shares to be issued pursuant to such
exercise have been registered under the Act, and such registration is then
effective in respect of such shares.
12
<PAGE>
EXHIBIT 10.12
SECTION 4.4 - CONDITIONS TO ISSUANCE OF STOCK CERTIFICATES
The shares of stock deliverable upon the exercise of the Option, or
any portion thereof, may be either previously authorized but unissued shares or
issued shares which have then been reacquired by the Corporation. Such shares
shall be fully paid and nonassessable. The Corporation shall not be required to
issue or deliver any certificate or certificates for shares of stock purchased
upon the exercise of the Option or portion thereof prior to fulfillment of all
of the following conditions:
(a) The obtaining of approval or other clearance from any state or
federal governmental agency which the Committee shall, in its absolute
discretion, determine to be necessary or advisable; and
(b) The lapse of such reasonable period of time following the
exercise of the Option as the Committee may from time to time establish
for reasons of administrative convenience.
SECTION 4.5 - RIGHTS AS STOCKHOLDER
The holder of the Option shall not be, nor have any of the rights or
privileges of, a stockholder of the Corporation in respect of any shares
purchasable upon the exercise of the Option or any portion thereof unless and
until the Option has been exercised and the relevant shares purchased.
ARTICLE V
MISCELLANEOUS
SECTION 5.1 - ADMINISTRATION
The Committee shall have the power to interpret the Plan and this
Agreement and to adopt such rules for the administration, interpretation and
application of the Plan as are consistent therewith and to interpret or revoke
any such rules. All actions taken and all interpretations and determinations
made by the Committee shall be final and binding upon the Optionee, the
Corporation and all other interested persons. No member of the Committee shall
be personally liable for any action, determination or interpretation made in
good faith with respect to the Plan or the Option. In its absolute discretion,
the Board of Directors may at any time and from time to time exercise any and
all rights and duties of the Committee under the Plan and this Agreement.
13
<PAGE>
EXHIBIT 10.12
SECTION 5.2 - OPTION NOT TRANSFERABLE
Except as provided in the Securityholders Agreement, neither the
Option nor any interest or right therein or part thereof shall be liable for the
debts, contracts or engagements of the Optionee or his successors in interest or
shall be subject to disposition by transfer, alienation, anticipation, pledge,
encumbrance, assignment or any other means whether such disposition be voluntary
or involuntary or by operation of law, by judgment, levy, attachment,
garnishment or any other legal or equitable proceedings (including bankruptcy),
and any attempted disposition thereof shall be null and void and of no effect;
provided, however, that this Section 5.2 shall not prevent transfers by will or
by the applicable laws of descent and distribution.
SECTION 5.3 - SHARES TO BE RESERVED
The Corporation shall at all times during the term of the Option
reserve and keep available such number of shares of stock as will be sufficient
to satisfy the requirements of this Agreement.
SECTION 5.4 - NOTICES
Any notice to be given under the terms of this Agreement to the
Corporation shall be addressed to the Corporation in care of its Secretary, and
any notice to be given to the Optionee shall be addressed to him at the address
given beneath his signature hereto. By a notice given pursuant to this Section
5.4, either party may hereafter designate a different address for notices to be
given to him. Any notice which is required to be given to the Optionee shall, if
the Optionee is then deceased, be given to the Optionee's personal
representative if such representative has previously informed the Corporation of
his status and address by written notice under this Section 5.4. Any notice
shall have been deemed duly given (i) when delivered by hand, (ii) two business
days after being mailed, certified or registered mail, return receipt requested,
with postage prepaid, (iii) when sent by telegram or telecopy (the receipt of
which is confirmed) or (iv) one business day after being sent by Express Mail,
Federal Express or other nationally recognized overnight courier service.
SECTION 5.5 - TITLES
Titles are provided herein for convenience only and are not to serve
as a basis for interpretation or construction of this Agreement.
SECTION 5.6 - APPLICABILITY OF PLAN AND SECURITYHOLDERS AGREEMENT
14
<PAGE>
EXHIBIT 10.12
The Option and the shares of Common Stock issued to the Optionee
upon exercise of the Option shall be subject to all of the terms and provisions
of the Plan and the Securityholders Agreement, to the extent applicable to the
Option and such shares. In the event of any conflict between this Agreement and
the Plan, the terms of the Plan shall control. In the event of any conflict
between this Agreement or the Plan and the Securityholders Agreement, the terms
of the Securityholders Agreement shall control.
SECTION 5.7 - AMENDMENT
This Agreement may be amended only by a writing executed by the
parties hereto which specifically states that it is amending this Agreement.
SECTION 5.8 - GOVERNING LAW
THE LAWS OF THE STATE OF DELAWARE SHALL GOVERN THE INTERPRETATION,
VALIDITY AND PERFORMANCE OF THE TERMS OF THIS AGREEMENT REGARDLESS OF THE LAW
THAT MIGHT BE APPLIED UNDER PRINCIPLES OF CONFLICTS OF LAWS.
SECTION 5.9 - JURISDICTION
Any suit, action or proceeding against the Optionee with respect to
this Agreement, or any judgment entered by any court in respect of any thereof,
may be brought in any court of competent jurisdiction in the State of Delaware,
and the Optionee hereby submits to the non-exclusive jurisdiction of such courts
for the purpose of any such suit, action, proceeding or judgment. The Optionee
hereby irrevocably waives any objections which he may now or hereafter have to
the laying of the venue of any suit, action or proceeding arising out of or
relating to this Agreement brought in any court of competent jurisdiction in the
State of Delaware, and hereby further irrevocably waives any claim that any such
suit, action or proceeding brought in any such court has been brought in any
inconvenient forum. No suit, action or proceeding against the Corporation with
respect to this Agreement may be brought in any court, domestic or foreign, or
before any similar domestic or foreign authority other than in a court of
competent jurisdiction in the State of Delaware, and the Optionee hereby
irrevocably waives any right which he may otherwise have had to bring such an
action in any other court, domestic or foreign, or before any similar domestic
or foreign authority. The Corporation hereby submits to the jurisdiction of such
courts for the purpose of any such suit, action or proceeding.
15
<PAGE>
EXHIBIT 10.12
IN WITNESS WHEREOF, this Agreement has been executed and delivered
by the parties hereto.
DOMAIN ENERGY CORPORATION
By: /S/RICK G. LESTER
Rick G. Lester
Vice President and
Chief Financial Officer
OPTIONEE
/S/MICHAEL V. RONCA
Address: 17318 Chagall Lane
Spring, TX 77379
Optionee's Taxpayer Identification
Number:
Aggregate number of shares of Common Stock for which the Time Option granted
hereunder is exercisable (50% of total number of shares):
225
Aggregate number of shares of Common Stock for which the Performance Option
granted hereunder is exercisable (50% of
total number of shares):
225
16
EXHIBIT 10.13
Final Draft
PURCHASE AGREEMENT
(NET PROFITS INTERESTS)
THIS AGREEMENT (this "AGREEMENT"), is made as of the 30th day of April,
1997, by and among Domain Energy Production Corporation, a Delaware corporation
("PURCHASER"), and each of GEAPPL Corp., a Texas non-profit corporation, GTPT
Corporation, a Texas non-profit corporation, Zeta MT Holding, Inc., a Texas
non-profit corporation (each of such parties being herein called a "SELLER", and
such parties being herein, collectively called, "SELLERS"), which Sellers are
acting at the direction of NationsBank of Texas, N.A., in its capacity as the
qualified professional asset manager (the "QPAM") with respect to the
disposition of the Net Profits Interests that are the subject of this Agreement
for each Seller.
R E C I T A T I O N S:
A. Sellers have acquired the Net Profits Interests pursuant to the
Acquisition Agreements and the conversion of loans under the Credit Agreements.
B. For its respective share of the Purchase Price (as defined herein) and
other consideration, and upon the terms and conditions hereinafter set forth,
the QPAM has agreed that each Seller shall sell all of its right, title and
interest in its Net Profits Interests to Purchaser, and Purchaser has agreed to
purchase each Seller's right, title and interest in its Net Profits Interests.
NOW, THEREFORE, in consideration of the premises and in consideration of
the mutual covenants, promises and undertakings of the parties hereinafter set
forth, and for other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged by the parties, it is agreed:
SECTION 1. DEFINITIONS. Certain of the defined terms used in this
Agreement are defined below:
"ACQUISITION AGREEMENTS" shall mean (i) with respect to GE, that certain
Acquisition Agreement dated as of June 16, 1992 and that certain Acquisition
Agreement dated as of December 31, 1994, (ii) with respect to GTE, that certain
Acquisition Agreement dated as of June 16, 1992 and that certain Acquisition
Agreement dated as of December 31, 1994, and (iii) with respect to Delta, that
certain Acquisition Agreement dated as of June 30, 1993 and that certain
Acquisition Agreement dated as of December 31, 1994, each of which Acquisition
Agreements is by and between the respective party named above and Tenneco Gas
Production Corporation.
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<PAGE>
"AFFILIATE" shall mean, with respect to any person, any person
controlling, controlled by or under common control with, such person.
"ALLOCABLE SHARE" shall mean 38.44% with respect to GEAPPL Corp., 38.44%
with respect to GTPT Corporation, and 23.12% with respect to Zeta MT Holding,
Inc.
"ASSIGNMENTS" shall have the meaning given such term in Section 7.2 of
this Agreement.
"CASH ELECTION" shall have the meaning given such term in Section 3.3(b).
"CLOSING" shall mean the closing of the transaction described in this
Agreement as contemplated by Section 7.1.
"CLOSING DATE" shall mean the date on which the Closing occurs.
"CODE" shall mean the Internal Revenue Code of 1986, as amended.
"CONVERSION NPIS" shall have the meaning given such term in the definition
of Net Profits Interests below.
"CONVEYANCE" shall mean each Conveyance of Net Profits Overriding Royalty
Interests pursuant to which a Conveyed NPI was created (such conveyances being
listed on Exhibit B hereto).
"CONVEYED NPIS" shall have the meaning given such term in the definition
of Net Profits Interests below.
"CREDIT AGREEMENTS" shall mean (i) with respect to GE, that certain Credit
Agreement dated as of June 16, 1992 and that certain Credit Agreement dated as
of December 31, 1994, (ii) with respect to GTE, that certain Credit Agreement
dated as of June 16, 1992 and that certain Credit Agreement dated as of December
31, 1994, and (iii) with respect to Delta, that certain Credit Agreement dated
as of June 30, 1993 and that certain Credit Agreement dated as of December 31,
1994, each of which Credit Agreements is by and between the respective party
named above and Tenneco Gas Production Corporation.
"DELTA" shall mean Citibank, F.S.B., as Directed Trustee (and not in its
individual capacity) of the Delta Master Trust.
"DISTRIBUTIONS" shall mean payments of net profits to the Sellers pursuant
to Section 2.7 of each Conveyance of a Conveyed NPI and similar payments of net
profits to the Sellers with respect to the Conversion NPI.
"ERISA" shall mean the Employee Retirement Income Security Act of 1974, as
amended.
"GE" shall mean the Trustees of the General Electric Pension Trust.
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<PAGE>
"GTE" shall mean Bankers Trust Company, as Trustee (and not in its
individual capacity) of a Trust established pursuant to a Trust Agreement
between GTE Service Corporation and Bankers Trust Company, as amended and
restated effective August 7, 1987.
"IPO" shall mean the proposed initial public offering of securities of
Purchaser Parent pursuant to a registration statement filed on Form S-1 with the
Securities and Exchange Commission pursuant to the Securities Act.
"NET PROFITS INTERESTS" shall mean (i) the net profits overriding royalty
interests, which were conveyed pursuant to the conveyances identified on Exhibit
B hereto (the "CONVEYED NPIS") each of such conveyances having been executed and
delivered pursuant to one of the Acquisition Agreements, and (ii) the net
profits overriding royalty interests to which the loans under the Credit
Agreements were converted pursuant to the respective Credit Agreements (the
"CONVERSION NPIS").
"NOTE ELECTION" shall have the meaning given such term in Section 3.3(b).
"PURCHASE PRICE" for each Seller shall mean:
(i) (A) in the event that the IPO shall occur (in which case the QPAM
shall be deemed to have made the Cash Election) or the IPO shall not
occur and the QPAM shall make the Note Election on behalf of such
Seller, such Seller's Allocable Share of $30,000,000, OR (B) in the
event that the IPO shall not occur and the QPAM shall make the Cash
Election on behalf of such Seller, such Seller's Allocable Share of
$25,000,000;
plus
(ii) Contributions of capital paid by such Seller pursuant to the
Acquisition Agreements or the Credit Agreements during the period
commencing on or after January 1, 1997 to and including the Closing;
provided, however, that payments of any such contributions of
capital shall not be added to the Purchase Price to the extent that
such payments are attributable to operations prior to January 1,
1997;
minus
(iii) Distributions paid to such Seller during the period commencing on or
after January 1, 1997 to and including the Closing (which do not
include amounts paid pursuant to subclause (i) above); provided,
however, that payments of such Distributions shall not be deducted
from the Purchase Price to the extent that such payments are
attributable to production occurring prior to January 1, 1997.
"PURCHASER PARENT" shall mean Domain Energy Corporation, a Delaware
corporation and the direct wholly owned parent of Purchaser.
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<PAGE>
"REGISTRATION STATEMENT" shall mean Purchaser Parent's registration
statement on Form S-1, No. 333-24641 as filed with the Securities and Exchange
Commission on April 4, 1997, as such registration statement is amended or
supplemented.
"RESERVE REPORT" shall mean those certain reserve reports dated as of
December 31, 1996, prepared by DeGolyer & MacNaughton and Netherland, Sewell &
Associates, Inc., respectively, and addressed to Purchaser.
"SECURITIES ACT" shall mean the Securities Act of 1933, as amended,
including the rules and regulations promulgated thereunder.
"SECURITY DOCUMENTS" shall have the meaning given such term in Section 7
below.
"SELLER PARENT" shall mean (i) as to GEAPPL Corp., GE, (ii) as to GTPT
Corporation, GTE, and (iii) as to Zeta MT Holding, Inc., Delta.
"SELLER'S ORGANIZATIONAL DOCUMENTS" shall mean, as applicable, (i) with
respect to each Seller, the Articles of Incorporation and Bylaws of such Seller,
each as amended; and (ii) with respect to each of GE, GTE and Delta, the current
operative trust documents of such Seller's Parent organized as a tax exempt
trust pursuant to Section 501 of the Code, including but not limited to the
trust agreement or indenture, each as amended.
"SENIOR INDEBTEDNESS" shall mean the principal of and premium, if any, and
interest on all indebtedness of Purchaser for money borrowed, under (i)
Purchaser Parent's Credit Agreement dated as of December 31, 1996, with The
Chase Manhattan Bank, as Administrative Agent (the "Chase Credit Agreement"), as
such agreement is amended, supplemented or restated from time to time, or under
any guaranty thereof by Purchaser, whether such indebtedness is outstanding on
the date hereof or hereafter created, incurred, guaranteed or assumed, and (ii)
any other indebtedness for money borrowed of Purchaser upon which Purchaser, the
QPAM and Sellers shall mutually agree prior to the Closing Date.
"TERMINATION ELECTION" shall have the meaning given such term in Section
3.3(b).
SECTION 2. ROLE OF THE QPAM.
(a) Pursuant to an Investment Management Agreement, the QPAM has the power
to make all decisions concerning the disposition of the Net Profits Interests
held by each Seller. In connection therewith, it is hereby acknowledged and
agreed that Purchaser has supplied, and shall continue to supply, the QPAM with
any information pertaining to the Net Profits Interests or this transaction
(subject to applicable confidentiality arrangements and relevant regulations)
reasonably requested by the QPAM regarding the Net Profits Interests. In
addition, the QPAM shall have the right to consult with Purchaser's technical
personnel, environmental consultants and the independent certified public
accountants performing services for Purchaser in connection with the Net Profits
Interests and the transactions contemplated by this Agreement.
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<PAGE>
(b) Purchaser hereby acknowledges and agrees that the QPAM shall not have
any personal liability for the obligations of any Seller or any Seller Parent
pursuant to this Agreement or the transaction contemplated hereby.
SECTION 3. TRANSFER AND CONSIDERATION. For the consideration and in
accordance with and subject to the other terms and conditions herein set forth:
3.1 PURCHASE AND SALE. At Closing, each Seller shall sell all of its
right, title and interest in its Net Profits Interests to Purchaser and will
assign the same to Purchaser, and Purchaser shall purchase and accept such
interests in the Net Profits Interests, in exchange for each Seller's share of
the Purchase Price (to be paid as provided in Section 7 below).
3.2 RIGHT OF INSPECTION. Without limiting any Seller's rights to inspect
and copy books and records relating to the Net Profits Interests (which rights
shall survive the Closing and continue in effect as to each Seller in connection
with any matter arising out of or related to the period prior to Closing), the
QPAM, each Seller and each Seller's authorized representatives shall have the
right to inspect and verify the calculations provided for in Section 3.3 below,
and to receive from Purchaser upon request reasonably detailed recapitulations
thereof.
3.3 NOTIFICATION AND FORM OF PURCHASE PRICE.
(a) Not less than ten (10) business days prior to the anticipated Closing
Date, Purchaser shall notify the QPAM and each Seller as to whether the IPO is
expected to occur, the Purchase Price, and the allocation of the Purchase Price,
and shall provide to the QPAM and each Seller a reasonably detailed written
statement showing the calculations thereof. In the event that the IPO is
expected to occur, such notice shall assume that subsection (i) under the
definition of Purchase Price shall be $30,000,000, and in the event that the IPO
is not expected to occur, such notice shall assume that subsection (i) under the
definition of Purchase Price shall be calculated using both $30,000,000 and
$25,000,000.
(b) Within five (5) business days of its receipt of the notice set forth
in Section 3.3(a) above, the QPAM (in its sole discretion) shall notify the
Purchaser as to whether such Purchase Price shall be paid (i) in cash (either
$30,000,000 in the event that the IPO shall occur or $25,000,000 in the event
that the IPO shall not occur) (the "CASH ELECTION"), (ii) partially in cash and
partially pursuant to a note (subject to the negotiation of the applicable
documents described in Section 7.3) (the "NOTE ELECTION"), or (iii) whether any
such Seller shall not participate in the Closing (the "TERMINATION ELECTION");
provided that (A) in the event that the IPO shall be expected to occur, the QPAM
shall be deemed to have made the Cash Election, and (B) the QPAM may give a
Termination Notice only in the event that the IPO is not expected to occur.
(c) The consideration paid to each Seller at Closing shall be based upon
such Purchase Price, subject to any modification as to which the parties agree
prior to Closing.
3.4 CONDUCT OF BUSINESS. Purchaser (a) represents and warrants to each
Seller that, since January 1, 1997, the grantor of each Net Profits Interest has
acted with respect to such
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Net Profits Interest in the ordinary course consistent with past practice and in
accordance with the terms of the Conveyance, the Acquisition Agreements and the
Credit Agreements, (b) agrees that such grantor shall continue to conduct itself
with respect to each Net Profits Interest in the ordinary course consistent with
past practice, and in accordance with the terms of the Conveyances, the
Acquisition Agreements and the Credit Agreements, until the earlier to occur of
the Closing Date or the termination of this Agreement, including without
limitation, the making of Distributions, and (c) agrees that prior to the
Closing Date, Purchaser shall not secure any indebtedness with the Net Profits
Interests. This Section 3.4 is not intended to alter any of the provisions of
the Conveyances, the Acquisition Agreements or the Credit Agreements, or
otherwise be applicable to the Net Profits Interests, following a termination of
this Agreement prior to Closing.
SECTION 4. SELLERS' REPRESENTATIONS AND WARRANTIES. To induce Purchaser to
enter into this Agreement and perform its obligations hereunder, each Seller
severally, but not jointly, makes the following representations and warranties
to Purchaser; provided, however, that each Seller makes the following
representations and warranties with respect to itself and its Net Profits
Interests only, and no Seller has any duties or obligations with respect to the
representations or warranties of any other Seller; and provided further, that
Sellers acknowledge and agree that Purchaser is entitled to rely and has relied
upon each:
4.1 ORGANIZATION AND POWER. Each Seller is duly incorporated, validly
existing and in good standing as a non-profit corporation under the laws of the
State of Texas and has full corporate power and authority to enter into and
perform its obligations under this Agreement.
4.2 AUTHORITY AND BINDING EFFECT. The execution and delivery of this
Agreement and such instruments referred to in Section 7.2 and the performance by
Seller of its obligations hereunder and thereunder have been duly authorized by
all necessary corporate and trust action. This Agreement has been and upon
execution and delivery, each instrument referred to in Section 7.2 will be, duly
and validly executed and delivered by Seller. This Agreement constitutes and
upon execution and delivery, each instrument referred to in Section 7.2 will
constitute, legal, valid and binding agreements of Seller, enforceable against
Seller in accordance with its terms, subject to (i) limitations under applicable
law on rights to indemnification, (ii) the effects of any applicable bankruptcy,
reorganization, moratorium or similar laws, and (iii) general principles of
equity.
4.3 NO VIOLATION. The execution and delivery of, and the performance by
each Seller of such Seller's obligations under this Agreement and each
instrument referred to in Section 7.2 do not and will not contravene, or
constitute a default under, (i) any provisions of Seller's Organizational
Documents, (ii) agreement, note, mortgage, indenture, lease, franchise, license
or other instrument to which any Seller is a party or by which it is bound, or
(iii) judgment, injunction, order, decree or other instrument binding upon any
Seller or its assets.
4.4 NO LITIGATION. To Seller's knowledge, without investigation, and
subject to Section 6.1.2, there is no action, suit or proceeding, pending or
threatened in writing, against or affecting Seller in any court or before any
arbitrator or before any governmental body or agency which challenges the
validity or enforceability of this Agreement.
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4.5 NO BROKER. Each Seller warrants and represents to Purchaser that
Seller has not retained any broker, finder or other person entitled to a
commission or other compensation in connection with this transaction other than
Petrie Parkman & Co., for whose costs and expenses Sellers shall be liable in
accordance with their Allocable Share. Any commissions or other compensation
payable to any underwriter in connection with the IPO shall be payable only by
Purchaser.
4.6 TITLE MATTERS. Except for transactions in which Tenneco Gas Production
Corporation was also a party, such Seller has not heretofore (i) executed any
release or partial release of any Net Profits Interest or (ii) sold any
participation or other interest in any Net Profits Interest. Each Seller's
interest in the Net Profits Interests are free and clear of all liens, charges,
security interests, claims, rights of offset or encumbrances of any kind granted
by such Seller (collectively, "ENCUMBRANCES"), other than those Encumbrances
granted in favor of the grantor of each Conveyance.
THE EXPRESS REPRESENTATIONS AND WARRANTIES OF SELLERS CONTAINED IN THIS
SECTION 4 ARE EXCLUSIVE AND ARE IN LIEU OF ALL OTHER REPRESENTATIONS AND
WARRANTIES, EXPRESS, IMPLIED, STATUTORY OR OTHERWISE, AND EACH SELLER EXPRESSLY
DISCLAIMS ANY AND ALL SUCH OTHER REPRESENTATIONS AND WARRANTIES. WITHOUT
LIMITATION OF THE FOREGOING, THE PROPERTIES SHALL BE CONVEYED PURSUANT HERETO
WITHOUT ANY WARRANTY OR REPRESENTATION WHETHER EXPRESS, IMPLIED, STATUTORY OR
OTHERWISE, RELATING TO TITLE TO THE NET PROFITS INTERESTS, AND, EXCEPT AS
PROVIDED OTHERWISE IN THE FIRST SENTENCE OF THIS PARAGRAPH, WITHOUT ANY OTHER
EXPRESS, IMPLIED, STATUTORY OR OTHER WARRANTY OR REPRESENTATION WHATSOEVER.
PURCHASER SHALL HAVE INSPECTED, OR WAIVED (AND UPON CLOSING SHALL BE DEEMED TO
HAVE WAIVED) ITS RIGHT TO INSPECT, THE NET PROFITS INTERESTS, AND THE PROPERTIES
COVERED THEREBY, FOR ALL PURPOSES AND SATISFIED ITSELF AS TO THEIR PHYSICAL AND
ENVIRONMENTAL CONDITION, BOTH SURFACE AND SUBSURFACE, INCLUDING BUT NOT LIMITED
TO CONDITIONS SPECIFICALLY RELATED TO THE PRESENCE, RELEASE OR DISPOSAL OF
HAZARDOUS SUBSTANCES, SOLID WASTES, ASBESTOS AND OTHER MAN MADE FIBERS, OR
NATURALLY OCCURRING RADIOACTIVE MATERIALS ("NORM"). PURCHASER IS RELYING SOLELY
UPON ITS OWN INSPECTION OF THE PROPERTIES, AND PURCHASER SHALL, EXCEPT AS
PROVIDED OTHERWISE HEREIN, ACCEPT ALL OF THE SAME IN THEIR "AS IS, WHERE IS"
CONDITION. ALSO WITHOUT LIMITATION OF THE FOREGOING, NO SELLER MAKES ANY
WARRANTY OR REPRESENTATION, EXPRESS, IMPLIED, STATUTORY OR OTHERWISE, AS TO THE
ACCURACY OR COMPLETENESS OF ANY DATA, REPORTS, RECORDS, PROJECTIONS, INFORMATION
OR MATERIALS NOW, HERETOFORE OR HEREAFTER FURNISHED OR MADE AVAILABLE TO
PURCHASER IN CONNECTION WITH THIS AGREEMENT INCLUDING, WITHOUT LIMITATION,
RELATIVE TO PRICING ASSUMPTIONS, OR QUALITY OR QUANTITY OF HYDROCARBON RESERVES
(IF ANY) ATTRIBUTABLE TO THE PROPERTIES OR THE ABILITY
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OR POTENTIAL OF THE PROPERTIES TO PRODUCE HYDROCARBONS OR THE ENVIRONMENTAL
CONDITION OF THE PROPERTIES OR ANY OTHER MATTERS CONTAINED IN THE PROPRIETARY
DATA OR ANY OTHER MATERIALS FURNISHED OR MADE AVAILABLE TO PURCHASER BY THE QPAM
OR ANY SELLER OR BY ANY OF THE QPAM'S OR SELLERS' AGENTS OR REPRESENTATIVES. ANY
AND ALL SUCH DATA, RECORDS, REPORTS, PROJECTIONS, INFORMATION AND OTHER
MATERIALS (WRITTEN OR ORAL) FURNISHED BY THE QPAM OR ANY SELLER OR OTHERWISE
MADE AVAILABLE OR DISCLOSED TO PURCHASER ARE PROVIDED PURCHASER AS A CONVENIENCE
AND SHALL NOT CREATE OR GIVE RISE TO ANY LIABILITY OF OR AGAINST ANY SELLER OR
THE QPAM AND ANY RELIANCE ON OR USE OF THE SAME SHALL BE AT PURCHASER'S SOLE
RISK TO THE MAXIMUM EXTENT PERMITTED BY LAW.
SECTION 5. PURCHASER'S AND PURCHASER PARENT'S REPRESENTATIONS AND
WARRANTIES. To induce Sellers to enter into this Agreement and to sell or
transfer their right, title and interest in their respective Net Profits
Interests to Purchaser, Purchaser and Purchaser Parent hereby jointly and
severally make the following representations and warranties, upon each of which
Purchaser acknowledges and agrees that the QPAM and Sellers are entitled to rely
and have relied:
5.1 ORGANIZATION AND POWER. Each of Purchaser and Purchaser Parent is a
corporation duly incorporated, validly existing and in good standing under the
laws of the State of Delaware, and has full corporate power and authority to
enter into and perform its obligations under this Agreement.
5.2 AUTHORITY AND BINDING EFFECT. The execution and delivery of this
Agreement and such instruments referred to in Section 7.3 and the performance by
Purchaser and Purchaser Parent of its respective obligations hereunder and
thereunder have been duly authorized by all necessary corporate action. This
Agreement constitutes and upon execution and deliver, each instrument referred
to in Section 7.3 will constitute, the legal, valid and binding agreement of
Purchaser and/or Purchaser Parent, enforceable against Purchaser and/or
Purchaser Parent in accordance with its terms, subject to (i) limitations under
applicable law on rights to indemnification, (ii) the effects of any applicable
bankruptcy, reorganization, moratorium or similar laws and (iii) general
principles of equity.
5.3 NO VIOLATION. The execution and delivery of this Agreement by
Purchaser and Purchaser Parent and the performance by Purchaser and Purchaser
Parent of its respective obligations under this Agreement and each instrument
referred to in Section 7.3 do not and will not (a) contravene, or constitute a
default under, any (i) provisions of its Certificate of Incorporation or Bylaws,
(ii) applicable law or regulation, (iii) agreement, note, mortgage, indenture,
lease, franchise, license or other instrument to which Purchaser or Purchaser
Parent is a party or by which it is bound, or (iv) judgment, injunction, order,
decree or other instrument binding upon Purchaser or Purchaser Parent or its
assets, or (b) result in the creation of any lien or other encumbrance on any
asset of Purchaser or Purchaser Parent.
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5.4 NO LITIGATION. There is no action, suit or proceeding, pending or, to
the knowledge of Purchaser or Purchaser Parent, threatened in writing, against
or affecting Purchaser or Purchaser Parent in any court or before any arbitrator
or before any governmental body or agency which in any manner raises any
question affecting the validity or enforceability of this Agreement or any other
agreement or instrument to which Purchaser or Purchaser Parent is a party or by
which it is bound and that is to be used in connection with, or is contemplated
by, this Agreement.
5.5 NO BROKER. Each of Purchaser and Purchaser Parent warrants and
represents to each Seller that neither Purchaser nor Purchaser Parent has
retained any broker, finder or other person entitled to a commission or other
compensation in connection with this transaction. Any commissions or other
compensation payable to any underwriter in connection with the IPO shall be
payable only by Purchaser or Purchaser Parent.
5.6 SECURITIES LAWS. Purchaser understands that the sale of the Net
Profits Interests has not been registered under the Securities Act, or any state
securities laws. Purchaser will not sell, transfer or otherwise dispose of such
Net Profits Interests, directly or indirectly, without an effective registration
under the Securities Act and such state securities laws or a valid exemption
therefrom.
5.7. KNOWLEDGEABLE PURCHASER, NO DISTRIBUTION. Purchaser is a
knowledgeable purchaser, owner and operator of oil and gas properties, has the
ability to evaluate (and in fact has evaluated) the Net Profits Interests for
purchase, and is acquiring the Net Profits Interests for its own account and not
with the intent to make a distribution in violation of the Securities Act of
1933 as amended (and the rules and regulations pertaining thereto) or in
violation of any other applicable securities laws, rules or regulations.
5.8. PURCHASER PARENT'S FINANCIAL STATEMENTS. Purchaser has delivered to
the QPAM and Sellers the audited annual consolidated financial statements of
Purchaser Parent dated as of December 31, 1996, and pro forma financial
statements, dated as of December 31, 1996 (which pro forma financial statements
were prepared based on such audited financial statements, but assuming the
closing of the transaction contemplated hereby in the absence of the occurrence
of the IPO and assuming a Purchase Price of $30,000,000). These financial
statements fairly present Purchaser Parent's financial position at the
respective dates thereof and the results of Purchaser Parent's operations and
cash flows for the respective periods thereof; provided, however, that in the
case of such pro forma financial statements, the assumptions used in the
preparation thereof are reasonable and the adjustments used therein are
appropriate to give effect to the transaction referred to therein. Since the
date of such audited annual consolidated financial statements no material
adverse change has occurred to Purchaser Parent's financial condition, assets,
liabilities, or properties. Purchaser Parent has no outstanding indebtedness or
obligation of any kind (including contingent obligations, tax assessments,
obligations in connection with any health, retirement or pension plans, or any
unusual forward or long-term commitments) which is material and is not disclosed
in the foregoing financial statements. There is no fact known to Purchaser
Parent that has not been disclosed to Sellers in writing which would materially
and adversely affect Purchaser's or Purchaser Parent's financial condition, or
Purchaser's or Purchaser Parent's ability to timely perform hereunder or under
any instruments executed in connection herewith (including,
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without limitation, any note which may be issued in payment of a portion of the
Purchase Price).
5.9 PURCHASER'S RESERVE REPORT; OTHER DISCLOSURES. A true and complete
copy of the Reserve Report has been delivered to the QPAM and each Seller. All
historical information contained in the Reserve Report or otherwise furnished by
Purchaser to the QPAM and Sellers in connection with the properties covered
thereby (or furnished to the parties preparing such Reserve Report in connection
with such parties' preparation of such report) is accurate and complete in all
material respects. No statement made by Purchaser (whether contained in any
document, certificate or other writing or other materials furnished by or on
behalf of Purchaser, or otherwise made) in connection herewith, or in connection
with the transaction contemplated hereby, or in connection with the Net Profits
Interests or the properties covered thereby, contains any untrue statement of a
material fact or omits to state any material fact necessary to make such
statements, in light of the circumstances under which they are made, not
misleading. Purchaser has actual knowledge of no matter which has not been
disclosed on Schedule 5.9, in the Registration Statement or as otherwise
disclosed to the QPAM and Sellers which materially alters, or so far as
Purchaser can now reasonably foresee would materially alter, the value of the
Net Profits Interests or which materially and adversely affects, or so far as
Purchaser can reasonably foresee would materially and adversely affect, the
consummation of the transactions contemplated hereby. Purchaser has made
available to the QPAM and Sellers all agreements, documents and other writings
material to the Net Profits Interests and the properties covered thereby.
SECTION 6. CONDITIONS PRECEDENT.
6.1 PURCHASER'S CONDITIONS. Purchaser's obligations hereunder, including
Purchaser's obligation to close the transaction contemplated hereby and to pay
the Purchase Price to Sellers, are subject to the satisfaction of the following
conditions precedent and the compliance by Sellers with the following covenants:
6.1.1 ASSIGNMENTS. Simultaneously with Purchaser's delivery to each
Seller of the Purchase Price to which each Seller is entitled under
Section 3.1, each Seller shall have delivered to Purchaser, on or before
the Closing, its Assignments, pursuant to the provisions of Section 7.2.
6.1.2 REPRESENTATIONS AND WARRANTIES TRUE AND CORRECT.
(a) As to each Seller, its representations and warranties made in
this Agreement are true and correct in all material respects as of the
date of the Closing as if then made.
(b) Notwithstanding any provision to the contrary contained herein,
Seller shall not have any liability whatsoever and shall not be deemed to
be in breach of this Agreement, and Purchaser shall not have any remedy at
law or in equity or any right to damages, indemnification or any other
entitlement to reimbursement of any kind with respect thereto, as a result
of any of Seller's representations and warranties contained in Section 4.4
being or becoming untrue subsequent to the date of this
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Agreement. However, if Purchaser determines that, as a result thereof, it
would be impractical or inadvisable for Purchaser to proceed with the
transactions contemplated by this Agreement, Purchaser shall have the sole
and exclusive right and remedy not to consummate the transactions
contemplated herein due to the failure of a condition precedent to be
satisfied, but Purchaser shall have no other rights or remedies of any
kind. The parties recognize, however, that Purchaser may, in its sole
discretion, waive the satisfaction of any such condition precedent, but
shall have no obligation to do so.
6.1.3 ELECTION TO PROCEED. In the event that the IPO shall not have
occurred, the QPAM shall have provided a Cash Election, a Note Election or
a Termination Election with respect to each Seller.
6.2 SELLERS' CONDITIONS. The respective obligations of Sellers hereunder,
including each Seller's obligation to sell and assign its right, title and
interest in its Net Profits Interests as contemplated hereby, are subject to the
satisfaction of the following conditions precedent and the compliance by
Purchaser with the following covenants:
6.2.1 NOTIFICATION AND FORM OF PURCHASE PRICE. Not less than ten
(10) business days prior to the anticipated Closing Date, the QPAM and
each Seller shall have received a written notification of the Purchase
Price payable at Closing as provided in Section 3.3(a).
6.2.2 ELECTION TO PROCEED. In the event that the IPO shall not have
occurred prior to the Closing, the QPAM shall have notified Purchaser in
writing that Sellers shall proceed with a sale of the Net Profits
Interests pursuant to a Cash Election or a Note Election.
6.2.3 RECEIPT OF PURCHASE CONSIDERATION. Simultaneously with each
Seller's delivery to Purchaser of its Assignments pursuant to the
provisions of Section 7, each Seller shall have received the Purchase
Price to which each Seller is entitled under Section 3.1 hereof (whether
such payment to be in the form of cash, or in the form of cash and a note,
all as provided in Section 7), and in the case that such Purchase Price is
paid in part through the issuance of one or more notes by Purchaser, each
Seller shall have received its Security Documents.
6.2.4 REPRESENTATIONS AND WARRANTIES TRUE AND CORRECT. Purchaser
shall deliver to each Seller at Closing a certificate signed by an
authorized party stating that their representations and warranties made in
this Agreement are true and correct as of the date of the Closing as if
then made and that Purchaser has performed all of its covenants and other
obligations under this Agreement.
6.2.5 RECEIPT OF LEGAL OPINION. The QPAM and each Seller shall have
been furnished with a legal opinion of Weil, Gotshal & Manges LLP, counsel
for Purchaser, covering the matters set forth in Section 5.1 through 5.4
and, to the extent applicable, Section 7.3(c), in such form as the QPAM,
Sellers and Purchaser shall agree.
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6.2.6 UPDATED FINANCIAL STATEMENTS, NO CHANGE IN FINANCIAL POSITION.
If any portion of the Purchase Price is to be paid by the issuance of one
or more notes, then (i) the QPAM and Sellers shall have received unaudited
financial statements of Purchaser dated as of the end of the calendar
month which precedes closing by at least 15 days, and shall have received
a pro forma financial statement (based on such unaudited statements, and
utilizing the same assumptions set forth in Section 5.9 above) as of the
same such date, and (ii) at the time of Closing, there shall have been no
material adverse changes in Purchaser's financial position since the date
hereof, including, without limitation, the financial statements referenced
in the preceding subclause (i) shall not reflect any adverse changes from
the corresponding financial statements furnished pursuant to Section 5.9,
or from the audited financial statements furnished pursuant to Section
5.9.
6.3 WAIVER. (a) Purchaser may waive all or part of any or all of the
conditions set forth in Section 6.1, (b) the QPAM, on behalf of each Seller, may
waive all or part of any or all of the conditions set forth in Section 6.2, in
each case in the sole discretion of the waiving party and only by a writing
signed by the waiving party and delivered by the waiving party to each other
party hereto.
SECTION 7. CLOSING.
7.1 CLOSING DATE AND TIME. Closing shall occur (i) in the event that the
IPO shall occur, at 10:00 a.m. Central Time, on the second business day
following the date that Purchaser or Purchaser Parent receives proceeds of the
IPO, or (ii) in the event that the IPO shall not have occurred by July 31, 1997,
the IPO shall have otherwise been abandoned by Purchaser, or the underwriters of
the IPO have otherwise determined not to proceed with an IPO or that it is
otherwise impracticable to consummate the IPO prior to July 31, 1997, then the
earlier to occur of (a) fifteen days following the abandonment of the IPO or
underwriters' determination not to proceed, or (b) July 31, 1997; unless, (A) in
the case of (i) or (ii) above, said date has been shortened or extended by
written agreement executed by Purchaser, the QPAM and each of Sellers or (B) in
the case of (i) or (ii) above, said date has been extended pursuant to written
notice executed by the QPAM and delivered to Purchaser, provided that such
extension shall not be for a period in excess of 60 days. The Closing will occur
at the offices of Purchaser, or such other place as Purchaser and Sellers may
mutually agree. Notwithstanding the foregoing, however, in the event that the
IPO shall not have occurred prior to July 31, 1997, the QPAM, on behalf of any
Seller, shall have the sole and absolute discretion to terminate this Agreement
with respect to such Seller, and such Seller and Purchaser (with respect to such
Seller) shall have no further obligations pursuant to this Agreement except as
set forth in Section 13.7 hereof.
7.2 DELIVERIES BY SELLERS. At the Closing, each Seller shall deliver to
Purchaser the following instruments (referred to herein as the "ASSIGNMENTS"):
(a) an assignment of all of its right, title and interest in its
Conveyed NPIs, in the form attached hereto as EXHIBIT A (with EXHIBIT B
hereto attached thereto as Annex I), fully executed and acknowledged;
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(b) an assignment of all of its right, title and interest in its
Conversion NPI, in the form attached hereto as EXHIBIT A-1, fully executed
and acknowledged; and
(c) Releases (below defined), fully executed and acknowledged by its
Seller Parent.
It is recognized that, although the loans under the respective Credit Agreements
were, pursuant to such agreements, converted to the Conversion NPIs,
respectively, there remain of record certain liens and security interests
securing such loans and each Seller has agreed to obtain from its Seller Parent
(in form satisfactory to each of the QPAM, such Seller, such Seller Parent and
Purchaser), releases (the "RELEASES") of such liens and security interests.
7.3 DELIVERIES BY PURCHASER. At the Closing, Purchaser will deliver each
Seller's Allocable Share of the Purchase Price to such Seller by wire transfer
to such Seller of immediately available funds (to the account specified by such
Seller at least three days prior to Closing); provided that, if the IPO has not
occurred and the QPAM has elected that the Purchase Price shall be paid pursuant
to a Note Election, then the Purchase Price shall be paid as follows:
(i) by wire transfer to each Seller of such Seller's Allocable
Share of $15,000,000, in immediately available funds (to the account
specified by such Seller at least five days prior to Closing); and
(ii) a note in form satisfactory to the QPAM, Sellers,
Purchaser and the holder of Purchaser's Senior Indebtedness for the
remainder of such Seller's share of the Purchase Price, which note
shall provide for interest at the rate of no less than 10% per annum
for the first 18 months and no less than 12% per annum for the next
18 months, shall be payable not later than three years after the
Closing Date and shall be subordinated in right of payment to the
Senior Indebtedness.
If payment of the Purchase Price is made in part by note, then Purchaser shall
also, at Closing, execute and deliver to each Seller the following (the
documents which are so to be executed and delivered to each Seller being herein
called the "SECURITY DOCUMENTS"):
(a) a Deed of Trust, Mortgage, Assignment, Security Agreement and
Financing Statement in form acceptable to the QPAM and such Seller (but to
be substantially in the form provided for in the Credit Agreements with
such Seller's Seller Parent), covering an undivided interest (equal to
such Seller's Allocable Share) in all of Purchaser's oil and gas
properties and related assets (including, without limitation, all
properties, rights and interests which are covered by security documents
executed pursuant to the Credit Agreements, or which, pursuant to the
Credit Agreements, should have been covered by security documents, and all
other right, title and interest of Purchaser in lands covered by such
properties, rights and interests); provided that such instrument shall
reflect it is subordinate to liens in favor of the holders of Senior
Indebtedness, such subordination terms to be in form satisfactory to the
QPAM, Sellers, Purchaser and the holders of Purchaser's Senior
Indebtedness; and
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(b) Financing Statements as the QPAM and such Seller may reasonably
require in connection with such Deed Trust, Mortgage, Assignment, Security
Agreement and Financing Statement; and
(c) Opinions, in form acceptable to the QPAM and such Seller, from
counsel acceptable to Seller and licensed to practice in such states,
confirming the validity and enforceability of the foregoing instruments
under the laws of the states where properties covered thereby are located,
subject to customary exceptions.
SECTION 8. LIABILITY OF PURCHASER; ASSUMPTION OF OBLIGATIONS;
INDEMNIFICATION OF SELLERS.
(A) NOTWITHSTANDING ANYTHING TO THE CONTRARY CONTAINED IN THIS AGREEMENT,
ANY ACQUISITION AGREEMENT, CREDIT AGREEMENT OR CONVEYANCE, NO SELLER NOR ITS
PARENT NOR ANY OTHER AFFILIATES SHALL EVER PERSONALLY BE RESPONSIBLE FOR PAYMENT
OF ANY PART OF THE COSTS, EXPENSES OR LIABILITIES INCURRED IN CONNECTION WITH
THE NET PROFITS INTERESTS OR THE PROPERTIES FROM WHICH THE NET PROFITS INTERESTS
WERE CARVED. PURCHASER AGREES TO INDEMNIFY AND HOLD EACH SELLER AND ITS PARENT
AND ITS AFFILIATES, AND THEIR RESPECTIVE DIRECTORS, OFFICERS, TRUSTEES,
PARTICIPANTS, BENEFICIARIES, EMPLOYEES, REPRESENTATIVES, FIDUCIARIES, AGENTS AND
AFFILIATES (AN "INDEMNIFIED PARTY"), HARMLESS FROM AND AGAINST ALL SUCH COSTS,
EXPENSES AND LIABILITIES (WITH SUCH INDEMNITY TO ALSO COVER ALL COSTS AND
EXPENSES OF SUCH INDEMNIFIED PARTY, INCLUDING REASONABLE LEGAL FEES AND
EXPENSES, WHICH ARE INCURRED INCIDENT TO THE MATTERS INDEMNIFIED AGAINST).
EXPRESSLY, BUT WITHOUT LIMITATION OF THE GENERALITY OF THE FOREGOING, PURCHASER
HEREBY AGREES TO INDEMNIFY AND HOLD EACH INDEMNIFIED PARTY HARMLESS FROM AND
AGAINST ALL CLAIMS, DEMANDS, LIABILITIES, LOSSES, DAMAGES, COSTS AND EXPENSES
(THE "INDEMNIFIED OBLIGATIONS") RELATING TO THE NET PROFITS INTERESTS OR THE
PROPERTIES FROM WHICH THE NET PROFITS INTERESTS WERE CARVED (WHETHER KNOWN OR
UNKNOWN, LATENT OR PATENT) ON, BEFORE OR AFTER THE DATE HEREOF (INCLUDING
WITHOUT LIMITATION ANY OF THE SAME ARISING UNDER ANY APPLICABLE LAWS, RULES,
REGULATIONS OR ORDERS PERTAINING TO HEALTH OR THE ENVIRONMENT (HEREIN CALLED THE
"APPLICABLE ENVIRONMENTAL LAWS"), WHETHER ADMINISTRATIVE, LOCAL, STATE OR
FEDERAL AND WHETHER NOW IN EXISTENCE OR HEREINAFTER ENACTED, INCLUDING WITHOUT
LIMITATION THE COMPREHENSIVE ENVIRONMENTAL RESPONSE, COMPENSATION AND LIABILITY
ACT OF 1980 (AS AMENDED BY THE SUPERFUND AMENDMENTS AND REAUTHORIZATION ACT OF
1986 OR OTHERWISE), THE RESOURCE CONSERVATION AND RECOVERY ACT OF 1976 (AS
AMENDED BY THE USED OIL RECYCLING ACT OF 1980, THE SOLID WASTE DISPOSAL ACT
AMENDMENTS OF 1980 AND THE SOLID WASTE AMENDMENTS OF 1984 OR OTHERWISE)). THE
INDEMNITIES AND HOLD
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HARMLESS PROVISIONS CONTAINED IN THIS SECTION 8 SHALL APPLY WHETHER OR NOT THE
INDEMNIFIED PARTY WAS WHOLLY OR PARTIALLY NEGLIGENT (OTHER THAN GROSSLY
NEGLIGENT), AND REGARDLESS OF WHETHER ANY SUCH INDEMNIFIED OBLIGATIONS AROSE
PRIOR TO, ON OR AFTER THIS AGREEMENT OR THE CLOSING.
(b) At Closing, Purchaser will accept the assignment of each Seller's
right, title and interest in its Net Profits Interests. At Closing, neither
Sellers nor Sellers' Parents shall have any additional obligations and
liabilities with respect to the Acquisition Agreements, the Credit Agreements,
the Conveyances or the Net Profits Interests, and the Credit Agreements and
Acquisition Agreements shall terminate in all respects except for any provisions
in such agreements that survive such termination by the express provisions of
such agreements. Except as provided in the preceding sentence, Purchaser hereby
releases each Seller and each Seller Parent, and each Seller hereby releases
Purchaser and Purchaser Parent, from any further obligations, liabilities or
duties from and after the Closing under the Acquisition Agreements, Credit
Agreements, the Conveyances or applicable law; provided, however, that Purchaser
and Purchaser Parent shall continue to have liability to each Seller (and its
related parties) for the indemnification obligations contained in Section 4.1 of
each Conveyance.
(c) Each Seller shall promptly notify Purchaser of any claim or action of
a third party against such Seller with respect to an Indemnified Obligation for
which such Seller may seek indemnification. Upon receipt of such notice,
Purchaser shall have the right, at its expense, to participate in and assume the
defense of such claim or action. If Purchaser does assume the defense of such
claim or action, such Seller shall cooperate fully with Purchaser in the defense
of such claim or action, and such Seller may at its election continue to
participate in the defense and may retain its own counsel at such Seller's
expense. No Seller shall settle or compromise any claim or action against it for
which an indemnity claim is made or is expected to be made under this Section
without the consent of Purchaser, which consent shall not unreasonably be
delayed or withheld.
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SECTION 9. WAIVER; INDEMNIFICATION; SURVIVAL.
9.1 INDEMNIFICATION BY SELLERS. The representations and warranties of each
Seller shall survive the Closing of the transaction contemplated hereby and
delivery of the Assignments and any other document or instrument executed and
delivered in connection herewith for a period of three months, and shall not
merge into any such Assignment or other instrument or document, and shall so
survive without regard to any investigation conducted by or on behalf of
Purchaser. Each Seller, severally and not jointly, does hereby indemnify and
hold Purchaser and Purchaser Parent (and their affiliates and the respective
directors, officers, employees, representatives and agents of Purchaser,
Purchaser Parent or such affiliates) harmless from and against any and all
claims, costs, penalties, damages, losses, liabilities and expenses (including
reasonable attorneys' fees and costs) that may at any time be incurred by such
parties, whether before or after Closing, as a result of any breach by any
Seller of any of such Seller's representations, warranties, covenants or
obligations set forth herein or in any other document delivered by any Seller
pursuant hereto. Each Seller, severally and not jointly, does hereby indemnify
and hold Purchaser harmless from and against any out-of-pocket costs and
expenses (including reasonable attorneys' fees and costs) that may be
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incurred by Purchaser as a result of any breach by such Seller of any of such
Seller's representations, warranties, covenants or obligations set forth herein
prior to the Closing. Notwithstanding any other provision to the contrary
contained in this Agreement or in any agreement contemplated by this Agreement,
Sellers shall not have any obligation to make any such indemnification payments
which, in the aggregate, exceed Purchaser's out-of-pocket costs and expenses
(including reasonable attorneys' fees and costs). Notwithstanding the foregoing,
unless Purchaser shall have filed suit against a Seller alleging a breach or
alleged breach of said Seller's warranties, representations, covenants, or
obligations and seeking indemnification pursuant to the preceding sentence
within three (3) months following the Closing, Purchaser will have no right
thereafter to make, file or prosecute any claims against such Seller arising out
of the breach or alleged breach thereof.
9.2 INDEMNIFICATION BY PURCHASER. Each representation and warranty of
Purchaser herein shall survive the Closing of the transaction contemplated
hereby and delivery of the Assignments and any other document or instrument
executed and delivered in connection herewith, and shall not merge into any such
Assignment or other instrument or document, and shall so survive without regard
to any investigation conducted by or on behalf of Sellers. Purchaser does hereby
indemnify and hold Sellers and the Seller Parents (and their affiliates, and the
respective directors, officers, trustees, participants, beneficiaries,
employees, representatives, fiduciaries, agents and affiliates of Sellers,
Sellers Parents or such affiliates) harmless from and against any claims, costs,
penalties, damages, losses, liabilities and expenses (including reasonable
attorneys' fees and costs) that may at any time be incurred by such parties,
whether before or after Closing, as a result of any breach by Purchaser of any
of Purchaser's representations, warranties, covenants or obligations set forth
herein or in any other document delivered by Purchaser pursuant hereto.
SECTION 10. DEFAULT.
10.1 DEFAULT BY SELLERS. In the event that any Seller shall default in its
obligation to deliver its right, title and interest in its Net Profits Interests
to Purchaser in accordance with the terms of this Agreement (a "DEFAULTING
SELLER"), Purchaser shall, in addition to a claim for indemnification against
such Defaulting Seller pursuant to Section 9.1 of this Agreement, have the right
to bring an action for specific performance, it being acknowledged that each Net
Profits Interest which is the subject matter of this Agreement, is unique in
nature and that an action for damages may not provide an adequate remedy to
Purchaser in the event of such default.
10.2 DEFAULT BY PURCHASER. In the event of default by Purchaser, Sellers
shall, in addition to a claim for indemnification against Purchaser pursuant to
Section 9.2 of this Agreement, have such remedies as against Purchaser as shall
be available at law or in equity, including the right to bring an action for
specific performance.
10.3 PAYMENT OF COSTS. In the event of any dispute between the parties
arising out of or in any way connected with this Agreement, resulting in any
litigation, then the prevailing party in such litigation shall be entitled to
recover its costs of prosecuting and/or defending such action, including,
without limitation, reasonable attorneys' fees and costs at
-16-
<PAGE>
trial and all appellate levels. The provisions of this Section shall survive the
Closing of the transaction contemplated hereby.
SECTION 11. CONSENTS. Upon the Closing, Purchaser consents to the transfer
of interests in the Net Profits Interests by each Seller pursuant to Section 6.2
of each Conveyance and agrees that all of the conditions and requirements under
the Conveyance with respect to the transfer of each Seller's Net Profits
Interests have been satisfied.
SECTION 12. REGISTRATION STATEMENT.
(a) Purchaser or Purchaser Parent shall provide copies of the Registration
Statement, as filed or as amended from time to time, to the QPAM and Sellers.
(b) Except as set forth in the next succeeding sentence, no Seller's name
nor any Seller Parent's name nor any derivative thereof shall be disclosed,
referred to or otherwise used in any prospectuses, press releases or other
agreements or material prepared in connection with the IPO. Notwithstanding the
immediately preceding sentence, Purchaser Parent may disclose the name of each
Seller or Seller's Parent in the Registration Statement in the event that (i)
such disclosure is required by law, (ii) as deemed necessary by counsel to
Purchaser Parent in connection with obtaining a declaration from the Securities
Exchange Commission as to the effectiveness of the Registration Statement (in
which case Purchaser Parent shall provide prior notice as to the specific
disclosure of the name of Seller or Seller's Parent in the Registration
Statement), or (iii) such party has given its prior written consent, which may
be withheld in such party's sole discretion; provided, however, that no Seller
(and no Seller Parent) shall have any liability or obligation whatsoever with
respect to any such disclosure or any information therein in the event of any
such disclosure.
SECTION 13. MISCELLANEOUS.
13.1 COMPLETENESS; MODIFICATION; WAIVER. This Agreement constitutes the
entire agreement between the parties hereto with respect to the transactions
contemplated hereby and supersedes all prior discussions, understandings,
agreements and negotiations between the parties hereto. This Agreement may be
modified only by a written instrument duly executed by the parties hereto. No
term or condition of this Agreement shall be deemed waived in whole or in part,
except by an instrument in writing signed by an authorized representative of
each party which references specifically the term or condition to be waived and
which states explicitly that the term or condition is waived. No waiver of any
term or condition hereof by any party hereto shall be deemed or construed to be
(a) a waiver by such party of any other term or condition hereof or (b) a waiver
of such term or condition for any party, any period or any purpose other than as
expressly set forth in the written instrument.
13.2 NO ASSIGNMENTS. Neither Purchaser nor any Seller may assign this
Agreement or their rights hereunder; provided that it is expressly understood
and agreed that such restriction on assignment does not apply to any note issued
hereunder to a Seller or to any Security Documents or to any merger of Purchaser
with and into Purchaser Parent or any wholly owned subsidiary thereof or any
transfer of assets of Purchaser to Purchaser Parent or any such subsidiary;
provided, no such merger or transfer will relieve Purchaser Parent from
-17-
<PAGE>
any liability under its guarantee of Purchaser's obligations hereunder. Any
assignment or attempted assignment that does not comply with all of the terms
and conditions hereof shall be null and void.
13.3 SUCCESSORS AND ASSIGNS. This Agreement shall bind and inure to the
benefit of the parties hereto and their respective successors and permitted
assigns.
13.4 GOVERNING LAW. Without regard to principles of conflicts of law, this
Agreement shall be construed and enforced in accordance with and governed by the
laws of the State of Texas applicable to contracts made and to be performed
entirely within such state and the laws of the United States of America, except
that, to the extent that the law of a state in which a portion of the properties
covered by the Net Profits Interest are located (or which is otherwise
applicable to a portion of such properties) necessarily governs, the law of such
state shall apply as to that portion of such properties located in (or otherwise
subject to the laws of) such state.
13.5 COUNTERPARTS. To facilitate execution, this Agreement may be executed
in as many counterparts as may be required. It shall not be necessary that the
signature on behalf of all parties hereto appear on each counterpart hereof;
provided, however, that signature pages from separate counterparts may be
assembled into one or more counterparts containing all signatures. All
counterparts hereof shall collectively constitute a single agreement.
13.6 SEVERABILITY. If any term, covenant or condition of this Agreement,
or the application thereof to any person or circumstance, shall to any extent be
invalid or unenforceable, the remainder of this Agreement, or the application of
such term, covenant or condition to other persons or circumstances, shall not be
affected thereby, and each term, covenant or condition of this Agreement shall
be valid and enforceable to the fullest extent permitted by law.
13.7 COSTS. Regardless of whether Closing occurs hereunder, Purchaser
shall be responsible for all of its own costs and for the first $100,000 of the
costs incurred by Sellers in connection with this Agreement and the transactions
contemplated hereby, including without limitation fees of attorneys and
accountants; provided that all of the fees and expenses of Petrie Parkman & Co.
shall be born by Sellers in accordance with their engagement letter with Petrie
Parkman & Co. and the other costs of Sellers in excess of $100,000 shall be born
by Sellers in accordance with their respective Allocable Shares.
Sellers shall not bear any costs of the IPO.
13.8 NOTICES. All notices, requests, demands and other communications
hereunder shall be in writing and shall be delivered by hand, transmitted by
facsimile transmission, sent prepaid by Federal Express (or a comparable
overnight delivery service) or sent by the United States mail, certified,
postage prepaid, return receipt requested, at the addresses and with such copies
as designated below. Any notice, request, demand or other communication
delivered or sent in the manner aforesaid shall be deemed given or made (as the
case may be) when actually delivered to the intended recipient.
-18-
<PAGE>
If to Purchaser:
Domain Energy Corporation
P.O. Box 2511
Houston, Texas 75252-2511
Attention: Michael V. Ronca
for personal deliveries:
1100 Louisiana, Suite 1500
Houston, Texas 77002
With a copy to:
James L. Rice III
Weil, Gotshal & Manges LLP
700 Louisiana, Suite 1600
Houston, Texas 77002
If to the QPAM:
NationsBank of Texas, N.A.
P.O. Box 830308
Dallas, Texas 75283-0308
Attention: Trust Oil and Gas
With a copy to:
GEAPPL Corp.
3003 Summer Street, 7th Floor
Stamford, Connecticut 06904
Attention: Christopher W. Smith and Michael M. Pastore
GTPT Corporation
One Stamford Forum
Stamford, Connecticut 06904
Attention: Carol W. Tusch and Judith L. Harris
-19-
<PAGE>
Zeta MT Holding, Inc.
1007 Virginia Avenue, Suite 208
Atlanta, Georgia 30354
Attention: Linda S. Sutton
Zeta MT Holding, Inc.
1030 Delta Boulevard
Administration Center, Department 987
Legal Department
Atlanta, Georgia 30320
Attention: Deborah D. Brown
Jeffrey A. Zlotky
Thompson & Knight, P.C.
1700 Pacific Avenue, Suite 3300
Dallas, Texas 75201
or to such other address as the intended recipient may have specified in a
notice to the other party. Any party hereto may change its address or designate
different or other persons or entities to receive copies by notifying the other
party in a manner described in this paragraph.
13.9 INCORPORATION BY REFERENCE. All of the exhibits attached hereto are
by this reference incorporated herein and made a part hereof.
13.10 FURTHER ASSURANCES. Each Seller and Purchaser covenant and agree
further to sign, execute and deliver, or cause to be signed, executed and
delivered, and to do or make, or cause to be done or made, upon the written
request of the other party, and any and all customary in transactions of the
type contemplated by this Agreement and reasonably required by either party
hereto for the purpose of or in connection with consummating the purchase and
sale of the Net Profits Interests or, if the Purchase Price is paid in part by
issuance of one or more notes, in connection with the execution and delivery of
the Security Documents and/or the creation or perfection of the liens and
security interests contemplated thereby.
13.11 NO PARTNERSHIP OR THIRD PARTY BENEFICIARY. This Agreement does not
and shall not be construed to create a partnership, joint venture or any other
relationship between the parties hereto. No person or party is intended to be or
shall be construed to be a third party beneficiary of this agreement or any
provision hereof.
13.12 TIME OF ESSENCE. Time is of the essence with respect to every
provision hereof.
13.13 HEADINGS. Headings are included herein for convenience of reference
only, and shall in no way be construed to define, alter, or modify any of the
provisions hereof.
-20-
<PAGE>
IN WITNESS WHEREOF, Purchaser, the QPAM and each Seller have executed this
Agreement as of the date set forth above.
PURCHASER:
DOMAIN ENERGY PRODUCTION
CORPORATION
By:/S/MICHAEL V. RONCA
Name:Michael V. Ronca
Title:President
QPAM:
NATIONSBANK OF TEXAS, N.A., in its
capacity acting as a qualified professional
asset manager
By:/s/ROBERT D. MAXWELL
Name:Robert D. Maxwell
Title:Vice President
SELLERS:
GEAPPL CORP.
By:/s/CHRISTOPHER W. SMITH
Name:Christopher W. Smith
Title:President
-21-
<PAGE>
GTPT CORPORATION
By:/s/JOHN B. CARROLL
Name:John B. Carroll
Title:President
ZETA MT HOLDING, INC.
By:/s/JAMES B. TAYLOR
Name:James B. Taylor
Title:President
As a material inducement to Sellers to enter into this Agreement, Domain
Energy Corporation, a Delaware corporation, (i) joins in the execution of this
Agreement for the purpose of making the representations and warranties set forth
in Section 5 and (ii) hereby unconditionally guarantees to and for the benefit
of Sellers and each Seller Parent, and their respective successors and assigns,
the full and complete payment and performance by Purchaser of each and every
representation, warranty, covenant, indemnity, agreement and/or other obligation
of Purchaser under this Agreement, including without limitation, any promissory
note delivered to Sellers pursuant to this Agreement, it being understood and
agreed that no assignment by Purchaser of any of its rights under this Agreement
or any of the Net Profit Interests to be acquired hereunder shall act as a
release or novation of Domain Energy Corporation from any duty, obligation or
liability as guarantor hereunder.
DOMAIN ENERGY CORPORATION
By: /s/MICHAEL V. RONCA
Michael V. Ronca
Chief Executive Officer
-22-
<PAGE>
EXHIBIT A
FORM OF ASSIGNMENT
(for Conveyed NPIs)
[Subject to completion at Closing]
WHEREAS, reference is made to those certain Conveyances of Net Profits
Overriding Royalty Interest described on Annex I hereto (collectively, the
"CONVEYANCES"), wherein certain Net Profits Overriding Royalty Interests (the
"NET PROFITS INTERESTS") were conveyed;
NOW, THEREFORE, in consideration of ten dollars ($10.00) and other good
and valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, ___________________________, a ___________________ non-profit
corporation (the "ASSIGNOR"), hereby assigns, transfers, conveys and sets over
to Domain Energy Production Corporation, a Delaware corporation whose address is
1100 Louisiana, Suite 1500, Houston, Texas 77002 (the "ASSIGNEE"), all of
Assignor's right, title and interest in and to the Net Profits Interests.
THIS CONVEYANCE IS MADE WITHOUT WARRANTIES OR REPRESENTATIONS (INCLUDING,
WITHOUT LIMITATION, WITHOUT REPRESENTATION OR WARRANTY OF TITLE), EXPRESS,
IMPLIED, STATUTORY OR OTHERWISE, AND ASSIGNOR EXPRESSLY DISCLAIMS ANY AND ALL
REPRESENTATIONS AND WARRANTIES.
This Assignment shall be binding upon and inure to the benefit of the
parties hereto and their respective successors and assigns.
This Assignment is being executed in several counterparts, all of which
are identical, except that, to facilitate recordation in certain jurisdictions,
there may be attached to certain counterparts hereof those portions of certain
of the Exhibits to the Conveyances which contain descriptions of properties
located in the recording jurisdiction in which the particular counterpart is to
be recorded. All of such counterparts together shall constitute one and the same
instrument.
This Assignment shall merge Assignor's title to the Net Profits Interests
herein conveyed to Assignee with and into Assignee's title to the leasehold
interests burdened thereby.
A-1
<PAGE>
IN WITNESS WHEREOF, this Assignment is duly executed and delivered this
_____ day of _____________________, 1997, effective as of January 1, 1997 at
7:00 A.M. Central Time.
WITNESSES: ASSIGNOR:
_________________________ _________________________________
Name:____________________
_________________________ By:______________________________
Name:____________________ Name:____________________________
Title:___________________________
[ADD ACKNOWLEDGMENTS]
A-2
<PAGE>
EXHIBIT A-1
FORM OF ASSIGNMENT
(for Conversion NPIs)
[Subject to completion at Closing]
WHEREAS, pursuant to (i) that certain Credit Agreement dated ___________
between ______________________ and Tenneco Gas Production Corporation ("TGPC"),
and (ii) that certain Credit Agreement dated _____________________ between
_____________________________ and TGPC, certain loans were converted to a Net
Profits Overriding Royalty Interest (the "NET PROFITS INTEREST").
NOW, THEREFORE, in consideration of ten dollars ($10.00) and other good and
valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, ____________________________, a ________________________ non
profit corporation (the "ASSIGNOR"), hereby assigns, transfers, conveys and sets
over to Domain Energy Production Corporation, a Delaware corporation whose
address is 1100 Louisiana, Suite 1500, Houston, Texas 77002 (the "ASSIGNEE"),
all of Assignor's right, title and interest in and to the Net Profits Interest.
THIS ASSIGNMENT IS MADE WITHOUT WARRANTIES OR REPRESENTATIONS (INCLUDING
WITHOUT LIMITATION, WITHOUT REPRESENTATION OR WARRANTY OF TITLE), EXPRESS,
IMPLIED, STATUTORY OR OTHERWISE, AND ASSIGNOR EXPRESSLY DISCLAIMS ANY AND ALL
REPRESENTATIONS AND WARRANTIES.
This Assignment shall be binding upon and inure to the benefit of the
parties hereto and their respective successors and assigns.
This Assignment is being executed in several counterparts, all of which are
identical. All of such counterparts together shall constitute one and the same
instrument.
IN WITNESS WHEREOF, this Assignment is duly executed and delivered this
_____ day of _____________________, 1997, effective as of January 1, 1997 at
7:00 A.M. Central Time.
WITNESSES: ASSIGNOR:
_______________________________ __________________________________
Name:__________________________
_______________________________ By:______________________________
Name:__________________________ Name:____________________________
Title:___________________________
[ADD ACKNOWLEDGMENTS]
A-1-1
<PAGE>
EXHIBIT B
1. GEAPPL CORP.
a. CNG ACQUISITION
Conveyance of Net Profits Overriding Royalty Interest dated September 8,
1993, from Tenneco Gas Production Corporation ("TGPC") to GEAPPL Corp.
JURISDICTION RECORDING INFORMATION
Vermilion Parish, LA File No. 9400631
Iberia Parish, LA COB 1067, Entry No. 94-437
Minerals Management Filed
Service
b. BG ACQUISITION
Conveyance of Net Profits Overriding Royalty Interest from TGPC to GEAPPL
Corp.
JURISDICTION RECORDING INFORMATION
Mobile Co., AL Real Property Records
Book 4133, Page 1776
Jackson Co., MS Book 5, Page 243
Minerals Management Received 9/12/94
Service
c. MARATHON-MIDCON ACQUISITION
Conveyance of Net Profits Overriding Royalty Interest dated May 19, 1993,
from TGPC to GEAPPL Corp.
JURISDICTION RECORDING INFORMATION
Aransas Co., TX File No. 188706
Chambers Co., TX Vol. 208, Page 522
Galveston Co., TX Microfilm ID No.###-##-####
B-1
<PAGE>
Jefferson Co., TX File No. 9318811
Nueces Co., TX File No. 861032
Cameron Parish, LA File No. 231528, COB 771
Iberia Parish, LA Entry No. 93-4236, COB 1054
Vermilion Parish, LA File No. 9305218
2. GTPT CORPORATION
a. CNG ACQUISITION
Conveyance of Net Profits Overriding Royalty Interest dated September 8,
1993, from Tenneco Gas Production Corporation ("TGPC") to GTPT Corporation.
JURISDICTION RECORDING INFORMATION
Vermilion Parish, LA File No. 9400630
Iberia Parish, LA COB 1067, Entry No. 94-436
Minerals Management Filed
Service
b. BG ACQUISITION
Conveyance of Net Profits Overriding Royalty Interest from TGPC to GTPT
Corporation.
JURISDICTION RECORDING INFORMATION
Mobile Co., AL Real Property Records
Book 4133, Page 1800
Jackson Co., MS Book 5, Page 219
Minerals Management Received 9/12/94
Service
c. MARATHON-MIDCON ACQUISITION
Conveyance of Net Profits Overriding Royalty Interest dated May 19, 1993,
from TGPC to GTPT Corporation
JURISDICTION RECORDING INFORMATION
Aransas Co., TX File No. 188707
Chambers Co., TX Vol. 208, Page 545
Galveston Co., TX Microfilm ID No. ###-##-####
Jefferson Co., TX File No. 9318812
Nueces Co., TX Doc. No. 861031
Cameron Parish, LA File No. 231529, COB 771
Iberia Parish, LA Entry No. 93-4237, COB 1054
Vermilion Parish, LA File No. 9305217
B-2
<PAGE>
3. ZETA MT HOLDING INC.
a. BG ACQUISITION
Conveyance of Net Profits Overriding Royalty Interest from Tenneco Gas
Production Corporation to Zeta MT Holding, Inc.
JURISDICTION RECORDING INFORMATION
Mobile Co., AL Real Property Records
Book 4133, Page 1749
Jackson Co., MS Book 5, Page 195
Minerals Management Received 9/12/94
Service
B-3
<PAGE>
SCHEDULE 5.9
------------
1997 WELLCOUNT
(THRU 5/19)
<TABLE>
<CAPTION>
EQUITY FUND I FUND II
PROJECT WELL NAME W.I.(%) W.I.(%) W/I.(%) STATUS
<S> <C> <C> <C> <C> <C>
Kenedy Ranch KMF 279 #1 12.5 Dry Hole - Non-consent on
Completion
Brigham Mustang #1 25.0 12.5 Completing - Awaiting Economic Test
Popham 193 #1 14.0 21.0 Testing
Son of Bevo 281 #1 14.0 21.0 Drilled - Waiting on Completion
Rand-Paulson Lucky 28-1 24.6 Dry Hole
State 26-1 50.0 Dry Hole
A.J. 6-1 50.0 Completing - Awaiting Economic Test
Trick State Unit #1 2.6 Completing - Producer
Treat State Unit #1 8.3 Waiting on Completion
State 27-1 50.0 Producing - Running Bottom Hole
Pressure Test
</TABLE>
1997 DRILLING
(5/19 THRU 7/31)
<TABLE>
<CAPTION>
EQUITY FUND I FUND II
PROJECT WELL NAME W.I.(%) W.I.(%) W/I.(%) STATUS
<S> <C> <C> <C> <C> <C>
Kenedy Ranch KMF 243 #1 12.5 Drilling
Brigham Son of Bevo 192 #1 14.0 21.0 AFE Approved
Mustang #2 25.0 12.5 Finalizing Location
Lumberjack 12 #1 28.0 42.0 Non-consent
West Delta 30 OCS-G-0367 #26 7.2 0.0 Drilling
EE-16 5.0 30.0 AFE Approved
Rand-Paulson State 27-2 50.00 Drilling
State 27-3 90.00 Drilling
</TABLE>
Page 1 of 2
<PAGE>
DISPOSITION SUMMARY
(AS OF 4/18/97)
SHALLOW MIOCENE - MOBILE AREA
FIELD PROSPECTIVE BUYER COMMENTS
- ----- ----------------- --------
Main Pass 154 Callon Negotiating Divestiture
Chandeleur 37 Callon
Mobile 864 Callon
MISSISSIPPI AREA
- ----------------
FIELD
- -----
Chaparral Savannah Negotiating Sale Agreement
Forest #2 Taurus Initial Divestiture Discussions
S. TEXAS BASIN
- --------------
Kenedy Ranch TBD Preparing Brochure for Marketing
ANADARKO BASIN
- --------------
Brigham Sonat Under Consideration for Divestiture
Page 2 of 2
<PAGE>
EXHIBIT 21.1
LIST OF SUBSIDIARIES OF THE COMPANY
JURISDICTION
OF
NAME ORGANIZATION
- ------------------------------------- -------------
Domain Energy Ventures Corporation... Delaware
Domain Energy Production
Corporation........................ Delaware
Domain Energy Guaranty Corporation... Delaware
Domain Energy Finance Corporation.... Delaware
Oceana Exploration Company, L.C. .... Texas
Matrix Energy-T Limited
Partnership........................ Texas
Michigan Gas Fund I.................. Texas
New York Gas Fund I.................. New York
Texas Gas Fund I..................... Texas
Texas Gas Fund II.................... Texas
Gas Fund Partnership................. Texas
EXHIBIT 23.1
INDEPENDENT AUDITOR'S CONSENT
We consent to the use in this Registration Statement of Domain Energy
Corporation on Form S-1 of our report dated April 3, 1997, appearing in the
Prospectus, which is part of this Registration Statement, and of our report
dated April 3, 1997 relating to the financial statement schedule appearing
elsewhere in this Registration Statement.
We also consent to the reference to us under the heading "Experts" in such
Prospectus.
Houston, Texas
May 21, 1997
The accompanying financial statements reflect the 754-for-one stock split
to be effected immediately before consummation of the Offering. The above
consent is in the form which will be signed by Deloitte & Touche LLP upon
consummation of such stock split, which is described in Note 7 of Notes to the
Combined and Consolidated Financial Statements, and assuming that, from April 3,
1997 to the date of such stock split, no other events should have occurred that
would affect the accompanying financial statements and notes thereto.
DELOITTE & TOUCHE LLP
Houston, Texas
May 21, 1997
EXHIBIT 23.5
CONSENT OF PERSON NAMED TO BECOME A DIRECTOR
Pursuant to Rule 438 under the Securities Act of 1933, as amended
(the "Act"), I hereby consent to the incorporation by reference in this
Registration Statement on Form S-1 of Domain Energy Corporation, a Delaware
corporation (the "Company"), of the use of my name and any references to me as a
person nominated to become a director of the Company appearing in the Prospectus
constituting a part of the Company's Registration Statement on Form S-1 that has
been filed with the Securities and Exchange Commission pursuant to the Act.
Dated: May 8, 1997 /S/ WILLIAM P. NICOLETTI
William P. Nicoletti
CONSENT OF PERSON NAMED TO BECOME A DIRECTOR
Pursuant to Rule 438 under the Securities Act of 1933, as amended
(the "Act"), I hereby consent to the incorporation by reference in this
Registration Statement on Form S-1 of Domain Energy Corporation, a Delaware
corporation (the "Company"), of the use of my name and any references to me as a
person nominated to become a director of the Company appearing in the Prospectus
constituting a part of the Company's Registration Statement on Form S-1 that has
been filed with the Securities and Exchange Commission pursuant to the Act.
Dated: May 8, 1997 /S/ GARY K. WRIGHT
Gary K. Wright
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS INCLUDED ELSEWHERE IN
THE REGISTRATION STATEMENT AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS 12-MOS 12-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1996 DEC-31-1996 DEC-31-1995 DEC-31-1994
<PERIOD-END> MAR-31-1997 MAR-31-1996 DEC-31-1996 DEC-31-1995 DEC-31-1994
<CASH> 14,186 0 8,736 0 11,467
<SECURITIES> 0 0 0 0 0
<RECEIVABLES> 17,089 0 21,278 15,466 5,100
<ALLOWANCES> 0 0 0 0 0
<INVENTORY> 0 0 0 0 0
<CURRENT-ASSETS> 32,747 0 31,359 17,074 16,919
<PP&E> 91,343 0 88,648 137,975 97,735
<DEPRECIATION> 2,766 0 0 26,251 3,912
<TOTAL-ASSETS> 143,125 0 137,126 137,096 117,755
<CURRENT-LIABILITIES> 18,280 0 23,888 11,313 2,378
<BONDS> 90,567 0 84,675 0 103,302
0 0 0 0 0
0 0 0 0 0
<COMMON> 76 0 72 2 2
<OTHER-SE> 31,682 0 27,505 2,158 802
<TOTAL-LIABILITY-AND-EQUITY> 143,125 0 137,126 137,096 106,486
<SALES> 13,695 16,143 57,322 37,647 7,040
<TOTAL-REVENUES> 13,695 16,143 57,322 37,647 7,040
<CGS> 0 0 0 0 0
<TOTAL-COSTS> 7,812 11,380 43,261 35,432 4,961
<OTHER-EXPENSES> 0 0 0 0 0
<LOSS-PROVISION> 0 0 0 0 0
<INTEREST-EXPENSE> 1,323 0 470 0 0
<INCOME-PRETAX> 4,560 4,763 13,591 2,215 2,079
<INCOME-TAX> 1,733 1,596 5,551 861 1,105
<INCOME-CONTINUING> 2,874 3,167 8,197 1,354 974
<DISCONTINUED> 0 0 0 0 0
<EXTRAORDINARY> 0 0 0 0 0
<CHANGES> 0 0 0 0 0
<NET-INCOME> 2,874 3,167 8,197 1,354 974
<EPS-PRIMARY> 0 0 0 0 0
<EPS-DILUTED> 0 0 0 0 0
</TABLE>
