AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 2, 1997
REGISTRATION NO. 333-24641
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 2
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 76-0526147
(STATE OR OTHER (PRIMARY STANDARD (I.R.S. EMPLOYER
JURISDICTION INDUSTRIAL IDENTIFICATION NUMBER)
OF INCORPORATION OR CLASSIFICATION CODE
ORGANIZATION) 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>
==================================================================================================================
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
- ------------------------------------------------------------------------------------------------------------------
<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 $31,364 was paid in connection with the initial filing
of this Registration Statement on April 4, 1997 and no additional filing fee
is required.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
================================================================================
<PAGE>
<PAGE>
******************************************************************************
* *
* INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A *
* REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED *
* WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT *
* BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE *
* REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT *
* CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR *
* SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH *
* OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR *
* QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. *
* *
******************************************************************************
SUBJECT TO COMPLETION, DATED JUNE 2, 1997
DOMAIN ENERGY CORPORATION
6,000,000 Shares
Common Stock
($.01 par value)
------------------
All of the shares of Common Stock, $.01 par value (the "Common Stock"), of
Domain Energy Corporation (the "Company") offered hereby are being sold by
the Company (the "Offering"). 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" BEGINNING 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 ADEQUACY 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 GRANT OF OPTIONS TO PURCHASE COMMON STOCK TO 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
3
<PAGE>
1996 the Company achieved a lease operating expense of $0.42 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 54% 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 its inception in 1993 through December 31, 1996, the IPF Program
has generated an average return on net assets of approximately 19%. 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 $7.0 million, $0.5 million and $0.4
million in 1996, 1995 and 1994, respectively. Pro forma net income for the year
ended December 31, 1996 was $8.8 million. See "-- Summary Historical and Pro
Forma Combined and Consolidated Financial Data."
The Company generated earnings before stock compensation expense, interest,
income taxes, depreciation, depletion and amortization ("EBITDA") plus IPF
Program return of capital of $41.1 million in 1996, $26.2 million in 1995 and
$7.7 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 $55.5 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
4
<PAGE>
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
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.
5
<PAGE>
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 ("Fund VII"), has agreed to purchase, at a 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.
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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.
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 $55.0
million of indebtedness outstanding
under the Company's existing credit
facilities, with the balance to be
used for general working capital
purposes. 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 and the three months ended
March 31, 1997 give effect to (i) the Acquisition, (ii) the sale of shares of
Common Stock and the grant of options to purchase shares of Common Stock to the
Company's employees in 1997, (iii) the Michigan Disposition, (iv) the completion
of the Offering, (v) the completion of the Concurrent Sale and (vi) the
completion of the Funds Acquisition, as if all such transactions occurred on
January 1, 1996. 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> <C>
INCOME STATEMENT DATA:
Revenues:
Oil and natural gas sales(1)........ $ 5,340 $ 34,877 $ 52,274 $70,746 $15,688 $12,782 $16,538
IPF Activities(2)................... 1,417 2,356 4,369 4,369 340 732 732
Other............................... 283 414 (413) 198 115 (292) 185
--------- --------- --------- --------- ----------- --------- ---------
Total revenues................. 7,040 37,647 56,230 75,313 16,143 13,222 17,455
--------- --------- --------- --------- ----------- --------- ---------
Expenses:
Lease operating..................... 1,790 7,980 10,207 14,438 2,127 3,060 4,078
Production and severance taxes...... 18 710 1,340 1,492 279 413 469
Depreciation, depletion and
amortization...................... 3,101 22,692 24,920 22,866 7,613 3,282 4,046
General and administrative, net..... 52 2,780 3,361 3,361 1,089 792 828
Corporate overhead allocation....... 944 2,627 4,827 5,119 939 -- --
Stock compensation.................. -- -- -- 5,045 -- 3,150 293
--------- --------- --------- --------- ----------- --------- ---------
Total operating expenses....... 5,905 36,789 44,655 52,321 12,047 10,697 9,714
--------- --------- --------- --------- ----------- --------- ---------
Income from operations.................. 1,135 858 11,575 22,992 4,096 2,525 7,741
Interest expense, net................... -- -- 150 8,670 -- 1,109 (44)
--------- --------- --------- --------- ----------- --------- ---------
Income before income taxes.............. 1,135 858 11,425 14,322 4,096 1,416 7,785
Income tax provision.................... 735 351 4,394 5,495 1,342 538 2,916
--------- --------- --------- --------- ----------- --------- ---------
Net income.............................. $ 400 $ 507 $ 7,031 $ 8,827 $ 2,754 $ 878 $ 4,869
========= ========= ========= ========= =========== ========= =========
Net income per share(3)................. $ .58 $ 0.10 $ .32
Common stock and common stock
equivalents outstanding............... 15,133 9,133 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.................... $ 1,135 $ 858 $ 11,575 $22,992 $ 4,096 $ 2,525 $ 7,741
Net cash provided by operating
activities........................ 11,487 19,933 34,553 -- 5,715 8,112 --
Net cash used in investing
activities........................ (86,669) (39,728) (47,329) -- (10,634) (7,577) --
Net cash provided by financing
activities........................ 85,014 8,328 12,776 -- 5,285 5,511 --
Capital expenditures(4)............. 85,205 49,904 28,145 58,145 4,848 2,276 32,276
OTHER NON-GAAP FINANCIAL DATA:
EBITDA(5)........................... 4,236 23,550 36,495 50,903 11,709 8,957 12,080
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........................... 7,743 26,188 41,113 55,521 12,226 12,383 15,506
</TABLE>
AS OF MARCH 31, 1997
----------------------------
HISTORICAL PRO FORMA
----------- ----------
(IN THOUSANDS)
BALANCE SHEET DATA:
Cash and cash equivalents........... $ 6,082 $ 8,711
Property, plant and equipment,
net................................ 63,636 93,636
IPF Program notes receivable........ 27,530 27,530
Total assets........................ 125,664 148,064
Long-term debt (including current
maturities)........................ 83,838 21,718
Stockholders' equity................ 33,690 118,891
- ------------
(1) Oil and natural gas sales increased from $5.3 million in 1994 to $52.3
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 on a pro forma basis 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 stock compensation expense, interest,
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 81,338 83,418
Oil and condensate (MBbls) ...... 4,109 2,197 11,380 11,736
Total (MMcfe) ................... 98,056 95,865 149,616 153,834
PV-10 Reserve Value (in
thousands) .................... $61,812 $103,931 $184,816 $213,030
Percent of proved developed
producing reserves ............ 53.4% 55.0% 61.3% 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 $ 0.66
Production replacement
ratio(4) ...................... 3,117.9% 222.8% 217.9% 276.8%
- ------------
(1) Includes the Company's proportionate share of reserves 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 34.6 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>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------------ ------------------------------------
PRO FORMA PREDECESSOR SUCCESSOR PRO FORMA
1994 1995 1996 1996(1) 1996 1997 1997(1)
--------- --------- --------- --------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
PRODUCTION VOLUMES:
Natural gas (MMcf)............... 2,334 18,065 21,192 25,714 5,828 3,668 4,586
Oil and condensate (MBbls)....... 83 424 564 920 116 141 199
Total (MMcfe).................... 2,832 20,609 24,575 31,234 6,524 4,516 5,780
AVERAGE REALIZED PRICES:(2)
Natural gas (per Mcf)............ $ 1.76 $ 1.54 $ 1.97 $ 2.06 $ 2.36 $ 2.75 $ 2.74
Oil and condensate (per Bbl)..... 14.93 16.76 18.63 19.43 16.52 19.06 20.07
EXPENSES (PER MCFE):
Lease operating.................. $ 0.63 $ 0.39 $ 0.42 $ 0.46 $ 0.33 $ 0.68 $ 0.71
Production taxes................. 0.01 0.03 0.05 0.05 0.04 0.09 0.08
Depreciation, depletion and
amortization................... 1.03 1.08 1.01 0.71 1.19 0.69 0.70
General and administrative,
net(3)......................... 0.26 0.16 0.12 0.11 0.14 0.14 0.14
</TABLE>
- ------------
(1) Gives effect to the Michigan Disposition and the Funds Acquisition as if
such transactions were consummated as of January 1, 1996.
(2) 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."
(3) 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 $0.26, $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 $21.7 million
(consisting of approximately $9.4 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 $118.9 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. 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, the Company's existing
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 (other than the Common Stock
to be purchased by Fund VII pursuant to the Concurrent Sale) 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 $5.68 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. The Company will use $55.0 million of the proceeds to the Company
of the Offering and the Concurrent Sale to repay $50.0 million of indebtedness
outstanding under the Revolving Credit Facility and $5.0 million of indebtedness
outstanding under the IPF Company Credit Facility. The remainder of the net
proceeds will be used for general working capital purposes of the Company.
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.... 23,500 --
Long-term debt.......................... $ 60,338 $ 21,718
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......... 33,282 118,416
Notes receivable -- stockholders... (546) (546)
Retained earnings.................. 878 878
---------- -----------
Total stockholders' equity.............. 33,690 118,891
---------- -----------
Total capitalization.................... $ 117,528 $ 140,609
========== ===========
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
$34.1 million, or approximately $4.45 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, the use of the net proceeds thereof as specified in "Use of Proceeds"
and 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 $8.32 per share, representing an immediate increase in pro forma
net tangible book value of $3.87 per share to the Company's existing
stockholders and an immediate dilution in pro forma net tangible book value of
$5.68 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....... $ 4.45
Increase per share attributable to
new investors (including Fund
VII).............................. 3.87
---------
Pro forma net tangible book value
per share after the Offering and
the Concurrent Sale............... 8.32
---------
Dilution per share to new investors..... $ 5.68
=========
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 $96.2 million and the assumption of liabilities of approximately
$16.8 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 had occurred on March 31, 1997. The unaudited pro forma
consolidated income statements for the year ended December 31, 1996 and for the
three months ended March 31, 1997 give effect to (i) the Acquisition, (ii) the
sale of 486,003 shares of Common Stock to the Company's employees in 1997 for an
aggregate purchase price of $2,031,354 and the grant to such employees in 1997
of options to purchase 849,694 shares of Common Stock, (iii) the Michigan
Disposition, (iv) the completion of the Offering, (v) the completion of the
Concurrent Sale and (vi) the completion of the Funds Acquisition, as if all such
transactions (the "Transactions") had occurred on January 1, 1996. 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............ $ 6,082 $ 400(a) $ 2,229(b) $ 8,711 $ 30,000(c) $-- $ (30,000)(e)
Restricted certificate of
deposit................ 8,000 -- -- 8,000 -- (8,000)(d) --
Accounts receivable...... 13,989 -- (5,400)(b) 8,589 -- -- --
Notes receivable, current
portion................ 8,512 -- 5,400(b) 13,912 -- -- --
Prepaids and other
current assets......... 1,468 -- -- 1,468 -- -- --
---------- ----------- ----------- ------------ ----------- ----------- --------------
Total current
assets............. 38,051 400 2,229 $ 40,680 30,000 (8,000) (30,000)
---------- ----------- ----------- ------------ ----------- ----------- --------------
Notes receivable......... 19,018 -- -- 19,018 -- -- --
Property, plant and
equipment, net (full
cost method)........... 63,636 -- -- 63,636 -- -- 30,000(e)
Investments, equity...... 2,229 -- (2,229)(b) -- -- -- --
Other assets............. 2,730 -- -- 2,730 -- --
---------- ----------- ----------- ------------ ----------- ----------- --------------
Total assets......... $125,664 $ 400 $ -- 126,064 $ 30,000 $(8,000) $ --
---------- ----------- ----------- ------------ ----------- ----------- --------------
LIABILITIES AND
STOCKHOLDERS' EQUITY
Accounts payable......... $ 4,674 $ -- $ -- $ 4,674 $ -- $-- $ --
-- -- -- -- -- -- --
Accrued expenses......... 2,697 -- -- 2,697 -- (681)(d) --
Current maturities of
long-term debt......... 23,500 -- -- 23,500 (16,500)(c) (7,000)(d) --
---------- ----------- ----------- ------------ ----------- ----------- --------------
Total current
liabilities........ 30,871 -- -- 30,871 (16,500) (7,681) --
---------- ----------- ----------- ------------ ----------- ----------- --------------
Long-term debt........... 60,338 -- -- 60,338 (30,620)(c) (8,000)(d) --
Deferred taxes........... 353 -- -- 353 -- --
---------- ----------- ----------- ------------ ----------- ----------- --------------
Total liabilities.... 91,562 -- -- 91,562 (47,120) (15,681) --
---------- ----------- ----------- ------------ ----------- ----------- --------------
Minority interest........ 412 -- -- 412 -- -- --
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................ 33,282 399(a) -- 33,681 77,060(c) 7,675(d) --
Notes receivable --
shareholders........... (546) -- -- (546) -- -- --
Retained earnings........ 878 -- -- 878 -- -- --
---------- ----------- ----------- ------------ ----------- ----------- --------------
Total stockholders'
equity............. 33,690 400 -- 34,090 77,120 7,681 --
---------- ----------- ----------- ------------ ----------- ----------- --------------
Total liabilities and
stockholders'
equity............. $125,664 $ 400 $ -- $126,064 $ 30,000 $(8,000) $ --
========== =========== =========== ============ =========== =========== ==============
</TABLE>
PRO
FORMA
---------
ASSETS
Cash and cash
equivalents............ $ 8,711
Restricted certificate of
deposit................ --
Accounts receivable...... 8,589
Notes receivable, current
portion................ 13,912
Prepaids and other
current assets......... 1,468
---------
Total current
assets............. 32,680
---------
Notes receivable......... 19,018
Property, plant and
equipment, net (full
cost method)........... 93,636
Investments, equity...... --
Other assets............. 2,730
---------
Total assets......... $ 148,064
---------
LIABILITIES AND
STOCKHOLDERS' EQUITY
Accounts payable......... $ 4,674
Accrued expenses......... 2,016
Current maturities of
long-term debt......... --
---------
Total current
liabilities........ 6,690
---------
Long-term debt........... 21,718
Deferred taxes........... 353
---------
Total liabilities.... 28,761
---------
Minority interest........ 412
Common stock
7,567,988 shares issued
and outstanding
historical; 14,283,755
shares issued and
outstanding pro
forma.................. 143
Additional paid-in
capital................ 118,416
Notes receivable --
shareholders........... (546)
Retained earnings........ 878
---------
Total stockholders'
equity............. 118,891
---------
Total liabilities and
stockholders'
equity............. $ 148,064
=========
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
FOR EMPLOYEE
OFFERINGS AND ADJUSTMENTS
ADJUSTMENTS STOCK OPTION FOR SUBTOTAL FOR ADJUSTMENTS
FOR THE GRANTS MICHIGAN COMPLETED FOR
HISTORICAL ACQUISITION IN 1997 DISPOSITION TRANSACTIONS OFFERING
---------- ----------- ------------- ----------- ------------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
REVENUES
Oil and natural gas sales............... $ 52,274 $ -- $ -- $-- $52,274 $--
IPF Activities.......................... 4,369 -- -- -- 4,369 --
Other................................... (413) -- -- 605(k) 192 --
---------- ----------- ------------- ----------- ------------- -----------
Total revenues..................... 56,230 -- -- 605 56,835 --
---------- ----------- ------------- ----------- ------------- -----------
EXPENSES
Lease operating......................... 10,207 -- -- -- 10,207 --
Production and severance taxes.......... 1,340 -- -- -- 1,340 --
Depreciation, depletion and
amortization.......................... 24,920 (8,520)(f) -- -- 16,400 --
General and administrative.............. 3,361 -- -- -- 3,361 --
Stock compensation...................... -- -- 5,045(g) -- 5,045 --
Corporate overhead allocation........... 4,827 -- -- -- 4,827 --
---------- ----------- ------------- ----------- ------------- -----------
Total operating expenses........... 44,655 (8,520) 5,045 -- 41,180 --
---------- ----------- ------------- ----------- ------------- -----------
Operating income........................ 11,575 (8,520) (5,045) 605 15,655 --
---------- ----------- ------------- ----------- ------------- -----------
Interest expense, net................... 150 14,131(h) -- -- 14,281 (3,960)(h)
Interest income......................... -- (368)(i) -- (675)(k) (1,043) --
---------- ----------- ------------- ----------- ------------- -----------
Net income before income taxes.......... 11,425 (5,243) (5,045) 1,280 2,417 3,960
Income tax expense...................... 4,394 (1,992)(j) (1,917) 486(j) 971 1,505(j)
---------- ----------- ------------- ----------- ------------- -----------
Net income.............................. $ 7,031 $ (3,251) $ (3,128) $ 794 $ 1,446 $ 2,455
========== =========== ============= =========== ============= ===========
Net income per share....................
Common stock and common stock
equivalents outstanding...............
</TABLE>
ADJUSTMENTS
ADJUSTMENTS FOR
FOR PENDING
CONCURRENT FUNDS
SALE ACQUISITION PRO FORMA
----------- ----------- ---------
REVENUES
Oil and natural gas sales........... $-- $18,472(m) $70,746
IPF Activities...................... -- -- 4,369
Other............................... -- 6(m) 198
----------- ----------- ---------
Total revenues................. -- 18,478 75,313
----------- ----------- ---------
EXPENSES
Lease operating..................... -- 4,231(m) 14,438
Production and severance taxes...... -- 152(m) 1,492
Depreciation, depletion and
amortization...................... -- 6,466(m) 22,866
General and administrative.......... -- -- 3,361
Stock compensation.................. -- -- 5,045
Corporate overhead allocation....... -- 292(m) 5,119
----------- ----------- ---------
Total operating expenses....... -- 11,141 52,321
----------- ----------- ---------
Operating income.................... -- 7,337 22,992
----------- ----------- ---------
Interest expense, net............... (976)(h) -- 9,345
Interest income..................... 368(1) -- (675)
----------- ----------- ---------
Net income before income taxes...... 608 7,337 14,322
Income tax expense.................. 231(j) 2,788(j) 5,495
----------- ----------- ---------
Net income.......................... $ 377 $ 4,549 $ 8,827
=========== =========== =========
Net income per share................ $ 0.58
=========
Common stock and common stock
equivalents outstanding........... 15,133(n)
=========
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
FOR EMPLOYEE
OFFERINGS AND ADJUSTMENTS SUBTOTAL
ADJUSTMENTS STOCK OPTION FOR FOR ADJUSTMENTS
FOR THE GRANTS MICHIGAN COMPLETED FOR
HISTORICAL ACQUISITION IN 1997 DISPOSITION TRANSACTIONS OFFERING
---------- ----------- ------------- ----------- ------------ -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
REVENUES
Oil and natural gas..................... $ 12,782 $-- $-- $-- $ 12,782 $ --
IPF Activities.......................... 732 -- -- -- 732 --
Other................................... (292) -- -- 477(k) 185 --
---------- ----------- ------------- ----------- ------------ -----------
Total revenues..................... 13,222 -- -- 477 13,699 --
---------- ----------- ------------- ----------- ------------ -----------
EXPENSES
Lease operating......................... 3,060 -- -- -- 3,060 --
Production and severance taxes.......... 413 -- -- -- 413 --
Depreciation, depletion and
amortization.......................... 3,282 (534)(f) -- -- 2,748 --
General and administrative.............. 792 -- -- -- 792 --
Stock compensation...................... 3,150 -- (2,857)(g) -- 293 --
---------- ----------- ------------- ----------- ------------ -----------
Total operating expenses........... 10,697 (534) (2,857) -- 7,306 --
---------- ----------- ------------- ----------- ------------ -----------
Operating income........................ 2,525 534 2,857 477 6,393 --
---------- ----------- ------------- ----------- ------------ -----------
Interest expense, net................... 1,206 -- -- -- 1,206 (992)(h)
Interest income, net.................... (97) -- -- (135)(k) (232) --
---------- ----------- ------------- ----------- ------------ -----------
Net income before income taxes.......... 1,416 534 2,857 612 5,419 992
Income tax expense...................... 538 203(j) 1,086(j) 232(j) 2,059 377(j)
---------- ----------- ------------- ----------- ------------ -----------
Net income.............................. $ 878 $ 331 $ 1,771 $ 380 $ 3,360 $ 615
========== =========== ============= =========== ============ ===========
Net income per share.................... $ 0.10
==========
Common stock and common stock
equivalents outstanding............... 9,133
</TABLE>
ADJUSTMENTS ADJUSTMENTS
FOR FOR PENDING
CONCURRENT FUNDS
SALE ACQUISITION PRO FORMA
----------- ----------- ---------
REVENUES
Oil and natural gas.................. $ -- $ 3,756(m) $16,538
IPF Activities....................... -- -- 732
Other................................ -- -- 185
----------- ----------- ---------
Total revenues.................. -- 3,756 17,455
----------- ----------- ---------
EXPENSES
Lease operating...................... -- 1,018(m) 4,078
Production and severance taxes....... -- 56(m) 469
Depreciation, depletion and
amortization....................... -- 1,298(m) 4,046
General and administrative........... -- 36(m) 828
Stock compensation................... -- -- 293
----------- ----------- ---------
Total operating expenses........ -- 2,408 9,714
----------- ----------- ---------
Operating income..................... -- 1,348 7,741
----------- ----------- ---------
Interest expense, net................ (118)(h) -- 96
Interest income, net................. 92(l) -- (140)
----------- ----------- ---------
Net income before income taxes....... 26 1,348 7,785
Income tax expense................... 10(j) 470(j) 2,916
----------- ----------- ---------
Net income........................... $ 16 $ 878 $ 4,869
=========== =========== =========
Net income per share................. $ 0.32
=========
Common stock and common stock
equivalents outstanding............ 15,133(n)
=========
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 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 on April 9, 1997 of the Company's ownership interest in
Michigan Production Company, L.L.C. and Michigan Energy Company, L.L.C.
pursuant to the Michigan Disposition. The Company's interest in both
entities was accounted for using the equity method of accounting. The
Company received total consideration of approximately $7.6 million,
consisting of approximately $2.2 million in cash and an interest bearing
note receivable of $5.4 million.
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) proceeds of $8.7 million 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 proceeds of
$8.0 million from the sale of the restricted certificate of deposit and
(ii) the use of such proceeds for repayment of indebtedness to Fund VII,
payment of accrued expenses and repayment of debt under the Revolving
Credit Facility.
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. The Company completed
the Acquisition for a total cash purchase price of approximately $95.5
million and the assumption of liabilities of approximately $17.5 million.
The assets and liabilities acquired have
26
<PAGE>
DOMAIN ENERGY CORPORATION
NOTES TO CONDENSED PRO FORMA FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
been recorded by the Company at their estimated fair market values,
summarized as follows (in thousands):
Assets:
Accounts receivable--trade......... $ 19,456
IPF Program notes receivable....... 21,710
Oil and gas properties............. 66,176
Other assets....................... 5,658
----------
$ 113,000
==========
Liabilities:
Accounts payable................... $ (11,225)
Long-term debt..................... (6,212)
----------
$ (17,437)
==========
g. Reflects stock compensation expense relating to stock purchases made by
management and employees of the Company on February 21, 1997 and April 3,
1997, respectively, and stock options granted to management and employees
on February 21, 1997 and April 3, 1997, respectively (see "Notes to
Combined and Consolidated Financial Statements -- Note 7 -- Stockholders'
Equity -- Stock Purchase and Option Plan"), as if all of such equity
securities were issued on January 1, 1996 summarized as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
-----------------------------
FIRST QUARTER
NUMBER FAIR 1996 1997
1. STOCK PURCHASES OF SHARES PRICE VALUE COMPENSATION COMPENSATION
---------------------------------------- --------- ----- ------ ------------ -------------
<S> <C> <C> <C> <C> <C>
Management.............................. 390,307 $4.18 $12.00 $3,052 $--
Employees............................... 95,696 $4.18 $12.00 749 --
------------ -------------
$3,801 $--
------------ -------------
2. STOCK OPTIONS
----------------------------------------
(a)Performance
Management.............................. 376,999 $0.01 $ 4.18 $ 786 $ 197
Employees............................... 47,848 $0.01 $12.00 287 72
------------ -------------
$1,073 $ 269
------------ -------------
(b)Time
Management.............................. 376,999 $4.18 $ 4.18 $-- $--
Employees............................... 47,848 $4.18 $12.00 171 24
------------ -------------
$ 171 $ 24
------------ -------------
Total stock compensation............................................... $5,045 $ 293
Historical............................................................. $-- $ 3,150
------------ -------------
Pro forma adjustment................................................... $5,045 $(2,857)
============ =============
</TABLE>
27
<PAGE>
DOMAIN ENERGY CORPORATION
NOTES TO CONDENSED PRO FORMA FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
h. Reflects the adjustments to interest expense computed as follows (in
thousands):
<TABLE>
<S> <C> <C> <C> <C>
1.Year Ended December 31, 1996
(a) Historical
BEFORE AFTER
PAYMENT PAYMENT RATE INTEREST
------- -------- --------- --------
IPF Company Credit Facility........... $ 6,212 $ 6,212 8.00% $ 150(i)
--------
$ 150
--------
(b) 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 $61.2 million and $5.0
million under its Revolving Credit Facility and IPF Company Credit Facility,
respectively. As discussed in Note (f), the Company assumed $6.2 million of
long-term debt in connection with the Acquisition.
The Acquisition Financing:
Revolving Credit Facility........ $ -- $ 61,200 8.00% $ 4,896
IPF Company Credit Facility...... 6,212 11,212 8.00% 400
Indebtedness to Fund VII......... -- 8,000 4.60% 368
Average historical indebtedness
to Predecessor Parent......... -- 118,500 8.00% 9,480
Less: amounts capitalized on
$12.6 million of properties
not subject to amortization... -- -- 8.00% (1,013)
--------
$ 14,131
--------
(c) Repayment of debt using Offering
proceeds:
Revolving Credit Facility............. $61,200 $ 19,080 7.00%(ii) $ (3,560)
IPF Company Credit Facility........... 11,212 6,212 8.00% (400)
--------
$ (3,960)
--------
(d) Repayment of debt using proceeds
from Concurrent Sale:
Revolving Credit Facility............. $19,080 $ 11,080 7.00%(ii) $ (608)
Indebtedness to Fund VII.............. 8,000 -- 4.60% (368)
--------
$ (976)
--------
Total pro forma interest expense
adjusted...................... $ 9,345
========
A 1/8% increase in the variable interest rates on the above debt instruments would
decrease net income by $99,800.
</TABLE>
28
<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(i)
Indebtedness to Fund VII... 8,000 8,000 4.60% 92
Less:Amount capitalized on
$12.6 million of
properties not subject to
amortization............. -- -- 8.00% (336)
--------
$ 1,206
--------
(b) Repayment of debt using
Offering Proceeds:
Revolving Credit
Facility................. $59,500 $ 17,380 7.00%(ii) $ (894)
IPF Company Credit
Facility................. 17,338 12,338 8.00% (98)
--------
$ (992)
========
(c) Repayment of debt using
proceeds of Concurrent Sale:
Revolving Credit
Facility................. $17,380 $ 9,380 7.00% ($ 152)
Indebtedness to Fund VII... 8,000 -- 4.60% (92)
Adjustment to amounts
capitalized for reduction
in interest rate(ii)..... -- -- 7.00% 126
--------
$ (118)
--------
Total pro forma interest expense
adjusted.............................. $ 96
========
A 1/8% increase in the variable interests rates on the above debt instruments would
decrease net income by $6,000.
</TABLE>
- ------------
(i) Reflects actual historical interest expense incurred on IPF Company Credit
Facility debt outstanding prior to the Acquisition based on amounts
outstanding from time to time.
(ii) Once the total amount of debt outstanding is below the threshold amount as
defined by the Revolving Credit Facility, the interest rate is lowered by
1.0%. See "Notes to Combined and Consolidated Financial
Statements--Long-term Debt--Revolving Credit Facility."
i. Reflects the interest income on a certificate of deposit used as collateral
for the Michigan Development Project.
j. The effective rate of 38.0% is computed using statutory rates, including
state taxes, less the federal income tax benefit derived from state taxes.
k. As discussed in Note b., on April 9, 1997, the Company sold its ownership
interest in two entities accounted for using the equity method of
accounting. This adjustment reflects the effects of the exclusion of the
Company's equity share of the results of operations of these two entities
and the interest income on the note receivable from the sale.
l. Reflects reduction in interest income on a certificate of deposit used as
collateral for the Michigan Development Project as a result of the sale of
the certificate of deposit.
m. 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.
29
<PAGE>
DOMAIN ENERGY CORPORATION
NOTES TO CONDENSED PRO FORMA FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
n. 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, 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.
30
<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, EXCEPT PER SHARE DATA)
<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 $ 52,274 $15,688 $ 12,782
IPF Activities(2).................. -- 200 1,417 2,356 4,369 340 732
Other.............................. -- -- 283 414 (413) 115 (292)
--------- --------- ---------- ---------- ---------- ----------- ---------
Total revenues................ 2 2,122 7,040 37,647 56,230 16,143 13,222
--------- --------- ---------- ---------- ---------- ----------- ---------
Expenses:
Lease operating.................... -- 218 1,790 7,980 10,207 2,127 3,060
Production and severance taxes..... -- 2 18 710 1,340 279 413
Depreciation, depletion and
amortization..................... -- 987 3,101 22,692 24,920 7,613 3,282
General and administrative, net.... 332 681 52 2,780 3,361 1,089 792
Corporate overhead allocation...... -- 257 944 2,627 4,827 939 --
Stock compensation................. -- -- -- -- -- -- 3,150
--------- --------- ---------- ---------- ---------- ----------- ---------
Total operating expenses...... 332 2,145 5,905 36,789 44,655 12,047 10,697
--------- --------- ---------- ---------- ---------- ----------- ---------
Income (loss) from operations........... (330) (23) 1,135 858 11,575 4,096 2,525
Interest expense, net................... 20 -- -- -- 150 -- 1,109
--------- --------- ---------- ---------- ---------- ----------- ---------
Income (loss) before income taxes....... (350) (23) 1,135 858 11,425 4,096 1,416
Income tax provision (benefit).......... (119) 2 735 351 4,394 1,342 538
--------- --------- ---------- ---------- ---------- ----------- ---------
Net income (loss)....................... $ (231) $ (25) $ 400 $ 507 $ 7,031 $ 2,754 $ 878
========= ========= ========== ========== ========== =========== =========
Net income per share.................... $ 0.10
=========
Common stock and common stock
equivalents outstanding............... 9,133
<CAPTION>
AS OF DECEMBER 31,
--------------------------------------------------------
PREDECESSOR SUCCESSOR
-------------------------------------------- SUCCESSOR AS OF MARCH 31,
1992 1993 1994 1995 1996 1997
--------- --------- ---------- ---------- ---------- ---------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.......... $ 2 $ 1,635 $ 11,467 $ -- $ 36 $ 6,082
Property, plant and equipment,
net.............................. 131 11,544 93,823 111,724 66,176 63,636
IPF Program notes receivable....... -- 4,215 4,023 7,991 21,710 27,530
Total assets....................... 1,403 23,493 117,755 137,096 122,429 125,664
Long-term debt (including current
maturities)...................... -- -- -- -- 79,412 83,838
Parent advances.................... 1,684 19,491 104,504 112,832 -- --
Stockholders' equity............... (309) (335) 65 572 28,577 33,690
</TABLE>
- ------------
(1) Oil and natural gas sales increased from $5.3 million in 1994 to $52.3
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."
31
<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 54% of
the Company's net proved reserves at such date were natural gas and
approximately 61% 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 but includes the Company's proportionate share of reserve value
attributable to 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).
32
<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)... $96.2
-------------
$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.
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
33
<PAGE>
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.
34
<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 $ 41,767 $13,772 $ 10,094
Oil and condensate............ 1,239 7,105 10,507 1,916 2,688
IPF Activities(1)............. 1,417 2,356 4,369 340 732
Total revenues..................... 7,040 37,647 56,230 16,143 13,222
Total operating expenses........... 5,905 36,789 44,655 12,047 10,697
---------- --------- --------- ----------- ---------
Operating income................... $ 1,135 $ 858 $ 11,575 $ 4,096 $ 2,525
========== ========= ========= =========== =========
Net income......................... $ 400 $ 507 $ 7,031 $ 2,754 $ 878
Net cash provided by operating
activities....................... 11,487 19,933 34,553 5,715 8,112
Net cash used in investing
activities....................... (86,669) (39,728) (47,329) (10,634) (7,577)
Net cash provided by financing
activities....................... 85,014 8,328 12,776 5,285 5,511
NON-GAAP FINANCIAL DATA
(IN THOUSANDS):
EBITDA(2).......................... $ 4,236 $ 23,550 $ 36,495 $11,709 $ 8,957
IPF Program return of capital(3)... 3,507 2,638 4,618 517 3,426
EBITDA plus IPF Program return of
capital.......................... 7,743 26,188 41,113 12,226 12,383
PRODUCTION VOLUMES:
Natural gas (MMcf)................. 2,334 18,065 21,192 5,828 3,668
Oil and condensate (MBbls)......... 83 424 564 116 141
Total (MMcfe)...................... 2,832 20,609 24,575 6,524 4,516
AVERAGE REALIZED PRICES:(4)
Natural gas (per Mcf).............. $ 1.76 $ 1.54 $ 1.97 $ 2.36 $ 2.75
Oil and condensate (per Bbl)....... 14.93 16.76 18.63 16.52 19.06
EXPENSES (PER MCFE):
Lease operating.................... $ 0.63 $ 0.39 $ 0.42 $ 0.33 $ 0.68
Production taxes................... 0.01 0.03 0.05 0.04 0.09
Depreciation, depletion and
amortization..................... 1.03 1.08 1.01 1.19 0.69
General and administrative,
net(5)........................... 0.26 0.16 0.12 0.14 0.14
</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)
35
<PAGE>
(2) EBITDA represents earnings before stock compensation expense, interest,
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 $0.26, $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 $12.8 million in the first quarter of 1997, a decrease of
$2.9 million, or 18.5%. Production volumes for oil and condensate increased from
116 MBbls in the first quarter of 1996 to 141 MBbls in the first quarter of
1997, an increase of 25 MBbls, or 21.6%. 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 2.2 Bcf, or 37.1%. 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 $4.7 million.
This was partially offset by a 15.4% increase in oil and condensate prices and a
16.5% 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 $19.06 per Bbl and an average gas price of $2.75 per Mcf for the first
quarter of 1997, compared to average prices of $21.45 per Bbl and $2.73 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 $3.1 million in the first quarter of 1997, an increase of $1.0
million or 43.9%. On an Mcfe basis, lease operating expenses increased from
$0.33 in the first quarter of 1996 to $0.68 in the first quarter of 1997, an
increase of $0.35, or 106.1%. Lease operating expenses were higher in the first
quarter of 1997 as compared to the first quarter of 1996 as a result of the
Wasson Field acquisition completed by the Company after the first quarter of
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.
Depreciation, depletion and amortization ("DD&A") expense declined from
$7.6 million in the first quarter of 1996 to $3.3 million in the first quarter
of 1997, a decrease of $4.3 million, or 56.9%. This was the result of lower oil
and gas production volumes and a 42.0% 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."
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.
36
<PAGE>
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 compensation increased from zero in the first quarter of 1996 to $3.2
million in the first quarter of 1997 due to the implementation of the Stock
Purchase and Option Plan.
Income tax expense decreased from $1.3 million in the first quarter of 1996
to $0.5 million in the first quarter of 1997, a decrease of $0.8 million or
59.9%. This was primarily due to a decrease in income before taxes from $4.1
million in the first quarter of 1996 to $1.4 million in the first quarter of
1997 and an effective tax rate increase in the first quarter of 1997 to 38% from
32.8% in the first quarter of 1996.
Net income was $2.8 million in the first quarter of 1996 compared to $0.9
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 $52.2
million in 1996, an increase of $17.4 million, or 49.9%. Production volumes for
oil and condensate increased from 424 MBbls in 1995 to 564 MBbls in 1996, an
increase of 140 MBbls, or 33.0%. Production volumes for natural gas increased
from 18.1 Bcf in 1995 to 21.2 Bcf in 1996, an increase of 3.1 Bcf, or 17.3%. 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
$7.2 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 $18.63 per Bbl and an average gas price of $1.97 per Mcf for the year
ended December 31, 1996, compared to average prices of $20.88 per Bbl and $2.41
per Mcf, respectively, that otherwise would have been received. These hedging
activities decreased oil and natural gas revenues by approximately $10.5
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 $10.2
million in 1996, an increase of $2.2 million, or 27.9%. On an Mcfe basis, lease
operating expenses increased from $0.39 in 1995 to $0.42 in 1996, an increase of
$0.03, or 7.7%. 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 increased from
$22.7 million in 1995 to $24.9 million, an increase of $2.2 million. This was
the result of higher oil and gas production volumes partially offset by a 6.5%
decrease in the DD&A rate. The reduced DD&A rate was attributable to the
acquisition of low cost reserves in the Wasson Field.
General and administrative expense increased from $2.8 million in 1995 to
$3.4 million in 1996, an increase of $0.6 million, or 20.9%. 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.
The corporate overhead allocation increased from $2.6 million in 1995 to
$4.8 million in 1996, an increase of $2.2 million, or 83.7%. The increase was
primarily due to approximately $2.0 million in costs
37
<PAGE>
related to severance payments, retention bonuses and other costs associated with
the merger of Tenneco with an affiliate of El Paso Natural Gas Company.
Income tax expense increased from $0.4 million in 1995 to $4.4 million in
1996, an increase of $4.0 million, or 1152%. This was due to an increase in
income before taxes from $0.9 million in 1995 to $11.4 million in 1996 and an
increase in the effective tax rate from 40.9% in 1995 to 38.5% in 1996.
Net income was $0.5 million in 1995 compared to $7.0 million in 1996, 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 15.7 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
$32.8 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 $0.9 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 an increase in the DD&A rate per Mcfe from
$1.03 in 1994 to $1.08 in 1995, a 5.0% increase. The 1994 DD&A rate was
adversely affected by a downward revision in the prior year's estimate of oil
and gas reserves. The downward revision was primarily caused by negative
drilling results by the Company in an offshore field. The increase in DD&A rate
per Mcfe in 1995 is the result of higher finding costs relative to 1994 ($1.13
in 1995 compared to $0.91 in 1994).
General and administrative expense increased from $0.1 million in 1994 to
$2.8 million in 1995, an increase of $2.7 million. Net general and
administrative expense in 1994 was nominal because direct expenses of $3.5
million were offset by $1.8 million of overhead reimbursement paid to the
Company by investors in the Funds and $1.6 million of capitalized general and
administrative expense. The increase in 1995 was primarily attributable to
salary, benefits, rent and related costs of the additional 24 employees hired
during 1995 due to acquisitions and increased business activity.
The corporate overhead allocation increased from $0.9 in 1994 to $2.6
million in 1995, an increase of $1.7 million. The increase was based on the
Company's increased business activities resulting from acquisitions.
Income tax expense decreased from $0.7 million in 1994 to $0.4 million in
1995, a decrease of $0.4 million, or 52.2%. This was primarily due to a decrease
in the effective tax rate from 64.8% in 1994 to 40.9% in 1995.
Net income was $0.4 million in 1994 compared to $0.5 million in 1995, as a
result of the factors described above.
38
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Cash flows provided by operating activities from the Predecessor's
operations were $11.5 million, $19.9 million and $34.6 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 $8.1 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 $47.3 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 $7.6 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 $85.0
million, $8.3 million and $12.8 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, $6.2 million was
generated from the IPF Company Credit Facility and $6.6 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 $5.5
million, consisting of additional net borrowings of $4.4 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 $83.8 million. On a pro forma basis as of March 31, 1997, the
Company would have had total consolidated indebtedness for money borrowed of
approximately $21.7 million, resulting in availability for additional borrowings
of $53.9 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
39
<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 $52.1 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 working capital of
approximately $8.4 million. After consummation of 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
40
<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. IPF Company incurs a quarterly commitment
fee based on the difference between amounts outstanding under the facility and
the borrowing base.
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 under the IPF Company Credit Facility.
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 $ 8,513
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
--------- --------- ---------
Total.............................. $ 88,520 $ 56,510 $ 46,753
========= ========= =========
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.
41
<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 $1.97 during the years ended December 31,
1994, 1995, and 1996, respectively. Hedging transactions resulted in a $0.44
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 $18.63,
respectively. Hedging transactions resulted in a $2.25 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)..... -- -- (0.44) (0.21) 0.02
Effect of hedging transactions on
average oil sales price (per Bbl)..... -- 0.45 (2.25) (1.28) (2.39)
</TABLE>
42
<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 $0.42 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 54% 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.
43
<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 its inception in 1993 through December 31, 1996, the IPF Program
has generated an average return on net assets of approximately 19%. 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 $7.0 million, $0.5 million and $0.4
million in 1996, 1995 and 1994, respectively. Pro forma net income for the year
ended December 31, 1996 was $8.8 million. See "Prospectus Summary -- Summary
Historical and Pro Forma Combined and Consolidated Financial Data."
The Company generated earnings before stock compensation expense, interest,
income taxes, depreciation, depletion and amortization ("EBITDA") plus IPF
Program return of capital of $41.1 million in 1996, $26.2 million in 1995 and
$7.7 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 $55.5 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
44
<PAGE>
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
45
<PAGE>
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
46
<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 of approximately 19%. 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."
47
<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
48
<PAGE>
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. Two such wells have been drilled and are awaiting completion.
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.
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%.
49
<PAGE>
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.
50
<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)
--------- ---------- ---------- ---------
PROVED RESERVES:
<S> <C> <C> <C> <C>
Natural Gas (MMcf)................. 73,399 82,682 81,338 83,418
Oil and condensate (MBbls)......... 4,109 2,197 11,380 11,736
Total (MMcfe)...................... 98,056 95,865 149,616 153,834
PROVED DEVELOPED PRODUCING RESERVES:
Natural Gas (MMcf)................. 46,544 45,386 36,293 44,292
Oil and condensate (MBbls)......... 967 1,219 9,248 9,673
Total (MMcfe)...................... 52,346 52,700 91,781 102,330
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 $ 154,424 --
</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) Includes the Company's proportionate share of reserves 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
51
<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.
52
<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 21,192 5,828 3,668
Oil and liquids (MBbls)............ 83 424 564 116 141
Total (MMcfe)...................... 2,832 20,609 24,575 6,524 4,516
AVERAGE REALIZED PRICES:(1)
Natural gas (per Mcf).............. $ 1.76 $ 1.54 $ 1.97 $ 2.36 $ 2.75
Oil and liquids (per Bbl).......... 14.93 16.76 18.63 16.52 19.06
EXPENSES (PER MCFE):
Lease operating expense............ $ 0.63 $ 0.39 $ 0.42 $ 0.33 $ 0.68
Production taxes................... 0.01 0.03 0.05 0.04 0.09
Depreciation, depletion and
amortization..................... 1.03 1.08 1.01 1.19 0.69
General and administrative,
net(2)........................... 0.26 0.16 0.12 0.14 0.14
</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 $0.26, $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.
53
<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 58,471 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.
54
<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
55
<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.
56
<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
57
<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 39 full-time persons and five
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 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 Tenneco Ventures since 1992. Ms. Sliva has 17 years experience in
offshore and onshore petroleum engineering and economics and is experienced in
production finance,
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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 Tenneco Ventures in 1992. 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 1991.
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
or its subsidiaries 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. Members of the Board of Directors who are not employees of the Company
or its subsidiaries will be eligible to receive options to purchase Common Stock
as described below under " -- Stock Option Plan for Nonemployee Directors."
STOCK OPTION PLAN FOR NONEMPLOYEE DIRECTORS
Effective upon consummation of the Offering, the Company plans to adopt the
Domain Energy Corporation 1997 Stock Option Plan for Nonemployee Directors (the
"Nonemployee Director Plan"). The objective of the Nonemployee Director Plan
is to enable the Company to attract and retain the services of outstanding
nonemployee directors by affording them an opportunity to acquire a proprietary
interest in the Company through automatic, non-discretionary awards of options
exercisable to purchase shares of Common Stock.
Each member of the Board of Directors who is not an employee of the Company
or its subsidiaries is eligible to receive options under the Nonemployee
Director Plan. On the effective date of the Nonemployee Director Plan, each such
eligible director will automatically be granted an option to purchase such
number of shares of Common Stock as will be determined by the Board of Directors
prior to consummation of the Offering. Future eligible directors will also be
granted an option to purchase an identical number of shares of Common Stock upon
their initial appointment or election to the Board of Directors. The exercise
price of the options will be equal to the fair market value of the Common Stock
on the date of grant. The options may be exercised for a period of ten years
commencing on the date of grant as follows: (i) up to one-third of the total
number of shares of Common Stock subject to an option may be purchased as of the
date of grant; (ii) up to an additional one-third of the total number of shares
of Common Stock subject to an option may be purchased as of the date of the
annual meeting of stockholders of the Company in the year following the year in
which the option was granted ("Second Vesting Date"), provided that the holder
of the option is an eligible director immediately following such meeting; and
(iii) the balance of the total number of shares of Common Stock subject to an
option may be purchased as of the date of the annual meeting of stockholders
next following the Second Vesting Date ("Final Vesting Date"), provided that
the holder of the option is an eligible director immediately following such
meeting. On the date of the annual meeting of stockholders of the Company that
takes place during the calendar year in which the first anniversary of the Final
Vesting Date of an option occurs, the holder of such option shall automatically
be granted an option to purchase such number of shares of Common Stock as will
be determined by the Board of Directors prior to
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consummation of the Offering, provided that the holder of the option is an
eligible director immediately following such meeting.
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 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
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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 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
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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.
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
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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. 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.
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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 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 and (ii) $500,000 to be paid in cash by Fund VII.
See "-- Indebtedness to Fund VII."
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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 54.6% of the
outstanding shares of Common Stock of the Company (or 51.4% 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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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 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.
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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<PAGE>
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
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<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
77
<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.
78
<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.
79
<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.
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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.
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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
June 2, 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............ $ -- $ 36
Restricted certificate of deposit.... -- 8,000
Accounts receivable.................. 13,219 19,456
IPF Program notes receivable, current
portion............................ 2,247 7,874
Prepaid and other current assets..... 1,608 1,525
------------ -------------
Total current assets............ 17,074 36,891
IPF Program notes receivable......... 5,744 13,836
Oil and natural gas properties, full
cost method......................... 137,975 66,176
Less: Accumulated depreciation,
depletion and amortization.......... (26,251) --
Investments and other assets......... 2,554 5,526
------------ -------------
Total assets.................... $137,096 $ 122,429
============ =============
LIABILITIES
Accounts payable..................... $ 11,265 $ 14,018
Accrued expenses..................... 48 42
Current maturities of long-term
debt............................... -- 24,900
------------ -------------
Total current liabilities....... 11,313 38,960
Long-term debt....................... -- 54,512
Deferred income taxes................ 12,379 --
Parent advances...................... 112,832 --
------------ -------------
Total liabilities............... 136,524 93,472
Minority interest.................... -- 380
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........... -- 28,505
Retained earnings.................... 570 --
------------ -------------
Total stockholder's equity...... 572 28,577
------------ -------------
Total liabilities and
stockholder's equity........... $137,096 $ 122,429
============ =============
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 $ 52,274
IPF Activities.......................... 1,417 2,356 4,369
Other................................... 283 414 (413)
--------- --------- ---------
Total revenues................ 7,040 37,647 56,230
--------- --------- ---------
EXPENSES:
Lease operating......................... 1,790 7,980 10,207
Production and severance taxes.......... 18 710 1,340
Depreciation, depletion and
amortization.......................... 3,101 22,692 24,920
General and administrative.............. 52 2,780 3,361
Corporate overhead allocation........... 944 2,627 4,827
--------- --------- ---------
Total operating expenses...... 5,905 36,789 44,655
Income from operations.................. 1,135 858 11,575
Interest expense........................ -- -- 150
--------- --------- ---------
Income before income taxes.............. 1,135 858 11,425
Income tax provision.................... 735 351 4,394
--------- --------- ---------
Net income.............................. $ 400 $ 507 $ 7,031
========= ========= =========
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 $ -- $ (337) $ (335)
Net income.............................. -- -- 400 400
------ ---------- -------- --------------
Balance at December 31, 1994............ 2 -- 63 65
Net income.............................. -- -- 507 507
------ ---------- -------- --------------
Balance at December 31, 1995............ 2 -- 570 572
Net income.............................. -- -- 7,031 7,031
------ ---------- -------- --------------
Balance at December 31, 1996
(prior to the Acquisition)............ $ 2 $ -- $ 7,601 $ 7,603
====== ========== ======== ==============
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
Issuance of detachable stock options.... -- 1,000 -- 1,000
------ ---------- -------- --------------
Balance at December 31, 1996............ $ 72 $ 28,505 $ -- $ 28,577
====== ========== ======== ==============
</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.............................. $ 400 $ 507 $ 7,031 $--
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation, depletion and
amortization..................... 3,101 22,692 24,920 --
Deferred income taxes.............. 9,586 883 6,702 --
Minority interest.................. -- -- 380 --
Allowance for doubtful IPF
investments...................... -- -- 437
Changes in operating assets and
liabilities:
Increase in accounts receivable.... (713) (6,731) (7,584) --
Decrease (increase) in prepaid and
other current assets............. (441) (956) 83 --
Increase (decrease) in accounts payable
and accrued expenses.................. (446) 3,538 2,584 --
---------- ---------- ---------- -------------
Net cash provided by operating
activities............................ 11,487 19,933 34,553 --
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of the Tenneco Entities..... -- -- -- (96,164)
Purchase of restricted certificate of
deposit............................... -- -- -- (8,000)
Investment in oil and natural gas
properties............................ (85,433) (44,118) (32,023) --
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 (2,425) --
---------- ---------- ---------- -------------
Net cash used in investing activities... (86,669) (39,728) (47,329) (104,164)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from debt borrowings........... -- -- 6,968 73,200
Repayment of debt borrowings............ -- -- (756) --
Advances from Parent, net............... 85,014 8,328 6,564 --
Issuance of common stock................ -- -- -- 31,000
---------- ---------- ---------- -------------
Net cash provided by financing
activities............................ 85,014 8,328 12,776 104,200
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 $ -- $ -- $ 36
========== ========== ========== =============
</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 $96.2 million and the assumption of
liabilities of approximately $16.8 million. The Company did not assume the
liability of $124.1 million due to the parent of the Tenneco Entities. 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.... $ 19,456
IPF Program notes receivable.... 21,710
Oil and gas properties.......... 66,176
Other assets.................... 5,658
----------
Total assets............... $ 113,000
==========
LIABILITIES:
Accounts payable................ (10,624)
Long-term debt.................. (6,212)
----------
Total liabilities.......... $ (16,836)
==========
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 $ 56,230
Net income.............................. $ 3,024 $ 9,714
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 Company and the investors each own direct undivided interests in oil and gas
properties. The Company accounts for its interests in the Funds using the pro
rata method of consolidation.
The Company owns 35% of the voting capital stock of Michigan Production
Company L.L.C. ("MPC") and accounts for MPC using the equity method of
accounting. 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. Both equity investments were acquired in 1996.
The following presents combined summary information for MPC and MEC (in
thousands):
DECEMBER 31,
1996
------------
Current assets....................... $ 1,654
Non-current assets................... 35,601
Current liabilities.................. 6,640
Non-current liabilities.............. 27,587
YEAR ENDED
DECEMBER 31,
1996
------------
Revenues............................. $ 690
Operating expenses................... 953
Net income........................... (520)
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 $1.6 million,
$2.1 million and $2.6 million were included in capitalized costs for the years
ended December 31, 1994, 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 $1.01,
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
F-8
<PAGE>
DOMAIN ENERGY CORPORATION
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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
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.
PARENT ADVANCES -- Prior to the Acquisition, Parent advances to the Company
for net working capital and capital expenditure requirements are recorded as
non-current liabilities on the combined balance sheet. The Parent did not charge
the Company any interest expense on the funds utilized by the Company.
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 ($10.5 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>
F-9
<PAGE>
DOMAIN ENERGY CORPORATION
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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> <C>
Interest expense paid................ $ -- $ -- $ 307 --
Income taxes paid to Parent.......... -- -- -- --
The Acquisition:
Total cash consideration........ $ -- $ -- $ -- $ 96,164
Fair value of assets acquired... -- -- -- 113,000
Liabilities assumed............. -- -- -- 16,836
</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
F-10
<PAGE>
DOMAIN ENERGY CORPORATION
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 20.0% and
17.7%, respectively. The weighted average returns expected by the Company on the
notes receivable outstanding at December 31, 1995 and December 31, 1996 were
26.5% and 20.9%, 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. The allowance for doubtful
accounts was zero for the years ended December 31, 1994 and 1995. 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....................... -- 12,662
--------- ---------
$ 37,917 $ 12,662
========= =========
F-11
<PAGE>
DOMAIN ENERGY CORPORATION
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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
Indebtedness to Fund VII............. -- 7,000
IPF Company Credit Facility.......... -- 11,212
--------- ----------
Long-term debt....................... $ -- $ 79,412
Less current maturities.............. -- (24,900)
--------- ----------
$ -- $ 54,512
========= ==========
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
F-12
<PAGE>
DOMAIN ENERGY CORPORATION
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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.
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. Pursuant to the terms of the Note, First
Reserve has the right to convert the Note into Common Stock. In accordance with
APB 14, $1.0 million of the Note has been reclassified from notes payable to
additional paid-in capital on the Company's financial statements. As a result of
the reclassification, the effective interest rate on the Note increases from
4.60% to 5.26%. The remaining $7.0 million of the Note has been classified as
current maturities of long-term debt in keeping with First Reserve's intent to
exercise its option to acquire Common Stock concurrent with consummation of the
Offering.
6. RELATED PARTY TRANSACTIONS
CORPORATE OVERHEAD ALLOCATION -- Prior to the Acquisition, the Company paid
an affiliate of the Parent for various administrative support services,
including treasury, legal, tax, human resources and administration. Allocations
were based on the Company's percentage of total assets as compared to the
Parent's total assets. 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
F-13
<PAGE>
DOMAIN ENERGY CORPORATION
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Tenneco with an affiliate of El Paso Natural Gas Company. Management of the
Company believes that the allocations were reasonable and approximate those
costs which would have been incurred from unrelated parties.
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,........ $ 19,491 $ 104,504 $ 112,832
Cash advances, net................... 93,937 5,545 1,737
Corporate overhead allocation........ 944 2,627 4,827
Other allocations (accrued taxes).... (9,868) 156 4,734
Liability to Parent at the
Acquisition date not assumed by the
Company............................ -- -- (124,130)
---------- ---------- ------------
Ending balance, December 31.......... $ 104,504 $ 112,832 $ --
========== ========== ============
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. All share amounts in the financial statements have been retroactively
restated to present a 754-for-one stock split to be effected immediately before
consummation of the Offering. As of December 31, 1996, 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 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
F-14
<PAGE>
DOMAIN ENERGY CORPORATION
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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 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.
F-15
<PAGE>
DOMAIN ENERGY CORPORATION
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
COMPENSATION EXPENSE -- For purposes of determining compensation expense
pursuant to APB 25, the measurement date for the stock options granted to
officers of the Company is December 31, 1996 while the measurement date for
other options granted and stock sold is the date of the grant or sale.
Compensation expense is calculated based on the difference in the proceeds that
the Company receives upon issuance of the stock and the estimated fair value of
the stock at the measurement date. The Company anticipates recognizing stock
compensation expense based on actual stock acquired and in accordance with the
vesting schedule of options granted as follows:
1997................................. $ 4,832,000
1998................................. $ 1,188,000
1999................................. $ 238,000
2000................................. $ 40,000
2001................................. $ 20,000
2002................................. $ 4,000
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 and (ii) $500,000 in cash to be paid by Fund VII.
In accordance with APB 14, $1.0 million of the Note, representing the
estimated fair value of the First Reserve Option, has been reclassified from
notes payable to additional paid-in capital. See Note 5.
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........................ 7,296 791 6,511
State:
Current......................... (1,769) (14) 657
Deferred........................ 2,290 92 191
--------- --------- ---------
Income tax expense................... $ 735 $ 351 $ 4,394
========= ========= =========
F-16
<PAGE>
DOMAIN ENERGY CORPORATION
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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........... $ 1,135 $ 858 $ 11,425
--------- --------- ---------
Income tax computed at statutory
rates.............................. $ 397 $ 300 $ 3,999
State taxes, net of federal
benefit............................ 338 54 551
Other................................ -- (3) (156)
--------- --------- ---------
Income tax expense................... $ 735 $ 351 $ 4,394
========= ========= =========
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
$12,379,000. This amount represents the temporary difference in the tax and book
basis of the Company's oil and natural gas properties and investments.
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).............. (454) 418 (547) 1,441
Net income (loss).................... (287) 241 (336) 889
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 $ 14,686 $13,531 $ 11,870
Operating income (loss).............. 4,096 6,126 2,047 (694)
Net income (loss).................... 2,754 3,855 982 (560)
</TABLE>
- ------------
(1) 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 $ 53,514
Unevaluated properties............... 37,917 12,662
---------- ---------
137,975 66,176
Less: Accumulated depreciation,
depletion and amortization......... (26,251) --
---------- ---------
Net capitalized costs................ $ 111,724 $ 66,176
========== =========
Company's share of equity method
investee's net capitalized cost.... $ 17,815
---------
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 7,781
Exploration costs.................... 15,121 23,677 12,126
Development costs.................... 4,883 7,834 7,506
--------- --------- ---------
Total costs incurred................. $ 85,205 $ 49,904 $ 28,145
========= ========= =========
Company's share of equity method
investee's cost incurred........... $ 17,978
---------
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.
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) 289,216
Purchases of oil and gas
properties.................... 3,713,694 1,713,328 8,152,514
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) (563,831)
----------- ------------ ------------
End of year..................... 4,109,442 2,197,181 10,128,061
=========== ============ ============
Proved developed reserves at end of
year............................... 3,124,873 1,701,656 9,775,753
Equity in proved reserves of equity
investee........................... 1,251,592
<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 82,682,380
Revisions of previous
estimates..................... (4,525,096) 5,769,806 (2,920,927)
Purchases of oil and gas
properties.................... 64,489,577 19,898,227 --
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) (21,191,895)
------------ -------------- --------------
End of year..................... 73,398,877 82,682,380 60,094,539
============ ============== ==============
Proved developed reserves at end of
year............................... 58,005,413 65,178,731 47,495,614
============ ============== ==============
Equity in proved reserves of equity
investee........................... 21,243,379
<CAPTION>
TOTAL (MCFE)
--------------------------------------------
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 (1,185,631)
Purchases of oil and gas
properties.................... 86,771,741 30,178,195 48,915,084
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) (24,574,881)
============ ============== ==============
End of year..................... 98,055,529 95,865,466 120,862,905
============ ============== ==============
Proved developed reserves at end of
year............................... 76,754,651 75,388,667 106,150,132
============ ============== ==============
Equity in proved reserves of equity
investee........................... 28,752,931
</TABLE>
F-19
<PAGE>
DOMAIN ENERGY CORPORATION
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 $ 422,377
Future oil and natural gas operating
expenses........................... (47,895) (43,204) (204,741)
Future development costs............. (40,622) (38,680) (31,208)
Future income tax expenses........... (852) (14,422) (37,156)
---------- ---------- ----------
Future net cash flows................ 80,868 114,512 149,272
10% annual discount for estimated
timing of cash flows............... (12,376) (15,513) (23,926)
---------- ---------- ----------
Standardized measure of discounted
future net cash flows.............. $ 68,492 $ 98,999 $ 125,346
========== ========== ==========
Company's share of equity method
investee's standardized measure of
discounted future net cash flows... $ 29,078
----------
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 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.
F-20
<PAGE>
DOMAIN ENERGY CORPORATION
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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) $ (40,727)
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 12,601
Future development costs
incurred...................... 4,883 7,834 7,270
Changes due to revisions in
standardized variables
Price & production costs........ (8,793) 23,926 52,020
Revisions of previous quantity
estimates..................... (10,008) (950) (1,857)
Estimated future development
costs......................... (4,535) (8,825) (1,187)
Income taxes.................... 8,185 (11,613) (17,560)
Accretion of discount........... 1,211 6,181 10,393
Production rates (timing) and
other......................... 11,363 20,443 2,092
---------- ---------- ----------
Net increase......................... 57,885 30,507 26,347
Beginning of year.................... 10,607 68,492 98,999
---------- ---------- ----------
End of year.......................... $ 68,492 $ 98,999 $ 125,346
========== ========== ==========
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............ $ 36 $ 6,082
Restricted certificate of deposit.... 8,000 8,000
Accounts receivable.................. 19,456 13,989
IPF Program notes receivable, current
portion............................ 7,874 8,512
Prepaid and other current assets..... 1,525 1,468
------------ ---------
Total current assets............ 36,891 38,051
IPF Program notes receivable......... 13,836 19,018
Oil and natural gas properties, full
cost method........................ 66,176 66,752
Less: Accumulated depreciation,
depletion and amortization......... -- (3,116)
Investments and other assets......... 5,526 4,959
------------ ---------
Total assets.................... $122,429 $ 125,664
============ =========
LIABILITIES
Accounts payable..................... $ 14,018 $ 4,491
Accrued expenses..................... 42 2,880
Current maturities of long-term
debt............................... 24,900 23,500
------------ ---------
Total current liabilities....... 38,960 30,871
Long-term debt....................... 54,512 60,338
Deferred income taxes................ -- 353
------------ ---------
Total liabilities............... 93,472 91,562
Minority interest.................... 380 412
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........... 28,505 33,282
Notes receivable -- stockholders..... -- (546)
Retained earnings.................... -- 878
------------ ---------
Total stockholders' equity...... 28,577 33,690
------------ ---------
Total liabilities and
stockholders' equity.......... $122,429 $ 125,664
============ =========
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 $ 12,782
IPF Activities....................... 340 732
Other................................ 115 (292)
------------ ----------
Total revenues............. 16,143 13,222
------------ ----------
EXPENSES
Lease operating...................... 2,127 3,060
Production and severance taxes....... 279 413
Depreciation, depletion and
amortization....................... 7,613 3,282
General and administrative........... 1,089 792
Corporate overhead allocation........ 939 --
Stock compensation................... -- 3,150
------------ ----------
Total operating expenses... 12,047 10,697
Income from operations............... 4,096 2,525
Interest expense..................... -- 1,109
------------ ----------
Income before income taxes........... 4,096 1,416
Income tax provision................. 1,342 538
------------ ----------
Net income........................... $ 2,754 $ 878
============ ==========
Net income per share................. $ 0.10
Common Stock and common stock
equivalents outstanding............ 9,133
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 $ 28,505 $-- $-- $28,577
Sale of common stock to employees.... 4 1,627 (546) -- 1,085
Stock compensation................... -- 3,150 -- -- 3,150
Net income........................... -- -- -- 878 878
------- ---------- ------------- -------- -------------
Balance at March 31, 1997............ $ 76 $ 33,282 $ (546) $ 878 $33,690
======= ========== ============= ======== =============
</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........................... $ 2,754 $ 878
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation, depletion and
amortization................... 7,613 3,282
Stock option compensation....... -- 3,150
Deferred income taxes........... 320 353
Minority interest............... -- 32
Changes in operating assets and
liabilities:
Decrease (increase) in accounts
receivable..................... (6,302) 5,467
Decrease (increase) in prepaid
and other current assets....... (117) 57
Increase (decrease) in accounts
payable and accrued expenses... 1,447 (5,107)
----------- ---------
Net cash provided by operating
activities......................... 5,715 8,112
CASH FLOWS FROM INVESTING ACTIVITIES:
Investments in oil and natural gas
properties......................... (9,306) (3,858)
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.......... 57 401
----------- ---------
Net cash used in investing
activities......................... (10,634) (7,577)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from debt borrowings........ -- 9,379
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 5,511
Increase in cash and cash
equivalents........................ 366 6,046
Cash and cash equivalents, beginning
of period.......................... 0 36
----------- ---------
Cash and cash equivalents, end of
period............................. $ 366 $ 6,082
=========== =========
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.
COMPENSATION EXPENSE -- For purposes of determining compensation expense
pursuant to APB 25, the measurement date for the stock options granted to
officers of the Company is December 31, 1996 while the measurement date for
other options granted and stock sold is the date of the grant or sale.
Compensation expense is calculated based on the difference in the proceeds that
the Company receives upon issuance of the stock and the estimated fair value of
the stock at the measurement date.
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 and (ii) $500,000 in cash to be paid by Fund VII.
In accordance with APB 14, $1.0 million of the Note, representing the
estimated fair value of the First Reserve Option, has been reclassified from
notes payable to additional paid-in capital.
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 Company received $2.1 million in cash and will receive an
additional $5.4 million from the payment of an interest-bearing note receivable.
The aggregate sale price approximated the Company's carrying value.
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
($) ($) ($)
-------------- ----------- --------------
<S> <C> <C> <C>
DOMAIN
Future Gross Revenue............... 340,203,048 37,704,437 377,907,485
Production Taxes................... 13,483,172 149,489 13,632,661
Operating Costs and Ad Valorem
Taxes............................ 185,033,938 3,267,082 188,301,020
Capital Costs...................... 11,954,105 8,535,145 20,489,250
Future Net Revenue*................ 129,731,833 25,752,721 155,484,554
Present Worth at 10 Percent*....... 108,460,234 14,303,791 122,764,025
</TABLE>
* Future income tax expenses were not taken into account in the preparation of
these estimates.
The net proved reserves, as of December 31, 1996, of the properties owned
by the Matrix Limited Partnership are estimated as follows:
OIL AND
CONDENSATE GAS
(BBL) (MCF)
---------- -----------
Net Proved Reserves.................. 7,863 4,078,080
Revenue and costs attributable to the production and sale of Matrix Limited
Partnership's net proved reserves as of December 31, 1996, of the properties
evaluated, under the aforementioned assumptions concerning future prices and
costs, are estimated as follows:
<TABLE>
<CAPTION>
PROVED PROVED TOTAL
DEVELOPED UNDEVELOPED PROVED
($) ($) ($)
------------ ----------- ------------
<S> <C> <C> <C>
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
</TABLE>
* 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:
<TABLE>
<CAPTION>
PROVED PROVED TOTAL
DEVELOPED UNDEVELOPED PROVED
($) ($) ($)
------------ ----------- ------------
<S> <C> <C> <C>
DEPC FUND I
Future Gross Revenue............... 53,972,978 9,809,858 63,782,836
Production Taxes................... 387,065 171,027 558,092
Operating Costs and Ad Valorem
Taxes............................ 3,297,374 517,507 3,814,881
Capital Costs...................... 1,882,791 1,891,348 3,774,139
Future Net Revenue*................ 48,405,748 7,229,976 55,635,724
Present Worth at 10 Percent*....... 36,128,387 5,484,908 41,613,295
</TABLE>
* Future income tax expenses were not taken into account in the preparation of
these estimates.
The net proved reserves, as of December 31, 1996, of the properties owned
by Domain Energy Production Corporation through DEPC Fund II are estimated as
follows:
OIL AND
CONDENSATE GAS
(BBL) (MCF)
---------- ---------
Net Proved Reserves.................. 0 149,922
Revenue and costs attributable to the production and sale of the net proved
reserves, as of December 31, 1996, of the DEPC Fund II properties, under the
aforementioned assumptions concerning future prices and costs, are estimated as
follows:
PROVED PROVED TOTAL
DEVELOPED UNDEVELOPED PROVED
($) ($) ($)
--------- ----------- ---------
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...... 31
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................ 32
Business and Properties................. 43
Management.............................. 63
Transactions with Management and First
Reserve............................... 70
Security Ownership of Certain Beneficial
Owners and Management................. 72
Description of Capital Stock............ 73
Shares Eligible for Future Sale......... 74
Underwriting............................ 76
Notice to Canadian Residents............ 77
Legal Matters........................... 78
Experts................................. 78
Available Information................... 79
Glossary................................ 80
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.
[LOGO]
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
- ------------------------ ------------------------------------------------------------------------------------------
<S> <C>
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>
EXHIBIT NO. DESCRIPTION
- ------------------------ ------------------------------------------------------------------------------------------
<S> <C>
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**
10.14 -- Form of Domain Energy Corporation 1997 Stock Option Plan for Nonemployee Directors
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. 2 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 JUNE 2, 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 AMENDMENT NO. 2 TO
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 June 2, 1997
MICHAEL V. RONCA and Director (principal executive
officer)
/s/RICK G. LESTER Vice President and Chief Financial June 2, 1997
RICK G. LESTER Officer (principal financial and
accounting officer)
/s/JONATHAN S. LINKER* Director June 2, 1997
JONATHAN S. LINKER
/s/STEVEN H. PRUETT* Director June 2, 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 (June _, 1997 as to Note 7), 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 (June _, 1997
as to stockholder's equity)
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
June 2, 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.......... $ 89,777
=========
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........... 28,505
Retained earnings.................... --
Total stockholder's
equity.............. 28,577
---------
Total liabilities and
stockholder's
equity.............. $ 89,777
=========
The notes to the consolidated balance sheet appearing on pages F-7 through
F-21, to the extent applicable, are incorporated herein by reference.
S-2
EXHIBIT 1.1
6,000,000 SHARES
DOMAIN ENERGY CORPORATION
COMMON STOCK
FORM OF
UNDERWRITING AGREEMENT
June __, 1997
CREDIT SUISSE FIRST BOSTON CORPORATION
PaineWebber Incorporated
Prudential Securities Incorporated
Morgan Keegan & Company, Inc.
As Representatives of the Several Underwriters,
c/o Credit Suisse First Boston Corporation
Eleven Madison Avenue
New York, New York 10010-3629
Ladies and Gentlemen:
Domain Energy Corporation, a Delaware corporation (the "Company"),
proposes to sell an aggregate of 6,000,000 shares (the "Firm Shares") of the
Company's common stock, par value $.01 per share (the "Common Stock"), to you
and to the other underwriters named in Schedule I (collectively, the
"Underwriters"), for whom you are acting as representatives (the
"Representatives"). The Company has also agreed to grant to you and the other
Underwriters an option (the "Option") to purchase up to an additional 900,000
shares of Common Stock (the "Option Shares") on the terms and for the purposes
set forth in Section 1(b). The Firm Shares and the Option Shares are hereinafter
collectively referred to as the "Shares."
The Company and the subsidiaries of the Company signatory hereto
(the "Material Subsidiaries") confirm as follows their agreements with the
Representatives and the several other Underwriters.
1. AGREEMENT TO SELL AND PURCHASE.
(a) On the basis of the representations, warranties and
agreements herein contained of the Company and the Material Subsidiaries and,
subject to all the terms and conditions of this Agreement, the Company agrees to
sell to each Underwriter named below, and each Underwriter, severally and not
jointly, agrees to purchase from the Company, at price equal to $____ per share,
the number of Firm Shares set forth opposite the name of such Underwriter in
Schedule I,
HOU03A:432629.7
<PAGE>
plus such additional number of Shares which such Underwriter may become
obligated to purchase pursuant to Section 8 hereof.
(b) Subject to all the terms and conditions of this Agreement,
the Company grants the Option to the several Underwriters to purchase, severally
and not jointly, up to 900,000 Option Shares from the Company at the same price
per share as the Underwriters shall pay for the Firm Shares. The Option may be
exercised only to cover over-allotments in the sale of the Firm Shares by the
Underwriters and may be exercised in whole or in part at any time or from time
to time on or before the 30th day after the date of this Agreement, upon written
or telegraphic notice (the "Option Shares Notice") by the Representatives to the
Company no later than 12:00 noon, New York City time, at least three and no more
than five business days before the date specified for closing in the Option
Shares Notice (the "Option Closing Date") setting forth the aggregate number of
Option Shares to be purchased and the time and date for such purchase. On each
Option Closing Date, the Company will issue and sell to the Underwriters the
number of Option Shares set forth in corresponding Option Shares Notice, and
each Underwriter will purchase such percentage of the Option Shares as is equal
to the percentage of Firm Shares that such Underwriter is purchasing, as
adjusted by the Representatives in such manner as they deem advisable to avoid
fractional shares.
2. DELIVERY AND PAYMENT. Delivery of the Firm Shares shall be made
to the Representatives for the accounts of the Underwriters at the office of
Credit Suisse First Boston Corporation ("CSFBC"), Eleven Madison Avenue, New
York, New York, 10010 against payment of the purchase price by wire transfer of
Federal Funds or similar same day funds to an account designated by the Company
of a bank acceptable to CSFBC at least one day prior to the Closing Date (as
hereinafter defined). Such payment shall be made at 10:00 a.m., New York City
time, on _____________, 1997 or at such time on such other date, not later than
ten business days after such date, as may be agreed upon by the Company and
CSFBC (such date is hereinafter referred to as the "Closing Date").
To the extent the Option is exercised, delivery of the Option Shares
against payment by the Underwriters (in the manner specified above) will take
place at the office specified above for the Closing Date at the time and date
(which may be the Closing Date) specified in the Option Shares Notice.
Certificates evidencing the Shares shall be in definitive form and
shall be registered in such names and in such denominations as the
Representatives shall request at least two business days prior to the Closing
Date or the Option Closing Date, as the case may be, by written notice to the
Company. For the purpose of expediting the checking and packaging of
certificates for the Shares, the Company agrees to make such certificates
available for inspection at least 24 hours prior to the Closing Date or the
Option Closing Date, as the case may be.
The cost of original issue tax stamps, if any, in connection with
the issuance and delivery of the Firm Shares and the Option Shares by the
Company to the respective Underwriters shall be borne by the Company. The
Company will pay and save each Underwriter and any
HOU03A:432629.7
2
<PAGE>
subsequent holder of the Shares harmless from any and all liabilities with
respect to or resulting from any failure or delay in paying Federal and state
stamp and other transfer taxes, if any, which may be payable or determined to be
payable in connection with the original issuance or sale to such Underwriter of
the Firm Shares or the Option Shares.
3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company and
the Material Subsidiaries, jointly and severally, represent, warrant and
covenant to each Underwriter that:
(a) A registration statement (Registration No. 333-24641) on
Form S-1 relating to the Shares, including a preliminary prospectus and such
amendments to such registration statement as may have been required to the date
of this Agreement, has been prepared by the Company under the provisions of the
Securities Act of 1933, as amended (the "Act"), and the rules and regulations
(collectively referred to as the "Rules and Regulations") of the Securities and
Exchange Commission (the "Commission") thereunder, and has been filed with the
Commission. The term "preliminary prospectus" as used herein means a preliminary
prospectus as contemplated by Rule 430 or Rule 430A ("Rule 430A") of the Rules
and Regulations included at any time as part of the registration statement.
Copies of such registration statement and amendments and of each related
preliminary prospectus have been delivered to the Representatives. The term
"Registration Statement" means the registration statement as amended at the time
it becomes or became effective (the "Effective Date"), including financial
statements and all exhibits and any information deemed to be included by Rule
430A or Rule 434 of the Rules and Regulations. If the Company files a
registration statement to register a portion of the Shares and relies on Rule
462(b) of the Rules and Regulations for such registration statement to become
effective upon filing with the Commission (the "Rule 462 Registration
Statement"), then any reference to the "Registration Statement" shall be deemed
to include the Rule 462 Registration Statement, as amended from time to time.
The term "Prospectus" means the prospectus as first filed with the Commission
pursuant to Rule 424(b) of the Rules and Regulations or, if no such filing is
required, the form of final prospectus included in the Registration Statement at
the Effective Date.
(b) On the Effective Date, the date the Prospectus is first
filed with the Commission pursuant to Rule 424(b) (if required), at all times
subsequent to and including the Closing Date and, if later, any Option Closing
Date and when any post-effective amendment to the Registration Statement becomes
effective or any amendment or supplement to the Prospectus is filed with the
Commission, the Registration Statement and the Prospectus (as amended or as
supplemented if the Company shall have filed with the Commission any amendment
or supplement thereto), including the financial statements included in the
Prospectus, did or will comply with all applicable provisions of the Act and the
Rules and Regulations and will contain all statements required to be stated
therein in accordance with the Act and the Rules and Regulations. On the
Effective Date and when any post-effective amendment to the Registration
Statement becomes effective, no part of the Registration Statement or any such
amendment did or will contain any untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary in order to
make the statements therein not misleading. At the Effective Date, the date the
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Prospectus or any amendment or supplement to the Prospectus is filed with the
Commission and at the Closing Date and, if later, any Option Closing Date, the
Prospectus did not or will not contain any untrue statement of a material fact
or omit to state a material fact necessary to make the statements therein, in
the light of the circumstances under which they were made, not misleading. The
foregoing representations and warranties in this Section 3(b) do not apply to
any statements or omissions made in reliance on and in conformity with
information relating to any Underwriter furnished in writing to the Company by
the Representatives specifically for inclusion in the Registration Statement or
the Prospectus or any amendment or supplement thereto. For all purposes of this
Agreement, the Company acknowledges that (i) the last paragraph at the bottom of
the cover page of the Prospectus concerning the terms of the offering by the
Underwriters, (ii) the legend on the inside front cover page concerning
stabilization and (iii) the statements in the first, fourth, seventh, ninth,
tenth and eleventh paragraphs under the caption "Underwriting" in the Prospectus
constitute the only information relating to any Underwriter furnished in writing
to the Company by the Representatives specifically for inclusion in the
Registration Statement, the preliminary prospectus or the Prospectus. The
Company has not distributed and will not distribute any offering material in
connection with the offering or sale of the Shares other than the Registration
Statement, the preliminary prospectus, the Prospectus or any other materials, if
any, permitted by the Act.
(c) For purposes of this Agreement, "Subsidiaries" shall mean
Domain Energy Ventures Corporation, Domain Energy Production Corporation, Domain
Energy Finance Corporation, Domain Energy Guarantor Corporation, Oceana
Exploration Company, L.C. and Matrix Energy Limited Partnership. The Company has
no subsidiaries that are "Significant Subsidiaries" within the meaning of Rule
405 of the Rules and Regulations that are not Subsidiaries. The Company and each
of the Subsidiaries is, and at the Closing Date will be, a corporation or other
entity duly organized, validly existing and in good standing under the laws of
its jurisdiction of formation. The Company and each of the Subsidiaries has, and
at the Closing Date will have, full power and authority to conduct all the
activities conducted by it, to own or lease all the assets owned or leased by it
and to conduct its business as described in the Registration Statement and the
Prospectus. The Company and each of the Subsidiaries that is a corporation is,
and at the Closing Date will be, duly licensed or qualified to do business and
in good standing as a foreign corporation in all jurisdictions in which the
nature of the activities conducted by it or the character of the assets owned or
leased by it makes such licensing or qualification necessary, except where the
failure to be duly licensed or qualified or to be in good standing would not
have a material adverse effect on the business, properties, condition (financial
or otherwise) or results of operations of the Company and the Subsidiaries taken
as a whole (a "Material Adverse Effect"). All of the outstanding shares of
capital stock of the Subsidiaries have been duly authorized and validly issued
and are fully paid and non-assessable and are owned by the Company directly, or
indirectly through one of the other Subsidiaries, free and clear of all liens,
encumbrances and claims whatsoever except such as are described in the
Prospectus. Except for the stock of the Subsidiaries, as disclosed in the
Registration Statement and as set forth on Schedule II hereto, the Company does
not own, and at the Closing Date will not own, directly or indirectly, any
shares of stock or any other equity or long-term debt securities of any
corporation or have any material equity interest in any firm, partnership, joint
venture, association or other entity. Complete and correct copies of the
certificate of incorporation
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and of the by-laws of the Company and each of the Subsidiaries and all
amendments thereto have been delivered to the Representatives or their counsel,
and except as disclosed in the Registration Statement, no material changes
therein will be made subsequent to the date hereof and prior to the Closing Date
or, if later, the Option Closing Date.
(d) The outstanding shares of Common Stock have been, and the
Shares to be issued and sold by the Company upon such issuance will be, duly
authorized, validly issued, fully paid and nonassessable and will not be subject
to any preemptive or similar right. The description of the Common Stock in the
Registration Statement and the Prospectus is, and at the Closing Date will be,
complete and accurate in all respects. Except as set forth in the Prospectus,
the Company does not have outstanding, and at the Closing Date will not have
outstanding, any options to purchase, or any rights or warrants to subscribe
for, or any securities or obligations convertible into, or any contracts or
commitments to issue or sell, any shares of Common Stock, any shares of capital
stock of any Subsidiary or any such warrants, convertible securities or
obligations.
(e) The financial statements and schedules included in the
Registration Statement or the Prospectus present fairly the consolidated
financial condition of the Company as of the respective dates thereof and the
consolidated results of operations and cash flows of the Company for the
respective periods covered thereby, all in conformity with generally accepted
accounting principles applied on a consistent basis throughout the entire period
involved, except as otherwise disclosed in the Prospectus. The pro forma
financial statements and other pro forma financial information included in the
Registration Statement or the Prospectus (i) present fairly in all material
respects the information shown therein, (ii) have been prepared in accordance
with the Commission's rules and guidelines with respect to pro forma financial
statements and (iii) have been properly computed on the bases described therein.
The assumptions used in the preparation of the pro forma financial statements
and other pro forma financial information included in the Registration Statement
or the Prospectus are, in the opinion of the Company, reasonable, and the
adjustments used therein are appropriate to give effect to the transactions or
circumstances referred to therein. No other financial statements or schedules of
the Company or any of the Subsidiaries are required by the Act or the Rules and
Regulations to be included in the Registration Statement or the Prospectus.
Deloitte & Touche LLP (the "Accountants"), who have reported on such financial
statements and schedules, are independent accountants with respect to the
Company as required by the Act and the Rules and Regulations. The statements
included in the Registration Statement with respect to the Accountants pursuant
to Item 509 of Regulation S-K of the Rules and Regulations are true and correct
in all material respects.
(f) The Company and the Subsidiaries maintain a system of
internal accounting controls sufficient to provide reasonable assurance that (i)
transactions are executed in accordance with management's general or specific
authorization; (ii) transactions are recorded as necessary to permit preparation
of financial statements in conformity with generally accepted accounting
principles and to maintain accountability for assets; (iii) access to assets is
permitted only in accordance with management's general or specific
authorization; and (iv) the recorded
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accountability for assets is compared with existing assets at reasonable
intervals and appropriate action is taken with respect to any differences.
(g) Subsequent to the respective dates as of which information
is given in the Registration Statement and the Prospectus and prior to the
Closing Date, except as set forth in or contemplated by the Registration
Statement and the Prospectus, (i) there has not been and will not have been any
change in the capitalization of the Company and there has not occurred any
Material Adverse Effect, (ii) neither the Company nor any of the Subsidiaries
has incurred nor will any of them incur any material liabilities or obligations,
direct or contingent, nor has any of them entered into any material transactions
other than pursuant to this Agreement and the transactions referred to herein
and (iii) the Company has not and will not have paid or declared any dividends
or other distributions of any kind on any class of its capital stock.
(h) The Company is not an "investment company" or an entity
controlled by, an "investment company", as such terms are defined in the
Investment Company Act of 1940, as amended.
(i) Except as set forth in the Registration Statement and the
Prospectus, there are no actions, suits or proceedings pending or, to the best
of the Company's knowledge, threatened against or affecting the Company or any
of the Subsidiaries or any of their respective officers in their capacity as
such, before or by any Federal or state court, commission, regulatory body,
administrative agency or other governmental body, domestic or foreign, wherein
an unfavorable ruling, decision or finding might result in a Material Adverse
Effect.
(j) The Company and each of the Subsidiaries has, and at the
Closing Date will have, (i) all material governmental licenses, permits,
consents, orders, approvals and other authorizations necessary to carry on its
business as described in the Prospectus, (ii) complied in all material respects
with all laws, regulations and orders applicable to it or its business and (iii)
performed all its material obligations required to be performed by it, and is
not, and at the Closing Date will not be, in default under any indenture,
mortgage, deed of trust, voting trust agreement, loan agreement, bond,
debenture, note agreement, material lease, material contract or other material
agreement or material instrument (collectively, a "contract or other agreement")
to which it is a party or by which its property is bound or affected. To the
best knowledge of the Company and each of the Subsidiaries, no other party under
any contract or other agreement to which it is a party is in default in any
respect thereunder. Neither the Company nor any of the Subsidiaries is, nor at
the Closing Date will any of them be, in violation of any provision of its
certificate of incorporation or by-laws.
(k) No consent, approval, authorization or order of, or any
filing or declaration with, any court or governmental agency or body is required
in connection with the authorization, issuance, transfer, sale or delivery of
the Shares by the Company, in connection with the execution, delivery and
performance of this Agreement by the Company or in connection with the taking by
the Company of any action contemplated hereby, except such as have been obtained
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or made under the Act, the Rules and Regulations or the Delaware General
Corporation Law and such as may be required under state securities or Blue Sky
laws or the by-laws and rules of the National Association of Securities Dealers,
Inc. (the "NASD") in connection with the purchase and distribution by the
Underwriters of the Shares.
(l) The Company and each of the Material Subsidiaries have
full corporate power and authority to enter into this Agreement. This Agreement
has been duly authorized, executed and delivered by the Company and each of the
Material Subsidiaries, constitutes a valid and binding agreement of the Company,
each of the Material Subsidiaries and is enforceable against the Company and
each of the Material Subsidiaries in accordance with the terms hereof (subject
to bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and
similar laws of general applicability relating to or affecting creditors' rights
and to general equity principles). The execution and delivery of this Agreement
by the Company and each of the Material Subsidiaries and the performance of this
Agreement and the consummation of the transactions contemplated hereby and the
application of the net proceeds from the offering and sale of the Shares in the
manner set forth in the Prospectus under "Use of Proceeds" will not result in
the creation or imposition of any lien, charge or encumbrance upon any of the
assets of the Company or any of the Subsidiaries pursuant to the terms or
provisions of, or result in a breach or violation of any of the terms or
provisions of, or constitute a default under, or give any other party a right to
terminate any of its obligations under, or result in the acceleration of any
obligation under, the certificate of incorporation or by-laws of the Company or
any of the Subsidiaries, any contract or other agreement to which the Company or
any of the Subsidiaries is a party or by which the Company or any of the
Subsidiaries or any of their respective properties is bound or affected, or
violate or conflict with any judgment, ruling, decree, order, statute, rule or
regulation of any court or other governmental agency or body applicable to the
business or properties of the Company or any of the Subsidiaries.
(m) Except as to their interests in oil and gas leases, the
Company and each of the Subsidiaries have good and marketable title to all
properties and assets described in the Prospectus as owned by them, free and
clear of all liens, charges, encumbrances or restrictions, except such as are
described in the Prospectus or are not material to the business of the Company
or the Subsidiaries. Except as to their interests in oil and gas leases, the
Company and each of the Subsidiaries have valid, subsisting and enforceable
leases for the properties described in the Prospectus as leased by them, with
such exceptions as are not material and do not materially interfere with the use
made and proposed to be made of such properties by the Company and the
Subsidiaries. The Company and each of the Subsidiaries have good and defensible
title to their respective interests in oil and gas leases, free and clear of any
security interests, mortgages, pledges, liens, encumbrances, charges, defects or
restrictions of any kind or character, other than (i) those described in the
Prospectus; (ii) liens and encumbrances under operating agreements, unitization
and pooling arrangements and gas sales contracts that secure payment of amounts
not yet due and payable and which are of a nature and scope customary in
connection with similar oil and gas drilling and producing operations; and (iii)
those that do not have a Material Adverse Effect. The Company and each of the
Subsidiaries have conducted such title investigations and have acquired their
respective interests in oil and gas leases in such manner as is customary in the
oil and gas industry. The
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Company and each of the Subsidiaries have complied in all material respects with
the terms of the oil and gas leases in which they purport to own an interest,
and no claim of any sort has been asserted by anyone adverse to the rights of
the Company or any Subsidiary as lessee or sublessee under any of such leases or
questioning their respective rights to the continued possession of the leased
premises under any such lease, except with respect to any such default or claim
which would not have a Material Adverse Effect. The concessions, reservations,
licenses, permits and rights to hydrocarbons held by the Company and the
Subsidiaries are valid, subsisting and enforceable with such exceptions as are
described in the Prospectus or which would not have a Material Adverse Effect.
(n) Neither the Company nor any Subsidiary is a party to any
material contract, agreement or other document except for the contracts and
other documents (the "Material Contracts") filed as exhibits 10.1, 10.2, 10.3,
10.4, 10.5, 10.6, 10.7, 10.8, 10.9, 10.10, 10.11, 10.12, 10.13 and 10.14 to the
Registration Statement and the Material Contracts are the only contracts
required to be filed as an exhibit to the Registration Statement. All Material
Contracts to which the Company or any Subsidiary is a party have been duly
authorized, executed and delivered by the Company or such Subsidiary, constitute
valid and binding agreements of the Company or such Subsidiary and are
enforceable against the Company or such Subsidiary in accordance with the terms
thereof (subject to bankruptcy, insolvency, fraudulent transfer, reorganization,
moratorium and similar laws of general applicability relating to or affecting
creditors' rights and to general equity principles).
(o) No statement, representation, warranty or covenant made in
this Agreement by the Company or any of the Material Subsidiaries, or made in
any certificate or document required by this Agreement to be delivered to the
Representatives, was or will be, when made, inaccurate, untrue or incorrect in
any material respect.
(p) None of the Company or any of its directors or officers
has taken, directly or indirectly, any action intended, or which might
reasonably be expected, to cause or result, under the Act or otherwise, in, or
which has constituted, stabilization or manipulation of the price of any
security of the Company to facilitate the sale or resale of the Shares.
(q) Except as set forth in the Registration Statement and the
Prospectus, no holder of securities of the Company has any right to require the
registration of any securities of the Company because of the filing of the
Registration Statement.
(r) The Shares are duly authorized for listing, subject to
official notice of issuance, on the New York Stock Exchange.
(s) The Company and its Subsidiaries are in compliance with
all federal, state and local employment and labor laws, including, but not
limited to, laws relating to non-discrimination in hiring, promotion and pay of
employees; no labor dispute with the employees of the Company or any Subsidiary
exists or, to the knowledge of the Company, is imminent or
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threatened; and the Company is not aware of any existing, imminent or threatened
labor disturbance by the employees of any of its principal suppliers,
manufacturers or contractors in any case described above that could result in a
Material Adverse Effect.
(t) The Company and the Subsidiaries own, or possess adequate
rights to use the material patents, patent rights, licenses, inventions,
copyrights, know-how (including trade secrets and other unpatented and/or
unpatentable proprietary or confidential information, systems or procedures),
trademarks, services marks and trade names (collectively, "patent and
proprietary rights") presently employed by them or which are necessary in
connection with the conduct of the business now operated by them, and neither
the Company nor any of its Subsidiaries has received any written notice or
otherwise has actual knowledge of any infringement of or conflict with asserted
rights of others or any other claims with respect to any patent or proprietary
rights, or of any basis for rendering any patent and proprietary rights invalid
or inadequate to protect the interest of the Company or any of its Subsidiaries.
(u) Neither the Company nor any of the Subsidiaries nor, to
the Company's knowledge, any employee or agent of the Company or any Subsidiary,
has made any payment of funds of the Company or any Subsidiary or received or
retained any funds in violation of any law, rule or regulation or of a character
required to be disclosed in the Prospectus.
(v) There is no transaction or relationship between the
Company and any affiliate of the Company, including, without limitation, First
Reserve Fund VII, Limited Partnership, a Delaware limited partnership ("First
Reserve"), required to be described in the Registration Statement or the
Prospectus which is not described as required.
(w) The information upon which were based the estimates of
reserves in the reserve reports for the oil and gas properties of the Company
and the Subsidiaries prepared by DeGolyer and MacNaughton and Netherland, Sewell
& Associates, Inc. (collectively, the "Engineers"), to the extent provided by
the Company or any Subsidiary, was at the time of delivery thereof complete and
accurate in all material respects. Each Engineer is a firm of independent
petroleum engineers. Information in the Prospectus regarding estimates of
reserves, future net cash flows and present values of estimated net cash flows
comply in all material respects with the applicable requirements of Rule 4-10 of
Regulation S-X and Industry Guide 2 under the Act.
(x) The Company and the Subsidiaries carry, or are covered by,
insurance in such amounts and covering such risks as is adequate for the conduct
of their businesses and the value of their properties and as is customary for
companies engaged in similar businesses in similar industries.
(y) The Company and its Subsidiaries (i) are in compliance
with any and all applicable foreign, federal, state and local laws and
regulations relating to the protection of human health and safety, the
environment or imposing liability or standards of conduct concerning any
Hazardous Material (as hereinafter defined) ("Environmental Laws"), (ii) have
received all
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permits, licenses or other approvals required of them under applicable
Environmental Laws to conduct their respective businesses and (iii) are in
compliance with all terms and conditions of any such permit, license or
approval, except where such noncompliance with Environmental Laws, failure to
receive required permits, licenses or other approvals or failure to comply with
the terms and conditions of such permits, licenses or approvals would not,
individually or in the aggregate, result in a Material Adverse Effect. The term
"Hazardous Material" means (i) any "hazardous substance" as defined by the
Comprehensive Environmental Response, Compensation and Liability Act of 1980, as
amended, (ii) any "hazardous waste" as defined by the Resource Conservation and
Recovery Act, as amended, (iii) any petroleum or petroleum product, (iv) any
polychlorinated biphenyl and (v) any pollutant or contaminant or hazardous,
dangerous, or toxic chemical, material, waste or substance regulated under or
within the meaning of any other Environmental Law.
(z) Except as set forth in the Registration Statement and the
Prospectus there are no costs and liabilities associated with or arising in
connection with Environmental Laws as currently in effect (including, without
limitation, costs of compliance therewith) which would, singly or in the
aggregate, result in a Material Adverse Effect.
(aa) The Company has filed all material federal, state and
foreign income and franchise tax returns required to be filed by it and has paid
all taxes shown as due thereon, other than taxes which are being contested in
good faith and for which adequate reserves have been established in accordance
with generally accepted accounting principles ("GAAP"); and the Company has no
knowledge of any tax deficiency which has been or might be asserted or
threatened against the Company. There are no tax returns of the Company or any
of its Subsidiaries that are currently being audited by state, local or federal
taxing authorities or agencies (and with respect to which the Company or any
Subsidiary has received notice), where the findings of such audit, if adversely
determined, would result in a Material Adverse Effect.
(bb) With respect to each employee benefit plan, program and
arrangement (including, without limitation, any "employee benefit plan" as
defined in Section 3(3) of the Employee Retirement Income Security Act of 1974,
as amended ("ERISA")) maintained or contributed to by the Company, or with
respect to which the Company could incur any liability under ERISA
(collectively, the "Benefit Plans"), no event has occurred and, to the best
knowledge of the Company, there exists no condition or set of circumstances, in
connection with which the Company could be subject to any liability under the
terms of such Benefit Plan, applicable law (including, without limitation, ERISA
and the Internal Revenue Code of 1986, as amended) or any applicable agreement
that could result in a Material Adverse Effect.
4. AGREEMENTS OF THE COMPANY. The Company agrees with the several
Underwriters as follows:
(a) The Company will not, either prior to the Effective Date
or thereafter during such period as the Prospectus is required by law to be
delivered in connection with sales of the Shares by an Underwriter or dealer,
file any amendment or supplement to the Registration
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Statement or the Prospectus, unless a copy thereof shall first have been
submitted to the Representatives within a reasonable period of time prior to the
filing thereof and the Representatives shall not have objected thereto in good
faith. Neither CSFBC's consent to, nor the Underwriters' delivery of, any such
amendment or supplement shall constitute a waiver of any of the conditions set
forth in Section 5 hereof.
(b) The Company will use every reasonable effort to cause the
Registration Statement to become effective and will notify the Representatives
promptly, and will confirm such notice in writing, (i) when the Registration
Statement has become effective and when any post-effective amendment thereto
becomes effective, (ii) of any request by the Commission for amendments or
supplements to the Registration Statement or the Prospectus or for additional
information, (iii) of the issuance by the Commission of any stop order
suspending the effectiveness of the Registration Statement or the initiation of
any proceedings for that purpose or the threat thereof, (iv) of the happening of
any event during the period mentioned in the second sentence of Section 4(e)
that in the judgment of the Company makes any statement made in the Registration
Statement or the Prospectus untrue or that requires the making of any changes in
the Registration Statement or the Prospectus in order to make the statements
therein, in the light of the circumstances in which they are made, not
misleading and (v) of receipt by the Company or any representative or attorney
of the Company of any other substantive communication from the Commission
relating to the Company, the Registration Statement, any preliminary prospectus
or the Prospectus. If at any time the Commission shall issue any order
suspending the effectiveness of the Registration Statement, the Company will
make every reasonable effort to obtain the withdrawal of such order at the
earliest possible moment. The Company will use its best efforts to comply with
the provisions of and make all requisite filings with the Commission pursuant to
Rule 430A and to notify the Representatives promptly of all such filings.
(c) The Company will furnish to the Representatives, without
charge, three signed copies of the Registration Statement and of any
post-effective amendment thereto, including financial statements and schedules,
and all exhibits thereto, and will furnish to the Representatives, without
charge, for transmittal to each of the other Underwriters, a copy of the
Registration Statement and any post-effective amendment thereto, including
financial statements and schedules but without exhibits.
(d) The Company will comply with all the provisions of any
undertakings contained in the Registration Statement.
(e) On the Effective Date, and thereafter from time to time,
the Company will deliver to each of the Underwriters, without charge, as many
copies of the Prospectus or any amendment or supplement thereto as the
Representatives may reasonably request. The Company consents to the use of the
Prospectus or any amendment or supplement thereto by the several Underwriters
and by all dealers to whom the Shares may be sold, both in connection with the
offering or sale of the Shares and for any period of time thereafter during
which the Prospectus is required by law to be delivered in connection therewith.
If during such period of time any event
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shall occur which in the judgment of the Company or counsel to the Underwriters
should be set forth in the Prospectus in order to make any statement therein, in
the light of the circumstances under which it was made, not misleading, or if it
is necessary to supplement or amend the Prospectus to comply with law, the
Company will forthwith prepare and duly file with the Commission an appropriate
supplement or amendment thereto and will deliver to each of the Underwriters,
without charge, such number of copies thereof as the Representatives may
reasonably request.
(f) Prior to any public offering of the Shares by the
Underwriters, the Company will cooperate with the Representatives and counsel to
the Underwriters in connection with the registration or qualification of the
Shares for offer and sale under the securities or Blue Sky laws of such
jurisdictions as the Representatives may request; provided, that in no event
shall the Company be obligated to qualify to do business in any jurisdiction
where it is not now so qualified or to take any action which would subject it to
general service of process in any jurisdiction where it is not now so subject.
(g) During the period of five years commencing on the
Effective Date, the Company will furnish to the Representatives and each other
Underwriter who may so request copies of such financial statements and other
periodic and special reports as the Company may from time to time distribute
generally to the holders of any class of its capital stock and will furnish to
the Representatives and each other Underwriter who may so request a copy of each
annual or other report it shall be required to file with the Commission.
(h) The Company will make generally available to holders of
its securities as soon as may be practicable but in no event later than the last
day of the fifteenth full calendar month following the calendar quarter in which
the Effective Date falls, an earnings statement (which need not be audited but
shall be in reasonable detail) for a period of 12 months ended commencing after
the Effective Date and satisfying the provisions of Section 11(a) of the Act
(including Rule 158 of the Rules and Regulations).
(i) Whether or not the transactions contemplated by this
Agreement are consummated or this Agreement is terminated, the Company will pay,
or reimburse if paid by the Representatives, all costs and expenses incident to
the performance of the obligations of the Company under this Agreement,
including, but not limited to, costs and expenses of or relating to (i) the
preparation, printing and filing of the Registration Statement and exhibits to
it, each preliminary prospectus, the Prospectus and any amendment or supplement
to the Registration Statement or the Prospectus, (ii) the preparation and
delivery of certificates representing the Shares, (iii) the word processing and
reproduction of this Agreement, (iv) furnishing (including costs of shipping,
mailing and courier) such copies of the Registration Statement, the Prospectus
and any preliminary prospectus, and all amendments and supplements thereto, as
may be requested for use in connection with the offering and sale of the Shares
by the Underwriters or by dealers to whom Shares may be sold, (v) the listing of
the Shares on the New York Stock Exchange, (vi) any filings required to be made
by the Underwriters with the NASD, and the fees, disbursements and other charges
of counsel for the Underwriters in connection therewith not to exceed $10,850,
(vii) the
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registration or qualification of the Shares for offer and sale under the
securities or Blue Sky laws of such jurisdictions designated pursuant to Section
4(f), including the fees, disbursements and other charges of counsel to the
Underwriters in connection therewith not to exceed $10,000, and the preparation
and printing of preliminary, supplemental and final Blue Sky memoranda, (viii)
counsel to the Company, (ix) the transfer agent for the Shares, (x) the
Accountants and (xi) the Engineers.
(j) If this Agreement shall be terminated by the Company
pursuant to any of the provisions hereof (otherwise than pursuant to Section 8
or following the occurrence of any of the events specified in Sections 7(c), (d)
or (e)) or if for any reason the Company shall be unable to perform its
obligations hereunder, the Company will reimburse the several Underwriters for
all out-of-pocket expenses (including the fees, disbursements and other charges
of counsel to the Underwriters) reasonably incurred by them in connection
herewith.
(k) The Company will not at any time, directly or indirectly,
take any action intended, or which might reasonably be expected, to cause or
result in, or which will constitute, stabilization of the price of the shares of
Common Stock to facilitate the sale or resale of any of the Shares.
(l) The Company will apply the net proceeds from the offering
and sale of the Shares to be sold by the Company in the manner set forth in the
Prospectus under "Use of Proceeds" and shall file such reports with the
Commission with respect to the sale of the Shares and the application of the
proceeds therefrom as may be required in accordance with Rule 463 under the Act.
(m) During the period of 180 days commencing at the Closing
Date, the Company will not, without the prior written consent of CSFBC, directly
or indirectly, sell, offer to sell, grant any option for the sale of, pledge or
otherwise dispose of, or file with the Commission a registration statement under
the Act relating to, any additional shares of Common Stock or securities
convertible into or exchangeable or exercisable for shares of Common Stock, or
publicly disclose the intention to make such offer, sale, pledge, disposition or
filing, other than (i) to the Underwriters pursuant to this Agreement (ii)
pursuant to a registration statement filed with the Commission on Form S-4 in
connection with a transaction with a public company and (iii) pursuant to
employee or director benefit plans, provided, that the Company will not grant
options to purchase shares of Common Stock pursuant to such employee or director
benefit plans at a price less than the initial public offering price.
(n) The Company will cause each of its executive officers and
directors and First Reserve and each other beneficial owner of more than 5% of
the outstanding shares of Common Stock, if any, to enter into agreements with
the Representatives in the form set forth in Exhibit A to the effect that they
will not, for a period of 180 days after the commencement of the public offering
of the Shares, without the prior written consent of CSFBC, sell, contract to
sell or otherwise dispose of any shares of Common Stock or rights to acquire
such shares (other than
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pursuant to the Company's employee stock option plans or in connection with
other employee incentive compensation or director compensation arrangements of
the Company).
(o) For so long as the Company shall be an independent
publicly traded company, during the period of two years commencing on the
Effective Date, the Company will use every reasonable effort to cause the Shares
to remain listed on the New York Stock Exchange.
5. CONDITIONS OF THE OBLIGATIONS OF THE UNDERWRITERS. The
obligations of each Underwriter hereunder are subject to the following
conditions:
(a) Notification that the Registration Statement has become
effective shall be received by the Representatives not later than 10:00 p.m.,
New York City time, on the date of this Agreement or at such later date and time
as shall be consented to in writing by the Representatives, and all filings
required by Rule 424 of the Rules and Regulations and Rule 430A shall have been
made.
(b) (i) No stop order suspending the effectiveness of the
Registration Statement shall have been issued, and no proceedings for that
purpose shall be pending or threatened by the Commission, (ii) no order
suspending the effectiveness of the Registration Statement or the qualification
or registration of the Shares under the securities or Blue Sky laws of any
jurisdiction shall be in effect, and no proceeding for such purpose shall be
pending before or threatened or contemplated by the Commission or the
authorities of any such jurisdiction, (iii) any request for additional
information on the part of the staff of the Commission or any such authorities
shall have been complied with to the satisfaction of the staff of the Commission
or such authorities and (iv) after the date hereof, no amendment or supplement
to the Registration Statement or the Prospectus shall have been filed unless a
copy thereof was first submitted to the Representatives and the Representatives
did not object thereto in good faith, and the Representatives shall have
received certificates, dated the Closing Date and the Option Closing Date and
signed by the Chief Executive Officer or the Chairman of the Board of Directors
of the Company and the Chief Financial Officer of the Company (who may, as to
proceedings threatened, rely upon the best of their information and belief), to
the effect of clauses (i), (ii) and (iii).
(c) Since the respective dates as of which information is
given in the Registration Statement and the Prospectus, (i) there shall not have
occurred and no development shall have occurred which could reasonably be
expected to result in a Material Adverse Effect, whether or not arising from
transactions in the ordinary course of business, in each case other than as set
forth in or contemplated by the Registration Statement and the Prospectus and
(ii) neither the Company nor any of the Subsidiaries shall have sustained any
material loss or interference with its business or properties from fire,
explosion, flood or other casualty, whether or not covered by insurance, or from
any labor dispute or any court or legislative or other governmental action,
order or decree, which is not set forth in the Registration Statement and the
Prospectus, if in the judgment of the Representatives any such development makes
it impracticable or inadvisable to consummate the sale and delivery of the
Shares by the Underwriters at the initial public offering price.
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(d) Since the respective dates as of which information is
given in the Registration Statement and the Prospectus, there shall have been no
litigation or other proceeding instituted against the Company or any of the
Subsidiaries or any of their respective officers or directors in their
capacities as such, before or by any Federal, state or local court, commission,
regulatory body, administrative agency or other governmental body, domestic or
foreign, in which litigation or proceeding an unfavorable ruling, decision or
finding would have a Material Adverse Effect.
(e) Each of the representations and warranties of the Company
and the Material Subsidiaries contained herein shall be true and correct in all
material respects at the Closing Date and, with respect to the Option Shares, at
the Option Closing Date, as if made at the Closing Date and, with respect to the
Option Shares, at the Option Closing Date, and all covenants and agreements
herein contained to be performed on the part of the Company and all conditions
herein contained to be fulfilled or complied with by the Company at or prior to
the Closing Date and, with respect to the Option Shares, at or prior to the
Option Closing Date, shall have been duly performed, fulfilled or complied with.
(f) The Representatives shall have received an opinion, dated
the Closing Date and, with respect to the Option Shares, the Option Closing
Date, from Weil, Gotshal & Manges LLP, counsel to the Company, to the effect set
forth in Exhibit B.
(g) The Representatives shall have received an opinion, dated
the Closing Date and, with respect to the Option Shares, the Option Closing
Date, from Baker & Botts, L.L.P., counsel to the Underwriters, with respect to
the Registration Statement, the Prospectus and this Agreement, which opinion
shall be satisfactory in all respects to the Representatives.
(h) On the date of the Prospectus, the Accountants shall have
furnished to the Representatives a letter, dated the date of its delivery,
addressed to the Representatives and in form and substance satisfactory to the
Representatives, confirming that they are independent accountants with respect
to the Company as required by the Act and the Rules and Regulations and stating
in effect that:
(i) In their opinion the financial statements and
schedules examined by them and included or incorporated by reference in
the Registration Statement comply in form in all material respects with
the applicable accounting requirements of the Act and the Rules and
Regulations;
(ii) They have made a review of the unaudited financial
statements included in the Registration Statement in accordance with
standards established by the American Institute of Certified Public
Accountants, as indicated in their reports attached to such letter;
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(iii) On the basis of the review referred to in clause
(ii) above, a reading of the latest available interim financial statements
of the Company, inquiries of officials of the Company who have
responsibility for financial and accounting matters and other specified
procedures, nothing came to their attention that caused them to believe
that:
(A) The unaudited financial statements included in
the Registration Statement do not comply in form in all material
respects with the applicable accounting requirements of the Act and
the Rules and Regulations or are not in conformity with GAAP applied
on a basis substantially consistent with that of the audited
financial statements in the Registration Statement;
(B) The pro forma financial statements included in
the Registration Statement and the Prospectus do not comply in form
in all material respects with the applicable accounting requirements
of Rule 11-02 of Regulation SX of the Rules and Regulations or that
the pro forma adjustments have not been properly applied to the
historical amounts in the compilation of such statements;
(C) At the date of the latest available balance
sheet read by such accountants, or at a subsequent specified date
not more than five days prior to the date of this Agreement, there
was any change in the capital stock or any increase in total current
liabilities or total liabilities or any decrease in total current
assets or total assets of the Company, as compared with amounts
shown on the latest balance sheet included in the Prospectus; or
(D) For the period from the closing date of the
latest income statement included in the Prospectus to the closing
date of the latest available income statement read by such
accountants, or to the subsequent specified date referred to in
clause (C), there were any decreases, as compared with the
corresponding periods of the previous year, in total revenues, total
operating expenses or net income;
except in all cases set forth above for changes, increases or decreases
which the Prospectus discloses have occurred or may occur or which are
described in such letter; and
(iv) They have compared specified dollar amounts (or
percentages derived from such dollar amounts) and other financial
information contained in the Registration Statement (in each case to the
extent that such dollar amounts, percentages and other financial
information are derived from the general accounting records of the Company
and its subsidiaries subject to the internal controls of the Company's
accounting system or are derived directly from such records by analysis or
computation) with the results obtained from inquiries, a reading of such
general accounting records and other procedures specified in such letter
and have found such dollar amounts, percentages and
HOU03A:432629.7
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<PAGE>
other financial information to be in agreement with such results, except
as otherwise specified in such letter.
At the Closing Date and, as to the Option Shares, the Option Closing Date, the
Accountants shall have furnished to the Representatives a letter, dated the date
of its delivery, which shall confirm, on the basis of a review in accordance
with the procedures set forth in the letter from the Accountants, that nothing
has come to their attention during the period from the date of the letter
referred to above to a date (specified in the letter) not more than two business
days prior to the Closing Date and the Option Closing Date which would require
any change in their letter dated the date of the Prospectus, if it were required
to be dated and delivered at the Closing Date and the Option Closing Date.
(i) On the date of the Prospectus and at the Closing Date and,
as to the Option Shares, the Option Closing Date, each of the Engineers shall
have furnished to the Representatives a letter, dated the date of its delivery,
addressed to the Representatives and in form and substance satisfactory to the
Representatives, confirming that they are independent petroleum engineers with
respect to the Company and with respect to certain of the oil and gas
information contained in the Registration Statement.
(j) At the Closing Date and, as to the Option Shares, the
Option Closing Dates, there shall be furnished to the Representatives an
accurate certificate, dated the date of its delivery, signed by each of the
Chief Executive Officer and the Chief Financial Officer of the Company, in form
and substance satisfactory to the Representatives, to the effect that:
(i) Each signer of such certificate has carefully
examined the Registration Statement and the Prospectus and (A) as of the
date of such certificate, such documents are true and correct in all
material respects and do not omit to state a material fact required to be
stated therein or necessary in order to make the statements therein not
untrue or misleading and (B) since the Effective Date, no event has
occurred as a result of which it is necessary to amend or supplement the
Prospectus in order to make the statements therein not untrue or
misleading in any material respect;
(ii) To the best of their knowledge after reasonable
investigation, each of the representations and warranties of the Company
contained in this Agreement were, when originally made, and are, at the
time such certificate is delivered, true and correct in all material
respects;
(iii) Each of the covenants required herein to be
performed by the Company on or prior to the delivery of such certificate
has been duly, timely and fully performed and each condition herein
required to be complied with by the Company on or prior to the delivery of
such certificate has been duly, timely and fully complied with; and
(iv) Since the respective dates as of which information
is given in the Registration Statement and the Prospectus, (A) there has
not been, and no development
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<PAGE>
has occurred which could reasonably be expected to result in, a Material
Adverse Effect, whether or not arising from transactions in the ordinary
course of business, in each case other than as set forth in or
contemplated by the Registration Statement and the Prospectus and (B)
neither the Company nor any of its Subsidiaries has sustained any material
loss or interference with its business or properties from fire, explosion,
flood or other casualty, whether or not covered by insurance, or from any
labor dispute or any court or legislative or other governmental action,
order or decree, which is not set forth in the Registration Statement and
the Prospectus.
(k) On or prior to the Closing Date, the Representatives shall
have received the executed agreements referred to in Section 4(n).
(l) The Shares shall be qualified for sale in such states as
the Representatives may reasonably request, and each such qualification shall be
in effect and not subject to any stop order or other proceeding on the Closing
Date and the Option Closing Date.
(m) Prior to the Closing Date, the Shares shall have been duly
authorized for listing by the New York Stock Exchange upon official notice of
issuance.
(n) The National Association of Securities Dealers, Inc. shall have
approved the underwriting terms and arrangements and such approval shall not
have been withdrawn or limited.
(o) The Company and each of the Material Subsidiaries shall
have furnished to the Representatives such certificates, in addition to those
specifically mentioned herein, as the Representatives may have reasonably
requested as to the accuracy and completeness at the Closing Date and the Option
Closing Date of any statement in the Registration Statement or the Prospectus,
as to the accuracy at the Closing Date and the Option Closing Date of the
representations and warranties of the Company and the Material Subsidiaries
herein, as to the performance by the Company and the Material Subsidiaries of
their respective obligations hereunder or as to the fulfillment of the
conditions concurrent and precedent to the obligations hereunder of the
Representatives.
6. INDEMNIFICATION.
(a) The Company and each of the Material Subsidiaries, jointly
and severally, will indemnify and hold harmless each Underwriter, the directors,
officers, employees and agents of each Underwriter and each person, if any, who
controls each Underwriter within the meaning of Section 15 of the Act or Section
20 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), from
and against any and all losses, claims, liabilities, expenses and damages
(including, but not limited to, any and all investigative, legal and other
expenses reasonably incurred as such expenses are incurred in connection with,
and any and all amounts paid in settlement of, any action, suit or proceeding
between any of the indemnified parties and any indemnifying parties or
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<PAGE>
between any indemnified party and any third party, or otherwise, or any claim
asserted), as and when incurred, to which any Underwriter, or any of such
persons, may become subject under the Act, the Exchange Act or other Federal or
state statutory law or regulation, at common law or otherwise, insofar as such
losses, claims, liabilities, expenses or damages arise out of or are based on
(i) any untrue statement or alleged untrue statement of a material fact
contained in any preliminary prospectus, the Registration Statement or the
Prospectus or any amendment or supplement to the Registration Statement or the
Prospectus, (ii) the omission or alleged omission to state in such document a
material fact required to be stated in it or necessary to make the statements in
it not misleading or (iii) any act or failure to act or any alleged act or
failure to act by any Underwriter in connection with, or relating in any manner
to, the Shares or the offering contemplated hereby, and which is included as a
part of or referred to in any loss, claim, liability, expense or damage arising
out of or based upon matters covered by clause (i) or (ii) above (provided that
the Company shall not be liable under this clause (iii) to the extent it is
finally judicially determined by a court of competent jurisdiction that such
loss, claim, liability, expense or damage resulted directly from any such acts
or failures to act undertaken or omitted to be taken by such Underwriter through
its gross negligence or wilful misconduct); PROVIDED, HOWEVER, that the Company
will not be liable to the extent that such loss, claim, liability, expense or
damage (A) arises from the sale of the Shares in the public offering to any
person by an Underwriter and is based on an untrue statement or omission or
alleged untrue statement or omission made in reliance on and in conformity with
information relating to any Underwriter furnished in writing to the Company by
the Representatives on behalf of any Underwriter expressly for inclusion in the
Registration Statement, any preliminary prospectus or the Prospectus or (B)
results solely from an untrue statement of a material fact contained in, or the
omission of a material fact from, such preliminary prospectus, which untrue
statement or omission was completely corrected in the Prospectus (as then
amended or supplemented) if the Company shall sustain the burden of proving that
the Underwriters sold Shares to the person alleging such loss, claim, liability,
expense or damage without sending or giving, at or prior to the written
confirmation of such sale, a copy of the Prospectus (as then amended or
supplemented) if the Company has previously furnished copies thereof to the
Underwriters within a reasonable amount of time prior to such sale or such
confirmation, and the Underwriters failed to deliver the corrected Prospectus,
if required by law to have so delivered it and if delivered would have been a
complete defense against the person asserting such loss, claim, liability,
expense or damage. This indemnity agreement will be in addition to any liability
that the Company might otherwise have.
(b) Each Underwriter will, severally and not jointly,
indemnify and hold harmless the Company, each of the Subsidiaries, First
Reserve, each other person, if any, who controls the Company within the meaning
of Section 15 of the Act or Section 20 of the Exchange Act, each director of the
Company and each officer of the Company who signs the Registration Statement to
the same extent as the foregoing indemnity from the Company and the Material
Subsidiaries to each Underwriter, but only insofar as losses, claims,
liabilities, expenses or damages arise out of or are based on any untrue
statement or omission or alleged untrue statement or omission made in reliance
on and in conformity with information relating to any Underwriter furnished in
writing to the Company by CSFBC on behalf of such Underwriter expressly for use
in the Registration Statement, any preliminary prospectus or the Prospectus;
PROVIDED, HOWEVER, that in no
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<PAGE>
case shall any Underwriter be liable or responsible for any amount in excess of
the underwriting discounts and commissions received by such Underwriter. This
indemnity will be in addition to any liability that each Underwriter might
otherwise have.
(c) Any party that proposes to assert the right to be
indemnified under this Section 6 will, promptly after receipt of notice of
commencement of any action against such party in respect of which a claim is to
be made against an indemnifying party or parties under this Section 6, notify
each such indemnifying party of the commencement of such action, enclosing a
copy of all papers served, but the omission so to notify such indemnifying party
will not relieve it from any liability that it may have to any indemnified party
under the foregoing provisions of this Section 6 unless, and only to the extent
that, such omission results in the forfeiture of substantive rights or defenses
by the indemnifying party. If any such action is brought against any indemnified
party and it notifies the indemnifying party of its commencement, the
indemnifying party will be entitled to participate in and, to the extent that it
elects by delivering written notice to the indemnified party promptly after
receiving notice of the commencement of the action from the indemnified party,
jointly with any other indemnifying party similarly notified, to assume the
defense of the action, with counsel reasonably satisfactory to the indemnified
party, and after notice from the indemnifying party to the indemnified party of
its election to assume the defense, the indemnifying party will not be liable to
the indemnified party for any legal or other expenses except as provided below
and except for the reasonable costs of investigation subsequently incurred by
the indemnified party in connection with the defense. The indemnified party will
have the right to employ its own counsel in any such action, but the fees,
expenses and other charges of such counsel will be at the expense of such
indemnified party unless (i) the employment of counsel by the indemnified party
has been authorized in writing by the indemnifying party, (ii) the indemnified
party has reasonably concluded (based on advice of counsel) that there may be
legal defenses available to it that are different from or in addition to those
available to the indemnifying party, (iii) a conflict or potential conflict
exists (based on advice of counsel to the indemnified party) between the
indemnified party and the indemnifying party (in which case the indemnifying
party will not have the right to direct the defense of such action on behalf of
the indemnified party) or (iv) the indemnifying party has not in fact employed
counsel to assume the defense of such action within a reasonable time after
receiving notice of the commencement of the action, in each of which cases the
reasonable fees, disbursements and other charges of counsel will be at the
expense of the indemnifying party or parties. It is understood that the
indemnifying party or parties shall not, in connection with any proceeding or
related proceedings in the same jurisdiction, be liable for the reasonable fees,
disbursements and other charges of more than one separate firm admitted to
practice in such jurisdiction at any one time (in addition to any local counsel)
for all such indemnified party or parties. All such fees, disbursements and
other charges will be reimbursed by the indemnifying party promptly as they are
incurred. An indemnifying party will not be liable for any settlement of any
action or claim effected without its written consent (which consent will not be
unreasonably withheld). No indemnifying party shall, without the prior written
consent of each indemnified party, settle or compromise or consent to the entry
of any judgment in any pending or threatened claim, action or proceeding
relating to the matters contemplated by this Section 6 (whether or not any
indemnified party is a party thereto), unless such settlement, compromise or
consent includes an
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unconditional release of each indemnified party from all liability arising or
that may arise out of such claim, action or proceeding.
(d) In order to provide for just and equitable contribution in
circumstances in which the indemnification provided for in the foregoing
paragraphs of this Section 6 is applicable in accordance with its terms but for
any reason is held to be unavailable from the Company, any of the Material
Subsidiaries, or the Underwriters, the Company and the Material Subsidiaries, on
the one hand, and the Underwriters or the other will contribute to the total
losses, claims, liabilities, expenses and damages (including any investigative,
legal and other expenses reasonably incurred in connection with, and any amount
paid in settlement of, any action, suit or proceeding or any claim asserted, but
after deducting any contribution received by the Company or any Material
Subsidiary from persons other than the Underwriters, such as persons who control
the Company within the meaning of the Act, officers of the Company who signed
the Registration Statement and directors of the Company, who also may be liable
for contribution) to which the Company, any one or more of the Material
Subsidiaries and any one or more of the Underwriters may be subject in such
proportion as shall be appropriate to reflect the relative benefits received by
the Company, the Material Subsidiaries, on the one hand, and the Underwriters on
the other. The relative benefits received by the Company and the Material
Subsidiaries, on the one hand, and the Underwriters, on the other, shall be
deemed to be in the same proportion as the total net proceeds from the offering
(before deducting expenses) received by the Company bear to the total
underwriting discounts and commissions received by the Underwriters, in each
case as set forth in the table on the cover page of the Prospectus. If, but only
if, the allocation provided by the foregoing sentence is not permitted by
applicable law, the allocation of contribution shall be made in such proportion
as is appropriate to reflect not only the relative benefits referred to in the
foregoing sentence but also the relative fault of the Company and the Material
Subsidiaries, on the one hand, and the Underwriters, on the other, with respect
to the statements or omissions which resulted in such loss, claim, liability,
expense or damage, or action in respect thereof, as well as any other relevant
equitable considerations with respect to such offering. Such relative fault
shall be determined by reference to whether the untrue or alleged untrue
statement of a material fact or omission or alleged omission to state a material
fact relates to information supplied by the Company or any of the Material
Subsidiaries, on the one hand, or the Representatives on behalf of the
Underwriters, on the other, the intent of the parties and their relative
knowledge, access to information and opportunity to correct or prevent such
statement or omission. The Company, the Material Subsidiaries and the
Underwriters agree that it would not be just and equitable if contributions
pursuant to this Section 6(d) were to be determined by pro rata allocation (even
if the Underwriters were treated as one entity for such purpose) or by any other
method of allocation which does not take into account the equitable
considerations referred to herein. The amount paid or payable by an indemnified
party as a result of the loss, claim, liability, expense or damage, or action in
respect thereof, referred to above in this Section 6(d) shall be deemed to
include, for purposes of this Section 6(d), any legal or other expenses
reasonably incurred by such indemnified party in connection with investigating
or defending any such action or claim. Notwithstanding the provisions of this
Section 6(d), no Underwriter shall be required to contribute any amount in
excess of the underwriting discounts and commissions received by it, and no
person found guilty of fraudulent misrepresentation (within the meaning of
Section 11(f) of the Act) will
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be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. The Underwriters' obligations to contribute as
provided in this Section 6(d) are several in proportion to their respective
underwriting obligations and not joint. For purposes of this Section 6(d), any
person who controls a party to this Agreement within the meaning of the Act will
have the same rights to contribution as that party, and each officer of the
Company who signed the Registration Statement and each director of the Company
will have the same rights to contribution as the Company, subject in each case
to the provisions hereof. Any party entitled to contribution, promptly after
receipt of notice of commencement of any action against such party in respect of
which a claim for contribution may be made under this Section 6(d), will notify
any such party or parties from whom contribution may be sought, but the omission
so to notify will not relieve the party or parties from whom contribution may be
sought from any other obligation it or they may have under this Section 6(d).
(e) The indemnity and contribution agreements contained in
this Section 6 and the representations and warranties of the Company and the
Subsidiaries contained in this Agreement shall remain operative and in full
force and effect regardless of (i) any investigation made by or on behalf of the
Underwriters, (ii) acceptance of any of the Shares and payment therefor or (iii)
any termination of this Agreement.
7. TERMINATION. The obligations of the several Underwriters under
this Agreement may be terminated at any time on or prior to the Closing Date
(or, with respect to the Option Shares, on or prior to the Option Closing Date),
by notice to the Company from the Representatives, without liability on the part
of any Underwriter to the Company or any of the Material Subsidiaries, if, prior
to delivery and payment for the Shares (or the Option Shares, as the case may
be), in the sole judgment of the Representatives, (a) since the respective dates
as of which information is given in the Registration Statement there has been,
and no development has occurred which could reasonably be expected to result in,
any Material Adverse Effect, (b) trading in any of the equity securities of the
Company shall have been suspended by the Commission, the NASD, by an exchange
that lists the Shares, (c) trading in securities generally on the New York Stock
Exchange or the Nasdaq Stock Market shall have been suspended or limited or
minimum or maximum prices shall have been generally established on such
exchange, or additional material governmental restrictions, not in force on the
date of this Agreement, shall have been imposed upon trading in securities
generally by such exchange or by order of the Commission or any court or other
governmental authority, (d) a general banking moratorium shall have been
declared by either Federal or New York State authorities or (e) any outbreak or
escalation of major hostilities in which the United States is involved, any
declaration of war by Congress or any other substantial national or
international calamity or emergency if, in the judgment of a majority in
interest of the Underwriters including the Representatives, the effect of any
such outbreak, declaration, calamity or emergency makes it impracticable or
inadvisable to proceed with completion of the public offering or the sale of and
payment for the Shares.
8. SUBSTITUTION OF UNDERWRITERS. If any one or more of the
Underwriters shall default in their obligations to purchase Shares hereunder on
either the Closing Date or the Option
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Closing Date, and the aggregate number of Shares which such defaulting
Underwriter or Underwriters agreed but failed or refused to purchase on such
date is not more than one-tenth of the aggregate number of Shares that the
Underwriters are obligated to purchase on such date, the other Underwriters
shall be obligated, severally, to purchase the Shares which such defaulting
Underwriter or Underwriters agreed but failed or refused to purchase, in the
proportions which the number of Shares which they have respectively agreed to
purchase on such date bears to the aggregate number of Shares which all such
non-defaulting Underwriters have so agreed to purchase, or in such other
proportions as CSFBC may specify; provided that in no event shall the maximum
number of Shares which any Underwriter has become obligated to purchase on such
date be increased pursuant to this Section 8 by more than one-ninth of the
number of Shares agreed to be purchased by such Underwriter on such date without
the prior written consent of such Underwriter. If any Underwriter or
Underwriters shall so default and the aggregate number of Shares with respect to
which such default or defaults occur exceeds one-tenth of the aggregate number
of Shares that the Underwriters are obligated to purchase on such date and
arrangements satisfactory to CSFBC and the Company for the purchase of such
Shares are not made within 48 hours after such default, this Agreement will
terminate without liability on the part of any non-defaulting Underwriter or the
Company for the purchase or sale of any Shares under this Agreement (provided
that if such default occurs with respect to the Option Shares after the Closing
Date, this Agreement will not terminate as to the Firm Shares). In any such
case, either the Representatives or the Company shall have the right to postpone
the Closing Date or the Option Closing Date, as applicable, but in no event for
longer than seven days, in order that the required changes, if any, in the
Registration Statement and in the Prospectus or in any other documents or
arrangements may be effected. As used in this Agreement, the term "Underwriters"
includes any person substituted for an Underwriter under this Section. Any
action taken pursuant to this Section 8 shall not relieve any defaulting
Underwriter from liability in respect of any default of such Underwriter under
this Agreement.
9. MISCELLANEOUS. Notice given pursuant to any of the provisions of
this Agreement shall be in writing and, unless otherwise specified, shall be
mailed or delivered if to the Company, at the office of the Company, 1100
Louisiana, 15th Floor, P.O. Box 2511, Houston, Texas 77252, Attention: President
and Chief Executive Officer, with a copy to Weil, Gotshal & Manges LLP, 700
Louisiana, Suite 1600, Houston, Texas 77002, Attention: James L. Rice III, Esq.,
or, if to the Underwriters, to the Representatives at the offices of Credit
Suisse First Boston Corporation, Eleven Madison Avenue, New York, New York,
10010-3629, Attention: Investment Banking Department -- Transactions Advisory
Group. Any such notice shall be effective only upon receipt. Any notice under
Section 7 or 8 may be made by telex or telephone, but if so made shall be
subsequently confirmed in writing.
This Agreement has been and is made solely for the benefit of the
several Underwriters and the Company and the controlling persons, directors and
officers referred to in Section 6, and their respective successors and assigns,
and no other person shall acquire or have any right under or by virtue of this
Agreement. The term "successors and assigns" as used in this Agreement shall not
include a purchaser, as such purchaser, of Shares from any of the several
Underwriters.
HOU03A:432629.7
23
<PAGE>
All representations, warranties and agreements of the Company
contained herein or in certificates or other instruments delivered pursuant
hereto, shall remain operative and in full force and effect regardless of any
investigation made by or on behalf of any Underwriter or any of its controlling
persons and shall survive delivery of and payment for the Shares hereunder.
Any action required or permitted to be taken by the Representatives
under this Agreement may be taken by them jointly or by CSFBC.
THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH
THE LAWS OF THE STATE OF NEW YORK WITHOUT REGARD TO THE CONFLICT OF LAWS
PRINCIPLES OF SUCH STATE.
This Agreement may be signed in two or more counterparts with the
same effect as if the signatures thereto and hereto were upon the same
instrument.
In case any provision in this Agreement shall be invalid, illegal or
unenforceable, the validity, legality and enforceability of the remaining
provisions shall not in any way be affected or impaired thereby.
The Company and the Underwriters each hereby irrevocably waives any
right it may have to a trial by jury in respect of any claim based upon or
arising out of this Agreement or the transactions contemplated hereby.
This Agreement may not be amended or otherwise modified or any
provision hereof waived except by an instrument in writing signed by the
Representatives, the Company and each of the Material Subsidiaries.
Please confirm that the foregoing correctly sets forth the agreement
among the Company, the Material Subsidiaries and the several Underwriters.
HOU03A:432629.7
24
<PAGE>
Very truly yours,
DOMAIN ENERGY CORPORATION
By:
Name:
Title:
DOMAIN ENERGY VENTURES CORPORATION
By:
Name:
Title:
DOMAIN ENERGY PRODUCTION CORPORATION
By:
Name:
Title:
DOMAIN ENERGY FINANCE CORPORATION
By:
Name:
Title:
HOU03A:432629.7
25
<PAGE>
Confirmed as of the date first above mentioned:
CREDIT SUISSE FIRST BOSTON CORPORATION
PAINEWEBBER INCORPORATED, PRUDENTIAL
SECURITIES CORPORATION and
MORGAN KEEGAN & COMPANY, INC.
Acting on behalf of themselves
and as the Representatives of
the other several Underwriters
named in Schedule I hereof.
By: CREDIT SUISSE FIRST BOSTON CORPORATION
By:
Name:
Title:
HOU03A:432629.7
26
<PAGE>
SCHEDULE I
UNDERWRITERS
Number of
Firm Shares
to be
UNDERWRITER PURCHASED
Credit Suisse First Boston Corporation..........................
PaineWebber Incorporated........................................
Prudential Securities Incorporated..............................
Morgan Keegan & Company, Inc....................................
_____________________...........................................
_____________________...........................................
_____________________...........................................
_____________________...........................................
Total..................................................... 6,000,000
HOU03A:432629.7
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<PAGE>
SCHEDULE II
EQUITY INVESTMENTS
ENTITY HOLDING INVESTMENT NATURE OF INVESTMENT
Domain Energy Ventures Corporation Warrants to acquire 28,350 shares
of Common Stock of Benton Corp.
Domain Energy Ventures Corporation 63,000 shares of National Energy
Group Common Stock
HOU03A:432629.7
28
<PAGE>
EXHIBIT A
[DATE]
CREDIT SUISSE FIRST BOSTON CORPORATION
PAINEWEBBER INCORPORATED,
PRUDENTIAL SECURITIES CORPORATION and
MORGAN KEEGAN & COMPANY, INC.
As Representatives of the
several Underwriters
c/oCredit Suisse First Boston Corporation,
Eleven Madison Avenue
New York, New York 10010
Dear Sirs:
In consideration of the agreement of the several Underwriters, for which
Credit Suisse First Boston Corporation, PaineWebber Incorporated, Prudential
Securities Corporation and Morgan Keegan & Company, Inc. (the "Representatives")
intend to act as representatives to underwrite a proposed public offering (the
"Offering") of 6,000,000 shares of common stock, par value $.01 per share (the
"Common Stock"), of Domain Energy Corporation, a Delaware corporation (the
"Company"), as contemplated by a registration statement with respect to such
shares filed with the Securities and Exchange Commission on Form S-1
(Registration No. 333-24641), the undersigned hereby agrees that the undersigned
will not, for a period of 180 days after the commencement of the public offering
of such shares, without the prior written consent of Credit Suisse First Boston
Corporation, offer to sell, sell, contract to sell, grant any option to sell, or
otherwise dispose of, or require the Company to file with the Securities and
Exchange Commission a registration statement under the Securities Act of 1933 to
register, any shares of Common Stock or securities convertible into or
exchangeable for Common Stock or warrants or other rights to acquire shares of
Common Stock of which the undersigned is now, or may in the future become, the
beneficial owner (within the meaning of Rule 13d-3 under the Securities Exchange
Act of 1934) (other than pursuant to the Company's employee stock option plans
or in connection with other employee incentive compensation or director
compensation arrangements of the Company).
In furtherance of the foregoing, the Company and its transfer agent and
registrar are hereby authorized to decline to make any transfer of shares of
Common Stock if such transfer would constitute a violation or breach of this
Agreement.
HOU03A:432629.7
<PAGE>
This Agreement shall be binding on the undersigned and the respective
successors, heirs, personal representatives and assigns of the undersigned. This
Agreement shall lapse and become null and void if the Offering shall not have
occurred on or before , 1997.
Very truly yours,
By:
Print Name:
HOU03A:432629.7
A-2
<PAGE>
EXHIBIT B
[Weil, Gotshal & Manges LLP letterhead]
_______________, 1997
Credit Suisse First Boston Corporation
PaineWebber Incorporated,
Prudential Securities Incorporated and
Morgan Keegan & Company, Inc.
As Representatives of the
several Underwriters
c/oCredit Suisse First Boston Corporation
Eleven Madison Avenue
New York, New York 10010-3629
Gentlemen:
We have acted as counsel to Domain Energy Corporation, a Delaware
corporation (the "Company"), in connection with (i) the execution and delivery
of, and the consummation of the transactions contemplated by, the Underwriting
Agreement (the "Agreement"), dated ____________, 1997, among Credit Suisse First
Boston Corporation, PaineWebber Incorporated, Prudential Securities Incorporated
and Morgan Keegan & Company, Inc., as representatives of the several
underwriters named in Schedule I thereto (the "Underwriters"), and the Company
and certain of the Company's subsidiaries and (ii) the sale by the Company to
the Underwriters of 6,000,000 shares (the "Shares") of common stock, par value
$.01 per share (the "Common Stock"), of the Company. This opinion is delivered
to you pursuant to Section 5(f) of the Agreement. Capitalized terms defined in
the Agreement and used but not otherwise defined herein are used herein as so
defined.
In so acting, we have examined originals or copies, certified or otherwise
identified to our satisfaction, of (i) the Agreement, (ii) the Registration
Statement on Form S-1 (Registration No. 333-24641) of the Company filed with the
Securities and Exchange Commission (the "Commission") under the Securities Act
of 1933, as amended (the "Act"), on April 4, 1997, (iii) Amendment No. 1 to the
Registration Statement filed with the Commission on May 22, 1997, (iv) Amendment
No. 2 to the Registration Statement filed with the Commission on
___________________, 1997 (the Registration Statement, as so amended and
including information deemed to be a part of the Registration Statement at the
time it became effective pursuant to Rule 430A under the Act, is hereinafter
referred to as the ("Registration Statement"), (v) the
HOU03A:432629.7
A-1
<PAGE>
prospectus dated _____________________, 1997 of the Company in the form filed
with the Commission pursuant to Rule 424(b) under the Act (the "Prospectus"),
and (vi) such other corporate records, agreements, documents and other
instruments, and such certificates or comparable documents of public officials
and of officers and representatives of the Company, and we have made such
inquiries of such officers and representatives, as we have deemed relevant and
necessary as a basis for the opinions hereinafter set forth.
In such examination, we have assumed the genuineness of all signatures,
the legal capacity of natural persons, the authenticity of all documents
submitted to us as originals, the conformity to original documents of all
documents submitted to us as certified, conformed or photostatic copies and the
authenticity of the originals of such latter documents. As to all questions of
fact material to this opinion that have not been independently established, we
have relied upon certificates or comparable documents of officers and
representatives of the Company and upon the representations and warranties of
the Company contained in the Agreement. As used herein "to our knowledge" and
"of which we are aware" means the conscious awareness of facts or other
information by any lawyer in our firm actively involved in the transactions
contemplated by the Agreement.
Based on the foregoing, and subject to the qualifications stated herein,
we are of the opinion that:
1. The Company, and Domain Energy Ventures Corporation, Domain
Energy Production Corporation, and Domain Energy Finance Corporation
(collectively, the "Subsidiaries"), each is a corporation duly incorporated,
validly existing and in good standing under the laws of the State of Delaware
and has all requisite corporate power and authority to own, lease and operate
its properties and to carry on its business as described in the Prospectus.
2. The authorized capital stock of the Company consists of
25,000,000 shares of common stock, par value $.01 per share, and 5,000,000
shares of preferred stock, par value $.01 per share. As of ________________,
1997, there were 7,663,684 shares of common stock and no shares of preferred
stock issued and outstanding. All of such outstanding shares of the Company's
capital stock are duly authorized, validly issued, fully paid and nonassessable,
and have not been issued in violation of any preemptive rights pursuant law or
in the Company's restated certificate of incorporation or in any instrument,
contract or other document filed as an exhibit to the Registration Statement.
The statements in the Prospectus under the caption "Description of Capital
Stock," insofar as they constitute descriptions of the capital stock of the
Company, constitute fair summaries thereof in all material respects. Except as
described in the Registration Statement or the Prospectus, to our knowledge,
there are no outstanding securities of the Company or any Subsidiary convertible
into or evidencing the right to purchase or subscribe for any shares of capital
stock of the Company and there are no outstanding or authorized options,
warrants, calls, subscriptions, rights, commitments or any other agreements of
any character obligating the Company to issue any shares of its capital stock or
any securities convertible into or evidencing the right to purchase or subscribe
for any shares of such stock.
HOU03A:432629.7
B-2
<PAGE>
3. The Shares to be issued pursuant to the Agreement have been duly
authorized and, when issued as contemplated by the Agreement, will be validly
issued, fully paid and nonassessable and free of preemptive rights (i) pursuant
to law, (ii) in the Company's restated certificate of incorporation or (iii) in
any instrument, contract or other document filed as an exhibit to the
Registration Statement.
4. All of the outstanding shares of capital stock of each Subsidiary
are owned of record by the Company or one of the other Subsidiaries. To our
knowledge, all of the outstanding shares of capital stock of each Subsidiary are
owned beneficially by the Company or one of the other Subsidiaries, subject to
the pledge of the capital stock of Domain Energy Ventures Corporation and Domain
Energy Production Corporation to The Chase Manhattan Bank as Administrative
Agent under that certain Credit Agreement filed as Exhibit 10.10 to the
Registration Statement. Upon transfer and delivery of the Shares and payment
therefor in accordance with the terms of the Agreement, the Underwriters will
acquire good and marketable title to such Shares, assuming the Underwriters
acquire the Shares without notice of any adverse claim as such term is used in
Section 8-302 of the Uniform Commercial Code in effect in the State of New York.
5. The Company and each of the Subsidiaries has all requisite
corporate power and authority to execute and deliver the Agreement and to
perform its obligations thereunder. The execution, delivery and performance of
the Agreement by the Company and each of the Subsidiaries and the consummation
by the Company and each of the Subsidiaries of the transactions contemplated
thereby have been duly authorized by all necessary corporate action on the part
of the Company and each of the Subsidiaries. The Agreement has been duly and
validly executed and delivered by the Company and each of the Subsidiaries and
(assuming the due authorization, execution and delivery thereof by the other
parties thereto) constitutes the legal, valid and binding obligation of the
Company and each of the Subsidiaries, enforceable against each in accordance
with its terms, subject to applicable bankruptcy, insolvency, fraudulent
conveyance, reorganization, moratorium and similar laws affecting creditors'
rights and remedies generally, and subject, as to enforceability, to general
principles of equity, including principles of commercial reasonableness, good
faith and fair dealing (regardless of whether enforcement is sought in a
proceeding at law or in equity) and except that rights to indemnification and
contribution thereunder may be limited by federal or state securities laws or
public policy relating thereto.
6. The execution and delivery of the Agreement, the consummation of
the transactions contemplated thereby and compliance by the Company and the
Subsidiaries with the provisions thereof will not conflict with, constitute a
default under or violate (i) any of the terms, conditions or provisions of the
restated certificate of incorporation or by-laws of the Company or any of the
Subsidiaries, (ii) any of the terms, conditions or provisions of any material
document, agreement or other instrument to which the Company or any of the
Subsidiaries is a party or by which any of them is bound of which we are aware,
(iii) any New York, Texas or Delaware corporate or federal law or regulation
(other than federal and state securities or blue sky laws, as to which we
express no opinion in this paragraph) or (iv) any judgment, writ, injunction,
decree, order
HOU03A:432629.7
B-3
<PAGE>
or ruling of any court or governmental authority binding on the Company or any
of the Subsidiaries of which we are aware.
7. No consent, approval, waiver, license or authorization or other
action by or filing with any New York, Texas or Delaware corporate or federal
governmental authority is required in connection with the execution and delivery
by the Company or any of the Subsidiaries of the Agreement or the consummation
by the Company or any of the Subsidiaries of the transactions contemplated
thereby, except for filings and other actions required pursuant to federal and
state securities or blue sky laws, as to which we express no opinion in this
paragraph, and those already obtained and made under the Delaware General
Corporation Law.
8. To our knowledge, there is no litigation, proceeding or
governmental investigation pending or overtly threatened against the Company or
any of the Subsidiaries that relates to any of the transactions contemplated by
the Agreement.
9. The Registration Statement and the Prospectus (except for (i) the
financial statements and the notes thereto, the financial statement schedules
and the other financial, statistical and accounting data and (ii) the estimates
of oil and gas reserves and information related thereto, included in or which
should be included in the Registration Statement or the Prospectus, as to which
we express no opinion) comply as to form in all material respects with the
requirements of the Act and the rules and regulations thereunder.
10. To our knowledge, there is no instrument, contract or other
document (the "Documents") that is required to be described in the Registration
Statement or the Prospectus or is required to be filed as an exhibit to the
Registration Statement that is not described therein or filed as an exhibit
thereto. Insofar as the provisions of any of the Documents are described in the
Registration Statement or the Prospectus, such provisions conform in all
material respects to the respective descriptions thereof set forth in the
Prospectus or the Registration Statement.
11. To our knowledge, except as disclosed in the Registration
Statement or the Prospectus, no person or entity has the right to require the
Company to register under the Act shares of Common Stock or other securities of
the Company by reason of the filing or effectiveness of the Registration
Statement.
12. Insofar as certain provisions of the Delaware General
Corporation Law have been described under the caption "Management -- Limitation
of Directors' Liability; Indemnification of Directors and Officers" or under
Item 14 of Part II of the Registration Statement, such provisions conform in all
material respects to the respective descriptions thereof set forth under such
caption and such Item 14, respectively. The statements in the Prospectus under
the caption "Shares Eligible for Future Sale," insofar as they refer to
statements of laws or legal conclusions under the Act or the rules and
regulations thereunder, constitute fair summaries thereof in all material
respects. The statements in the Prospectus under the caption "Description of
Capital Stock," insofar as they refer to statements of laws or legal conclusions
under the Delaware General Corporation Law, constitute
HOU03A:432629.7
B-4
<PAGE>
fair summaries thereof in all material respects. The statements in the
Prospectus under the caption "Business and Properties -- Regulation," insofar as
they constitute descriptions of the NGA, the NGPA, the Decontrol Act, Order No.
636, the OCSLA, regulations promulgated by the MMS, Order No. 509 and
regulations promulgated by the FERC (each as defined in the Prospectus) or
amendments thereto or, as applicable, the rules and regulations thereunder,
constitute fair summaries thereof in all material respects. The statements in
the Prospectus under the caption "Business and Properties --Environmental
Matters," insofar as they constitute descriptions of the CERCLA, OPA or CWA
(each as defined in the Prospectus) or amendments thereto or the rules and
regulations thereunder, constitute fair summaries thereof in all material
respects.
13. The Company is not an "investment company" or an entity
"controlled" by an "investment company" under the Investment Company Act of
1940, as amended, and the rules and regulations promulgated by the Commission
thereunder (the "Investment Company Act"). In rendering the opinion in this
paragraph 13, we have assumed that neither Fund VII nor its managing general
partner, First Reserve Corporation, is or is controlled by an "investment
company" under the Investment Company Act.
14. Based solely upon telephonic confirmation from the Commission,
the Registration Statement has become effective under the Act and, to our
knowledge, no stop order suspending the effectiveness of the Registration
Statement or suspending or preventing the use of the Prospectus has been issued
and no proceedings for that purpose have been instituted or are pending or
threatened under the Act. Any required filing of the Prospectus pursuant to Rule
424(b) under the Act has been made in the manner and within the time period
required by Rule 424(b).
We have participated in conferences with directors, officers and other
representatives of the Company, representatives of the independent public
accountants for the Company, representatives of the Underwriters and
representatives of counsel for the Underwriters, at which conferences the
contents of the Registration Statement and the Prospectus and related matters
were discussed, and, although we have not independently verified and are not
passing upon and assume no responsibility for the accuracy, completeness or
fairness of the statements contained in the Registration Statement and the
Prospectus, no facts have come to our attention which lead us to believe that
the Registration Statement, on the effective date thereof, contained an untrue
statement of a material fact or omitted to state a material fact required to be
stated therein or necessary to make the statements contained therein not
misleading or that the Prospectus, on the date thereof or on the date hereof,
contained or contains an untrue statement of a material fact or omitted or omits
to state a material fact required to be stated therein or necessary to make the
statements contained therein, in light of the circumstances under which they
were made, not misleading (it being understood that we express no view with
respect to (i) the financial statements and related notes, the financial
statement schedules and the other financial, statistical and accounting data and
(ii) the estimates of oil and gas reserves and information related thereto,
included in the Registration Statement).
HOU03A:432629.7
B-5
<PAGE>
The opinions expressed herein are limited to the laws of the States of New
York and Texas, the corporate laws of the State of Delaware and the federal laws
of the United States, and we express no opinion as to the effect on the matters
covered by this letter of the laws of any other jurisdiction.
The opinions expressed herein are rendered solely for your benefit in
connection with the transactions described herein. Those opinions may not be
used or relied upon by any other person (other than your counsel solely for the
purpose of delivering to you the opinion required by Section 5(g) of the
Agreement), nor may this letter or any copies thereof be furnished to a third
party, filed with a governmental agency, quoted, cited or otherwise referred to
without our prior written consent.
Very truly yours,
HOU03A:432629.7
B-6
EXHIBIT 10.14
FORM OF
DOMAIN ENERGY CORPORATION
1997 STOCK OPTION PLAN FOR NONEMPLOYEE DIRECTORS
1. PURPOSES
Domain Energy Corporation, a Delaware corporation (the "Company"),
desires to attract and retain the services of outstanding nonemployee directors
by affording them an opportunity to acquire a proprietary interest in the
Company through automatic, non-discretionary awards of options ("Options")
exercisable to purchase shares of Common Stock (as defined below), and thus to
create in such directors an increased interest in and a greater concern for the
welfare of the Company and its subsidiaries.
The Options offered pursuant to this Domain Energy Corporation 1997
Stock Option Plan for Nonemployee Directors (the "Plan") are a matter of
separate inducement and are not in lieu of any other compensation for the
services of any director.
The Options granted under the Plan are intended to be options that
do not meet the requirements for incentive stock options within the meaning of
Section 422 of the Internal Revenue Code of 1986, as amended (the "Code").
As used in the Plan, the term "subsidiary corporation" shall mean a
corporation coming within the definition of such term contained in Section
424(f) of the Code.
2. STOCK SUBJECT TO THE PLAN
Options granted under the Plan shall be exercisable for shares of
the Company's common stock, par value $.01 per share ("Common Stock").
The total number of shares of Common Stock authorized for issuance
under the Plan upon the exercise of Options (the "Shares"), shall not exceed, in
the aggregate, [_______] of the currently authorized shares of Common Stock of
the Company, such number to be subject to adjustment in accordance with Section
13 of the Plan.
1
<PAGE>
Shares available for issuance under the Plan may be either
authorized but unissued Shares, Shares of issued stock held in the Company's
treasury, or both, at the discretion of the Company. If and to the extent that
Options granted under the Plan expire or terminate without having been
exercised, the Shares covered by such expired or terminated Options may again be
subject to an Option under the Plan.
3. EFFECTIVE DATE AND TERM OF THE PLAN
The Plan shall become effective at 5:00 p.m., Houston time, on June
__, 1997 (the "Effective Date"). The Plan shall terminate at the close of
business on June __, 2007 (the "Termination Date"), unless sooner terminated in
accordance with its terms.
4. ADMINISTRATION
The Plan shall be administered by the Board of Directors of the
Company (the "Board of Directors"), which may designate from among its members a
committee to exercise all power and authority of the Board of Directors at any
time and from time to time to administer the Plan. (References herein to the
Board of Directors shall be deemed to include references to any such committee,
except as the context otherwise requires.) Subject to the express provisions of
the Plan, the Board of Directors shall have authority to construe the Plan and
the Options granted hereunder, to prescribe, amend and rescind rules and
regulations relating to the Plan and to make all other ministerial
determinations necessary or advisable for administering the Plan. However, the
timing of grants of Options under the Plan and the determination of the amounts
and prices of such Options shall be effected automatically in accordance with
the terms and provisions of the Plan without further action by the Board of
Directors.
The determination of the Board of Directors on matters referred to
in this Section 4 shall be conclusive.
5. ELIGIBILITY
Each member of the Board of Directors who is not an employee of the
Company or any subsidiary corporation of the Company shall be eligible to be
granted Options under the Plan ("Eligible Directors").
2
<PAGE>
6. OPTION GRANTS
On the Effective Date, each Eligible Director then in office shall
automatically be granted an Option to purchase [______] Shares (subject to
adjustment as provided in Section 13). Future Eligible Directors shall
automatically be granted an Option to purchase [______] Shares (subject to
adjustment as provided in Section 13) upon their initial appointment or election
to the Board of Directors. On the date of the annual meeting of stockholders of
the Company which takes place during the calendar year in which the first
anniversary of the Final Vesting Date (as defined below) of an Option occurs,
the holder of such Option shall automatically be granted an Option to purchase
[______] Shares (subject to adjustment as provided in Section 13), provided such
holder is an Eligible Director in office immediately following such annual
meeting. Each Option granted to an Eligible Director pursuant to the Plan shall
be evidenced by a written agreement between the Company and such Eligible
Director substantially in the form of Exhibit A hereto (each such agreement, a
"Grant Agreement"). Any Eligible Director entitled to receive an Option grant
pursuant to the Plan may elect to decline the Option.
7. OPTION PRICE AND PAYMENT
The price for each Share purchasable upon exercise of any Option
granted hereunder shall be an amount equal to the fair market value per Share on
the date of grant. For purposes of the Plan, fair market value per share with
respect to any date of determination, means:
(i) if the Shares are listed or admitted to trading on a
national securities exchange in the United States or reported
through the National Association of Securities Dealers Automated
Quotation System-National Market System ("NASDAQ- NMS"), then the
closing sale price on such exchange or NASDAQ-NMS on such date or,
if no trading occurred or quotations were available on such date,
then on the closest preceding date on which the Shares were traded
or quoted; or
(ii) if not so listed or reported but a regular, active public
market for the Shares exists (as determined in the sole discretion
of the Board of Directors, whose decision shall be
3
<PAGE>
conclusive and binding), then the average of the closing bid and ask
quotations per Share in the over-the-counter market for such Shares
in the United States on such date or, if no such quotations are
available on such date, then on the closest date preceding such
date. For purposes of the foregoing, a market in which trading is
sporadic and the ask quotations generally exceed the bid quotations
by more than 15% shall not be deemed to be a "regular, active public
market."
If the Board of Directors determines that a regular, active public
market does not exist for the Shares, the Board of Directors shall determine the
fair market value of the Shares in its good faith judgment based on the total
number of shares of Common Stock then outstanding, taking into account all
outstanding options, warrants, rights or other securities exercisable or
exchangeable for, or convertible into, shares of Common Stock.
The payment of the option price for all Shares purchased pursuant to
the exercise of an Option shall be (w) by cash or check in full on the date of
exercise (such cash or check may be delivered on behalf of a holder of an option
by a stock broker designated by the Company to whom such holder has submitted an
irrevocable notice of election, on forms approved by the Company, to sell shares
of Common Stock deliverable upon exercise of an Option), (x) through the
delivery of shares of Common Stock having a fair market value equal to the full
amount of the exercise price, (y) by the withholding by the Company from the
Shares issuable upon any exercise of the Option that number of Shares having a
fair market value equal to such exercise price pursuant to a written election
delivered to the Board of Directors prior to the date of exercise, or (z) by a
combination of such methods. The Board of Directors shall determine acceptable
methods for tendering Common Stock and may impose such limitations and
prohibitions on the use of Common Stock to exercise an Option as it deems
appropriate. The fair market value per share of shares of Common Stock so
delivered or withheld shall be determined as of the date immediately preceding
the date on which the Option is exercised, or as may be required in order to
comply with or conform to the requirements of any applicable laws or
regulations.
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<PAGE>
8. TERMS OF OPTIONS AND LIMITATIONS ON THE RIGHT OF
EXERCISE
Any Option granted to an Eligible Director shall be exercisable, on
a cumulative basis, for a period commencing on the date of grant and ending ten
(10) years after the date of grant of such Option as follows:
(a) up to one third of the total number of
Shares subject to an Option may be purchased as of the date of
grant of an Option;
(b) up to an additional one third of the total number of Shares
subject to an Option may be purchased as of the date of the annual meeting of
stockholders of the Company in the year following the year in which the Option
was granted ("Second Vesting Date"), provided that such holder is an Eligible
Director immediately following such annual meeting; and
(c) the balance of the total number of Shares subject to an Option
may be purchased as of the date of the annual meeting of stockholders of the
Company next following the Second Vesting Date (the "Final Vesting Date"),
provided such holder is an Eligible Director immediately following such annual
meeting.
To the extent that an Option is not exercised within the period of
exercisability specified therein, it shall expire as to the then unexercised
part.
In no event shall an Option granted hereunder be exercised for a
fraction of a Share or for less than one hundred (100) Shares (unless the number
purchased is the total balance for which the Option is then exercisable).
A person entitled to receive Shares upon the exercise of an Option
shall not have the rights of a stockholder with respect to such Shares until the
date of issuance of a stock certificate to him or her for such Shares; provided,
however, that until such stock certificate is issued, any holder of an Option
using previously acquired shares of Common Stock in payment of an option
exercise price shall continue to have the rights of a stockholder with respect
to such previously acquired shares of Common Stock.
5
<PAGE>
9. TERMINATION OF DIRECTORSHIP
If an Eligible Director's service as a director of the Company is
terminated, any Option previously granted to such Eligible Director shall, to
the extent not theretofore exercised, terminate and become null and void;
provided, however, that:
(a) if an Eligible Director holding an outstanding Option
dies, including during either the three (3) month or one (1) year period,
whichever is applicable, specified in clause (b) immediately below, such
Option shall, to the extent exercisable on the date of death and not
theretofore exercised, remain exercisable for one (1) year after such
Eligible Director's death, by such Eligible Director's legatee,
distributee, guardian or legal or personal representative; and
(b) if the service of an Eligible Director holding an
outstanding Option is terminated by reason of (i) such Eligible Director's
disability (as described in Section 22(e)(3) of the Code), (ii) voluntary
retirement from service as a director of the Company or (iii) failure of
the Company to nominate for re-election such Eligible Director who is
otherwise eligible, except if such failure to nominate for re-election is
due to any act of (A) fraud or intentional misrepresentation or (B)
embezzlement, misappropriation or conversion of assets or opportunities of
the Company or any subsidiary corporation or parent corporation of the
Company (in which case, such Option shall terminate and no longer be
exercisable), such Option shall, to the extent exercisable on the date of
such termination and not therefore exercised, remain exercisable at any
time up to and including (X) three (3) months after the date of such
termination of service in the case of termination by reason of voluntary
retirement or failure of the Company to nominate for re-election such
Eligible Director who is otherwise eligible, subject to the above
exceptions thereto stated in this clause (b), and (Y) one (1) year after
the date of termination of service in the case of termination by reason of
disability.
None of the events described above shall extend the period of
exercisability of an Option beyond the expiration date thereof. If an Option
granted hereunder
6
<PAGE>
shall be exercised by the legal representative of a deceased Eligible Director
or former Eligible Director, or by a person who acquired an Option granted
hereunder by bequest or inheritance or by reason of the death of any Eligible
Director or former Eligible Director, written notice of such exercise shall be
accompanied by a certified copy of letters testamentary or equivalent proof of
the right of such legal representative or other person to exercise such Option.
10. EXERCISE OF OPTIONS
Options granted under the Plan, or any exercisable portion thereof,
may be exercised solely by delivering to the Secretary of the Company all of the
following prior to the time when the Option or such portion becomes
unexercisable under Sections 8 or 9:
(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 Board of Directors;
(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 Company to whom the optionee has submitted an
irrevocable notice of election, on forms approved by the Company, 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
equal to the full amount of the exercise price, (iii) by the withholding
by the Company from the shares of Common Stock issuable upon any exercise
of the Option that number of shares having a fair market value equal to
such exercise price pursuant to a written election delivered to the Board
of Directors prior to the date of exercise, or (iv) by a combination of
such methods;
(c) A written representation and agreement (which may be included
within the applicable Grant Agreement), in a form satisfactory to the
Board of Directors, 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
7
<PAGE>
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 the applicable
rules and regulations thereunder, and that the optionee or other person
then entitled to exercise such Option or portion thereof will indemnify
the Company against and hold it free and harmless from any loss, damage,
expense or liability resulting to the Company 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 Board of
Directors 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 Company 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 Board of Directors 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; and
(e) In the event the Option or portion thereof shall be exercised
pursuant to Section 9 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 Board of Directors 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
8
<PAGE>
been registered under the Act, and such registration is then effective in
respect of such shares.
11. USE OF PROCEEDS
The cash proceeds of the sale of Shares subject to the Options
granted hereunder are to be added to the general funds of the Company and used
for its general corporate purposes as the Board of Directors shall determine.
12. NON-TRANSFERABILITY OF OPTIONS
An Option granted hereunder shall not be transferable, whether by
operation of law or otherwise, other than by will or the laws of descent and
distribution, and any Option granted hereunder shall be exercisable, during the
lifetime of such holder, only by such holder. Except to the extent provided
above, Options may not be assigned, transferred, pledged, hypothecated or
disposed of in any way (whether by operation of law or otherwise) and shall not
be subject to execution, attachment or similar process.
13. ADJUSTMENTS
In the event of any change in the outstanding Common Stock by reason
of a stock split, spin-off, stock dividend, stock combination or
reclassification, recapitalization or merger, Change of Control (as defined
below) or similar event, or as required under any Grant Agreement, the Board of
Directors may adjust appropriately the number of Shares subject to the Plan and
available for or covered by each outstanding Option and make such other
revisions to outstanding Options as it deems are equitably required.
14. MERGER, CONSOLIDATION, EXCHANGE, ACQUISITION,
LIQUIDATION OR DISSOLUTION
In its absolute discretion, and on such terms and conditions as it
deems appropriate, coincident with or after the grant of any Option, the Board
of Directors may provide, with respect to the merger or consolidation of the
Company into another corporation, the exchange of all or substantially all of
the assets of the Company for the securities of another corporation, a Change of
Control or the recapitalization, reclassification, liquidation or dissolution of
the Company, either (a) that such Option
9
<PAGE>
cannot be exercised after such event, in which case the Board of Directors shall
also provide, either by the terms of such Option or by a resolution adopted
prior to the occurrence of such event, that for some period of time prior to
such event, such Option shall be exercisable as to all Shares subject thereto
which are exercisable or, by virtue of the event, become exercisable,
notwithstanding anything to the contrary herein (but subject to the expiration
thereof pursuant to Sections 8 and 9 hereof) and that, upon the occurrence of
such event, such Option shall terminate and be of no further force or effect; or
(b) that even if the Option shall remain exercisable after such event, from and
after such event, any such Option shall be exercisable only for the kind and
amount of securities and/or other property, or the cash equivalent thereof,
receivable as a result of such event by the holder of a number of shares of
stock for which such Option could have been exercised immediately prior to such
event.
In addition, in the event of a Change of Control, the Board of
Directors may, in its absolute discretion and on such terms and conditions as it
deems appropriate, provide, either by the terms of such Option or by a
resolution adopted prior to the occurrence of the Change of Control, that such
Option shall be exercisable as to all or any portion of the shares subject
thereto, notwithstanding anything to the contrary herein (but subject to the
expiration thereof pursuant to Sections 8 and 9 hereof).
As used in the Plan, the following words shall have the following
meanings:
(a) "Change of Control" shall mean the occurrence of either (x) the
purchase or other acquisition by any person, entity or group (within the meaning
of section 13(d) of 14(d) of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), 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 Company's then
outstanding voting securities entitled to vote generally or (ii) all or
substantially all of the direct and indirect assets of the Company and its
subsidiaries or (y) any merger, consolidation, reorganization or other business
combination of the Company with or into any other entity which results in a
person, entity or Group other than the FRC Entities owning fifty percent (50%)
or more of the combined voting power of the surviving or resulting
10
<PAGE>
corporation's then outstanding voting securities entitled to vote generally; and
(b) "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.
15. RIGHT TO TERMINATE SERVICE
The Plan shall not impose any obligation on the Company or on any
subsidiary corporation or parent corporation thereof to continue the service of
any Eligible Director holding Options and shall not impose any obligation on the
part of any Eligible Director holding Options to remain in the service of the
Company or of any subsidiary corporation or parent corporation thereof.
16. ISSUANCE OF STOCK CERTIFICATES; LEGENDS; PAYMENT OF
EXPENSES
Upon any exercise of an Option granted hereunder and payment of the
purchase price therefor, a certificate or certificates representing the Shares
shall be issued by the Company in the name of the person exercising the Option
and shall be delivered to or upon the order of such person.
The Company may endorse such legend or legends upon the certificates
for Shares issued pursuant to the Plan and may issue such "stop transfer"
instructions to its transfer agent in respect of such Shares as the Board of
Directors, in its sole discretion, determines to be necessary or appropriate to
(a) prevent a violation of, or to perfect an exemption from, the registration
requirements of the Securities Act or (b) implement the provisions of the Plan
and any agreement between the Company and the optionee with respect to such
Shares.
The Company shall pay all issue or transfer taxes with respect to
the issuance or transfer of Shares. All Shares issued as provided herein shall
be fully paid and nonassessable to the extent permitted by law.
17. WITHHOLDING TAXES
The Company may require an Eligible Director exercising an Option to
pay to the Company, upon its demand,
11
<PAGE>
such amount as may be requested by the Company for the purpose of satisfying any
liability to withhold federal, state, local or foreign income or other taxes. If
the amount requested is not paid, the Company shall have no obligation to issue,
and the Eligible Director shall have no right to receive, the Shares subject to
such Option.
18. LISTING OF SHARES AND RELATED MATTERS
If at any time the Board of Directors shall determine that the
listing, registration or qualification of the Shares subject to such Option on
any securities exchange or under any applicable law, or the consent or approval
of any governmental regulatory authority, is necessary or desirable as a
condition of, or in connection with, the granting of an Option, or the issuance
of Shares thereunder, such Option may not be exercised in whole or in part
unless such listing, registration, qualification, consent or approval shall have
been effected or obtained free of any conditions not acceptable to the Board of
Directors.
19. AMENDMENT OF THE PLAN
The Board of Directors may, from time to time, amend the Plan;
provided, however, that (i) no amendment shall become effective without the
approval of the stockholders of the Company to the extent that stockholder
approval is required in order to comply with Rule 16b-3 (or any successor
provision) under the Exchange Act and (ii) if required in order to comply with
Rule 16b-3 under the Exchange Act, no provision of the Plan addressing
eligibility to participate in the Plan or the amount, price or timing of Options
to be granted under the Plan may be amended more than once every six months,
other than to comport with changes in the Code, the Employee Retirement Income
Security Act of 1974, as amended, or the rules promulgated thereunder. The
rights and obligations under any Option granted before amendment of the Plan or
any unexercised portion of such Option shall not be adversely affected by
amendment of the Plan or the Option without the consent of the holder of such
Option.
20. TERMINATION OR SUSPENSION OF THE PLAN
The Board of Directors may at any time suspend or terminate the
Plan. Options may not be granted while the Plan is suspended or after it is
terminated. Rights and obligations under any Option granted while the Plan is in
12
<PAGE>
effect shall not be altered or impaired by suspension or termination of the
Plan, except upon the consent of the person to whom the Option was granted. The
ministerial power of the Board of Directors to construe and administer any
Options under Section 4 that are granted prior to the termination or suspension
of the Plan shall continue after such termination or during such suspension.
21. PARTIAL INVALIDITY
The invalidity or illegality of any provision herein shall not be
deemed to affect the validity of any other provision.
13
<PAGE>
EXHIBIT A
June __, 1997
[Nonemployee Director]
RE: AUTOMATIC GRANT OF STOCK OPTION
Dear [ ]:
On May __, 1997, the Board of Directors of Domain Energy Corporation
(the "Company") authorized and approved the 1997 Stock Option Plan for
Nonemployee Directors (the "Plan"), which Plan became effective on June __,
1997. The Plan provides for the automatic grant of options to the nonemployee
directors of the Company. A copy of the Plan is annexed hereto and shall be
deemed a part hereof as if fully set forth herein. Unless the context otherwise
requires, all terms defined in the Plan shall have the same meaning when used
herein.
The Company hereby grants to you the option (the "Option") to
purchase, in accordance with the terms and conditions set forth in the Plan, but
subject to the limitations set forth herein and in the Plan, an aggregate of
__________ shares of Common Stock, $.01 par value per share, of the Company at a
price of $_________ per share, such option price being, in the judgment of the
Board of Directors, not less than one hundred percent (100%) of the fair market
value of such share at the date hereof (i.e., June __, 1997). The Option is not
intended to qualify as an "incentive stock option" within the meaning of Section
422 of the Internal Revenue Code of 1986, as amended.
Subject to the provisions and limitations of Sections 8 and 10 of
the Plan, this Option may be exercised by you, on a cumulative basis, during a
period of ten (10) years commencing on the date hereof and terminating at the
close of business on June __, 2007 as follows:
1
<PAGE>
(a) up to [one-third] of the total number of
shares subject to this Option may be purchased by you as of
the date hereof;
(b) up to an additional [one-third] of the total number of shares
subject to this Option may be purchased by you as of the date of the annual
meeting of stockholders of the Company during 1998, provided that you are an
Eligible Director immediately following such annual meeting; and
(c) the balance of the total number of shares subject to this Option
may be purchased by you as of the date of the annual meeting of stockholders of
the Company during 1999, provided that you are an Eligible Director immediately
following such annual meeting.
The unexercised portion of the Option granted herein will
automatically and without notice terminate and become null and void upon the
expiration of ten (10) years from the date hereof. If, however, prior to the
expiration of ten (10) years from the date hereof, your service as a director of
the Company terminates, this Option will terminate on the applicable date set
forth in Section 9 of the Plan.
In no event shall you exercise this Option for a fraction of a share
or for less than one hundred (100) Shares (unless the number purchased is the
total balance for which the Option is then exercisable).
This Option is not transferable by you otherwise than by will or the
laws of descent and distribution, and is exercisable, during your lifetime, only
by you. This Option may not be assigned, transferred (except by will or the laws
of descent and distribution), pledged, hypothecated or disposed of in any way
(whether by operation of law or otherwise) and shall not be subject to
execution, attachment or similar process. Any attempted assignment, transfer,
pledge, hypothecation or other disposition of this Option contrary to the
provisions hereof, and the levy of any attachment or similar proceeding upon the
Option, shall be null and void and without effect.
Any exercise of this Option shall be in writing addressed to the
Secretary of the Company at the principal place of business of the Company, and
shall comply with the requirements of the Plan.
2
<PAGE>
If the Company, in its sole discretion, shall determine that it is
necessary, to comply with applicable securities laws, the certificate or
certificates representing the shares purchased pursuant to the exercise of this
Option shall bear an appropriate legend in form and substance, as determined by
the Company, giving notice of applicable restrictions on transfer under or in
respect of such laws.
You hereby covenant and agree with the Company that if, at the time
of exercise of this Option, there does not exist a Registration Statement on an
appropriate form under the Securities Act of 1933, as amended (the "Act"), which
Registration Statement shall have become effective and shall include a
prospectus which is current with respect to the shares subject to this Option,
(i) you are purchasing the shares for your own account, for investment and not
with a view to the resale or distribution thereof and (ii) any subsequent offer
for sale or sale of any such shares shall be made either pursuant to (x) a
Registration Statement on an appropriate form under the Act, which Registration
Statement shall have become effective and shall be current with respect to the
shares being offered and sold, or (y) a specific exemption from the registration
requirements of the Act, but in claiming such exemption, you shall, prior to any
offer for sale or sale of such shares, obtain a favorable written opinion from
counsel for or approved by the Company as to the applicability of such
exemption. You further covenant and agree to indemnify the Company against and
hold it free and harmless from any loss, damage, expense or liability resulting
to the Company if any sale or distribution of the shares by you is contrary to
the representation and agreement referred to above.
As provided in the Plan, the Company may require you to pay to the
Company, upon its demand, such amount as may be requested by the Company for the
purpose of satisfying any liability to withhold federal, state, local or foreign
income or other taxes. If the amount requested is not paid either (i) by cash or
check or (ii) by electing, pursuant to a written notice delivered to the Board
of Directors 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, the Company shall have no obligation to issue,
and you shall have no right to receive, any shares subject to this Option.
3
<PAGE>
This agreement is subject to all terms, conditions, limitations and
restrictions contained in the Plan, which shall be controlling in the event of
any conflicting or inconsistent provisions.
4
<PAGE>
Please indicate your acceptance of all the terms and conditions of
this Option and the Plan by signing and returning a copy of this letter.
Very truly yours,
DOMAIN ENERGY CORPORATION
By: __________________________
ACCEPTED:
__________________________
Signature of Director
__________________________
Name of Director
Date:________________________
5
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 (June _, 1997 as to
Note 7), appearing in the Prospectus, which is part of this Registration
Statement, and of our report dated April 3, 1997 (June _, 1997 as to
stockholder's equity) 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
June , 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
June 2, 1997
<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> 14,082 0 8,036 0 11,467
<SECURITIES> 0 0 0 0 0
<RECEIVABLES> 22,501 0 27,330 15,466 5,100
<ALLOWANCES> 0 0 0 0 0
<INVENTORY> 0 0 0 0 0
<CURRENT-ASSETS> 38,051 0 36,891 17,074 16,919
<PP&E> 66,752 0 66,176 137,975 97,735
<DEPRECIATION> 3,116 0 0 26,251 3,912
<TOTAL-ASSETS> 125,664 0 122,429 137,096 117,755
<CURRENT-LIABILITIES> 30,871 0 38,960 11,313 2,378
<BONDS> 75,838 0 71,412 0 104,504
0 0 0 0 0
0 0 0 0 0
<COMMON> 76 0 72 2 2
<OTHER-SE> 33,614 0 28,505 2,158 63
<TOTAL-LIABILITY-AND-EQUITY> 125,664 0 122,429 137,096 104,504
<SALES> 13,222 16,143 56,230 37,647 7,040
<TOTAL-REVENUES> 13,222 16,143 56,230 37,647 7,040
<CGS> 0 0 0 0 0
<TOTAL-COSTS> 10,697 12,047 44,655 36,789 5,905
<OTHER-EXPENSES> 0 0 0 0 0
<LOSS-PROVISION> 0 0 0 0 0
<INTEREST-EXPENSE> 1,109 0 150 0 0
<INCOME-PRETAX> 1,416 4,096 11,425 858 1,135
<INCOME-TAX> 538 1,342 4,394 351 735
<INCOME-CONTINUING> 878 2,754 7,031 507 400
<DISCONTINUED> 0 0 0 0 0
<EXTRAORDINARY> 0 0 0 0 0
<CHANGES> 0 0 0 0 0
<NET-INCOME> 878 2,754 7,031 507 400
<EPS-PRIMARY> .10 0 0 0 0
<EPS-DILUTED> .10 0 0 0 0
</TABLE>
