<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 30, 1997
REGISTRATION NO. 333-34251
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
PETROGLYPH ENERGY, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 1311 74-2826234
(STATE OR OTHER (PRIMARY STANDARD (I.R.S. EMPLOYER
JURISDICTION OF INDUSTRIAL CLASSIFICATION IDENTIFICATION NO.)
INCORPORATION CODE NUMBER)
ORORGANIZATION)
(PRIMARY STANDARD INDUSTRIAL CLASSIFICATION CODE NUMBER)
6209 NORTH HIGHWAY 61
HUTCHINSON, KANSAS 67502
(316) 665-8500
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
---------------
ROBERT C. MURDOCK
PRESIDENT, CHIEF EXECUTIVE OFFICER AND CHAIRMAN OF THE BOARD
PETROGLYPH ENERGY, INC.
6209 NORTH HIGHWAY 61
HUTCHINSON, KANSAS 67502
(316) 665-8500
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF REGISTRANT'S AGENT FOR SERVICE)
---------------
COPIES OF COMMUNICATION TO:
MICHAEL L. BENGTSON R. JOEL SWANSON
THOMPSON & KNIGHT, P.C. BAKER & BOTTS, L.L.P.
1700 PACIFIC AVENUE, SUITE 3300 ONE SHELL PLAZA
DALLAS, TEXAS 75201 HOUSTON, TEXAS 77002
---------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the Prospectus is expected to be made pursuant to Rule 434,
please check the following box. [X]
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION,
ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+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 SEPTEMBER 30, 1997
PROSPECTUS
- --------------------------------------------------------------------------------
2,333,333 Shares
PETROGLYPH ENERGY, INC.
[LOGO OF PETROGLYPH ENERGY APPEARS HERE]
Common Stock
- --------------------------------------------------------------------------------
All of the shares of the Common Stock, $.01 par value (the "Common Stock"),
offered hereby (the "Offering") are being sold by Petroglyph Energy, Inc., a
Delaware corporation ("Petroglyph" or the "Company").
Prior to this Offering, there has been no public market for the Common Stock of
the Company. It is currently anticipated that the initial public offering price
will be between $14.00 and $16.00 per share. 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 quotation in The Nasdaq Stock Market's
National Market (the "Nasdaq National Market") under the trading symbol "PGEI."
SEE "RISK FACTORS" ON PAGES 10 TO 18 FOR A DISCUSSION OF MATERIAL FACTORS THAT
SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE COMMON STOCK
OFFERED HEREBY.
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Underwriting
Price to Discounts and Proceeds to
Public Commissions(1) Company(2)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share.................................. $ $ $
- --------------------------------------------------------------------------------
Total(3)................................... $ $ $
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(1) The Company has agreed to indemnify the several Underwriters against
certain liabilities, including liabilities under the Securities Act of
1933. See "Underwriting."
(2) Before deducting expenses payable by the Company estimated to be $ .
(3) The Company has granted the several Underwriters a 30-day over-allotment
option to purchase up to 350,000 additional shares of Common Stock on the
same terms and conditions as set forth above. If all such additional shares
are purchased by the Underwriters, the total Price to Public will be $ ,
the total Underwriting Discounts and Commissions will be $ and the total
Proceeds to Company will be $ . See "Underwriting."
- --------------------------------------------------------------------------------
The shares of Common Stock are offered by the several Underwriters subject to
delivery by the Company and acceptance by the Underwriters, to prior sale and
to withdrawal, cancellation or modification of the offer without notice.
Delivery of the shares to the Underwriters is expected to be made at the office
of Prudential Securities Incorporated, One New York Plaza, New York, New York,
on or about October , 1997.
PRUDENTIAL SECURITIES INCORPORATED
OPPENHEIMER & CO., INC.
JOHNSON RICE & COMPANY L.L.C.
October , 1997
<PAGE>
[MAPS OF THE COMPANY'S PRINCIPAL PROPERTIES]
----------------
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING 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."
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the detailed
information and consolidated financial statements and the notes thereto
appearing elsewhere in this Prospectus. The information presented gives effect
to the reorganization of the Company. See "The Company." As used herein,
references to the Company or Petroglyph are to Petroglyph Energy, Inc. and its
predecessors and subsidiaries, including Petroglyph Gas Partners, L.P. (the
"Partnership"). Unless otherwise indicated, the information in this Prospectus
assumes that the Underwriters' over-allotment option will not be exercised.
Certain terms relating to the oil and natural gas industry are defined in
"Glossary of Oil and Natural Gas Terms."
THE COMPANY
Petroglyph is an independent energy company engaged in the exploration,
development and acquisition of crude oil and natural gas reserves. Since its
inception in 1993, the Company has grown through leasehold acquisitions which,
together with associated development drilling, have increased the Company's
proved reserves, production, revenue and cash flow. The Company seeks to
develop properties in regions with known producing horizons, significant
available undeveloped acreage and considerable opportunities to increase
reserves, production and ultimate recoveries through development drilling and,
where applicable, enhanced oil recovery techniques. The Company's primary
activities are focused in the Uinta Basin in Utah, where it is implementing
enhanced oil recovery projects in the Lower Green River formation of the
Greater Monument Butte Region. The Company anticipates spending approximately
$35 million in 1997 and 1998 in connection with these projects. The Company has
identified several other formations in the Uinta Basin above and below the
Lower Green River formation that it believes have the potential to be
commercially productive. The Company recently acquired 56,000 gross and net
acres in the Raton Basin in Colorado. The Company plans to spend up to
approximately $5.0 million to initiate a pilot coalbed methane project to
determine the commercial viability of development of this area.
From January 1, 1994 through June 30, 1997, the Company drilled a total of 98
gross (51.5 net) wells, with a success rate of 99% and an average finding cost
of $3.43 per BOE. As of June 30, 1997, the Company had estimated net proved
reserves of approximately 7.7 MMBbls of oil and 20.9 Bcf of natural gas, or an
aggregate of 11.2 MMBOE with a PV-10 of $42.9 million. Of the Company's
estimated proved reserves, 97% are located in the Uinta Basin. At June 30,
1997, the Company had a total acreage position of approximately 108,000 gross
(99,000 net) acres and estimates that it has over 1,000 potential drilling
locations based on current spacing, approximately 75 of which are included in
the Company's independent petroleum engineers' estimate of proved reserves.
Uinta Basin. The Uinta Basin is generally recognized as one of the largest
onshore basins in the contiguous United States in terms of total hydrocarbons
in place. The Uinta Basin is a major onshore depositional and structural basin
containing the remnants of an ancient fresh water lake that broadly deposited
sand bars over the basin as the shoreline of the lake expanded and contracted
over time. Based on electric log analysis, the Company believes that
approximately 26 different horizons of oil and natural gas bearing sands have
been created in the Lower Green River formation by the ancient lake and exist
throughout its development area. As of December 31, 1996, approximately 450
MMBbls of oil and 1.6 Tcf of natural gas had been recovered from over 2,750
wells drilled in the Uinta Basin, including approximately 148 MMBbls of oil and
358 Bcf of natural gas from approximately 930 wells drilled in a 900 square
mile area of the Uinta Basin known as the Greater Monument Butte Region located
along the southern shoreline of the ancient lake.
The Company is currently implementing enhanced oil recovery projects using
waterflood techniques designed to repressure zones within the 1,500-foot thick
Lower Green River formation in the Greater Monument Butte Region. In 1996, the
Department of Energy (the "DOE") published a study of a similar enhanced oil
recovery project and concluded that such a program could ultimately increase
the recovery of the original oil in place in the Lower Green River formation
from approximately 5% to up to 21%. The Company believes the results of the
DOE's
3
<PAGE>
study are applicable to its enhanced oil recovery project in the Greater
Monument Butte Region. The Company also believes oil and natural gas exist at
depths above and below the Lower Green River formation throughout the Greater
Monument Butte Region.
The Company is an experienced operator in the Uinta Basin. From January 1,
1994 through June 30, 1997, the Company drilled 90 gross (46 net) new
development and exploratory wells in the Uinta Basin, with a 99% success rate.
As of June 30, 1997, the Company's independent petroleum engineers estimated
that the Company had approximately 75 gross (40 net) proved undeveloped well
locations in the Antelope Creek field in the Uinta Basin. The independent
petroleum engineers attributed an average of 135 MBOE gross proved undeveloped
reserves to such locations with a PV-10 per gross well of approximately
$285,000, net of drilling and completion costs. The Company's net share per
gross well is 58 MBOE with a PV-10 of $152,000, resulting in an aggregate of
approximately 4,340 MBOE with a PV-10 of approximately $11.4 million for such
75 proved undeveloped well locations. The Company believes that as of June 30,
1997 full development of the Company's 38,685 gross undeveloped acres within
the Uinta Basin would support approximately 820 additional drilling locations
based on 40-acre spacing, consisting of approximately 615 locations for
production wells and 205 locations for injection wells, at an estimated average
gross cost of $400,000 per well. In addition to the implementation of its
enhanced oil recovery projects in the Lower Green River formation, the Company
is currently developing the Upper Green River and Wasatch formations utilizing
traditional production methods.
Raton Basin. The Raton Basin, which is located in southeastern Colorado and
northeastern New Mexico, is approximately 80 miles long and 50 miles wide. The
Gas Research Institute has estimated that as of 1993 the Raton Basin held 18
Tcf of recoverable natural gas reserves from coalbed methane, a type of natural
gas produced from a coal source rather than traditional sandstone/carbonate
reservoirs. The Company estimates that, as of December 31, 1996, cumulative
production of approximately 7.9 Bcf of natural gas had been recovered from
approximately 140 coalbed methane wells in the Raton Basin, 91% of which
commenced production since January 1, 1995. As of December 31, 1996, daily
production from these wells was approximately 20 MMcf per day.
The Company recently acquired 56,000 gross and net acres in the Raton Basin
of southeastern Colorado for $700,000, where the Company plans to develop
coalbed methane natural gas reserves. During the last ten years, new drilling,
completion and production techniques have led to the development of substantial
new reserves of coalbed methane natural gas in the United States. Initially,
the Company plans to spend up to approximately $5.0 million to develop a pilot
project to study the feasibility of a full-scale coalbed methane project.
Should the pilot project be successful, based on proposed spacing, the Company
could drill up to 200 wells over the life of the project.
BUSINESS STRATEGY
The Company's strategy, which includes the following key elements, is to
increase its oil and natural gas reserves, oil and natural gas production and
cash flow per share:
. Develop Drillsite Inventory. The Company has established a large
inventory of potential projects by focusing on areas where known
hydrocarbon accumulations have not been fully exploited. The Company is
implementing enhanced oil recovery projects in a development area in the
Uinta Basin that has over 800 drillsite locations for production and
injection wells and intends to initiate a coalbed methane project in the
Raton Basin that, based upon the results of a pilot project, could
support up to 200 wells. Collectively, these projects provide the
Company with a ten-year inventory of potential drilling locations.
. Exploit Existing Reserve Base. The Company intends to apply management's
extensive geological, engineering and operating expertise to identify,
develop and exploit its existing undeveloped and
4
<PAGE>
underdeveloped acreage portfolio. The Company anticipates total capital
expenditures in the second half of 1997 and all of 1998 of approximately
$38 million, of which approximately $18 million will be used to develop
existing proved reserves included in the Company's June 30, 1997 reserve
report. The amount and timing of these expenditures will depend on a
number of factors, including actual drilling results, product prices and
availability of capital.
. Control of Operations. The Company seeks to operate and maintain a
majority working interest position in each of its core properties. These
factors enable the Company to influence directly its projects by
controlling all aspects of drilling, completion and production. In
addition, the Company intends to maintain a low cost overhead structure
by controlling the timing of the development of its properties. By
operating its producing wells, the Company believes it is well
positioned to control the expenses and timing of development and
exploitation of such properties and to better manage cost reduction
efforts.
. Acquire Additional Property Interests. The Company expects that it will,
from time to time, evaluate acquisitions of oil and natural gas
properties in its principal areas of operation and in other areas that
provide attractive investment opportunities for the addition of reserves
and production and that meet one or more of the Company's selection
criteria: (i) an attractive purchase price that, when combined with the
anticipated capital expenditures, exceeds a targeted internal rate of
return, (ii) the potential to increase reserves and production through
the application of lower risk exploitation and exploration techniques
and (iii) the opportunity for improved operating efficiency.
THE OFFERING
Common Stock Offered Hereby.............. 2,333,333 shares
Common Stock to be Outstanding after the
Offering................................. 5,166,666 shares(1)
Use of Proceeds.......................... To fund capital expenditures
relating to the Company's
development programs, to repay
existing indebtedness and for other
general corporate purposes. See
"Use of Proceeds."
PGEI
Nasdaq National Market Symbol.......
- -------
(1) Excludes 260,000 shares of Common Stock issuable upon exercise of
outstanding employee stock options, with an exercise price equal to the
initial public offering price set forth on the cover page of this
Prospectus, and 9,280 shares of Common Stock issuable upon exercise of
outstanding warrants. See "Capitalization," "Executive Compensation and
Other Information--1997 Incentive Plan," "Description of Capital Stock--
Warrants" and Note 9 of Notes to Consolidated Financial Statements.
RISK FACTORS
Investors should consider the material risk factors involved in connection
with an investment in the Common Stock and the impact to investors from
various events that could adversely affect the Company's business. See "Risk
Factors."
5
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
The following table sets forth certain summary consolidated financial data of
the Company. The information should be read in conjunction with the
Consolidated Financial Statements and notes thereto included elsewhere in this
Prospectus. The Company acquired significant interests in certain oil and
natural gas properties and disposed of certain producing oil and natural gas
properties in certain of the periods presented which affect the comparability
of the historical financial and operating data for the periods presented. The
Company's predecessor was classified as a partnership for federal income tax
purposes and, therefore, no income taxes were paid by the Company prior to the
Conversion (as defined in "The Company").
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
------------------------------------------------ -----------------------------------------------
HISTORICAL PRO FORMA(1) HISTORICAL PRO FORMA(1) HISTORICAL PRO FORMA(2)
---------------------------------- ------------ ---------- ------------ ---------- ------------
1993 1994 1995 1996 1996 1996 1996 1997 1997
------- ------- ------- ------- ------------ ---------- ------------ ---------- ------------
(UNAUDITED) (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Operating revenues:
Oil sales............ $ 224 $ 1,644 $ 3,217 $ 4,459 $ 3,523 $2,544 $1,608 $ 1,725 $1,725
Natural gas sales.... 182 796 1,016 999 878 592 471 513 513
Other................ 86 45 36 -- -- -- -- 69 69
------- ------- ------- ------- ------- ------ ------ ------- ------
Total operating
revenues.......... 492 2,485 4,269 5,458 4,401 3,136 2,079 2,307 2,307
------- ------- ------- ------- ------- ------ ------ ------- ------
Operating expenses:
Lease operating...... 238 1,601 2,260 2,369 1,954 1,329 914 841 841
Production taxes..... 9 89 188 249 205 121 77 98 98
Exploration costs.... -- 70 376 69 69 42 42 -- --
Depreciation,
depletion and
amortization........ 153 1,977 2,302 2,806 2,359 1,277 830 1,020 1,020
Impairments.......... -- -- 109 -- -- -- -- -- --
General and
administrative...... 278 956 1,064 902 1,202 590 740 546 696
------- ------- ------- ------- ------- ------ ------ ------- ------
Total operating
expenses.......... 678 4,693 6,299 6,395 5,789 3,359 2,603 2,505 2,655
------- ------- ------- ------- ------- ------ ------ ------- ------
Operating loss........ (186) (2,208) (2,030) (937) (1,388) (223) (524) (198) (348)
Other income
(expenses):
Interest income
(expense), net...... -- (93) (216) 40 147 15 122 19 70
Gain (loss) on sales
of property and
equipment, net...... 63 44 (138) 1,384 70 1,174 (140) 6 6
------- ------- ------- ------- ------- ------ ------ ------- ------
Net income (loss)
before income taxes.. (123) (2,257) (2,384) 487 (1,171) 966 (542) (173) (272)
Pro forma tax
expense(3)........... -- -- -- (190) -- (377) -- -- --
------- ------- ------- ------- ------- ------ ------ ------- ------
Net income (loss)..... $ (123) $(2,257) $(2,384) $ 297 $(1,171) $ 589 $ (542) $ (173) $ (272)
======= ======= ======= ======= ======= ====== ====== ======= ======
Pro forma earnings
(loss) per common
share(6)............. $ (.23) $ (.10) $ (.05)
======= ====== ======
STATEMENT OF CASH FLOWS
DATA:
Net cash provided by
(used in):
Operating
activities.......... $ 4 $ (67) $ 347 $ 4,129 $ 906 $ 87
Investing
activities.......... (1,084) (8,131) (9,580) 303 2,816 (5,627)
Financing
activities.......... 1,418 8,119 10,049 (3,930) (100) 4,335
OTHER FINANCIAL DATA:
Capital expenditures.. $ 1,136 $ 8,277 $10,443 $ 8,665 $4,596 $ 6,367
Adjusted EBITDA(4).... 30 (117) 619 3,322 $ 1,110 2,270 $ 208 828 $ 678
Operating cash
flow(5).............. (33) (233) 608 2,024 1,628 795
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1997
-------------------------
HISTORICAL AS ADJUSTED(7)
---------- --------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents............................ $ 372 $22,422
Working capital...................................... (996) 21,054
Total assets......................................... 23,545 51,095
Total long-term debt................................. 5,035 35
Total owners' equity................................. 12,522 45,072
</TABLE>
6
<PAGE>
- --------
(1) The 1996 Pro Forma amounts reflect results of operations as if (i) the June
1, 1996 disposition of the 50% interest in the Antelope Creek properties
and (ii) the Offering and the application of the net proceeds therefrom
each occurred on January 1, 1996. Assuming that the Offering occurred on
such date, the Company estimates that, for the year ended December 31,
1996, legal, accounting and other general and administrative expenses would
have increased by $300,000. There is no pro forma reduction to interest
expense as a result of the Offering because application of the proceeds
from the disposition of the 50% interest in the Antelope Creek properties
already had the effect of reducing outstanding debt to zero on a pro forma
basis for the year ended December 31, 1996.
(2) The 1997 Pro Forma amounts reflect results of operations as if the Offering
and the application of the net proceeds therefrom occurred on January 1,
1997. Assuming that the Offering occurred on such date, the Company
estimates that for the six months ended June 30, 1997 (i) legal, accounting
and other general and administrative expenses would have increased by
$150,000 and (ii) interest expense would have been reduced by $51,000 to
zero as a result of the application of the net proceeds from the Offering.
(3) The pro forma tax expense was computed at the federal statutory rate of 35%
and an average of the state statutory rates for those states in which the
Company has operations of 4% for each period presented.
(4) Adjusted EBITDA (as used herein) is calculated by adding interest, income
taxes, depreciation, depletion and amortization, impairments and
exploration and abandonment costs to net income (loss). Interest includes
interest expense accrued and amortization of deferred financing costs.
Adjusted EBITDA is presented not as a measure of operating results, but
rather as a measure of the Company's operating performance and ability to
service debt. Adjusted EBITDA is not intended to represent cash flows for
the period; nor has it been presented as an alternative to net income
(loss) or operating income (loss) nor as an indicator of the Company's
financial or operating performance. Adjusted EBITDA should not be
considered in isolation, as a substitute for measures of performance
prepared in accordance with generally accepted accounting principles or as
being comparable to other similarly titled measures of other companies,
which are not necessarily calculated in the same manner.
(5) Operating cash flow is defined as net income plus adjustments to net income
to arrive at net cash provided by operating activities before changes in
working capital.
(6) Pro forma earnings (loss) per common share is calculated giving effect to
the sale of the 2,333,333 shares offered hereby as of January 1, 1996.
Weighted average common shares outstanding used in the calculation of pro
forma earnings (loss) per common share for all periods presented was
5,166,666 common shares.
(7) Adjusted to give effect to the sale of 2,333,333 shares of Common Stock
offered hereby and the application of the estimated net proceeds therefrom.
See "Use of Proceeds" and "Capitalization."
7
<PAGE>
SUMMARY RESERVE AND ACREAGE DATA
The reserve and present value data at June 30, 1997 for the Company's
properties have been prepared by Lee Keeling and Associates, Inc. ("Keeling"),
independent petroleum engineering consultants. The reserve estimates for 1994,
1995 and 1996 have been prepared by the Company. For additional information
relating to the Company's oil and natural gas reserves, see "Risk Factors--
Uncertainty of Reserve Information and Future Net Revenue Estimates," "Business
and Properties--Oil and Natural Gas Reserves" and Note 12 of the Notes to the
Consolidated Financial Statements of the Company. A summary of the June 30,
1997 reserve report and the letter of Keeling with respect thereto is included
as Appendix A to this Prospectus.
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
------------------------------------ AS OF JUNE 30,
1994 1995 1996 1997
----------- ----------- ------------ --------------
<S> <C> <C> <C> <C>
ESTIMATED PROVED RESERVES:
Oil (Bbls)............... 1,204,969 1,561,092 6,127,136 7,724,137
Natural gas (Mcf)........ 7,307,359 6,659,160 18,812,463 20,910,065
BOE (6 Mcf per Bbl)...... 2,422,862 2,670,952 9,262,547 11,209,147
Percent proved
developed............... 100% 100% 15% 24%
Present value of
estimated future net
cash flows before income
tax(1)(2)............... $11,426,635 $14,973,803 $ 64,102,934 $42,871,275(3)
Future net cash flows
before income tax(2).... $16,657,782 $22,431,506 $123,799,579 $84,394,660(4)
ACREAGE:
Gross acres:
Developed............... 21,592 16,251 12,719 13,119
Undeveloped............. 18,561 20,577 34,407 94,612
Net acres:
Developed............... 15,392 13,640 9,450 9,783
Undeveloped............. 13,664 20,537 28,263 89,088
</TABLE>
- --------
(1) The present value of future net cash flows attributable to the Company's
reserves was prepared using prices and costs in effect at the end of the
respective periods presented, discounted at 10% per annum on a pre-tax
basis. These amounts reflect the future effects of the Company's open
hedging contracts at the end of the periods presented. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Hedging Transactions."
(2) Period-end weighted average oil prices used in the estimation of proved
reserves and calculation of the standardized measure were $17.01, $18.00,
$19.50 and $15.09 per Bbl at December 31, 1994, 1995, 1996 and June 30,
1997, respectively. Period-end weighted average natural gas prices were
$1.45, $1.85, $3.37 and $1.71 per Mcf at December 31, 1994, 1995 and 1996
and June 30, 1997, respectively.
(3) Using the Company's weighted average prices received for the 12 months
ending June 30, 1997 of $17.19 per Bbl of oil and $2.12 per Mcf of natural
gas, the present value of estimated net cash flows before income tax would
be $57.0 million as of June 30, 1997.
(4) Using the Company's weighted average prices received for the 12 months
ending June 30, 1997 of $17.19 per Bbl of oil and $2.12 per Mcf of natural
gas, the future net cash flows before income tax would be $110.6 million.
8
<PAGE>
SUMMARY OPERATING DATA
The following table sets forth summary data with respect to the production
and sales of oil and natural gas by the Company for the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
----------------------------------------------- ----------------------------------
HISTORICAL PRO FORMA(1) HISTORICAL PRO FORMA(1) HISTORICAL
---------------------------------- ------------ ---------- ------------ ----------
1993 1994 1995 1996 1996 1996 1996 1997
------- -------- -------- -------- ------------ ---------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PRODUCTION DATA:
Oil (Bbls)............. 10,782 110,373 182,704 262,910 213,535 141,775 94,542 117,770
Natural gas (Mcf)...... 81,192 485,062 659,202 553,770 461,292 358,420 271,431 243,095
Total (BOE)............ 24,314 191,217 292,571 355,205 290,417 201,512 139,781 158,286
AVERAGE SALES PRICE PER
UNIT(2):
Oil (per Bbl)(3)....... $ 20.78 $ 14.89 $ 17.61 $ 16.96 $ 16.50 $ 17.94 $ 17.01 $ 14.65
Natural gas (per Mcf).. 2.24 1.64 1.54 1.80 1.90 1.65 1.74 2.11
BOE.................... 16.71 12.76 14.47 15.36 15.15 15.56 14.87 14.14
COSTS PER BOE:
Average lease operating
expenses including
production and property
taxes (per BOE):
Utah.................. $ -- $ 9.95 $ 6.06 $ 5.21 $ 4.53 $ 6.08 $ 4.92 $ 4.13
Other................. 10.18 8.40 11.68 11.99 11.99 9.36 9.36 17.45(4)
Weighted average...... 10.18 8.84 8.37 7.37 7.43 7.19 7.09 5.93
General and
administrative........ 11.42 5.00 3.64 2.54 3.11 2.93 4.22 3.45
Depreciation, depletion
and amortization...... 6.31 10.34 7.87 7.90 8.12 6.34 5.94 6.45
</TABLE>
- --------
(1) The Pro Forma amounts reflect results of operations as if the June 1, 1996
disposition of the 50% interest in the Antelope Creek properties had
occurred on January 1, 1996.
(2) Before deduction of production taxes.
(3) Excluding the effects of losses from crude oil hedging transactions and
amortization of deferred revenue, the weighted average sales price per Bbl
of oil was $20.22 for the year ended December 31, 1996, $18.22 for the
historical six months ended June 30, 1996, $17.43 for the pro forma six
months ended June 30, 1996 and $15.96 for the historical six months ended
June 30, 1997.
(4) Excluding the effects of a workover and bottomhole repair to a well that
totaled $131,000, the average lease operating expense for the other
properties for the six months ended June 30, 1997 was $11.37 per BOE.
The following table sets forth average finding costs data with respect to the
Company's oil and natural gas properties for the periods indicated.
<TABLE>
<CAPTION>
SIX MONTHS FROM
YEAR ENDED DECEMBER 31, ENDED JANUARY 1, 1994
------------------------ JUNE 30, TO
1994 1995 1996 1997 JUNE 30, 1997
------- -------- ------- ---------- ---------------
<S> <C> <C> <C> <C> <C>
AVERAGE FINDING COSTS
(PER BOE):
Utah.................. $ 7.79 $ 9.86 $ 2.74(1) $2.53(1) $3.39(1)
Other................. 2.31 * * * 4.01
Total................. 3.92 10.96 2.86 2.55 3.43
</TABLE>
- --------
* Not meaningful.
(1) The calculation of average finding costs for Utah for the year ended
December 31, 1996, the six months ended June 30, 1997 and for the period
from January 1, 1994 to June 30, 1997, includes future development costs of
$16.5 million, $1.7 million, and $18.1 million, respectively. Average
finding costs per BOE for Utah excluding these amounts were $0.79, $1.78
and $1.87 for the year ended December 31, 1996, the six months ended June
30, 1997, and for the period from January 1, 1994 to June 30, 1997,
respectively.
9
<PAGE>
RISK FACTORS
An investment in the shares of Common Stock offered hereby involves a high
degree of risk. Prospective investors should carefully consider the following
risk factors, in addition to the other information contained in this
Prospectus, in connection with an investment in the shares of Common Stock
offered hereby.
This Prospectus contains forward-looking statements. The words "anticipate,"
"believe," "expect," "plan," "intend," "estimate," "project," "will," "could,"
"may" and similar expressions are intended to identify forward-looking
statements. These statements include information regarding oil and natural gas
reserves, future drilling and operations, future production of oil and natural
gas and future net cash flows. Such statements reflect the Company's current
views with respect to future events and financial performance and involve
risks and uncertainties, including without limitation the risks described
below in "Risk Factors." Should one or more of these risks or uncertainties
occur, or should underlying assumptions prove incorrect, actual results may
vary materially and adversely from those anticipated, believed, estimated or
otherwise indicated.
VOLATILITY OF OIL AND NATURAL GAS PRICES. The Company's revenues, operating
results, profitability and future growth and the carrying value of its oil and
natural gas properties are substantially dependent upon the prices received
for the Company's oil and natural gas. Historically, the markets for oil and
natural gas have been volatile and such volatility may continue or recur in
the future. Various factors beyond the control of the Company will affect
prices of oil and natural gas, including the worldwide and domestic supplies
of oil and natural gas, the ability of the members of the Organization of
Petroleum Exporting Countries ("OPEC") to agree to and maintain oil price and
production controls, political instability or armed conflict in oil or natural
gas producing regions, the price and level of foreign imports, the level of
consumer demand, the price, availability and acceptance of alternative fuels,
the availability of pipeline capacity, weather conditions, domestic and
foreign governmental regulations and taxes and the overall economic
environment.
Any significant decline in the price of oil or natural gas would adversely
affect the Company's revenues and operating income (loss) and could require an
impairment in the carrying value of the Company's oil and natural gas
properties. See "Risk Factors--Uncertainty of Reserve Information and Future
Net Revenue Estimates," "Business and Properties--Competition" and "Business
and Properties--Regulation."
UNCERTAINTY OF RESERVE INFORMATION AND FUTURE NET REVENUE ESTIMATES. There
are numerous uncertainties inherent in estimating quantities of proved oil and
natural gas reserves and their values, including many factors beyond the
Company's control. Estimates of proved undeveloped reserves and reserves
recoverable through enhanced oil recovery techniques, which comprise a
significant portion of the Company's reserves, are by their nature uncertain.
The reserve information set forth in this Prospectus represents estimates
only. Although the Company believes such estimates to be reasonable, reserve
estimates are imprecise and should be expected to change as additional
information becomes available.
Estimates of oil and natural gas reserves, by necessity, are projections
based on engineering data, and there are uncertainties inherent in the
interpretation of such data as well as the projection of future rates of
production and the timing of development expenditures. Reserve engineering is
a subjective process of estimating underground accumulations of oil and
natural gas that are difficult to measure. The accuracy of any reserve
estimate is a function of the quality of available data, engineering and
geological interpretation and judgment. In particular, given the early stage
of the Company's development programs, the ultimate effect of such programs is
difficult to ascertain. Estimates of economically recoverable oil and natural
gas reserves and of future net cash flows necessarily depend upon a number of
variable factors and assumptions, such as historical production from the area
compared with production from other producing areas, the assumed effects of
improved recovery techniques such as the enhanced oil recovery techniques
utilized by the Company, the assumed effects of regulations by governmental
and tribal 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. For these reasons, estimates of the economically
recoverable quantities of oil and natural gas attributable to any particular
group of properties, classifications of
10
<PAGE>
such reserves based on risk of recovery and estimates of the future net cash
flows expected therefrom may vary substantially. Any significant variance in
the assumptions could materially affect the estimated quantity and value of
the reserves. Actual production, revenues and expenditures with respect to the
Company's reserves will likely vary from estimates, and such variances may be
material. See "Business and Properties--Oil and Natural Gas Reserves."
The PV-10 referred to in this Prospectus should not be construed as the
current market value of the estimated oil and natural gas reserves
attributable to the Company's properties. In accordance with applicable
requirements, the estimated discounted future net cash flows from proved
reserves are based on prices and costs as of the date of the estimate, whereas
actual future prices and costs may be materially higher or lower. Actual
future net cash flows also will be affected by factors such as the amount and
timing of actual production, supply and demand for oil and natural gas,
refinery capacity, curtailments or increases in consumption by natural gas
purchasers and changes in governmental regulations or taxation. The timing of
actual future net cash flows from proved reserves, and thus their actual
present value, will be affected by the timing of both the production and the
incurrence of expenses in connection with development and production of oil
and natural gas properties. In addition, the 10% discount factor, which is
required to be used to calculate discounted future net cash flows for
reporting purposes, is not necessarily the most appropriate discount factor
based on interest rates in effect from time to time and risks associated with
the Company or the oil and natural gas industry in general.
LIMITED OPERATING HISTORY. The Company, which began operations in April
1993, has a limited operating history upon which investors may base their
evaluation of the Company's performance. As a result of its brief operating
history, expanded drilling program and change in the Company's mix of
properties during such period as a result of its acquisition and disposition
of properties, the operating results from the Company's historical periods may
not be indicative of future results. There can be no assurance that the
Company will continue to experience growth in, or maintain its current level
of, revenues, oil and natural gas reserves or production. In addition, the
Company's expansion has placed significant demands on its administrative,
operational and financial resources and the Company is in the process of
implementing a new accounting system. Any future growth of the Company's oil
and natural gas reserves, production and operations would place significant
further demands on the Company's financial, operational and administrative
resources. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
HISTORY OF OPERATING LOSSES AND NET LOSSES. The Company has experienced
operating losses in each year since its inception in 1993, including an
operating loss of approximately $937,000 in 1996. Excluding the effect of the
$1.3 million gain on the sale of the 50% interest in Antelope Creek in 1996,
the Company also has experienced net losses in each year since its inception.
During the first six months of 1997, the Company incurred an operating loss
and a net loss of approximately $198,000 and $173,000, respectively. Although
the Company expects its results of operations to improve as it completes
additional Uinta Basin wells and develops its Raton Basin acreage, there is no
assurance that the Company will achieve, or be able to sustain, profitability.
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations."
EARLY STAGES OF DEVELOPMENT ACTIVITIES. The Company's development plan
includes (i) the drilling of development and exploratory wells in the Uinta
Basin, together with injection wells that are intended to repressurize
producing reservoirs in the Lower Green River formation, (ii) subject to the
evaluation of the results of a pilot program, the drilling of exploratory
wells in connection with the development of a coalbed methane project in the
Raton Basin and (iii) the use of 3-D seismic technology to exploit its
properties in south Texas. The success of these projects will be materially
dependent on whether the Company's development and exploratory wells can be
drilled and completed as commercially productive wells, whether the enhanced
oil recovery techniques can successfully repressurize reservoirs and increase
the rate of production and ultimate recovery of oil and natural gas from the
Company's acreage in the Uinta Basin and whether the Company can successfully
implement its planned coalbed methane project on its acreage in the Raton
Basin. Although the Company believes the geologic characteristics of its
project areas reduce the probability of drilling nonproductive wells, there
can be no assurance that the Company will drill productive wells. If the
Company drills a significant number of nonproductive wells, the Company's
business, financial condition and results of operations would be materially
adversely affected. While the Company's pilot enhanced oil recovery projects
in the Uinta Basin have
11
<PAGE>
indicated that rates of oil production can be increased, the repressurization
takes place over a period of approximately two years, with full response
occurring after approximately five years; therefore, the ultimate effect of
the enhanced oil recovery operations will not be known for several years.
Ultimate recoveries of oil and natural gas from the enhanced oil recovery
programs may also vary at different locations within the Company's Uinta Basin
properties. Accordingly, due to the early stage of development, the Company is
unable to predict whether its development activities in the Uinta Basin will
meet its expectations. In the event the Company's enhanced oil recovery
program does not effectively increase rates of production or ultimate recovery
of oil reserves, the Company's business, financial condition and results of
operation will likely be materially adversely affected.
RISKS ASSOCIATED WITH OPERATING IN THE UINTA BASIN
Concentration in Uinta Basin. The Company's properties in the Greater
Monument Butte Region of the Uinta Basin constitute the majority of the
Company's existing inventory of producing properties and drilling locations.
Approximately 82% of the Company's 1997 capital expenditure budget of
approximately $18 million is expected to be dedicated to developing the
Company's enhanced oil recovery projects in this area. There can be no
assurance that the Company's operations in the Uinta Basin will yield positive
economic returns. Failure of the Company's Uinta Basin properties to yield
significant quantities of economically attractive reserves and production
would have a material adverse impact on the Company's financial condition and
results of operations. In addition, recent heavy drilling activity by a number
of operators in the Uinta Basin may increase the cost to acquire additional
acreage in this area, reduce or limit the availability of drilling and service
rigs, equipment and supplies, or reduce demand for the Company's production,
any of which would impact the Company more adversely than if the Company were
more geographically diversified.
Limited Refining Capacity for Uinta Basin Black Wax. The marketability of
the Company's oil production depends in part upon the availability, proximity
and capacity of refineries, pipelines and processing facilities. The crude oil
produced in the Uinta Basin is known as "black wax" or "yellow wax" and has a
higher paraffin content than crude oil found in most other major North
American basins. Currently, the most economic markets for the Company's black
wax production are five refineries in Salt Lake City that have limited
facilities to refine efficiently this type of crude oil. Because these
refineries have limited capacity, any significant increase in Uinta Basin
"black wax" production or temporary or permanent refinery shutdowns due to
maintenance, retrofitting, repairs, conversions to or from "black wax"
production or otherwise could create an over supply of "black wax" in the
market, causing prices for Uinta Basin oil to decrease. Since July 1996, the
posted prices for Uinta Basin oil production have been lower than major
national indexes for crude oil. The Company believes these differences are
attributable to one or more market factors, including refinery capacity
constraints caused by scheduled maintenance at one of the Salt Lake City
refineries, the increase in supply of Uinta Basin "black wax" production
resulting from the recent drilling activity or the reaction to the potential
availability of additional non-Uinta Basin crude oil production associated
with a new pipeline. There can be no assurance that prices will return to
historical levels or that other price declines related to supply imbalances
will not occur in the future. To the extent crude oil prices decline further
or the Company is unable to market efficiently its oil production, the
Company's business, financial condition and results of operations could be
materially adversely affected.
Marketability of Natural Gas Production. The Company's Uinta Basin
properties currently produce natural gas in association with the production of
crude oil. The produced natural gas is gathered into the Company's natural gas
pipeline gathering system and compressed into an interstate natural gas
pipeline at which point the produced natural gas is sold to marketers or end
users. Because current state and Ute tribal regulations prohibit the flaring
or venting of natural gas produced in the Uinta Basin, in the event the
Company is unable to either market its natural gas production due to pipeline
capacity constraints or curtailments, the Company may be forced to shut in or
curtail its oil and natural gas production from any affected wells or install
the necessary facilities to reinject the natural gas into existing wells.
Federal and state regulation of oil and natural gas production and
transportation, tax and energy policies, changes in supply and demand and
general economic conditions all could adversely affect the Company's ability
to produce and market its natural gas. Any dramatic change in any of these
market factors or curtailment of oil and natural gas production due to the
Company's inability to vent or flare natural gas could have a material adverse
effect on the Company.
12
<PAGE>
Availability of Water for Enhanced Oil Recovery Program. The Company's
enhanced oil recovery program involves the injection of water into wells to
pressurize reservoirs and, therefore, requires substantial quantities of
water. The Company intends to satisfy its requirements from one or more of
three sources: water produced from water wells, water purchased from local
water districts and water produced in association with oil production. The
Company currently has drilled water wells only in the Antelope Creek field,
and there can be no assurance that these water wells will continue to produce
quantities sufficient to support the Company's enhanced oil recovery program,
that the Company will be able to obtain the necessary approvals to drill
additional water wells or that successful water wells can be drilled in its
other Uinta Basin development areas. The Company has a contract with East
Duchesne Water District to purchase up to 10,000 barrels of water per day
through September 30, 2004. After the initial term, this contract
automatically renews each year for one additional year; however, either party
may terminate the agreement with twelve months prior notice. In the event of a
water shortage, the East Duchesne Water District contract provides that
preferences will be given to residential customers and other water customers
having a higher use priority than the Company. In addition, the Company has
not yet secured a water source for full development of its Natural Buttes
Extension properties. There can be no assurance that water shortages will not
occur or that the Company will be able to renew or enter into new water supply
agreements on commercially reasonable terms or at all. To the extent the
Company is required to pay additional amounts for its supply of water, the
Company's financial condition and results of operations may be adversely
affected. While the Company believes that there will be sufficient volumes of
water available to support its improved oil recovery program and has taken
certain actions to ensure an adequate water supply will be available, in the
event the Company is unable to obtain sufficient quantities of water, the
Company's enhanced oil recovery program and business would be materially
adversely affected.
RISKS ASSOCIATED WITH PLANNED OPERATIONS IN THE RATON BASIN
Coalbed Methane Production. Although similar to traditional natural gas
reserves, coalbed methane reserves have historically been more expensive to
develop and produce. During the last ten years, new technology has lowered the
cost of coalbed methane production, making such development commercially
viable in areas where production was previously thought to be uneconomic.
While the Company believes that these new technologies will be applicable to
its acreage in the Raton Basin, the Company has yet to begin its development
program. There can be no assurance that when and if such program is begun the
Company will discover natural gas and, if discovered, be successful in
completing commercially productive wells.
Dependence on Third Party Expertise. Based on its limited operating
experience in the Raton Basin, the Company intends to engage independent
contractors in connection with its coalbed methane natural gas development
activities. There can be no assurance that such technological expertise will
be available to the Company on commercially reasonable terms or at all.
Water Disposal. The Company believes that the water produced from the Raton
Basin coal seams will be low in dissolved solids, allowing the Company,
operating under permits which the Company believes will be issued by the State
of Colorado, to discharge the water into streambeds or stockponds. However, if
nonpotable water is discovered, it may be necessary to install and operate
evaporators or to drill disposal wells to reinject the produced water back
into the underground rock formations adjacent to the coal seams or to lower
sandstone horizons. In the event the Company is unable to obtain permits from
the State of Colorado, nonpotable water is discovered or if applicable future
laws or regulations require water to be disposed of in an alternative manner,
the costs to dispose of produced water will increase, which increase could
have a material adverse effect on the Company's operations in this area. See
"Business and Properties--Principal Properties--Raton Basin--Water Production
and Disposal."
RISKS OF HEDGING TRANSACTIONS. In order to manage its exposure to price
risks in the marketing of its oil and natural gas, the Company has in the past
and expects to continue to enter into oil and natural gas price hedging
arrangements with respect to a portion of its expected production. These
arrangements may include
13
<PAGE>
futures contracts on the New York Mercantile Exchange ("NYMEX"), fixed price
delivery contracts and financial collars and swaps. While intended to reduce
the effects of the volatility of the price of oil and natural gas, such
transactions may limit potential gains by the Company if oil and natural gas
prices were to rise substantially over the price established by the hedge. In
addition, such transactions may expose the Company to the risk of financial
loss in certain circumstances, including instances in which (i) production is
less than expected, (ii) there is a widening of price differentials between
delivery points for the Company's production and the delivery point assumed in
the hedging arrangement, (iii) the counterparties to the Company's
future contracts fail to perform the contract, or (iv) a sudden, unexpected
event materially impacts oil or natural gas prices. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Hedging Transactions," "Business and Properties--Hedging Activities" and Note
7 of Notes to Consolidated Financial Statements.
SUBSTANTIAL CAPITAL REQUIREMENTS. The Company's current development plans
will require it to make substantial capital expenditures in connection with
the exploration, development and exploitation of its oil and natural gas
properties. The Company's enhanced oil recovery project and pilot coalbed
methane project require substantial initial capital expenditures.
Historically, the Company has funded its capital expenditures through a
combination of internally generated funds from sales of production or
properties, equity contributions, long-term debt financing and short-term
financing arrangements. The Company anticipates that the net proceeds from the
Offering will be sufficient to meet its estimated capital expenditure
requirements for the 12 months following the Offering. The Company believes
that after such 12-month period it will require a combination of additional
financing and cash flow from operations to implement its future development
plans. The Company currently does not have any arrangements with respect to,
or sources of, additional financing other than the Credit Agreement, and there
can be no assurance that any additional financing will be available to the
Company on acceptable terms or at all. Future cash flows and the availability
of financing will be subject to a number of variables, such as the level of
production from existing wells, prices of oil and natural gas, the Company's
success in locating and producing new reserves and the success of the enhanced
recovery program in the Uinta Basin and the coalbed methane project in the
Raton Basin. To the extent that future financing requirements are satisfied
through the issuance of equity securities, the Company's existing stockholders
may experience dilution that could be substantial. The incurrence of debt
financing could result in a substantial portion of the Company's operating
cash flow being dedicated to the payment of principal and interest on such
indebtedness, could render the Company more vulnerable to competitive
pressures and economic downturns and could impose restrictions on the
Company's operations. If revenue were to decrease as a result of lower oil and
natural gas prices, decreased production or otherwise, and the Company had no
availability under the Credit Agreement or any other credit facility, the
Company could have a reduced ability to execute its current development plans,
replace its reserves or to maintain production levels, which could result in
decreased production and revenue over time. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources."
DRILLING AND OPERATING RISKS. Oil and natural gas drilling activities are
subject to many risks, including the risk that no commercially productive
reservoirs will be encountered. There can be no assurance that wells drilled
by the Company will be productive or that the Company will recover all or any
portion of its drilling costs. 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 enhanced
oil recovery techniques in the Uinta Basin requires greater development
expenditures than alternative primary production strategies. In order to
accomplish enhanced oil recovery, the Company expects to drill a number of
wells utilizing waterflood technology in the future. The Company's waterflood
program involves greater risk of mechanical problems than conventional
development programs. 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, title problems, water
shortages, weather conditions, compliance with governmental and tribal
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.
14
<PAGE>
The Company's operations are subject to hazards and risks inherent in
drilling for and producing and transporting oil and natural gas, such as
fires, natural disasters, explosions, encountering formations with abnormal
pressures, blowouts, cratering, pipeline ruptures and spills, any of which can
result in the loss of hydrocarbons, environmental pollution, personal injury
claims and other damage to properties of the Company and others. As protection
against operating hazards, the Company maintains insurance coverage against
some, but not all, potential losses. The Company may elect to self-insure in
circumstances in which management believes that the cost of insurance,
although available, is excessive relative to the risks presented. The
occurrence of an event that is not covered, or not fully covered, by third-
party insurance could have a material adverse effect on the Company's
business, financial condition and results of operations.
COMPLIANCE WITH GOVERNMENTAL AND TRIBAL REGULATIONS. Oil and natural gas
operations are subject to extensive federal, state and local laws and
regulations relating to the exploration for, and the development, production
and transportation of, oil and natural gas, as well as safety matters, which
may be changed from time to time in response to economic or political
conditions. In addition, approximately 35% of the Company's acreage is located
on Ute tribal land and is leased by the Company from the Ute Indian Tribe and
the Ute Distribution Corporation. Because the Ute tribal authorities have
certain rule making authority and jurisdiction, such leases may be subject to
a greater degree of regulatory uncertainty than properties subject to only
state and federal regulations. Although the Company has not experienced any
material difficulties with its Ute tribal leases or in complying with Ute
tribal laws or customs, there can be no assurance that material difficulties
will not be encountered in the future. Matters subject to regulation by
federal, state, local and Ute tribal authorities include permits for drilling
operations, road and pipeline construction, reports concerning operations, the
spacing of wells, unitization and pooling of properties, taxation and
environmental protection. Prior to drilling any wells in the Uinta Basin,
applicable federal and Ute tribal requirements and the terms of its
development agreements will require the Company to have prepared by third
parties and submitted for approval an environmental and archaeological
assessment for each area to be developed prior to drilling any wells in such
areas. Although the Company has not experienced any material delays that have
affected its development plans, there can be no assurance that delays will not
be encountered in the preparation or approval of such assessments, or that the
results of such assessments will not require the Company to alter its
development plans. Any delays in obtaining approvals or material alterations
to the Company's development plans could have a material adverse effect on the
Company's operations. 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 oil and natural gas. Although the Company believes it is
in substantial compliance with all applicable laws and regulations, the
requirements imposed by such laws and regulations are frequently changed and
subject to interpretation, and the Company is unable to predict the ultimate
cost of compliance with these requirements or their effect on its operations.
Significant expenditures may be required to comply with governmental and Ute
tribal laws and regulations and may have a material adverse effect on the
Company's financial condition and results of operations. See "Business and
Properties--Regulation."
COMPLIANCE WITH ENVIRONMENTAL REGULATIONS. The Company's operations are
subject to complex and constantly changing environmental laws and regulations
adopted by federal, state and local governmental authorities. The
implementation of new, or the modification of existing, laws or regulations
could have a material adverse effect on the Company. The discharge of oil,
natural gas or other pollutants into the air, soil or water may give rise to
significant liabilities on the part of the Company to the government and third
parties and may require the Company to incur substantial costs of remediation.
Moreover, the Company has agreed to indemnify sellers of properties purchased
by the Company against certain liabilities for environmental claims associated
with such properties. No assurance can be given that existing environmental
laws or regulations, as currently interpreted or reinterpreted in the future,
or future laws or regulations will not materially adversely affect the
Company's results of operations and financial condition or that material
indemnity claims will not arise against the Company with respect to properties
acquired by the Company. See "Business and Properties--Regulation."
RESERVE REPLACEMENT RISK. The Company's future success depends upon its
ability to find, develop or acquire additional oil and natural gas reserves
that are economically recoverable. The proved reserves of the Company will
generally decline as reserves are depleted, except to the extent that the
Company conducts
15
<PAGE>
successful exploration or development activities, enhanced oil recovery
activities or acquires properties containing proved reserves. Approximately
76% of the Company's total proved reserves at June 30, 1997 were undeveloped.
In order to increase reserves and production, the Company must continue its
development and exploitation drilling programs or undertake other replacement
activities. The Company's current development plan includes increasing its
reserve base through continued drilling, development and exploitation of its
existing properties. There can be no assurance, however, that the Company's
planned development and exploitation projects will result in significant
additional reserves or that the Company will have continuing success drilling
productive wells at anticipated finding and development costs.
DEPENDANCE ON KEY PERSONNEL. The Company's success has been and will
continue to be highly dependent on Robert C. Murdock, its Chairman of the
Board, President and Chief Executive Officer, Robert A. Christensen, its
Executive Vice President and Chief Technical Officer, Sidney Kennard Smith,
its Executive Vice President and Chief Operating Officer, and a limited number
of other senior management and technical personnel. Loss of the services of
Mr. Murdock, Mr. Christensen, Mr. Smith or any of those other individuals
could have a material adverse effect on the Company's operations. The
Company's failure to retain its key personnel or hire additional personnel
could have a material adverse effect on the Company.
CONTROL BY EXISTING STOCKHOLDERS. Upon completion of the Offering,
directors, executive officers and current principal stockholders of the
Company will beneficially own approximately 54.8% of the Company's outstanding
Common Stock (approximately 51.4% if the Underwriters over-allotment option is
exercised in full). Accordingly, these stockholders, as a group, will be able
to control the outcome of stockholder votes, including votes concerning the
election of directors, the adoption or amendment of provisions in the
Company's Certificate of Incorporation or Bylaws and the approval of mergers
and other significant corporate transactions. Furthermore, because certain
actions of the Board such as issuing preferred stock and amending the Bylaws
require an 80% supermajority approval of the Board of Directors, the existence
of these levels of ownership concentrated in a few persons makes it unlikely
that any other holder of Common Stock will be able to control the election of
enough directors to affect the management or direction of the Company. These
factors may also have the effect of delaying or preventing a change in the
management or voting control of the Company, including transactions that
otherwise could involve payment of a premium over prevailing market prices to
holders of Common Stock. See "Principal Stockholders" and "--Certain Anti-
Takeover Provisions."
COMPETITION. The Company operates in the highly competitive areas of oil and
natural gas exploration, exploitation, acquisition and production with other
companies, many of which have substantially larger financial resources,
operations, staffs and facilities. In seeking to acquire desirable producing
properties or new leases for future exploration and in marketing its oil and
natural gas production, the Company faces intense competition from both major
and independent oil and natural gas companies. Many of these competitors have
financial and other resources substantially in excess of those available to
the Company. The effects of this highly competitive environment could have a
material adverse effect on the Company. See "Business and Properties--
Competition."
ACQUISITION RISKS. The Company has grown primarily through the acquisition
and development of its oil and natural gas properties. Although the Company
expects to concentrate on such activities in the future, the Company expects
that it may evaluate and pursue from time to time acquisitions in the Uinta
Basin, the Raton Basin and in other areas that provide attractive investment
opportunities for the addition of production and reserves and that meet the
Company's selection criteria. The successful acquisition of producing
properties and undeveloped acreage 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 performs a
review of the subject properties it believes to be generally consistent with
industry practices. This review, however, will not reveal all existing or
potential problems, nor will it permit a buyer to become sufficiently familiar
with the properties to assess fully their deficiencies and capabilities.
Inspections may not be performed on every well, and structural and
environmental problems are not necessarily observable even
16
<PAGE>
when an inspection is undertaken. The Company generally assumes preclosing
liabilities, including environmental liabilities, and generally acquires
interests in the properties on an "as is" basis. With respect to its
acquisitions to date, the Company has no material commitments for capital
expenditures to comply with existing environmental requirements. There can be
no assurance that any acquisitions will be successful. Any unsuccessful
acquisition could have a material adverse effect on the Company.
CERTAIN ANTI-TAKEOVER PROVISIONS. The Company's Certificate of Incorporation
and Bylaws contain provisions which may have the effect of delaying, deferring
or preventing a change in control of the Company. These provisions, among
other things, provide for noncumulative election of the Board of Directors,
impose certain procedural requirements on stockholders of the Company who wish
to make nominations for the election of directors or propose other actions at
stockholders' meetings and require an 80% supermajority vote of the Board of
Directors in order to approve amendments to the Company's Bylaws. Furthermore,
the Company's Bylaws provide that stockholders may only call special meetings
by a majority of the votes entitled to be cast by the stockholders at the
meeting except that, not more than once per year, a meeting may be called by
the holders of 10% of the votes entitled to be cast at such meeting. In
addition, the Company's Certificate of Incorporation authorizes the Board to
issue up to 5,000,000 shares of preferred stock without stockholder approval
and to set the rights, preferences and other designations, including voting
rights, of those shares as the Board of Directors may determine. These
provisions, alone or in combination with each other and with the matters
described in "Risk Factors--Control by Existing Stockholders," may discourage
transactions involving actual or potential changes of control of the Company,
including transactions that otherwise could involve payment of a premium over
prevailing market prices to holders of Common Stock. The Company also is
subject to provisions of the Delaware General Corporation Law that may make
some business combinations more difficult. See "Description of Capital Stock--
Certain Provisions of the Company's Charter and Bylaws and Delaware Law
Provisions."
ABSENCE OF DIVIDENDS ON COMMON STOCK. The Company has never declared or paid
cash dividends on its Common Stock and anticipates that future earnings will
be retained for development of its business. In addition, the Credit Agreement
prohibits the payment of cash dividends. See "Dividend Policy."
SHARES ELIGIBLE FOR FUTURE SALE; REGISTRATION RIGHTS. Upon completion of the
Offering, the Company will have a total of 5,166,666 shares outstanding. Of
these shares, the 2,333,333 shares offered hereby (2,683,333 shares if the
Underwriters' over-allotment option is exercised in full) will be freely
tradeable without restriction or registration under the Securities Act of
1933, as amended (the "Securities Act"), by persons other than "affiliates" of
the Company, as defined under the Securities Act. The remaining 2,833,333
shares of Common Stock outstanding will be "restricted securities" as that
term is defined by Rule 144 as promulgated under the Securities Act. Upon the
closing of the Offering, the Company will have options and warrants
outstanding to purchase an aggregate of 269,280 shares of Common Stock. See
"Executive Compensation and Other Information," "Shares Eligible for Future
Sale" and "Description of Capital Stock."
Under Rule 144 (and subject to the conditions thereof, including the volume
limitations described above), the Company believes that the earliest date on
which any of the shares of its Common Stock currently outstanding will be
eligible for sale under Rule 144 is the first anniversary of the completion of
the Offering. All of the restricted shares are subject to lockup restrictions.
Pursuant to these restrictions, the holders of all restricted shares,
including certain of the Company's executive officers and directors, have
agreed that they will not, directly or indirectly, offer, sell, offer to sell,
contract to sell, pledge, grant any option to purchase or otherwise sell or
dispose (or announce any offer, sale, offer of sale, contract to sell, pledge,
grant of any options to purchase or sale or disposition) of any shares of
Common Stock or other capital stock of the Company, or any securities
convertible into, or exercisable or exchangeable for, any shares of Common
Stock or other capital stock of the Company without the prior written consent
of Prudential Securities Incorporated, on behalf of the Underwriters, for a
period of 180 days from the date of this Prospectus. Prudential Securities
Incorporated may, in its sole discretion, at any time and without notice,
release all or any portion of the securities to such agreements. The holders
of 2,833,333 shares of Common Stock and their permitted transferees have
demand registration rights to require the Company to register such shares
under the Securities Act beginning 180 days after the date of this
17
<PAGE>
Prospectus. See "Description of Capital Stock--Registration Rights."
Registration and sale of such shares could have an adverse effect on the
trading price of the Common Stock.
Prior to the Offering, there has been no public market for the Common Stock
and no predictions can be made of the effect, if any, that the sale or
availability for sale of shares of additional Common Stock will have on the
market price of the Common Stock. Nevertheless, sales of substantial amounts
of such shares in the public market, or the perception that such sales could
occur, could materially and adversely affect the market price of the Common
Stock and could impair the Company's future ability to raise capital through
an offering of its equity securities.
IMMEDIATE AND SUBSTANTIAL DILUTION. Assuming an initial public offering
price of $15.00 per share, purchasers of the Common Stock in the Offering will
experience an immediate and substantial dilution in net tangible book value
per share of approximately $6.53. See "Dilution."
NO PRIOR PUBLIC MARKET; POSSIBLE STOCK PRICE VOLATILITY. Before the
Offering, there has been no public market for the Common Stock. The initial
public offering price will be determined through negotiation between the
Company and the Representatives of the Underwriters based on several factors
that may not be indicative of future market prices. See "Underwriting" for a
discussion of the factors to be considered in determining the initial public
offering price. Although the Common Stock has been approved for inclusion in
the Nasdaq National Market, there can be no assurance that it will be actively
traded on such market or that, if active trading does develop, it will be
sustained. The market price of the Common Stock and the price at which the
Company may sell securities in the future could be subject to large
fluctuations in response to changes and variations in the Company's operating
results, litigation, general market conditions, the prices of oil and natural
gas, refining capacity in Salt Lake City, Utah and other regions, the
liquidity of the Company and the Company's ability to raise additional funds
the number of market makers for the Company's Common Stock and other factors.
In the event that the Company's operating results are below the expectations
of public market analysts and investors in one or more future periods, it is
likely that the price of the Common Stock will be materially adversely
affected. In addition, the stock market has experienced significant price and
volume fluctuations that have particularly affected the market prices of
equity securities of many energy companies and that often have been unrelated
to the operating performance of such companies. General market fluctuations
may also adversely affect the market price of the Common Stock.
18
<PAGE>
THE COMPANY
GENERAL
Petroglyph is an independent energy company engaged in the exploration,
development and acquisition of oil and natural gas properties. The Company's
primary operations are focused in the Greater Monument Butte Region of the
Uinta Basin of Utah. In addition, the Company recently acquired properties in
the Raton Basin in Colorado. See "Business and Properties."
COMPANY HISTORY
Initial Operations. The Company's predecessor was formed as a limited
partnership in April 1993 by Robert C. Murdock, Robert A. Christensen and
Natural Gas Partners, L.P. ("NGP I"). From its inception, the Company has
engaged in the acquisition, exploration and exploitation of oil and natural
gas properties, acquiring proved developed producing properties in Colorado,
Kansas, Oklahoma, Utah and Texas for approximately $11.7 million. These
acquisitions were funded by equity capital from NGP I and certain members of
management. Since inception of the Company to December 31, 1996, cash flow
from operations and from the sale of these properties amounted to
approximately $14.4 million. The Company sold the predominant portion of these
properties during 1996 in order to focus on and accelerate its Uinta Basin oil
and natural gas exploration and exploitation projects. Since the Company's
formation, NGP I, Natural Gas Partners II, L.P., Natural Gas Partners III,
L.P. (collectively, "NGP"), certain of NGP's affiliates and certain members of
the Company's management have invested an aggregate of approximately $17.0
million in the Company.
Uinta Basin. In February 1994, the Company purchased a 50% working interest
and operating rights in existing Antelope Creek and Duchesne fields containing
approximately 22,000 gross acres in the Uinta Basin for approximately $4.5
million. In September 1995, the Company purchased the remaining 50% working
interest in these fields for approximately $5.6 million. In April 1996, the
Company acquired development rights to approximately 15,450 gross acres in the
Natural Buttes Extension field, which forms the eastern boundary of the
Greater Monument Butte Region.
In June 1996, the Company sold a 50% working interest in its Antelope Creek
field to an industry partner. The Company owns the remaining 50% working
interest and continues to serve as operator of the property. In exchange for
the sale of the interest in the Antelope Creek field, the Company received
approximately $7.5 million in cash and $5.3 million in carried development
costs. The Company recognized a gain of $1.3 million on the sale of this
interest. See "Pro Forma Condensed Consolidated Statements of Operations."
Raton Basin. The Company recently acquired 56,000 gross and net acres in the
Raton Basin of southeastern Colorado for $700,000. This acquisition was
financed through the use of proceeds from borrowings under the Company's
Credit Agreement. Initially, the Company plans to spend up to approximately
$5.0 million to conduct a pilot project to study the feasibility of a full-
scale coalbed methane project in this area.
CORPORATE CONVERSION
Petroglyph was incorporated in Delaware in 1997 for the purpose of
consolidating and continuing the activities previously conducted by the
Partnership. Pursuant to the terms of an Exchange Agreement dated August 22,
1997 (the "Exchange Agreement"), the Company will acquire all of the
outstanding limited partnership interests of the Partnership from NGP and
certain of its affiliates and all of the stock of Petroglyph Energy, Inc., a
Kansas corporation and the general partner of the Partnership, in exchange for
shares of Common Stock of the Company (the "Conversion"). The Conversion and
other transactions contemplated by the Exchange Agreement will be consummated
immediately prior to the closing of the Offering. The Conversion will be
accounted for as a transfer of assets and liabilities between affiliates under
common control and will result in no change in carrying values of these assets
and liabilities.
Petroglyph's principal executive offices are located at 6209 North Highway
61, Hutchinson, Kansas 67502 and its telephone number is (316) 665-8500.
19
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the Offering are expected to be
approximately $32.0 million ($36.9 million if the Underwriters' over-allotment
option is exercised in full), based upon an assumed initial public offering
price of $15.00 per share and after deducting underwriting discounts and
commissions and estimated offering expenses of the Company. The net proceeds
will be used first to fund capital expenditures relating to the Company's
development programs. The Company intends to use the balance to repay existing
indebtedness under the Company's Amended and Restated Loan Agreement, dated
September 15, 1997, with The Chase Manhattan Bank ("Chase") (as amended, the
"Credit Agreement"), and for other general corporate purposes. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources." Pending the application of the
net proceeds, the Company intends to invest the net proceeds in short-term,
investment-grade, interest-bearing securities.
At September 29, 1997, the outstanding principal balance of indebtedness
under the Credit Agreement was $9.0 million. For the six months ended June 30,
1997, the Original Agreement (as defined below) had an average interest rate
of 8.875% per annum, and the Credit Agreement has a final maturity of
September 2002.
DIVIDEND POLICY
The Company has never declared or paid cash dividends on its Common Stock
and anticipates that any future earnings will be retained for development of
its business. In addition, the Credit Agreement prohibits the payment of cash
dividends on Common Stock. The Board of Directors of the Company may review
the Company's dividend policy from time to time in light of, among other
things, the Company's earnings and financial position and limitations imposed
by the Company's debt instruments. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Liquidity and Capital
Resources" and Note 5 of the Notes to Consolidated Financial Statements.
20
<PAGE>
DILUTION
Purchasers of Common Stock offered hereby will experience an immediate and
substantial dilution in the net tangible book value of the Common Stock from
the initial public offering price. At June 30, 1997, the net tangible book
value per share of the Common Stock of the Company, on a pro forma basis after
giving effect to the issuance of 2,833,333 shares in the Conversion, was
$2.27. Such amount does not give effect to the Offering. Net tangible book
value per share represents the amount of the Company's tangible book value
(total book value of tangible assets less total liabilities) divided by the
total number of shares of Common Stock outstanding. After giving effect to the
receipt of $32.0 million of estimated net proceeds from the Offering and the
completion of the Conversion, the net tangible book value of the Common Stock
outstanding at June 30, 1997 would have been $41.4 million, or $8.47 per
share, representing an immediate increase in net tangible book value of
approximately $6.20 per share to current stockholders and an immediate
dilution of $6.53 per share (the difference between the assumed initial public
offering price and the net tangible book value per share after the Offering)
to persons purchasing Common Stock at the assumed initial public offering
price. The following table illustrates such per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price......................... $15.00
Net tangible book value before the Offering................. $2.27
Increase in net tangible book value attributable to new
investors.................................................. 6.20
-----
Net tangible book value after giving effect to the Offering... 8.47
------
Dilution in net tangible book value to new investors.......... $ 6.53
======
</TABLE>
The following table sets forth the number of shares of Common Stock
purchased from the Company, the total consideration paid and the average price
per share paid by existing stockholders and to be paid (at an assumed initial
public offering price of $15.00 per share) by purchasers of shares offered
hereby (before deducting underwriting discounts and commissions and estimated
offering expenses):
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
-------------------- ---------------------- AVERAGE PRICE
NUMBER PERCENTAGE AMOUNT PERCENTAGE PER SHARE
--------- ---------- ----------- ---------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders... 2,833,333 54.8% $16,989,011 32.7% $ 6.00
New investors........... 2,333,333 45.2 34,999,995 67.3 15.00
--------- ----- ----------- -----
Total................. 5,166,666 100.0% $51,989,006 100.0%
========= ===== =========== =====
</TABLE>
The preceding table does not include 375,000 shares reserved for future
issuance under the Company's 1997 Incentive Plan, of which 260,000 shares are
issuable upon exercise of outstanding options with an exercise price equal to
the initial public offering price set forth on the cover page of this
Prospectus, or 9,280 shares of Common Stock issuable upon exercise of
outstanding warrants.. See "Executive Compensation and Other Information" and
"Description of Capital Stock--Warrants."
21
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of June
30, 1997 on a historical basis and as adjusted to give effect to the
Conversion and the Offering and the application of the net proceeds therefrom,
as if such transactions had been consummated as of June 30, 1997, assuming an
initial public offering price for the Common Stock of $15.00 per share. The
following table should be read in conjunction with the Consolidated Financial
Statements of the Company and the related notes and the other information
contained elsewhere in this Prospectus, including the information set forth in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
<TABLE>
<CAPTION>
JUNE 30, 1997
-------------------
ACTUAL AS ADJUSTED
------- -----------
(IN THOUSANDS)
<S> <C> <C>
Long-term debt (excluding current portion)(1).............. $ 5,035 $ 35
------- -------
Owners' equity:
Partners' capital........................................ 12,522 --
Preferred Stock, $.01 par value, 5,000,000 shares
authorized; no shares outstanding actual and as
adjusted................................................ -- --
Common Stock, $.01 par value, 25,000,000 shares
authorized; no shares issued and outstanding, actual;
5,166,666 shares issued and outstanding, as
adjusted(1)............................................. -- 51
Additional paid-in capital............................... -- 45,021
------- -------
Total owners' equity....................................... 12,522 45,072
------- -------
Total capitalization....................................... $17,557 $45,107
======= =======
</TABLE>
- --------
(1) As of September 29, 1997, the outstanding principal balance of long-term
debt (excluding current portion) was approximately $9.0 million.
(2) Excludes 260,000 shares of Common Stock issuable upon exercise of
outstanding employee stock options, with an exercise price equal to the
initial public offering price set forth on the cover page of this
Prospectus, and 9,280 shares of Common Stock issuable upon exercise of
outstanding warrants. See "Executive Compensation and Other Information--
1997 Incentive Plan," "Description of Capital Stock--Warrants" and Note 9
of Notes to Consolidated Financial Statements.
22
<PAGE>
PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
The following unaudited Pro Forma Condensed Consolidated Statements of
Operations for the year ended December 31, 1996 and for the six months ended
June 30, 1996 give effect to (i) the Company's sale of a 50% working interest
in its Antelope Creek field as if the sale had been consummated as of January
1, 1996 and (ii) the Offering and the application of the net proceeds
therefrom as of January 1, 1996. See "The Company--Company History--Uinta
Basin." The unaudited Pro Forma Condensed Consolidated Statement of Operations
for the six months ended June 30, 1997 gives effect to the Offering and the
application of the net proceeds therefrom. The unaudited Pro Forma Condensed
Consolidated Statements of Operations are not necessarily indicative of the
results of operations that would have occurred had the transaction been
effected on the assumed dates. Additionally, future results may vary
significantly from the results reflected in the unaudited Pro Forma Condensed
Consolidated Statements of Operations due to normal production declines,
changes in prices, future development and acquisition activity and other
factors. These statements should be read in conjunction with the Company's
audited Consolidated Financial Statements and related notes as of and for the
years ended December 31, 1994, 1995 and 1996 and the Company's unaudited
Consolidated Financial Statements and related notes as of and for the six
months ended June 30, 1997 and 1996, included elsewhere in this Prospectus.
23
<PAGE>
PETROGLYPH ENERGY, INC.
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
ANTELOPE CREEK
DISPOSITION OFFERING PRO FORMA
PRO FORMA PRO FORMA PRO FORMA AFTER DISPOSITION
HISTORICAL ADJUSTMENTS AFTER DISPOSITION ADJUSTMENT AND OFFERING
---------- -------------- ----------------- ---------- -----------------
<S> <C> <C> <C> <C> <C>
Oil and natural gas
revenues............... $5,457,689 $(1,057,000)(1) $4,400,689 $ 4,400,689
---------- ----------- ---------- -----------
Total operating
revenues............. 5,457,689 (1,057,000) 4,400,689 4,400,689
Lease operating
expenses............... 2,368,973 (415,000)(1) 1,953,973 1,953,973
Production taxes........ 248,848 (44,000)(1) 204,848 204,848
Exploration costs....... 68,818 68,818 68,818
Depreciation, depletion
and amortization....... 2,805,693 (447,000)(2) 2,358,693 2,358,693
General and
administrative
expenses............... 902,409 902,409 $ 300,000(6) 1,202,409
---------- ----------- ---------- --------- -----------
Total operating
expenses............. 6,394,741 (906,000) 5,488,741 300,000 5,788,741
Interest income, net.... 40,580 107,000 (3) 147,580 147,580 (7)
Gain on sales of
property and equipment,
net.................... 1,383,766 (1,314,000)(4) 69,766 69,766
---------- ----------- ---------- --------- -----------
Net income (loss) before
taxes.................. 487,294 (1,358,000) (870,706) (300,000) (1,170,706)
Pro forma tax
expense(5)............. 190,044 (190,044) -- --
---------- ----------- ---------- --------- -----------
Net income (loss)....... $ 297,250 $(1,167,956) $ (870,706) $(300,000) $(1,170,706)
========== =========== ========== ========= ===========
</TABLE>
- --------
(1) To reduce oil and natural gas revenues, production taxes, lease operating
expenses and exploration costs from 100% of such amounts for the Company's
Antelope Creek field for the period from January 1, 1996 to June 1, 1996
(the effective date of the sale of a 50% interest in this field) to 50% of
such amounts.
(2) To reflect depreciation, depletion and amortization expense on the
Antelope Creek field as if the Company had owned a 50% working interest
for all of 1996.
(3) To reduce interest expense based on reduction in outstanding debt as if
proceeds from the sale were used to reduce outstanding debt as of January
1, 1996.
(4) To remove the gain recognized on sale of the 50% interest in the Antelope
Creek properties.
(5) The pro forma tax expense was computed at the federal statutory rate of
35% and an average of the state statutory rates for those states in which
the Company has operations of 4% for each period presented.
(6) To reflect estimated additional legal, accounting and other general and
administrative expenses that would have been incurred assuming the
Offering occurred on January 1, 1996.
(7) There is no pro forma reduction to interest expense as a result of the
Offering as, after considering application of the proceeds from the
disposition of the 50% interest in the Antelope Creek properties, interest
expense was already reduced to zero on a pro forma basis for the year
ended December 31, 1996.
24
<PAGE>
PETROGLYPH ENERGY, INC.
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
ANTELOPE CREEK
DISPOSITION OFFERING PRO FORMA
PRO FORMA PRO FORMA PRO FORMA AFTER DISPOSITION
HISTORICAL ADJUSTMENTS AFTER DISPOSITION ADJUSTMENT AND OFFERING
---------- -------------- ----------------- ---------- -----------------
<S> <C> <C> <C> <C> <C>
Oil and natural gas
revenues............... $3,135,717 $(1,057,000)(1) $2,078,717 $2,078,717
---------- ----------- ---------- ----------
Total operating
revenues............. 3,135,717 (1,057,000) 2,078,717 2,078,717
Lease operating
expense................ 1,328,971 (415,000)(1) 913,971 913,971
Production taxes........ 120,841 (44,000)(1) 76,841 76,841
Exploration costs....... 41,610 41,610 41,610
Depreciation, depletion
and amortization....... 1,277,317 (447,000)(2) 830,317 830,317
General and
administrative
expenses............... 590,248 590,248 $150,000(6) 740,248
---------- ----------- ---------- --------- ----------
Total operating
expenses............. 3,358,987 (906,000) 2,452,987 150,000 2,602,987
Interest income, net.... 15,543 107,000 (3) 122,543 122,543 (7)
Gain (loss) on sales of
property and equipment,
net.................... 1,173,801 (1,314,000)(4) (140,199) (140,199)
---------- ----------- ---------- --------- ----------
Net income (loss) before
taxes.................. 966,074 (1,358,000) (391,926) (150,000) (541,926)
Pro forma tax
expense(5)............. 376,769 (376,769) -- --
---------- ----------- ---------- --------- ----------
Net income (loss)....... $ 589,305 $ (981,231) $ (391,926) $(150,000) $ (541,926)
========== =========== ========== ========= ==========
</TABLE>
- --------
(1) To reduce oil and natural gas revenues, production taxes, lease operating
expenses and exploration costs from 100% of such amounts for the Company's
Antelope Creek field for the period from January 1, 1996 to June 1, 1996
(the effective date of the sale of a 50% interest in this field) to 50% of
such amounts.
(2) To reflect depreciation, depletion and amortization expense on the
Antelope Creek field as if the Company had owned a 50% working interest
for all of 1996.
(3) To reduce interest expense based on reduction in outstanding debt as if
proceeds from the sale were used to reduce outstanding debt at January 1,
1996.
(4) To remove the gain recognized on sale of the 50% interest in the Antelope
Creek properties.
(5) The pro forma tax expense was computed at the federal statutory rate of
35% and an average of the state statutory rates for those states in which
the Company has operations of 4% for each period presented.
(6) To reflect additional legal, accounting and other general and
administrative expenses that would have been incurred assuming the
Offering occurred on January 1, 1996.
(7) There is no pro forma reduction to interest expense as a result of the
Offering as, after considering application of the proceeds from the
disposition of the 50% interest in the Antelope Creek properties, interest
expense was already reduced to zero on a pro forma basis for the six
months ended June 30, 1996.
25
<PAGE>
PETROGLYPH ENERGY, INC.
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
OFFERING PRO FORMA
PRO FORMA AFTER
HISTORICAL ADJUSTMENT OFFERING
---------- ---------- ----------
<S> <C> <C> <C>
Oil and natural gas revenues............ $2,307,089 $2,307,089
---------- ----------
Total operating revenues.............. 2,307,089 2,307,089
Lease operating expense................. 840,657 840,657
Production taxes........................ 97,840 97,840
Exploration costs....................... -- --
Depreciation, depletion and
amortization........................... 1,020,221 1,020,221
General and administrative expenses..... 546,306 $150,000 (1) 696,306
---------- -------- ----------
Total operating expenses.............. 2,505,025 2,655,025
Interest income, net.................... 19,011 51,197 (2) 70,208
Gain (loss) on sales of property and
equipment, net......................... 6,335 6,355
---------- -------- ----------
Net income (loss) before taxes.......... (172,569) (98,803) (271,372)
Pro forma tax expense................... -- --
---------- -------- ----------
Net income (loss)....................... $ (172,569) $(98,803) $ (271,372)
========== ======== ==========
</TABLE>
- --------
(1) To reflect estimated additional legal, accounting and other general and
administrative expenses that would have been incurred assuming the
Offering occurred on January 1, 1997.
(2) To reflect reduction to interest expense as a result of the application of
the net proceeds from the Offering.
26
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth certain summary consolidated financial data
of the Company. The information should be read in conjunction with the
Consolidated Financial Statements and notes thereto included elsewhere in this
Prospectus. The Company acquired significant and disposed of certain producing
oil and natural gas properties in certain of the periods presented which
affect the comparability of the historical financial and operating data for
the periods presented. The Company's predecessor was classified as a
partnership for federal income tax purposes and, therefore, no income taxes
were paid by the Company prior to the Conversion.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
------------------------------------------------- -----------------------------------------------
HISTORICAL PRO FORMA(1) HISTORICAL PRO FORMA(1) HISTORICAL PRO FORMA(5)
----------------------------------- ------------ ---------- ------------ ---------- ------------
1993 1994 1995 1996 1996 1996 1996 1997 1997
------- ------- -------- ------- ------------ ---------- ------------ ---------- ------------
(UNAUDITED) (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF
OPERATIONS DATA:
Operating revenues:
Oil sales........... $ 224 $ 1,644 $ 3,217 $ 4,459 $ 3,523 $2,544 $1,608 $ 1,725 $1,725
Natural gas sales... 182 796 1,016 999 878 592 471 513 513
Other............... 86 45 36 -- -- -- -- 69 69
------- ------- -------- ------- ------- ------ ------ ------- ------
Total operating
revenues.......... 492 2,485 4,269 5,458 4,401 3,136 2,079 2,307 2,307
------- ------- -------- ------- ------- ------ ------ ------- ------
Operating expenses:
Lease operating..... 238 1,601 2,260 2,369 1,954 1,329 914 841 841
Production taxes.... 9 89 188 249 205 121 77 98 98
Exploration costs... -- 70 376 69 69 42 42 -- --
Depreciation,
depletion and
amortization....... 153 1,977 2,302 2,806 2,359 1,277 830 1,020 1,020
Impairments......... -- -- 109 -- -- -- -- -- --
General and
administrative..... 278 956 1,064 902 1,202 590 740 546 696
------- ------- -------- ------- ------- ------ ------ ------- ------
Total operating
expenses.......... 678 4,693 6,299 6,395 5,789 3,359 2,603 2,505 2,655
------- ------- -------- ------- ------- ------ ------ ------- ------
Operating loss...... (186) (2,208) (2,030) (937) (1,388) (223) (524) (198) (348)
Other income
(expenses):
Interest income
(expense), net..... -- (93) (216) 40 147 15 122 19 70
Gain (loss) on sales
of property and
equipment, net..... 63 44 (138) 1,384 70 1,174 (140) 6 6
------- ------- -------- ------- ------- ------ ------ ------- ------
Net income (loss)
before income
taxes.............. (123) (2,257) (2,384) 487 (1,171) 966 (542) (173) (272)
Pro forma tax
expense(3)......... -- -- -- (190) -- (377) -- -- --
------- ------- -------- ------- ------- ------ ------ ------- ------
Net income (loss)... $ (123) $(2,257) $ (2,384) $ 297 $(1,171) $ 589 $ (542) $ (173) $ (272)
======= ======= ======== ======= ======= ====== ====== ======= ======
Pro forma earnings
(loss) per common
share(6)........... $ (.23) $ (.10) $ (.05)
======= ====== ======
STATEMENT OF CASH
FLOWS DATA:
Net cash provided by
(used in):
Operating
activities......... $ 4 $ (67) $ 347 $ 4,129 $ 906 $ 87
Investing
activities......... (1,084) (8,131) (9,580) 303 2,816 (5,627)
Financing
activities......... 1,418 8,119 10,049 (3,930) (100) 4,335
OTHER FINANCIAL DATA:
Capital
expenditures....... $ 1,136 $ 8,277 $ 10,443 $ 8,665 $4,596 $ 6,367
Adjusted EBITDA(4).. 30 (117) 619 3,322 $ 1,110 2,270 $ 208 828 $ 678
Operating cash
flow(5)............ (33) (233) 608 2,024 1,628 795
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1997
-------------------------
DECEMBER 31, 1996 HISTORICAL AS ADJUSTED(7)
----------------- ---------- --------------
<S> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA: (UNAUDITED)
Cash and cash equivalents......... $ 1,578 $ 372 $22,422
Working capital................... (541) (996) 21,054
Total assets...................... 17,470 23,545 51,095
Total long-term debt.............. 52 5,035 35
Total owners' equity.............. 12,695 12,522 45,072
</TABLE>
27
<PAGE>
- -------
(1) The 1996 Pro Forma amounts reflect results of operations as if (i) the
June 1, 1996 disposition of the 50% interest in the Antelope Creek
properties and (ii) the Offering and the application of the net proceeds
therefrom each occurred on January 1, 1996. Assuming that the Offering
occurred on such date, the Company estimates that, for the year ended
December 31, 1996, legal, accounting and other general and administrative
expenses would have increased by $300,000. There is no pro forma reduction
to interest expense as a result of the Offering because application of the
proceeds from the disposition of the 50% interest in the Antelope Creek
properties already had the effect of reducing outstanding debt to zero on
a pro forma basis for the year ended December 31, 1996.
(2) The 1997 Pro Forma amounts reflect results of operations as if the
Offering and the application of the net proceeds therefrom occurred on
January 1, 1997. Assuming that the Offering occurred on such date, the
Company estimates that for the six months ended June 30, 1997 (i) legal,
accounting and other general and administrative expenses would have
increased by $150,000 and (ii) interest expense would have been reduced by
$51,000 to zero as a result of the application of the net proceeds from
the Offering.
(3) The pro forma tax expense was computed at the federal statutory rate of
35% and an average of the state statutory rates for those states in which
the Company has operations of 4% for each period presented.
(4) Adjusted EBITDA (as used herein) is calculated by adding interest, income
taxes, depreciation, depletion and amortization, and exploration and
abandonment costs to net income (loss). Interest includes interest expense
accrued and amortization of deferred financing costs. Adjusted EBITDA is
presented not as a measure of operating results, but rather as a measure
of the Company's operating performance and ability to service debt.
Adjusted EBITDA is not intended to represent cash flows for the period;
nor has it been presented as an alternative to income (loss) or operating
income (loss) nor as an indicator of the Company's financial or operating
performance. Adjusted EBITDA should not be considered in isolation, as a
substitute for measures of performance prepared in accordance with
generally accepted accounting principles or as being comparable to other
similarly titled measures of other companies, which are not necessarily
calculated in the same manner.
(5) Operating cash flow is defined as net income plus adjustments to net
income to arrive at net cash provided by operating activities before
changes in working capital.
(6) Pro forma earnings (loss) per common share is calculated giving effect to
the sale of the 2,333,333 shares offered hereby as of January 1, 1996.
Weighted average common shares outstanding used in the calculation of pro
forma earnings (loss) per common share for all periods presented was
5,166,666 common shares.
(7) Adjusted to give effect to the sale of 2,333,333 shares of Common Stock
offered hereby and the application of the estimated net proceeds
therefrom. See "Use of Proceeds" and "Capitalization."
28
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
Petroglyph is an independent energy company engaged in the exploration,
development and acquisition of crude oil and natural gas properties. The
Company's strategy is to increase oil and natural gas reserves, oil and
natural gas production and cash flow per share through (i) the development of
the Company's drillsite inventory, (ii) the exploitation of the Company's
existing reserve base, (iii) the control of operations and (iv) the
acquisition of additional interests in oil and natural gas properties that
meet its selection criteria.
The following table sets forth certain operating data of the Company for the
periods presented:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
------------------------------------------ ----------------------------------
HISTORICAL PRO FORMA(1) HISTORICAL PRO FORMA(1) HISTORICAL
-------------------------- ------------ ---------- ------------ ----------
1994 1995 1996 1996 1996 1996 1997
-------- -------- -------- ------------ ---------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C> <C>
PRODUCTION DATA:
Oil (Bbls)............. 110,373 182,704 262,910 213,535 141,775 94,542 117,770
Natural gas (Mcf)...... 485,062 659,202 553,770 461,292 358,420 271,431 243,095
Total (BOE)........... 191,217 292,571 355,205 290,417 201,512 139,781 158,286
AVERAGE SALES PRICE PER
UNIT(2):
Oil (per Bbl)(3)....... $ 14.89 $ 17.61 $ 16.96 $ 16.50 $ 17.94 $ 17.01 $ 14.65
Natural gas (per Mcf).. 1.64 1.54 1.80 1.90 1.65 1.74 2.11
BOE.................... 12.76 14.47 15.36 15.15 15.56 14.87 14.14
COSTS PER BOE:
Lease operating
expenses.............. $ 8.38 $ 7.73 $ 6.67 $ 6.73 $ 6.60 $ 6.54 $ 5.31
Production and property
taxes................. 0.47 0.64 0.70 0.70 0.60 0.55 0.62
General and
administrative........ 5.00 3.64 2.54 3.11 2.93 4.22 3.45
Depreciation, depletion
and amortization...... 10.34 7.87 7.90 8.12 6.34 5.94 6.45
Average finding costs.. 3.92 10.96 2.86(4) -- -- -- 2.55(4)
</TABLE>
- --------
(1) The 1996 Pro Forma amounts reflect results of operations as if the June 1,
1996 disposition of the 50% interest in the Antelope Creek field had
occurred on January 1, 1996.
(2) Before deduction of production taxes.
(3) Excluding the effects of losses from crude oil hedging transactions and
amortization of deferred revenue, the weighted average sales price per Bbl
of oil was $20.22 for the year ended December 31, 1996, $18.22 for the
historical six months ended June 30, 1996, $17.43 for the pro forma six
months ended June 30, 1996 and $15.96 for the historical six months ended
June 30, 1997.
(4) The calculation of average finding costs for the year ended December 31,
1996 and the six months ended June 30, 1997 includes future development
costs of $16.5 million and $1.7 million, respectively. Average finding
costs per BOE excluding these amounts were $0.79 and $1.78 for the year
ended December 31, 1996 and the six months ended June 30, 1997,
respectively.
The Company uses the successful efforts method of accounting for its oil and
natural gas activities. Costs to acquire mineral interests in oil and natural
gas properties, to drill and equip exploratory wells that result in proved
reserves, and to drill and equip development wells are capitalized. Costs to
drill exploratory wells that do not result in proved reserves, geological,
geophysical and seismic costs, and costs of carrying and retaining properties
that do not contain proved reserves are expensed. Costs of significant
nonproducing properties, wells in the process of being drilled and development
projects are excluded from depletion until such time as the related project is
developed and proved reserves are established or impairment is determined.
29
<PAGE>
The Company's predecessor was classified as a partnership for federal income
tax purposes. Therefore, no income taxes were paid or provided for by the
Company prior to the Conversion. Future tax amounts, if any, will be dependent
upon several factors, including but not limited to the Company's results of
operations.
RESULTS OF OPERATIONS
Six Months Ended June 30, 1997 Compared to Six Months Ended June 30, 1996
OPERATING REVENUES
Oil revenues decreased by 32% to $1,725,000 for the six months ended June
30, 1997 as compared to $2,544,000 for the 1996 period primarily as a result
of a decrease in the Company's oil production volume of 24,005 Bbls and a
decline in average oil sales prices from $17.94 per Bbl in the 1996 period to
$14.65 in 1997. The decline in the Company's oil production is due to the sale
of the 50% interest in the Utah properties in June 1996 and the sale of
certain other non-strategic properties in Texas in March 1997, partially
offset by increased production volume from the Company's remaining 50%
interest in the Utah properties as a result of the Company's aggressive
drilling program on its Utah properties beginning in the second half of 1996.
The decline in average oil sales price of $3.29 per Bbl was due to a reduction
in demand for the Company's production as a result of a temporary shutdown for
major maintenance of one of the refineries which is a primary user of the
Company's Utah production during late 1996 and early 1997, a crude oil hedge
loss of $114,000 and amortization of deferred revenue of $46,000. The
Company's average oil sales price for the six months ended June 30, 1997,
excluding the effects of the hedge loss and amortization of deferred revenue
was $15.96 per Bbl.
Natural gas revenues declined by 13% to $513,000 for the six months ended
June 30, 1997, as compared to $592,000 for the 1996 period primarily due to a
decline in natural gas production of 115,325 Mcf due to dispositions of
certain non-strategic natural gas properties during 1996, the sale of the 50%
interest in the Utah properties in June 1996 and the inception of the
secondary oil recovery program on the Company's Utah properties in mid-1996.
These declines in natural gas production volumes were partially offset by
increased natural gas production volumes related to the Company's remaining
50% interest in the Utah properties as a result of the Company's aggressive
drilling program on the properties beginning in the second half of 1996. The
decline in natural gas production volumes was partially offset by an increase
in average natural gas sales price to $2.11 per Mcf during the six months
ended June 30, 1997, as compared to $1.65 per Mcf for the 1996 period.
OPERATING EXPENSES
Lease operating expenses decreased to $841,000 for the six months ended June
30, 1997, as compared to $1,329,000 for the same 1996 period primarily as a
result of the sale of the 50% interest in the Company's Utah properties in
June 1996 and the sale of certain other non-strategic oil and natural gas
properties in March 1997 partially offset by an increase in the number of
producing wells in which the Company has an interest due to the aggressive
drilling program on the Company's Utah properties. In addition, the Company's
lease operating expenses on a per BOE basis for its Utah properties declined
by 32% to $4.13 per BOE during the 1997 period as compared to $6.08 per BOE
for the 1996 period. This decline in lease operating expenses per BOE is due
to the benefits of increasing economies of scale as the production volumes of
the Utah properties continue to increase and the Company's continued focus on
reduction of operating costs through improved efficiencies. This decline was
partially offset by a significant increase in per BOE production costs of the
Company's non-Utah properties due to several workovers performed during 1997.
Depreciation, depletion and amortization expense decreased by 20% to
$1,020,000 for the six months ended June 30, 1997, as compared to $1,277,000
for the same period in 1996 primarily as a result of the sale of the 50%
interest in the Company's Utah properties in June 1996 and the sale of certain
other non-strategic oil and natural gas properties in March 1997 partially
offset by increased production from the Company's remaining interest in the
Utah properties.
Exploration costs declined by $42,000 to zero for the six months ended June
30, 1997 as compared to the same period in 1996, as the Company's exploratory
drilling activities were all successful during the period and no geological
and geophysical work was performed.
30
<PAGE>
General and administrative expenses declined by 7% to $546,000 for the six
months ended June 30, 1997, as compared to $590,000 for the same 1996 period.
This decrease was due to an increase in overhead charges billed to non-
operating partners of $160,000 during 1997 due to sale of a 50% interest in
the Utah properties in June 1996 and the significant increase in the number of
Company-operated wells as a result of the aggressive drilling program on the
Company's Utah properties. This decline was partially offset by an increase in
engineering, geological and administrative staff as a result of the increased
development activity.
OTHER INCOME (EXPENSES)
Gain on sale of assets declined to $6,000 for the six month period ended
June 30, 1997, as compared to $1,174,000 for the same 1996 period due to a
gain of $1,314,000 recognized on the sale of the 50% interest in the Utah
properties in June 1996.
Year Ended December 31, 1996 Compared to December 31, 1995
OPERATING REVENUES
Oil revenues increased by 39% to $4,459,000 in 1996 as compared to
$3,217,000 in 1995 primarily as a result of an increase in the Company's oil
production volume of 80,206 Bbls in 1996. The increase in production volume is
primarily the result of the Company's aggressive drilling program on its Utah
properties during the last six months of 1996. This increase was partially
offset by a decline in average oil sales prices from $17.61 per Bbl in 1995 to
$16.96 per Bbl in 1996. The decline in the average oil sales price was due to
a reduction in demand for the Company's Utah oil production during the second
half of 1996 as a result of a temporary shutdown for major maintenance of one
of the refineries which is a primary purchaser of the Company's Utah
production, a crude oil hedge loss of $128,000 and amortization of deferred
revenue of $524,000. The Company's average 1996 sales price of oil excluding
the effects of the hedge loss and amortization of deferred revenue was $20.22
per Bbl.
Natural gas revenues declined by 2% to $999,000 in 1996 as compared to
$1,016,000 in 1995 primarily due to a decline in natural gas sales production
to 553,770 Mcf in 1996 as compared to 659,202 Mcf in 1995. The decline in
natural gas sales production is attributable to disposition of certain
nonstrategic natural gas properties during 1996 and reduced gas production
volumes from the Utah properties due to inception of the secondary oil
recovery program. The decrease in natural gas production volumes was partially
offset by an increase in average sales prices of natural gas to $1.80 per Mcf
in 1996 as compared to $1.54 per Mcf in 1995.
OPERATING EXPENSES
Lease operating expenses increased to $2,369,000 in 1996 as compared to
$2,260,000 in 1995 primarily as a result of an increase in the number of
producing wells in which the Company has an interest due to the 1996 drilling
program, partially offset by a reduction in lease operating expenses per BOE
to $6.67 in 1996 as compared to $7.73 in 1995. The 14% decrease in lease
operating expenses on a per BOE basis is primarily due to a decline in
production costs of the Utah properties due to the Company's continued focus
on reduction of operating costs through improved efficiencies. This decrease
is partially offset by an increase in per BOE production costs of the Company
non-Utah properties.
Production taxes increased by 33%, or $61,000, from 1995 to 1996. This
increase is due primarily to a 29% increase in the Company's oil and natural
gas revenues during 1996 as compared to 1995.
Depreciation, depletion and amortization expense increased by 22% to
$2,806,000 in 1996 as compared to $2,302,000 in 1995, primarily as a result of
increased production volumes due to 1996 drilling activity. Depreciation,
depletion and amortization expense increased slightly to $7.90 per BOE in 1996
as compared to $7.87 per BOE in 1995.
31
<PAGE>
Exploration costs declined by 82% to $69,000 in 1996 as compared to $376,000
in 1995 due to a reduction in dry hole costs in 1996.
General and administrative expenses decreased by 15% to $902,000 in 1996 as
compared to $1,064,000 in 1995. This decline was due to an increase in
overhead charges billed to non-operating partners of $484,000 as a result of
increased activity on the Utah properties during 1996 due to the significant
number of wells drilled in the second half of 1996. This decline was partially
offset by an increase in engineering and administrative staff as a result of
the increased development activity.
OTHER INCOME (EXPENSES)
Interest income (expense), net, improved by $256,000 as compared to 1995 to
$40,000 of income in 1996 primarily as a result of a reduction in average
outstanding debt and an increase in interest capitalized of $44,000 on the
Company's Utah properties development project.
Gain on sale of assets was $1,384,000 in 1996 as compared to a loss of
$138,000 in 1995. The gain in 1996 is primarily due to a gain of $1,314,000
recognized on the sale of the 50% interest in the Utah properties in
June 1996.
Year Ended December 31, 1995 Compared to December 31, 1994
OPERATING REVENUES
Oil revenues increased by 96% to $3,217,000 in 1995 as compared to
$1,644,000 in 1994. This increase was primarily due to an increase in oil
production volumes of 72,331 Bbls as a result of the acquisition of an
additional 50% interest in the Antelope Creek and Duchesne fields in July 1995
which brought the Company's working interest to 100%. In addition, the average
oil sales price increased to $17.61 per Bbl in 1995 from $14.89 per Bbl in
1994.
Natural gas revenues increased by 28% to $1,016,000 in 1995 as compared to
$796,000 in 1994 primarily due to an increase in natural gas production
volumes of 174,140 Mcf as a result of the acquisition of an additional 50%
interest in the Utah properties in July 1995. This increase was partially
offset by a decline in the average sales price of natural gas to $1.54 per Mcf
in 1995 from $1.64 per Mcf in 1994.
OPERATING EXPENSES
Lease operating expense increased by 41% to $2,260,000 in 1995 as compared
to $1,601,000 in 1994, primarily as a result of the acquisition of an
additional 50% interest in the Utah properties in July 1995. This increase was
partially offset by a decline in lease operating expenses of $0.65 per BOE in
1995 as compared to 1994 due to the Company's focus on reduction of lease
operating expense through improved efficiency of operations.
Production and property taxes increased by 110%, or $98,000, in 1995 as
compared to 1994. This increase is primarily the result of the increase in oil
and natural gas revenues during 1995 as compared to 1994 which is discussed
above.
Depreciation, depletion and amortization expense increased by 16% to
$2,302,000 in 1995 as compared to $1,977,000 in 1994 primarily as a result of
increased production volumes due to the acquisition of an additional 50%
interest in the Utah properties in July 1995. Depreciation, depletion and
amortization expense declined to $7.87 per BOE in 1995 as compared to $10.34
per BOE in 1994 as a result of increased proved reserves due to upward reserve
revisions on properties that existed at December 31, 1994, and lower
depreciation rates on 1995 acquisitions.
32
<PAGE>
During 1995, the Company recognized an impairment of $109,000 in the
carrying value of its Kansas properties, in accordance with Statement of
Financial Accounting Standards No. 121, "Accounting for Impairment of Long-
Lived Assets to be Disposed Of."
Exploration costs increased to $376,000 in 1995 as compared to $70,000 in
1994 primarily due to $316,000 of exploratory dry hole costs on two
exploratory wells on the Company's Kansas properties during 1995. There were
no exploratory dry hole costs in 1994.
General and administrative expense increased by 11% to $1,064,000 in 1995 as
compared to $956,000 in 1994 primarily as a result of an increase in
engineering, accounting and clerical staff to handle the increased activity as
a result of the Company's growth and a reduction in overhead changes billed to
non-operating partners of $53,000 due primarily to acquisition in July 1995 of
the remaining 50% interest in the Utah properties.
OTHER INCOME (EXPENSES)
Interest expense, net, increased by 131% to $216,000 in 1995 as compared to
$93,000 in 1994. This was primarily the result of an increase in the average
balance of outstanding debt in 1995 as compared to 1994 and was partially
offset by an increase in interest capitalized on development projects of
$114,000 from 1995 to 1994.
The Company recognized a loss on sale of assets in 1995 of $138,000 as
compared to a gain of $44,000 in 1994. The 1995 loss was caused primarily by a
loss on sale of the Company's investment in certain producing properties in
Kansas and Oklahoma.
LIQUIDITY AND CAPITAL RESOURCES
Overview
The Company's primary sources of liquidity are cash flow from operations and
borrowings under the Credit Agreement. The Company's cash flow requirements
other than for operations are generally for the development of its Uinta Basin
oil and natural gas properties.
The Company's primary financial resource is its oil and natural gas reserves
in the Uinta Basin of Utah. In addition, the Company entered into the Credit
Agreement in May 1995 with Texas Commerce Bank National Association. The
Company's borrowing base under the Credit Agreement at June 30, 1997 was $7.5
million. In the past, the Company's owners have provided a significant portion
of the capital needed by the Company to finance its acquisitions and
development program.
Capital Expenditures
The Company requires capital primarily for the exploration, development and
acquisition of oil and natural gas properties, the repayment of indebtedness
and general working capital purposes.
33
<PAGE>
The following table sets forth costs incurred by the Company in its
exploration, development and acquisition activities during the periods
indicated.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------- SIX MONTHS ENDED
1994 1995 1996 JUNE 30, 1997
---------- ---------- ---------- ----------------
<S> <C> <C> <C> <C>
Acquisition costs:
Unproved properties......... $ 52,685 $ 8,206 $ 490,487 $ 416,601
Proved properties........... 5,193,043 4,718,201 -- --
Development costs............. 1,311,272 3,448,972 6,983,715 4,057,976
Exploration costs............. 69,570 316,089 -- --
Improved recovery costs....... 271,276 154,023 327,027 99,531
---------- ---------- ---------- ----------
Total......................... $6,897,846 $8,645,491 $7,801,229 $4,574,108
========== ========== ========== ==========
</TABLE>
During the last six months of 1997, the Company plans to focus its efforts
on the continued development of its improved recovery projects in the Uinta
Basin.
The Company plans to drill approximately 45 gross (29 net) wells in the
Uinta Basin during the last six months of 1997 at a projected cost of $8.5
million. In addition, the Company plans to drill up to 10 pilot wells in the
Raton Basin at an estimated cost of up to $3.0 million during the same time
period.
Capital Resources
During the first six months of 1997, the Company generated cash flow from
operating activities of $87,000 and received proceeds from sales of oil and
natural gas properties of $740,000 and from borrowings against the Credit
Agreement of $5,000,000. During the same period, the Company incurred capital
costs of $6,367,000, consisting primarily of the development of its Uinta
Basin properties and the enhanced oil recovery infrastructure.
During 1996, the Company generated cash flow from operating activities of
$4,129,000 and received proceeds from sales of oil and natural gas properties
of $8,968,000. During the same period, the Company incurred $8,665,000 in
capital expenditures and repaid $5,909,000 of outstanding debt.
The Company's working capital decreased from $1,133,000 at December 31,
1995, to a deficit of ($541,000) and ($996,000) at December 31, 1996 and June
30, 1997, respectively. This was due to an increase in spending and an
increase in trade payables which is the result of the increased development
activity in the Uinta Basin during the last six months of 1996 and the first
six months of 1997 and the retirement of all outstanding long-term debt during
1996. These decreases were partially offset by increased cash flow as a result
of higher average prices for oil and natural gas production and proceeds
received from the June 1, 1996 sale of a 50% interest in the Antelope Creek
field.
The Company's cash flow from operations during the last six months of 1997
is not expected to be adequate to fund the Company's operations and planned
Uinta Basin and Raton Basin development programs. The Company anticipates that
the remaining available borrowing capacity under the Credit Agreement,
including the overdraft facility, will be sufficient to meet its estimated
capital expenditure requirements until such time as the net proceeds from the
Offering become available, and that the net proceeds from the Offering will be
sufficient to meet its estimated capital expenditure requirements for the 12
months following the Offering. The Company believes that after such 12-month
period it will require a combination of additional financing and cash flow
from operations to implement its future development plans. The Company
currently does not have any arrangements with respect to, or sources of,
additional financing other than the Credit Agreement, and there can be no
assurance that any additional financing will be available to the Company on
acceptable terms or at all. In the event a sufficient amount of capital is not
available, the Company may be unable to develop its Uinta Basin properties in
accordance with the planned schedule discussed elsewhere in this Prospectus.
34
<PAGE>
Financing
In May 1995, the Company entered into a credit agreement with Texas Commence
Bank National Association (the "Original Agreement"). The Original Agreement
was a combination credit facility with a two-year revolving credit agreement
which originally expired on May 25, 1997, at which time all balances
outstanding under the revolving credit agreement were to convert to a term
loan, expiring on October 1, 1999. The borrowing base was redetermined at $7.5
million on July 2, 1997. This effectively allowed the Company to continue to
borrow on the facility in place at June 30, 1997. On September 15, 1997, the
Company amended the Original Agreement and entered into the Credit Agreement
with Chase. The Credit Agreement includes a $20.0 million combination credit
facility with a two-year revolving credit agreement with an original borrowing
base of $7.5 million to be redetermined semi-annually ("Tranche A"), which
expires on September 15, 1999, at which time all balances outstanding under
Tranche A will convert to a term loan expiring on September 15, 2002.
Additionally, the Credit Agreement contains a separate revolving facility of
$2.5 million ("Tranche B"), which expires on March 15, 1999, at which time all
balances outstanding become immediately payable. Subsequent to June 30, 1997,
the Company has borrowed an additional $4.0 million, for a total outstanding
obligation under this facility of $9.0 million at September 29, 1997. The
Company had no balances outstanding under the Original Agreement at December
31, 1996. Interest on borrowings outstanding under both Tranche A and Tranche
B is calculated, at the Company's option, at either Chase's prime rate or the
London interbank offer rate, plus a margin determined by the amount
outstanding under each tranche.
INFLATION AND CHANGES IN PRICES
The Company's revenue and the value of its oil and natural gas properties
have been, and will continue to be, affected by changes in oil and natural gas
prices. The Company's ability to obtain capital through borrowings and other
means is also substantially dependent on oil and natural gas prices. Oil and
natural gas prices are subject to significant seasonal and other fluctuations
that are beyond the Company's ability to control or predict. In an attempt to
manage this price risk, the Company periodically engages in hedging
transactions.
HEDGING TRANSACTIONS
In the past, the Company has entered into hedging contracts of various types
in an attempt to manage price risk with regard to a portion of the Company's
crude and natural gas production. While use of these hedging arrangements
limit the downside risk of price declines, such arrangements may also limit
the benefits which may be derived from price increases.
The Company historically has used various financial instruments such as
collars, swaps and futures contracts in an attempt to manage its price risk.
Monthly settlements on these financial instruments are typically based on
differences between the fixed prices specified in the instruments and the
settlement price of certain future contracts quoted on the NYMEX or certain
other indices. The instruments which have been historically used by the
Company have not had a contractual obligation which requires or allows the
future physical delivery of the hedged products.
The Company had one open hedging contract at June 30, 1997, which is a crude
oil collar on 378,000 Bbls of oil with a floor price of $17.00 per Bbl and a
ceiling price of $20.75 per Bbl indexed to the NYMEX light crude future
settlement price. See Note 7 to the Notes to Consolidated Financial
Statements. This contract covers 378,000 Bbls of oil over the next two and
one-half years as follows:
<TABLE>
<CAPTION>
YEAR BBLS
---- -------
<S> <C>
1997................................. 69,000
1998................................. 150,000
1999................................. 159,000
-------
Total............................... 378,000
=======
</TABLE>
35
<PAGE>
ENVIRONMENTAL AND OTHER LAWS AND REGULATIONS
The Company's business is subject to certain federal, state, tribal and
local laws and regulations relating to the exploration for and the
development, production and transportation of oil and natural gas, as well as
environmental and safety matters. Many of these laws and regulations have
become more stringent in recent years, often imposing greater liability on a
larger number of potentially responsible parties. Although the Company
believes it is in substantial compliance with all applicable laws and
regulations, the requirements imposed by such laws and regulations are
frequently changed and subject to interpretation, and the Company is unable to
predict the ultimate cost of compliance with these requirements or their
effect on its operations. The Company has no material commitments for capital
expenditures to comply with existing environmental requirements. Nevertheless,
changes in existing environmental laws or in interpretations thereof could
have a significant impact on the operating costs of the Company as well as the
oil and natural gas industry in general.
36
<PAGE>
BUSINESS AND PROPERTIES
GENERAL
Petroglyph is an independent energy company engaged in the exploration,
development and acquisition of crude oil and natural gas reserves. Since its
inception in 1993, the Company has grown through leasehold acquisitions which,
together with associated development drilling, have increased the Company's
proved reserves, production, revenue and cash flow. The Company seeks to
develop properties in regions with known producing horizons, significant
available undeveloped acreage and considerable opportunities to increase
reserves, production and ultimate recoveries through development drilling and,
where applicable, enhanced oil recovery techniques. The Company's primary
activities are focused in the Uinta Basin in Utah, where it is implementing
enhanced oil recovery projects in the Lower Green River formation of the
Greater Monument Butte Region. The Company anticipates spending approximately
$35 million in 1997 and 1998 in connection with these projects. The Company
has identified several other formations in the Uinta Basin above and below the
Lower Green River formation that it believes have the potential to be
commercially productive. The Company recently acquired 56,000 gross and net
acres in the Raton Basin in Colorado. The Company plans to spend up to
approximately $5.0 million to initiate a pilot coalbed methane project to
determine the commercial viability of development of this area.
From January 1, 1994 through June 30, 1997, the Company drilled a total of
98 gross (51.5 net) wells, with a success rate of 99% and an average finding
cost of $3.43 per BOE. As of June 30, 1997, the Company had estimated net
proved reserves of approximately 7.7 MMBbls of oil and 20.9 Bcf of natural
gas, or an aggregate of 11.2 MMBOE with a PV-10 of $42.9 million. Of the
Company's estimated proved reserves, 97% are located in the Uinta Basin. At
June 30, 1997, the Company had a total acreage position of approximately
108,000 gross (99,000 net) acres and estimates that it has over 1,000
potential drilling locations based on current spacing, approximately 75 of
which are included in the Company's independent petroleum engineers' estimate
of proved reserves.
Uinta Basin. The Uinta Basin is generally recognized as one of the largest
onshore basins in the contiguous United States in terms of total hydrocarbons
in place. The Uinta Basin is a major onshore depositional and structural basin
containing the remnants of an ancient fresh water lake that broadly deposited
sand bars over the basin as the shoreline of the lake expanded and contracted
over time. Based on electric log analysis, the Company believes that
approximately 26 different horizons of oil and natural gas bearing sands have
been created in the Lower Green River formation by the ancient lake and exist
throughout its development area. As of December 31, 1996, approximately 450
MMBbls of oil and 1.6 Tcf of natural gas had been recovered from over 2,750
wells drilled in the Uinta Basin, including approximately 148 MMBbls of oil
and 358 Bcf of natural gas from approximately 930 wells drilled in a 900
square mile area of the Uinta Basin known as the Greater Monument Butte Region
located along the southern shoreline of the ancient lake.
The Company is currently implementing enhanced oil recovery projects using
waterflood techniques designed to repressure zones within the 1,500-foot thick
Lower Green River formation in the Greater Monument Butte Region. In 1996, the
DOE published a study of a similar enhanced oil recovery project and concluded
that such a program could ultimately increase the recovery of the original oil
in place in the Lower Green River formation from approximately 5% to up to
21%. The Company believes the results of the DOE's study are applicable to its
enhanced oil recovery project in the Greater Monument Butte Region. The
Company also believes oil and natural gas exist at depths above and below this
formation throughout the Greater Monument Butte Region.
The Company is an experienced operator in the Uinta Basin. From January 1,
1994 through June 30, 1997, the Company drilled 90 gross (46 net) new
development and exploratory wells in the Uinta Basin, with a 99% success rate.
As of June 30, 1997, the Company's independent petroleum engineers estimated
that the Company had approximately 75 gross (40 net) proved undeveloped well
locations in the Antelope Creek field in the Uinta Basin. The independent
petroleum engineers attributed an average of 135 MBOE gross proved undeveloped
37
<PAGE>
reserves to such locations with a PV-10 per gross well of approximately
$285,000, net of drilling and completion costs. The Company's net share per
gross well is 58 MBOE with a PV-10 of $152,000, resulting in an aggregate of
approximately 4,340 MBOE with a PV-10 of approximately $11.4 million for such
75 proved undeveloped well locations. The Company believes that as of June 30,
1997, full development of the Company's 38,685 gross undeveloped acres within
the Uinta Basin would support approximately 820 additional drilling locations
based on 40-acre spacing, consisting of approximately 615 locations for
production wells and 205 locations for injection wells, at an estimated
average gross cost of $400,000 per well. In addition to the implementation of
its enhanced oil recovery projects in the Lower Green River formation, the
Company is currently developing the Upper Green River and Wasatch formations
utilizing traditional production methods.
Raton Basin. The Raton Basin, which is located in southeastern Colorado and
northeastern New Mexico, is approximately 80 miles long and 50 miles wide. The
Gas Research Institute has estimated that as of 1993 the Raton Basin held 18
Tcf of recoverable natural gas reserves from coalbed methane, a type of
natural gas produced from a coal source rather than traditional
sandstone/carbonate reservoirs. As of December 31, 1996, the Company estimates
that cumulative production of approximately 7.9 Bcf of natural gas had been
recovered from approximately 140 coalbed methane wells in the Raton Basin, 91%
of which commenced production since January 1, 1995. As of December 31, 1996,
daily production from these wells was approximately 20 MMcf per day.
The Company recently acquired 56,000 gross and net acres in the Raton Basin
of southeastern Colorado for $700,000 million, where the Company plans to
develop coalbed methane natural gas reserves. During the last ten years, new
drilling, completion and production techniques have led to the development of
substantial new reserves of coalbed methane natural gas in the United States.
Initially, the Company plans to spend up to approximately $5.0 million to
conduct a pilot project to study the feasibility of a full-scale coalbed
methane project. Should the pilot project be successful, based on proposed
spacing, the Company could drill up to 200 wells over the life of the project.
BUSINESS STRATEGY
The Company's strategy, which includes the following key elements, is to
increase its oil and natural gas reserves, oil and natural gas production and
cash flow per share:
. Develop Drillsite Inventory. The Company has established a large
inventory of potential projects by focusing on areas where known
hydrocarbon accumulations have not been fully exploited. The Company is
implementing enhanced oil recovery projects in a development area in the
Uinta Basin that has over 800 drillsite locations for production and
injection wells, and intends to initiate a coalbed methane project in
the Raton Basin that, based upon the results of a pilot project, could
support up to 200 wells. Collectively, these projects provide the
Company with a ten-year inventory of potential drilling locations.
. Exploit Existing Reserve Base. The Company intends to apply management's
extensive geological, engineering and operating expertise to identify,
develop and exploit its existing undeveloped and underdeveloped acreage
portfolio. The Company anticipates capital expenditures in the second
half of 1997 and all of 1998 of approximately $38 million, of which
approximately $18 million will be used to develop existing proved
reserves included in the Company's June 30, 1997 reserve report. The
amount and timing of these expenditures will depend on a number of
factors, including actual drilling results, product prices and
availability of capital.
. Control of Operations. The Company seeks to operate and maintain a
majority working interest position in each of its core properties. These
factors enable the Company to influence directly its projects by
controlling all aspects of drilling, completion and production. In
addition, the Company intends to maintain a low cost overhead structure
by controlling the timing of the development of its properties. By
operating its producing wells, the Company believes it is well
positioned to control the expenses and timing of development and
exploitation of such properties and to better manage cost reduction
efforts.
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<PAGE>
. Acquire Additional Property Interests. The Company expects that it will,
from time to time, evaluate acquisitions of oil and natural gas
properties in its principal areas of operations and in other areas that
provide attractive investment opportunities for the addition of reserves
and production and that meet one or more of the Company's selection
criteria: (i) an attractive purchase price that, when combined with the
anticipated capital expenditures, exceeds a targeted internal rate of
return, (ii) the potential to increase reserves and production through
the application of lower risk exploitation and exploration techniques
and (iii) the opportunity for improved operating efficiency.
PRINCIPAL PROPERTIES
The following table sets forth certain information, as of June 30, 1997,
which relates to the principal oil and natural gas properties owned by the
Company.
<TABLE>
<CAPTION>
PROVED RESERVES
------------------------------
TOTAL OIL
GROSS OIL NATURAL GAS EQUIVALENT
REGION ACRES (MBBLS) (MMCF) (MBOE)
------ ------- ------- ----------- ----------
<S> <C> <C> <C> <C>
Utah-Uinta Basin......................... 45,525 7,560 19,755 10,853
Colorado-Raton Basin..................... 55,927 -- -- --
Other.................................... 6,279 164 1,155 356
------- ----- ------ ------
Total.................................. 107,731 7,724 20,910 11,209
======= ===== ====== ======
</TABLE>
UINTA BASIN. The Uinta Basin is a major onshore depositional and structural
basin located in northeast Utah. The American Association of Petroleum
Geologists has estimated that as of 1971 the Uinta Basin held 3.5 billion Bbls
of remaining recoverable oil reserves. In 1996, the Uinta Basin was estimated
by an independent industry publication to contain 7.0 Tcf of remaining
recoverable natural gas reserves. As of December 31, 1996, cumulative
production of approximately 450 MMBbls of oil and 1.6 Tcf of natural gas had
been recovered from approximately 2,750 wells in the Uinta Basin.
The Company's Uinta Basin properties are located in the Greater Monument
Butte Region, an area that begins at the Company's Duchesne field on the west,
extends across the Monument Butte field and ends to the east at the Wonsits
Valley and Red Wash fields. The Greater Monument Butte Region, which is
depicted on the map appearing on the inside front cover page of this
Prospectus, is roughly 15 miles wide and 60 miles long. Hydrocarbons have been
shown to exist throughout the explored sedimentary column. The first
successful enhanced oil recovery project in the Uinta Basin was initiated
approximately 40 years ago. As of June 30, 1996, cumulative production of 148
MMBbls of oil and 358 Bcf of natural gas had been recovered from the Greater
Monument Butte Region.
The principal producing horizons in the Greater Monument Butte Region is the
Lower Green River formation. Commercial production of hydrocarbons has also
occurred from the Uinta, Upper Green River, Wasatch and Mesa Verde formations.
These four reservoir formations contain discontinuous sand bodies of varying
size that are multi-layered and pinch out at the boundaries. Within the
Greater Monument Butte Region, the producing formations have similar time and
depositional characteristics. The producing sands can be correlated as they
occur across the Greater Monument Butte Region.
Development History. Exploratory drilling in the Uinta Basin commenced
around 1900. The first significant hydrocarbon discovery was in 1925 in the
Ashley field. The first enhanced oil recovery program in the Lower Green River
formation consisted of a natural gas injection pilot program in the Red Wash
field beginning in 1957. Beginning in 1960, waterflood programs were conducted
in the Red Wash field in the Lower Green River formation. This project
indicated that enhanced oil recovery techniques were successful in recovering
additional hydrocarbons in the Lower Green River formation and successful
enhanced oil recovery projects followed in the Walker Hallow and Wonsits
Valley fields.
The Department of Energy Study. In 1986, Lomax Exploration Co. ("Lomax")
conducted a study of the Wonsits Valley unit enhanced oil recovery program and
concluded that its Monument Butte field, located 30 miles to the west, had
similar geological and reservoir characteristics. An enhanced oil recovery
unit was formed, and in November 1987, a pilot enhanced oil recovery project
using waterflood technology commenced. Based
39
<PAGE>
on the initial results, Lomax expanded the program in 1992. In October 1992,
the DOE selected Lomax in cooperation with the University of Utah, for a co-
funded program to study Green River enhanced oil recovery results. An
extensive study ensued utilizing full and side wall cores, advanced wireline
logging technology, computer derived reservoir simulation and laboratory
analysis of crude oil and associated natural gas samples.
In November 1996, the DOE concluded that the utilization of conventional
waterflooding technology could produce significant enhanced oil recoveries
from pressure depleted reservoirs in Green River formations in the 1,400-acre
region of the Monument Butte Unit of the Greater Monument Butte Region, which
includes the Company's three prospect areas. The methods and techniques
employed in the project were predicted by the DOE to be applicable to an area
of about 300 square miles, which is included within the Greater Monument Butte
Region. The DOE concluded that the primary recovery would account for 5% of
the original oil in place. In addition, the DOE concluded that the Lomax
enhanced oil recovery program may increase the ultimate recovery to 21% of
original oil in place.
Recent Enhanced Oil Recovery Projects. Since 1992, nine additional
waterflood projects around the Monument Butte Unit have been commenced. In
addition to the Company's development areas, certain of the units involved in
these projects include the Wells Draw unit (operated by Enserch Exploration,
Inc.) and the Jonah unit (operated by Equitable Resources Energy Company).
Although the enhanced oil recovery techniques studied by the DOE in the
Monument Butte Unit were commenced after a number of years of primary
production, Lomax and other operators in the Uinta Basin have experienced
increases in production and reserves in other fields by initiating waterfloods
during initial production from new wells. The Company's Antelope Creek field
contains the largest single unit of contiguous acreage currently undergoing
enhanced oil recovery (waterflood) operations in the Greater Monument Butte
Region.
Development Approach to the Greater Monument Butte Region. The Company
believes that it can achieve results similar to those experienced by other
operators utilizing waterflood techniques in the Monument Butte, Red Wash and
Wonsits fields in the Greater Monument Butte Region. The Company's enhanced
oil recovery development strategy utilizes waterflood techniques designed to
rebuild and maintain reservoir pressure, which are similar to the techniques
studied by the DOE. Waterflooding involves the injection of water into a
reservoir forcing oil through the formation toward producing wells in the
development area and driving free natural gas in the reservoir back into oil
solution, creating greater pressure within the reservoir and making the oil
more mobile, and increasing the rate of production and ultimate recoverable
volumes.
The Company believes that primary oil recovery, i.e., without waterflooding,
results in the production of approximately 5% of the original oil in place for
wells in the Lower Green River formation of the Greater Monument Butte Region.
By utilizing waterflood techniques, the Company hopes to increase recoveries
from these wells to approximately 25% of the original oil in place. By
introducing enhanced oil recovery techniques during primary production, the
Company believes that cumulative and daily production may increase. Based on
the results of the Company and other operators in the region, the Company
believes that the sands prevalent in the Lower Green River formation of the
Antelope Creek field are analogous to the sands from the same formation of the
Monument Butte, Red Wash and Wonsits fields. The Company is implementing a
similar enhanced oil recovery program in the Antelope Creek field in the
Greater Monument Butte Region. The Company believes that the preliminary
results of its enhanced oil recovery project are comparable to those
recognized by the DOE study and that wells are responding to the waterflood.
When the Company begins enhanced oil recovery development of a field, it
generally drills four wells on 160 acres (based on 40-acre spacing) and uses
one of the four wells as an injection well for its waterflood repressurization
program. In order to optimize the recovery of hydrocarbons through enhanced
oil recovery techniques, the Company utilizes a variety of open hole logs and
other analytical techniques to categorize the different formations in the
Greater Monument Butte Region. The Company plans to drill and evaluate at
least four wells in a group before determining which well to operate as the
water injection well.
40
<PAGE>
The Company emphasizes preplanning in project development to lower capital
and operational costs and to efficiently integrate potential well locations
into the existing and planned infrastructure, including gathering systems,
water distribution and other surface facilities. The Company currently
estimates that the average cost to drill, complete and install the necessary
surface and waterflood facilities will be approximately $400,000 per producing
or injection well. Historically, the Company has been able to minimize cycle
time from drilling to hook-up of wells, which the Company believes should
accelerate cash flow and improve ultimate project economics.
In the future, the Company may consider other enhanced oil recovery
techniques to increase production of oil and natural gas. For example, the
Company anticipates that it may inject produced natural gas, imbibition agents
or surfactants into reservoirs in an effort to further enhance ultimate oil
recovery and increase production rates.
The Company's major projects in the Uinta Basin include:
Antelope Creek Field. The Antelope Creek field lies in the western portion
of the Greater Monument Butte Region. Production in this field first occurred
in July 1983. The potential producing formations in this field are the Uinta,
Upper Green River, Lower Green River, Wasatch and Mesa Verde. The Company owns
a 50% working interest in, and is the operator of, approximately 20,912 gross
(12,668 net) acres within the field.
The Company began operations in the Antelope Creek field in February 1994
and is currently implementing enhanced oil recovery projects using waterflood
technology in 16 separate horizons in the Lower Green River formation. The
initial pilot program commenced in September 1994, and the preliminary
response for affected producing wells has been consistent with the DOE study.
To date, the Company has recorded responses in eight of the 18 horizons and
expects to experience responses in additional horizons as the waterflood
program matures. In July 1997, the Company completed construction of its water
distribution and injection system. This system, which has the capacity to
carry 15,000 Bbls of water per day, includes 43 miles of low and high pressure
steel and polypropylene pipe buried below the frost line. The Company believes
that the system, which was designed to last 50 years, offers operating
flexibility and redundant water supplies and provides lower cost heated water
for completion and production operations. In addition, the Company initiated a
natural gas injection pilot in February 1997 to determine the effectiveness of
natural gas as an alternative or supplement to water as an injection medium.
At June 30, 1997, the Company had drilled 86 gross (43 net) production wells
in the Antelope Creek field and converted 11 gross (5.5 net) wells to
injection wells. At June 30, 1997, the Company owned 136 gross (68 net) wells
in the Antelope Creek field, all of which are operated by the Company. These
wells range in depth from 5,000 feet to greater than 7,000 feet. Average gross
daily production from the Antelope Creek field in July 1997 was 1,607 Bbls of
oil and 2,976 Mcf of natural gas. Approximately 350 gross wells (approximately
260 of which are expected to be utilized as production wells) remain to be
drilled within the current acreage position based on 40-acre spacing.
Duchesne Field. The Duchesne field is located five miles northwest of the
Antelope Creek field. This field was discovered in 1951, and 31 wells have
been drilled in an area of approximately 11,360 acres. The primary producing
formations in this field are the Upper and Lower Green River and Wasatch at
depths ranging from 1,300 to 8,500 feet. In addition to the Lower Green River
formation enhanced oil recovery potential, there is established oil production
from the Wasatch and Upper Green River formations within the field and
adjacent acreage.
The Company began operating in the Duchesne field in February 1994 in
connection with its acquisition of interests in this field and the Antelope
Creek field. At June 30, 1997, the Company owned approximately 11,360 gross
and net acres and operated six active producing wells, not including two wells
currently awaiting completion, and 23 shut-in wells in anticipation of
implementation of waterflood projects and Wasatch formation
41
<PAGE>
recompletions. The Company owns 100% of the working interest in the field.
Average daily production from the Duchesne field in 1996 was 20 Bbls of oil
and 70 Mcf of natural gas.
The Company has yet to commence waterflooding this field. As a result of
geological similarities to the Antelope Creek field, however, the Company
intends during the first half of 1998 to initiate a pilot waterflood area
within the field targeting known Lower Green River oil reservoirs for enhanced
oil recovery. In addition, the Company drilled and completed two wells in the
Upper Green River formation in August 1997. The Company expects that these
wells will begin commercial production in August 1997. In August 1997, the
Company also began operations to recomplete seven existing well bores in the
Wasatch formation at depths of approximately 7,500 feet.
Natural Buttes Extension Development Area. The Natural Buttes Extension
development area is located in the eastern part of the Greater Monument Butte
Region and lies at the northern edge of the Greater Natural Buttes natural gas
field. The project lies within the Green River enhanced oil recovery project
area identified in the DOE study and is bordered on three sides by existing
Green River oil fields. To date, no wells have been drilled in the Company's
approximately 13,253 gross and net acres in the Natural Buttes Extension
development area. As in the Antelope Creek and Duchesne fields, the Company's
primary development objective is enhanced oil recovery in Lower Green River
oil reservoirs.
Two Green River enhanced oil recovery waterflood projects have been
initiated recently by other operators approximately six miles to the west of
the Natural Buttes Extension development area. In addition, an enhanced oil
recovery gas injection project is located south of the Company's acreage in
the West Willow Creek field. The Wonsits Valley enhanced oil recovery
waterflood project is located approximately four miles to the east. The
Company believes that results from these waterflood projects support
exploratory wells on the Company's acreage in this development area.
In addition, the Natural Buttes Extension Development area is located
adjacent to the northwest extension of the Natural Buttes gas field and is
directly offset by two wells that have produced in excess of 1.0 Bcf of
natural gas each. The Company's independent reservoir engineers have assigned
1.8 Bcf of net proved undeveloped reserves to two Wasatch natural gas
development locations that the Company plans to drill in November 1997.
Current Uinta Basin Development Plan. The Company intends to develop its
Uinta Basin Properties through the drilling of development and exploratory
wells and associated injection wells. The final determination with respect to
the drilling, production and development of wells will be dependent upon a
number of factors, including (i) the results of development activities in the
areas, (ii) the availability of sufficient capital resources by the Company
for drilling, (iii) the approval of the development plan by tribal and other
governmental authorities and (iv) economic and industry conditions at the time
of drilling, including prevailing and anticipated prices for oil and natural
gas and the availability of drilling rigs and crews. The full development of
any area will be dependent upon the commercial success of the Company's
development program. In the event that the results of the initial development
activities in any area do not meet the Company's expectations, the Company
will modify the development of such area.
The Company's acreage in each of these three development areas is held
pursuant to various development agreements with the Ute Indian Tribe, the Ute
Distribution Corporation and fee mineral owners. Under these development
agreements, the Company is responsible for making the key development and
operating decisions for each field. All of the Company's acreage in the
Antelope Creek field and approximately 54% of the Company's acreage in the
Duchesne field is held by production. The Company's acreage in the Natural
Buttes Extension development area and acreage recently leased is subject to
rentals until the Company is able to develop those areas.
Sources of Water for the Company's Enhanced Oil Recovery Programs. The
Company's enhanced oil recovery program in the Uinta Basin involves the
injection of water into wells to pressurize reservoirs and, therefore,
requires substantial quantities of water. The Company intends to satisfy its
requirements from one or
42
<PAGE>
more of three sources, water produced from water wells, water purchased from
local water districts and water produced in association with oil production.
The Company has drilled water wells only in the Antelope Creek field, and
there can be no assurance that these water wells will continue to produce
quantities sufficient to support the injection program, that the Company will
be able to obtain the necessary approvals to drill additional water wells or
that successful water wells can be drilled in its other Uinta Basin
development areas. The Company has a contract with East Duchesne Water
District to purchase up to 10,000 barrels of water per day through September
30, 2004. After the initial term, this contract automatically renews each year
for one additional year; however, either party may terminate the agreement
with twelve months prior notice. In the event of a water shortage, the East
Duchesne Water District contract provides that preferences will be given to
residential customers in the area and other water customers having a higher
use priority than the Company. In addition, the Company has not yet secured a
water source for the full development of its Natural Buttes Extension
properties. There can be no assurance that water shortages will not occur or
that the Company will be able to renew or enter into new water supply
agreements on commercially reasonable terms or at all. To the extent the
Company is required to pay additional amounts for its supply of water, the
Company's financial condition and results of operations may be adversely
affected. While the Company believes that there will be sufficient volumes of
water available to support its improved oil recovery program and has taken
certain actions to ensure an adequate water supply will be available, in the
event the Company is unable to obtain sufficient quantities of water, the
Company's enhanced oil recovery program and business would be materially
adversely affected.
RATON BASIN. The Raton Basin, which is located in southeastern Colorado and
northeastern New Mexico, is approximately 80 miles long and 50 miles wide. The
Gas Research Institute has estimated that as of 1993 the Raton Basin held 18.0
Tcf of recoverable natural gas reserves from coalbed methane. As of December
31, 1996, cumulative production of approximately 7.9 Bcf of natural gas had
been recovered from approximately 140 coalbed methane wells in the Raton
Basin.
The Company recently acquired properties located in the northern portion of
the Raton Basin in Huerfano County, Colorado. The primary producing reservoir
in the Raton Basin is the Vermejo, which consists of several individual coal
seams at depths ranging from 500 to 5,000 feet. Over 45 million years ago,
plant material accumulated in thick layers in coastal swamps in the Raton
Basin and was subsequently buried and subjected to heat and pressure which
formed the coals. Since these coals were buried, continued mountain building
forces compressed the Raton Basin, creating an extensive series of fractures
in the coal and surrounding rocks. Later, portions of the area was intruded by
hot liquid rock or "magma" from lower in the earth's crust, which cooled to
form two large structures in the center of the Raton Basin known as the
Spanish Peaks. The magma moved up through existing fractures and created
additional fractures that radiate outward from the Spanish Peaks. As the magma
cooled, its heat altered the surrounding rocks, including the Vermejo and
Raton coals beds. The Company believes that the compression of mountain
building and the intrusion of magma into the Raton Basin have enhanced the
ability of the Vermejo and Raton coals to yield coalbed methane.
Development History. Exploratory drilling in the Raton Basin commenced in
1982. The first significant hydrocarbon discovery was coalbed methane natural
gas in 1987; however, early efforts to produce the natural gas were
commercially unsuccessful. During the last ten years, new technology has led
to the development of substantial new reserves of coalbed methane natural gas
in the United States. Application of this technology in the Raton Basin has
resulted in the discovery of additional reserves by other operators in the
area. In addition, the limited natural gas pipeline infrastructure in the
Raton Basin delayed the development of coalbed methane reserves. In December
1994, Colorado Interstate Gas Company completed construction of a 10-inch
pipeline from Weston, Colorado to Trinidad, Colorado, providing an outlet for
Raton Basin natural gas. The Company believes that construction of the
pipeline has allowed operators to increase drilling activity in the Raton
Basin.
Coalbed Methane Production. Coalbed methane production is similar to
traditional natural gas production in terms of the physical producing
facilities and the product produced. However, the subsurface mechanisms that
allow the gas to move to the wellbore and the producing characteristics of
coalbed methane wells are different from traditional natural gas production.
Coal beds produce nearly pure methane gas while traditional gas wells
43
<PAGE>
normally produce gas that contains small portions of ethane, propane and other
heavier hydrocarbon gases. Methane normally constitutes more than 90% of the
total gases in the production from traditional natural gas wells. The Raton
Basin natural gas does not contain significant amounts of contaminants, such
as hydrogen sulfide, carbon dioxide or nitrogen, that are sometimes present in
traditional natural gas production. Therefore, the properties of the Raton
Basin natural gas, such as heat content per unit volume (Btu), are very close
to the average properties of pipeline natural gas from traditional natural gas
wells.
Coal is a black organic mineral formed from buried deposits of plant
material from ancient coastal swamps. Methane is a common component of coal,
though coals vary in their methane content per ton. Rather than being limited
to open spaces in the coal structure, methane is adsorbed onto the inner coal
surfaces. When the coal is fractured and exposed to lower pressures, the
natural gas leaves the coal. Whether a coal bed will produce commercial
quantities of natural gas depends on its original content of natural gas per
ton of coal, the thickness of the coal bed, the reservoir pressure and the
existence of fractures through which the released natural gas can flow to the
wellhead. Frequently, coal beds are partly or completely saturated with water.
As the water is produced, space is created for natural gas to leave the coal
and flow to the well. Contrary to traditional natural gas wells, new coalbed
methane wells often produce water for several months and then, as the water
production decreases because the coal seams are being drained, and the
pressure decreases, methane gas production increases.
Water Production and Disposal. The Company believes that the water produced
from the Raton Basin coal seams will be low in dissolved solids, allowing the
Company, operating under permits which the Company believes will be issued by
the State of Colorado, to discharge the water into streambeds or stockponds.
However, if nonpotable water is discovered, it may be necessary to install and
operate evaporators or to drill disposal wells to reinject the produced water
back into the underground rock formations adjacent to the coal seams or to
lower sandstone horizons.
Coalbed Methane Technology. Coalbed methane wells are drilled and completed
in a manner similar to traditional natural gas wells, but exploration is
easier because coalbeds are relatively continuous underground and because it
is not essential to find folded or faulted structures that create natural
traps. The coalbed methane is trapped in the molecular structure of the coal
itself until released by pressure reduction in the reservoir brought about by
water removal. The Company intends to complete its wells in the Vermejo and
Raton coal beds.
The ability of natural gas to move through the coal or rocks to the wellbore
from its place of origination in the formation is the key determinant of the
rate at which a well will produce. Coal often provides very little ability for
the natural gas to move through it to the wellbore. Permeability is the
measure of the ability of fluids to move through the rock (coal) under the
influence of a differential pressure. The Raton Basin coals exhibit very good
to excellent permeability. However, in order to establish commercial gas
production rates, the Company must create a permanent conduit between the
individual coal seams and the wellbore. This is accomplished by creating and
propping open artificial fractures within the coal seams so the pathway for
gas migration to the wellbore is enhanced. Similar techniques of fracturing
are used on traditional natural gas and oil wells and have been proven to be
successful on other acreage in the Raton Basin.
The Company also intends to use specialized drilling techniques in the Raton
Basin. Traditional gas wells are drilled with the use of rotary drill bits
cooled and lubricated by drilling fluids. Exposing the Raton Basin coals to
drilling mud may significantly lower the permeability of the coals by plugging
the pores and natural fractures in the coals. The Company, therefore, intends
to use percussion air drilling without traditional drilling muds in drilling
its wells.
Raton Basin Development Plan. The Company recently acquired oil and natural
gas leases covering approximately 56,000 gross and net acres in the Raton
Basin. The Company intends to include much of its acreage in this area in a
federal exploratory unit of land that is governed by federal rules because
federal leases are included in the unit. Under an exploratory unit agreement,
production from any well in the unit will extend all of the leases in the unit
beyond their primary term. In addition, production and expenses are shared
among the individual lessors and lessees in the unit.
44
<PAGE>
Initially, the Company plans to spend up to approximately $5.0 million to
conduct a pilot project to study the feasibility of a full-scale coalbed
methane project. Should the pilot project be successful, the Company could
drill up to 200 wells on 160-acre spacing over the life of the project.
WILCOX TREND. The Wilcox Trend, which is located in Victoria and DeWitt
Counties in the Gulf Coast region of South Texas, is a high potential, multi-
pay province that lends itself to 3-D seismic exploration due to its
substantial structural and stratigraphic complexity. As of May 31, 1997,
cumulative production of approximately 12 MBbls of oil and 53 Bcf of natural
gas had been recovered from approximately 25 wells in the Company's properties
in the Helen Gohlke field.
On September 1, 1994, the Company purchased a 100% working interest in 5,079
gross and net acres in the Helen Gohlke field located within the Wilcox Trend.
The Company currently operates 13 producing oil and natural gas wells and two
disposal wells in this field. The Company is currently conducting a 3-D
seismic survey of the field and, subject to the results of the survey,
anticipates drilling one to three wells in the fourth quarter of 1997 or first
quarter of 1998. Average daily production from the Helen Gohlke field in
December 1996 was 70 Bbls of oil and 205 Mcf of natural gas.
MARKETING ARRANGEMENTS
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 oil-
producing and natural gas-producing countries, the actions of OPEC and
domestic government regulation, legislation and policies. Decreases in the
prices of oil and natural gas could have an adverse effect on the carrying
value of the Company's proved reserves and the Company's revenues,
profitability and cash flow.
In June 1994, the Company entered into a contract to sell its oil production
from certain leases of its Utah properties to an industry participant. The
price under this contract is agreed upon monthly and is generally based on
such purchaser's posted prices. This contract will continue in effect until
terminated by either party. During the three years ended December 31, 1996,
the volumes sold under this contract totaled approximately 66 MBbls, 101 MBbls
and 61 MBbls, respectively, at an average sales price per Bbl for each year of
$16.51, $17.09 and $19.33.
In June 1997, the Company entered into a crude oil contract to sell "black
wax" production from certain of its oil tank batteries in Antelope Creek to a
refinery. This contract is effective until May 31, 1998 and calls for the
Company to receive a per Bbl price equal to the current month NYMEX closing
price for sweet crude, averaged over the month in which the crude is sold,
less an agreed upon adjustment.
In July 1997, the Company entered into a modification of its crude oil sales
contract to sell its black wax production from the Antelope Creek field to a
major oil company at a price equal to posting, less an agreed upon adjustment
to cover handling and gathering costs. This contract will continue in effect
until terminated by either party. In addition to the sales contract discussed
above, the purchaser has the option under an Oil Production Call Agreement to
purchase all or any portion of the oil produced from the Antelope Creek field
at the current market price. The option, which has no expiration date, allows
the purchaser to purchase the Company's oil production at a price that
approximates the market price for oil produced by the Company.
HEDGING ACTIVITIES
The Company historically has used various financial instruments such as
collars, swaps and futures contracts in an attempt to manage its price risk
with regard to a portion of the Company's crude and natural gas production.
Monthly settlements on these financial instruments are typically based on
differences between the fixed prices specified in the instruments and the
settlement price of certain future contracts quoted on the NYMEX or certain
45
<PAGE>
other indices. The instruments which have been historically used by the
Company have not had a contractual obligation which requires or allows the
future physical delivery of the hedged products. While use of these hedging
arrangements limit the downside risk of price declines, such arrangements may
also limit the benefits which may be derived from price increases.
Approximately 378 MBbls of oil of the Company's expected oil production
through December 31, 1999 is subject to collars with a floor price of $17.00
and a ceiling price of $20.75.
The Company monitors oil markets and the Company's actual performance
compared to the estimates used in entering into hedging arrangements. If
material variations occur from those anticipated when a hedging arrangement is
made, the Company takes actions intended to minimize any risk through
appropriate market actions. The Company attempts to manage its exposure to
counterparty nonperformance risk through the selection of financially
responsible counterparties.
OIL AND NATURAL GAS RESERVES
The Company's estimated total proved reserves of oil and natural gas as of
December 31, 1994, 1995 and 1996 and June 30, 1997 were as follows:
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-------------------------------------------------------- AS OF JUNE 30,
1994 1995 1996 1997
------------------ ------------------ ------------------ ------------------
OIL NATURAL OIL NATURAL OIL NATURAL OIL NATURAL
(MBBLS) GAS (MMCF) (MBBLS) GAS (MMCF) (MBBLS) GAS (MMCF) (MBBLS) GAS (MMCF)
------- ---------- ------- ---------- ------- ---------- ------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Proved developed:
Utah................... 247 1,156 870 1,219 568 1,600 1,685 3,696
Other.................. 958 6,151 691 5,440 297 1,410 164 1,155
----- ----- ----- ----- ----- ------ ----- ------
Total................. 1,205 7,307 1,561 6,659 865 3,010 1,849 4,851
Proved undeveloped:
Utah................... -- -- -- -- 5,262 15,802 5,875 16,059
Other.................. -- -- -- -- -- -- -- --
----- ----- ----- ----- ----- ------ ----- ------
Total................. -- -- -- -- 5,262 15,802 5,875 16,059
----- ----- ----- ----- ----- ------ ----- ------
Total proved.......... 1,205 7,307 1,561 6,659 6,127 18,812 7,724 20,910
===== ===== ===== ===== ===== ====== ===== ======
</TABLE>
46
<PAGE>
The following table sets forth the future net cash flows from the Company's
estimated proved reserves:
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
------------------------ AS OF JUNE 30,
1994 1995 1996 1997
------- ------- -------- --------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Future net cash flow before income
taxes:
Utah................................ $ 5,776 $10,019 $117,101 $82,122
Other............................... 10,882 12,412 6,699 2,273
------- ------- -------- -------
Total............................. $16,658 $22,431 $123,800 $84,395
======= ======= ======== =======
Future net cash flow before income
taxes, discounted at 10%:
Utah................................ $ 4,126 $ 7,421 $ 59,447 $41,230
Other............................... 7,301 7,553 4,656 1,641
------- ------- -------- -------
Total............................. $11,427 $14,974 $ 64,103 $42,871
======= ======= ======== =======
</TABLE>
The reserve estimates reflected above for 1994, 1995 and 1996 were prepared
by the Company. The reserve estimates for June 30, 1997 were prepared by
Keeling, the Company's petroleum engineers, and are part of a report on the
Company's oil and natural gas properties, a summary of which is set forth
herein as Appendix A.
In accordance with applicable requirements of the Commission, estimates of
the Company's proved reserves and future net revenues are made using sales
prices estimated to be in effect as of the date of such reserve estimates and
are held constant throughout the life of the properties (except to the extent
a contract specifically provides for escalation). Estimated quantities of
proved reserves and future net revenues therefrom are affected by oil and
natural gas prices, which have fluctuated widely in recent years. There are
numerous uncertainties inherent in estimating oil and natural gas reserves and
their estimated values, including many factors beyond the control of the
producer. The reserve data set forth in this Prospectus represents only
estimates. Reservoir engineering is a subjective process of estimating
underground accumulations of oil and natural gas that cannot be measured in an
exact manner. The accuracy of any reserve estimate is a function of the
quality of available data and of engineering and geological interpretation and
judgment. In addition, the Company's use of enhanced oil recovery techniques
requires greater development expenditures than traditional drilling
strategies. The Company expects to drill a number of wells utilizing
waterflood technology in the future. The Company's waterflood program involves
greater risk of mechanical problems than conventional development programs. As
a result, estimates of different engineers, including those used by the
Company, may vary. In addition, estimates of reserves are subject to revision
based upon actual production, results of future development and exploration
activities, prevailing natural gas and oil prices, operating costs and other
factors, which revisions may be material. Accordingly, reserve estimates are
often different from the quantities of natural gas and oil that are ultimately
recovered and are highly dependent upon the accuracy of the assumptions upon
which they are based. The Company's estimated proved reserves have not been
filed with or included in reports to any federal agency. See "Risk Factors--
Uncertainty of Reserve Information and Future Net Revenue Estimates."
47
<PAGE>
EXPLORATION AND DEVELOPMENT ACTIVITIES
The Company drilled, or participated in the drilling of, the following
number of wells during the periods indicated. At June 30, 1997, the Company
was in the process of completing 7 gross (3.5 net) wells as producers.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------- SIX MONTHS ENDED
1994 1995 1996 JUNE 30, 1997
--------- --------- --------- -----------------
GROSS NET GROSS NET GROSS NET GROSS NET
----- --- ----- --- ----- --- -----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Exploratory:
Oil........................... 1 .5 -- -- -- -- 2 2
Natural gas................... -- -- -- -- -- -- -- --
Nonproductive................. 1 .5 3 2.5 -- -- -- --
--- --- --- --- --- --- ------- --------
Total....................... 2 1 3 2.5 -- -- 2 2
=== === === === === === ======= ========
Development:
Oil........................... 7 3.5 9 4.5 38 19 31 15.5
Natural gas................... 3 2 2 1 -- -- -- --
Nonproductive................. 1 .5 -- -- -- -- -- --
--- --- --- --- --- --- ------- --------
Total....................... 11 6 11 5.5 38 19 31 15.5
=== === === === === === ======= ========
Total:
Productive.................... 11 6 11 5.5 38 19 33 17.5
Nonproductive................. 2 1 3 2.5 -- -- -- --
--- --- --- --- --- --- ------- --------
Total....................... 13 7 14 8 38 19 33 17.5
=== === === === === === ======= ========
</TABLE>
As a result of the Company's drilling results to date, the Company believes
that the nature of the geology in the Lower Green River formation in the
Greater Monument Butte Region is characterized by the presence of hydrocarbons
throughout the region and, as a consequence, the distinction between
exploratory and development wells in this region is not as important as it is
in other oil and natural gas producing areas.
The Company does not own any drilling rigs; therefore, all of its drilling
activities are conducted by independent contractors under standard drilling
contracts.
PRODUCTIVE WELL SUMMARY
The following table sets forth the Company's ownership interest as of June
30, 1997 in productive oil and natural gas wells in the development areas
indicated.
<TABLE>
<CAPTION>
OIL NATURAL GAS TOTAL
--------- ------------ ---------
AREA GROSS NET GROSS NET GROSS NET
- ---- ----- --- ------ ----- ----- ---
<S> <C> <C> <C> <C> <C> <C>
Utah:
Antelope Creek Field......................... 94 47 -- -- 94 47
Duchesne Field............................... 6 6 -- -- 6 6
Natural Buttes Extension..................... -- -- -- -- -- --
--- --- ----- ----- --- ---
Total ...................................... 100 53 -- -- 100 53
Colorado....................................... -- -- -- -- -- --
Other.......................................... 11 10 8 6 19 16
--- --- ----- ----- --- ---
Total...................................... 111 63 8 6 119 69
=== === ===== ===== === ===
</TABLE>
In addition, as of June 30, 1997, the Company had 10 gross (5 net) active
water injection wells on its acreage in the Uinta Basin.
48
<PAGE>
VOLUMES, PRICES AND PRODUCTION COSTS
The following table sets forth the production volumes, average sales prices
and average production costs associated with the Company's sale of oil and
natural gas for the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
------------------------------------ ----------------------------------
HISTORICAL PRO FORMA(1) HISTORICAL PRO FORMA(1) HISTORICAL
----------------------- ------------ ---------- ------------ ----------
1994 1995 1996 1996 1996 1996 1997
------- ------- ------- ------------ ---------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Net production:
Oil (Bbls)............. 110,373 182,704 262,910 213,535 141,775 94,542 117,770
Natural gas (Mcf)...... 485,062 659,202 553,770 461,292 358,420 271,431 243,095
Oil equivalent (BOE)... 191,217 292,571 355,205 290,417 201,512 139,781 158,286
Average sales price(2):
Oil (per Bbl):
Utah................... $ 16.23 $ 17.01 $ 15.82 $ 15.25 $ 17.46 $ 15.53 $ 13.87
Other.................. 14.42 18.66 20.35 20.35 19.32 19.32 20.05
Weighted average(3).... 14.89 17.61 16.96 16.83 17.94 17.01 14.65
Natural gas (per Mcf):
Utah................... $ 1.73 $ 1.40 $ 1.64 $ 1.41 $ 1.37 $ 1.34 $ 1.99
Other.................. 1.60 1.69 1.96 1.96 1.90 1.90 2.72
Weighted average....... 1.64 1.54 1.80 1.75 1.65 1.74 2.11
Average lease operating
expenses including
production and property
taxes (per BOE):
Utah................... $ 9.95 $ 6.06 $ 5.21 $ 4.53 $ 6.08 $ 4.92 $ 4.13
Other.................. 8.40 11.68 11.99 11.99 9.36 9.36 17.45(4)
Weighted average....... 8.84 8.37 7.37 7.43 7.19 7.09 5.93
</TABLE>
- --------
(1) Reflects results of operations as if the June 1, 1996 disposition of the
50% interest in the Antelope Creek properties had occurred on January 1,
1996.
(2) Before deduction of property taxes.
(3) Excluding the effects of losses from crude oil hedging transactions and
amortization of deferred revenue, the weighted average sales price per Bbl
of oil was $20.22 for the year ended December 31, 1996, $18.22 for the
historical six months ended June 30, 1996, $17.43 for the pro forma six
months ended June 30, 1996 and $15.96 for the historical six months ended
June 30, 1997.
(4) Excluding the effects of a workover and bottomhole repair to a well that
totaled $131,000, the average lease operating expense for the other
properties for the six months ended June 30, 1997 was $11.37 per BOE.
DEVELOPMENT, EXPLORATION AND ACQUISITION EXPENDITURES
The following table sets forth the costs incurred by the Company in its
development, exploration and acquisition activities during the periods
indicated.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------- SIX MONTHS ENDED
1994 1995 1996 JUNE 30, 1997
---------- ---------- ---------- ----------------
<S> <C> <C> <C> <C>
Acquisition costs:
Unproved properties......... $ 52,685 $ 8,206 $ 490,487 $ 416,601
Proved properties........... 5,193,043 4,718,201 -- --
Development costs............. 1,311,272 3,448,972 6,983,715 4,057,976
Exploration costs............. 69,570 316,089 -- --
Improved recovery costs....... 271,276 154,023 327,027 99,531
---------- ---------- ---------- ----------
Total..................... $6,897,846 $8,645,491 $7,801,229 $4,574,108
========== ========== ========== ==========
</TABLE>
49
<PAGE>
ACREAGE
The following table sets forth, as of June 30, 1997, the gross and net acres
of developed and undeveloped oil and natural gas leases which the Company
holds or has the right to acquire.
<TABLE>
<CAPTION>
DEVELOPED UNDEVELOPED TOTAL
------------ ------------- --------------
AREA GROSS NET GROSS NET GROSS NET
- ---- ------ ----- ------ ------ ------- ------
<S> <C> <C> <C> <C> <C> <C>
Utah:
Antelope Creek Field................ 5,600 2,880 15,312 9,788 20,912 12,668
Duchesne Field...................... 1,240 1,240 10,120 10,120 11,360 11,360
Natural Buttes Extension............ -- -- 13,253 13,253 13,253 13,253
------ ----- ------ ------ ------- ------
Total.............................. 6,840 4,120 38,685 33,161 45,525 37,281
Colorado.............................. -- -- 55,927 55,927 55,927 55,927
Other................................. 6,279 5,663 -- -- 6,279 5,663
------ ----- ------ ------ ------- ------
Total............................. 13,119 9,783 94,612 89,088 107,731 98,871
====== ===== ====== ====== ======= ======
</TABLE>
ACQUISITIONS
The Company expects that it may evaluate and pursue from time to time
acquisitions in the Uinta Basin, the Raton Basin and in other areas that
provide attractive investment opportunities for the addition of production and
reserves and that meet the Company's selection criteria. The successful
acquisition of producing properties and undeveloped acreage 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 performs a review of the subject properties it
believes to be generally consistent with industry practices. This review,
however, will not reveal all existing or potential problems, nor will it
permit a buyer to become sufficiently familiar with the properties to assess
fully their deficiencies and capabilities. Inspections may not be performed on
every well, and structural and environmental problems are not necessarily
observable even when an inspection is undertaken. The Company generally
assumes preclosing liabilities, including environmental liabilities, and
generally acquires interests in the properties on an "as is" basis.
COMPETITION
The Company operates in the highly competitive areas of oil and natural gas
exploration, exploitation, acquisition and production with other companies,
many of which have substantially larger financial resources, operations,
staffs and facilities. In seeking to acquire desirable producing properties or
new leases for future exploration and in marketing its oil and natural gas
production, the Company faces intense competition from both major and
independent oil and natural gas companies. In addition to the development of
its existing proved reserves, the Company expects that its inventory of
unproved drilling locations will be the primary source of new reserves,
production and cash flow over the next few years. The Company's properties in
the Uinta Basin constitute the majority of the Company's existing inventory.
Approximately 82% of the Company's fiscal year 1997 capital expenditure budget
is expected to be associated with drilling and acreage acquisition activity in
the Uinta Basin. There can be no assurance that the Uinta Basin will yield
substantial economic returns. Failure of the Uinta Basin to yield significant
quantities of economically attractive reserves in production could have a
material adverse impact on the Company's future financial condition and
results of operations and could result in a write-off of a significant portion
of its investment in the Uinta Basin. In addition, recent heavy drilling
activity by a number of operators in the Uinta Basin may reduce or limit the
availability of equipment and supplies or reduce demand for the Company's
production, either of which would impact the Company more adversely than if
the Company were geographically diversified.
The Company's competitors include major integrated oil and natural gas
companies and numerous independent oil and natural gas companies, individuals
and drilling and income programs. Many of its
50
<PAGE>
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 energy business for a much longer
time than the Company. Such companies may be able to pay more for productive
oil and natural gas properties and exploratory prospects and to define,
evaluate, bid for and purchase a greater number of properties and prospects
than the Company's financial or human resources permit. The Company's ability
to acquire additional properties and to discover reserves in the future will
be dependent upon its ability to evaluate and select suitable properties and
to consummate transactions in a highly competitive environment.
OPERATING HAZARDS AND UNINSURED RISKS
Oil and natural gas 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 natural gas may involve unprofitable efforts, not only
from dry holes, 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 enhanced oil recovery techniques
for its Uinta Basin properties requires greater development expenditures than
alternative primary production strategies. In order to accomplish enhanced oil
recovery, the Company expects to drill a number of wells utilizing waterflood
technology in the future. The Company's waterflood program involves greater
risk of mechanical problems than conventional development programs. 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, title problems, water shortages, weather
conditions, compliance with governmental and tribal 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.
The Company's operations are subject to hazards and risks inherent in
drilling for and producing and transporting oil and natural gas, such as
fires, natural disasters, explosions, encountering formations with abnormal
pressures, blowouts, cratering, pipeline ruptures and spills, any of which can
result in the loss of hydrocarbons, environmental pollution, personal injury
claims and other damage to properties of the Company and others. As protection
against operating hazards, the Company maintains insurance coverage against
some, but not all, potential losses. The Company may elect to self-insure in
circumstances in which management believes that the cost of insurance,
although available, is excessive relative to the risks presented. The
occurrence of an event that is not covered, or not fully covered, by third-
party insurance could have a material adverse effect on the Company's
business, financial condition and results of operations.
REGULATION
Regulation of Oil and Natural Gas Production. The Company's oil and natural
gas exploration, production and related operations are subject to extensive
rules and regulations promulgated by federal, state and local authorities and
agencies. Failure to comply with such rules and regulations can result in
substantial penalties. The regulatory burden on the oil and natural gas
industry increases the Company's cost of doing business and affects its
profitability. Although the Company believes it is in substantial compliance
with all applicable laws and regulations, because such rules and regulations
are frequently amended or reinterpreted, the Company is unable to predict the
future cost or impact of complying with such laws.
The State of Utah and many other states require permits for drilling
operations, drilling bonds and reports concerning operations and impose other
requirements relating to the exploration and production of oil and natural
gas. Such states also have statutes or regulations addressing conservation
matters, including provisions for the unitization or pooling of oil and
natural gas properties, the establishment of maximum rates of production from
wells, and the regulation of spacing, plugging and abandonment of such wells.
51
<PAGE>
Federal Regulation of Natural Gas. The Federal Energy Regulatory Commission
("FERC") 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 production.
Since the mid-1980's, FERC has issued a series of orders, culminating in Order
Nos. 636, 636-A and 636-B ("Order 636"), that have significantly altered the
marketing and transportation of natural gas. Order 636 mandates a fundamental
restructuring of interstate pipeline sales and transportation service,
including the unbundling by interstate pipelines of the sale, transportation,
storage and other components of the city-gate sales services such pipelines
previously performed. One of FERC's purposes in issuing the order was to
increase competition within all phases of the natural gas industry. In July
1996, the United States Court of Appeals for the District of Columbia Circuit
largely upheld Order 636. A number of parties have appealed this ruling to the
Supreme Court and proceedings on remanded issues are currently ongoing at
FERC. In addition, numerous parties have filed for review of Order 636, as
well as orders in individual pipeline restructuring proceedings. Because these
orders may be modified as a result of the appeals, it is difficult to predict
the ultimate impact of the orders on the Company and its natural gas marketing
efforts. Generally, Order 636 has eliminated or substantially reduced the
interstate pipelines' traditional role as wholesalers of natural gas in favor
of providing only storage and transportation service, and has substantially
increased competition and volatility in natural gas markets.
The price the Company receives from the sale of oil and natural gas liquids
is affected by the cost of transporting products to markets. Effective January
1, 1995, FERC implemented regulations establishing an indexing system for
transportation rates for oil pipelines, which, generally, would index such
rates to inflation, subject to certain conditions and limitations. The Company
is not able to predict with certainty the effect, if any, of these regulations
on its operations. However, the regulations may increase transportation costs
or reduce well head prices for oil and natural gas liquids.
Bureau of Indian Affairs. A substantial part of the Company's producing
properties in the Uinta Basin are operated under oil and natural gas leases
issued by the Ute Indian Tribe, which is under the supervision of the Bureau
of Indian Affairs. These activities must comply with rules and orders that
regulate aspects of the oil and natural gas industry, including drilling and
operating on leased land and the calculation and payment of royalties to the
federal government or the Ute Indian Tribe. Operations on Ute Indian tribal
lands must also comply with significant restrictive requirements of the
governing body of the Ute Indians. For example, such leases typically require
the operator to obtain an environmental impact statement based on planned
drilling activity. To the extent an operator wishes to drill additional wells,
it will be required to obtain a new assessment. In addition, leases with the
Ute Indian Tribe require that the operator agree to protect certain
archeological and ancestral ruins located on the acreage and to actively
recruit members of the Ute Indian Tribe to work on the drilling operations.
Environmental Matters. The Company's operations and properties are subject
to extensive and changing federal, state and local laws and regulations
relating to environmental protection, including the generation, storage,
handling, emission, transportation and discharge of materials into the
environment, and relating to safety and health. The recent trend in
environmental legislation and regulation generally is toward stricter
standards, and this trend will likely continue. These laws and regulations may
(i) require the acquisition of a permit or other authorization before
construction or drilling commences and for certain other activities; (ii)
limit or prohibit construction, drilling and other activities on certain lands
lying within wilderness and other protected areas; and (iii) impose
substantial liabilities for pollution resulting from the Company's operations.
The permits required for various of the Company's operations are subject to
revocation, modification and renewal by issuing authorities. Governmental
authorities have the power to enforce their regulations, and violations are
subject to fines or injunctions, or both. In the opinion of management, the
Company is in substantial compliance with current applicable environmental
laws and regulations, and the Company has no material commitments for capital
expenditures to comply with existing environmental requirements. Nevertheless,
changes in existing environmental laws and regulations or in interpretations
thereof could have a significant impact on the Company, as well as the oil and
natural gas industry in general.
The Comprehensive Environmental, Response, Compensation, and Liability Act
("CERCLA") and comparable state statutes impose strict, joint and several
liability on owners and operators of sites and on persons
52
<PAGE>
who disposed of or arranged for the disposal of "hazardous substances" found
at such sites. It is not uncommon for the neighboring land owners and other
third parties to file claims for personal injury and property damage allegedly
caused by the hazardous substances released into the environment. The Federal
Resource Conservation and Recovery Act ("RCRA") and comparable state statutes
govern the disposal of "solid waste" and "hazardous waste" and authorize the
imposition of substantial fines and penalties for noncompliance. Although
CERCLA currently excludes petroleum from its definition of "hazardous
substance," state laws affecting the Company's operations impose clean-up
liability relating to petroleum and petroleum related products. In addition,
although RCRA classifies certain oil field wastes as "non-hazardous," such
exploration and production wastes could be reclassified as hazardous wastes
thereby making such wastes subject to more stringent handling and disposal
requirements.
The Company has acquired leasehold interests in numerous properties that for
many years have produced oil and natural gas. Although the previous owners of
these interests may have used operating and disposal practices that were
standard in the industry at the time, hydrocarbons or other wastes may have
been disposed of or released on or under the properties. In addition, some of
the Company's properties may be operated in the future by third parties over
whom the Company has no control. Notwithstanding the Company's lack of control
over properties operated by others, the failure of the operator to comply with
applicable environmental regulations may, in certain circumstances, adversely
impact the Company.
NEPA. The National Environmental Policy Act ("NEPA") is applicable to many
of the Company's activities and operations. NEPA is a broad procedural statute
intended to ensure that federal agencies consider the environmental impact of
their actions by requiring such agencies to prepare environmental impact
statements ("EIS") in connection with all federal activities that
significantly affect the environment. Although NEPA is a procedural statute
only applicable to the federal government, a large portion of the Company's
Uinta Basin acreage is located either on federal land or Ute tribal land
jointly administered with the federal government. The Bureau of Land
Management's issuance of drilling permits and the Secretary of the Interior's
approval of plans of operation and lease agreements all constitute federal
action within the scope of NEPA. Consequently, unless the responsible agency
determines that the Company's drilling activities will not materially impact
the environment, the responsible agency will be required to prepare an EIS in
conjunction with the issuance of any permit or approval.
ESA. The Endangered Species Act ("ESA") seeks to ensure that activities do
not jeopardize endangered or threatened animal, fish and plant species, nor
destroy or modify the critical habitat of such species. Under ESA, exploration
and production operations, as well as actions by federal agencies, may not
significantly impair or jeopardize the species or its habitat. ESA provides
for criminal penalties for willful violations of the Act. Other statutes that
provide protection to animal and plant species and that may apply to the
Company's operations include, but are not necessarily limited to, the Fish and
Wildlife Coordination Act, the Fishery Conservation and Management Act, the
Migratory Bird Treaty Act and the National Historic Preservation Act. Although
the Company believes that its operations are in substantial compliance with
such statutes, any change in these statutes or any reclassification of a
species as endangered could subject the Company to significant expense to
modify its operations or could force the Company to discontinue certain
operations altogether.
ABANDONMENT COSTS
The Company is responsible for payment of its working interest share of
plugging and abandonment costs on its oil and natural gas properties. Based on
its experience, the Company anticipates that the ultimate aggregate salvage
value of lease and well equipment located on its properties will exceed the
costs of abandoning such properties. There can be no assurance, however, that
the Company will be successful in avoiding additional expenses in connection
with the abandonment of any of its properties. In addition, abandonment costs
and their timing may change due to many factors including actual production
results, inflation rates and changes in environmental laws and regulations.
53
<PAGE>
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
natural gas industry. The Company's properties are subject to customary
royalty interests, liens incident to operating agreements, liens for current
taxes and other burdens which the Company believes do not materially interfere
with the use of or affect the value of such properties. The Company's Credit
Agreement is secured by substantially all the Company's oil and natural gas
properties. Presently, the Company keeps in force its leaseholds for 18% of
its net acreage by virtue of production on that acreage in paying quantities.
The remaining acreage is held by lease rentals and similar provisions and
requires production in paying quantities prior to expiration of various time
periods to avoid lease termination.
OTHER FACILITIES
The Company currently leases approximately 3,300 square feet of office space
in Hutchinson, Kansas, where its principal offices are located. A significant
portion of the Company's principal offices are leased through Hutch Realty
LLC, an affiliate of the Company.
EMPLOYEES
As of September 29, 1997, the Company had 45 full-time employees, none of
whom is represented by any labor union. Included in the total were 18
corporate employees located in the Company's office in Hutchinson, Kansas. The
Company considers its relations with its employees to be good.
LEGAL PROCEEDINGS
The Company is not a party to any material pending legal proceedings.
54
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information regarding the directors
and executive officers of the Company as of September 29, 1997:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Robert C. Murdock........................ 40 President, Chief Executive Officer
and Chairman of the Board
Robert A. Christensen.................... 51 Executive Vice President, Chief
Technical Officer and Director
Sidney Kennard Smith..................... 53 Executive Vice President and Chief
Operating Officer
Tim A. Lucas............................. 33 Vice President and Chief Financial
Officer
David R. Albin........................... 38 Director
Kenneth A. Hersh......................... 34 Director
A. J. Schwartz........................... 45 Director
</TABLE>
Set forth below is a description of the backgrounds of the directors and
executive officers of the Company.
Robert C. Murdock has served as President, Chief Executive Officer and
Chairman of the Board of the Company since its inception in 1993. From 1985
until the formation of the Company, Mr. Murdock was President of GasTrak
Holdings, Inc., a natural gas gathering and marketing company. From 1982 to
1985, Mr. Murdock held various staff and management positions with Panhandle
Eastern Pipe Line Company, where he was responsible for the development and
implementation of special marketing programs, natural gas supply acquisitions,
natural gas supply planning and forecasting, and for developing computer
management systems for natural gas contract administration.
Robert A. Christensen has served as Executive Vice President and Director of
the Company since its inception in April 1993, and currently functions as
Chief Technical Officer with primary responsibility for property acquisition
evaluations, business development and strategic alliance formation. From April
1993 to 1996, Mr. Christensen served as President of Petroglyph Operating
Company, Inc., a wholly owned operating subsidiary of the Company. From
January 1992 to April 1993, Mr. Christensen was the President of Bishop
Resources, Inc., where he was responsible for managing the oil and natural gas
assets of the company. From April 1988 to April 1993, Mr. Christensen was
Manager of Project Development for Management Resources Group, Ltd. From
November 1985 to April 1988, Mr. Christensen was an independent consultant in
engineering operations and economic evaluations, primarily in Kansas. Prior to
November 1985, Mr. Christensen held various positions with independent oil and
natural gas exploration and production companies, as well as a major service
company. He is a member of the Society of Petroleum Engineers, the Society of
Professional Well Log Analysts and has completed the James M. Smith and
William T. Cobb course in waterflooding.
Sidney Kennard Smith has served as Executive Vice President and Chief
Operating Officer of the Company since January 1994, and was responsible for
accounting, financial planning and budgeting through December 1995. Currently
Mr. Smith serves as President of Petroglyph Operating Company. From June 1992
through 1993, Mr. Smith was a principal and treasurer of TKS Consulting, where
he performed economic and financial analysis, as well as served as an expert
witness in state and federal court and regulatory agency hearings. From
February 1986 to May 1992, Mr. Smith served as Vice President of Finance for
Gage Corporation, a natural gas development and processing company. From
August 1982 to July 1985, Mr. Smith was Treasurer and Controller for Sparkman
Energy Corporation. Mr. Smith is a Certified Public Accountant and is a member
of the American Institute of Certified Public Accountants and the Texas and
Oklahoma Societies of Certified Public Accountants.
55
<PAGE>
Tim A. Lucas has served as Vice President and Chief Financial Officer of the
Company since July 1997. Mr. Lucas previously served as Senior Financial
Manager for Cross Oil Refining & Marketing, Inc. from 1994 to 1997. From 1989
to 1994, Mr. Lucas worked in the energy group of the audit division of Arthur
Andersen, LLP. Mr. Lucas is a Certified Public Accountant and a member of the
American Institute of Certified Public Accountants and the Oklahoma Society of
Certified Public Accountants.
David R. Albin has served as a director of the Company since its inception.
Since 1988, Mr. Albin has been a manager of the NGP investment funds, which
were organized to make direct equity investments in the North American oil and
natural gas industry. From December 1984 until November 1988, Mr. Albin was
employed by Bass Investment Limited Partnership, where he was responsible for
portfolio management. Mr. Albin serves as a director of Offshore Energy
Development Corporation and Titan Exploration, Inc.
Kenneth A. Hersh has served as a director of the Company since its
inception. Since 1989, Mr. Hersh has been a manager of the NGP investment
funds, which were organized to make direct equity investments in the North
American oil and natural gas industry. From 1985 to 1987, Mr. Hersh was
employed by the investment banking division of Morgan Stanley & Co.
Incorporated, where he was a member of the Energy Group specializing in oil
and natural gas financing and merger and acquisition transactions. Mr. Hersh
serves as a director of Pioneer Natural Resources Company, HS Resources, Inc.
and Titan Exploration, Inc.
A. J. Schwartz has served as a director of the Company since April 1997.
Since 1980, Mr. Schwartz has been a shareholder in the law firm of Morris,
Laing, Evans, Brock & Kennedy, Chartered.
All directors are elected to serve until the next annual meeting of
stockholders and until their successors are elected and qualified. Executive
officers are generally elected annually by the Board of Directors to serve,
subject to the discretion of the Board of Directors, until their successors
are elected or appointed.
COMMITTEES OF THE BOARD
Upon completion of the Offering, the Company will establish standing audit
and compensation committees of the Board of Directors. Messrs. Albin and Hersh
are expected to be members of the Audit Committee and the Compensation
Committee. The Audit Committee will review the functions of the Company's
management and independent accountants pertaining to the Company's financial
statements and perform such other related duties and functions as are deemed
appropriate by the Audit Committee or the Board of Directors. The Compensation
Committee of the Board of Directors will recommend to the Board of Directors
the base salaries, bonuses and other incentive compensation for the Company's
officers. The Board of Directors is expected to designate the Compensation
Committee as the administrator of the Company's 1997 Incentive Plan. See
"Executive Compensation and Other Information--1997 Incentive Plan."
DIRECTOR COMPENSATION
Directors who are also employees of the Company are not separately
compensated for serving on the Board of Directors. Directors who are not
employees of the Company receive $5,000 per year for their services as
directors. In addition, the Company reimburses them for the expenses incurred
in connection with attending meetings of the Board of Directors and its
committees.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
In accordance with Section 102(b)(7) of the Delaware General Corporation Law
(the "DGCL"), the Company's Certificate of Incorporation includes a provision
eliminating the personal liability of members of its Board of Directors to the
corporation or its stockholders for monetary damages for breach of fiduciary
as a director. Such provision does not eliminate or limit the liability of a
director (1) for any breach of a director's duty of loyalty to the corporation
or its stockholders, (2) for acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of law, (3) for paying
an unlawful dividend or approving an illegal
56
<PAGE>
stock repurchase (as provided in Section 174 of the DGCL), or (4) for any
transaction from which the director derived an improper personal benefit.
The Company has entered into indemnity agreements with each of its executive
officers and directors that provide for indemnification in certain instances
against liability and expenses incurred in connection with proceedings brought
by or in the right of the Company or by third parties by reason of a person
serving as an officer or director of the Company.
The Company believes that these provisions and agreements will assist the
Company in attracting and retaining qualified individuals to serve as
directors and officers.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
None of the Board members expected to be named as members of the
Compensation Committee is or has been an employee of the Company. No executive
officer of the Company serves as a member of the board of directors or
compensation committee of any entity that has one or more executive officers
serving as a member of the Company's Board of Directors or Compensation
Committee. Messrs. Murdock, Christensen, Smith, Albin and Hersh, or their
affiliates, have acquired capital stock of the Company. See "Certain
Transactions" and "Principal Stockholders."
57
<PAGE>
EXECUTIVE COMPENSATION AND OTHER INFORMATION
SUMMARY COMPENSATION TABLE
The following table sets forth all compensation paid for the last fiscal
year to the Company's Chief Executive Officer. None of the Company's other
executive officer's annual salary and bonus exceeded $100,000 for the fiscal
year ended December 31, 1996. Upon completion of the Offering, the Company
intends to increase the annual salary of each of Robert C. Murdock, Robert A.
Christensen and Sidney Kennard Smith to $125,000.
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
-------------------------------------
NAME AND OTHER ANNUAL ALL OTHER
PRINCIPAL POSITION SALARY($) BONUS($) COMPENSATION($)(1) COMPENSATION($)(2)
------------------ --------- -------- ------------------ ------------------
<S> <C> <C> <C> <C>
Robert C. Murdock....... 85,800 5,000 -- 475
President and Chief
Executive Officer
</TABLE>
- --------
(1) Other Annual Compensation does not include perquisites and other personal
benefits because the aggregate amount of such compensation does not exceed
the lesser of (i) $50,000 or (ii) 10% of individual combined salary and
bonus for the year.
(2) Consists of premiums paid by the Company under a life insurance program.
OPTION GRANTS AND EXERCISES
During the Company's most recent fiscal year, no options to purchase Common
Stock of the Company were granted to or exercised or held by Mr. Murdock. The
executive officers of the Company are eligible to participate in the Company's
1997 Incentive Plan, and it is expected that such officers will receive grants
in the future.
EMPLOYMENT AGREEMENTS
Each of Messrs. Murdock, Christensen and Smith and Tim A. Lucas is a party
to a confidentiality and noncompete agreement with the Company. Each such
agreement provides that if the Company terminates the employee's employment
other than for cause, the Company may elect, at its option, to make severance
payments to such employee in an amount equal to the employee's salary for a
period not less than six months or greater than 18 months. The Company may
discontinue such payments for any reason.
1997 INCENTIVE PLAN
The Board of Directors and the stockholders of the Company approved the
adoption of the Company's 1997 Incentive Plan (the "1997 Incentive Plan") as
of the completion of the Offering. The purpose of the 1997 Incentive Plan is
to attract and retain key employees, to encourage their sense of
proprietorship and to stimulate the active interest of such persons in the
development and financial success of the Company.
Participants in the 1997 Incentive Plan are selected by the Board of
Directors or such committee of the Board as is designated by the Board to
administer the 1997 Incentive Plan (upon completion of the Offering, the
Compensation Committee of the Board of Directors) from among those persons who
hold positions of responsibility and whose performance, in the judgment of the
Compensation Committee, can have a significant
effect on the success of the Company. An aggregate of 375,000 shares of Common
Stock have been authorized and reserved for issuance pursuant to the 1997
Incentive Plan. As of August 22, 1997, options have been granted to
participants under the 1997 Incentive Plan to purchase a total of 260,000
shares of Common Stock at an exercise price per share equal to the Price to
Public set forth on the cover page of this Prospectus. One-third of these
options vest on each of the first through third anniversaries of the date of
grant. Messrs. Murdock, Christensen, Smith and Lucas have been granted options
to purchase 80,000, 80,000, 80,000 and 20,000 shares, respectively.
Subject to the provisions of the 1997 Incentive Plan, the Compensation
Committee will be authorized to determine the type or types of awards made to
each participant and the terms, conditions and limitations applicable to each
award. In addition, the Compensation Committee will have the exclusive power
to interpret the 1997 Incentive Plan and to adopt such rules and regulations
as it may deem necessary or appropriate in keeping with the objectives of the
1997 Incentive Plan.
58
<PAGE>
Pursuant to the 1997 Incentive Plan, participants will be eligible to
receive awards consisting of (i) stock options, (ii) stock appreciation
rights, (iii) stock, (iv) restricted stock, (v) cash, or (vi) any combination
of the foregoing. Stock options may be either incentive stock options within
the meaning of Section 422 of the Internal Revenue Code of 1986, as amended,
or nonqualified stock options.
CERTAIN TRANSACTIONS
Each of Messrs. Murdock, Christensen and Smith personally guaranteed
indebtedness owed to Petroglyph Gas Partners, L.P. by its general partner by
an affiliate. The outstanding principal balance plus accrued interest of this
affiliate loan, as of June 30, 1997 was $340,988. In connection with the
Conversion, the Company will make loans to each of Messrs. Murdock,
Christensen and Smith. The proceeds of those loans will be contributed by
Messrs. Murdock, Christensen and Smith to the capital of their affiliate and
applied to retire the outstanding affiliate indebtedness and discharge their
personal guarantees. The loans to be made to Messrs. Murdock, Christensen and
Smith will be evidenced by promissory notes bearing interest at a rate of 9.0%
per annum, maturing June 30, 1999. Assuming that the Conversion is completed
on October 31, 1997, the principal balance of these promissory notes would be
$150,353, $150,353 and $53,066 for Messrs. Murdock, Christensen and Smith,
respectively.
The Company leases its office building from Hutch Realty LLC ("Hutch"), an
entity controlled by certain directors and executive officers of the Company.
Rentals paid to Hutch for such lease were $17,400 for the six months ended
June 30, 1996. Rentals paid during 1994, 1995 and 1996 totaled $24,000,
$39,200 and $34,800, respectively.
On August 22, 1997, the Company and NGP entered into a financial advisory
services agreement whereby NGP has agreed to provide financial advisory
services to the Company for a quarterly fee of $13,750. In addition, NGP will
be reimbursed for its out of pocket expenses incurred in performing such
services. The agreement is for a one year term and can be terminated by NGP at
the end of any fiscal quarter. Under the agreement, NGP will assist the
Company in managing its public and private financing activities, its public
financial reporting obligations, its budgeting and planning processes, and its
investor relations program, as well as provide ongoing strategic advice. NGP
will not receive any other transaction-related compensation for its advisory
assistance.
For the year ended December 31, 1996, the Company paid legal fees of
$109,000 to the law firm of Morris, Laing, Evans, Brock & Kennedy, Chartered,
where A. J. Schwartz, a director of the Company, is a shareholder. For the six
months ended June 30, 1997, the Company paid legal fees of $81,000 to Morris,
Laing, Evans, Brock & Kennedy, Chartered.
59
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth the names and addresses of each of the
Company's stockholders who beneficially owns more than five percent of the
Company's Common Stock, the number of shares beneficially owned by such
stockholders and the percentage of the Common Stock so owned as of September
29, 1997, assuming in each case the Conversion had been consummated on
September 29, 1997 and that the Offering is consummated at an initial public
offering price of $15.00 and without the Underwriters' over-allotment option
being exercised.
<TABLE>
<CAPTION>
PERCENTAGE OF
SHARES OWNED
-----------------
NUMBER OF PRIOR TO AFTER
NAME AND ADDRESS OF BENEFICIAL OWNER SHARES OWNED OFFERING OFFERING
- ------------------------------------ ------------ -------- --------
<S> <C> <C> <C>
Natural Gas Partners, L.P. ...................... 1,124,276 39.68% 21.76%
777 Main Street, Suite 2700
Fort Worth, Texas 76102
Natural Gas Partners II, L.P. ................... 641,160 22.63% 12.41%
777 Main Street, Suite 2700
Fort Worth, Texas 76102
Natural Gas Partners III, L.P. .................. 719,581 25.40% 13.93%
777 Main Street, Suite 2700
Fort Worth, Texas 76102
R. Gamble Baldwin(1)............................. 1,141,474 40.29% 22.09%
c/o Natural Gas Partners, L.P.
777 Main Street, Suite 2700
Fort Worth, Texas 76102
</TABLE>
- --------
(1) Includes (i) 17,198 shares held by Mr. Baldwin and (ii) 1,124,276 shares
held by Natural Gas Partners, L.P., over which Mr. Baldwin exercises
voting and investment power. R. Gamble Baldwin is the sole general partner
of G.F.W. Energy, L.P., which is the sole general partner of Natural Gas
Partners, L.P.
The following table sets forth information as of September 29, 1997
(assuming the Conversion had been consummated on such date) with respect to
the shares of Common Stock beneficially owned by each of the Company's
directors, the Company's executive officers and all directors and executive
officers as a group and the percent of the outstanding Common Stock owned by
each, assuming that the Offering is consummated without the Underwriters'
over-allotment option being exercised.
<TABLE>
<CAPTION>
PERCENTAGE OF
SHARES OWNED
-----------------
NUMBER OF PRIOR TO AFTER
DIRECTOR AND EXECUTIVE OFFICERS SHARES OWNED OFFERING OFFERING
- ------------------------------- ------------ -------- --------
<S> <C> <C> <C>
David R. Albin(1)(2)............................ 1,412,336 49.85% 27.34%
Kenneth A. Hersh(1)(3).......................... 1,373,640 48.48% 26.59%
A. J. Schwartz.................................. -- -- --
Robert C. Murdock............................... 109,295 3.86% 2.12%
Robert A. Christensen........................... 109,295 3.86% 2.12%
Sidney Kennard Smith............................ 38,575 1.36% *
Tim A. Lucas.................................... -- -- --
All executive officers and directors as a group
(7 persons).................................... 1,682,400 59.38% 32.56%
</TABLE>
- --------
* Represents less than 1% of outstanding Common Stock.
(1) David R. Albin and Kenneth A. Hersh are each managing members of the
general partner of Natural Gas Partners II, L.P. and Natural Gas Partners
III, L.P. As such, Mr. Albin and Mr. Hersh may be deemed to share voting
and investment power with respect to the 1,360,741 shares beneficially
owned by Natural Gas Partners II, L.P. and Natural Gas Partners III, L.P.
and these shares are included in the total number of shares reported for
each. Each of Mr. Albin and Mr. Hersh disclaims beneficial ownership of
such shares.
(2) Includes 51,595 shares held in trust for Mr. Albin.
(3) Includes 12,899 shares owned by Mr. Hersh.
Each of the Company's current stockholders is a party to that certain
Stockholders Agreement dated as of August 22, 1997, pursuant to which each
stockholder has agreed to certain restrictions on the transfer of its shares
of Common Stock.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
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 ("Preferred Stock"). Of such authorized
shares, 5,166,666 shares of Common Stock will be issued and outstanding upon
completion of this offering (5,516,666 shares if the Underwriters' over-
allotment option is exercised in full). As of September 29, 1997 the Company
had outstanding 2,833,333 shares of Common Stock held of record by 11
stockholders. In addition to the issued and outstanding Common Stock, options
and warrants to purchase up to an aggregate of 269,280 shares of Common Stock
are outstanding.
COMMON STOCK
The holders of Common Stock are entitled to one vote for each share held of
record on all matters submitted to the stockholders. See "Risk Factors--
Control by Existing Stockholders." The Bylaws permit the holders of a majority
of the Company's outstanding Common Stock to call a special meeting of the
Stockholders and, not more than once during each calendar year, holders of 10%
or more of the Company's outstanding Common Stock may call a special meeting
of stockholders. Each share of Common Stock is entitled to participate equally
in dividends, if, as and when declared by the Company's Board of Directors,
and in the distribution of assets in the event of liquidation, subject in all
cases to any prior rights of outstanding shares of Preferred Stock. The
Company has never paid cash dividends on its Common Stock. The shares of
Common Stock have no preemptive or conversion rights, redemption rights, or
sinking fund provisions. The outstanding shares of Common Stock are, and the
shares of Common Stock offered hereby upon issuance and sale will be, duly
authorized, validly issued, fully paid and nonassessable.
PREFERRED STOCK
The Company has no outstanding Preferred Stock. The Company is authorized to
issue 5,000,000 shares of Preferred Stock. The Company's Board of Directors
may establish, without stockholder approval, one or more classes or series of
Preferred Stock having the number of shares, designations, relative voting
rights, dividend rates, liquidation and other rights, preferences, and
limitations that the Board of Directors may designate. The Company believes
that this power to issue Preferred Stock will provide flexibility in
connection with possible corporate transactions. The issuance of Preferred
Stock, however, could adversely affect the voting power of holders of Common
Stock and restrict their rights to receive payments upon liquidation of the
Company. It could also have the effect of delaying, deferring or preventing a
change in control of the Company. The Company currently does not plan to issue
shares of Preferred Stock.
WARRANTS
In connection with the execution of the Credit Agreement, on September 15,
1997, the Company granted to Chase warrants (the "Warrants") to purchase up to
9,280 shares of Common Stock at a nominal exercise price.
CERTAIN PROVISIONS OF THE COMPANY'S CHARTER AND BYLAWS AND DELAWARE LAW
PROVISIONS
The Company's Certificate of Incorporation and Bylaws contain provisions
which may have the effect of delaying, deferring or preventing a change in
control of the Company. These provisions, among other things, provide for
noncumulative election of the Board of Directors, impose certain procedural
requirements on stockholders of the Company who wish to make nominations for
the election of directors or propose other actions at stockholders' meetings
and require an 80% supermajority vote of the Board of Directors in order to
approve amendments to the Company's Bylaws. Furthermore, the Company's Bylaws
provide that special meetings of the stockholders may only be called by a
majority of the votes entitled to be cast by the stockholders at the meeting
except for, no more than once per year, in a meeting called by the holders of
10% of the votes entitled to be cast at such meeting. In addition, the
Company's Certificate of Incorporation authorizes the Board to issue up to
5,000,000 shares of preferred stock without stockholder approval and to set
the rights, preferences and other designations, including voting rights, of
those shares as the Board of Directors may determine. These provisions, alone
or in combination with each other and with the matters described in "Risk
Factors--Control
61
<PAGE>
by Existing Stockholders," may discourage transactions involving actual or
potential changes of control of the Company, including transactions that
otherwise could involve payment of a premium over prevailing market prices to
holders of Common Stock.
The Company is a Delaware corporation and is subject to Section 203 of the
Delaware General Corporation Law. Generally, Section 203 prohibits the Company
from engaging in a "business combination" (as defined in Section 203) with an
"interested stockholder" (defined generally as a person owning 15% or more of
the Company's outstanding voting stock) for three years following the date
that person becomes an interested stockholder, unless (a) before that person
became an interested stockholder, the Company's Board of Directors approved
the transaction in which the interested stockholder became an interested
stockholder or approved the business combination; (b) upon completion of the
transaction that resulted in the interested stockholder's becoming an
interested stockholder, the interested stockholder owns at least 85% of the
voting stock outstanding at the time the transaction commenced (excluding
stock held by directors who are also officers of the Company and by employee
stock plans that do not provide employees with the right to determine
confidentially whether shares held subject to the plan will be tendered in a
tender or exchange offer); or (c) following the transaction in which that
person became an interested stockholder, the business combination is approved
by the Company's Board of Directors and authorized at a meeting of
stockholders by the affirmative vote of the holders of at least two-thirds of
the outstanding voting stock not owned by the interested stockholder.
Under Section 203, these restrictions also do not apply to certain business
combinations proposed by an interested stockholder following the announcement
or notification of one of certain extraordinary transactions involving the
Company and a person who was not an interested stockholder during the previous
three years or who became an interested stockholder with the approval of a
majority of the Company's directors, if that extraordinary transaction is
approved or not opposed by a majority of the directors who were directors
before any person became an interested stockholder in the previous three years
or who were recommended for election or elected to succeed such directors by a
majority of such directors then in office.
REGISTRATION RIGHTS
The Company has entered into a Registration Rights Agreement (the
"Registration Rights Agreement") with Natural Gas Partners, L.P., Natural Gas
Partners II, L.P., Natural Gas Partners III, L.P., Robert C. Murdock, Robert
A. Christensen, Sidney Kennard Smith, the Albin Income Trust, R. Gamble
Baldwin, John S. Foster, Kenneth A. Hersh and Bruce B. Selkirk, III (the
"Shareholder Parties"). Pursuant to the Registration Rights Agreement, on up
to three separate occasions, commencing on the 180th day following the date of
the Company's initial registration statement under the securities laws,
Shareholder Parties owning at least 35% of the outstanding shares then subject
to such agreement may require the Company to register shares held by them
under applicable securities laws, provided that the shares to be registered
have an estimated aggregate offering price to the public of at least $5.0
million. The Registration Rights Agreement also provides that the Shareholder
Parties have piggyback registration rights pursuant to which such persons may
include shares of Common Stock held by them in certain registrations initiated
by the Company or by any other holder of the Company's Common Stock. The
piggyback rights are subject to customary cutback provisions. The Registration
Rights Agreement provides for customary indemnities by the Company in favor of
persons including shares in a registration pursuant to the Registration Rights
Agreement, and by such persons in favor of the Company, with respect to
information to be included in the relevant registration statement. These
registration rights have been waived in connection with this offering and for
180 days after the date of this Prospectus.
The Company and Chase have entered into a registration rights agreement
covering the Common Stock issuable upon exercise of the Warrants pursuant to
which the Company has granted Chase certain incidental, or "piggyback",
registration rights. In addition, beginning three years after the date of this
Prospectus, Chase has certain demand registration rights. The Company may, at
its option, repurchase the shares issuable to Chase upon conversion of the
Warrants in lieu of registering such shares.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock is American Stock
Transfer & Trust Company.
62
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, the Company will have a total of 5,166,666
shares of Common Stock outstanding. Of these shares, the 2,333,333 shares of
Common Stock offered hereby (2,683,333 shares if the Underwriters' over-
allotment option is exercised in full) will be freely tradeable without
restriction or registration under the Securities Act by persons other than
"affiliates" of the Company, as defined under the Securities Act. The
remaining 2,833,333 shares of Common Stock outstanding will be "restricted"
securities as that term is defined by Rule 144 as promulgated under the
Securities Act.
In general, under Rule 144 as currently in effect, a person (or persons
whose sales are aggregated) who has beneficially owned restricted shares for
at least one year, including persons who may be deemed to be "affiliates" of
the Company would be entitled to sell, within any three-month period, a number
of shares that does not exceed the greater of one percent of the number of
shares of Common Stock then outstanding (approximately 52,000 shares upon
completion of the Offering) or the average weekly trading volume of the Common
Stock during the four calendar weeks preceding the filing of a Form 144 with
respect to such sale. Sales under Rule 144 are also subject to certain manner
of sale provisions and notice requirements, and to the availability of current
public information about the Company. In addition, 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, would be entitled to sell such shares under Rule
144(k) without regard to the requirements described above.
Under Rule 144 (and subject to the conditions thereof, including the volume
limitations described above), the Company believes that the earliest date on
which any of its restricted securities currently outstanding will be eligible
for sale under Rule 144 is the first anniversary of the completion of the
Offering. All 2,833,333 of the restricted shares are subject to lockup
restrictions. Pursuant to these restrictions, the holders of these restricted
shares, including all the Company's executive officers and directors, have
agreed that they will not, directly or indirectly, offer, sell, offer to sell,
contract to sell, pledge, grant any option to purchase or otherwise sell or
dispose (or announce any offer, sale, offer of sale, contract to sell, pledge,
grant of any options to purchase or sale or disposition) of any shares of
Common Stock or other capital stock of the Company, or any securities
convertible into, or exercisable or exchangeable for, any shares of Common
Stock or other capital stock of the Company without the prior written consent
of Prudential Securities Incorporated, on behalf of the Underwriters, for a
period of 180 days from the date of this Prospectus. Prudential Securities
Incorporated may, in its sole discretion, at any time and without notice,
release all or any portion of the securities subject to such agreements. The
holders of approximately 2,833,333 shares of Common Stock and their permitted
transferees have demand registration rights to require the Company to register
such shares under the Securities Act beginning 180 days after the date of this
Prospectus. Registration and sale of such shares could have an adverse effect
on the market price of the Common Stock. See "Description of Capital Stock--
Registration Rights."
The Company intends to file a registration statement under the Securities
Act to register Common Stock to be issued pursuant to the exercise of options,
including options under the 1997 Incentive Plan.
Prior to the Offering, there has been no public market for the Common Stock
and no predictions can be made of the effect, if any, that the sale or
availability for sale of shares of additional Common Stock will have on the
market price of the Common Stock. Nevertheless, sales of substantial amounts
of such shares in the public market, or the perception that such sales could
occur, could materially and adversely affect the market price of the Common
Stock and could impair the Company's future ability to raise capital through
an offering of its equity securities.
63
<PAGE>
UNDERWRITING
The Underwriters named below (the "Underwriters"), for whom Prudential
Securities Incorporated, Oppenheimer & Co., Inc. and Johnson Rice & Company
L.L.C. are acting as Representatives (the "Representatives"), have severally
agreed, subject to the terms and conditions contained in the Underwriting
Agreement, to purchase from the Company the number of shares of Common Stock
set forth below opposite their respective names:
<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
----------- ---------
<S> <C>
Prudential Securities Incorporated................................
Oppenheimer & Co., Inc. ..........................................
Johnson Rice & Company L.L.C. ....................................
---------
Total........................................................... 2,333,333
=========
</TABLE>
The Company is obligated to sell, and the Underwriters are obligated to
purchase, all of the shares of Common Stock offered hereby if any are
purchased.
The Underwriters, through the Representatives, have advised the Company that
they propose to offer the shares of Common Stock initially at the public
offering price set forth on the cover page of this Prospectus; that the
Underwriters may allow to selected dealers a concession of $ per share; and
that such dealers may reallow a concession of $ per share to certain other
dealers. After the initial public offering, the offering price and the
concessions may be changed by the Representatives.
The Company has granted to the Underwriters an option, exercisable for 30
days from the date of this Prospectus, to purchase up to 350,000 additional
shares of Common Stock at the initial public offering price less underwriting
discounts and commissions, as set forth on the cover page of this Prospectus.
The Underwriters may exercise such option solely for the purpose of covering
over-allotments incurred in the sale of the shares of Common Stock offered
hereby. To the extent such option to purchase is exercised, each Underwriter
will become obligated, subject to certain conditions, to purchase
approximately the same percentage of such additional shares as the number of
shares set forth opposite each Underwriters' name in the preceding table bears
to 2,333,333.
The Company, its executive officers and directors, and all of the Company's
stockholders have agreed that they will not, directly or indirectly, offer,
sell, offer to sell, contract to sell, pledge, grant any option to purchase,
or otherwise sell or dispose of (or announce any offer, sale, offer of sale,
contract of sale, pledge, grant of any option to purchase or other sale or
disposition) of any shares of Common Stock or other capital stock of the
Company or any securities convertible into, or exercisable or exchangeable
for, any shares of Common Stock or other capital stock of the Company without
the prior written consent of Prudential Securities Incorporated, on behalf of
the Underwriters, for a period of 180 days after the date of this Prospectus,
except issuances pursuant to the exercise of employee stock options.
Prudential Securities Incorporated may, in its sole discretion, at any time
and without notice, release all or any portion of the securities subject to
such agreements.
The Company has agreed to indemnify the several Underwriters or to
contribute to losses arising out of certain liabilities, including liabilities
under the Securities Act.
64
<PAGE>
The Representatives have informed the Company that the Underwriters do not
intend to confirm sales to any accounts over which they exercise discretionary
authority.
Prior to the Offering, there has been no public market for the Common Stock
of the Company. Consequently, the initial public offering price for the Common
Stock will be determined through negotiation between the Company and the
Representatives of the Underwriters. Among the factors to be considered in
making such determination will be the prevailing market conditions, the
results of operations of the Company in recent periods relevant to its
prospects and the prospects for its industry in general, the management of the
Company and the market prices of securities for companies in businesses
similar to that of the Company.
In connection with this Offering, certain Underwriters and selling group
members and their respective affiliates may engage in transactions that
stabilize, maintain or otherwise affect the market price of the Common Stock.
Such transactions may include stabilization transactions effected in
accordance with Rule 104 of Regulation M, pursuant to which such persons may
bid for or purchase Common Stock for the purpose of stabilizing its market
price. The Underwriters also may create a short position for the account of
the Underwriters by selling more Common Stock in connection with the Offering
than they are committed to purchase from the Company, and in such case may
purchase Common Stock in the open market following completion of the Offering
to cover all or a portion of such short position. The Underwriters may also
cover all or a portion of such short position, up to 350,000 shares of Common
Stock, by exercising the Underwriters' over-allotment option referred to
above. In addition, Prudential Securities Incorporated, on behalf of the
Underwriters, may impose "penalty bids" under contractual arrangements with
the Underwriters whereby it may reclaim from an Underwriter (or dealer
participating in the Offering) for the account of the other Underwriters, the
selling concession with respect to Common Stock that is distributed in the
Offering but subsequently purchased for the account of the Underwriters in the
open market. Any of the transactions described in this paragraph may result in
the maintenance of the price of the Common Stock at a level above that which
might otherwise prevail in the open market. None of the transactions described
in this paragraph is required, and, if they are undertaken, they may be
discontinued at any time.
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for the
Company by Thompson & Knight, P.C., Dallas, Texas. Certain matters will be
passed upon for the Underwriters by Baker & Botts, L.L.P., Houston, Texas.
EXPERTS
The audited financial statements included in the registration statement, to
the extent and for the periods indicated in their reports, have been audited
by Arthur Andersen LLP, independent public accountants, as indicated in their
reports with respect thereto, and are included herein in reliance upon the
authority of said firm as experts in accounting and auditing in giving said
reports.
The information appearing in this Prospectus regarding proved reserves of
the Company as of June 30, 1997 and the related future net revenues and the
present value thereof is derived, as to the extent described herein, from the
reserve report prepared by Lee Keeling and Associates, Inc., independent oil
and natural gas engineers, and, to such extent, are included herein in
reliance upon the authority of such firm as experts with respect to such
reports.
65
<PAGE>
AVAILABLE INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-1 (as amended and together with all exhibits thereto, the "Registration
Statement") under the Securities Act, with respect to the shares of Common
Stock offered by this Prospectus. This Prospectus constitutes a part of the
Registration Statement and does not contain all of the information set forth
in the Registration Statement, certain parts of which are omitted from this
Prospectus as permitted by the rules and regulations of the Commission.
Statements in this Prospectus about the contents of any contract or other
document are not necessarily complete; reference is made in each instance to
the copy of the contract or other document filed as an exhibit to the
Registration Statement. Each such statement is qualified in all respects by
such reference. The Registration Statement and accompanying exhibits and
schedules may by inspected and copies may be obtained (at prescribed rates) at
the public reference facilities of the Commission at Judiciary Plaza, 450
Fifth Street, N.W., Room 1024, Washington, D.C. 20549. Copies of the
Registration Statement may also be inspected at the Commission's regional
offices at 7 World Trade Center, Suite 1300, New York, New York 10048 and
Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-
2511. In addition, the Company expects that the Common Stock will be listed on
the Nasdaq National Market, 1735 K Street, N.W., Washington, D.C. 20006-1500,
where such material may also be inspected and copied.
As a result of the Offering, the Company will become subject to the
information and periodic reporting requirements of the Securities Exchange Act
of 1934, as amended (the "Exchange Act"), and, in accordance therewith, will
file periodic reports, proxy statements and other information with the
Commission. Such periodic reports, proxy statements and other information will
be available for inspection and copying at the public reference facilities and
regional offices referred to above. In addition, these reports, proxy
statements and other information may also be obtained from the web site that
the Commission maintains at http://www.sec.gov.
66
<PAGE>
GLOSSARY OF OIL AND NATURAL GAS TERMS
The following are abbreviations and definitions of terms commonly used in
the oil and natural gas industry and this Prospectus. Unless otherwise
indicated in this Prospectus, natural gas volumes are stated at the legal
pressure base of the state or area in which the reserves are located and at 60
degrees Fahrenheit.
Average Finding Costs. The average amount of total capital expenditures,
including acquisition costs, and exploration and abandonment costs for oil and
natural gas activities divided by the amount of proved reserves (expressed in
BOE) added in the specified period (including the effect on proved reserves or
reserve revisions).
Bbl. One stock tank barrel, or 42 U.S. gallons liquid volume, used herein in
reference to oil or other liquid hydrocarbons.
Bcf. One billion cubic feet.
BOE. Barrels of oil equivalent, determined using the ratio of six Mcf of
natural gas to one Bbl of oil, condensate or natural gas liquids.
Btu or British thermal unit. The quantity of heat required to raise the
temperature of one pound of water by one degree Fahrenheit.
Coalbed methane. Methane gas from coals in the ground, extracted using
conventional oil and natural gas industry drilling and completion methodology.
The gas produced is usually over 90% methane, with a small percentage of
ethane and impurities such as carbon dioxide and nitrogen. Methane is the
principal component of natural gas. Coalbed methane shares the same markets as
conventional natural gas, via the natural gas pipeline infrastructure.
Completion. The installation of permanent equipment for the production of
oil or natural gas.
Condensate. A hydrocarbon mixture that becomes liquid and separates from
natural gas when the natural gas is produced and is similar to oil.
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 natural
gas reservoir to the depth of a stratigraphic horizon known to be productive.
Dry well. A well found to be incapable of producing either oil or natural
gas in sufficient quantities to justify completion of an oil or natural gas
well.
Exploratory well. A well drilled to find and produce oil or natural gas in
an unproved area, to find a new reservoir in a field previously found to be
productive of oil or natural gas in another reservoir, or to extend a known
reservoir.
Gross acres or gross wells. The total acres or wells, as the case may be, in
which the Company has a working interest.
LOE. Lease operating expenses.
MBbl. One thousand barrels of crude oil or other liquid hydrocarbons.
MBOE. One thousand barrels of oil equivalent.
Mcf. One thousand cubic feet of natural gas.
67
<PAGE>
MMBbl. One million barrels of oil or other liquid hydrocarbons.
MMBOE. One million barrels of oil equivalent.
MMcf. One million cubic feet of natural gas.
Net acres or net wells. Gross acres or wells multiplied, in each case, by
the percentage working interest owned by the Company.
Net production. Production that is owned by the Company less royalties and
production due others.
Oil. Crude oil or condensate.
Operator. The individual or company responsible for the exploration,
development, and production of an oil or natural gas well or lease.
Original oil in place. The estimated number of barrels of crude oil in known
reservoirs prior to any production.
Present Value of Future Net Revenues or PV-10. The present value of
estimated future net revenues to be generated from the production of proved
reserves, net of estimated production and ad valorem taxes, future capital
costs and operating expenses, using prices and costs in effect as of the date
indicated, without giving effect to federal income taxes. The future net
revenues have been discounted at an annual rate of 10% to determine their
"present value." The present value is shown to indicate the effect of time on
the value of the revenue stream and should not be construed as being the fair
market value of the properties.
Proved developed reserves. Reserves that can be expected to be recovered
through existing wells with existing equipment and operating methods.
Additional oil and natural gas expected to be obtained through the application
of fluid injection or other improved recovery techniques for supplementing the
natural forces and mechanisms of primary recovery will be included as "proved
developed reserves" only after testing by a pilot project or after the
operation of an installed program has confirmed through production response
that increased recovery will be achieved.
Proved reserves. The estimated quantities of crude oil, natural gas and
natural gas liquids which geological and engineering data demonstrate with
reasonable certainty to be recoverable in future years from known reservoirs
under existing economic and operating conditions, i.e., prices and costs as of
the date the estimate is made. Prices include consideration of changes in
existing prices provided only by contractual arrangements, but not on
escalations based upon future conditions.
i. Reservoirs are considered proved if economic producibility is
supported by either actual production or conclusive formation test. The
area of a reservoir considered proved includes (A) that portion delineated
by drilling and defined by natural gas-oil and/or oil-water contacts, if
any; and (B) the immediately adjoining portions not yet drilled, but which
can be reasonably judged as economically productive on the basis of
available geological and engineering data. In the absence of information on
fluid contacts, the lowest known structural occurrence of hydrocarbons
controls the lower proved limit of the reservoir.
ii. Reserves which can be produced economically through application of
improved recovery techniques (such as fluid injection) are included in the
"proved" classification when successful testing by a pilot project, or the
operation of an installed program in the reservoir, provides support for
the engineering analysis on which the project or program was based.
iii. Estimates of proved reserves do not include the following: (A) oil
that may become available from known reservoirs but is classified
separately as "indicated additional reserves"; (B) crude oil, natural gas
and natural gas liquids, the recovery of which is subject to reasonable
doubt because of uncertainty as to geology, reservoir characteristics, or
economic factors; (C) crude oil, natural gas and natural gas liquids that
68
<PAGE>
may occur in undrilled prospects; and (D) crude oil, natural gas and
natural gas liquids that may be recovered from oil shales, coal, gilsonite
and other such sources.
Proved undeveloped reserves. Reserves that are expected to be recovered from
new wells on undrilled acreage, or from existing wells where a relatively
major expenditure is required for recompletion. Reserves on undrilled acreage
shall be limited to those drilling units offsetting productive units that are
reasonably certain of production when drilled. Proved reserves for other
undrilled units can be claimed only where it can be demonstrated with
certainty that there is continuity of production from the existing productive
formation. Under no circumstances should estimates for proved undeveloped
reserves be attributable to any acreage for which an application of fluid
injection or other improved recovery technique is contemplated, unless such
techniques have been proved effective by actual tests in the area and in the
same reservoir.
Recompletion. The completion for production of an existing well bore in
another formation from that in which the well has been previously completed.
Reserve replacement cost. Total cost incurred for exploration and
development, divided by reserves added from all sources, including reserve
discoveries, extensions and improved recovery additions, net revisions to
reserve estimates and purchases of reserves-in-place.
Reserves. Proved reserves.
Royalty. An interest in an oil and natural gas lease that gives the owner of
the interest the right to receive a portion of the production from the leased
acreage (or of the proceeds of the sale thereof), but generally does not
require the owner to pay any portion of the costs of drilling or operating the
wells on the leased acreage. Royalties may be either landowner's royalties,
which are reserved by the owner of the leased acreage at the time the lease is
granted, or overriding royalties, which are usually reserved by an owner of
the leasehold in connection with a transfer to a subsequent owner.
Spud. Start drilling a new well (or restart).
3-D seismic. Seismic data that are acquired and processed to yield a three-
dimensional picture of the subsurface.
Tcf. One trillion cubic feet of natural gas.
Undeveloped acreage. Lease 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. Included within undeveloped acreage are those lease acres
(held by production under the terms of a lease) that are not within the
spacing unit containing, or acreage assigned to, the productive well holding
such lease.
Waterflood. The injection of water into a reservoir to fill pores vacated by
produced fluids, thus maintaining reservoir pressure and assisting production.
Working interest. An interest in an oil and natural gas lease that gives the
owner of the interest the right to drill for and produce oil and natural gas
on the leased acreage and requires the owner to pay a share of the costs of
drilling and production operations. The share of production to which a working
interest owner is entitled will always be smaller than the share of costs that
the working interest owner is required to bear, with the balance of the
production accruing to the owners of royalties. For example, the owner of a
100% working interest in a lease burdened only by a landowner's royalty of
12.5% would be required to pay 100% of the costs of a well but would be
entitled to retain 87.5% of the production.
Workover. Operations on a producing well to restore or increase production.
69
<PAGE>
INDEX TO FINANCIAL STATEMENTS
FINANCIAL STATEMENTS OF PETROGLYPH ENERGY, INC.
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants.................................. F-2
Consolidated Balance Sheets as of June 30, 1997 and as of December 31,
1996 and 1995............................................................ F-3
Consolidated Statements of Operations for the Years Ended December 31,
1994, 1995 and 1996 and for the Six Month Periods Ended June 30, 1996 and
1997..................................................................... F-4
Consolidated Statements of Change in Owners' Equity for the Years Ended
December 31, 1994, 1995 and 1996 and for the Six Month Periods Ended June
30, 1996 and 1997........................................................ F-5
Consolidated Statements of Cash Flows for the Years Ended December 31,
1994, 1995 and 1995 and for the Six Month Periods Ended June 30, 1996 and
1997..................................................................... F-6
Notes to Consolidated Financial Statements................................ F-7
</TABLE>
F-1
<PAGE>
After the conversion transaction discussed in Note 1 to Petroglyph Energy,
Inc.'s consolidated financial statements is effected, we expect to be in a
position to render the following audit report.
/s/ Arthur Andersen LLP
August 20, 1997
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of Petroglyph Energy, Inc.:
We have audited the accompanying consolidated balance sheets of Petroglyph
Energy, Inc. (a Delaware corporation) and subsidiary as of December 31, 1996
and 1995, and the related consolidated statements of operations, changes in
owners' 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, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Petroglyph
Energy, Inc. and subsidiary as of December 31, 1996 and 1995 and the results
of its operations and cash flows for each of the three years in the period
ended December 31, 1996, in conformity with generally accepted accounting
principles.
Dallas, Texas
F-2
<PAGE>
PETROGLYPH ENERGY, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------ JUNE 30,
1995 1996 1997
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents.............. $ 1,074,936 $ 1,577,632 $ 372,452
Accounts receivable:
Oil and natural gas sales............. 709,843 1,178,287 1,008,584
Joint interest billing................ 20,206 152,118 1,551,248
Other................................. 204,224 85,037 105,268
----------- ----------- -----------
934,273 1,415,442 2,665,100
Inventory.............................. 485,545 1,064,802 1,742,567
Prepaid expenses....................... 128,606 125,045 211,765
----------- ----------- -----------
Total Current Assets................. 2,623,360 4,182,921 4,991,884
----------- ----------- -----------
Property and Equipment, Successful
efforts method at cost:
Proved properties...................... 15,360,707 13,266,674 16,338,467
Unproved properties.................... 485,138 1,269,873 1,653,604
Pipelines, gas gathering and other..... 3,008,635 3,429,985 5,295,258
----------- ----------- -----------
18,854,480 17,966,532 23,287,329
Less--Accumulated depreciation,
depletion, and amortization........... (4,188,222) (5,083,655) (5,785,851)
----------- ----------- -----------
Property and equipment, net........... 14,666,258 12,882,877 17,501,478
----------- ----------- -----------
Note receivable from directors.......... 246,500 246,500 246,500
Other assets, net....................... 61,932 157,809 804,745
----------- ----------- -----------
Total Assets......................... $17,598,050 $17,470,107 $23,544,607
=========== =========== ===========
LIABILITIES AND OWNERS' EQUITY
Current Liabilities:
Accounts payable and accrued
liabilities:
Trade................................. $ 1,258,459 $ 3,768,143 $ 4,853,255
Oil and natural gas sales............. 170,329 657,287 776,898
Deferred revenue...................... -- 45,860 --
Current portion of long-term debt..... -- 24,697 28,333
Other................................. 61,922 227,686 329,149
----------- ----------- -----------
Total Current Liabilities............ 1,490,710 4,723,673 5,987,635
----------- ----------- -----------
Long term debt.......................... 3,900,000 51,800 5,034,910
----------- ----------- -----------
Owners' equity.......................... 12,207,340 12,694,634 12,522,062
----------- ----------- -----------
Total Liabilities and Owners' Equi-
ty..................................... $17,598,050 $17,470,107 $23,544,607
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
PETROGLYPH ENERGY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
------------------------------------- --------------------------
1994 1995 1996 1996 1997
----------- ----------- ----------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Operating Revenues:
Oil sales.............. $ 1,643,985 $ 3,216,901 $ 4,458,769 $ 2,543,744 $ 1,724,768
Natural gas sales...... 796,240 1,015,863 998,920 591,973 513,363
Other.................. 44,766 36,050 -- -- 68,958
----------- ----------- ----------- ------------ ------------
Total operating
revenues........... 2,484,991 4,268,814 5,457,689 3,135,717 2,307,089
----------- ----------- ----------- ------------ ------------
Operating Expenses:
Lease operating........ 1,601,460 2,260,303 2,368,973 1,328,971 840,658
Production taxes....... 89,084 187,563 248,848 120,841 97,839
Exploration costs...... 69,570 375,649 68,818 41,610 --
Depreciation,
depletion, and
amortization.......... 1,977,121 2,302,515 2,805,693 1,277,317 1,020,221
Impairments............ -- 109,209 -- -- --
General and
administrative........ 956,129 1,063,708 902,409 590,248 546,307
----------- ----------- ----------- ------------ ------------
Total operating
expenses........... 4,693,364 6,298,947 6,394,741 3,358,987 2,505,025
----------- ----------- ----------- ------------ ------------
Operating Loss.......... (2,208,373) (2,030,133) (937,052) (223,270) (197,936)
Other Income (Expenses):
Interest income
(expense), net........ (93,327) (215,669) 40,580 15,543 19,009
Gain (loss) on sales of
property and equip-
ment, net............. 44,048 (138,614) 1,383,766 1,173,801 6,355
----------- ----------- ----------- ------------ ------------
Net income (loss) before
income taxes........... (2,257,652) (2,384,416) 487,294 966,074 (172,572)
----------- ----------- ----------- ------------ ------------
Pro Forma Income Tax
Expense (Benefit):
Current................ -- -- (222,169) 334,485 --
Deferred............... -- -- 412,213 42,284 --
----------- ----------- ----------- ------------ ------------
Total Pro Forma
Income Tax Expense
(Benefit).......... -- -- 190,044 376,769 --
----------- ----------- ----------- ------------ ------------
Pro Forma Net Income
(Loss)................. $(2,257,652) $(2,384,416) $ 297,250 $ 589,305 $ (172,572)
=========== =========== =========== ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
PETROGLYPH ENERGY, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN OWNERS' EQUITY
FOR THE PERIODS ENDED JUNE 30, 1997 (UNAUDITED), DECEMBER 31, 1996, 1995 AND
1994
<TABLE>
<S> <C>
BALANCE, DECEMBER 31, 1993......................................... $ 2,217,884
Contributions..................................................... 6,631,524
Net loss before income taxes...................................... (2,257,652)
-----------
BALANCE, DECEMBER 31, 1994......................................... 6,591,756
Contributions..................................................... 8,000,000
Net loss before income taxes...................................... (2,384,416)
-----------
BALANCE, DECEMBER 31, 1995......................................... 12,207,340
Contributions..................................................... --
Net income before income taxes.................................... 487,294
-----------
BALANCE, DECEMBER 31, 1996......................................... 12,694,634
Contributions..................................................... --
Net loss before income taxes...................................... (172,572)
-----------
BALANCE, JUNE 30, 1997 (UNAUDITED)................................. $12,522,062
===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
PETROGLYPH ENERGY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------------ ----------------------
1994 1995 1996 1996 1997
----------- ----------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Operating Activities:
Net income (loss) be-
fore income taxes..... $(2,257,652) $(2,384,416) $ 487,294 $ 966,074 $ (172,572)
Adjustments to
reconcile net income
(loss) to net cash
used in operating
activities--
Depreciation, deple-
tion, and amortiza-
tion................. 1,977,121 2,302,515 2,805,693 1,277,317 1,020,221
(Gain) loss on sales
of property and
equipment, net....... (44,048) 138,614 (1,383,766) (1,173,801) (6,355)
Amortization of de-
ferred revenue ...... -- -- (524,140) (52,951) (45,860)
Impairments........... -- 109,209 -- -- --
Exploration Costs..... 69,570 316,089 -- -- --
Property abandon-
ments................ -- 59,560 68,818 41,610 --
Amortization of fi-
nancing costs........ 22,085 66,255 -- -- --
Proceeds from deferred
revenue............... -- -- 570,000 570,000 --
Changes in assets and
liabilities--
Increase in accounts
receivable........... (710,600) (100,937) (481,169) (844,932) (1,249,658)
(Increase) decrease in
inventory............ (201,211) (275,151) (579,257) 5,460 (677,765)
(Increase) decrease in
prepaid expenses .... (41,439) (82,715) 3,561 (24,847) (86,720)
Increase (decrease) in
accounts payable and
accrued liabilities.. 1,119,024 197,759 3,162,406 141,672 1,306,186
----------- ----------- ---------- ---------- ----------
Net cash provided by
(used in) operating
activities.......... (67,150) 346,782 4,129,440 905,602 87,477
Investing Activities:
Proceeds from sales of
property and equip-
ment.................. 145,277 805,869 8,968,274 7,412,043 739,628
Additions to oil and
natural gas
properties, including
exploration costs..... (6,897,846) (8,645,491) (7,801,229) (4,468,080) (4,574,108)
Additions to pipelines,
gas gathering and oth-
er.................... (1,378,884) (1,797,955) (863,911) (127,656) (1,792,915)
Maturity of certifi-
cates of deposit...... -- 57,925 -- -- --
----------- ----------- ---------- ---------- ----------
Net cash provide by
(used in) investing
activities.......... (8,131,453) (9,579,652) 303,134 2,816,307 (5,627,395)
Financing Activities:
Contributions by part-
ners.................. 6,631,524 8,000,000 -- -- --
Note receivable from
general partner....... (246,500) -- -- -- --
Proceeds from issuance
of, and draws on,
notes payable......... 1,800,000 7,400,000 2,085,024 2,000,000 5,000,000
Payments on note pay-
able.................. -- (5,300,000) (5,908,527) (2,100,000) (13,254)
Payments for organiza-
tion and financing
costs................. (66,255) (50,620) (106,375) -- (652,008)
----------- ----------- ---------- ---------- ----------
Net cash provided by
(used in) financing
activities.......... 8,118,769 10,049,380 (3,929,878) (100,000) 4,334,738
----------- ----------- ---------- ---------- ----------
Net increase (decrease)
in cash and cash
equivalents............ (79,834) 816,510 502,696 3,621,909 (1,205,180)
Cash and cash
equivalents, beginning
of period.............. 338,260 258,426 1,074,936 1,074,936 1,577,632
----------- ----------- ---------- ---------- ----------
Cash and cash
equivalents, end of
period................. $ 258,426 $ 1,074,936 $1,577,632 $4,696,845 $ 372,452
=========== =========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
PETROGLYPH ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1994, 1995, AND 1996
JUNE 30, 1996 AND 1997 (UNAUDITED)
1. ORGANIZATION:
Petroglyph Energy, Inc. ("Petroglyph" or the "Company") was incorporated in
Delaware in April 1997 for the purpose of consolidating and continuing the
activities previously conducted by Petroglyph Gas Partners, L.P. ("PGP" or the
"Partnership"). PGP is a Delaware limited partnership, which was organized on
April 15, 1993 to acquire, explore for, produce and sell oil, natural gas, and
related hydrocarbons. The general partner is Petroglyph Energy, Inc., a Kansas
corporation ("PEI"), and the primary limited partner is Natural Gas Partners,
L.P. ("NGP"). Petroglyph Gas Partners II, L.P. ("PGP II") is a Delaware
limited partnership, which was organized on April 15, 1995 to acquire, explore
for, produce and sell oil, natural gas and related hydrocarbons. The general
partner of PGP II is PEI (1% interest) and the limited partner is PGP (99%
interest). Pursuant to the terms of an Exchange Agreement dated August 22,
1997 (the "Exchange Agreement"), the Company will acquire all of the
outstanding partnership interests of the Partnership and all of the stock of
PEI in exchange for shares of Common Stock of the Company (the "Conversion").
The Conversion and other transactions contemplated by the Exchange Agreement
will be consummated immediately prior to the closing of the initial public
offering of the Company's Common Stock (the "Offering"). The Conversion will
be accounted for as a transfer of assets and liabilities between affiliates
under common control and will result in no change in carrying values of these
assets and liabilities.
The accompanying consolidated financial statements of Petroglyph include the
assets, liabilities and results of operations of PGP, its wholly owned
subsidiary, Petroglyph Operating Company, Inc. ("POCI"), and PGP's
proportionate share of assets, liabilities and revenues and expenses of PGP
II. PGP owned a 99% interest in PGP II as of December 31, 1996 and 1995 and
June 30, 1997. POCI is a subchapter C corporation. POCI is the designated
operator of all wells for which PGP has acquired operating rights.
Accordingly, all producing overhead and supervision fees were charged to the
joint accounts by POCI. All material intercompany transactions and balances
have been eliminated in the preparation of the accompanying consolidated
financial statements.
The Company's operations are primarily focused in the Uinta Basin of Utah
and the Raton Basin of Colorado.
Amounts presented in these Notes as of June 30, 1997 and for the six month
periods ended June 30, 1997 and 1996 are all unaudited but include all
adjustments (consisting of normal recurring accruals only) which management
considers necessary to present fairly the Company's consolidated financial
position as of June 30, 1997, and the consolidated statements of operations
and cash flows for the six month periods ended June 30, 1996 and 1997.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
MANAGEMENT'S 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 revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.
F-7
<PAGE>
PETROGLYPH ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1994, 1995 AND 1996
JUNE 30, 1996 AND 1997 (UNAUDITED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:--(CONTINUED)
SUPPLEMENTAL CASH FLOW INFORMATION
Cash payments for interest during 1996, 1995 and 1994 totaled $250,000,
$266,000 and $46,000, respectively. Cash payments for interest during the six
months ended June 30, 1997 and 1996 were $23,000 and $197,000, respectively.
The Company did not make any cash payments for income taxes during 1996, 1995,
1994, or for the six month periods ended June 30, 1997 and 1996 based on its
partnership structure in effect during those periods.
ACCOUNTS RECEIVABLE
Accounts receivable are presented net of allowance for doubtful accounts,
the amounts of which are immaterial as of June 30, 1997, December 31, 1996 and
1995.
INVENTORY
Inventories consist primarily of tubular goods and oil field materials and
supplies, which the Company plans to utilize in its ongoing exploration and
development activities and are carried at the lower of weighted average
historical cost or market value.
PROPERTY AND EQUIPMENT
Oil and Natural Gas Properties
The Company follows the successful efforts method of accounting for its oil
and natural gas properties whereby costs of productive wells, developmental
dry holes and productive leases are capitalized and amortized on a unit-of-
production basis over the respective properties' remaining proved reserves.
Amortization of capitalized costs is provided on a prospect-by-prospect basis.
Leasehold costs are capitalized when incurred. Unproved oil and natural gas
properties with significant acquisition costs are periodically assessed and
any impairment in value is charged to exploration costs. The costs of unproved
properties which are not individually significant are assessed periodically in
the aggregate based on historical experience, and any impairment in value is
charged to exploration costs. The costs of unproved properties that are
determined to be productive are transferred to proved oil and natural gas
properties. The Company does not capitalize general and administrative costs
related to drilling and development activities.
Exploration costs, including geological and geophysical expenses, property
abandonments and annual delay rentals, are charged to expense as incurred.
Exploratory drilling costs, if any, including the cost of stratigraphic test
wells, are initially capitalized but charged to expense if and when the well
is determined to be unsuccessful.
The Company adopted the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of," in connection with its
formation. SFAS No. 121 requires that proved oil and natural gas properties be
assessed for an impairment in their carrying value whenever events or changes
in circumstances indicate that such carrying value may not be recoverable.
SFAS No. 121 requires that this assessment be performed by comparing the
anticipated future net cash flows to the net carrying value of oil and natural
gas properties. This assessment must generally be performed on a property-by-
property basis. The Company recognized impairments of $109,209 in 1995. No
such impairments were required in the years ended December 31, 1994 and
December 31, 1996 or the six month periods ended June 30, 1996 and 1997.
F-8
<PAGE>
PETROGLYPH ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1994, 1995 AND 1996
JUNE 30, 1996 AND 1997 (UNAUDITED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:--(CONTINUED)
Pipelines, Gas Gathering and Other
Other property and equipment is primarily comprised of a field water
distribution system and a natural gas gathering system located in the Uinta
Basin, field building and land, office equipment, furniture and fixtures and
automobiles. The gathering system and the field water distribution system are
amortized on a unit-of-production basis over the remaining proved reserves
attributable to the properties served. These other items are amortized on a
straight-line basis over their estimated useful lives which range from three
to forty years.
ORGANIZATION AND FINANCING COSTS
Organization costs are amortized on a straight-line basis over a period not
to exceed 20 years and are presented net of accumulated amortization of
$54,531, $49,459 and $28,012 at June 30, 1997 and December 31, 1996 and 1995,
respectively. Amortization of $21,447, $14,610 and $7,860 is included in
depreciation, depletion and amortization expense in the accompanying
consolidated statements of operations for the years ended December 31, 1996,
1995 and 1994, respectively. Amortization of $5,072 and $11,782 is included in
depreciation, depletion and amortization expense in the consolidated statement
of operations for the six month periods ended June 30, 1997 and 1996,
respectively. Organization costs at June 30, 1997 and December 31, 1996 are
primarily comprised of costs related to the Offering.
Costs related to the issuance of the Company's notes payable are deferred
and amortized on a straight-line basis over the life of the related borrowing.
Such amortization costs of $66,255 and $22,085 are included in interest
expense in the accompanying statements of operations for the years ended
December 31, 1995 and 1994, respectively. Amortization costs for the six month
periods ended June 30, 1997 and June 30, 1996, and for the year ended December
31, 1996 were not significant.
INTEREST EXPENSE
Interest expense includes amortization of deferred debt issuance costs and
is presented net of interest income of $147,295 and $33,311 for the years
ended December 31, 1996 and 1995, respectively. Interest income totalled
$70,207 and $63,115 for the six month periods ended June 30, 1997 and 1996,
respectively.
CAPITALIZATION OF INTEREST
Interest costs associated with maintaining the Company's inventory of
unproved oil and natural gas properties and significant development projects
are capitalized. Interest capitalized totaled approximately $44,000 for the
six months ended June 30, 1997 and $195,000 and $114,000 for the years ended
December 31, 1996 and 1995, respectively. No interest was capitalized during
1994.
REVENUE RECOGNITION AND NATURAL GAS BALANCING
The Company utilizes the entitlement method of accounting for recording
revenues whereby revenues are recognized based on the Company's revenue
interest in the amount of oil and natural gas production. The amount of oil
and natural gas sold may differ from the amount which the Company is entitled
based on its revenue interests in the properties. The Company had no
significant natural gas balancing positions at June 30, 1997, December 31,
1996 and 1995.
INCOME TAXES
Prior to the Conversion, the results of operations of the Company were
included in the tax returns of its owners. As a result, tax strategies were
implemented that are not necessarily reflective of strategies the Company
F-9
<PAGE>
PETROGLYPH ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1994, 1995 AND 1996
JUNE 30, 1996 AND 1997 (UNAUDITED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:--(CONTINUED)
would have implemented. In addition, the tax net operating losses generated by
the Company during the period from its inception to date of the Conversion
will not be available to the Company to offset future taxable income as such
benefit accrued to the owners.
In conjunction with the Conversion, the Company will adopt SFAS No. 109,
"Accounting for Income Taxes", which provides for determining and recording
deferred income tax assets or liabilities based on temporary differences
between the financial statement carrying amounts and the tax bases of assets
and liabilities using enacted tax rates. SFAS No. 109 requires that the net
deferred tax liabilities of the Company on the date of the Conversion be
recognized as a component of income tax expense. The Company will be required
to recognize approximately $2.4 million in deferred tax liabilities and income
tax expense on the date of the Conversion.
Upon the Conversion, the Company became taxable as a corporation. Pro forma
income tax information for the year ended December 31, 1996, presented in the
accompanying consolidated statements of operations and in Note 6, reflects the
income tax expense (benefit), net income (loss) and net income (loss) per
common share as if all Partnership income for 1996 had been subject to
corporate federal income tax, exclusive of the effects of recording the
Company's net deferred tax liabilities upon the Conversion.
DERIVATIVES
The Company uses derivatives on a limited basis to hedge against interest
rate and product prices risks, as opposed to their use for trading purposes.
The Company's policy is to ensure that a correlation exists between the
financial instruments and the Company's pricing in its sales contracts prior
to entering into such contracts. Gains and losses on commodity futures
contracts and other price risk management instruments are recognized in oil
and natural gas revenues when the hedged transaction occurs. Cash flows
related to derivative transactions are included in operating activities.
STOCK BASED COMPENSATION
Upon Conversion, the Company will adopt the provisions of Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees".
In accordance with APB No. 25, no compensation will be recorded for stock
options or other stock-based awards that are granted with an exercise price
equal to or above the common stock price on the date of the grant. The Company
will, however, adopt the disclosure requirements of SFAS No. 123, "Accounting
for Stock-Based Compensation" which will require the Company to present pro
forma disclosures of net income and earnings per share as if SFAS No. 123 had
been adopted. As of June 30, 1997 and December 31, 1996 there would be no
impact from adoption of APB No. 25 or SFAS No. 123 as no stock options,
warrants or grants had been issued at such dates and none will be issued until
the date of the Conversion.
3. ACQUISITIONS AND DISPOSITIONS:
In February 1994, the Company purchased a 50% working interest in the
existing Antelope Creek and Duchesne fields in the Uinta Basin for $4.5
million. In September 1995, the Company acquired for total consideration of
$5.6 million the remaining 50% interest of its joint venture partners, Inland
Resources, in the Utah properties. The consideration consisted of $3.1 million
in cash plus assumption of Inland's outstanding debt of $2.5 million, which
was specifically collateralized by Inland's investment in the Utah properties.
The assumption of outstanding debt is not reflected on the accompanying
statement of cash flows as it is a noncash transaction. These acquisitions
were accounted for using the purchase method of accounting.
Effective September 1, 1994, the Company acquired Southwest Oil and Land's
interest in the Victoria properties in Victoria and DeWitt counties located in
Texas for approximately $1.6 million.
In June 1996, the Company sold a 50% working interest in its Antelope Creek
field properties to an industry partner. The Company retained a 50% working
interest and continues to serve as operator of the property. In exchange for
the sale of the interest in the Antelope Creek field, the Company received
$7.5 million, as adjusted,
F-10
<PAGE>
PETROGLYPH ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1994, 1995 AND 1996
JUNE 30, 1996 AND 1997 (UNAUDITED)
3. ACQUISITIONS AND DISPOSITIONS:--(CONTINUED)
in cash and the parties entered into a Unit Participation Agreement for
development of the Antelope Creek field. Under the terms of this agreement,
the Company received $5.3 million in carried development costs for
approximately 50 wells over a 12 month period which ended on June 30, 1997.
The Company recognized a pre-tax gain on this sale of $1.3 million. This Unit
Participation Agreement is structured such that the Company will pay 25% of
the development costs of the Antelope Creek field from the date of the
agreement until approximately $21 million in total development costs have been
incurred. At June 30, 1997, all of this carried development cost had been
expended. In addition, under the terms of the Unit Participation Agreement,
the Company's working interest in the Antelope Creek field will increase to
58%, and its partner's working interest will be reduced to 42%, at such time
as the Company's partner in the Antelope Creek field achieves payout, as
defined in the Unit Participation Agreement.
As an additional part of the purchase and sale agreement, the Company sold a
50% net profits interest (NPI) in its remaining 50% interest in the Antelope
Creek field commencing on the date of the agreement. The NPI will continue in
effect until such time as 67,389 barrels of equivalent production related to
the NPI has been produced from the Antelope Creek field. The NPI entitles the
holder to receive the net profits, defined in the purchase and sale agreement
as revenues less direct operating expenses, from the sale of the barrels of
oil equivalent production relating to the NPI. A value of $570,000 has been
assigned to the sale of the NPI and recorded as deferred revenue. This amount
was determined based on the projected net profits to be received from the sale
of the barrels of oil equivalent production related to the NPI. As these
barrels of oil equivalent production are produced and NPI proceeds are
disbursed to the holder of the NPI, an equal amount of the deferred revenue is
recognized as oil and natural gas revenue. Through December 31, 1996, the
Company had recognized $524,140 of revenue related to this NPI. The remaining
$45,860 was recognized during the six months ended June 30, 1997.
The following unaudited Pro Forma Consolidated Condensed Statements of
Operations for the six month period ended June 30, 1996, and for the years
ended December 31, 1996 and 1995 give effect to the Antelope Creek disposition
as if the sale had been consummated at January 1, 1996 and 1995. Pro forma
balance sheets at June 30, 1997 and December 31, 1996 are not necessary as the
balance sheets at June 30, 1997 and December 31, 1996 include the effect of
the disposition. The unaudited pro forma data is presented for illustrative
purposes only and is not necessarily indicative of the operating results that
would have occurred had the transaction been consummated at the dates
indicated, nor are they necessarily indicative of future operating results.
PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, SIX MONTHS
----------------------- ENDED
1995 1996 JUNE 30, 1996
----------- ---------- -------------
<S> <C> <C> <C>
Oil and natural gas revenues........... $ 3,678,764 $4,400,689 $2,078,717
Other revenues......................... 36,050 -- --
----------- ---------- ----------
Total Revenues....................... 3,714,814 4,400,689 2,078,717
Lease operating expenses............... 2,085,303 1,953,973 913,971
Production taxes....................... 143,563 204,848 76,841
Exploration costs...................... 335,649 68,818 41,610
Depreciation, depletion, and amortiza-
tion.................................. 1,920,515 2,358,693 830,317
Impairments............................ 109,209 -- --
General and administrative expenses.... 1,063,708 902,409 590,248
----------- ---------- ----------
Total Expenses....................... 5,657,947 5,488,741 2,452,987
Interest income (expense), net......... (147,669) 147,580 122,543
Gain (loss) on sale of assets.......... (138,614) 69,766 (140,199)
----------- ---------- ----------
Net loss before taxes.................. (2,229,416) (870,706) (391,926)
----------- ---------- ----------
Net loss............................... $(2,229,416) $ (870,706) $ (391,926)
=========== ========== ==========
</TABLE>
F-11
<PAGE>
PETROGLYPH ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1994, 1995 AND 1996
JUNE 30, 1996 AND 1997 (UNAUDITED)
4. TRANSACTIONS WITH AFFILIATES:
The Company has a note receivable from certain executive officers for
$246,500 at June 30, 1997, December 31, 1996 and 1995. This note bears
interest at a rate of 11% and has no set maturity date. As of July 1, 1997,
the interest rate on this note was changed to 9%.
The Company leases its office building from an affiliate. Rentals paid to
the affiliate for such leases were $17,400 for each of the six month periods
ended June 30, 1997 and 1996 (unaudited). Rentals paid during 1996, 1995 and
1994 totaled $34,800, $39,200 and $24,000, respectively. These rentals are
included in general and administrative expense in the accompanying financial
statements.
In August 1997, the Company and NGP entered into a financial advisory
services agreement whereby NGP has agreed to provide financial advisory
services to the Company for a quarterly fee of $13,750. In addition, NGP will
be reimbursed for its out of pocket expenses incurred in performing such
services. The agreement is for a one year term and can be terminated by NGP at
the end of any fiscal quarter. Under the agreement, NGP will assist the
Company in managing its public and private financing activities, its public
financial reporting obligations, its budgeting and planning processes, and its
investor relations program, as well as provide ongoing strategic advice. NGP
will not receive any other transaction-related compensation for its advisory
assistance.
For the year ended December 31, 1996, the Company paid legal fees of
$109,000 to the law firm of Morris, Laing, Evans, Brock & Kennedy, Chartered,
where A.J. Schwartz, a director of the Company, is a partner. For the six
months ended June 30, 1997, the Company paid legal fees to Morris, Laing,
Evans, Brock & Kennedy, Chartered of $81,000.
5. LONG-TERM DEBT:
At December 31, 1994, the Company had a note payable to Enron Capital and
Trade Resources ("ECTR") for $1,800,000. As stated in the ECTR note agreement,
the first $1,500,000 of loans were to be designated as production loans, and
amounts after this initial amount were to be designated as development loans
related to the Company's Utah properties. The note bore interest at a rate
equal to the prime rate plus 1.5% for the production loan and the prime rate
plus 4.0% for the development loan. The note was paid in full September 1995.
The Company negotiated a $10,000,000 loan facility with Texas Commerce Bank
National Association ("TCB") of Dallas, Texas, as agent for a group of
financial institutions, in May 1995. The loan facility is collateralized by
the Company's oil and natural gas properties located in Utah and contains
certain financial covenants with which the Company was in compliance at June
30, 1997 and December 31, 1995 and 1996. The loan facility is a combination
credit facility with a revolving credit agreement, which expired on May 25,
1997, at which time all balances outstanding under the revolving credit
agreement were to convert to a term loan, expiring on October 1, 1999. The
revolving loan facility was redetermined at $7.5 million on July 2, 1997. This
effectively allowed the Company to continue to borrow on the facility in place
at June 30, 1997. Subsequent to the redetermination, the Company has borrowed
an additional $2.5 million for a total outstanding obligation under this
facility of $7.5 million at August 22, 1997. Interest on the revolver is at
TCB's prime plus .375% and on the term loan is at TCB prime plus .75%. The
Company is currently negotiating and has agreed to terms with TCB to provide
an additional $2.5 million to the Company through an amendment to the loan
facility. As part of this negotiation, the agent was changed from TCB to The
Chase Manhattan Bank; however, the group of lenders remains unchanged.
F-12
<PAGE>
PETROGLYPH ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1994, 1995 AND 1996
JUNE 30, 1996 AND 1997 (UNAUDITED)
5. LONG-TERM DEBT:--(CONTINUED)
In July 1996, the Company used proceeds received from the sale of oil and
gas properties to pay in full the outstanding balance of $5.9 million on the
revolver. The revolver was still open at December 31, 1996, although there is
no outstanding balance due as of that date. The availability to the Company
under this revolver at December 31, 1996 was $7.5 million. The Company pays a
commitment fee of three-eighths of 1% on the unused portion of the available
borrowings under the Revolver. There were no outstanding amount under this
line of credit at December 31, 1996. As of June 30, 1997, the Company had
drawn approximately $5,000,000 upon its revolving line of credit to provide
funding for the 1997 development expenditures on the Company's Utah
properties. As of August 22, 1997, $7,500,000 was outstanding under the
Revolver.
In September 1996, the Company entered into a term loan with a local lender
covering four vehicles. The principal balance was $85,000 and bears interest
at an annual rate of 7.5%. The loan matures on September 16, 1999 and is
secured by the four vehicles. At December 31, 1996, the outstanding balance is
$76,497, $51,800 of which is presented as long-term debt in the accompanying
Consolidated Statement of Assets, Liabilities and Owners' Equity. At June 30,
1997, the outstanding balance of this loan is $63,243, $34,910 of which is
presented as long-term debt.
Aggregate maturities of long-term debt at December 31, 1996 and June 30,
1997 are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1996 JUNE 30, 1997
----------------- -------------
(UNAUDITED)
<S> <C> <C>
1997....................................... $24,697 --
1998....................................... 28,800 $ 28,333
1999....................................... 23,000 5,034,910
2000....................................... -- --
</TABLE>
6. PRO FORMA INCOME TAXES:
The pro forma effective income tax rate for the Company was different than
the statutory federal income tax rate for the periods shown below, for the
following reasons (in thousands):
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------ ------------------
1994 1995 1996 1997 1996
--------- --------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Pro Forma Income Tax expense
(benefit) at the federal
statutory rate of 35%....... $(790,178) $(834,546) $170,552 $(60,400) $338,126
Pro Forma State income tax
expense (benefit)........... (90,306) (95,377) 19,492 (6,903) 38,643
Pro Forma Net operating loss
utilized by partners........ 880,484 929,923 -- 67,303 --
--------- --------- -------- -------- --------
$ -- $ -- $190,044 $ -- $376,769
========= ========= ======== ======== ========
</TABLE>
Components of pro forma income tax expense (benefit) are as follows:
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
------------------- -------------------
1994 1995 1996 1996 1997
---- ---- --------- ---------- --------
<S> <C> <C> <C> <C> <C>
Current............................. -- -- $(222,169) $334,485 --
Deferred............................ -- -- 412,213 42,284 --
--- --- --------- ---------- -----
Total............................. -- -- $ 190,044 376,769 --
=== === ========= ========== =====
</TABLE>
F-13
<PAGE>
PETROGLYPH ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1994, 1995 AND 1996
JUNE 30, 1996 AND 1997 (UNAUDITED)
6. PRO FORMA INCOME TAXES:--(CONTINUED)
Deferred tax assets and liabilities are the results of temporary differences
between the financial statement carrying values and tax bases of assets and
liabilities. The Company's pro forma net deferred tax liability positions as
of December 31, 1995 and 1996 and June 30, 1997 are summarized below:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------- JUNE 30,
1995 1996 1997
--------- ----------- -----------
<S> <C> <C> <C>
Inventory............................. $ (53,820) $ (53,820) $ (43,602)
Property and equipment................ (855,515) (1,267,728) (2,361,705)
--------- ----------- -----------
Total............................... $(909,335) $(1,321,548) $(2,405,307)
========= =========== ===========
</TABLE>
The pro forma net deferred tax liability as of June 30, 1997 is
approximately the amount that the Company expects will be required to be
recognized as income tax expense on the date of the Conversion discussed in
Note 2.
7. DERIVATIVES, SALES CONTRACTS AND SIGNIFICANT CUSTOMERS:
DERIVATIVES AND SALES CONTRACTS
The Company accounts for forward sales transactions as hedging activities
and, accordingly, records all gains and losses in oil and natural gas revenues
in the period the hedged production is sold. Included in oil revenue is a net
loss of $128,400 in 1996. Losses incurred during 1994 and 1995 were not
significant. Losses included in oil revenue for the six month periods ended
June 30, 1996 and 1997, are $39,800 and $113,800, respectively. Included in
natural gas revenues in 1997 is a net loss of $42,000.
In August 1994, the Company entered into a financial swap arrangement
covering the sale of 549,000 barrels of oil production from January 1996 to
December 1999, at a floor price of $17.00 per Bbl and a ceiling price of
$20.75 per Bbl. This agreement was terminated in October of 1995, for which
the Company received a premium of $170,000. This premium is included in oil
revenue for the year ended December 31, 1995 in the accompanying Consolidated
Statement of Operations.
In January 1995, the Company entered into an additional swap arrangement
covering the sale of 4,000 Bbls per month from February 1995 to January 1996,
at a floor price of $17.00 per Bbl and a ceiling price of $19.00 per Bbl. This
agreement was terminated in October 1995. In September 1995, the Company
assumed the obligations of a former joint interest owner under a financial
swap arrangement. This agreement covers the sale of 549,000 Bbls from January
1996 to December 1999 at a floor price of $17.00 per Bbl and a ceiling price
of $20.75 per Bbl. At June 30, 1997, this contract was outstanding and calls
for the remaining sale of 378,000 barrels of oil over the next three years as
follows:
<TABLE>
<CAPTION>
YEAR BBLS
---- -------
<S> <C>
1997................................. 69,000
1998................................. 150,000
1999................................. 159,000
-------
Total.............................. 378,000
=======
</TABLE>
In June 1994, the Company entered into a contract to sell its oil production
from certain leases of its Utah properties to Purchaser "A". The price under
this contract is agreed upon on a monthly basis and is generally
F-14
<PAGE>
PETROGLYPH ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1994, 1995 AND 1996
JUNE 30, 1996 AND 1997 (UNAUDITED)
7. DERIVATIVES, SALES CONTRACTS, AND SIGNIFICANT CUSTOMERS:--(CONTINUED)
based on this purchaser's posted price for Yellow or Black Wax production, as
applicable. This contract will continue in effect until terminated by either
party upon giving proper notice. During the three years ended December 31,
1996, the volumes sold under this contract totaled 65,931, 101,115 and 60,663
Bbls, respectively, at an average sales price per Bbl for each year of $16.51,
$17.09 and $19.33. For the six month period ended June 30, 1997, the Company
sold 28,359 Bbls under this contract at an average price of $15.36
(unaudited).
In January of 1996, the Company entered into a contract to sell Black Wax
production from its Utah leases to Purchaser "B". The price under this
contract is based on the monthly average of the NYMEX price for West Texas
Intermediate ("WTI") crude oil, less $.50 per Bbl, adjusted for the pricing
differential related to the gravity difference between Purchaser B's Utah
Black Wax posting and WTI, less $2.50 per
Bbl to cover gathering costs and quality differential. During the year ended
December 31, 1996, the Company sold 59,048 Bbls of oil under this contract at
an average price of $19.69 per Bbl. This contract was cancelled effective
January 1, 1997.
In July 1997, the Company entered into a modification of its crude oil sales
contract to sell all of its equity share of Black Wax crude oil production
from the Antelope Creek field to Purchaser "C" at a per Bbl price equal to
posting, less $2.00 per Bbl to cover handling and gathering costs. This
contract supersedes the contract which the Company had with this purchaser
from February 1994 through June 1997. This contract will continue in effect
until terminated by either party upon giving proper notice. For the six month
period ended June 1, 1997, the Company sold 49,633 Bbls under this contract at
an average price of $15.32 per Bbl (unaudited).
In June 1997, the Company entered into a crude oil contract to sell Black
Wax production from certain of its oil tank batteries in Antelope Creek to
Purchaser "D". This contract is effective until May 31, 1998 and calls for the
Company to receive a per Bbl price equal to the current month NYMEX closing
price for sweet crude, averaged over the month in which the crude is sold,
less an agreed upon fixed adjustment. This contract replaces a contract the
Company had with Purchaser "D" for the month of April 1997. Volumes sold under
this contract totaled 19,623 Bbls at an average price of $15.37 for the six
months ended June 30, 1997.
In addition to the sales contracts discussed above, Purchaser "C" has a call
on all of the Company's share of oil production from the Antelope Creek field,
which has priority over all other sales contracts. Under the terms of the Oil
Production Call Agreement (the "Call Agreement"), this purchaser has the
option to purchase all or any portion of the oil produced from the Antelope
Creek field at the current market price for the gravity and type of oil
produced and delivered by the Company. The Call Agreement has no expiration
date and was assumed by the Company on the date it acquired its interest in
the Antelope Creek field.
SIGNIFICANT CUSTOMERS
The Company's revenues are derived principally from uncollateralized sales
to customers in the oil and gas industry. The concentration of credit risk in
a single industry affects the Company's overall exposure to credit risk
because customers may be significantly affected by changes in economic and
other conditions. In addition, the Company sells a significant portion of its
oil and natural gas revenue each year to a few customers. Oil sales to three
purchasers in 1996 were approximately 26%, 26% and 12% of total 1996 oil and
gas revenues. Oil sales to one purchaser in 1995 was approximately 43% of
total 1995 oil and natural gas revenues. Oil sales to two purchasers in 1994
were approximately 45% and 12% of total 1994 oil and natural gas revenues.
Natural gas
F-15
<PAGE>
PETROGLYPH ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1994, 1995 AND 1996
JUNE 30, 1996 AND 1997 (UNAUDITED)
7. DERIVATIVES, SALES CONTRACTS, AND SIGNIFICANT CUSTOMERS:--(CONTINUED)
sales to one purchaser in 1994 were approximately 23% of total 1994 oil and
natural gas revenues. Oil sales to three purchasers during the six month
period ended June 30, 1997, were approximately 34%, 20% and 14% of total oil
and natural gas revenues for the same period. Natural gas sales to one
purchaser for the six month period ended June 30, 1997 were approximately 20%
of total oil and natural gas sales for the same period. The Company does not
believe that the loss of these purchasers would adversely impact its ability
to market its production.
8. FAIR VALUE OF FINANCIAL INSTRUMENTS:
Because of their short-term maturity, the fair value of cash and cash
equivalents, certificates of deposit, accounts receivable and accounts payable
approximate their carrying values at June 30, 1997 and at December 31, 1995
and 1996. The fair value of the Company's bank borrowings approximate their
carrying value because the borrowings bear interest at market rates. The
Company does not have any investments in debt or equity securities at June 30,
1997, or at December 31, 1995 or 1996. The fair value of the Company's
outstanding oil price swap arrangement, described in the preceding note, has
an estimated fair value of $(255,000), $170,000 and $(576,000) at June 30,
1997, December 31, 1995 and 1996, respectively. These estimates are based on
quoted market values.
9. STOCK INCENTIVE PLAN:
The Board of Directors and the stockholders of the Company approved the
adoption of the Company's 1997 Incentive Plan (the "1997 Incentive Plan")
effective as of the completion of the Offering. The purpose of the 1997
Incentive Plan is to reward selected officers and key employees of the Company
and others who have been or may be in a position to benefit the Company,
compensate them for making significant contributions to the success of the
Company and provide them with proprietary interest in the growth and
performance of the Company.
Participants in the 1997 Incentive Plan are selected by the Board of
Directors or such committee of the Board as is designated by the Board to
administer the 1997 Incentive Plan (upon completion of the Offering, the
Compensation Committee of the Board of Directors) from among those who hold
positions of responsibility and whose performance, in the judgment of the
Compensation Committee, can have a significant effect on the success of the
Company. An aggregate of 375,000 shares of Common Stock have been authorized
and reserved for issuance pursuant to the 1997 Incentive Plan. As of August
22, 1997, options have been granted to the participants under the 1997
Incentive Plan to purchase a total of 260,000 shares of Common Stock to
participants at an exercise price per share equal to the Price to Public set
forth on the cover page of this Prospectus. One-third of these options will
vest each year on the anniversary date of the offering.
Pursuant to the 1997 Incentive Plan, participants will be eligible to
receive awards consisting of (i) stock options, (ii) stock appreciation
rights, (iii) stock, (iv) restricted stock, (v) cash, or (vi) any combination
of the foregoing. Stock options may be either incentive stock options within
the meaning of Section 422 of the Internal Revenue Code of 1986, as amended,
or nonqualified stock options.
F-16
<PAGE>
PETROGLYPH ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1994, 1995 AND 1996
JUNE 30, 1996 AND 1997 (UNAUDITED)
10. COMMITMENTS AND CONTINGENCIES:
LEASES
The Company leases offices and office equipment in its primary locations
under non-cancelable operating leases. As of June 30, 1997 and December 31,
1996, minimum future lease payments for all non-cancelable lease agreements
are as follows:
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, 1996 JUNE 30, 1997
----------------- ----------------
(UNAUDITED)
<S> <C> <C>
1997......................................... $22,882 $ 5,134
1998......................................... 9,650 8,518
1999......................................... 8,100 8,100
2000......................................... 7,425 7,425
2001......................................... -- --
------- -------
Total...................................... $48,057 $29,177
======= =======
</TABLE>
Amounts incurred by the Company under operating leases (including renewable
monthly leases) were $56,142, $50,543 and $41,548 in 1994, 1995 and 1996,
respectively. Amounts incurred by the Company under these same leases for the
six month periods ended June 30, 1997 and 1996 are $22,659 and $17,696,
respectively (unaudited).
LITIGATION
The Company and its subsidiary are involved in certain litigation and
certain governmental proceedings arising in the normal course of business.
Company management and legal counsel do not believe that ultimate resolution
of these claims will have a material effect on the Company's financial
position or results of operations.
OTHER COMMITMENTS
On December 9, 1996, the Company entered into an agreement with an industry
partner whereby the industry partner would pay for the costs of a three-
dimensional seismic survey on the Company's leasehold interests in the Helen
Gohlke field, located in Victoria County, Texas. In exchange for such costs,
the industry partner has the right to earn a 50% interest in the leasehold
rights of the Company in the Helen Gohlke field. The industry partner is
required to pay 50% of the costs to drill and complete any wells in the area
covered by the seismic survey, and, in exchange, will earn a 50% interest in
the well and in certain acreage surrounding the well. The amount of such
surrounding acreage in which the industry partner will earn an interest is to
be determined based upon the depth of the well drilled.
ENVIRONMENTAL MATTERS
The Company's operations and properties are subject to extensive and
changing federal, state and local laws and regulations relating to
environmental protection, including the generation, storage, handling,
emission, transportation and discharge of materials into the environment, and
relating to safety and health. The recent trend
in environmental legislation and regulating generally is toward stricter
standards, and this trend will likely continue. These laws and regulations may
require the acquisition of a permit or other authorization before construction
of drilling commences and for certain other activities; limit or prohibit
construction, drilling and
F-17
<PAGE>
PETROGLYPH ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1994, 1995 AND 1996
JUNE 30, 1996 AND 1997 (UNAUDITED)
10. COMMITMENTS AND CONTINGENCIES:--(CONTINUED)
other activities on certain lands lying within wilderness and other protected
areas; and impose substantial liabilities for pollution resulting from the
Company's operations. The permits required for various of the Company's
operations are subject to revocation, modification and renewal by issuing
authorities. Governmental authorities have the power to enforce compliance
with their regulations, and violations are subject to fines or injunction, or
both. In the opinion of management, the Company is in substantial compliance
with current applicable environmental laws and regulations, and the Company
has no material commitments for capital expenditures to comply with existing
environmental requirements. Nevertheless, changes in existing environmental
laws and regulations or in interpretations thereof could have a significant
impact on the Company, as well as the oil and natural gas industry in general.
11. SUBSEQUENT EVENTS:
On February 28, 1997, the Company sold its Arco Fee properties, located in
Texas, for approximately $600,000. The Company recognized a gain of
approximately $120,000 on this sale.
In July of 1997, the Company acquired 56,000 net mineral acres in the Raton
Basin in Colorado for approximately $700,000. This acquisition had an
effective date of May 15, 1997. In addition, the Company also acquired,
simultaneously, an 80% interest in a 25 mile pipeline strategically located
across the Company's acreage positions in the Raton Basin for total
consideration of approximately $300,000. The Company, together with an
industry partner, formed a partnership to operate this pipeline. Under the
terms of the purchase and sale agreement, the Company is obligated to pay
$200,000 by July, 1998, and an additional $41,000 by July, 1999.
12. SUPPLEMENTAL FINANCIAL INFORMATION OIL AND NATURAL GAS PRODUCING
ACTIVITIES (UNAUDITED):
All of the Company's operations are directly related to oil and natural gas
producing activities located in the United States, therefore, a separate
result of operations disclosure is not necessary.
COSTS INCURRED RELATED TO OIL AND NATURAL GAS PRODUCING ACTIVITIES
The following table summarizes costs incurred whether such costs are
capitalized or expensed for financial reporting purposes (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------- SIX MONTHS ENDED
1994 1995 1996 JUNE 30, 1997
---------- ---------- ---------- ----------------
<S> <C> <C> <C> <C>
Acquisition
Unproved Properties......... $ 52,685 $ 8,206 $ 490,487 $ 416,601
Proved Properties........... 5,193,043 4,718,201 -- --
Development................... 1,311,272 3,448,972 6,983,715 4,057,976
Exploration................... 69,570 316,089 -- --
Improved recovery costs....... 271,276 154,023 327,027 99,531
---------- ---------- ---------- ----------
Total..................... $6,897,846 $8,645,491 $7,801,229 $4,574,108
========== ========== ========== ==========
</TABLE>
PROVED RESERVES
Independent petroleum engineers have estimated the Company's proved oil and
natural gas reserves as of June 30, 1997, all of which are located in the
United States. Prior period reserves were estimated by the Company's reserve
engineer. Proved reserves are the estimated quantities that geologic and
engineering data
F-18
<PAGE>
PETROGLYPH ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1994, 1995 AND 1996
JUNE 30, 1996 AND 1997 (UNAUDITED)
12. SUPPLEMENTAL FINANCIAL INFORMATION OIL AND NATURAL GAS PRODUCING
ACTIVITIES (UNAUDITED):--(CONTINUED)
demonstrate with reasonable certainty to be recoverable in future years from
known reservoirs under existing economic and operating conditions. Proved
developed reserves are the quantities expected to be recovered through
existing wells with existing equipment and operating methods. Due to the
inherent uncertainties and the limited nature of reservoir data, such
estimates are subject to change as additional information becomes available.
The reserves actually recovered and the timing of production of these reserves
may be substantially different from the original estimate. Revisions result
primarily from new information obtained from development drilling and
production history and from changes in economic factors.
STANDARDIZED MEASURE
The standardized measure of discounted future net cash flows ("standardized
measure") and changes in such cash flows are prepared using assumptions
required by the Financial Accounting Standards Board. Such assumptions include
the use of year-end prices for oil and natural gas and year-end costs for
estimated future
development and production expenditures to produce year-end estimated proved
reserves. Discounted future net cash flows are calculated using a 10% rate.
Estimated future income taxes are calculated by applying year-end statutory
rates to future pre-tax net cash flows, less the tax basis of related assets
and applicable tax credits.
The standardized measure does not represent management's estimate of the
Company's future cash flows or the value of the proved oil and natural gas
reserves. Probable and possible reserves, which may become proved in the
future, are excluded from the calculations. Furthermore, year-end prices used
to determine the standardized measure of discounted cash flows are influenced
by seasonal demand and other factors and may not be the most representative in
estimating future revenues or reserve data.
F-19
<PAGE>
PETROGLYPH ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1994, 1995 AND 1996
JUNE 30, 1996 AND 1997 (UNAUDITED)
12. SUPPLEMENTAL FINANCIAL INFORMATION OIL AND NATURAL GAS PRODUCING ACTIVITIES
(UNAUDITED):--(CONTINUED)
<TABLE>
<CAPTION>
OIL NATURAL GAS
(BBLS) (MCF)
--------- -----------
<S> <C> <C>
PROVED RESERVES:
December 31, 1993....................................... 525,882 2,786,957
Revisions.............................................. (331,422) 282,725
Extensions, additions and discoveries.................. 405,070 788,305
Production............................................. (110,373) (485,062)
Purchases of reserves.................................. 741,579 4,096,791
Sales in place......................................... (25,767) (162,357)
--------- ----------
December 31, 1994....................................... 1,204,969 7,307,359
Revisions.............................................. (295,013) (698,765)
Extensions, additions and discoveries.................. 291,097 181,797
Production............................................. (182,704) (659,202)
Purchases of reserves.................................. 628,789 694,187
Sales in place......................................... (86,046) (166,216)
--------- ----------
December 31, 1995....................................... 1,561,092 6,659,160
Revisions.............................................. (801,535) (3,146,699)
Extensions, additions and discoveries.................. 6,440,869 18,448,489
Production............................................. (262,910) (553,770)
Purchases of reserves.................................. -- --
Sales in place......................................... (810,380) (2,594,717)
--------- ----------
December 31, 1996....................................... 6,127,136 18,812,463
Revisions.............................................. 1,292,689 1,580,650
Extensions, additions and discoveries.................. 578,757 760,047
Production............................................. (117,770) (243,095)
Purchases of reserves.................................. -- --
Sales in place......................................... (156,675) --
--------- ----------
June 30, 1997........................................... 7,724,137 20,910,065
========= ==========
PROVED DEVELOPED RESERVES:
December 31, 1993...................................... 525,882 2,786,957
========= ==========
December 31, 1994...................................... 1,204,969 7,307,359
========= ==========
December 31, 1995...................................... 1,561,092 6,659,160
========= ==========
December 31, 1996...................................... 865,018 3,010,401
========= ==========
June 30, 1997.......................................... 1,849,412 4,850,895
========= ==========
</TABLE>
F-20
<PAGE>
PETROGLYPH ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1994, 1995 AND 1996
JUNE 30, 1996 AND 1997 (UNAUDITED)
12. SUPPLEMENTAL FINANCIAL INFORMATION OIL AND NATURAL GAS PRODUCING
ACTIVITIES (UNAUDITED):--(CONTINUED)
Standardized Measure of Discounted Future Net Cash Flows Relating to Proved
Reserves
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------- JUNE 30,
1994 1995 1996 1997
----------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
Future cash inflows..... $36,973,132 $40,419,081 $184,248,490 $149,594,640
Future costs:
Production............. (20,315,350) (17,987,575) (43,993,010) (47,054,005)
Development............ -- -- (16,455,901) (18,145,975)
----------- ----------- ------------ ------------
Future net cash flows
before income tax...... 16,657,782 22,431,506 123,799,579 84,394,660
Future income tax....... (2,032,872) (3,032,875) (32,657,687) (21,458,867)
----------- ----------- ------------ ------------
Future net cash flows... 14,624,910 19,398,631 91,141,892 62,935,793
10% annual discount..... (4,264,268) (6,027,926) (43,117,804) (31,917,544)
----------- ----------- ------------ ------------
Standardized Measure.... $10,360,642 $13,370,705 $ 48,024,088 $ 31,018,249
=========== =========== ============ ============
Changes in Standardized Measure of Discounted Future Net Cash Flows
<CAPTION>
DECEMBER 31,
-------------------------------------- JUNE 30,
1994 1995 1996 1997
----------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
Standardized Measure,
January 1.............. $ 3,295,195 $10,360,642 $ 13,370,705 $ 48,024,088
Revisions:
Prices and costs....... (1,696,963) (525,763) 4,839,954 (29,472,218)
Quantity estimates..... 52,989 (989,701) 6,000,942 7,745,031
Accretion of discount.. 418,262 1,169,449 1,484,547 3,460,353
Future development
costs................. -- -- (15,068,164) 439,331
Income tax............. (178,573) (269,251) (14,604,066) 4,971,181
Production rates and
other................. (237,342) (1,227,766) 1,901,254 (5,480,645)
----------- ----------- ------------ ------------
Net revisions....... (1,641,627) (1,843,032) (15,445,533) (18,336,967)
Extensions, additions
and discoveries........ 1,943,705 3,728,389 56,781,465 2,332,717
Production.............. (434,154) (1,156,297) (2,390,023) (1,199,752)
Development costs....... -- -- -- 1,305,230
Purchases in place...... 7,450,474 2,609,642 -- --
Sales in place.......... (252,951) (328,639) (4,292,526) (1,107,067)
----------- ----------- ------------ ------------
Net change.......... 7,065,447 3,010,063 34,653,383 (17,005,839)
----------- ----------- ------------ ------------
Standardized Measure,
End of period.......... $10,360,642 $13,370,705 $ 48,024,088 $ 31,018,249
=========== =========== ============ ============
</TABLE>
Year-end weighted average oil prices used in the estimation of proved
reserves and calculation of the standardized measure were $17.01, $18.00, and
$19.50 per Bbl at December 31, 1994, 1995, and 1996, respectively. Year-end
weighted average gas prices were $1.45, $1.85, and $3.37 per Mcf at December
31, 1994, 1995, and 1996, respectively. Weighted average oil and natural gas
prices used in the estimation proved reserves and calculation of the
standardized measure at June 30, 1997 are $15.09 per Bbl and $1.71 per Mcf,
respectively.
Price and cost revisions are primarily the net result of changes in period-end
prices, based on beginning of period reserve estimates.
The Company's proved oil and natural gas reserves at June 30, 1997, using
weighted average oil and natural gas prices for the twelve months ending June
30, 1997 of $17.19 per Bbl of oil and $2.12 per Mcf of natural gas, would have
been 11,389,034 BOE, as compared to 11,209,147 BOE using oil and natural gas
prices in effect at June 30, 1997. The standardized measure of the Company's
proved oil and natural gas reserves using the weighted average prices for such
twelve month period would have been $40,406,588, as compared to $31,018,249
using oil and natural gas prices in effect at June 30, 1997.
F-21
<PAGE>
EXHIBIT 1
PETROGLYPH ENERGY, INC.
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
The following table indicates the calculation of the Company's ratio of
earnings to fixed charges for the six month period ended June 30, 1997, and for
each of the four years in the period ended December 31, 1996:
<TABLE>
<CAPTION>
JUNE 30,
1993 1994 1995 1996 1997
--------- ----------- ----------- -------- ---------
<S> <C> <C> <C> <C> <C>
Net income (loss)....... $(123,636) $(2,257,652) $(2,384,416) $487,294 $(172,572)
Income tax expense..... -- -- -- -- --
Interest expense....... -- 93,327 363,076 301,863 95,632
Interest portion of
rentals............... -- -- -- -- --
Preferred stock
dividends............. -- -- -- -- --
--------- ----------- ----------- -------- ---------
Earnings (loss) before
provision for taxes and
fixed charges.......... $(123,636) $(2,164,325) $(2,021,340) $789,157 $ (76,940)
--------- ----------- ----------- -------- ---------
Interest expense........ -- $ 93,327 $363,076 $301,863 $ 95,632
Interest portion of
rentals................ -- -- -- -- --
Preferred stock
dividends.............. -- -- -- -- --
Total fixed charges..... -- $93,327 $363,076 $301,863 $ 95,632
--------- ----------- ----------- -------- ---------
Ratio of earnings to
fixed charges.......... -- (23.19) (5.57) 2.61 (0.80)
Excess of fixed charges
over income (loss)..... $(123,636) $(2,257,652) $(2,384,416) $487,294 $(172,572)
</TABLE>
F-22
<PAGE>
[LEE KEELING AND ASSOCIATES, INC. LETTERHEAD]
SEPTEMBER 26, 1997
Petroglyph Energy, Inc.
6209 North Highway 61
Hutchinson, Kansas 67502
Attn: Robert A. Christensen
Gentlemen:
In accordance with your request, we have estimated the proved reserves and
future revenue, as of June 30, 1997, to the interest of Petroglyph Energy,
Inc. and its successors and subsidiaries (collectively "Petroglyph") in
certain oil and natural gas properties located in Utah, Texas and Kansas as
listed in the accompanying tabulations. 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 revenues to the Petroglyph
interest, as of June 30, 1997, to be:
<TABLE>
<CAPTION>
NET RESERVES FUTURE NET REVENUES
--------------------- -----------------------------
OIL NATURAL GAS PRESENT WORTH
CATEGORY (BBLS) (MCF) TOTAL DISCOUNTED AT 10%
- -------- --------- ----------- ----------- -----------------
<S> <C> <C> <C> <C>
Proved Developed:
Producing 994,193 2,924,633 $10,434,000 $ 7,826,000
Non-Producing 855,219 1,926,262 7,998,000 4,564,000
Proved Undeveloped 5,874,725 16,059,170 65,963,000 30,481,000
--------- ---------- ----------- -----------
Total Proved 7,724,137 20,910,065 $84,395,000 $42,871,000
========= ========== =========== ===========
</TABLE>
The oil reserves shown include crude oil, condensate and natural gas plant
liquids. Oil volumes are expressed in barrels which are equivalent to 42
United States gallons. Natural Gas volumes are expressed in thousands of
standard cubic feet (Mcf) at the contract temperature and pressure bases.
This report includes summary projections of reserves and future net revenues
for each reserve category. For the purposes of this report, the term "lease"
refers to a single economic projection.
A-1
<PAGE>
The estimated reserves and future net revenues shown in this report 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. This report does 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 to the Petroglyph interest is prior to deducting state
and tribal production taxes and ad valorem taxes. Future net revenues are
computed after deducting these taxes, future capital costs and operating
expenses, but before consideration of federal income taxes. In accordance with
SEC guidelines, the future net revenues have been discounted at an annual rate
of 10% 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 nor the cost of abandoning the properties.
As requested, oil prices used in this report are based on a June 30, 1997
weighted average posted price of $15.09 per Bbl, adjusted by lease for
gravity, transportation fees and regional posted price differentials. Natural
gas prices used in this report are based on a June 30, 1997 weighted average
price of $1.71 per McF, adjusted by lease for transportation fees and regional
spot market price differentials. Oil, natural gas liquids and natural gas
prices are held constant in accordance with SEC guidelines.
Lease and well operating costs are based on operating expense records of
Petroglyph. As requested, the Petroglyph operated properties include only direct
lease and field level costs. Headquarters general and administrative overhead
expenses of Petroglyph 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 and injection wells and production and
enhanced recovery equipment.
We have made no investigation of potential natural gas volume and value
imbalances which may have resulted from over delivery or underdelivery to the
Petroglyph interest. Therefore, our estimates of reserves and future net
revenues do not include adjustments for the settlement of any such imbalances;
our projections are based on Petroglyph receiving its net revenue interest
share of estimated future gross natural gas production.
This report has been prepared utilizing methods and procedures regularly
used by petroleum engineers to estimate oil and gas reserves for properties of
this type and character. The recovery of oil and natural gas reserves and
projection of producing rates are dependent upon many variable factors
including prudent operation, development of the proposed enhanced recovery
project, injection of water, compression of natural gas when needed, market
demand, installation of lifting equipment, and remedial work when required.
The reserves included in this report have been based upon the assumption that
the wells will be operated in a
A-2
<PAGE>
prudent manner and that the waterflood expansion will proceed as projected.
Actual production results and future well data may yield additional facts, not
presently available to us, which will require an adjustment to our estimates.
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. The sales rates, prices received for the reserves,
costs incurred in recovering such reserves and future capital costs may vary
from assumptions included in this report due to governmental policies,
uncertainties of supply and demand and other factors. 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 natural 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 Lee Keeling and
Associates, Inc., nor has the actual degree or type of interest owned been
independently confirmed. The data used in our estimates were obtained from
Petroglyph and the nonconfidential files of Lee Keeling and Associates, Inc.
and were accepted as accurate. We are independent petroleum engineers, and
geologists; 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/ Lee Keeling and Associates, Inc.
Lee Keeling and Associates, Inc.
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY IN-
FORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS AND, IF GIVEN
OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE COMPANY OR ANY OF THE UNDERWRITERS. THIS PROSPECTUS
DOES NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF ANY OFFER TO BUY
ANY SECURITIES OTHER THAN THE SHARES OF COMMON STOCK OFFERED BY THIS PROSPEC-
TUS, NOR DOES IT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF ANY OFFER TO
BUY THE SHARES OF COMMON STOCK BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OF-
FER OR SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH OF-
FER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS
UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PRO-
SPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY
IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO THE DATE HEREOF.
UNTIL , 1997, ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURI-
TIES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO
DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DE-
LIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UN-
SOLD ALLOTMENTS OR SUBSCRIPTIONS.
---------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary....................................................... 3
Risk Factors............................................................. 10
The Company.............................................................. 19
Use of Proceeds.......................................................... 20
Dividend Policy.......................................................... 20
Dilution................................................................. 21
Capitalization........................................................... 22
Pro Forma Condensed Consolidated Statements of Operations................ 23
Selected Consolidated Financial Data..................................... 27
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 29
Business and Properties.................................................. 37
Management............................................................... 55
Executive Compensation and Other Information............................. 58
Certain Transactions..................................................... 59
Principal Stockholders................................................... 60
Description of Capital Stock............................................. 61
Shares Eligible for Future Sale.......................................... 63
Underwriting............................................................. 64
Legal Matters............................................................ 65
Experts.................................................................. 65
Available Information.................................................... 66
Glossary of Oil and Natural Gas Terms.................................... 67
Index to Financial Statements............................................ F-1
Summary Reserve Report................................................... A-1
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
2,333,333 Shares
PETROGLYPH
ENERGY, INC.
Common Stock
--------------
PROSPECTUS
--------------
PRUDENTIAL SECURITIES INCORPORATED
OPPENHEIMER & CO., INC.
JOHNSON RICE & COMPANY L.L.C.
October , 1997
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The estimated expenses payable by Petroglyph Energy, Inc. (the "Registrant"
or the "Company") in connection with the registration of the securities
offered hereby, other than underwriting discounts and commissions, are as
follows:
<TABLE>
<S> <C>
SEC Registration Fee........................................... $ 13,011
NASD Filing Fee................................................ 4,794
Nasdaq National Market Listing Fee............................. 30,000
Blue Sky Qualification Fees and Expenses....................... 5,000
Accounting Fees and Expenses................................... 140,000
Legal Fees and Expenses........................................ 140,000
Engineering Fees and Expenses.................................. 30,000
Transfer Agent and Registrar Fees.............................. 3,500
Printing and Engraving Expenses................................ 130,000
Miscellaneous.................................................. 3,695
--------
Total...................................................... $500,000
========
</TABLE>
- --------
* To be provided by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 102(b)(7) of the Delaware General Corporation Law ("DGCL") enables a
corporation to include in its certificate of incorporation a provision
eliminating or limiting the personal liability of members of its board of
directors to the corporation or its stockholders for monetary damages for
breach of fiduciary duty as a director. Such a provision may not eliminate or
limit the liability of a director (1) for any breach of a director's duty of
loyalty to the corporation or its stockholders, (2) for acts or omissions not
in good faith or which involve intentional misconduct or a knowing violation
of law, (3) for paying an unlawful dividend or approving an illegal stock
repurchase (as provided in Section 174 of the DGCL), or (4) for any
transaction from which the director derived an improper personal benefit.
Under Section 145 of the DGCL, a corporation has the power to indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding (other than an
action by or in the right of the corporation) by reason of the fact that the
person is or was a director, officer, employee or agent of any corporation,
partnership, joint venture, trust or other enterprise, against any and all
expenses (including attorneys' fees), judgments, fines and amounts paid in
settlement and reasonably incurred in connection with such action, suit or
proceeding. The power to indemnify applies only if the person acted in good
faith and in a manner he reasonably believed to be in or not opposed to the
best interests of the corporation, and with respect to any criminal action or
proceeding, had no reasonable cause to believe the person's conduct was
unlawful.
In the case of an action by or in the right of the corporation, no
indemnification may be made with respect to any claim, issue or matter as to
which such person shall have been adjudged to be liable to the corporation
unless and only to the extent that the court of chancery or the court in which
such action or suit was brought shall determine that despite the adjudication
of liability such person is fairly and reasonably entitled to indemnity for
such expenses which the court shall deem proper. Section 145 of the DGCL
further provides that to the extent a director or officer of a corporation has
been successful in the defense of any action, suit or proceeding referred to
above or in the defense of any claim, issue or matter therein, he shall be
indemnified against expenses (including attorney's fees) actually and
reasonably incurred by him in connection therewith.
II-1
<PAGE>
A corporation also has the power to purchase and maintain insurance on
behalf of any person covering any liability incurred by such person in his
capacity as a director, officer, employee or agent of the corporation, or
arising out of his status as such, whether or not the corporation would have
the power to indemnify him against such liability.
The Registrant's Certificate of Incorporation and Bylaws provide that no
director of the Registrant will be personally liable to the Registrant or any
of its stockholders for monetary damages arising from the director's breach of
fiduciary duty as a director. However, this does not apply with respect to any
action in which the director would be liable under Section 174 of the DGCL nor
does it apply with respect to any liability in which the director (i) breached
his duty of loyalty to the Registrant or its stockholders; (ii) did not act in
good faith or, in failing to act, did not act in good faith; (iii) acted in a
manner involving intentional misconduct or a knowing violation of law or, in
failing to act, shall have acted in a manner involving intentional misconduct
or a knowing violation of law; or (iv) derived an improper personal benefit.
The Certificate of Incorporation and Bylaws provide that the Registrant will
indemnify its officers, directors, employees and agents and former officers,
directors, employees and agents against any expenses, judgments or settlement
payments sustained or paid by such persons as a result of having acted as an
officer or director of the Registrant, or, at the request of the Registrant,
as an officer, director, agent or employee of another business entity. The
Certificate of Incorporation and Bylaws further provide that the Registrant
may, by action of its Board of Directors, provide indemnification to employees
and agents of the Registrant, individually or as a group, with the same scope
and effect as the indemnification of directors and officers.
The form of Indemnity Agreement contained in Exhibit 10.6 provides for the
indemnification in certain instances against liability and expenses incurred
in connection with proceedings brought by or in the right of the Company or by
third parties by reason of a person serving as an officer or director of the
Company.
The form of Underwriting Agreement contained in Exhibit 1 provides for
indemnification of the directors and officers signing the Registration
Statement, including Robert C. Murdock, Robert A. Christensen and S. Kennard
Smith (the "PEI Stockholders"), and certain controlling persons of the Company
against certain liabilities (including certain liabilities under the
Securities Act of 1933, as amended (the "Securities Act")) in certain
instances by the Underwriters.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
The following information relates to all securities issued or sold by the
Registrant and not registered under the Securities Act.
Unless otherwise specifically provided, each of the transactions described
below was conducted in reliance upon the exemption from registration provided
in Section 4(2) of the Securities Act and the rules and regulations
promulgated thereunder. Furthermore, each of the certificates representing the
Registrant's securities issued in connection with such transactions contains a
restrictive legend, as appropriate, requiring each person acquiring such
securities from the Registrant to furnish investment representations to the
Registrant and stating that no underwriters participated in such transactions.
Immediately prior to the completion of the Offering, the Company will
consummate the Conversion described in the Prospectus included in this
Registration Statement pursuant to the Exchange Agreement dated as of August
22, 1997 (the "Exchange Agreement") by and among the Company, Petroglyph Gas
Partners, L.P., Petroglyph Energy, Inc., a Kansas corporation ("PEI"), and
Robert C. Murdock, Robert A. Christensen and S. Kennard Smith (collectively,
the "PEI Stockholders"), and Natural Gas Partners, L.P, Natural Gas Partners
II, L.P., Natural Gas Partners III, L.P. (collectively, "NGP"), and R. Gamble
Baldwin, Albin Income Trust, John S. Foster, Kenneth A. Hersh and Bruce B.
Selkirk, III (collectively, with NGP, the "Limited Partners"). The Exchange
Agreement provides that (i) the PEI Stockholders will transfer all of their
shares of stock in PEI to the Company in exchange for a total of 257,164
shares of Common Stock of the Company and (ii) the Limited Partners will
transfer all of their limited partnership interests in Petroglyph Gas
Partners, L.P. to the Company in
II-2
<PAGE>
exchange for a total of 2,576,169 shares of Common Stock of the Company. The
exchange ratios for securities to be surrendered for Common Stock in the
Conversion were determined based primarily on the proportionate equity
interest in the Company's operations represented by such securities. The
transactions contemplated by the Exchange Agreement are subject to the
consummation of the sale of Common Stock in the Offering.
Since inception, the Registrant has granted options to purchase an aggregate
of 260,000 shares of Common Stock to officers and key employees. These
transactions did not involve a public offering and were effected in reliance
upon Section 4(2) of the Securities Act.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
1* Form of Underwriting Agreement.
2* Exchange Agreement.
3.1* Certificate of Incorporation.
3.2* Bylaws.
4 Form of Common Stock Certificate.
5 Opinion of Thompson & Knight, A Professional Corporation.
10.1* Stockholders Agreement.
10.2* Registration Rights Agreement.
10.3* Financial Advisory Services Agreement.
10.4* 1997 Incentive Plan.
10.5* Form of Confidentiality and Noncompete Agreement between the
Registrant and each of its executive officers.
10.6* Form of Indemnity Agreement between the Registrant and each of its
executive officers.
10.7 Amended and Restated Loan Agreement, dated September 15, 1997, among
Petroglyph Gas Partners, L.P., Petroglyph Energy, Inc. and The Chase
Manhattan Bank.
10.8* Asset Purchase and Sale Agreement dated as of July 1, 1995, by and
between Inland Resources, Inc., and Petroglyph Gas Partners, L.P.
10.9* First Amendment to Asset Purchase and Sale Agreement dated as of
September 1, 1995 by and between Inland Resources Inc. and Petroglyph
Gas Partners, L.P.
10.10* Asset Purchase and Sale Agreement, dated as of June 1, 1996, by and
between Petroglyph Gas Partners, L.P., and CoEnergy Enhanced
Production, Inc.
10.11* Assignment of mining lease dated June 26, 1996, by Petroglyph Gas
Partners, L.P. to CoEnergy Enhanced Production, Inc.
10.12* Cooperative Plan of Development and Operation for the Antelope Creek
Enhanced Recovery Project Duchesne, County Utah, dated as of February
17, 1994, by and between Petroglyph Operating Company, Inc., Inland
Resources, Inc., Petroglyph Gas Partners, L.P., Ute Indian Tribe and
Ute Distribution Corporation.
10.13* Exploration and Development Agreement between The Ute Indian Tribe,
The Ute Distribution Corporation and Petroglyph Gas Partners, L.P.
10.14* Antelope Creek Unit Participation Agreement, dated as of June 1, 1996,
by and between Petroglyph Operating Company, Inc., Petroglyph Gas
Partners, L.P. and CoEnergy Enhanced Production, Inc.
10.15* Unit Operating Agreement Unit, dated June 1, 1996, by and between
Petroglyph Operating Company, Inc., Petroglyph Gas Partners, L.P. and
CoEnergy Enhanced Production, Inc.
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.16* Water Agreement, dated October 1, 1994, between East Duchesne Culinary
Water Improvement District and Petroglyph Operating Company, Inc.
10.17* Asset Purchase and Sale Agreement, dated May 15, 1997, among Infinity
Oil & Gas, Inc. and PGP II, L.P.
10.18 Lease Agreement between Hutch Realty, L.L.C. and Petroglyph Operating
Company, Inc.
10.19 Letter dated August 21, 1997 from Hutch Realty, L.L.C. to Petroglyph
Operating Company, Inc. concerning renewal of Lease Agreement.
10.20 Warrant Agreement, dated September 15, 1997, among The Chase Manhattan
Bank, Petroglyph Gas Partners, L.P. and Petroglyph Energy, Inc.
10.21 Registration Rights Agreement, dated September 15, 1997, between The
Chase Manhattan Bank and Petroglyph Energy, Inc.
10.22 Guaranty dated September 15, 1997 by Petroglyph Energy, Inc. in favor
of The Chase Manhattan Bank.
21* Subsidiaries of the Registrant.
Consent of Thompson & Knight, A Professional Corporation (included in
23.1 Exhibit 5 above).
23.2 Consent of Arthur Andersen, LLP, independent public accountants.
23.3 Consent of Lee Keeling and Associates Inc., independent petroleum
engineers.
24.1* Powers of Attorney .
27* Financial Data Schedule.
</TABLE>
- --------
* Previously filed.
(b) Financial Statement Schedules: None.
ITEM 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreements, certificates in such
denominations and registered in such names as required by the particular
Underwriter, to permit prompt delivery to each purchaser.
The undersigned Registrant also hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, Petroglyph
Energy, Inc. has duly caused this Amendment No. 1 to Registration Statement on
Form S-1 to be signed on its behalf by the undersigned, thereunto duly
authorized, in Hutchinson, Kansas, on September 29, 1997.
Petroglyph Energy, Inc.
By: /s/ Robert C. Murdock
---------------------------------
ROBERT C. MURDOCK (PRESIDENT,
CHIEF EXECUTIVE OFFICER AND
CHAIRMAN OF THE BOARD)
POWER OF ATTORNEY
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to Registration Statement has been signed by the following persons in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Robert C. Murdock President, Chief September 29,
- ------------------------------------- Executive Officer 1997
ROBERT C. MURDOCK and Chairman of the
Board (principal
executive officer)
/s/ Robert A. Christensen* Executive Vice September 29,
- ------------------------------------- President, Chief 1997
ROBERT A. CHRISTENSEN Technical Officer
and Director
/s/ Tim A. Lucas* Vice President and September 29,
- ------------------------------------- Chief Financial 1997
TIM A. LUCAS Officer (principal
financial and
accounting officer)
/s/ David R. Albin* Director September 29,
- ------------------------------------- 1997
DAVID R. ALBIN
/s/ Kenneth A. Hersh* Director
- ------------------------------------- September 29,
KENNETH A. HERSH 1997
/s/ A. J. Schwartz* Director September 29,
- ------------------------------------- 1997
A. J. SCHWARTZ
*By: /s/ Robert C. Murdock
- -------------------------------------
ROBERT C. MURDOCK
Attorney-in-fact
</TABLE>
II-5
<PAGE>
EXHIBIT 4.1
INCORPORATED UNDER THE
LAWS OF THE STATE OF DELAWARE
NUMBER SHARES
C
COMMON STOCK PETROGLYPH ENERGY, INC. CUSIP __________
THIS CERTIFIES THAT ______________________________________ is the owner of
______________________________ FULLY PAID AND NON-ASSESSABLE SHARES OF COMMON
STOCK OF THE PAR VALUE OF $.01 PER SHARE, OF
PETROGLYPH ENERGY, INC.
transferable on the books of the Corporation by the holder hereof in person or
by duly authorized attorney, upon surrender of this certificate properly
endorsed.
WITNESS the signatures of the Corporation's duly authorized officers.
Dated:
COUNTERSIGNED AND REGISTERED:
AMERICAN STOCK TRANSFER & TRUST
COMPANY
PRESIDENT TRANSFER AGENT AND REGISTRAR
BY
SECRETARY AUTHORIZED SIGNATURE
<PAGE>
PETROGLYPH ENERGY, INC.
THE CORPORATION WILL FURNISH WITHOUT CHARGE TO EACH STOCKHOLDER WHO SO
REQUESTS THE POWERS, DESIGNATIONS, PREFERENCES AND RELATIVE, PARTICIPATING,
OPTIONAL OR OTHER SPECIAL RIGHTS OF EACH CLASS OF STOCK OR SERIES THEREOF OF THE
CORPORATION, AND THE QUALIFICATIONS, LIMITATIONS OR RESTRICTIONS OF SUCH
PREFERENCES AND/OR RIGHTS.
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
<TABLE>
<S> <C>
TEN COM -- as tenants in common UNIF GIFT MIN ACT -- ______ Custodian _______
TEN ENT -- as tenants by the entireties (Cust) (Minor)
JT TEN -- as joint tenants with right Under Uniform Gifts to Minors
of survivorship and not as Act ________________________
tenants in common (State)
</TABLE>
Additional abbreviations may also be used though not on the above list.
For Value Received, ______________________________ hereby sell, assign and
transfer unto
PLEASE INSERT SOCIAL SECURITY NUMBER OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
________________________________________________________________________________
________________________________________________________________________________
Please print or typewrite name and address, including postal zip code, of
assignee
________________________________________________________________________________
_________________________________________________________________________Shares
of the Stock represented by the within Certificate, and do hereby irrevocably
constitute and appoint
________________________________________________________________________________
________________________________________________________________________________
Attorney to transfer the said stock on the books of the within-named
Corporation, with full power of substitution in the premises.
Dated ______________
NOTICE: THE SIGNATURE(S) TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME(S) AS
WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR WITHOUT ALTERATION
OR ENLARGEMENT OR ANY CHANGE WHATEVER.
X_______________________________________________
X_______________________________________________
THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION
(BANKS, STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH
MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM), PURSUANT TO
S.E.C. RULE 17Ad-15.
SIGNATURE(S) GUARANTEED BY:
<PAGE>
EXHIBIT 5
[LETTERHEAD OF THOMPSON & KNIGHT, P.C.]
August 22, 1997
Petroglyph Energy, Inc.
6209 North Highway 61
Hutchinson, Kansas 67502
Dear Sirs and Madams:
We have acted as counsel for Petroglyph Energy, Inc., a Delaware
corporation (the "Company"), in connection with the preparation of the Company's
Registration Statement on Form S-1, as amended (the "Registration Statement"),
filed with the Securities and Exchange Commission under the Securities Act of
1933, as amended, relating to the proposed offering of 2,333,333 shares (the
"Shares") of the Company's common stock, par value $.01 per share (the "Common
Stock"), together with 350,000 additional shares of Common Stock (the
"Additional Shares") subject to the underwriters' over-allotment option as
described in the Registration Statement.
We understand that the Shares and any Additional Shares are to be sold
pursuant to the terms of an Underwriting Agreement (the "Underwriting
Agreement") in substantially the form filed as an exhibit to the Registration
Statement.
In connection with the foregoing, we have examined the originals or copies,
certified or otherwise authenticated to our satisfaction, of the Registration
Statement and such corporate records of the Company, certificates of public
officials and of officers of the Company, and other agreements, instruments and
documents as we have deemed necessary as a basis for the opinions hereinafter
expressed. Where facts material to the opinions hereinafter expressed were not
independently established by us, we have relied upon the statements of officers
of the Company, where we deemed such reliance appropriate under the
circumstances.
Based upon the foregoing and in reliance thereon, and subject to the
assumptions and qualifications hereinafter specified, it is our opinion that:
1. The Company is a corporation duly incorporated and validly existing
in good standing under the laws of the State of Delaware.
2. Upon (a) the taking of action by the Board of Directors of the
Company (or a duly constituted committee thereof) to determine the price at
which the Shares and Additional Shares are to be sold under the Underwriting
Agreement and (b) the sale of the Shares and the Additional Shares in accordance
with the terms of the Underwriting Agreement for the price so determined, the
Shares and any Additional Shares sold by the Company will be duly authorized by
all necessary corporate action on the part of the Company, validly issued, fully
paid and nonassessable.
<PAGE>
Petroglyph Energy, Inc.
August 22, 1997
Page 2
We hereby consent to the filing of this opinion as Exhibit 5 to the
Registration Statement and to the reference to us under the caption "Legal
Matters" in the prospectus forming a part of the Registration Statement. In
giving this consent, we do not thereby admit that we are within the category of
persons whose consent is required under Section 7 of the Securities Act or the
rules or regulations of the Commission thereunder.
Respectfully submitted,
THOMPSON & KNIGHT,
A Professional Corporation
By: /s/ Michael L. Bengtson
---------------------------------------------
Michael L. Bengtson, Attorney
<PAGE>
EXHIBIT 10.7
AMENDED AND RESTATED LOAN AGREEMENT
AMONG
PGP II, L.P.
and
PETROGLYPH GAS PARTNERS, L.P.,
as Borrowers,
PETROGLYPH ENERGY, INC.,
as a Guarantor
and
THE CHASE MANHATTAN BANK
as Lender
Dated as of
September 15, 1997
<PAGE>
TABLE OF CONTENTS
SECTION 1. CERTAIN DEFINITIONS AND TERMS............................. 5
SECTION 2. REVOLVING CREDIT FACILITY AND TERM LOAN FACILITY.......... 17
2.1 Revolving Credit Commitment............................... 17
2.2 Borrowing Procedure; Disbursement......................... 17
2.3 Tranche A Conversion and Tranche B Termination............ 20
2.4 Notes..................................................... 20
2.5 Manner of Payments........................................ 20
2.6 Interest.................................................. 20
2.7 Computation of Interest................................... 20
2.8 Default Rate.............................................. 21
2.9 Principal Payments........................................ 21
2.10 Mandatory Payment of Loans................................ 21
2.11 Voluntary Designation of Borrowing Base; Mandatory
Cancellation of Revolving Credit Facility............... 22
2.12 Voluntary Principal Prepayments........................... 22
2.13 Order of Application...................................... 22
2.14 Use of Proceeds........................................... 23
2.15 Capital Adequacy.......................................... 23
2.16 Commitment Fee............................................ 23
2.17 Clawback Fee.............................................. 24
2.18 Joint and Several Liability; Rights of Contribution....... 24
2.19 Closing Fee............................................... 25
SECTION 3. CONDITIONS PRECEDENT...................................... 25
3.1 Initial Loans............................................. 25
3.2 Each Loan................................................. 25
3.3 Waiver of Conditions...................................... 25
SECTION 4. REPRESENTATIONS AND WARRANTIES............................ 26
4.1 Organization and Powers................................... 26
4.2 Validity and Binding Nature............................... 26
4.3 Compliance with Laws and Documents........................ 26
4.4 Prior Names............................................... 26
4.5 Relationship with Lender.................................. 26
4.6 Financial Statements and Reserve Reports.................. 26
4.7 Labor Matters............................................. 27
4.8 Litigation................................................ 27
4.9 Taxes and Claims.......................................... 27
4.10 Government Regulation..................................... 27
i
<PAGE>
4.11 Employee Benefit Plans.................................... 27
4.12 Purpose of Loan........................................... 27
4.13 Properties; Liens; Debt................................... 27
4.14 Material Agreements....................................... 27
4.15 No Consents............................................... 28
4.16 Environmental Laws; Hazardous Materials................... 28
4.17 Intentionally deleted..................................... 29
4.18 Capitalization and Control................................ 29
4.19 General................................................... 29
4.20 Mortgaged Properties Same as Properties Engineered........ 29
4.21 Operation of Business.................................... 29
4.22 Operator of Working Interest.............................. 29
4.23 Exchange Agreement........................................ 29
SECTION 5. COVENANTS................................................. 30
5.1 Affirmative Covenants..................................... 30
5.2 Negative Covenants........................................ 33
5.3 Reporting Requirements.................................... 36
SECTION 6. EVENTS OF DEFAULT......................................... 37
6.1 Payment of Obligation..................................... 37
6.2 Certain Covenants......................................... 37
6.3 Other Covenants........................................... 38
6.4 Loan Documents and Security Documents..................... 38
6.5 Bankruptcy................................................ 38
6.6 Attachment................................................ 38
6.7 Payment of Judgments...................................... 38
6.8 Default Under Other Debt.................................. 38
6.9 Material Adverse Effect................................... 38
6.10 Impairment of Collateral or Ability to Pay................ 39
6.11 Misrepresentation......................................... 39
6.12 Change of Control......................................... 39
SECTION 7. RIGHTS AND REMEDIES....................................... 39
7.1 Remedies.................................................. 39
7.2 Performance by Lender..................................... 39
7.3 Delegation of Duties and Rights........................... 39
7.4 Expenditures by Lender.................................... 40
ii
<PAGE>
SECTION 8. MISCELLANEOUS................................................... 40
8.1 Notices................................................... 40
8.2 Amendments, Etc........................................... 40
8.3 No Waiver; Remedies Cumulative............................ 40
8.4 Successors and Assigns.................................... 40
8.5 Number and Gender of Words; References.................... 40
8.6 Headings.................................................. 41
8.7 Exhibits and Schedules.................................... 41
8.8 Form and Number of Documents.............................. 41
8.9 Conflicts................................................. 41
8.10 Waivers by Parent and the Borrowers....................... 41
8.11 Changes in the Accounting Standard........................ 41
8.12 Exceptions to Covenants................................... 42
8.13 Survival.................................................. 42
8.14 GOVERNING LAW............................................. 42
8.15 VENUE; SERVICE OF PROCESS................................. 42
8.16 WAIVER OF JURY TRIAL PUNITIVE DAMAGES, ETC................ 43
8.17 Maximum Interest Rate..................................... 44
8.18 Severability.............................................. 44
8.19 Lender Not in Control..................................... 44
8.20 Entirety and Amendments................................... 44
8.21 Multiple Counterparts..................................... 44
8.22 Petroleum Terms........................................... 45
8.23 Amendment and Restatement of Original Loan Agreement...... 45
iii
<PAGE>
Schedules
3.1 - Closing Documents and Conditions
4.4 - Prior Names
4.8 - Litigation
4.11 - Employee Benefit Plans
4.13 - Permitted Liens
4.15 - Consents
4.16 - Environmental Laws
4.18 - Ownership
5.2(a) - Permitted Debt
8.1 - Notices
Exhibits
A Advance Request
B Financial Report Certificate
C Oil and Gas Leases
D Assignment and Amendment of Oil and Gas Mortgages
E PGP II Oil and Gas Mortgages
F PGP Oil and Gas Mortgages
G Parent Guaranty
H Spanish Peaks Pledge Agreement
I Form of Note A
J Form of Note B
K Well Certificate
L Legal Opinion of Counsel
M Legal Opinion of Local Counsel
N Solvency Certificate
O Warrant Agreement
P Warrant Certificate
Q Registration Rights Agreement
iv
<PAGE>
AMENDED AND RESTATED LOAN AGREEMENT
-----------------------------------
THIS AMENDED AND RESTATED LOAN AGREEMENT is entered into as of September
15, 1997, by and among PGP II, L.P., a Delaware limited partnership ("PGP II"),
------
PETROGLYPH GAS PARTNERS, L.P., a Delaware limited partnership ("PGP"),
---
PETROGLYPH ENERGY, INC., a Delaware corporation ("Parent") and THE CHASE
------
MANHATTAN BANK, a New York state banking corporation ("Lender").
------
W I T N E S S E T H:
WHEREAS, PGP II and Texas Commerce Bank National Association ("TCB")
---
entered into that certain Loan Agreement, dated May 25, 1995, as amended by that
certain Letter Amendment dated August 29, 1995, by and between TCB and PGP II,
as further amended by that certain Letter Amendment dated September 18, 1995, by
and between TCB and PGP II, as further amended by that certain Letter Amendment
dated March 15, 1996, by and between TCB and PGP II, and as further amended by
that certain Fourth Amendment to Loan Agreement dated as of July 1, 1996, by and
between TCB and PGP II (as amended, the "Original Loan Agreement"); and
-----------------------
WHEREAS, TCB, Lender and PGP II entered into that certain Assignment dated
of even date herewith, whereby TCB assigned to Lender all of TCB's rights and
obligations under the Original Loan Agreement; and
WHEREAS, Parent, Petroglyph Energy, Inc., a Kansas corporation ("PEI-
---
Kansas") and certain other Persons are parties to the Exchange Agreement (as
herein defined) pursuant to which certain partnership interests in PGP and PGP
II and certain capital stock of PEI-Kansas will be exchanged for shares of
common stock of Parent and PGP, PGP II and PEI-Kansas will become direct or
indirect wholly owned Subsidiaries (as herein defined) of Parent; and
WHEREAS, PGP II, PGP, Parent and Lender desire to amend and restate the
Original Loan Agreement as hereinafter set forth in order to, among other
things, include PGP as a borrower thereunder, include Parent as a guarantor
thereunder, increase the existing revolving credit facility to $20,000,000.00
and provide an additional revolving credit facility from Lender to PGP and PGP
II in the amount of $2,500,000.00.
NOW, THEREFORE, in consideration of the premises herein contained and other
good and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties, intending to be legally bound, agree as follows:
SECTION 1. CERTAIN DEFINITIONS AND TERMS. used herein, the following terms
- ---------- -----------------------------
shall have the meanings herein indicated:
Advance Request has the meaning set forth in SECTION 2.2 and shall be
--------------- -----------
substantially in the form of EXHIBIT A.
---------
5
<PAGE>
Affiliate means any Person who (a) would be an "affiliate" of either
---------
Borrower within the meaning of the regulations promulgated pursuant to the
Securities Act of 1933, as such regulations and Act are amended and in effect on
the date in question, if such Person were subject to such Act and regulations,
or (b) owns any legal or beneficial interest in such Person (except holders of
publicly traded shares of Parent), is a director or officer of any Credit Party,
or is a relative of any of the Persons described in this clause (b).
----------
Agreement means this Amended and Restated Loan Agreement, including the
---------
Schedules and Exhibits hereto, as the same may be in effect from time to time
after giving effect to any amendments, supplements, increases, extensions, and
renewals hereof.
Antelope Creek Gathering Assets means the natural gas gathering system
-------------------------------
owned by PGP on the date hereof located in the Uinta Basin of Utah, including,
without limitation, (a) all easements, rights of way, licenses, permits, fee
interests, leases, and other rights in and to, or the rights to use, real
property for the purposes of construction, maintenance or operation of such
gathering systems (b) all pipe, pipelines, compressors, meters, valves,
separators, interconnects, and other machinery, equipment, fixtures or fixed
assets of any nature comprising a part of or used in connection with the
ownership or operation of such gathering system, and (c) all contracts
(including, without limitation, gathering agreements, processing agreements and
similar agreements) licences, permits entered into or held by PGP in connection
with the ownership or operation of such gathering system. The Antelope Creek
Gathering Assets are more particularly described in the PGP Oil and Gas
Mortgage.
Apex Borrowing Base means, on any date of determination, the highest
-------------------
Borrowing Base which has been in effect under this Agreement at any time from
and after the Closing Date to such date without giving effect to any increase in
the Borrowing Base which is effective on such date.
Borrowers means PGP II and PGP, and Borrower means either of such Person.
---------
Borrowing Base means, as of the date of determination thereof, an amount
--------------
equal to the difference of (a) an amount determined in accordance with the terms
and conditions of SECTION 2.2(a), minus (b) the sum of (i) the aggregate amount
------------- -----
of all proceeds from the sale of any Proven Reserves in accordance with the
terms and conditions of SECTION 5.2(j)(ii), plus (ii) $300,000. During the
----------------- ----
period from the Closing Date to the first Determination Date, the Borrowing Base
shall be $7,500,000.00. The Borrowing Base shall periodically be redetermined
in accordance with the terms and conditions set forth in SECTION 2.2 and 2.11.
----------- ----
Borrowing Base Deficiency means, on any day, the excess, if any, of the
-------------------------
outstanding principal balance of the Tranche A Revolving Credit Loans or the
Term Loan on such day over the Borrowing Base in effect on such day.
Business Day means any day excluding Saturday and Sunday and excluding any
------------
other day on which Lender is required or authorized to close.
6
<PAGE>
Change of Control means the occurrence of any of the following:
-----------------
(a) before the Exchange (i) PGP shall own less than ninety-nine percent
(99%) of PGP II, as the sole limited partner, (ii) NGP shall own less than
fifty-one percent (51%) of the limited partnership interests of PGP, (iii) PEI-
Kansas shall own less than one percent (1%) of each Borrower, as the sole
general partner of such Borrower, (iv) the Management Group shall own, on a
combined basis, less than fifty-one percent (51%) of the issued and outstanding
capital stock of PEI-Kansas of every class, or (v) NGP shall own less than
fifty-one percent (51%) of the outstanding capital stock, if any, of every class
with ordinary voting rights of Parent;
(b) after consummation of the Exchange but prior to the completion of an
initial public offering of Parent's common stock which results in Net Proceeds
to Parent of at least $15,000,000, the Management Group and NGP shall own, on a
combined basis, less than fifty-one percent (51%) of the issued and outstanding
capital stock of Parent of every class with ordinary voting rights; or
(c) after the consummation of the Exchange, any group (other than the
Management Group and NGP) becomes the beneficial owner, directly or indirectly,
of voting stock of Parent which has aggregate voting power that at the time in
question both (i) exceeds the aggregate voting power of all stock of Parent then
owned by the Management Group and NGP on a combined basis, and (ii) exceeds
thirty percent (30%) of the total voting power of all then outstanding voting
stock of Parent. As used in this definition, "person" has the meaning applied
to such term in Sections 13(d) and 14(d)(2) of the Securities Exchange Act of
1934, as amended (the "Act"), "group" of persons has the meaning applied to such
term in Rule 13d-5 under the Act, and "beneficial owners" has the meaning
applied to such term in Rule 13d-3 under the Act, in each case as the Act and
the aforementioned Rules thereunder are in effect.
Closing Date means the date hereof.
------------
Code means the Internal Revenue Code of 1986, as amended, and all
----
regulations promulgated and rulings issued thereunder.
Collateral shall mean all present and future tangible or intangible
----------
property and rights of any kind in which the Lender is granted a Lien pursuant
to the Security Documents (whether or not perfected).
Credit Parties means, collectively, Borrowers, Parent, PEI-Kansas, POC and
--------------
each of their Subsidiaries, and Credit Party means any one of the foregoing.
------------
Consolidated Subsidiary or Consolidated Subsidiaries means, for any Person,
----------------------------------------------------
any Subsidiary or other entity the accounts of which would be consolidated with
those of such Person in its consolidated Financial Statements prepared in
accordance with GAAP.
Current Financials means (a) the consolidated and consolidating balance
------------------
sheet of Parent and its Consolidated Subsidiaries as of June 30, 1997 and the
related consolidated and consolidating statements of income (loss) and cash
flow, copies of which have been provided by Borrowers to Lender.
7
<PAGE>
Current Maturities of Long Term Debt means as of any applicable date of
------------------------------------
determination, that portion of Long Term Debt that should be classified as
current in accordance with GAAP.
Dated Assets has the meaning set forth in SECTION 2.18.
------------ ------------
Dated Liabilities has the meaning set forth in SECTION 2.18.
----------------- ------------
Debt of any Person includes, without duplication, (i) all obligations,
----
contingent or otherwise, which in accordance with GAAP should be classified upon
such Person's balance sheet as liabilities, (ii) all obligations of such Person
for borrowed money, (iii) all obligations of such Person evidenced by bonds,
debentures, notes and other similar instruments, (iv) all obligations of such
Person upon which interest charges are customarily paid, (v) all obligations
created or arising under any conditional sale or other title retention agreement
with respect to property acquired by such Person (even though the rights and
remedies of the seller or lender under such agreement in the event of default
are limited to repossession or sale of such property), (vi) all obligations of
such Person issued or assumed as the deferred purchase price of property or
services (other than accounts payable to suppliers incurred in the ordinary
course of business and paid, in each case, within forty-five (45) days of the
date when each such account is payable), (vii) all obligations under leases
which shall have been or should be, in accordance with GAAP, recorded as
capitalized leases in respect of which such Person is liable as lessee, (viii)
all indebtedness, liabilities and obligations of such Person in connection with
any Hydrocarbon Hedge, (ix) all reimbursement obligations, contingent or
otherwise, in respect of letters of credit, surety and appeal bonds and
performance bonds or similar instruments assuring any other Person of the
performance of any act or acts or the payment of any obligation, and (x) all
Debt of the types referred to in clauses (i) through (ix) above directly or
indirectly guaranteed by such Person.
Default means any event which with the passage of time or the giving of
-------
notice or both will be an Event of Default.
Default Rate means a rate of interest per annum equal to the lesser of (i)
------------
the Maximum Rate, or (ii) three percent (3.0%) in excess of the Floating Base
Rate (as defined in the Note).
Determination Date has the meaning set forth in SECTION 2.2(A).
------------------ --------------
Environmental Laws means any and all laws, statutes, ordinances, rules,
------------------
regulations, orders, or determinations of any Governmental Authority pertaining
to health or the environment in effect from time to time in any and all
jurisdictions in which either Borrower is conducting or at any time has
conducted business, or where any property of either Borrower is located, or
where any hazardous substances generated by or disposed of by either Borrower
are located, including, without limitation, the Clean Air Act, as amended, the
Comprehensive Environmental, Response, Compensation, and Liability Act of 1980
("CERCLA"), as amended, the Federal Water Pollution Control Act, as amended, the
------
Occupational Safety and Health Act of 1970, as amended, the Resource
Conversation and Recovery Act of 1976 ("RCRA"), as amended, the Safe Drinking
----
Water Act, as amended, the Toxic Substances Control Act, as amended, the
Superfund Amendments and Reauthorization Act of 1986, as amended, the National
Environmental Policy Act, and other environmental, conservation or protection
laws. The terms "hazardous substance," "release" and
8
<PAGE>
"threatened release" have the meanings specified in CERCLA, and the terms "solid
waste" and "disposal" (or "disposed") have the meanings specified in RCRA;
provided, however, that in the event either CERCLA or RCRA is amended so as to
- -------- -------
broaden the meaning of any term defined thereby, such broader meaning shall
apply subsequent to the effective date of such amendment with respect to all
provisions of this Agreement, and provided further that, to the extent the laws
of the state in which any property of either Borrower is located establish a
meaning for "hazardous substance," "release," "solid waste" or "disposal" which
is broader than that specified in either CERCLA or RCRA, such broader meaning
shall apply.
ERISA means the Employee Retirement Income Security Act of 1974, as
-----
amended, and the regulations promulgated and rulings issued thereunder.
ERISA Affiliate means any Person who is a member of either Borrower's
---------------
controlled group, or under common control with either Borrower, within the
meaning of Section 414 of the Code and the regulations promulgated and rulings
issued thereunder.
ERISA Event shall mean, with respect to a Borrower and an ERISA Affiliate
-----------
(a) a "reportable event" as defined in section 4043 of ERISA (other than a
reportable event not subject to the provisions for 30-day notice to the PBGC
under regulations issued under section 4043 of ERISA), (b) the withdrawal of a
Borrower or an ERISA Affiliate from a Plan subject to Title IV of ERISA during a
plan year in which it was a "substantial employer" as defined in section
4001(a)(2) of ERISA, (c) the filing of a notice of intent to terminate under
section 4041(c) of ERISA, (d) the institution of proceeding to terminate a Plan
by the PBGC, (e) the failure to make required contributions which could result
in the imposition of a lien under section 412 of the Code or section 302 of
ERISA, or (f) any other event or condition which might reasonably be expected to
constitute grounds under section 4042 of ERISA for the termination of, or the
appointment of a trustee to administer, any Plan or the imposition of any
liability under Title IV of ERISA other than PBGC premiums due but not
delinquent under section 4007 of ERISA.
Event of Default shall have the meaning set forth in SECTION 6.
---------------- ---------
Exchange means the acquisition by Parent pursuant to the Exchange Agreement
--------
of all of the outstanding limited partnership interests of PGP and PGP II and
all of the stock of PEI-Kansas in exchange for common stock of Parent.
Exchange Agreement means that certain Exchange Agreement dated August 22,
------------------
1997 among Parent, PEI-Kansas, Robert C. Murdock, Robert A. Christensen, S.
Kennard Smith, Natural Gas Partners, L.P., Natural Gas Partners II, L.P.,
Natural Gas Partners III, L.P., R. Gamble Baldwin, Albin Income Trust, John S.
Foster, Kenneth A. Hersh and B. Bruce Selkirk.
Existing Burdens means royalty interests, overriding royalty interests, net
----------------
profits interests, production payments or other payments out of or with respect
to the production of Hydrocarbons, and which are (a) in existence on the Closing
Date and have been taken into account in the ownership interests of each
Borrower in and to the Mortgaged Property as set forth in Exhibit A to the Oil
and Gas Mortgage executed by each Borrower, (b) reserved by the grantor in an
assignment of an Oil and Gas Lease to a Borrower after the Closing Date, or
reserved by a lessor in any Oil and
9
<PAGE>
Gas Lease entered into with a Borrower after the Closing Date, (c) assigned or
transferred by a Borrower in the ordinary course of business after the Closing
Date, with respect to Mineral Interests that are not Mortgaged Property, or (d)
permitted by the Lender in writing after the Closing Date.
Final Termination Date means September 15, 2002.
----------------------
Financial Report Certificate means a certificate substantially in the form
----------------------------
of EXHIBIT B and containing such other certifications, statements, calculations,
---------
explanations, and conclusions as Lender may request concerning compliance with
the Loan Documents.
Financial Statements means balance sheets, profit and loss statements,
--------------------
statements of cash flows prepared in comparative form with respect to the
corresponding period of the preceding fiscal year and prepared in accordance
with GAAP.
Floating Base Rate has the meaning given to such term in the Notes.
------------------
GAAP means generally accepted accounting principles, applied on a
----
consistent basis, set forth in Opinions of the Accounting Principles Board of
the American Institute of Certified Public Accountants and/or in statements of
the Financial Accounting Standards Board and/or their successors which are
applicable in the circumstances as of the date in question; and the requirement
that such principles be applied on a consistent basis means that the accounting
principles observed in a current period are comparable in all material respects
to those applied in a preceding period.
Gas means natural gas, coal seam gas, gas well gas and casinghead gas, and
---
the residue therefrom.
Governmental Authority means any nation or government, any state, county,
----------------------
or city and any political subdivision of any of the foregoing and any entity
exercising executive, legislative, judicial, regulatory or administrative
functions of or pertaining to government.
Hazardous Material means any hazardous substance, solid waste, and any
------------------
other hazardous, toxic or dangerous waste, substance or material defined as such
in or for purposes of any Environmental Law or any other similar Law.
Hydrocarbon Hedge means a swap, collar, floor, cap, option or other
-----------------
contract (including sales contracts with known prices) which is intended to
reduce or eliminate the risk of fluctuations in the price of Hydrocarbons.
Hydrocarbons means oil, Gas, drop gasoline, natural gasoline, condensate,
------------
distillate and all other liquid and gaseous hydrocarbons produced or to be
produced in conjunction therewith from a wellbore and all products, by-products
and other substances derived therefrom or from the processing thereof, and all
other minerals and substances produced in conjunction with such substances,
including, but not limited to, sulfur, geothermal steam, water, carbon dioxide,
helium and any and all minerals, ores or substances of value and the products
and proceeds therefrom.
10
<PAGE>
Initial Reserve Report means the reserve report of the Mineral Interests
----------------------
owned by the Borrowers prepared as of June 30, 1997 by Lee Keeling and
Associates, Inc.
Law means all applicable statutes, laws, ordinances, regulations, orders,
---
writs, injunctions or decrees of any Governmental Authority.
Lender has the meaning set forth in the preamble to this Agreement.
------
Lien means any mortgage, pledge, security interest, encumbrance, lien,
----
charge or deposit arrangement or other arrangement having the practical effect
of the foregoing and shall include the interest of a vendor or lessor under any
conditional sale agreement, capitalized lease or other title retention
agreement.
Litigation means any proceeding, claim, lawsuit or investigation conducted
----------
or threatened by or before any Governmental Authority.
Loan Documents means (a) this Agreement, (b) the Warrant Agreement, (c) the
--------------
Warrant Certificate, (d) the Registration Rights Agreement, (e) the Security
Documents, (f) Note A, (g) Note B, (h) the Parent Guaranty, (i) any and all
other notes, mortgages, deeds of trust, security agreements, pledge agreements,
financing statements, guaranties and other agreements, documents and instruments
ever delivered pursuant to or in connection with this Agreement or the Original
Loan Agreement, and (j) all future renewals, extensions, or restatements of, or
amendments, modifications or supplements to, all or any part of the foregoing.
Loans means the Revolving Credit Loans and the Term Loan.
-----
Long Term Debt means, as of any applicable date of determination, all Debt
--------------
of any Credit Party (other than the outstanding principal balance of all
Revolving Credit Loans) which should be classified as "funded indebtedness" or
"long-term indebtedness" on Financial Statements of the Credit Parties prepared
as of such date in accordance with GAAP.
Management Group means Robert C. Murdock, S. Kennard Smith and Robert A.
----------------
Christensen.
Material Adverse Effect means any set of circumstances or events which
-----------------------
would reasonably be expected to (a) have any material adverse effect upon the
validity or enforceability of any Loan Document, (b) be material and adverse to
the financial condition or business operations of any Credit Party, as
represented to Lender in the Current Financials, or to the prospects of any
Credit Party, (c) materially impair any Credit Party's ability to fulfill its
obligations under the terms and conditions of the Loan Documents, or (d) cause a
Default or an Event of Default.
Material Contract means, as to any Person, any supply, purchase, service,
-----------------
employment, tax, indemnity, operating, pooling order, unitization,
communitization, partnership, joint venture or other agreement or order of such
Person or any of its Subsidiaries or by which such Person or any of its
Subsidiaries or any of their respective properties are otherwise bound, which is
material to the
11
<PAGE>
business, operations or Properties of such Person, as the same shall be amended,
modified and supplemented and in effect from time to time.
Maximum Borrowing Base means, as of the date of determination, an amount
----------------------
determined by Lender in accordance with the terms of SECTION 2.2(d) minus the
--------------
aggregate amount of all proceeds from the sale of Proven Reserves in accordance
with the terms and conditions of SECTION 5.2(j)(ii).
------------------
Maximum Rate means the maximum rate or amount of interest which Lender is
------------
allowed to contract for, charge, take, reserve or receive under applicable law.
Mineral Interests means all present and future rights, remedies, powers,
-----------------
privileges, estates, titles and interests in and to (a) all Oil and Gas Leases
and all mineral interests, royalty and overriding royalty interests, production
payment and net profits interests (and similar interests in oil or gas in place,
or as produced, or the proceeds or value thereof), mineral fee interests and
rights therein, including without limitation, any reversionary or carried
interests relating thereto, (b) all rights, titles and interests created by or
arising under the terms of all present and future unitization, communitization,
and pooling arrangements (and all properties covered and units created thereby)
whether arising by contract or operation of law which now or hereafter include
all or any part of the foregoing, (c) all rights, remedies, powers and
privileges with respect to all of the foregoing, and (d) all lands now or
hereafter subject to any of the foregoing.
Mortgaged Properties means all present and future Mineral Interests of any
--------------------
nature whatsoever, whether as record or beneficial owner, that either Borrower
may now have or hereafter acquire in and to those Oil and Gas Leases and other
assets listed on EXHIBIT C attached hereto, and all other properties in which
---------
either Borrower has previously granted to, or hereafter grants or purports to
grant to the Lender, a mortgage or lien, including all real and personal
property mortgaged to the Lender pursuant to and described in each Oil and Gas
Mortgage, and further including, the Antelope Creek Gathering Assets; provided,
that "Mortgaged Properties" shall not include any Oil and Gas Leases and other
assets which have been expressly released from the Oil and Gas Mortgages
pursuant to a written instrument executed by Lender.
Multiemployer Plan means a multiemployer plan as defined in Sections 3(37)
------------------
or 4001(a) (3) of ERISA or Section 414 of the Code.
Net Proceeds means, in respect of any issuance by any Credit Party of debt
------------
or equity securities, the gross proceeds from the issuance and sale of such debt
or equity securities less underwriters discounts and commissions, commitment and
closing fees, legal fees and expenses, and other out of pocket costs and
expenses actually incurred and paid in cash by a Credit Party in connection with
the closing and funding of such issue.
NGP means collectively, Natural Gas Partners, L.P., Natural Gas Partners
---
II, L.P. and Natural Gas Partners III, L.P.
Note A has the meaning set forth in SECTION 2.4.
------ -----------
12
<PAGE>
Note B has the meaning set forth in SECTION 2.4.
------ -----------
Notes has the meaning set forth in SECTION 2.4.
----- -----------
Obligation has the following meaning (i) the obligation of each Borrower
----------
for the due and punctual payment of principal of and interest on the Note when
due, whether at maturity, by acceleration, by notice of voluntary prepayment or
otherwise, (ii) all other obligations and all out-of-pocket expenses and
indemnities now or hereafter existing of any Credit Party to the Lender under
this Agreement or any other Loan Document, and (iii) all out-of-pocket costs and
expenses, now or hereafter existing, that may be incurred by the Lender in
connection with the administration and enforcement of the Loan Documents or the
realization on the security provided for by the Loan Documents.
Oil and Gas Leases means oil, gas, casinghead gas or other mineral (or any
------------------
combination thereof) leases, and subleases and assignments thereof and/or of
operating rights and all instruments executed in amendment, correction,
modification, confirmation, renewal, extension, ratification and/or sublease
thereof or thereunder under and pursuant to which either Borrower has or obtains
the right to enter upon lands and explore for, drill, develop and exploit such
lands for the production of Hydrocarbons.
Oil and Gas Mortgage means, collectively, (i) (A) the Mortgage, Assignment
--------------------
of Proceeds of Production, Security Agreement and Financing Statement dated May
25, 1995, executed and delivered by PGP II originally in favor of Texas Commerce
Bank National Association and which has been assigned to the Lender, as amended
by an Assignment and Amendment to Oil and Gas Mortgage in the form of EXHIBIT D
---------
hereto dated on or about the date hereof, to be executed by PGP II to the Lender
as the same may be further amended, modified, supplemented and in effect from
time to time, and (B) the Mortgage, Assignment of Proceeds of Production,
Security Agreement and Financing Statement substantially in the form of EXHIBIT
-------
E hereto dated on or about the date hereof, to be executed by PGP II to the
- -
Lender as the same may be amended, modified, supplemented and in effect from
time to time (the mortgages described in clauses (A) and (B) proceeding are
referred to herein collectively as the PGP II Oil and Gas Mortgage"), and (ii)
---------------------------
the Trust Deed, Assignment of Proceeds of Production, Security Agreement and
Financing Statement substantially in the form of EXHIBIT F hereto, dated on or
---------
about the date hereof, to be executed and delivered by PGP to the Lender, as the
same may be amended, modified, supplemented and in effect from time to time (the
"PGP Oil and Gas Mortgage").
------------------------
Original Closing Date means May 25, 1995.
---------------------
Original Loan Agreement has the meaning set forth in the recitals to this
-----------------------
Agreement.
Parent means Petroglyph Energy, Inc., a Delaware corporation, which after
------
giving effect to the Exchange, will own, directly or indirectly, (through one or
more Subsidiaries) all of the issued and outstanding partnership interests of
each Borrower.
13
<PAGE>
Parent Guaranty means that certain Guaranty of Parent to be executed by
---------------
Parent and dated as or about the date hereof, in the form of EXHIBIT G hereto,
---------
by which Parent shall guarantee the Obligation.
Partnership Rollup means any of the following in a single transaction or
------------------
series of substantially simultaneous transactions, (a) a merger of the Borrowers
with and into Parent with the Parent being the surviving corporation, (b) the
acquisition by Parent of all of the outstanding partnership interests of the
Borrowers, or (c) the acquisition by Parent of substantially all of the assets
of each Borrower.
PEI-Kansas means Petroglyph Energy, Inc., a Kansas corporation, and the
----------
general partner of Borrowers.
Permitted Liens shall mean the Liens permitted by Lender to be listed on
---------------
SCHEDULE 4.13.
- -------------
Permitted Purchase Money Debt means Debt (i) in an aggregate amount
-----------------------------
outstanding at any time not to exceed $300,000, (ii) incurred to finance the
purchase of machinery, equipment, vehicles or other capital assets (but
expressly excluding Mineral Interests), (iii) in a principal amount not
exceeding one hundred percent (100%) of the purchase price of the assets
purchased with the proceeds of such Debt, and (iv) incurred substantially
simultaneously with the purchase of such asset.
Permitted Purchase Money Liens means Liens encumbering machinery,
------------------------------
equipment, vehicles or other capital assets (but expressly excluding Mineral
Interests) securing Permitted Purchase Money Debt, the proceeds of which are
used to finance the purchase of such assets; provided, that, such Liens shall
not attach to or encumber any other assets, and such Liens shall be granted
substantially simultaneously with the purchase of such assets.
Person means any individual, sole proprietorship, partnership, joint
------
venture, trust, unincorporated organization, association, corporation, limited
liability company, institution, entity, party, or Governmental Authority.
PGP has the meaning set forth in the preamble of this Agreement.
---
PGP II has the meaning set forth in the preamble of this Agreement.
------
Plan means any employee benefit plan within the meaning of Section 3(3) of
----
ERISA and any other program, policy and agreement providing bonus or other
incentive compensation, deferred compensation, change-in-control, leave of
absence, relocation, salary continuation, severance, sickness or other
disability, stock purchase, stock option or award, vacation, or holiday
benefits, which covers any employee or former employee of the Borrowers or any
ERISA Affiliate or any beneficiary or dependent of such employee or former
employee, whether or not written, and whether covering one person or more than
one person, and which are sponsored or maintained by a Borrower or any ERISA
Affiliate or to which the Borrower or any ERISA Affiliate contributes or is
obligated to contribute. Without limiting the generality of the foregoing, the
term "Plan" includes any employee welfare benefit plan within the meaning of
14
<PAGE>
Section 3(1) of ERISA and any employee pension benefit plan within the meaning
of Section 3(2) of ERISA.
POC means Petroglyph Operating Company, Inc., a Kansas corporation.
---
Proven Reserves means, at any particular time, the estimated quantities of
---------------
Hydrocarbons which geological and engineering data demonstrate with reasonable
certainty to be recoverable in future years from known reservoirs attributable
to Mineral Interests included or to be included in the Reserve Report under
existing economic and operating conditions. The prices used may include
consideration of changes in existing prices provided by contractual arrangements
(reasonably decreased where market conditions dictate).
Registration Rights Agreement means that certain Registration Rights
-----------------------------
Agreement of even date herewith between Parent and Lender.
Reserve Report means a report, in form and substance satisfactory to
--------------
Lender, prepared by Borrowers evaluating the oil and gas reserves attributable
to the Mineral Interests of Borrowers which shall, among other things, (a)
identify the wells covered thereby, (b) specify the Borrowers' opinions with
respect to the total volume of Proven Reserves (using the terms of categories
"proved developed producing reserves," "proved developed nonproducing reserves"
and "proved undeveloped reserves") which the Borrowers have the right to produce
(or cause to be produced) for their own account, (c) set forth the Borrowers'
opinions with respect to the projected future cash proceeds from the Proven
Reserves, discounted for present value and status of production at a rate
acceptable to the Lender, (d) set forth the Borrowers' opinions with respect to
the projected future rate of production of the Proven Reserves, (e) contain such
other information as requested by the Lender with respect to the projected rate
of production, gross revenues, operating expenses, taxes, capital costs, net
revenues and present value of future net revenues attributable to such reserves
and production therefrom, (f) contain a statement of the price and escalation
parameters, procedures and assumptions upon which such determinations were
based, and (g) specify which Borrower is the legal and record title holder with
respect to such Proven Reserves. Until superceded, the Initial Reserve Report
shall constitute the Reserve Report.
Revolving Credit Loans means Tranche A Revolving Loans and Tranche B
----------------------
Revolving Loans.
Rights means rights, remedies, powers, privileges and benefits.
------
Security Documents shall mean the Oil and Gas Mortgage, the Spanish Peaks
------------------
Pledge Agreement and all other mortgages, deeds of trust, assignments, security
agreements, financing statements, guarantees and other documents, certificates
and instruments from time to time securing or guaranteeing the Obligations
(including without limitation those delivered in connection with the Original
Loan Agreement), in each case as the same may be amended, modified, restated,
supplemented, increased, renewed, extended, substituted for or replaced from
time to time.
Sego Farmout means that certain Joint Participation and Development
------------
Agreement dated the 31st day of August, 1997, by and between PGP and Sego
Resources Corp.
15
<PAGE>
Spanish Peaks means Spanish Peaks Gathering, L.L.C., a Colorado limited
-------------
liability company, 80% of the outstanding membership interests of which are held
by PGP II and whose principal asset consists of the Spanish Peaks Gathering
Assets.
Spanish Peaks Gathering Assets means the natural gas gathering system owned
------------------------------
by Spanish Peaks on the date hereof located in the Raton Basin of Colorado,
including, without limitation (a) all easements, rights of way, licenses,
permits, fee interests, leases and other rights in and to, or the rights to use,
real property for the purposes of construction, maintenance or operation of such
gathering system, (b) all pipe, pipelines, compressors, meters, valves,
separators, interconnects, and other machinery, equipment, fixtures or fixed
assets of any nature comprising a part of or used in connection with the
ownership or operation of such gathering system, and (c) all contracts
(including, without limitation, gathering agreements, processing agreements and
similar agreements) licenses, permits entered into or held by Spanish Peaks in
connection with the ownership or operation of such gathering system.
Spanish Peaks Pledge Agreement means a Pledge Agreement in the form of
------------------------------
EXHIBIT H hereto dated on or about the date hereof, to be executed by PGP II
- ---------
in favor of Lender pursuant to which PGP II shall pledge its ownership interest
in Spanish Peaks to secure the Obligation.
Subordinated Debt means all present and future indebtedness, obligations
-----------------
and liabilities and all renewals, extensions and modifications thereof, now or
hereafter owed to any Person by either Borrower, arising from, by virtue of, or
pursuant to any loan document, or otherwise, together with all interest accruing
thereon and costs, expenses and attorneys' fees incurred in the enforcement or
collection thereof, which have been subordinated to repayment of the Obligations
by a written subordination agreement, the terms and conditions of which are
acceptable to Lender and its legal counsel, in their sole discretion.
Subsidiary of a Person means every firm, corporation, association,
----------
partnership, joint venture, trust, or other entity of which an aggregate of
fifty percent (50%) or more of the equity interests or the issued and
outstanding stock having ordinary voting power (except directors' qualifying
shares) is, at the time the determination is being made, owned, either directly
or indirectly, or controlled by such Person or one or more of such Person's
Subsidiaries.
Tangible Net Worth means, with respect to any Person at any time, the
------------------
shareholder's equity of such Person at such time less the Intangible Assets of
such Person at such time. For purposes of this definition, Intangible Assets
-----------------
means the amount (to the extent reflected in determining such shareholder's
equity) of all unamortized debt discount and expense, unamortized deferred
charges, goodwill, patents, trademarks, service marks, trade names, copyrights,
organization expenses and other intangible items.
Taxes means all taxes, assessments, fees, levies, imposts, duties,
-----
deductions, withholdings, or other charges of any nature whatsoever from time to
time or at any time imposed by any Law or Governmental Authority.
Term Loan has the meaning set forth in SECTION 2.3.
--------- -----------
16
<PAGE>
Total Capital means for any Person as of any date, the sum of (a) the Debt
-------------
of such Person as of such date, and (b) the shareholders equity of such Person
which would be reflected on a balance sheet of such Person as of such date
prepared in accordance with GAAP.
Total Commitment means the Tranche A Commitment and the Tranche B
----------------
Commitment.
Tranche A Commitment shall mean the commitment of the Lender to make
--------------------
Revolving Credit Loans to the Borrowers pursuant to SECTION 2.1(A) in an
--------------
aggregate principal amount at any one time outstanding not to exceed $20,000,000
or such lower amount as may be provided for pursuant to the terms of this
Agreement.
Tranche A Commitment Period means the period from and including the Closing
---------------------------
Date to but not including the Tranche A Commitment Termination Date.
Tranche A Commitment Termination Date shall mean the earlier of (i) Noon,
-------------------------------------
Eastern Time on September 15, 1999, and (ii) the date on which the Tranche A
Total Commitment is otherwise terminated in accordance with the terms of this
Agreement.
Tranche A Revolving Loans has the meaning set forth in SECTION 2.1(a).
------------------------- --------------
Tranche B Commitment means the commitment of the Lender to make Revolving
--------------------
Credit Loans to the Borrowers pursuant to SECTION 2.1(b) in an aggregate
--------------
principal amount at any one time outstanding not to exceed $2,500,000 or such
lower amount as may be provided for pursuant to the terms of this Agreement,
including but not limited to permanent reductions pursuant to SECTION 2.10.
------------
Tranche B Commitment Period means the period from and including the Closing
---------------------------
Date to but not including the Tranche B Commitment Termination Date.
Tranche B Commitment Termination Date shall mean the earlier of (i) Noon,
-------------------------------------
Eastern Time on March 15, 1999, and (ii) the date on which the Total Commitment
is otherwise terminated in accordance with the terms of this Agreement.
Tranche B Revolving Loans has the meaning set forth in SECTION 2.1(b).
------------------------- --------------
UCC means the Uniform Commercial Code as enacted in the State of New York
---
or other applicable jurisdiction, as amended.
Warrant Agreement means that certain Warrant Agreement of even date
-----------------
herewith among Parent, PGP and Lender.
Warrant Certificate means that certain Warrant Certificate to be issued by
-------------------
Parent to evidence the Warrants.
Warrants mean those certain Warrants to be issued by Parent to Lender
--------
pursuant to the Warrant Agreement.
17
<PAGE>
Well Certificates has the meaning set forth in paragraph (c) of SCHEDULE
----------------- ------------- --------
3.1.
- ---
SECTION 2. REVOLVING CREDIT FACILITY AND TERM LOAN FACILITY.
- --------- ------------------------------------------------
2.1 Revolving Credit Commitment. Subject to and in reliance upon the
---------------------------
terms, conditions, representations and warranties contained in this Agreement,
Lender agrees to make revolving credit loans to each Borrower in one or more
advances, (a) under the Tranche A Commitment ("Tranche A Revolving Loans") so
-------------------------
long as the aggregate of the Tranche A Revolving Loans outstanding never exceeds
the lesser of (i) the Borrowing Base or (ii) the Tranche A Commitment, and (b)
under the Tranche B Commitment ("Tranche B Revolving Loans") so long as the
-------------------------
aggregate of the Tranche B Revolving Loans outstanding never exceeds the Tranche
B Commitment. Lender shall have no obligation to make any Revolving Credit Loan
on a non-Business Day, or on or after the Tranche A Commitment Termination Date
in the case of Tranche A Revolving Loans or the Tranche B Commitment Termination
Date in the case of Tranche B Revolving Loans; provided that Borrowers'
--------
obligations and Lender's Rights under the Loan Documents shall continue in full
force and effect until the Obligation is paid and performed in full. During the
Tranche A Commitment Period with respect to Tranche A Revolving Loans, and
during the Tranche B Commitment Period with respect to Tranche B Revolving
Loans, Borrowers may borrow, repay and reborrow such Revolving Credit Loans in
whole or part, all in accordance with terms and conditions of this Agreement.
2.2 Borrowing Procedure; Disbursement. Each Revolving Credit Loan shall
---------------------------------
be made on Borrowers' notice (the "Advance Request") to Lender requesting an
---------------
advance. Each Advance Request shall be irrevocable and binding, shall be
substantially in the form of EXHIBIT A and, in the case of a Tranche A Revolving
---------
Loan, shall be accompanied by a Reserve Report with respect to any Mineral
Interests to be acquired by either Borrower, with the proceeds of such Advance,
if applicable. Each Revolving Credit Loan shall be in an amount of not less
than $200,000.00 or a greater integral multiple of $50,000.00 and shall be
subject to the following terms and conditions:
(a) Periodic Determinations of Borrowing Base. The Maximum Borrowing
-----------------------------------------
Base shall be redetermined by the Lender as of September 30 and March 31 of each
year (each a "Determination Date") commencing March 31, 1998, until the Final
------------------
Termination Date. Upon notification by Lender to Borrowers of the amount of the
Maximum Borrowing Base, Borrowers shall notify Lender of the amount of the
Borrowing Base requested by them which shall not exceed the amount of the
Maximum Borrowing Base. The Borrowing Base selected by Borrower shall be the
Borrowing Base which shall remain in effect until the next Determination Date,
provided that the Borrowing Base may be redetermined between Determination Dates
- --------
in accordance with SECTION 2.2(c) hereof, and provided further Borrowers may
-------------- -------- -------
designate a different Borrowing Base pursuant to SECTION 2.11(a). If Borrowers
---------------
fail to notify Lender of the amount of the requested Borrowing Base within ten
(10) days after they are notified of the amount of the Maximum Borrowing Base,
Borrowers will be deemed to have selected the Maximum Borrowing Base.
18
<PAGE>
(b) Engineering Data to be Provided Prior to Scheduled Determination Dates
----------------------------------------------------------------------
(i) At least forty-five (45) days prior to March 31 and September
30 of each calendar year, commencing with March 31, 1998, Borrowers shall
deliver to the Lender, at Borrowers' expense, a Reserve Report certified by
the chief financial officer of each Borrower dated as of the date of
delivery. The Reserve Report shall be in form and substance satisfactory to
the Lender, shall be addressed to the Lender and shall (A) set forth the
historical production data of the oil and gas reserves included in the
Mortgaged Properties since the date of the most recent Reserve Report, (B)
set forth for each property prices received for production, lease operating
expenses and such other information as the Lender may deem necessary or
appropriate, in Lender's sole discretion, (C) set forth any changes since
the date of the most recent Reserve Report in each Borrower's working
interest or net revenue interest in the Mortgaged Properties, (D) be
accompanied by a certification of the Borrowers to the effect that no event
has occurred or condition exists which has had or is reasonably expected to
have a Material Adverse Effect, except those which have previously been
disclosed to the Lender in writing, and (E) contain such other information
as may be reasonably requested by the Lender. As soon as practical after
the Lender's receipt of the Reserve Report, but in no event later than
March 31 or September 30 of such year, as the case may be, the Lender shall
redetermine the Maximum Borrowing Base in accordance with SECTION 2.2(d)
--------------
and the Lender shall promptly notify Borrowers of the amount of the Maximum
Borrowing Base as so determined.
(ii) In the event that the Borrowers do not furnish to the Lender
the Reserve Report or any other information specified in clause (i) above
----------
by the date specified therein, the Lender may nonetheless redetermine the
Maximum Borrowing Base and redesignate the Maximum Borrowing Base from time
to time thereafter at its discretion until Lender receives the relevant
Reserve Report or other information, whereupon the Lender shall redetermine
the Maximum Borrowing Base as otherwise specified in this SECTION 2.2.
-----------
(iii) Each delivery of a Reserve Report by the Borrowers to the
Lender shall constitute a representation and warranty by the Borrowers to
the Lender that, unless otherwise disclosed to the Lender in writing on or
prior to the date of such delivery, (A) the Borrowers own the Mineral
Interests described in the Reserve Report free and clear of any Liens
(except Permitted Liens) and (B) Mineral Interests representing not less
than eighty percent (80%) of the value of the Proven Reserves reflected in
such Reserve Report constitute Mortgaged Property.
(c) Special Determinations of Maximum Borrowing Base. Special
------------------------------------------------
determinations of the Maximum Borrowing Base may be requested by the Borrowers
or the Lender at any time during the term hereof; provided, however, that there
-------- -------
shall be no more than an aggregate of three (3) scheduled determinations and
special determinations in any calendar year. If any special determination is
requested by the Borrowers, it shall be accompanied by such information
regarding the Borrowers' businesses (including the Mineral Interests and the
Proven Reserves and production relating thereto) as the Lender may reasonably
request, including without limitation a Reserve Report to be delivered at least
forty-five (45) days prior to the requested date of redetermination. Borrowers
shall pay the Lender an engineering fee of $5,000 with respect to the third
determination or
19
<PAGE>
redetermination to occur in each calendar year. If any special determination is
requested by the Lender, the Borrowers shall provide the Lender with a Reserve
Report as soon as possible following the request; provided, however, (x) in no
-------- -------
event shall Borrowers be required to pay Lender the $5,000 engineering fee
referred to in this SECTION 2.2(c) as a result of Lender's request and (y) such
--------------
special determination shall not be counted as a special determination for
purposes of the first sentence of this SECTION 2.2(c). The determination
--------------
whether to increase or decrease the Maximum Borrowing Base shall then be made by
the Lender in its sole discretion in accordance with the standards set forth in
SECTION 2.2 hereof. The Lender shall promptly notify the Borrowers of the
- -----------
redetermination of Maximum Borrowing Base pursuant to SECTION 2.2(d) and the
--------------
amount of the Maximum Borrowing Base as so redetermined. In the event of any
special determination of the Maximum Borrowing Base pursuant to this SECTION
-------
2.2(c), the Lender in the exercise of its discretion may suspend the next
- ------
regularly scheduled determination of the Maximum Borrowing Base.
(d) Standards for Redetermination. Each redetermination of the Maximum
-----------------------------
Borrowing Base by the Lender made pursuant to this SECTION 2.2 shall be made (i)
-----------
in the sole discretion of the Lender, (ii) generally in accordance with the
Lender's then current practices, customary internal standards and procedures
used by Lender for its petroleum industry customers for valuing and
redetermining the value of oil and gas properties in connection with reserve
based on oil and gas loan transactions, (iii) in conjunction with the most
recent Reserve Report or other information received by the Lender and deemed
reliable by the Lender (in its sole discretion) relating to the Proven Reserves
of the Borrowers in the Oil and Gas Leases of the Borrowers which secure the
Loans, and (iv) based upon the estimated value of the Proven Reserves owned by
the Borrowers in the Oil and Gas Leases of the Borrowers which secure the Loans
as determined by the Lender; provided, however, no Proven Reserves shall be
-------- -------
included or considered for inclusion in the Maximum Borrowing Base unless (A)
100% of such Proven Reserves are (or will become simultaneously with a Tranche
A Revolving Loan hereunder) Collateral or are subject to a negative pledge in
favor of the Lender, and (B) the Lender shall have received, at the Borrowers'
expense, evidence of title satisfactory in form and substance to the Lender that
the Lender has a perfected, first priority Lien (except for Permitted Liens) on
at least 80% of the value of the Proven Reserves attributable to the Mineral
Interests relating thereto pursuant to the Security Documents. At all times
after the Lender has given the Borrowers notification of a redetermination of
the Maximum Borrowing Base under this SECTION 2.2, the Maximum Borrowing Base
-----------
shall be equal to the redetermined amount until the Maximum Borrowing Base is
subsequently redetermined in accordance with this SECTION 2.2 subject, however,
-----------
to reduction pursuant to SECTION 5.2(j)(ii).
------------------
(e) Borrowing Base Increase Fee. On or before the date of any increase
---------------------------
of the Borrowing Base which results in an increase in the Borrowing Base beyond
the existing Apex Borrowing Base, Borrowers shall pay Lender a borrowing base
increase fee equal to one-half of one percent (.50%) on the difference between
(i) the existing Apex Borrowing Base, and (ii) the Borrowing Base on the day of
such increase of the Borrowing Base after giving effect to such increase.
(f) Engineering Fee. On or before each anniversary of the Original
---------------
Closing Date, commencing on the third anniversary of the Original Closing Date,
the Borrowers shall pay the Lender an engineering fee of $10,000. The Borrowers
and the Lender acknowledge that the
20
<PAGE>
engineering fee is intended as reasonable compensation to the Lender for the use
of its engineers and other resources to review and analyze the engineering data
submitted by the Borrowers in connection with the determination of the Borrowing
Base and for no other purpose.
2.3 Tranche A Conversion and Tranche B Termination. Subject to and in
----------------------------------------------
reliance upon the terms, conditions, representations and warranties contained in
this Agreement, the unpaid balance of the Tranche A Revolving Loans on the
Tranche A Commitment Termination Date shall convert into a term loan (the "Term
----
Loan"). On and after the Tranche A Commitment Termination Date, the Lender
- ----
shall have no obligation to make a Tranche A Revolving Loan (the aggregate
amount of the same having been converted into the Term Loan), and Borrowers
shall repay the principal and interest then outstanding under the Term Loan in
accordance with the terms and conditions of Note A, which shall be fully due
and payable on the Final Termination Date. On and after the Tranche B Commitment
Termination Date, the Lender shall have no obligation to make a Tranche B
Revolving Loan, and Borrowers shall immediately repay the principal and interest
then outstanding under the Tranche B Commitment on the Tranche B Commitment
Termination Date.
2.4 Notes. Tranche A Revolving Loans and the Term Loan shall be
-----
evidenced by one promissory note executed by the Borrowers, substantially in the
form of EXHIBIT I attached hereto with appropriate insertions (the "Note A"),
--------- ------
payable to the order of Lender, representing the obligation of Borrowers to pay
the aggregate unpaid principal amount of the Tranche A Revolving Loans and the
Term Loan made by Lender, together with interest thereon as prescribed by this
Agreement. Tranche B Revolving Loans shall be evidenced by a promissory note of
Borrowers substantially in the form of EXHIBIT J attached hereto (the "Note B"),
--------- ------
payable to the order of Lender, representing the obligation of Borrowers to pay
the aggregate unpaid principal amount of the Tranche B Revolving Loans made by
Lender, together with interest thereon as prescribed by this Agreement (the Note
A and the Note B are herein collectively called the "Notes").
-----
2.5 Manner of Payments. All payments made by Borrowers to the Lender
------------------
hereunder on account of principal, interest or otherwise shall be made not later
than 2:00 P.M., Eastern Time, to Lender in New York, New York or at such other
place as Lender shall direct, in immediately available United States funds. If
any payment by Borrowers under this Agreement or either Note is to be made on a
day which is not a Business Day, such payment shall be made on the next
succeeding Business Day and such extension of time will in such case be included
in computing interest in connection with such payment.
2.6 Interest. Tranche A Revolving Loans and the Term Loan shall bear
--------
interest and shall be due and payable as provided in the Note A. Tranche B
Revolving Loans shall bear interest and shall be due and payable as provided in
the Note B.
2.7 Computation of Interest.
-----------------------
(a) Interest on each Note shall be calculated on the basis of actual days
elapsed, but computed as if each year consisted of 360 days, subject to the
provisions of SECTION 8.17 below. Any change in the interest rate on a Loan
------------
resulting from a change in the Floating Base Rate shall become effective as of
the day on which such change in the Floating Base Rate becomes effective. Lender
shall as soon as practicable notify Borrowers of the effective date and the
amount of each
21
<PAGE>
such change. Each determination of an interest rate by Lender pursuant to any
provision of this Agreement shall be presumptively conclusive and binding on the
Borrowers in the absence of manifest error, subject, however, to the provisions
of SECTION 8.17 below.
------------
(b) Notwithstanding anything to the contrary in the Notes or herein
contained, in the event that the rate of interest under either Note should ever
exceed the Maximum Rate, thereby causing the interest accruing on any of the
indebtedness evidenced by such Note to be limited to such Maximum Rate, then any
subsequent reduction in the Floating Base Rate shall not reduce the rate of
interest charged hereunder below the Maximum Rate until the total amount of
interest accrued on such indebtedness equals the amount of interest which would
have accrued on such indebtedness if the rate of interest under such Note had
been in effect at all times in the period during which the rate charged thereon
was limited to the Maximum Rate.
2.8 Default Rate. At Lender's option and to the extent permitted by
------------
applicable Law, all past due Obligations and accrued interest thereon and
related fees shall bear interest from maturity (stated or by acceleration) at
the Default Rate until paid, regardless of whether such payment is made before
or after entry of a judgment.
2.9 Principal Payments. The unpaid balance of the Tranche A Revolving
------------------
Loans shall convert to the Term Loan on the Tranche A Commitment Termination
Date as described in SECTION 2.3. The principal amount of the Term Loan shall
-----------
be payable as provided in the Note A; provided, however, the entire unpaid
-------- -------
principal balance of the Term Loan, together with all accrued and unpaid
interest, shall be due and payable on the Final Termination Date. The principal
amount of the Tranche B Revolving Loans shall be payable as provided in the Note
B, provided, however, the entire unpaid principal balance of the Tranche B
-------- -------
Revolving Loan, together with all accrued and unpaid interest, shall be due and
payable on the Tranche B Commitment Termination Date.
2.10 Mandatory Payment of Loans. If, at any time, the unpaid principal
--------------------------
balance of Note A shall exceed the Tranche A Commitment, then, Borrowers shall
immediately repay, without premium or penalty, Tranche A Revolving Credit Loans
or the Term Loan in an amount equal to such excess, along with accrued unpaid
interest on the amount so repaid to the date of such repayment. If, at any time
the unpaid principal balance of Note B shall exceed the Tranche B Commitment,
then, Borrowers shall immediately repay, without premium or penalty, Tranche B
Revolving Loans in an amount equal to such excess, along with accrued unpaid
interest on the amount so repaid to the date of such repayment. If, at any time,
a Borrowing Base Deficiency shall occur, then, Borrowers shall (i) within ninety
(90) days after the date such Borrowing Base Deficiency first occurs, either (A)
provide additional collateral as security for the Obligation, the value of which
shall be determined by Lender in its sole discretion, or (B) prepay, without
premium or penalty, Tranche A Revolving Credit Loans or the Term Loan, or a
combination thereof, which additional collateral or prepayment shall be in an
amount equal to at least fifty percent (50%) of the amount of such Borrowing
Base Deficiency, and (ii) within one hundred eighty (180) days after the date
such Borrowing Base Deficiency first occurs either (A) provide additional
collateral as security for the Obligation, the value of which shall be
determined by Lender in its sole discretion, or (B) prepay, without premium or
penalty, Tranche A Revolving Credit Loans or the Term Loan, or a combination
thereof, which additional collateral or prepayment shall be in an amount
sufficient to eliminate such deficiency; and each such prepayment shall be made
along with accrued unpaid
22
<PAGE>
interest on the amount so repaid to the date of such repayment. Any prepayment
of the Term Loan pursuant to the preceding sentence shall be applied to the
payments otherwise due under the Term Loan in inverse order of maturity.
Borrowers shall immediately repay Note B in the amount of the Net Proceeds from
the issuance of any Debt or equity securities issued by any Credit Party after
the Closing Date other than the issuance of debt securities evidencing Permitted
Purchase Money Debt. Notwithstanding anything to the contrary contained herein,
the Tranche B Commitment shall be permanently reduced simultaneously with the
issuance by any Credit Party of debt or equity securities by an amount equal to
the Net Proceeds from such issuance other than the issuance of debt securities
evidencing Permitted Purchase Money Debt.
2.11 Voluntary Designation of Borrowing Base; Mandatory Cancellation of
------------------------------------------------------------------
Revolving Credit Facility.
- -------------------------
(a) Subject to SECTIONS 2.17 and 2.2(e), Borrowers may from time to time
------------- -----
and at any time during the Tranche A Commitment Period, upon two (2) Business
Days' prior written notice to Lender, increase or decrease the Borrowing Base,
as the case may be, by designating the Borrowing Base at an amount not in excess
of the Maximum Borrowing Base then in effect pursuant to SECTION 2.2. Any such
------------
designation shall be effective as of the date of the notice.
(b) The Total Commitment shall, at the election of Lender, terminate upon
the occurrence and continuance of an Event of Default, provided, however, that
-------- -------
the Total Commitment shall automatically terminate upon the occurrence of an
Event of Default pursuant to any of SECTIONS 6.5(i) - (vi), inclusive, or
----------------------
SECTION 6.5(ix).
- --------------
2.12 Voluntary Principal Prepayments. The Borrowers may, at any time and
-------------------------------
from time to time prepay the unpaid principal amount of the Revolving Credit
Loans in whole or in part without premium or penalty, provided, that Borrower
shall not be permitted to make any prepayment of the Tranche A Revolving Loans
at any time that Tranche B Revolving Loans are outstanding. Upon giving Lender
one (1) Business Day's notice, Borrowers shall be entitled to prepay the Term
Loan from time to time and at any time, in whole or in part, without penalty;
provided, however, (a) each such prepayment shall equal or exceed the principal
- -------- -------
amount of $200,000, and (b) Borrowers shall only be entitled to make a
prepayment if all accrued interest on the amount prepaid and any and all fees
and other sums (including, without limitation, past due interest, if any)
payable to Lender hereunder shall be paid to the date of such prepayment. Prior
to the Tranche A Commitment Termination Date and the Tranche B Commitment
Termination Date, the Tranche A Revolving Loans and Tranche B Revolving Loans,
respectively, prepaid may, subject to the conditions of this Agreement, be
reborrowed hereunder, and this Agreement shall not be deemed to be terminated or
canceled prior to the expiration or termination of Lender's commitment to lend
hereunder solely because the Obligation may from time to time be paid in full.
No advance shall be made under the Tranche B Commitment unless at such time the
Tranche A Commitment is fully funded to the then maximum extent permitted by
SECTION 2.1(a). After the Tranche A Commitment Termination Date, Tranche A
- --------------
Revolving Loans may not be reborrowed hereunder. After the Tranche B Commitment
Termination Date, Tranche B Revolving Loans may not be reborrowed hereunder.
Amounts prepaid under the Term Loan may not be reborrowed.
23
<PAGE>
2.13 Order of Application. So long as no Default or Event of Default has
--------------------
occurred, all prepayments of the Term Loan shall be applied to the unpaid
installments of the Term Loan in the inverse order of maturity. At any time
during which a Default or Event of Default has occurred and is continuing, all
payments and prepayments of the Obligation, including proceeds from the exercise
of any Rights under the Loan Documents or proceeds of any of the Collateral
shall be applied to the Obligation in the order and manner as Lender deems
appropriate.
2.14 Use of Proceeds. Fundings of the Revolving Credit Loans and the Term
---------------
Loan may be used, subject to compliance with the terms and conditions herein,
solely (a) to acquire, develop, or explore the Mineral Interests which
constitute Mortgaged Properties, (b) to finance the working capital needs of
Borrowers including, without limitation, to pay interest on the Loans and fees
and expenses hereunder, and (c) as provided in SECTION 5.2(d). All Loan
--------------
proceeds shall be used by the Borrowers only for legal and proper partnership
purposes (duly authorized by their respective general partner's Board of
Directors) which are consistent with all applicable laws and statutes.
2.15 Capital Adequacy.
----------------
(a) If, after the date of this Agreement, Lender shall have reasonably
determined that the adoption of any applicable law, rule or regulation regarding
capital adequacy, or any change therein, or any change in the interpretation or
administration thereof, or compliance by Lender with any applicable request or
directive regarding capital adequacy (whether or not having the force of law) of
any such authority, central bank or comparable agency, has or would reasonably
be expected to have the effect of reducing the rate of return on Lender's
capital as a consequence of its obligations hereunder to a level below that
which Lender could have achieved but for such adoption, change or compliance
(taking into consideration Lender's policies with respect to capital adequacy)
by an amount reasonably deemed by Lender to be material to its business, then
from time to time, Borrowers shall pay to Lender such additional amount or
amounts as will compensate Lender for such reduction.
(b) A certificate of Lender setting forth such amount or amounts as shall
be necessary to compensate Lender as specified in paragraph (a) above shall be
-------------
delivered as soon as practicable to Borrowers and shall be conclusive and
binding, absent manifest error. Borrowers shall pay Lender the amount shown as
due on any certificate within fifteen (15) days after Lender delivers such
certificate. In preparing such certificate, Lender may employ such assumptions
and allocations of costs and expenses as it shall, in good faith, deem
reasonable and may use any reasonable averaging and attribution method.
2.16 Commitment Fee. During the Tranche A Commitment Period, Borrowers
--------------
shall pay to Lender a commitment fee as it accrues, at maturity and on the last
day of each September, December, March and June commencing September 30, 1997,
equal to three-eighths of one percent (.375%) per annum, on the difference
between the Borrowing Base and the average daily outstanding amount of Tranche A
Revolving Loans. During the Tranche B Commitment Period, Borrowers shall pay to
Lender a commitment fee as it accrues, at maturity and on the last day of each
September, December, March and June, commencing September 30, 1997, equal to
one-half of one percent (.50%) per annum, on the difference between the Tranche
B Commitment and the average daily outstanding amount of Tranche B Loans.
24
<PAGE>
2.17 Clawback Fee. During the Tranche A Commitment Period and upon
------------
any increase in the Borrowing Base pursuant to SECTION 2.11(a), Borrowers shall
---------------
pay to Lender a clawback fee equal to three-eighths of one percent (.375%) per
annum of the increased amount of the Borrowing Base then requested by Borrowers
pursuant to SECTION 2.11(a) beginning on the date of the last determination of
---------------
the Borrowing Base pursuant to SECTION 2.2 and ending on the effective date of
-----------
the then requested increase pursuant to SECTION 2.11(a). Such clawback fee
---------------
shall be due and payable on or before the date of any applicable increase in the
Borrowing Base. In no event shall Borrowers be obligated to pay such clawback
fee based on any designation of the Borrowing Base pursuant to SECTION 2.2.
-----------
2.18 Joint and Several Liability; Rights of Contribution.
---------------------------------------------------
(a) Each Borrower and Parent state and acknowledge that: (i) pursuant to
this Agreement, Borrowers desire to utilize their borrowing potential on a
consolidated basis to the same extent possible if they were merged into a single
corporate entity; (ii) each of Borrower and Parent has determined that it will
benefit specifically and materially from the advances of credit contemplated by
this Agreement; (iii) it is both a condition precedent to the obligations of
Lender hereunder and a desire of each Borrower and Parent that each Borrower and
Parent execute and deliver to Lender this Agreement; and (iv) each Borrower and
Parent has requested and bargained for the structure and terms of and security
for the advances contemplated by this Agreement.
(b) Each Borrower and Parent hereby irrevocably and unconditionally: (i)
agrees that it is jointly and severally liable to Lender for the full and prompt
payment and performance of the Obligation of each Borrower under this Agreement
and each other Loan Document that may specify that particular Borrower is
responsible for a given payment or performance; (ii) agrees to fully and
promptly perform all of its obligations hereunder with respect to each advance
of credit hereunder as if such advance had been made directly to it; and (iii)
agrees as a primary obligation to indemnify Lender on demand for and against any
loss incurred by Lender as a result of any of the obligations of any Borrower or
Parent being or becoming void, voidable, unenforceable or ineffective for any
reason whatsoever, whether or not known to Lender or any Person, the amount of
such loss being the amount which Lender would otherwise have been entitled to
recover from the other Borrower or Parent (as applicable).
(c) It is the intent of each Borrower that the indebtedness, obligations
and liabilities hereunder of no one of them be subject to challenge on any basis
related to any federal or state law dealing with fraudulent conveyances or any
other law related to transfers for less than fair or reasonably equivalent
value. Accordingly, as of the date hereof, the liability of each Borrower under
this SECTION 2.18, together with all of its other liabilities to all persons as
------------
of the date hereof and as of any other date on which a transfer is deemed to
occur by virtue of this Agreement, calculated in amount sufficient to pay its
probable net liabilities on its existing indebtedness as the same become
absolute and matured ("Dated Liabilities") is and is to be, less than the amount
-----------------
of the aggregate of a fair valuation of its property as of such corresponding
date ("Dated Assets"). To this end, each Borrower under this SECTION 2.18 (i)
------------ ------------
grants to and recognizes in each other Borrower, ratably, rights of subrogation
and contribution in the amount, if any, by which the Dated Assets of such
Borrower, but for the aggregate of subrogation and contribution in its favor
recognized herein, would exceed the Dated Liabilities of such Borrower or, as
the case may be, (ii) acknowledges
25
<PAGE>
receipt of and recognizes its right to subrogation and contribution ratably from
the other Borrower in the amount, if any, by which the Dated Liabilities of such
Borrower, but for the aggregate of subrogation and contribution in its favor
recognized herein, would exceed the Dated Assets of such Borrower under this
SECTION 2.18. In recognizing the value of the Dated Assets and the Dated
- ------------
Liabilities, it is understood that each Borrower will recognize, to at least the
same extent of their aggregate recognition of liabilities hereunder, their
rights to subrogation and contribution hereunder. It is a material objective of
this SECTION 2.18 that each Borrower recognizes rights to subrogation and
------------
contribution rather than be deemed to be insolvent (or in contemplation thereof)
by reason of an arbitrary interpretation of its joint and several obligations
hereunder.
2.19 Closing Fee. On the Closing Date, Borrowers shall pay to Lender a
-----------
closing fee in the amount of $25,000 in immediately available funds.
SECTION 3. CONDITIONS PRECEDENT.
- --------- --------------------
3.1 Initial Loans. Lender will not be obligated to make the initial
-------------
Revolving Credit Loans or the Term Loan to be made under this Agreement unless
it has received all of the items described on SCHEDULE 3.1 in form and substance
------------
satisfactory to Lender and complied with all the conditions and terms described
on SCHEDULE 3.1 to the satisfaction of Lender.
------------
3.2 Each Loan. In addition, Lender will not be obligated to make any
---------
Revolving Credit Loan or convert the Tranche A Revolving Credit Loan into the
Term Loan unless (a) with respect to Revolving Credit Loans, the Lender shall
have received an Advance Request with respect to such proposed Revolving Credit
Loan and each statement or certification made by Borrowers in their Advance
Request shall be true and correct in all material respects on the Borrowing
Date; (b) at the time of each Revolving Credit Loan and the conversion of the
Revolving Credit Loan into the Term Loan (i) the representations and warranties
made in the Loan Documents are true and correct in all material respects, and
(ii) neither any change in the financial condition or prospect of any Credit
Party which could have or has had a Material Adverse Effect nor any Default or
Event of Default shall have occurred and shall be continuing; (c) the making of
each Revolving Credit Loan and the Term Loan is permitted by Law; (d) all
matters related to any Revolving Credit Loan and the conversion of the Revolving
Credit Loan into the Term Loan are reasonably satisfactory to Lender and its
counsel, and, if requested by Lender, each Credit Party shall have delivered to
Lender evidence substantiating any of the matters contained in this Agreement
which are necessary to enable Borrowers to qualify for any Revolving Credit Loan
or the Term Loan; and (e) Lender shall have received such other agreements,
documents, instruments, information, approvals or opinions as Lender may
reasonably request.
The delivery of an Advance Request by the Borrowers and the acceptance by
the Borrowers of the proceeds of any Loan hereunder shall each be deemed to
constitute a representation and warranty by the Borrowers and Parent as to the
matters specified in this SECTION 3.2.
-----------
3.3 Waiver of Conditions. Lender may, at its election, make any
--------------------
Revolving Credit Loan or the Term Loan without all conditions being satisfied,
but this shall not be deemed to be a waiver of the requirement that each such
condition precedent be satisfied as a prerequisite for any subsequent Revolving
Credit Loan, unless Lender specifically waives each such item in writing.
26
<PAGE>
SECTION 4. REPRESENTATIONS AND WARRANTIES. Each Borrower and Guarantor
- --------- ------------------------------
jointly and severally represents and warrants to Lender as follows:
4.1 Organization and Powers. Each Credit Party (i) is duly organized,
-----------------------
validly existing and in good standing under the laws of the state of its
organization or incorporation, (ii) has all requisite partnership power and
authority to own its property and assets and to carry on its business as now
conducted and as proposed to be conducted, (iii) is qualified to do business in
every jurisdiction where such qualification is necessary or will be so qualified
within thirty (30) days of the Closing Date, (iv) has the partnership power and
authority to execute, deliver and perform each Loan Document to which it is or
will be a party, and (v) has taken all partnership action necessary to authorize
the execution, delivery and performance of the Loan Documents to which it is or
will be a party.
4.2 Validity and Binding Nature. This Agreement has been duly executed
---------------------------
and delivered by Parent and each Borrower and each other Loan Document when
executed and delivered by each Credit Party will be, a legal, valid and binding
obligation of such Credit Party enforceable against it in accordance with its
terms (except as enforcement thereof may be limited by bankruptcy,
reorganization, insolvency, moratorium or other laws affecting the enforcement
of creditors' rights generally).
4.3 Compliance with Laws and Documents. No Credit Party is, nor will the
----------------------------------
execution, delivery and the performance of and compliance with the terms of the
Loan Documents cause any Credit Party to be, in violation of (a) any Laws, or
(b) its certificate of incorporation, bylaws, agreement of limited partnership
or other organizational documents (as amended). The execution, delivery and the
performance of and compliance with the terms of the Loan Documents are not
inconsistent with, and will not conflict with or result in any breach of, or
constitute a default under, or result in the creation or imposition of any Lien
(except pursuant to the Loan Documents) upon any of the property, assets or
revenues of any Credit Party pursuant to the terms of, any indenture, mortgage,
lease, deed of trust, agreement, contract, instrument or Law to which any Credit
Party is a party or by which any Credit Party or any Credit Party's property,
assets or revenue is bound or to which it is subject.
4.4 Prior Names. In the last five (5) years, no Credit Party has
-----------
transacted business under any other corporate, partnership or trade name, been a
party to any merger, combination, or consolidation or acquired all or
substantially all of the assets of any Person.
4.5 Relationship with Lender. No Person who may be deemed to have
------------------------
"control" of any Credit Party is an "executive officer," "director," or
"principal shareholder" of Lender or any correspondent of Lender, as such quoted
terms are defined in Section 215.2 of Regulation O of the Board of Governors of
the Federal Reserve System, as amended.
4.6 Financial Statements and Reserve Reports. The Current Financials
----------------------------------------
were prepared in accordance with GAAP and present fairly the consolidated and
consolidating financial condition and results of operations of Parent and its
Consolidated Subsidiaries as of, and for the portion of the fiscal year ending
on, the date or dates thereof. All material liabilities (direct or indirect,
fixed or contingent) of the Credit Parties as of the date or dates of the
Current Financials are reflected
27
<PAGE>
therein or in the notes thereto. Between the date or dates of the Current
Financials and the date hereof, there has been no material adverse change in the
financial condition of any Credit Party, nor has any Credit Party incurred any
material liability (direct or indirect, fixed or contingent). All Reserve
Reports were prepared in accordance with generally accepted engineering
practices.
4.7 Labor Matters. Borrowers have no employees.
-------------
4.8 Litigation. Except for the Litigation described on SCHEDULE 4.8, the
---------- ------------
Credit Parties are not involved in, nor is any Credit Party aware of any
Litigation affecting any Credit Party, nor are there any outstanding or unpaid
judgments against any Credit Party. None of the Litigation described on
SCHEDULE 4.8 could, collectively or individually, have a Material Adverse Effect
- ------------
if determined adversely against any Credit Party.
4.9 Taxes and Claims. All Tax returns and reports of each Credit Party
----------------
required to be filed have been filed. All lawful claims under operating
agreements, pooling orders and unitization agreements, and for labor, material
and supplies, which, if unpaid, might become a Lien upon any of its property,
and all Taxes and claims imposed upon each Credit Party which are due and
payable have been paid.
4.10 Government Regulation. No Credit Party nor any transaction
---------------------
contemplated hereunder is subject to regulation under the Public Utility Holding
Company Act of 1935, the Federal Power Act, the Investment Company Act of 1940,
the Interstate Commerce Act (as any of the preceding acts have been amended),
any regulations promulgated by the Office of Foreign Assets Control as codified
in Chapter V of 31 C.F.R., or any other Law (other than Regulation G, T, U or X
of the Board of Governors of the Federal Reserve System) which regulates the
incurrence of Debt.
4.11 Employee Benefit Plans.
----------------------
(a) Except as set forth on SCHEDULE 4.11, no Borrower or any ERISA
-------------
Affiliate currently sponsors or contributes to, nor has any contract or other
obligation to contribute to (nor has any Borrower or any ERISA Affiliate in the
preceding sixty (60) calendar months sponsored or contributed to, or contracted
to or become otherwise obligated to contribute to) any Plan or any Multiemployer
Plan.
(b) Each Plan is in compliance with all applicable provisions of ERISA,
the Code and all other Laws, except for any failures to be in compliance
therewith which in the aggregate would not have a Material Adverse Effect. With
respect to each Plan (other than a "Multiemployer Plan"), all reports required
under ERISA or other applicable law to be filed with any governmental authority,
the failure of which to file could reasonably result in a Material Adverse
Effect, have been timely filed.
(c) No "accumulated funding deficiency" (as defined in section 412(a) of
the Code) with respect to any Plan has been incurred (without regard to any
waiver granted under section 412 of the Code), nor has any funding waiver from
the Internal Revenue Service been received or requested. Each Plan that is
intended to be "qualified" within the meaning of section
28
<PAGE>
401(a) of the Code has received all necessary governmental approvals, including
a favorable determination as to the qualification under the Code of each such
Plan and each amendment thereto, have been timely obtained and, to the knowledge
of the Borrowers and each ERISA Affiliate, there are no existing circumstances
nor any events that have occurred that would adversely affect the qualified
status of any such Plan or the tax exempt status of its related trust.
(d) The Borrowers and each ERISA Affiliate have complied in all material
respects with all requirements of ERISA sections 601 through 608 and Code
section 4980B. Neither the Borrowers nor any ERISA Affiliate has made any
promises of retirement or other benefits to employees, except as set forth in
the Plans, and neither a Borrower nor any ERISA Affiliate maintains or has
established any Plan which is a "welfare benefit plan" within the meaning of
section 3(1) of ERISA which provides for continuing benefits or coverage for any
participant or any beneficiary of a participant after such participant's
termination of employment except as may be required by sections 601 through 608
of ERISA and section 4980B of the Code, and at the expense of the participant or
the beneficiary of the participant, or retiree medical liabilities. Neither a
Borrower nor any ERISA Affiliate maintains, has established or has ever
participated in a multiple employer welfare benefit arrangement as described in
section 3(40)(A) of ERISA.
(e) Neither the Borrowers nor any ERISA Affiliate has incurred any
material liability to the Pension Benefit Guaranty Corporation in connection
with any Plan. The assets of each Plan that is subject to Title IV of ERISA are
sufficient to provide the benefits under such Plan, the payment of which the
Pension Benefit Guaranty corporation would guarantee if such Plan were
terminated, and such assets are also sufficient to provide all other "benefit
liabilities" (as defined in ERISA section 4001(a)(16)) due under the Plan upon
termination. No ERISA Event has occurred and is continuing with respect to any
Plan.
(f) There are no pending, or to the knowledge of Borrowers and each ERISA
Affiliate, threatened claims, lawsuits or actions (other than routine claims for
benefits in the ordinary course) asserted or instituted against, and neither the
Borrowers nor any ERISA Affiliate has knowledge of any threatened litigation or
claims against, the assets of any Plan or its related trust or against any
fiduciary of a Plan with respect to the operation of such Plan. Neither the
Borrowers nor any ERISA Affiliate has engaged in any prohibited transaction,
within the meaning of section 406 of ERISA or section 4975 of the Code, in
connection with any Plan.
4.12 Purpose of Loan. The proceeds of the advances will be used for
---------------
general working capital and partnership (or corporate after the Exchange)
purposes and shall not be used (i) to purchase or carry any "Margin Stock"
(within the meaning of Regulation G or U of the Board of Governors of the
Federal Reserve System), or (ii) for any purpose in violation of Regulations G,
T, U or X of said Board of Governors.
4.13 Properties; Liens; Debt. Borrowers have fee simple legal title
-----------------------
to or valid leasehold interest in, and the Borrowers are the beneficial owner
of, all the Mineral Interests reflected in the Reserve Report. Except for
Permitted Liens shown on SCHEDULE 4.13 and the Lender's Lien, there is no Lien
-------------
on any of any Borrowers' Mineral Interests in and to the Mineral Interests
reflected in the Reserve Report. Borrowers have no Debt other than that listed
on SCHEDULE 5.2(a).
---------------
29
<PAGE>
4.14 Material Agreements. No Credit Party is, nor will the execution,
-------------------
delivery and performance of and compliance with the terms of the Loan Documents
cause any Credit Party to be, in default (nor has any potential default
occurred) under any Material Contract or any other material agreement, document
or instrument other than such defaults or potential defaults which could not,
individually or collectively, cause a Material Adverse Effect.
4.15 No Consents. Except as set forth on SCHEDULE 4.15, no order,
----------- -------------
consent, approval, license, permit, waiver, exemption, authorization of or
validation of, or filing, recording or registration with (except as heretofore
have been obtained or made), or exemption by, any Person is required to
authorize, or is required in connection with, the execution, delivery,
performance, legality, validity, binding effect, or enforceability of the Loan
Documents.
4.16 Environmental Laws; Hazardous Materials. Except as set forth on
---------------------------------------
SCHEDULE 4.16:
- -------------
(a) To the best knowledge of each Credit Party, neither any property of
any Credit Party nor the operations conducted thereon violates any Environmental
Laws or order of any court or Governmental Authority with respect to
Environmental Laws;
(b) Without limitation of clause (a) above, no property of any Credit
---------
Party and no operations currently conducted thereon or, to the best knowledge of
each Credit Party, by any prior owner or operator of such property or operation,
are in violation of or subject to any existing, pending or, to the best
knowledge of each Credit Party, threatened action, suit, investigation, inquiry
or proceeding by or before any court or Governmental Authority with respect to
Environmental Laws or to any remedial obligations under Environmental Laws;
(c) To the best knowledge of each Credit Party, all notices, permits,
licenses or similar authorizations, if any, required to be obtained or filed in
connection with the operation or use of any and all property of each Credit
Party, including, without limitation, past or present treatment, storage,
disposal or release of a Hazardous Material into the environment, have been duly
obtained or filed;
(d) To the best knowledge of each Credit Party, all Hazardous Material
generated at any and all property of any Credit Party has in the past been
transported, treated and disposed of only by carriers maintaining valid permits
under RCRA and any other Environmental Law and only at treatment, storage and
disposal facilities maintaining valid permits under RCRA and any other
Environmental Law, which carriers and facilities have been and are operating in
compliance with such permits;
(e) Each Credit Party has taken all steps necessary and reasonable to
determine and has determined that no Hazardous Material has been disposed of or
otherwise released that has had or could reasonably be expected to have a
Material Adverse Effect and, to the best knowledge of any Credit Party, that
there has been no threatened release of any Hazardous Material on or to any
property of any Credit Party except in compliance with Environmental Laws;
30
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(f) To the best knowledge of each Credit Party, no Credit Party has any
contingent liability in connection with any release or, threatened release of
any Hazardous Material into the environment.
4.17 Intentionally deleted.
4.18 Capitalization and Control. Parts I and II of SCHEDULE 4.18
-------------------------- -------------
accurately set forth, before giving effect to the Exchange and after giving
effect to the Exchange, respectively, the authorized, issued and outstanding
partnership interests and capital stock of every class of each Credit Party,
including, with respect to each Credit Party, the name of each record and
beneficial owner of outstanding partnership interests and capital stock of such
Credit Party and the number of shares and percentage of partnership interests
held by each. Except as reflected on Part III of SCHEDULE 4.18 (a) no Credit
-------------
Party has issued, and there are not presently outstanding, any warrants,
options, subscription rights or other rights to acquire capital stock,
partnership interests or other equity interests in any Credit Party or
securities convertible into capital stock, partnership interests or other equity
securities of any Credit Party, (b) no Credit Party is under any obligation,
written or otherwise, to register any capital stock, partnership interests or
other equity securities under the Securities Act of 1933 or any state securities
laws, and (c) there are no shareholders agreements, voting agreements,
contractual restrictions on transfer or other similar agreements or arrangements
affecting the outstanding capital stock, partnership interests or other equity
securities of any Credit Party.
4.19 General. There are no material facts or conditions known to any
-------
Credit Party relating to the Loan Documents, any of the Collateral or the
financial condition and business of Credit Party which could, individually or
collectively, cause a Material Adverse Effect and which have not been related in
writing to Lender. All writings heretofore or hereafter exhibited or delivered
to Lender by or on behalf of any Credit Party are and will be genuine and in all
respects what they purport and appear to be. No information furnished to Lender
by or on behalf of any Credit Party contains any material misstatement of fact
or, to any Credit Party's knowledge, omits to state any fact necessary to make
the statements contained herein or therein in light of the circumstances in
which they were made not materially misleading.
4.20 Mortgaged Properties Same as Properties Engineered. The
--------------------------------------------------
Mortgaged Properties described in EXHIBIT C attached hereto are part of the
---------
Mortgaged Properties described in the Oil and Gas Mortgage and represent not
less than 80% of the value of the Proven Reserves reflected in the Initial
Reserve Report.
4.21 Operation of Business. Each Credit Party possesses all
----------------------
licenses, permits, franchises, patents, operating rights, copyrights, trademarks
and trade names, or rights thereto, reasonably necessary to conduct its business
substantially as now conducted and as presently proposed to be conducted except
for such matters which, individually, or in the aggregate, will not have a
Material Adverse Effect. No Credit Party is in violation of any valid rights of
others with respect to any of the foregoing except for such matters which,
individually, or in the aggregate, will not have a Material Adverse Effect.
31
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4.22 Operator of Working Interest. With respect to each Mineral
----------------------------
Interest which is a working interest, such Mineral Interest is operated by a
Person other than either Borrower.
4.23 Exchange Agreement. Borrowers have delivered to Lender a true
------------------
and correct copy of the Exchange Agreement. The Exchange Agreement has not been
modified, amended, terminated or rescinded in any respect and is in full force
and effect on the date hereof and represents the valid and binding agreements of
the parties thereto, enforceable in accordance with its terms.
SECTION 5. COVENANTS.
- --------- ---------
5.1 Affirmative Covenants. Parent and each Borrower covenant and agree
---------------------
with Lender, that so long as this Agreement shall remain in effect and the
principal of or interest on either Note or any other Obligation shall be unpaid,
it will and will cause each other Credit Party to comply with the following:
(a) Compliance with Law; Maintenance of Properties. Each Credit Party
----------------------------------------------
will do or cause to be done all things necessary (i) to preserve and keep in
full force and effect at all times its corporate or partnership (as applicable)
existence and its rights, licenses and franchises, (ii) to continue to conduct
its business substantially as now proposed to be conducted, (iii) to comply with
all applicable Laws including, without limitation, ERISA, and (iv) to preserve
all property in use or useful in the conduct of its business and keep the same
in good repair, working order and condition and from time to time make, or cause
to be made, all needful and proper repairs, renewals and replacements,
betterments and improvements thereto so its business carried on in connection
therewith may be properly and advantageously conducted at all times.
(b) Insurance. Each Credit Party shall (i) keep its properties of an
---------
insurable nature insured at all times against such risks and to the extent that
like properties are customarily insured by other companies engaged in the same
or similar businesses similarly situated, and (ii) use its best efforts to cause
the operator of each Mineral Interest in which such Credit Party owns a non-
operating working interest to do the following:
(A) Maintain for the benefit of all working interest owners
insurance of the types and in the coverage amounts and with reasonable
deductibles as is usual and customary including the following: (1)
workman's compensation or similar insurance as may be required by
applicable Law, (2) commercial or comprehensive general liability and
public liability insurance against claims for personal injury, death or
property damage suffered upon, in or about any premises or occurring as a
result of the ownership, maintenance or operation of any automobile, truck
or other vehicle or as the result of the use of products manufactured,
constructed or sold, or services rendered and property damage by blowout
and cratering, completed operations and broad form contractual liability as
respects any contract in which the operator may enter into under the terms
of its joint operating agreement, (3) fire insurance with a Broad Form
Extended Coverage on all property owned or hereafter acquired on a full
repair and replacement cost basis, (4) business interruption insurance
covering risk of loss as a result of the cessation for all or any part of
one year of any substantial part of any business conducted, and (5)
operator's extra expense insurance
32
<PAGE>
covering the costs of controlling a blowout, the expenses involved in re-
drilling or restoring the well, certain other related costs and seepage and
pollution liability (the limits of this insurance may vary according to the
depth and location of the well, all as is usual and customary in the oil
and gas exploration and production industry), all such insurance to be
maintained with financially sound and reputable insurance companies,
against such casualties, risks and contingencies, and in such types and
amounts, as are consistent with customary practices and standards of
companies engaged in similar business.
(B) Name the non-operating working interest owners, including the
Credit Party, as an additional insured on the liability policies (if
permitted by the applicable insurer).
(C) Obtain the agreement of each insurance company that its policy
may not be canceled, altered or amended without thirty (30) days prior
written notice to the operator and all non-operating working interest
owners. Borrowers shall deliver to Lender a certificate of insurance for
each policy of insurance which shall contain an endorsement showing Lender
as a loss payee and as an additional insured, as applicable. Such
endorsement shall provide for at least thirty (30) days' prior notice to
the Lender of any proposed termination or cancellation of such policy,
whether on account of default or otherwise. Each Borrower shall use its
best efforts to obtain from its operators certificates of insurance
coverage for each Mortgaged Property as and when requested by the Lender.
(c) Use of Proceeds. The proceeds of the Loans will be used by the
---------------
Borrowers solely as provided herein.
(d) Inspection. Each Credit Party will permit any representative of the
----------
Lender to visit and inspect any of its property, to examine its books and
records and to make copies and take extracts therefrom, and to discuss its
affairs, finances and accounts with its officers, all at such reasonable times
during normal business hours and as often as Lender may reasonably request.
(e) Further Assurances. Each Credit Party shall execute any and all
------------------
further documents and take all further actions which may be required under
applicable law, or which the Lender may reasonably request, to grant, preserve,
protect and perfect the first priority Lien on the Collateral created by the
Security Documents (subject only to Liens permitted by the Loan Documents).
(f) INDEMNITY. PARENT AND EACH BORROWER, JOINTLY AND SEVERALLY, SHALL
---------
INDEMNIFY THE LENDER AND ITS OFFICERS, DIRECTORS, EMPLOYEES, REPRESENTATIVES,
AGENTS, ATTORNEYS AND AFFILIATES (EACH, AN "INDEMNIFIED PARTY") FROM, HOLD EACH
-----------------
OF THEM HARMLESS AGAINST, PROMPTLY UPON DEMAND PAY OR REIMBURSE EACH OF THEM
WITH RESPECT TO, AND REFRAIN FROM CREATING OR ASSERTING AGAINST ANY OF THEM, ANY
AND ALL ACTIONS, SUITS, PROCEEDINGS (INCLUDING ANY INVESTIGATIONS, LITIGATION OR
INQUIRIES), CLAIMS, DEMANDS, CAUSES OF ACTION, COSTS, LOSSES, LIABILITIES,
DAMAGES OR EXPENSES OF ANY KIND OR NATURE WHATSOEVER INCLUDING, WITHOUT
LIMITATION, THOSE BASED UPON NEGLIGENCE (BUT EXCLUDING THOSE BASED UPON GROSS
NEGLIGENCE OR WILLFUL MISCONDUCT) (COLLECTIVELY, THE "INDEMNITY MATTERS")
-----------------
33
<PAGE>
WHICH MAY BE INCURRED BY OR ASSERTED AGAINST OR INVOLVE ANY OF THEM (WHETHER OR
NOT ANY OF THEM IS DESIGNATED A PARTY THERETO) AS A RESULT OF, ARISING OUT OF OR
IN ANY WAY RELATED TO (I) ANY ACTUAL OR PROPOSED USE BY THE BORROWERS OF THE
PROCEEDS OF ANY OF THE LOANS, (II) THE BREACH OF ANY REPRESENTATION OR WARRANTY
SET FORTH IN ANY LOAN DOCUMENT INCLUDING, WITHOUT LIMITATION, THOSE REGARDING
ENVIRONMENTAL LAWS, (III) THE FAILURE OF ANY CREDIT PARTY TO PERFORM ANY
OBLIGATION REQUIRED BY ENVIRONMENTAL LAWS OR BY ANY LOAN DOCUMENT IN CONNECTION
WITH ENVIRONMENTAL LAWS, OR (IV) ANY OTHER ASPECT OF THIS AGREEMENT AND THE
OTHER LOAN DOCUMENTS, INCLUDING, WITHOUT LIMITATION, THE REASONABLE FEES AND
DISBURSEMENTS OF COUNSEL (INCLUDING ALLOCATED COSTS OF INTERNAL COUNSEL), ALL
FORESEEABLE CONSEQUENTIAL DAMAGES OF ANY USE, GENERATION, MANUFACTURE,
PRODUCTION, STORAGE, RELEASE, THREATENED RELEASE, DISCHARGE, DISPOSAL, OR
PRESENCE OF A HAZARDOUS MATERIAL, THE COSTS OF ANY REQUIRED OR NECESSARY
ENVIRONMENTAL INVESTIGATION OR MONITORING ANY REPAIR, CLEANUP OR DETOXIFICATION
OF ITS REAL PROPERTY AND THE PREPARATION AND IMPLEMENTATION OF ANY CLOSURE,
REMEDIAL OR OTHER PLANS, AND ALL OTHER EXPENSES INCURRED IN CONNECTION WITH
INVESTIGATING, DEFENDING OR PREPARING TO DEFEND ANY SUCH INDEMNITY MATTER. THE
EACH BORROWER AND PARENT SHALL BE OBLIGATED TO PAY OR REIMBURSE EACH INDEMNIFIED
PARTY FOR ALL OUT-OF-POCKET COSTS AND EXPENSES (INCLUDING, WITHOUT LIMITATION,
REASONABLE ATTORNEYS' FEES AND EXPENSES) INCURRED BY SUCH INDEMNIFIED PARTY IN
CONNECTION WITH ANY INDEMNITY MATTER AT THE TIME SUCH COSTS AND EXPENSES ARE
INCURRED AND SUCH INDEMNIFIED PARTY HAS GIVEN THE BORROWERS WRITTEN NOTICE
THEREOF. BORROWERS' OBLIGATIONS UNDER THIS SECTION ARE SUBJECT TO SECTION 8.13
------------
HEREOF.
(g) Books and Records. Each Credit Party (i) shall keep, in accordance
-----------------
with GAAP, proper and complete books, records and accounts and (ii) shall permit
Lender to inspect the same and make and take away copies thereof.
(h) Taxes. Each Credit Party shall promptly pay when due any and all
-----
Taxes due, except Taxes for which the criteria for Permitted Liens have been
satisfied.
(i) Payment of Obligations. Each Credit Party shall promptly pay all of
----------------------
its Debt as it becomes due except to the extent that any such Debt is being
contested in good faith and by appropriate and lawful proceedings diligently
conducted and for which reserves or other provisions (if any) required by GAAP
shall have been made; provided, that no Credit Party shall, directly or
indirectly, make any prepayment of principal of or interest on any Subordinate
Debt at any time that the Obligation is outstanding or Lender has any commitment
to make Loans hereunder.
(j) Expenses of Lender. Any provision to the contrary notwithstanding,
------------------
and whether or not the transactions contemplated by this Agreement shall be
consummated, Parent and Borrowers
34
<PAGE>
shall pay on demand all reasonable out-of-pocket expenses (including, without
limitation, the fees and expenses of counsel for Lender) in connection with the
negotiation, preparation, execution, filing, recording, refiling, rerecording,
modification, release, supplement and waiver of the Loan Documents and the
making, servicing and collection of the Obligation including, without
limitation, the Obligation under SECTION 7.4.
-----------
(k) Environmental Laws. Each Credit Party shall conduct its business so
------------------
as to comply in all respects with all Environmental Laws except where the
failure to so comply will not have a Material Adverse Effect.
(l) Supplemented Schedules. Borrowers and Parent shall supplement in
----------------------
writing and deliver to Lender revisions of the Schedules annexed to this
Agreement to the extent necessary to disclose new or changed facts or
circumstances after the Closing Date so as to cause the representations and
warranties set forth herein to remain accurate and not misleading; provided that
--------
subsequent disclosures shall not constitute a cure or waiver of any Default or
Event of Default resulting from the matters disclosed.
(m) ERISA Reporting Requirements. A Borrower or ERISA Affiliate, as
----------------------------
applicable, shall furnish or cause to be furnished to Lender:
(i) Promptly and in any event (A) within 30 days after a Borrower
or any ERISA Affiliate knows or has reason to know that any ERISA Event
described in clause (a) of the definition of ERISA Event with respect to
any Plan has occurred and (B) within 10 days after the Borrower or any
ERISA Affiliate knows or has reason to know that any other ERISA Event with
respect to any Plan has occurred, a written notice describing such event
and describing what action is being taken or is proposed to be taken with
respect thereto, together with a copy of any notice or event that is given
to the PBGC;
(ii) Promptly and in any event within 10 Business Days after
receipt thereof by a Borrower or any ERISA Affiliate from the PBGC, copies
of each notice received by the Borrower or any ERISA Affiliate of the
PBGC's intention to terminate any Plan or to have a trustee appointed to
administer any Plan;
(iii) Promptly and in any event within 30 days after receipt
thereof, a copy of any notice, determination letter, ruling or opinion the
Borrowers or any ERISA Affiliate receives from the PBGC, the United States
Department of Labor or the Internal Revenue Service with respect to any
Plan;
(iv) Promptly, and in any event within 10 Business Days after
receipt thereof, a copy of any correspondence a Borrower or any ERISA
Affiliate receives from the Plan Sponsor (as defined by section 4001(a)(10)
of ERISA) of any Plan concerning potential withdrawal liability pursuant to
section 4219 or 4202 of ERISA, and a statement from the chief financial
officer of the Borrower or such ERISA Affiliate setting forth details as to
the events giving rise to such potential withdrawal liability and the
action which the Borrower or such ERISA Affiliate is taking or proposes to
take with respect thereto;
35
<PAGE>
(v) Notification promptly and in any event within 30 days of any
material increases in the benefits of any existing Plan which is not a
Multiemployer Plan, or the establishment of any new Plan, or the
commencement of contributions to any Plan to which a Borrower or any ERISA
Affiliate was not previously contributing;
(vi) Notification within 10 Business Days after a Borrower or any
ERISA Affiliate knows or has reason to know that the Borrower or any such
ERISA Affiliate has or intends to file a notice of intent to terminate any
Plan under a distress termination within the meaning of section 4041(c) of
ERISA and a copy of such notice; and
(vii) Promptly after receipt of written notice of commencement
thereof, notice of all (A) claims made by participants or beneficiaries
with respect to any Plan and (B) actions, suits and proceedings before any
court or governmental department, commission, board, bureau, agency or
instrumentality, domestic or foreign, affecting a Borrower or any ERISA
Affiliate with respect to any Plan, except those which, in the aggregate,
if adversely determined could not have a Material Adverse Effect.
5.2 Negative Covenants. Parent and each Borrower covenants and agrees
------------------
with Lender, so long as this Agreement shall remain in effect and the principal
of or interest on the Note, or any other Obligation, shall be unpaid, that it
will, and will cause each other Credit Party to, comply with the following:
(a) Debt. No Credit Party will, directly or indirectly, create, incur or
----
suffer to exist any direct, indirect, fixed or contingent liability for any
Debt, other than (i) the Obligation, (ii) the Debt described on SCHEDULE 5.2(a),
---------------
if any, (iii) obligations to pay Taxes, (iv) accounts payable in the ordinary
course of business, (v) Permitted Purchase Money Debt, (vi) salaries and wages,
(vii) accrued expenses, deferred credits and loss contingencies which are
properly classified as liabilities or indebtedness under GAAP, (viii)
Subordinated Debt, and (ix) Hydrocarbon Hedges permitted pursuant to SECTION
-------
5.2(s).
- ------
(b) Liens. No Credit Party will, directly or indirectly, (i) create,
-----
incur or suffer or permit to be created or incurred or to exist any Lien upon
any of its assets except (a) the Liens in favor of Lender, and (b) Permitted
Liens, or (ii) enter into or permit to exist any arrangement or agreement,
other than the Loan Documents, which directly or indirectly prohibits any Credit
Party from creating or incurring any Lien on any of its assets. Lender hereby
agrees with Parent and each Borrower that, provided no Default or Event of
Default has occurred which is continuing, upon the incurrence by any Credit
Party of Permitted Purchase Money Debt, if requested by the lender of such
Permitted Purchase Money Debt, Lender will subordinate the Liens created and
evidenced by the Security Documents to the Permitted Purchase Money Liens
securing such Permitted Purchase Money Debt with respect to the asset acquired
with the proceeds of such Debt.
(c) Acquisitions and Dissolutions. Borrowers will not, directly or
-----------------------------
indirectly (i) acquire all or any substantial portion of the assets or stock of,
or interest in, any Person, except in connection with the acquisition of Mineral
Interests in the ordinary course of business, or (ii) liquidate, wind up, or
dissolve itself (or suffer any liquidation or dissolution). Notwithstanding the
foregoing, Lender will not unreasonably withhold its consent to the completion
of the Partnership
36
<PAGE>
Rollup if, simultaneously with the closing of such Rollup, Parent executes and
delivers to lender, at Parent's expense, such amendments, modifications and
supplements to this Agreement and the other Loan Documents which Lender shall
reasonably require (a) to evidence the assumption and agreement of Parent to pay
and perform, as primary obligor, all of the obligations of each Borrower under
each Loan Document, and (b) to evidence, perfect and reaffirm the Liens created
by the Security Documents.
(d) Loans, Advances and Investments. Except as permitted by SECTION
------------------------------- -------
5.2(c), no Credit Party will directly or indirectly, make any loan, advance or
extension of credit, or capital contribution to, make any investments in, or
purchase or commit to purchase any stock or other securities or evidences of
contractual obligations of, or interests in, any Person, other than (i)
investments in obligations of the United States of America and agencies thereof
and obligations guaranteed by the United States of America maturing within one
year from the date of acquisition, (ii) certificates of deposit issued by
commercial banks organized under the Laws of the United States of America or any
state thereof and having a combined capital, surplus and undivided profits of
not less than $250,000,000, or completely insured by the Federal Deposit
Insurance Corporation, (iii) current trade and customer accounts receivable
which are for goods furnished or services rendered in the ordinary course of
business and are payable in accordance with customary trade terms, (iv) from and
after completion of the Exchange loans, advances and investments by either or
both Borrowers in or to Parent, (v) loans by either Borrower to POC up to
$500,000 in the aggregate outstanding from time to time, (vi) loans, advances
and investments by each Borrower in or to the other, (vii) from and after
completion of the Exchange, loans, advances and investments by Parent in each
Borrower (provided, that Parent may make investments in the equity capital of
each Borrower prior to the Exchange), (viii) loans by either Borrower to Spanish
Peaks up to $500,000 in the aggregate outstanding from time to time, or (ix)
investments in debt securities of a domestic issuer if such securities are rated
BBB+ or higher by Standard & Poor's Rating Service, or of a comparable quality
of any other rating agency acceptable to Lender.
(e) Employee Benefit Plans. The Borrowers shall not, and shall not
----------------------
permit any ERISA Affiliate to, directly or indirectly, (a) terminate any Plan,
(b) permit to exist any ERISA Event, or any other event or condition with
respect to a Plan, (c) make a complete or partial withdrawal (within the meaning
of section 4201 of ERISA) from any Multiemployer Plan, (d) enter into any new
Plan or modify any existing Plan so as to increase its obligations thereunder
except in the ordinary course of business consistent with past practice, or (e)
permit the present value of all benefit liabilities, as defined in Title IV of
ERISA, under each Plan (using the actuarial assumptions utilized by the PBGC
upon termination of a plan) to (in the opinion of the Lender) exceed the fair
market value of Plan assets allocable to such benefits all determined as of the
most recent valuation date for each such Plan; provided that any action
described in clauses (a) through (e) above individually, and/or in the
aggregate, could reasonably be expected to result in a Material Adverse Effect.
(f) Distributions. No Credit Party will, directly or indirectly, (i)
-------------
retire, redeem, purchase or otherwise acquire for value any capital stock or
other equity interest of such Credit Party, or (ii) declare, make or pay any
dividend or distribution on or with respect to any such capital stock or
interest; provided, however, that so long as there has not occurred, and after
-------- -------
giving effect thereto there does not exist, a Default or Event of Default, at
any time prior to the Exchange,
37
<PAGE>
(a) either Borrower may declare or pay distributions in respect of the
Borrowers' partners' income tax liability attributable to the net income of the
Borrowers to the extent and in the amounts contemplated by such Borrower's
Agreement of Limited Partnership, (b) after completion of the Exchange, either
Borrower may make Distributions to Parent, and (c) PGP II may make Distributions
to PGP.
(g) Capital Expenditures; Exploration Expenses. No Credit Party will,
------------------------------------------
directly or indirectly, make (i) capital expenditures other than such
expenditures which are for or related to assets or leaseholds used or useful in
the normal business operations of Borrowers, or (ii) incur aggregate exploration
expenses in excess of $250,000 during any six (6) month period commencing upon
the applicable Determination Date; provided, that, the Credit Parties shall not
be required to comply with clause (ii) of this SECTION 5.2(g) after completion
--------------
of an initial public offering of Parent's common stock which results in Net
Proceeds to Parent of at least $15,000,000.
(h) Issuance of Equity Interests. No Credit Party will, directly or
----------------------------
indirectly, issue, sell or otherwise dispose of (i) any equity interest in it or
any equity interest held by it in any other Credit Party, (ii) any securities
convertible into or exchangeable for any such interest, or (iii) any carrying
Rights, warrants, options, or other rights to subscribe for or purchase any such
interest; provided, that, nothing in this SECTION 5.2(h) shall be deemed to
--------------
prohibit (A) the Exchange, (B) any Credit Party from issuing additional equity
securities to the Persons which hold its equity securities on the date hereof or
will hold such equity securities after giving effect to the Exchange, or (C)
Parent from issuing shares of its common stock or preferred stock in any
transaction which does not result in a Change of Control.
(i) Transactions with Affiliates. No Credit Party will, directly or
----------------------------
indirectly, enter into any transaction (including, but not limited to, the sale
or exchange of property or the rendering of service) with any of its Affiliates,
other than (i) in the ordinary course of business of such Credit Party and upon
fair and reasonable terms no less favorable to such Credit Party than such
Credit Party could obtain or could become entitled to in an arm's-length
transaction with a Person which was not an Affiliate, and (ii) as provided in
SECTION 5.2(d).
- --------------
(j) Sale of Assets. Without the prior written consent of Lender, no
--------------
Credit Party will, directly or indirectly, sell, lease or otherwise dispose of
all or any substantial part of its assets, other than (i) sales of inventory
(including Hydrocarbon production) in the ordinary course of business, (ii)
sales by Borrowers of Proven Reserves which do not exceed $500,000 in the
aggregate during any six (6) month period commencing upon any Determination
Date, provided that upon prior written consent of Lender, Borrowers may sell
--------
Proven Reserves with an aggregate sales price in excess of $500,000 during such
period, and provided further that (x) to the extent the aggregate amount of
-------- -------
proceeds from such sales do not exceed $500,000 during any applicable period of
determination, the Borrowing Base shall be reduced by the amount of such
proceeds and (y) to the extent the aggregate amount of proceeds from such sales
exceed $500,000 during any applicable period of determination, the Borrowing
Base shall be reduced by the lesser of (A) the amount of such proceeds or (B)
such amount as such Proven Reserves comprise of the Borrowing Base determined by
Lender in its sole discretion, and (iii) PGP may transfer interests in and to
certain of its Uinta Basin properties only to the extent of depths lying below
the Green River formation pursuant to the Sego Farmout and at the time of such
transfer, Lender will release such properties
38
<PAGE>
from the Lien of the PGP Oil and Gas Mortgage. Notwithstanding the foregoing,
Lender agrees that it will not unreasonably withhold its consent to the transfer
by PGP of the Antelope Creek Gathering Assets to a Person in exchange for an
equity interest in such Person provided that (i) prior to making such transfer
PGP and such Person enter into a gathering agreement on customary and reasonable
terms pursuant to which such Person agrees to gather gas produced from PGP's
properties serviced by the Antelope Creek Gathering Assets, (ii) PGP grants to
Lender a first and prior security interest in and to its equity interest in such
Person pursuant to a Pledge Agreement in form and substance acceptable to
Lender, and (iii) no Event of Default has occurred which is continuing.
Simultaneously with granting its consent pursuant to the preceding paragraph,
Lender will, at Borrowers' expense, release the Antelope Creek Gathering Assets
from the Liens created by the PGP Oil and Gas Mortgage.
(k) Hazardous Materials. No Credit Party shall permit the manufacture,
-------------------
storage, transmission, presence, release, discharge or disposal of any Hazardous
Materials over, upon or under any of the real property except as permitted by
Law.
(l) Change in Ownership of Borrowers. No Credit Party shall permit a
--------------------------------
Change of Control.
(m) Fixed Charge Coverage Ratio. The Credit Parties will not permit
---------------------------
Parent's ratio determined on a consolidated basis for any period of four
consecutive fiscal quarters of (i) net income, plus (to the extent deducted
therefrom in arriving at net income) depreciation, depletion and amortization,
interest expense, income taxes actually paid (or distributions to the partners
of Borrowers for the payment of taxes pursuant to SECTION 5.2(f)), to (ii) the
--------------
sum of (x) Current Maturities of Long Term Debt, and (y) interest expense paid,
to be less than 1.25 to 1.0.
(n) Minimum Tangible Net Worth. Prior to the Exchange, the Credit
--------------------------
Parties will not permit the Borrowers' Tangible Net Worth, determined on a
consolidated basis, at any time to be less than $10,000,000. After giving effect
to the Exchange, the Credit Parties will not permit Parent's Tangible Net Worth,
determined on a consolidated basis, at any time to be less than the sum of (i)
$10,000,000, and (ii) seventy percent (70%) of the Net Proceeds from the
issuance of equity securities of Parent after the Closing Date.
(o) Current Ratio. The Credit Parties will not permit Parent's ratio,
-------------
determined on a consolidated basis, at any time of (i) current assets to (ii)
current liabilities to be less than 1.0 to 1.0. For purposes hereof, current
assets shall include, (A) until the Tranche A Commitment Termination Date, an
amount equal to the Borrowing Base less the then aggregate unpaid balance of the
Tranche A Revolving Loans, and (B) until the Tranche B Commitment Termination
Date, an amount equal to the Tranche B Commitment less the then aggregate unpaid
balance of the Tranche B Revolving Loans.
(p) Compliance with Laws and Documents. No Credit Party will, directly
----------------------------------
or indirectly, violate the provisions of any Laws, its agreement of limited
partnership or any material agreements if such violation alone, or when
aggregated with all other such violations, could cause a Material Adverse
Effect.
39
<PAGE>
(q) New Businesses. No Credit Party will, directly or indirectly, engage
--------------
in any business other than the ownership of equity interests in the other Credit
Parties owned by it on the date hereof or which will be owned by it immediately
after giving effect to the Exchange and the exploration, development, production
and sale of its Mineral Interests and related businesses in which it is
presently engaged.
(r) Fiscal Year and Accounting Methods. No Credit Party will change its
----------------------------------
fiscal year (which currently is December 31) or method of accounting (other than
immaterial changes in methods).
(s) Hydrocarbon Hedges. No Credit Party will enter into any Hydrocarbon
------------------
Hedge without the prior written consent of the Lender other than Hydrocarbon
Hedges which in the aggregate do not exceed sixty percent (60%) of anticipated
production from developed and producing Proven Reserves during the term of such
Hydrocarbon Hedge transactions.
5.3 Reporting Requirements. Each Credit Party shall cause the following
----------------------
to be furnished to Lender:
(a) As soon as available, but no later than ninety (90) days after the
last day of each fiscal year of the Credit Parties, audited consolidated
Financial Statements and unaudited consolidating Financial Statements showing
the financial condition and results of operations of Parent and its Consolidated
Subsidiaries as of, and for the year ended on, such last day, accompanied by (i)
the opinion, without material qualification, of Arthur Andersen or another firm
of independent certified public accountants reasonably acceptable to Lender,
based on an audit using generally accepted auditing standards, that such
Financial Statements were prepared in accordance with GAAP and present fairly
the financial condition and result of operations of Parent and its Consolidated
Subsidiaries, and (ii) a Financial Report Certificate with respect to such
Financial Statements.
(b) As soon as available, but no later than forty-five (45) days after
the last day of each fiscal quarter (A) consolidated and consolidating Financial
Statements showing the financial condition and results of operations of the
Credit Parties as of, and for the period from the beginning of the current
fiscal year, to such last day, and (B) a Financial Report Certificate with
respect to such Financial Statements.
(c) [Intentionally deleted].
(d) The Reserve Reports described in SECTION 2.2 at the times prescribed
-----------
therein.
(e) As soon as available, but not later than ninety (90) days after the
last day of each six (6) month period commencing upon the applicable
Determination Date, an exploration expenditure summary showing the exploration
expenses incurred by each Borrower for such six (6) month period.
(f) Notice, promptly after any Credit Party knows or has good faith
reason to believe, of (i) the existence and status of any Litigation with
respect to any Credit Party which could have
40
<PAGE>
a Material Adverse Effect, (ii) any change in any material fact or circumstance
represented or warranted in any Loan Document, or (iii) the occurrence of a
Default or Event of Default, specifying the nature thereof and what action any
Credit Party has taken, is taking, or proposed to take with respect thereto.
(g) Promptly upon request therefor by Lender, such information (not
otherwise required to be furnished under the Loan Documents) respecting the
business affairs, assets and liabilities of any Credit Party or any Person
guaranteeing or providing Collateral to secure all or any part of the
Obligation and such opinions, certifications and documents, in addition to those
mentioned in this Agreement, as Lender may reasonably request.
SECTION 6. EVENTS OF DEFAULT. The term "Event of Default" means the occurrence
- --------- ----------------- ----------------
of any one or more of the following events:
6.1 Payment of Obligation. The failure or refusal of either Borrower to
---------------------
pay any portion of the Obligation as the same becomes due in accordance with the
terms of the Loan Documents.
6.2 Certain Covenants. The failure or refusal of either Borrower to
-----------------
punctually and properly perform, observe and comply with any covenant, agreement
or condition contained in SECTIONS 5.1(e), (g), (k) and (l) and such failure or
---------------- --- --- ---
refusal continues for a period of fifteen (15) days after Parent or either
Borrower has, or, with the exercise of reasonable investigation, should have,
notice thereof.
6.3 Other Covenants. The failure or refusal of Parent or either Borrower
---------------
to punctually and properly perform, observe and comply with any covenant,
agreement or condition contained in this Agreement (other than the Sections
listed in SECTION 6.2 above).
-----------
6.4 Loan Documents and Security Documents. An Event of Default shall
-------------------------------------
occur and be continuing under any Security Document or other Loan Document;
6.5 Bankruptcy. (i) Any Credit Party shall commence a voluntary case
----------
concerning itself under Title 11 of the United States Code entitled "Bankruptcy"
as now or hereafter in effect, or any successor thereto, (ii) an involuntary
case is commenced against any Credit Party and the petition is not controverted
within thirty (30) days, or is not dismissed within sixty (60) days, after
commencement of the case, (iii) a custodian is appointed for, or takes charge
of, all or any substantial part of the property of any Credit Party, (iv) any
Credit Party commences any other proceeding under any reorganization,
arrangement, adjustment of debt, relief of debtors, dissolution, insolvency or
liquidation or similar law of any jurisdiction whether now or hereafter in
effect relating to any Credit Party or there is commenced against any Credit
Party any such proceeding which remains undismissed for a period of sixty (60)
days, (v) any Credit Party is adjudicated insolvent or bankrupt, (vi) any Credit
Party makes a general assignment for the benefit of creditors, (vii) any Credit
Party shall fail to pay, or shall state that it is unable to pay, or shall be
unable to pay, its debts generally as they become due, (viii) any Credit Party
shall call a meeting of its creditors with a view to arranging a composition or
adjustment of its debts, or (ix) any Credit Party shall by any act or failure to
act indicate its consent to, approval of or acquiescence in any of the
foregoing;
41
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6.6 Attachment. The failure to have discharged within a period of thirty
----------
(30) days after the commencement thereof any attachment, sequestration or
similar proceeding against any assets of any Credit Party, which assets have a
value, individually or collectively, in excess of $250,000.
6.7 Payment of Judgments. Any Credit Party shall fail to pay any money
--------------------
judgment in excess of $250,000 against it or its assets at least ten days prior
to the date on which any Credit Party's assets may be sold lawfully to satisfy
such judgment.
6.8 Default Under Other Debt. Any Credit Party shall default in the due
------------------------
and punctual payment of the principal of or the interest on any Debt in excess
of $250,000 in the aggregate principal amount, secured or unsecured, or in the
due performance or observance of any covenant or condition of any indenture or
other agreement executed in connection therewith, and such default shall have
continued beyond any period of grace provided with respect thereto.
6.9 Material Adverse Effect. The occurrence of any event or events which
-----------------------
shall have or cause a Material Adverse Effect.
6.10 Impairment of Collateral or Ability to Pay. The discovery by Lender
------------------------------------------
of reliable and accurate information that the prospect of payment or performance
of the Obligation is reasonably likely to be materially impaired, or that the
value of the Collateral has or will be materially decreased and the situation
giving rise thereto is not corrected to the reasonable satisfaction of Lender
within twenty (20) days after notice thereof from Lender to Parent or either
Borrower.
6.11 Misrepresentation. Any statement, representation, or warranty in
-----------------
the Loan Documents or in any writing ever delivered by any Credit Party or on
behalf of any Credit Party to Lender pursuant to the Loan Documents is false,
misleading or erroneous in any material respect when made or deemed to be
repeated.
6.12 Change of Control. A Change of Control shall occur.
-----------------
SECTION 7. RIGHTS AND REMEDIES.
- --------- -------------------
7.1 Remedies. Upon and after the occurrence of an Event of Default,
--------
Lender may, at its election, do any one or more of the following without notice
of any kind, including, without limitation, notice of acceleration or of
intention to accelerate, presentment and demand or protest, all of which are
hereby expressly waived by Parent and Borrowers: (a) declare the entire unpaid
balance of the Obligation, or any part thereof, immediately due and payable,
whereupon it shall be due and payable (provided that, upon the occurrence of an
-------- ----
Event of Default under SECTIONS 6.5(i) - (vi) inclusive, the entire Obligation
----------------------
shall automatically become due and payable without notice or other action of any
kind whatsoever); (b) terminate its commitment to lend hereunder; (c) reduce any
claim to judgment; (d) exercise the Rights of offset or banker's lien against
the interest of Parent or either Borrower in and to every account and other
property of Parent and each Borrower which are in the possession of Lender to
the extent of the full amount of the Obligation; (e) foreclose any or all Liens
held by Lender or otherwise realize upon any and all of the Rights Lender may
have in and to the Collateral, or any part thereof; and (f) exercise any and all
other legal
42
<PAGE>
or equitable Rights afforded by the Loan Documents, the Laws of the State of New
York or any other jurisdiction as Lender shall deem appropriate.
7.2 Performance by Lender. If any covenant, duty or agreement of any
---------------------
Credit Party is not performed in accordance with the terms of the Loan
Documents, Lender may, at its option, perform or attempt to perform, such
covenant, duty or agreement on behalf of such Credit Party. In such event, any
amount expended by Lender in such performance or attempted performance shall be
payable by each Borrower to Lender on demand, shall become part of the
Obligation and shall bear interest at the Default Rate from the date of such
expenditure by Lender until paid. Notwithstanding the foregoing, it is expressly
understood that Lender does not assume and shall never have, except by express
written consent of Lender, any liability or responsibility for the performance
of any covenant, duty or agreement of any Credit Party.
7.3 Delegation of Duties and Rights. Lender may perform any of its
-------------------------------
duties or exercise any of its Rights under the Loan Documents by or through its
officers, directors, employees, attorneys, agents or other representatives.
7.4 Expenditures by Lender. All court costs, reasonable attorneys' fees,
----------------------
other costs of collection and other sums spent by Lender pursuant to the
exercise of any Right (including, without limitation, any effort to collect or
enforce the Notes) provided herein shall be payable to Lender on demand, shall
become part of the Obligation and shall bear interest at the Default Rate from
the date spent until the date repaid.
SECTION 8. MISCELLANEOUS.
- --------- -------------
8.1 Notices. All notices, requests and other communications to any party
-------
hereunder shall be in writing and shall be given to such party at its address or
fax number set forth on SCHEDULE 8.1 hereto or such other address or fax number
------------
as such party may hereafter specify by notice to the other parties hereto. Each
such notice, request or other communication shall be effective (i) if given by
fax, when transmitted to the fax number specified in this Section and a
confirmation of receipt (which may be telephonic) is given by the recipient,
(ii) if given by certified mail, return receipt requested, on the fourth day
after such communication is deposited in the mails with first class postage
prepaid, addressed as aforesaid or (iii) if given by any other means (including,
without limitation, by air courier), when delivered at the address specified in
this Section.
8.2 Amendments, Etc. No amendment or waiver of any provision of this
----------------
Agreement or the Note, nor consent to any departure by Parent or either
Borrower, shall in any event be effective unless the same shall be in writing
and signed by the Lender, and then such waiver or consent shall be effective
only in the specific instance and for the specific purpose for which given.
8.3 No Waiver; Remedies Cumulative. No failure or delay on the part of
------------------------------
the Lender in exercising any right or remedy hereunder and no course of dealing
between or among the Parent, the Borrowers and the Lender shall operate as a
waiver thereof, nor shall any single or partial exercise of any right or remedy
hereunder preclude any other or further exercise thereof or the
43
<PAGE>
exercise of any other right or remedy hereunder. The rights and remedies herein
expressly provided are cumulative and not exclusive of any rights or remedies
which the Lender would otherwise have.
8.4 Successors and Assigns. This Agreement shall be binding upon and
----------------------
inure to the benefit of Parent, the Borrowers and the Lender and their
respective successors and permitted assigns. Neither the Parent, the Borrowers
nor Lender may assign or transfer any of its rights or obligations hereunder
without the prior written consent of the non-assigning party, such consent not
to be unreasonably withheld and any purported assignment in violation of the
foregoing shall be null and void.
8.5 Number and Gender of Words; References. Whenever in any Loan
--------------------------------------
Document the singular number is used, the same shall include the plural where
appropriate, and vice versa; and words of any gender in any Loan Document shall
----------
include each other gender where appropriate. The words "herein," "hereof," and
"hereunder," and other words of similar import refer to the relevant Loan
Document as a whole and not to any particular part or subdivision thereof. As
used in any Loan Document, the words "Section", "subsection", "paragraph",
"clause", "Schedule" and "Exhibit" refer to Sections, subsections, paragraphs
and clauses of, and Schedules and Exhibits to, such Loan Documents unless
otherwise specified.
8.6 Headings. The headings, captions, and arrangements used in any of
--------
the Loan Documents are, unless specified otherwise, for convenience only and
shall not be deemed to limit, amplify, or modify the terms of the Loan
Documents, nor affect the meaning thereof.
8.7 Exhibits and Schedules. If any Exhibit or Schedule, which is to be
----------------------
executed and delivered, contains blanks, the same shall be completed correctly
and in accordance with the terms and provisions contained and as contemplated
herein prior to, at the time of, or after the execution and delivery thereof.
Each of the Exhibits and Schedules are incorporated herein by this reference.
8.8 Form and Number of Documents. Each agreement, document, instrument,
----------------------------
or other writing to be furnished to Lender under any provision of this Agreement
must be in form and substance and in such number of counterparts as may be
satisfactory to Lender and its counsel.
8.9 Conflicts. Except as otherwise provided in this Agreement and except
---------
as otherwise provided in the other Loan Documents by specific reference to the
applicable provisions of this Agreement, if any provision contained in this
Agreement is in conflict with or is inconsistent with any provision in the other
Loan Documents, the provision contained in this Agreement shall govern and
control.
8.10 Waivers by Parent and the Borrowers. Except as otherwise provided
-----------------------------------
for in this Agreement, Parent and each Borrower waives (i) presentment, demand
and protest and notice of presentment, notice of intent to accelerate the
maturity of the Obligations and notice of such acceleration, protest, default,
non-payment, maturity, release, compromise, settlement, extension, or renewal;
(ii) all rights to notice of a hearing prior to the Lender's taking possession
or control of, or the Lender's replevy, attachment or levy upon, the Collateral
or any bond or security which might be required by any court prior to allowing
the Lender to exercise any of Lender's remedies; and (iii) the benefit of all
valuation, appraisement and exemption laws. Parent and each Borrower
44
<PAGE>
acknowledges that it has been advised by counsel with respect to this Agreement
and the transactions evidenced by this Agreement.
8.11 Changes in the Accounting Standard. All accounting and financial
-----------------------------------
terms used in any of the Loan Documents and the compliance with each covenant
contained in the Loan Documents which relates to financial matters shall be
determined in accordance with GAAP, except to the extent that a deviation
therefrom is expressly stated in such Loan Documents. Should a change in GAAP
require a change in any method of accounting, then such change shall not result
in an Event of Default if, at the time of such change, such Event of Default had
not occurred and was not then continuing, based upon the former methods of
accounting used by or on behalf of such Credit Party; provided that, after any
-------- ----
such change in accounting methods, the Financial Statements required to be
delivered to Lender pursuant to the terms hereof shall be prepared in compliance
with such new method or methods of accounting but accompanied by such
information, in form and detail satisfactory to Lender, that will allow Lender
to readily determine the effect of such changes in accounting methods on such
Financial Statements, and, for the purpose of determining whether an Event of
Default has occurred, Lender shall look solely to such Financial Statements as
adjusted to reflect compliance with such former method or methods of accounting.
The parties hereto acknowledge and agree that the Current Financials were
prepared, and until the Exchange occurs, all Financial Statements hereafter
delivered will be prepared, on a pro forma basis as if the Exchange had occurred
as of the date and for the period covered by such Financial Statements, and
compliance with the covenants set forth in SECTIONS 5.2(m), 5.2(n) and 5.2(o)
--------------- ------ ------
will be computed on a pro forma consolidated basis as if the Exchange had
occurred as of the dates and for the periods for which compliance with such
covenants is being calculated. The parties further agree that notwithstanding
anything contained herein to the contrary, unless requested by Lender after the
date hereof, no consolidating Financial Statement of PEI-Kansas shall be
required to be delivered to Lender hereunder.
8.12 Exceptions to Covenants. Neither Parent nor any Borrower shall
-----------------------
take any action or fail to take any action which is permitted as an exception to
any of the covenants contained in any of the Loan Documents if such action or
omission would result in the breach of any other covenant contained in any of
the Loan Documents.
8.13 Survival. All covenants, agreements, undertakings, representations,
--------
and warranties made in any of the Loan Documents shall survive all closings
under the Loan Documents and, except as otherwise indicated, shall not be
affected by any investigation made by any party. The Borrowers' and Parent's
obligations under SECTIONS 5.1(f) and 5.1(j) hereof (a) shall remain operative
--------------- -------
and in full force and effect regardless of the termination of this Agreement,
the repayment of the Note, or the existence of any investigation made on behalf
of the Lender regarding the representations and warranties made by the Borrowers
and Parent in connection with the Loan Documents. If and to the extent that the
obligations of the Borrowers and Parent under SECTIONS 5.1(f) and 5.1(j) are
--------------- ------
unenforceable for any reason, the Borrowers and Parent hereby agree to make the
maximum contribution to the payment and satisfaction of such obligations that is
permissible under applicable law.
8.14 GOVERNING LAW. PURSUANT TO NEW YORK GENERAL OBLIGATIONS LAW
-------------
SECTION 5-1401, THIS AGREEMENT AND ALL OTHER LOAN
45
<PAGE>
DOCUMENTS AND COLLATERAL DOCUMENTS SHALL BE CONSTRUED IN ACCORDANCE WITH AND
GOVERNED BY THE LAWS OF THE STATE OF NEW YORK, OTHER THAN CONFLICT OF LAWS RULES
THEREOF, EXCEPT TO THE EXTENT THAT THE LAWS OF ANY STATE IN WHICH ANY PROPERTY
INTENDED AS SECURITY FOR THE OBLIGATION IS LOCATED NECESSARILY GOVERN (A) THE
PERFECTION AND PRIORITY OF THE LIENS IN FAVOR OF LENDER WITH RESPECT TO SUCH
PROPERTY, AND (B) THE EXERCISE OF ANY REMEDIES (INCLUDING FORECLOSURE) WITH
RESPECT TO SUCH PROPERTY.
8.15 VENUE; SERVICE OF PROCESS. EACH BORROWER AND PARENT, FOR ITSELF,
-------------------------
ITS SUCCESSORS AND ASSIGNS, HEREBY (A) IRREVOCABLY SUBMITS TO THE NONEXCLUSIVE
JURISDICTION OF THE STATE AND FEDERAL COURTS OF THE STATE OF TEXAS AND AGREES
AND CONSENTS THAT SERVICE OF PROCESS MAY BE MADE UPON IT IN ANY LEGAL PROCEEDING
ARISING OUT OF OR IN CONNECTION WITH THE LOAN DOCUMENTS AND THE OBLIGATION BY
SERVICE OF PROCESS AS PROVIDED BY TEXAS LAW, (B) IRREVOCABLY WAIVES, TO THE
FULLEST EXTENT PERMITTED BY LAW, ANY OBJECTION WHICH IT MAY NOW OR HEREAFTER
HAVE TO THE LAYING OF VENUE OF ANY LITIGATION ARISING OUT OF OR IN CONNECTION
WITH THE LOAN DOCUMENTS AND THE OBLIGATION BROUGHT IN THE COURTS OF DALLAS
COUNTY, TEXAS, OR IN THE UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT
OF TEXAS, (C) IRREVOCABLY WAIVES ANY CLAIMS THAT ANY LITIGATION BROUGHT IN ANY
SUCH COURT HAS BEEN BROUGHT IN AN INCONVENIENT FORUM, (D) AGREES TO DESIGNATE
AND MAINTAIN AN AGENT FOR SERVICE OF PROCESS IN DALLAS COUNTY, TEXAS, IN
CONNECTION WITH ANY SUCH LITIGATION AND TO DELIVER TO LENDER EVIDENCE THEREOF,
(E) IRREVOCABLY CONSENTS TO THE SERVICE OF PROCESS OUT OF ANY OF THE
AFOREMENTIONED COURTS IN ANY SUCH LITIGATION BY THE MAILING OF COPIES THEREOF BY
CERTIFIED MAIL, RETURN RECEIPT REQUESTED, POSTAGE PREPAID, TO SUCH BORROWER AT
ITS ADDRESS SET FORTH HEREIN, AND (F) IRREVOCABLY AGREES THAT ANY LEGAL
PROCEEDING AGAINST LENDER ARISING OUT OF OR IN CONNECTION WITH THE LOAN
DOCUMENTS OR THE OBLIGATION SHALL BE BROUGHT IN THE COURTS OF DALLAS COUNTY,
TEXAS, OR IN THE UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF
TEXAS. NOTHING HEREIN SHALL AFFECT THE RIGHT OF LENDER TO COMMENCE LEGAL
PROCEEDINGS OR OTHERWISE PROCEED AGAINST EITHER BORROWER IN ANY JURISDICTION OR
TO SERVE PROCESS IN ANY MANNER PERMITTED BY APPLICABLE LAW.
8.16 WAIVER OF JURY TRIAL PUNITIVE DAMAGES, ETC. PARENT, BORROWERS AND
------------------------------------------
LENDER HEREBY (a) KNOWINGLY, VOLUNTARILY, INTENTIONALLY, AND IRREVOCABLY WAIVE,
TO THE MAXIMUM EXTENT NOT PROHIBITED BY LAW, ANY RIGHT IT MAY HAVE TO A TRIAL BY
JURY IN RESPECT OF ANY LITIGATION BASED HEREIN, OR DIRECTLY OR INDIRECTLY AT ANY
TIME ARISING OUT OF, UNDER OR IN CONNECTION WITH THE LOAN DOCUMENTS OR ANY
TRANSACTION CONTEMPLATED THEREBY
46
<PAGE>
OR ASSOCIATED THEREWITH, BEFORE OR AFTER MATURITY; (b) IRREVOCABLY WAIVE, TO THE
MAXIMUM EXTENT NOT PROHIBITED BY LAW, ANY RIGHT IT MAY HAVE TO CLAIM OR RECOVER
IN ANY SUCH LITIGATION ANY "SPECIAL DAMAGES," AS DEFINED BELOW; (c) CERTIFY THAT
NO PARTY HERETO NOR ANY REPRESENTATIVE OR AGENT OR COUNSEL FOR ANY PARTY HERETO
HAS REPRESENTED, EXPRESSLY OR OTHERWISE, OR IMPLIED THAT SUCH PARTY WOULD NOT,
IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVERS, AND (d)
ACKNOWLEDGE THAT IT HAS BEEN INDUCED TO ENTER INTO THIS AGREEMENT, THE OTHER
LOAN DOCUMENTS AND THE TRANSACTIONS CONTEMPLATED HEREBY AND THEREBY BY, AMONG
OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS CONTAINED IN THIS SECTION.
AS USED IN THIS SECTION, "SPECIAL DAMAGES" INCLUDES ALL SPECIAL, CONSEQUENTIAL,
EXEMPLARY, OR PUNITIVE DAMAGES (REGARDLESS OF HOW NAMED), BUT DOES NOT INCLUDE
ANY PAYMENT OR FUNDS WHICH ANY PARTY HERETO HAS EXPRESSLY PROMISED TO PAY OR
DELIVER TO ANY OTHER PARTY HERETO.
8.17 Maximum Interest Rate. Any provision herein, or in any document
---------------------
securing this Agreement, or any other document executed or delivered in
connection herewith, including the Loan Documents, or in any other agreement or
commitment, whether written or oral, expressed or implied, to the contrary
notwithstanding, neither Lender nor any successor or assignee shall in any event
be entitled to receive or collect, nor shall or may amounts received hereunder
be credited, so that Lender or any successor or assignee shall be paid, as
interest, a sum greater than the maximum amount permitted by applicable law to
be charged to the Borrowers. If any construction of this Agreement or any
document securing this Agreement, or any and all other papers, agreements or
commitments, indicate a different right given to Lender or any successor or
assignee to ask for, demand or receive any larger sum as interest, such is a
mistake in calculation or wording which this clause shall override and control,
it being the intention of the parties that this Agreement, and all other
instruments securing the payment of this Agreement or executed or delivered in
connection herewith shall in all things comply with applicable law and proper
adjustments shall automatically be made accordingly. In any event that Lender
or any successor or assignee ever receives, collects or applies or a
governmental entity deems as interest, any sum in excess of the Maximum Rate, if
any such excess amount shall be applied to the reduction of the unpaid principal
balance of the Obligation, and if the Obligation is paid in full, any remaining
excess shall be paid to Borrowers. In determining whether or not the interest
paid or payable, under any specific contingency, exceeds the Maximum Rate, if
any, Borrowers and Lender or any successor or assignee shall, to the maximum
extent permitted under applicable law: (i) characterize any nonprincipal payment
as an expense or fee rather than as interest, (ii) exclude voluntary prepayments
and the effects thereof, (iii) "spread" the total amount of interest throughout
the entire term of this Agreement; provided that if this Agreement is paid and
performed in full prior to the end of the full contemplated term hereof, and if
the interest received for the actual period of existence thereof exceeds the
Maximum Rate, if any, Lender or any successor or assignee shall refund to
Borrowers the amount of such excess, or credit the amount of such excess against
the aggregate unpaid principal balance of all advances made by the Lender or any
successor or assignee under the Obligation at the time in question.
47
<PAGE>
8.18 Severability. If any provision of this Agreement is held to be
------------
illegal, invalid, or unenforceable, such provision shall be fully severable, and
the remaining provisions of this Agreement shall remain in full force and effect
and shall not be affected thereby.
8.19 Lender Not in Control. None of the covenants or other provisions
---------------------
contained in this Agreement shall, or shall be deemed to, give Lender the Right
or power to exercise control over the affairs or management of either Borrower,
the power of Lender being limited to the Right to exercise the remedies provided
in SECTION 7.
---------
8.20 Entirety and Amendments. THIS AGREEMENT AND THE OTHER LOAN
-----------------------
DOCUMENTS REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE
CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS
BY THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.
This Agreement and the other Loan Documents embody the entire agreement among
Parent, Borrowers and Lender and supersede all prior proposals, agreements and
understandings relating to the subject matter hereof. Each Borrower and Parent
certifies that it is relying on no representation, warranty, covenant or
agreement except for those set forth herein and the other Loan Documents of even
date herewith.
8.21 Multiple Counterparts. This Agreement may be executed in a number
---------------------
of identical counterparts, each of which shall be deemed an original for all
purposes and all of which constitute, collectively, one Agreement; but, in
making proof of this Agreement, it shall not be necessary to produce or account
for more than one such counterpart.
8.22 Petroleum Terms. All petroleum terms used herein and in the other
---------------
Loan Documents including without limitation the terms "working interest," "net
revenue interest," "proved reserves," "proved developed reserves," "proved
developed producing reserves," "proved developed nonproducing reserves" and
"proved undeveloped reserves" have the meanings given such terms from time to
time and at the time in question by the Society of Petroleum Engineers of the
American Institute of Mining Engineers.
8.23 Amendment and Restatement of Original Loan Agreement. This
-----------------------------------------------------
Agreement and the Notes are given in amendment, restatement, renewal and
extension (but not in novation, extinguishment or satisfaction) of the Original
Loan Agreement and the promissory notes executed in connection therewith. All
liens and security interests securing payment of the obligations under the
Original Loan Agreement and such promissory notes are hereby collectively
renewed, extended, rearranged, ratified and brought forward as security for the
payment and performance of the Obligation. With respect to matters relating to
the period prior to the date hereof, all of the provisions of the Original Loan
Agreement and the promissory notes, security agreements and other documents,
instruments or agreements executed in connection therewith are hereby ratified
and confirmed and shall remain in force and effect.
48
<PAGE>
EXECUTED as of the day and year first mentioned.
PGP II, L.P.
By: Petroglyph Energy, Inc., its general
partner
By: /s/ Robert C. Murdock
----------------------------------------
Robert C. Murdock,
President
PETROGLYPH GAS PARTNERS, L.P.
By: Petroglyph Energy, Inc., its general partner
By: /s/ Robert C. Murdock
----------------------------------------
Robert C. Murdock,
President
PETROGLYPH ENERGY, INC.
By: /s/ Robert C. Murdock
----------------------------------------------
Robert C. Murdock
President
THE CHASE MANHATTAN BANK
By: /s/ Mary E. Gherty
----------------------------------------------
Name: Mary E. Gherty
--------------------------------------------
Title: Managing Director
-------------------------------------------
49
<PAGE>
SCHEDULE 3.1
CLOSING DOCUMENTS AND CONDITIONS
--------------------------------
(a) Loan Agreement. This Agreement shall have been duly executed and
--------------
delivered to Lender by Parent and Borrowers.
(b) Notes. Lender shall have received the Notes dated the Closing Date,
-----
conforming to the requirements of the Agreement and executed by Borrowers.
(c) Parent Guaranty. Lender shall have received the Parent Guaranty,
---------------
conforming to the requirements of the Agreement and executed by Parent.
(d) Well Certificates. Borrowers shall have delivered to the Lender
-----------------
certificates for each producing well and each unit containing producing wells
located on the oil and gas properties described in the PGP Oil and Gas Mortgage
(together with those PGP II Oil and Gas Mortgages delivered to Lender by PGP II
as of the Original Closing Date, and as updated as of the Closing Date, the
"Well Certificates"), which Well Certificates shall be in the form of EXHIBIT K
- ------------------ ---------
attached hereto or otherwise in form and substance acceptable to Lenders
containing the information as provided for therein, which shall be satisfactory
to the Lender.
(e) Spanish Peaks Pledge Agreement. Lender shall have received the Spanish
------------------------------
Peaks Pledge Agreement, conforming to the requirements of the Agreement and
executed by PGP II.
(f) Gas Contracts. Lender shall have received copies of all gas sales
-------------
and/or gathering and/or transportation, and/or processing contracts covering the
Mortgaged Property in form and substance satisfactory to the Lender.
(g) Oil and Gas Mortgages. The PGP Oil and Gas Mortgage substantially in
---------------------
the form and upon the terms of EXHIBIT F attached hereto, dated the Closing
---------
Date, shall have been executed and delivered by PGP to Lender and create a first
lien on Proven Reserves constituting at least eighty percent (80%) of discounted
present value of all Proven Reserves held by PGP and reflected in the Reserve
Report, as determined by Lender in its sole discretion. An Amendment to the
existing PGP II Oil and Gas Mortgage substantially in the form and upon the
terms of EXHIBIT E attached hereto, and a new PGP II Oil and Gas Mortgage
---------
covering PGP II's properties in the Raton Basin of Colorado in the form and upon
the terms of EXHIBIT E hereto, each dated the Closing Date, shall have been
---------
executed and delivered by PGP II to Lender.
(h) Financing Statements. All Uniform Commercial Code financing statements
--------------------
required or, in Lender's opinion, advisable to be filed in order to create, in
favor of the Lender, a first priority perfected Lien on the Collateral with
respect to which a Lien can be perfected by means of filing a Uniform Commercial
Code financing statement, shall have been properly executed and delivered to
Lender, and all necessary filing, subscription and inscription fees and all
recording and other similar fees, and all taxes and other expenses related to
such filings and recordings have been paid in full by or on behalf of Borrowers.
1
<PAGE>
(i) UCC Searches. Lender shall have received the results of Uniform
------------
Commercial Code searches showing all filings on file against Borrowers (their
predecessors) in the office of the Secretary of State of each of Texas, Kansas,
Colorado, Utah and each county in such state and such other offices as Lender
may require, each such search dated a date reasonably close to the Closing Date.
(j) Releases and/or Assignments. Lender shall have received fully executed
---------------------------
releases and/or assignments of all existing Liens on the Collateral (other than
Liens shown on SCHEDULE 4.13).
-------------
(k) Legal Opinion. Lender shall have received the opinion dated the
-------------
Closing Date and addressed to Lender, of legal counsel to the Credit Parties,
such opinion to be substantially in the form of EXHIBIT L to this Agreement,
---------
subject to modifications as Lender in its sole discretion may permit.
(l) Opinion of Local Counsel. Lender shall have received favorable
------------------------
opinions dated the Closing Date and addressed to Lender, of local counsel to the
Borrowers in Utah and Colorado. Such opinion to be substantially in the form of
EXHIBIT M to this Agreement, subject to modifications as Lender in its sole
- ---------
discretion may permit; and
(m) Solvency Certificates. Lender shall have received a solvency
---------------------
certificate in the form of EXHIBIT N to this Agreement executed by an executive
----------
officer of the general partner of PGP and PGPII.
(n) Representations and Warranties, Defaults and Judgments. Lender shall
------------------------------------------------------
have received a certificate from the chief executive officer of Parent and PEI
Kansas dated the Closing Date to the effect that: (i) the representations and
warranties made by Borrowers and Parent in the Agreement and the other Loan
Documents to which any Credit Party is a party or which are contained in any
certificate, document or financial or other statement of any Credit Party
furnished at any time under or in connection with the Agreement or the other
Loan Documents shall be correct on and as of the date requested for the making
of such loan as if made on and as of such date, (ii) no Default or Event of
Default shall have occurred and be continuing on such date or after giving
effect to the advance to be made on such date, and (iii) no outstanding or
unpaid judgment and no actions, suits or proceedings before any court or before
any governmental or administrative body or agency which might prevent or
preclude the consummation of the transactions contemplated by the Agreement or
the other Loan Documents to which either Borrower is a party are pending or to
the best of either Borrower's knowledge, threatened against such entity.
(o) Corporate and Partnership Matters. Lender shall have received
---------------------------------
resolutions, certificates of governmental authorities, certificates of the
secretary of the Credit Parties (or their general partners), and such other
documents, instruments and agreements as Lender shall request relating to or
evidencing (a) the organization and existence of each Credit Party, (b) the
status of payment of franchise taxes by each Credit Party, (c) the proper
qualification of each Credit Party to conduct business as a foreign corporation
or a foreign limited partnership in each jurisdiction in which its operations or
properties require the same, (d) the proper authorization and execution of each
of the Loan Documents, and (e) the capital and organizational structure of the
Credit Parties.
2
<PAGE>
(p) Copies of Material Contracts. Lender shall have received a copy of
----------------------------
each Material Contract pertaining to the Proven Reserves owned by Borrowers
which either (i) affects Borrowers' title to the Proven Reserves or otherwise
affects the value, use or operation of the Proven Reserves in any material
respect or (ii) creates or evidences a material obligation or liability on the
part of Borrowers.
(q) Title Opinions. Borrowers shall have caused to be delivered to the
--------------
Lender current favorable title opinions with respect to the Mortgaged Property
owned by Borrowers covering at least 80% of the value of Borrowers' Proven
Reserves in the Mineral Interests. Each title opinion (i) shall be addressed to
Lender and issued by counsel to Borrowers that is experienced in the examination
of title to oil and gas properties, (ii) shall confirm the priority of the Lien
created by the Oil and Gas Mortgage and (iii) shall opine as to such matters
incident to such properties as the Lender may reasonably request including the
following with respect to the Mineral Interests in the particular Oil and Gas
Leases being reviewed:
(A) Borrowers have good and marketable title to such oil and gas
properties to the extent of their Mineral Interests as specified therein,
free and clear of all Liens other than Permitted Liens.
(B) Subject to the Material Contracts described on Exhibit "A" to the
Mortgage, each Borrower is entitled to receive, after giving effect to all
royalties, overriding royalties and other burdens payable out of
production, a decimal share of all Hydrocarbons produced and sold from such
oil and gas properties, before and after payout, not less than that set
forth in the opinion.
(C) Subject to the Material Contracts described on Exhibit "A" to the
Mortgage, each Borrower's operating interest in such oil and gas properties
is not obligated to bear a decimal share of all costs and expenses from the
operation thereof in excess of that set forth therein.
(D) Subject to the Material Contracts described on Exhibit "A" to the
Mortgage, the Liens created by the Oil and Gas Mortgage are first in right
and prior in time and superior to all other Liens against such Mineral
Interests in such oil and gas properties.
(t) Same Interests. The Mineral Interests in the Mortgaged Properties
--------------
shall not be less than the Mineral Interests for such properties furnished by
the Borrowers to the Lender in connection with its credit evaluation for this
credit facility.
(u) Location of Producing Wells. The Borrowers shall have delivered to the
---------------------------
Lender evidence satisfactory to the Lender confirming that each of the producing
wells contained in the units described in each Well Certificate delivered by the
Borrowers is located on an Oil and Gas Lease or Oil and Gas Leases (i) covered
by the title opinions and (ii) described in the exhibit to an Oil and Gas
Mortgage.
(v) Insurance. Lender shall have received from Borrowers evidence
---------
satisfactory to Lender as to the satisfaction of the requirements relating to
insurance set forth in SECTION 5.1(b) of the Agreement.
-------------
3
<PAGE>
(w) Equity Interests of Borrowers. No Person other than the Persons
-----------------------------
listed on Part I of SCHEDULE 4.18 to the Agreement shall hold any shares of the
-------------
equity of any Credit Party, or rights thereto.
(x) Other Agreements. All of the other Loan Documents shall be in full
----------------
force and effect.
(y) Regulatory Approvals; Consents. Lender shall have received evidence
------------------------------
satisfactory to Lender that all requisite regulatory approvals and consents of
any other Person with respect to the transactions contemplated by the Agreement
and the other Loan Documents have been obtained in order to consummate the
transactions contemplated hereby.
(z) Absence of Changes. Lender shall have received evidence satisfactory
------------------
to Lender including, without limitation, a certificate executed by the chief
financial officer of Borrowers, to such effect, that no material adverse change
has occurred in the business, assets, operations, prospects or financial or
other condition of the Credit Parties since the date of the most recent Current
Financials.
(aa) Current Financials. Lender shall have received copies of the Current
------------------
Financials, each certified by an appropriate executive officer of Parent and a
letter from each Borrower and Parent addressed to their independent certified
public accountants, authorizing such accountants to disclose to Lender any and
all financial statements and other supporting financial documents and schedules,
including copies of any management letter with respect to the business,
financial condition and other affairs of Borrowers.
(ab) Fees and Expenses. Subject to SECTION 5.1(j), Borrowers shall have
----------------- --------------
paid to Lender (i) all fees to be received by Lender pursuant to this Agreement
or any other agreement accrued through the Closing Date, and (ii) an amount
equal to the estimated costs and out-of-pocket expenses of Lender's counsel
incurred in connection with the preparation, execution, and delivery of the Loan
Documents and the consummation of the transactions contemplated thereby.
(ac) Warrant. The Warrant Agreement, Warrant Certificate and Registration
-------
Rights Agreement substantially in the form and upon the terms of EXHIBITS O, P
-------------
AND Q, respectively attached hereto, dated the Closing Date, shall have been
- -----
executed and delivered by Parent and PGP (as applicable) to Lender.
(ad) Other Documents. Such other agreements, documents, instruments,
---------------
opinions, certificates, and evidences as Lender may request.
4
<PAGE>
SCHEDULE 4.4
PRIOR NAMES
-----------
Corporate or Trade Names
- ------------------------
PEI - Kansas: Bishop Energy, Inc.
POC: Bishop Operating Company, Inc.
Merger, Combination or Consolidation
- ------------------------------------
None.
Assets Acquired
- ---------------
None.
1
<PAGE>
SCHEDULE 4.8
LITIGATION
----------
None.
1
<PAGE>
SCHEDULE 4.11
EMPLOYEE BENEFIT PLANS
----------------------
See Attached.
2
<PAGE>
SCHEDULE 4.13
PERMITTED LIENS
---------------
1. Pledges or deposits made to secure payment of worker's compensation,
or to participate in any fund in connection with worker's compensation,
unemployment insurance, pensions, or other social security programs, provided
that such Liens may not attach or relate to any Mineral Interest;
2. Encumbrances consisting of zoning restrictions, easements, or other
restrictions on the use of real property, none of which impair the use of such
property by the Person in question in the operation of its business, and none of
which is violated by existing or proposed structures or land use;
3. The following to the extent no Lien has been filed in any jurisdiction
or agreed to: Liens for Taxes not yet due and payable; mechanics' materialmen
warehousemen, carriers, operators, or other like liens incident to the
exploration, development, operation and maintenance of the Oil and Gas Leases,
for services or materials for which payment is not yet due and payable; and
landlord's Liens for rental not yet due and payable and which, to the extent the
same encumbers any of the Collateral, is subordinate to Liens in favor of
Lender;
4. Existing Burdens;
5. Permitted Purchase Money Liens;
6. In respect of the Mineral Interests:
(i) minor defects in title which do not affect the
marketability thereof or restrict the full use and other benefits of
ownership by the Borrowers or the ability of the Borrowers to receive
a share of production or proceeds from, allocated to, or attributable
to such Mineral Interests equal to the net revenue interest of the
Borrowers therein as represented herein or in the other Borrowing
Documents, and which are customarily waived by reasonable and prudent
operators; and
(ii) Liens under operating agreements, pooling orders,
communitization and unitization agreements, subject to the provisions
of SECTION 4.9; and
-----------
7. Agreements shown on Exhibit A to Oil and Gas Mortgage.
1
<PAGE>
SCHEDULE 4.15
CONSENTS
--------
None.
2
<PAGE>
SCHEDULE 4.16
ENVIRONMENTAL LAWS
------------------
Violations
- ----------
None.
Notices
- -------
None.
1
<PAGE>
SCHEDULE 4.18
OWNERSHIP
---------
See Attached.
1
<PAGE>
SCHEDULE 4.18
OWNERSHIP
---------
Part I (Before Exchange)
1. Ownership of PGP
----------------
PEI-Kansas 4.65% general partnership interest
Natural Gas Partners, L.P. )
Natural Gas Partners II, L.P. )
Natural Gas Partners III, L.P. )
R. Gamble Baldwin ) 95.35% limited partnership interest
Albin Income Trust )
John S. Foster )
Kenneth A. Hersh )
Bruce B. Selkirk, III )
2. Ownership of PGP II
-------------------
PEI-Kansas 1% general partnership interest
PGP 99% limited partnership interest
3. Ownership of PEI-Kansas
-----------------------
S. Kennard Smith 15.0%
Robert C. Murdock 42.5%
Robert A. Christensen 42.5%
4. Ownership of POC
----------------
PGP 100%
5. Ownership of Spanish Peaks Gathering L.L.C.
-------------------------------------------
PGP II 80%
Infinity Oil & Gas, Inc. 20%
6. Ownership of Parent
-------------------
(No outstanding shares)
<PAGE>
Part II (After Exchange)
1. Ownership of PGP
----------------
PEI-Kansas between 4.65 & 14.65% general partnership interest
Parent between 85.35 & 95.35% limited partnership interest
2. Ownership of PGP II
-------------------
PEI-Kansas 1% general partnership interest
PGP 99% limited partnership interest
3. Ownership of PEI-Kansas
-----------------------
Parent 100%
4. Ownership of POC
----------------
PGP 100%
5. Ownership of Spanish Peaks Gathering, L.L.C.
--------------------------------------------
PGP II 80%
Infinity Oil & Gas, Inc. 20%
6. Ownership of Parent
-------------------
<TABLE>
<CAPTION>
Percentage of
Shares Owned
--------------------
Number of Prior to After
Name and Address of Beneficial Owner Shares Owned Offering Offering
- ------------------------------------ ------------ -------- --------
<S> <C> <C> <C>
Natural Gas Partners, L.P. ......................... 1,124,276 39.68% 21.76%
777 Main Street, Suite 2700
Fort Worth, Texas 76102
Natural Gas Partners II, L.P. ...................... 641,160 22.63% 12.41%
777 Main Street, Suite 2700
Fort Worth, Texas 76102
Natural Gas Partners III, L.P. ..................... 719,581 25.40% 13.93%
777 Main Street, Suite 2700
Fort Worth, Texas 76102
R. Gamble Baldwin(1) ............................... 1,141,474 40.29% 22.09%
c/o Natural Gas Partners, L.P.
777 Main Street, Suite 2700
Fort Worth, Texas 76102
</TABLE>
- ---------------
(1) Includes (i) 17,198 shares held by Mr. Baldwin and (ii) 1,124,276 shares
held by Natural Gas Partners, L.P., over which Mr. Baldwin exercises voting
and investment power. R. Gamble Baldwin is the sole general partner of
G.F.W. Energy, L.P., which is the sole general partner of Natural Gas
Partners, L.P.
2
<PAGE>
<TABLE>
<CAPTION>
Percentage of
Shares Owned
------------------------
Number of Prior to After
Director and Executive Officers Shares Owned Offering Offering
- ------------------------------- ------------ -------- --------
<S> <C> <C> <C>
David R. Albin (1)(2)........................ 1,412,336 49.85% 27.34%
Kenneth A. Hersh (1)(3)...................... 1,373,640 48.48% 26.59%
A. J. Schwartz............................... -- -- --
Robert C. Murdock............................ 109,925 3.86% 2.12%
Robert A. Christensen........................ 109,925 3.86% 2.12%
Sidney Kennard Smith......................... 38,575 1.36% *
Tim A. Lucas................................. -- -- --
All executive officers and directors
as a group (7 persons)..................... 1,682,400 59.38% 32.56%
</TABLE>
- -----------------------
* Represents less than 1% of outstanding Common Stock.
(1) David R. Albin and Kenneth A. Hersh are each managing members of the
general partner of Natural Gas Partners II, L.P. and Natural Gas Partners
III, L.P. As such, Mr. Albin and Mr. Hersh may be deemed to share voting
and investment power with respect to the 1,360,741 shares beneficially
owned by Natural Gas Partners II, L.P. and Natural Gas Partners III, L.P.
and these shares are included in the total number of shares reported for
each. Each of Mr. Albin and Mr. Hersh disclaims beneficial ownership of
such shares.
(2) Includes 51,595 shares held in trust for Mr. Albin.
(3) Includes 12,899 shares owned by Mr. Hersh.
Part III
Schedule 4.18 (continued)
1. Warrant Agreement
2. Registration Rights Agreement
3. Exchange Agreement
4. Amended and Restated Limited Partnership Agreement of PGP dated as of
April 15, 1993 Amended and Restated as of September 28, 1995
5. Limited Partnership Agreement of PGP II dated as of May 1, 1995
6. Stock Purchase and Redemption Agreement among Robert C. Murdock, Robert
A. Christensen, and S. Kennard Smith, stockholders of PEI-Kansas,
effective October 1, 1994
7. Registration Rights Agreement between Parent and Natural Gas Partners,
L.P., Natural Gas Partners II, L.P., Natural Gas Partners III, L.P.,
Robert C. Murdock, Robert A. Christensen, Sidney Kennard Smith, the
Albin Income Trust, R. Gamble Baldwin, John S. Foster, Kenneth A. Hersh,
and Bruce B. Selkirk, III.
8. 1997 Incentive Stock Option Plan of Parent pursuant to which an
aggregate 375,000 shares of common stock have been authorized and
reserved for issuance to eligible participants. Options on a total of
260,000 shares have been granted at an exercise price equal to the price
to the public set forth in the Parent's Prospectus filed with the SEC on
August 22, 1997.
9. Thirty-day over-allotment option to purchase up to 350,000 shares of
common stock of Parent to the underwriters as described on the Parent
Prospectus filed with the SEC on August 22, 1997.
3
<PAGE>
SCHEDULE 5.2(a)
PERMITTED DEBT
--------------
None.
1
<PAGE>
SCHEDULE 8.1
NOTICES
-------
BORROWERS AND
PARENT: PGP II, L.P.
6209 North Highway 61
Hutchinson, Kansas 67502
Telephone No.: (316) 665-8500
Telecopy No.: (316) 665-8577
Attention: Robert C. Murdock
PETROGLYPH GAS PARTNERS, L.P.
6209 North Highway 61
Hutchinson, Kansas 67502
Telephone No.: (316) 665-8500
Telecopy No.: (316) 665-8577
Attention: Robert C. Murdock
PETROGLYPH ENERGY, INC.
6209 North Highway 61
Hutchinson, Kansas 67502
Telephone No. (316) 665-8500
Telecopy No.: (316) 665-8577
Attention: Robert C. Murdock
LENDER: THE CHASE MANHATTAN BANK
One Chase Manhattan Place
Eighth Floor
New York, New York 10081
Telephone No.: (212) 552-7692
Telecopy No.: (212) 552-5777
Attention: Lynnette Lang
COPY TO: GARDERE & WYNNE, L.L.P.
3000 Thanksgiving Tower
1601 Elm Street
Dallas, Texas 75201
Telephone No.: (214) 999-4723
Telecopy No.: (214) 999-4667
Attention: William D. Young, Esq.
1
<PAGE>
COPY TO: TEXAS COMMERCE BANK NATIONAL ASSOCIATION
2200 Ross Avenue
Dallas, Texas 75201
Telephone No.: (214) 965-2671
Telecopy No.: (214) 965-2389
Attention: Debbie Sowards
2
<PAGE>
EXHIBIT A
---------
ADVANCE REQUEST
[See attached.]
1
<PAGE>
EXHIBIT B
---------
FINANCIAL REPORT CERTIFICATE
[See attached.]
1
<PAGE>
EXHIBIT C
---------
MORTGAGED PROPERTIES
[See attached.]
1
<PAGE>
EXHIBIT D
---------
ASSIGNMENT AND AMENDMENT OF OIL AND GAS MORTGAGES
[See attached.]
1
<PAGE>
EXHIBIT E
---------
PGP II COLORADO OIL AND GAS MORTGAGE
[See attached.]
1
<PAGE>
EXHIBIT F
---------
PGP OIL AND GAS MORTGAGE
1
<PAGE>
EXHIBIT G
---------
PARENT GUARANTY
[See attached.]
1
<PAGE>
EXHIBIT H
---------
SPANISH PEAKS PLEDGE AGREEMENT
[See attached.]
1
<PAGE>
EXHIBIT I
---------
FORM OF NOTE A
[See attached.]
1
<PAGE>
EXHIBIT J
---------
FORM OF NOTE B
[See attached.]
1
<PAGE>
EXHIBIT K
---------
WELL CERTIFICATES
[See attached.]
1
<PAGE>
EXHIBIT L
---------
LEGAL OPINION OF COUNSEL
[See attached.]
2
<PAGE>
EXHIBIT M
---------
LEGAL OPINION OF LOCAL COUNSEL
[See attached.]
3
<PAGE>
EXHIBIT N
---------
SOLVENCY CERTIFICATE
[See attached]
4
<PAGE>
EXHIBIT O
---------
WARRANT AGREEMENT
[See attached]
5
<PAGE>
EXHIBIT P
---------
WARRANT CERTIFICATE
[See attached]
6
<PAGE>
EXHIBIT Q
---------
REGISTRATION RIGHTS AGREEMENT
[See attached]
7
<PAGE>
EXHIBIT 10.17
ASSET PURCHASE AND SALE AGREEMENT
---------------------------------
This Asset Purchase and Sale Agreement (hereinafter "Agreement") is
effective as of the 15th day of May, 1997 ("Effective Date"), by and among
INFINITY OIL & GAS, INC., a Kansas corporation (hereinafter referred to as
"Infinity"); and PGP II, L.P., a Delaware limited partnership (hereinafter
referred to as "PGP").
WHEREAS, Infinity has entered into negotiations and signed a letter of
intent with Burlington Resources Oil & Gas Company ("Burlington") (a copy of
which is attached hereto as Exhibit A) and other owners to acquire certain oil
and gas properties known as the Raton Basin Center Coalgas Project in Huerfano
County, Colorado, as more particularly set forth in Exhibit B attached hereto,
together with related easements, rights-of-way, operating rights, and all other
incidents associated therewith;
WHEREAS, Infinity has entered into negotiations and signed letters of
intent with Industrial Gas Services, Inc., Sterling Petroleum Company, Sterling
Petroleum Operating Company, and Robert McCreery (copies of which are attached
hereto as Exhibit C) and other owners to purchase that certain gas pipeline
system known as the Spanish Peaks Gathering System, consisting of the,
pipelines, rights-of-way, easements, and a yard and building located at the
delivery point of the pipeline to the city of Walsenburg, Colorado, all set
forth more fully in Exhibit D attached hereto;
WHEREAS, Infinity desires to sell to PGP and PGP desires to purchase from
Infinity, all of its right, title and interest now owned or acquired before
Closing in and to the leases and related assets (subject to a reserved
overriding royalty interest);
WHEREAS, the parties wish for Infinity to assign all of its right, title,
and interest now owned or hereafter acquired in the pipeline and related assets
to an entity (the "Pipeline Acquisition Entity") owned jointly by PGP and
Infinity; and
WHEREAS, the parties wish to effectuate the sale on the terms and
conditions more fully set forth in this Agreement.
NOW, THEREFORE, in consideration of the covenants and promises contained
herein, the parties hereby agree as follows:
ARTICLE I
DEFINITIONS
-----------
1.1 "Hydrocarbons" means oil, gas, coalseam gas, condensate, casinghead
gas, natural gas, liquified natural gas, natural gasoline, methanol, drip
gasoline, liquids separated from gas, helium or other components of a gas
stream, and any and all products or by-products therefrom regardless of how
obtained, manufactured or produced.
<PAGE>
1.2 "Lease Burdens" means, as to any Lease, the lessor's royalty interest,
and all overriding royalty, net profits or production payment interests,
reversionary interests, and/or any other interests regardless of their form or
manner of calculation which burden the working interest in such Lease,
including, unless otherwise stated, the Overriding Royalty Interest (as defined
below).
1.3 "Lease Revenue Interest" or "LRI" as to any Lease means 100% (the
assumed working interest in such Lease) less the Lease Burdens.
1.4 "Net Revenue Interest" or "NRI" means the percentage of all
Hydrocarbons that may be produced, saved and sold from land covered by a Lease.
ARTICLE II
SALE OF LEASES BY INFINITY
--------------------------
2.1 PURCHASE AND SALE OF LEASES. PGP agrees to purchase and Infinity
---------------------------
agrees to sell (or cause the current owner to sell) all of its right, title, and
interest in and to (a) the oil and gas leases and other assets (individually a
"Lease" and collectively, the "Leases") described on Exhibit B attached hereto
(subject to the reserved Overriding Royalty Interest, hereafter defined); (b)
the federal exploratory unit or units hereafter formed containing the Leases or
any part of them; and (c) all oil and gas sales contracts, dedicated acreage,
wells, fixtures, attendant equipment, machinery, permits, franchises, licenses,
servitudes, surface leases, files, data, information, intellectual property,
seismic information, logs, core samples, and other personal property, agreements
and incidents associated therewith insofar as such items are attendant or relate
to the assets described on Exhibit A or B (the assets listed at (a), (b), and
(c) shall hereinafter be referred to collectively as the "Raton Basin Assets").
At Closing, Infinity shall execute and deliver in sufficient and recordable form
any and all assignments, conveyances, bills of sale, titles, and other documents
necessary to transfer title to all such interests (subject to the reserved
Overriding Royalty Interest) in the Raton Basin Assets to PGP.
2.2 WORKING INTERESTS AND NET REVENUE INTERESTS. Infinity shall deliver
-------------------------------------------
(or cause to be delivered) to PGP at Closing 100% of the working interest in
each Lease, which will entitle PGP to the Net Revenue Interest in and to the
Hydrocarbons produced from the lands covered by such Lease as set forth on
Exhibit B, less the Overriding Royalty Interest (as hereafter defined).
Infinity's failure to deliver the working interest and Net Revenue Interest set
forth herein shall not be a condition to Closing except as set forth in Article
7.1.
2.3 OVERRIDING ROYALTY INTEREST. Infinity shall be entitled to retain (or
---------------------------
receive, if the Leases are assigned to PGP by the current owner) an overriding
royalty interest ("Overriding Royalty Interest") not to exceed 5% of 8/8 in and
to production from the Leases assigned to PGP at Closing. The size of the
Overriding Royalty Interest in each case shall be determined by subtracting .81
from the Lease Revenue Interest (before reduction by the Overriding Royalty
Interest) owned by Infinity (or the LRI (before reduction by the Overriding
Royalty Interest) which Infinity otherwise has the right to cause to be assigned
to PGP) in such Lease, proportionately reduced to the extent such Lease does not
cover 100% of the fee mineral estate in and to the lands covered by such Lease.
In the event Infinity is unable to deliver to PGP at Closing a LRI (after
reduction by the Overriding Royalty Interest) of at least .81 in any Lease,
-2-
<PAGE>
Infinity shall not be entitled to reserve or acquire as a part of this
transaction any Overriding Royalty Interest in and to production from such
Lease.
Any overriding royalty interest that Coltex Petroleum, Inc. may own in any
of the lands covered by the Leases, under any other oil and gas lease covering
the same mineral interest as are covered by one or more of the Leases (the
"Cortex Overrides"), which may be acquired by Infinity within 12 months after
Closing, shall be included within the definition of "Overriding Royalty
Interest."
2.4 OPTION TO PURCHASE OVERRIDING ROYALTY INTEREST. For a period of
----------------------------------------------
eighteen (18) months beginning on the date of this Agreement, PGP will have the
option to purchase from Infinity out of its Overriding Royalty Interest an
overriding royalty interest of up to 3% of 8/8 of production from the lands
covered by the Leases. PGP may elect to purchase all or any lesser percentage
of the whole 3% of 8/8 (or such lesser interest that Infinity may own), provided
that the interest PGP may elect to purchase shall be proportionately reduced in
any lands to the extent any Lease thereon does not cover 100% of the fee mineral
estate in such lands. The election to purchase shall be an election to purchase
such overriding royalty interest in all the lands covered by the Leases.
2.4.1 NET MINERAL ACRE. As used herein the term "Net Mineral Acre"
----------------
means the total number of acres covered by any Lease times the percentage
interest of the fee mineral estate owned in such acres by the lessor or
lessors under such Lease, times the working interest owned by Infinity (or
which Infinity has the right to assign). By way of example, and not by
limitation:
a) if a Lease covers 160 acres, and the lessor owns a 25%
undivided interest in the fee mineral estate in such 160 acres,
then the Net Mineral Acres for such Lease equal 40 (160 acres x
25% interest in the mineral estate = 40 Net Mineral Acres);
b) if a Lease covers 160 acres, and the lessor owns 100% of the
fee mineral estate, and Infinity owns 25% of the working
interest in the Lease, the Net Mineral Acres for such Lease
equal 40 (160 acres x 25% working interest = 40 Net Mineral
Acres);
c) if a Lease covers 160 acres, and the lessor owns a 25%
undivided interest in the fee mineral estate in such 160 acres,
and Infinity owns 25% of the working interest in the Lease,
then the Net Mineral Acres for such Lease equal 10 (160 acres x
25% interest in the mineral estate x 25% working interest = 10
Net Mineral Acres).
2.4.2 CALCULATION OF PURCHASE PRICE. The purchase price shall be
-----------------------------
calculated on a Lease by Lease basis as follows:
$6.58 shall be multiplied times the percentage Overriding Royalty
Interest which PGP elects to purchase, which product shall be
multiplied times the Net Mineral Acres under such Lease.
-3-
<PAGE>
The products obtained by performing the above calculation for all
lands covered by the Leases shall be added together to obtain the
total purchase price for the Overriding Royalty Interest that PGP has
elected to purchase.
By way of example and not by limitation, assume that Infinity has the
following Overriding Royalty Interest that is subject to POP's purchase
option:
A. 5% of 8/8 in lands covered by Leases covering 53,000 Net Mineral
Acres.
1) If PGP elects to buy 1% of 8/8, the total purchase price will be:
$6.58 x 1 x 53,000 = $348,740
2) If PGP elects to buy 3% of 8/8, the total purchase price will be:
$6.58 x 3 x 53,000 = $1,046,220
B. 5% of 8/8 in lands covered by Leases which cover 16,000 Net Mineral
Acres; and
3% of 8/8 in lands covered by Leases which cover 10,000 Net Mineral
Acres; and
2.5% of 8/8 in lands covered by Leases which cover 15,000 Net Mineral
Acres; and
1.25% of 8/8 in lands covered by Leases which cover 11,000 Net Mineral
Acres; and
0% of 8/8 in lands covered by Leases which cover 1,000 Net Mineral
Acres.
1) If PGP elects to buy 3% of 8/8, the total purchase price will be:
$6.58 x 3 x 16,000 = $ 315,840
$6.58 x 3 x 10,000 = $ 197,400
$6.58 x 2.5 x 15,000 = $ 246,750
$6.58 x 1.25 x 11,000 = $ 90,475
$6.58 x 0 x 1000 = $ -0-
--------
Total purchase price $ 850.465
==========
2) If PGP elects to buy 1% of 8/8, the total purchase price will be:
$6.58 x 1 x 16,000 = $ 105,280
$6.58 x 1 x 10,000 = $ 65,800
$6.58 x 1 x 15,000 = $ 98,700
$6.58 x 1 x 11,000 = $ 72,380
$6.58 x 0 x 1000 = $ -0-
-------
Total purchase price $ 342.160
==========
2.5 PURCHASE PRICE OF LEASES. The purchase price of the Raton Basin
------------------------
Assets shall be Twelve Dollars ($12) per Net Mineral Acre (as defined
above) covered by the Leases, which PGP shall pay to Infinity as follows:
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<PAGE>
a) Sixty Thousand Dollars ($60,000) ("Earnest Money") paid to
Infinity contemporaneously with the execution of this
Agreement, to be credited against the total purchase price
at Closing; and
b) the balance in cash or readily available funds by wire
transfer to an account to be designated by Infinity, such
designation to be made no later than three (3) business days
prior to Closing.
In the event PGP shall be required to pay any amount directly to Burlington
Resources or to any other owner or owners of the Raton Basin Assets as a
condition to the transfer of Marketable Title (as hereafter defined) to the
Raton Basin Assets, then in such event, such amount shall be deducted from the
amount owing to Infinity and payable hereunder.
ARTICLE III
ASSIGNMENT OF PIPELINE
----------------------
3.1 PIPELINE ACQUISITION ENTITY. Prior to Closing, PGP and Infinity shall
---------------------------
establish a corporation, limited partnership, or limited liability company (the
"Pipeline Acquisition Entity") for the purposes of acquiring, holding, operating
and maintaining the pipeline and related assets as hereafter more fully
described.
3.2 OWNERSHIP INTERESTS. PGP shall own eighty percent (80%) of the equity
-------------------
and controlling interests in such Pipeline Acquisition Entity and Infinity shall
own the remaining twenty percent (20%).
3.3 ASSIGNMENT OF PIPELINE. Infinity agrees to assign to the Pipeline
----------------------
Acquisition Entity (a) the pipeline, rights-of-way, and easements described on
Exhibit C attached hereto; (b) a yard and building located at the delivery point
of the pipeline to the city of Walsenburg, Colorado, together with spare pipes,
equipment, materials, and other assets located thereon, all set forth more fully
in Exhibit D attached hereto; and (c) related contracts, attendant equipment,
operating rights, machinery, permits, franchises, licenses, servitudes, surface
leases, files, data, information, intellectual property, processing plants,
compressors, other personal property, and all other incidents associated
therewith as such items are attendant or relate to the assets described on
Exhibit C or D (the assets listed at (a), (b) and (c) shall hereafter be
referred to collectively as the "Pipeline Assets").
3.4 PURCHASE PRICE OF PIPELINE ASSETS. PGP shall pay Infinity One Hundred
---------------------------------
Eighty-Five Thousand Seven Hundred Twenty Dollars ($185,720) as the purchase
price for the Pipeline Assets (the "Pipeline Purchase Price"). The Pipeline
Purchase Price shall be deemed to be a capital contribution by PGP to the
Pipeline Acquisition Entity. In the event PGP shall be required to pay any
amount directly to Industrial Gas Services, Inc., Sterling Petroleum Company,
Sterling Petroleum Operating company, Robert McCreery or to any other owner or
owners of the Pipeline Assets as a condition to the transfer of Marketable Title
to the Pipeline Assets, then in such event, such amount shall be deducted from
the amount owing to Infinity and payable hereunder.
The Pipeline Purchase Price shall be payable in accordance with the terms
set forth on the letters of intent attached hereto as Exhibit C.
-5-
<PAGE>
3.5 ADDITIONAL PAYMENTS BY PGP. In addition to the Pipeline Purchase
--------------------------
Price, PGP shall pay the outstanding ad valorem taxes currently owing to
Huerfano County on the Pipeline Assets in the approximate amount of $100,000.
Furthermore, PGP shall pay an amount not to exceed $30,000 for repairs on the
pipeline and equipment thereon, so that the pipeline will be in working
condition. These payments for ad valorem taxes and repairs shall be deemed to
be a capital contribution by PGP to the Pipeline Acquisition Entity.
3.6 NOTICE OF DEFECTS. On or before July 1, 1997, PGP shall give notice
-----------------
to Infinity of any Defect (as hereafter defined) that it may discover in the
Pipeline Assets. Infinity shall have the option to cure such Defect before
Closing or terminate this Agreement, and the Earnest Money shall be returned to
PGP. In the event PGP fails to give such notice on or before such date, PGP
agrees that it has waived any Defect and will purchase the Pipeline Assets at
Closing.
ARTICLE IV
TITLE AND CONDITION OF ASSETS
-----------------------------
4.1 DEFINITIONS.
-----------
4.1.1 MARKETABLE TITLE. As used herein, the term "Marketable Title"
shall mean such title, subject to and except for the Permitted Encumbrances
(as defined below), which: (i) entitles Infinity (or Infinity's assignor)
to receive from each Lease (and wells thereon) not less than an NRI of 81%
(proportionately reduced to the extent the Lease covers less than 100% of
the mineral acres under the land covered by it) of all Hydrocarbons
produced, saved and marketed from the lands covered by a Lease; and (ii) is
free and clear of encumbrances, liens and defects that would create
evidence of material impairment of use or loss of interest in the affected
Lease or Pipeline Assets.
4.1.2 PERMITTED ENCUMBRANCE. The term "Permitted Encumbrance," as
used herein shall include:
a) Lease Burdens if the net cumulative effect of such Lease
Burdens does not operate to reduce the NRI to less than 81%
(proportionately reduced to the extent such Lease covers less
than 100% of the mineral acres in the lands covered by it) for
such land covered by a Lease;
b) liens for taxes or assessments not yet due;
c) liens, if any, to be released at Closing; and
d) such Defects (as defined below) as PGP has waived.
4.1.3 DEFECT. The term "Defect" as used herein shall mean any
material encumbrance, encroachment, irregularity, contract right, defect,
condition in or objection to Infinity's (or Infinity's assignor's) title to
the Assets, excluding Permitted Encumbrances, that alone or in combination
with other defects renders Infinity (or PGP after Closing) with less than
Marketable Title to any Asset or which exposes PGP (in the event it takes
title to such Assets) to possible liability under any federal, state or
local environmental law,
-6-
<PAGE>
rule, regulation or order ("Environmental Laws") for money damages,
injunction against development or operation, or cost of clean-up for
existing environmental contamination on, in, or under such Asset.
4.2 ACCESS TO RECORDS. Prior to Closing, PGP will be provided access to
-----------------
the title information, production information, and other files and information
included therein pertaining to the Leases and Pipeline Assets, including,
without limitation, accounting files, production files, land files, lease files,
well files, division order files, contract files and marketing files (including
any and all records currently in the possession of Industrial Gas Services,
Inc., or any other third person).
4.3 TITLE EXAMINATION. In addition to access to the title information
-----------------
contained in the files of Infinity (or of Infinity's assignor), PGP and its
agents may conduct such further title examinations as it deems reasonably
prudent.
4.4 DEFECTIVE LEASES. Within twelve (12) months after the Closing date,
----------------
PGP may give written notice of any material Defect its investigation has
revealed on any of the Leases to the extent PGP did not receive the full
interest in the minerals covered thereby or the full interest in such Leases
shown on Exhibit B. Upon such written notice Infinity shall either 1) at its
own expense cure such Defect within a reasonable time not to exceed 90 days; 2)
or repay to PGP that part of the purchase price paid by PGP (including any
purchase price PGP has paid for any Overriding Royalty Interest under Section
2.4) to Infinity attributable to the Lease subject to such Defect, and at the
request of Infinity, PGP shall quitclaim all further interest in such Lease
subject to the Defect. For purposes of this section a material Defect shall
mean a Defect which in the reasonable opinion of PGP requires payment to third
parties (without consideration to the cost of title opinions or preparation of
title curative documents) in any amount of at least $1,000 to cure such Defect.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF PGP
-------------------------------------
5.1 DUE ORGANIZATION AND VALID EXISTENCE. PGP is a validly existing
------------------------------------
limited partnership and is duly organized under the laws of Delaware.
5.2 POWER AND AUTHORITY TO ENTER INTO AGREEMENT; FURTHER ASSURANCES. PGP
---------------------------------------------------------------
is fully authorized to enter into and perform this Agreement, and PGP is fully
authorized to purchase the Raton Basin Assets. The consummation of this
Agreement will not violate or conflict with any governmental order, judgment or
decree applicable to PGP. This Agreement has been duly executed and delivered on
behalf of PGP, and at the Closing, all documents and instruments required
hereunder to be executed and delivered by PGP will be duly authorized, executed
and delivered. PGP shall furnish at Closing the consents of all parties whose
consents are required under POP's partnership agreement; a resolution of POP's
partners and Petroglyph Energy, Inc.'s Board of Directors authorizing the
execution of this Agreement and all documents and instruments required
hereunder, and a certificate of Petroglyph Energy, Inc.'s Secretary identifying
Petroglyph Energy, Inc.'s officers.
-7-
<PAGE>
ARTICLE VI
REPRESENTATIONS, WARRANTIES AND COVENANTS OF INFINITY
-----------------------------------------------------
6.1 DUE ORGANIZATION AND VALID EXISTENCE. Infinity is a validly existing
------------------------------------
corporation and is duly organized under the laws of Kansas.
6.2 POWER AND AUTHORITY TO ENTER INTO AGREEMENT; FURTHER ASSURANCES.
---------------------------------------------------------------
Infinity is fully authorized to enter into and perform this Agreement. The
consummation of this Agreement will not violate or conflict with any
governmental order, judgment or decree applicable to Infinity. This Agreement
has been duly executed and delivered on behalf of Infinity, and at the Closing,
all documents and instruments required hereunder to be executed and delivered by
Infinity will be duly authorized, executed and delivered. Infinity shall
furnish at Closing a certificate of Infinity's Secretary identifying Infinity's
officers.
6.3 CONSENTS. Infinity has obtained, as of Closing, all necessary
--------
consents and authorizations to the transfer of the Raton Basin Assets and
Pipeline Assets (collectively the "Assets") and attendant rights to PGP or the
Pipeline Acquisition Entity, except for approvals required to be obtained from
governmental entities who are lessors under Leases affected by this Agreement,
or who administer such Leases on behalf of such lessors, which are customarily
obtained post-closing and which the parties hereto have no reason to believe
cannot be obtained in the ordinary course of business.
6.4 COMPLIANCE WITH GOVERNMENTAL REGULATIONS. To the best of Infinity's
----------------------------------------
actual knowledge and belief up to the date of Closing, the operation of the
Leases and Pipeline Assets has been in conformity with all relevant state, local
and federal laws, regulations, ordinances, administrative rulings and
regulations, as well as those promulgated by any administrative or regulatory
agencies, commissions or bodies of such governmental authorities. To the best of
Infinity's actual knowledge and belief the Leases and Pipeline Assets have been
operated in compliance with all applicable Environmental Laws and to Infinity's
actual knowledge, no condition exists at the Effective Date that would violate
any Environmental Laws or subject any lessee or operator of the Leases or
Pipeline Assets to any damages, or any other liabilities, penalties, injunctive
relief or remedial or cleanup costs under any such Environmental Laws or that
requires, or is likely to require, cleanup, removal, remedial action or other
response by any lessee or operator to any such Environmental Laws. Infinity has
not investigated and has no knowledge of any oral or written notification of a
release of hazardous material, and Infinity has not investigated and has no
actual knowledge that the Leases or Pipeline Assets, or any part thereof, are
listed or proposed for listing on the National Priorities List promulgated
pursuant to CERCLA, or on any similar state list of sites requiring
investigation or cleanup.
6.5 OPERATIONS. To the best of Infinity's actual knowledge, the ownership
----------
and operation of the Assets, to the extent that nonconformance could adversely
affect the ownership, operation, value or use thereof after the Effective Date,
has been in conformity, in all material respects, with all applicable laws, and
all applicable rules, regulations and orders of all governmental agencies having
jurisdiction, relating to the Assets.
6.6 ACCURACY OF INFORMATION. Infinity has provided PGP access to lease
-----------------------
files, abstracts and title opinions, production records, maintenance records,
specification records, accounting
-8-
<PAGE>
records, surveys, design drawings and maps, and other files, documents and
records of which it has knowledge or to which it has access relating to the
Assets (herein called the "Files"). To the best of Infinity's knowledge, all
information contained in the Files (herein called the "Information") is
accurate, true and correct in all material respects as acquired by Infinity;
provided, Infinity does not warrant the accuracy of information or opinions
given to it by third parties. To the best of Infinity's knowledge, there have
been no changes affecting the Information since the date furnished which would
make the Information inaccurate, untrue or incomplete in any material respect.
6.7 SHARED KNOWLEDGE. In regard to Sections 6.4, 6.5, and 6:6, Infinity
----------------
has not sought legal counsel regarding the Environmental Laws referenced in
these Sections, and Infinity's statements herein are based upon its lay
understanding of the applicable laws. Infinity and PGP have jointly inspected
the Assets. Infinity's actual knowledge of the Assets is based upon this
inspection and other information made available to PGP, and, therefore, the
knowledge of Infinity is equivalent to that of PGP.
6.8 FEDERAL UNIT DESIGNATION. Infinity has no knowledge of any impediment
------------------------
to obtaining a federal unit designation in at least eighty-five (85%) of the
Leases.
6.9 DISCLAIMER OF WARRANTIES. Infinity sells and transfers the Pipeline
------------------------
Assets to PGP without any express, statutory or implied warranty or
representation of any kind, including warranties relating to (i) the condition
or merchantability of the property or (ii) the fitness of the property for a
particular purpose. After Closing PGP accepts the Pipeline Assets "as is,"
"where is," and "with all faults."
ARTICLE VII
CONDITIONS AND RIGHT TO TERMINATE
7.1 CONDITIONS PRECEDENT. The parties' obligations hereunder are subject
--------------------
to the following:
a) All representations and warranties of the parties shall be true and
correct as of the time of Closing;
b) Marketable Title to 100% of the Pipeline Assets shall be delivered to
the Pipeline Acquisition Entity at Closing; or in the alternative,
Marketable Title to not less than 70% of the Pipeline Assets shall be
delivered to the Pipeline Acquisition Entity at Closing and PGP shall
---
be furnished with an opinion of Colorado counsel opining that
ownership of less than 100% of the Pipeline Assets will allow for the
Pipeline Acquisition Entity's use and operation of the Pipeline Assets
and that the co-owners to the Pipeline Assets will not have the legal
right to prevent the Pipeline Acquisition Entity's right to use the
Pipeline Assets to transport gas from the Leases.
c) Receipt of any and all required consents, waivers, and approvals from
third parties including any governmental, or regulatory entities, if
any, to the transfers, conveyances, and assignments necessary to
complete the transactions contemplated under this Agreement, except
for approvals required to be obtained from governmental entities who
are lessors under Leases affected by this Agreement,
-9-
<PAGE>
which are customarily obtained after closing and which the parties
hereto have no reason to believe cannot be obtained in the ordinary
course of business.
d) Approval of the transactions contemplated by this Agreement by all
parties whose approval is necessary under POP's partnership agreement;
e) Leases covering at least 80% of the gross acreage (approximately
80,000 acres) described on Exhibit B shall be conveyed and assigned to
PGP at Closing;
f) As of Closing, Leases covering at least eighty-five percent (85%) of
the acreage described on Exhibit B shall by their terms allow for
their inclusion in a federal unit without any further consents or
approvals, and no more than ten percent (10%) of such acreage shall be
subject to any existing unit designation or agreement or pending
application therefor already filed with any regulatory agency with
jurisdiction at the time of Closing;
g) At Closing, PGP and Infinity shall each deliver to the other
appropriate opinion of counsel letters evidencing the due
authorization and execution by such party of the Agreement and
attendant documents and instruments and the enforceability thereof.
7.2 RIGHT TO TERMINATE AGREEMENT. If PGP or Infinity has not performed
-----------------------------
all those acts necessary for all of the conditions precedent to have occurred
prior to Closing, then PGP or Infinity, respectively, shall have the
unconditional right to terminate this Agreement, in which case it shall be of no
force and effect as among the undersigned parties.
7.3 CLOSING. Time is of the essence of this Agreement, and Closing shall
-------
occur as soon as all conditions precedent have been met, at the offices of
Morris, Laing, Evans, Brock & Kennedy, Chartered in Wichita, Kansas, at a time
mutually agreed on by the parties, but in no event later than the close of
business on July 15, 1997; provided, that Closing may be extended to a later
date by the mutual agreement of both parties. If Closing does not occur by such
date, either party shall have the right, but not the obligation, to cancel this
Agreement without penalty. The following shall occur at Closing:
a) PGP shall pay to Infinity the purchase price (subject to any credit
for payments directly to third parties) as set forth in Section 2.5
above;
b) Infinity shall execute and deliver to PGP the assignments and
conveyances of the Assets, warranting title by, through, and under
Infinity (or the current record owner), subject to the Overriding
Royalty Interest (which reserved overriding royalty shall be in that
form as shown on Exhibit E); or in the alternative, Infinity shall
cause the current record-title owners at the time of Closing to
execute and deliver to PGP the assignments and conveyances of the
Assets, warranting by, through, and under such current owners, subject
to an assignment from PGP to Indemnity of the Overriding Royalty
Interest in the form of Exhibit E;
c) the parties shall execute and deliver to PGP a notice of the option to
purchase the Overriding Royalty Interest and of POP's right to lease
minerals acquired in the
-10-
<PAGE>
area of mutual interest (as discussed below in Section 8.4) for
recordation in the public land records;
d) The parties shall deliver to each other the opinions of counsel
required herein;
e) The parties shall execute and deliver such other instruments as are
necessary to give effect to this Agreement and to discharge their
obligations hereunder.
7.4 DISPOSITION OF EARNEST MONEY. In the event either party is excused
------------------------------
from performing its obligations or terminates this Agreement under the
provisions of this Article VI, then PGP shall be entitled to a return of its
Earnest Money. Otherwise, in the event PGP fails to perform at Closing, the
Earnest Money shall be paid over to Infinity as liquidated damages and as its
sole remedy for breach of this Agreement by PGP.
ARTICLE VIII
MISCELLANEOUS PROVISIONS
------------------------
8.1 SINGLE TRANSACTION. Acquisition of the Raton Basin Assets by PGP and
------------------
the Pipeline Assets by the Pipeline Acquisition Entity shall be considered part
of the same transaction, and the acquisition of one is contingent upon the
acquisition of the other.
8.2 DIRECT ASSIGNMENTS/CONVEYANCES FROM OWNERS. Inasmuch as Infinity is
-------------------------------------------
not the current owner of the Assets, in closing this transaction Infinity will
use its best efforts to obtain assignments and conveyances of the Assets from
the current owners of the Assets directly to PGP or the Pipeline Acquisition
Entity, as the case may be.
8.3 MODIFICATIONS AND AMENDMENTS. Any changes in the provisions of this
-----------------------------
Agreement made subsequent to this execution shall be made by formal written and
executed amendments. It is stipulated that oral modifications and amendments
hereto shall not be binding, and that no evidence of oral amendments or
modifications shall be admissible during arbitration or adjudication.
8.4 AREA OF MUTUAL INTEREST. In the event of Closing, thereafter the
-----------------------
parties agree that in the event either party or an affiliate of either party
(the "Acquiring Party") shall acquire any oil and gas interests, whether
producing or nonproducing, farmouts or other similar contracts which affect or
pertain to lands and minerals, located within Huerfano County, Colorado (the
"Interests"), it shall notify the other party (the "Nonacquiring Party") of such
acquisition. At the time of giving the notice, the Acquiring Party shall provide
access to copies of all instruments of acquisition, including without
limitation, copies of leases, abstracts, agreements, title memos, assignments,
subleases, farmouts and other contracts affecting the Interests in possession of
the Acquiring Party. For thirty days (30) days after receipt of the notice of
acquisition, Nonacquiring Party shall have the right to acquire its
Proportionate Interest (as defined below) in the acquisition on the same terms
and conditions on which the Acquiring Party has acquired or has the right to
acquire such Interest by notifying the Acquiring Party of its desire to share in
the acquisition, and paying its Proportionate Share of the cost of acquisition,
or in the case of a farmout or other similar agreement requiring certain
performance such as drilling of a test well, agreeing to be liable for its
Proportionate Share of the cost of any performance required. For purposes of
this Section,
-11-
<PAGE>
the term Proportionate share shall mean:
a) when it pertains to leasehold working interests, ninety percent (90%)
in the case of PGP and ten percent (10%) in the case of Infinity; and
b) when it pertains to mineral interests and overriding royalty
interests, fifty percent (50%) in the case of PGP and fifty percent
(50%) in the case of Infinity.
Any mineral interests in Huerfano County acquired by either party shall be
subject to POP's right to acquire an oil and gas lease thereon, which lease
shall reserve to the mineral owners a royalty interest of 1/8th of production.
Notwithstanding anything to the contrary in this Section 8.4, the Coltex
Overrides shall not be subject to the terms of this Section 8.4.
8.5 FEDERAL UNIT DESIGNATION. The parties shall each use their reasonable
-------------------------
best efforts to effect the formation of a federal exploratory unit (with the
assistance of Unit Source, a Denver based company that specializes in the
formation of federal units) covering at least half of the acreage covered by the
Leases to be acquired at Closing.
8.6 GOVERNING LAWS. The laws of the State of Colorado shall govern this
---------------
Agreement in proceedings in court (law and/or equity) and proceedings in
arbitration.
8.7 WAIVER. Any party's failure or delay in protesting, taking legal
-------
action, or demanding arbitration upon the other party's breach is no waiver of
that cause of action; unless that party's delay to take action exceeds a
reasonable time under the circumstances, exceeds a time-frame limitation set
forth elsewhere herein, or exceeds the statute of limitation. Any party's
failure or delay in protesting or taking legal and/or equitable action, or
demanding arbitration upon the other party's breach is not to be considered as
being a waiver of that party's cause of action for any subsequent breach.
8.8 TITLES OF ARTICLES' SECTIONS AND SUBSECTIONS. The titles and
--------------------------------------------
subtitles of Articles, Section and Subsections of thus Agreement are for
convenience only; are not part of the terms of this Agreement; are without legal
or contractual significance; and, as such, shall not govern the terms of this
Agreement or in any way influence the interpretation of this Agreement.
8.9 NOTICES. Any and all written notices hereunder shall be delivered in
--------
person, via facsimile transmission (fax) or First Class U.S. Mail, postage
prepaid, or via private overnight courier service to the following individuals
at the following address:
INFINITY: INFINITY OIL & GAS, INC.
Attn: Tim Brittan
730 17th Street, Ste. 250
Denver, CO 80202 FAX: (303) 825-3342
-12-
<PAGE>
PGP: PETROGLYPH ENERGY, INC.
Attn: Robert C. Murdock
6209 North Highway 61
P. O. Box 1839
Hutchinson, KS 67504-1839 FAX: (316) 665-8577
Such agents and/or addresses may be unilaterally altered by either party upon
providing written notice thereof to the other party.
8.10 DUPLICATE ORIGINALS. This Agreement shall be executed in duplicate
--------------------
originals, with Infinity and PGP each receiving an original.
8.11 FURTHER ASSURANCES. The parties hereby agree to execute and to cause
-------------------
third parties to execute any and all documents, leases, affidavits, releases,
mortgage releases, transfers, change of operator forms, letters in lieu of
transfer orders, assignments, bills of sale, titles, notes or the like in
fulfillment of obligations set forth herein or in furtherance of the intent
hereof.
8.12 AGREEMENT SUBJECT TO LAWS. If any provision of this Agreement, or the
--------------------------
application thereof to any party or any circumstance, shall be found to be
contrary to or inconsistent with or unenforceable under any applicable law,
rule, regulation or order, such applicable law, rule, regulation or order shall
control and this Agreement shall be deemed modified accordingly; but the
remainder of this Agreement, and the application of such provisions to the other
parties or circumstances, shall not be affected thereby; and in all other
respects, the Agreement shall continue in full force and effect.
8.13 ASSIGNMENT. This Agreement may not be assigned by the parties without
-----------
the written consent of the other party, which consent will not be unreasonably
withheld. This Agreement shall be binding upon the parties hereto and their
respective successors and assigns.
8.14 INCIDENTAL COSTS. Each party to this Agreement shall bear its
----------------
respective expenses incurred in connection with the Closing of this transaction,
including its own consultant's and broker's fee, attorneys' fees, accountants'
fees and other similar costs and expenses.
8.15 SURVIVAL. Except as otherwise noted herein, the representations and
--------
warranties of the parties herein and all agreements herein shall survive the
Closing and delivery of any assignment, conveyance, or bill of sale, or other
instrument delivered at Closing.
8.16 FINAL AGREEMENT. This Agreement, together with other written
---------------
agreements executed at Closing, constitute the final agreement of the parties,
and supersede any and all prior agreements among the parties.
-13-
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement effective as
of the 15th day of May, 1997.
INFINITY OIL & GAS, INC.
By: /s/ Stephen D. Reynolds
------------------------------
Name: Stephen D. Reynolds
-------------------------
Title: Vice President
------------------------
"Infinity"
PETROGLYPH GAS PARTNERS, L. P.
By: PETROGLYPH ENERGY, INC.,
its general partner
By: /s/ Robert C. Murdock
------------------------------
Name: Robert C. Murdock
-------------------------
Title: President
------------------------
"PGP"
-14-
<PAGE>
Exhibit A
Infinity
OIL & GAS, INC.
- --------------------------------------------------------------------------------
April 3, 1997
Mr. James B. (Trey) Shepherd
Burlington Resources Oil & Gas Company
3300 N. "A" Street
Building 6
Midland, Texas 79719-1810
Re: Offer to Purchase
51536.4 Net Mineral Acre Leasehold
Raton Basin
Huerfano County, Colorado
Dear Trey Shepherd,
Pursuant to your ongoing discussions with Tim Brittan regarding the
Burlington Resources Oil & Gas Company (Burlington) leasehold interests
captioned above, please find the following offer to purchase all Burlington's
interests in and to their oil & gas leases and associated agreements covering
those lands shown in the caption above, (hereinafter called "the Properties").
Infinity Oil & Gas Inc. (Infinity) offers to purchase one hundred percent
(100%) of Burlington's interest in and to the Properties for Three Hundred Fifty
Thousand Dollars ($350,000.00). The effective date of an Assignment and Bill of
Sale would be May 1, 1997.
Infinity makes this offer contingent upon due diligence of the Properties.
The foregoing offer is in effect until April 14, 1997.
If the following offer is agreeable to Burlington, please signify by
signing below in the space provided.
Sincerely,
/s/ Stephen D. Reynolds
Stephen D. Reynolds
Vice President-Land
<PAGE>
Burlington Resources Oil & Gas Company agrees and accepts the terms of the
foregoing Offer to Purchase the Properties.
BURLINGTON RESOURCES OIL & GAS COMPANY
By: /s/ James B. (Trey) Shepherd III
-------------------------------------
Land Advisor
<PAGE>
Exhibit B
Schedule listing the names of lessors, effective dates, expiration dates,
gross and net acreage interests and legal descriptions of certain oil and gas
leases in the Raton Basin North Prospect, Huerfano County, Colorado.
<PAGE>
Exhibit C
INFINITY
OIL & GAS, INC.
- --------------------------------------------------------------------------------
April 4, 1997
Bob Oxford
Industrial Gas Services, Inc.
4501 Wadsworth Blvd.
Wheat Ridge, Colorado 80033
Re: Offer to Purchase
Spanish Peaks Gathering System
Raton Basin
Huerfano County, Colorado
Dear Bob Oxford
Pursuant to the ongoing discussions between Tim Brittan and yourself
regarding the working interests of Industrial Gas Services, Inc. (IGS) in the
Spanish Peaks Gathering System (SPGS) captioned above, please find the following
offer to purchase all IGS interests in and to said SPGS as well as any and all
associated agreements covering those lands lying within the captioned right-of-
way area above, (hereinafter called "the Properties").
Infinity Oil & Gas, Inc. (Infinity) offers to purchase one hundred percent
(100%) of IGS's interest in and to the SPGS, (illustrated by the enclosed map)
and all associated contracts and agreements thereto, net of Huerfano County tax
debts, for Fifty Five Thousand Seven Hundred Twenty Dollars ($55,720.00). The
effective date of an Assignment and Bill of sale would be June 1, 1997. Payment
of the $55,720.00 shall be paid in three annual installments to wit:
. Upon closing, Infinity shall transfer to IGS $25,000.00.
. On or before the first anniversary of the effective date shown
above, Infinity shall transfer to IGS $20,000.00.
. On or before the second anniversary of the effective date shown
above, Infinity shall transfer to IGS the remaining balance of
$10,720.00.
Infinity shall accept and take assignment to those well bores, plugging
liabilities and any remaining contractual obligations or rights of IGS with
respect to the Goemmer wells in Huerfano County, Colorado.
Infinity makes this offer contingent upon due diligence of the Properties.
The foregoing offer is in effect until April 14, 1997.
If the following offer is agreeable to IGS, please signify by signing below
in the space provided.
Sincerely,
Stephen D. Reynolds
Vice President-Land
Industrial Gas Services, Inc. agrees and accepts the terms of the foregoing
Offer to Purchase the SPGS and Properties.
INDUSTRIAL GAS SERVICES, INC.
By:
-------------------------------------
Bob Oxford
<PAGE>
INFINITY
OIL & GAS, INC.
- --------------------------------------------------------------------------------
April 4, 1997
Robert McCreery
P.O. Box 1692
Estes Park, Colorado 80517
Re: Offer to Purchase
Spanish Peaks Gathering System
Raton Basin
Huerfano County, Colorado
Dear Robert McCreery,
Pursuant to the ongoing discussions between Tim Brittan and Bob Oxford
regarding the working interests of Robert McCreery, Sterling Petroleum Company
and/or Sterling Petroleum Operating Company (McCreery) in the Spanish Peaks
Gathering System (SPGS) captioned above, please find the following offer to
purchase all McCreery interests in and to said SPGS as well as any and all
associated agreements covering those lands lying within the captioned right-of-
way area above, (hereinafter called "the Properties").
Infinity Oil & Gas, Inc. (Infinity) offers to purchase one hundred percent
(100%) of McCreery's interest in and to the SPGS, (illustrated by the enclosed
map) and all associated contracts and agreements thereto, net of Huerfano County
tax debts, for One Hundred Thirty Thousand Dollars ($130,000.00). The effective
date of an Assignment and Bill of sale would be June 1, 1997. Payment of the
$130,000.00 shall be paid in three annual installments to wit:
. Upon closing, Infinity shall transfer to McCreery $50,000.00.
. On or before the first anniversary of the effective date shown
above, Infinity shall transfer to McCreery $50,000.00.
. On or before the second anniversary of the effective date shown
above, Infinity shall transfer to McCreery the remaining balance of
$30,000.00.
Infinity shall accept and take assignment to those well bores, plugging
liabilities and any remaining contractual obligations or rights of McCreery with
respect to the Goemmer wells in Huerfano County, Colorado.
Infinity makes this offer contingent upon due diligence of the Properties.
The foregoing offer is in effect until April 14, 1997.
If the following offer is agreeable to McCreery, please signify by signing
below in the space provided.
Sincerely,
Stephen D. Reynolds
Vice President-Land
McCreery agrees and accepts the terms of the foregoing Offer to Purchase the
SPGS and Properties.
STERLING PETROLEUM COMPANY,
STERLING PETROLEUM OPERATING COMPANY,
ROBERT McCREERY
By:
-------------------------------------
Robert McCreery
<PAGE>
Exhibit D
Map indicating the location of the Spanish Peaks Gathering System natural
gas pipeline in Huerfano County, Colorado, including the locations of well
sites, the plant site and delivery facilities.
Schematic diagrams of (1) as-built plant site, (2) as-built delivery site
and (3) as-built tie-in of Spanish Peaks Gathering System to Walsenburg Pipe
Line.
<PAGE>
Exhibit 10.18
-------------
LEASE AGREEMENT
THIS LEASE AGREEMENT is made and entered into as of the 7th day of April,
1994
BY AND BETWEEN HUTCH REALTY, L.L.C.,
"Lessor"
AND PETROGLYPH OPERATING COMPANY, INC.,
"Tenant"
1. Property Leased
---------------
Lessor, in consideration of the covenants and the agreements contained in
this Lease and the timely payment of rents as set out below, does hereby lease
to the Tenant the following property:
That certain office building, parking lot and surrounding grassy area
located on the eastern portion of the real property commonly known as 6209 North
Highway 61, Hutchinson, Kansas (see area outlined in survey attached hereto as
Ex. A)
together with all improvements thereon (hereinafter called the "Premises"), upon
the conditions and covenants set forth below.
2. Term
----
(a) Original Term. This Lease shall continue for a term of two (2)
-------------
years, commencing on May 7, 1994, and ending on May 6th, 1996.
(b) Renewal Term. Provided that Tenant has complied with the terms
------------
and provisions of this Lease throughout the original term and any prior Renewal
Terms, Tenant shall have the option to renew the term of this lease for an
additional period of one year ("Renewal Term") upon the same terms and
conditions contained herein applicable to the original term except that rent
will be determined as provided below. To exercise this option to renew, Tenant
shall give Lessor written notice of its exercise of such option not later than
sixty (60) days prior to the end of the original term hereof or any renewal
term. As used herein, the "term" of this Lease shall refer, collectively, to
the original term and all Renewal Terms.
<PAGE>
3. Rent
----
(a) Original Term. The Tenant shall pay rent during the original term
-------------
hereof of $2,000 per month, payable in advance on the first-day of each month.
In the event the term of this Lease commences on a day other than the first day
of a calendar month, the monthly rental for the first month shall be prorated,
based on the number of days of occupancy, and the rent for the fractional
beginning month shall be paid at the commencement of the term hereof. All rents
shall be paid to Lessor at 630 E. Iron, Salina, Kansas, or such other place as
Lessor may from time to time designate.
(b) Renewal Term Rent. The monthly rent during [each] Renewal Term,
-----------------
in the event of the renewal of this Lease, shall be an adjusted rent determined
by multiplying the monthly rent set out immediately above by a fraction, the
denominator of which is the cost of living index for the month in which this
Lease was executed, and the numerator of which is the cost of living index for
the third month prior to the commencement of the Renewal Term for which rent is
being calculated; provided, that the adjustment of rent shall be not less than
the rent for the original term of this Lease. The cost of living index referred
to herein is the Consumer Price Index for Urban Wage-Earners and Clerical
Workers, United States, All Items, as revised 1964 (1967 = 100 base) maintained
by the U.S. Bureau of Labor Statistics or, in the event such index is no longer
maintained, such other then current index as is generally used for the same
purposes and will yield a result approximating that of the index described.
(c) Security Deposit. Tenant shall deposit with Lessor upon the
----------------
execution of this Lease the sum of $2,000 to be held by Lessor, without
liability for interest, as security for the faithful performance by Tenant of
all of the terms, covenants, and conditions of this Lease. If Tenant fails to
perform any covenant of this Lease, Lessor may appropriate and apply all or any
portion of the deposit for payment of any sum due Lessor under this Lease or to
compensate Lessor for loss or damage sustained due to a breach by Tenant of this
Lease, all without prejudice to or constituting a waiver of Lessor's other
rights and remedies. If Tenant complies with all terms and conditions of this
Lease, the deposit shall be returned to Tenant at the end of the term of this
Lease.
4. Use of the Premises
-------------------
Tenant shall use the Premises for general office use and for no other
purpose without Lessor's prior written consent. In Tenant's use of the
Premises, Tenant will not permit any waste to be committed thereon; will not do
or permit anything to be done on or about the Premises causing any objectionable
noise or odor to be emitted from the Premises or in any way tending to create a
nuisance; and shall comply with all applicable laws, ordinances, rules and
regulations.
5. Utilities
---------
Tenant acknowledges that there are common electric and gas meters for all
of the buildings shown on the survey attached as Exhibit A and that all of such
buildings utilize water
-2-
<PAGE>
from a common well. Tenant shall pay to Lessor 45% of the total cost for gas
and 10% of the total cost for electricity on a monthly basis within 5 days of
being notified by Lessor of the amount owed by it. Tenant shall pay 60% of the
cost of repair, maintenance and replacement of the water well and attendant
plumbing and piping necessitated for the supply of water to the common property.
6. Inspection
----------
It shall be lawful for Lessor and Lessor's agents and representatives, at
any reasonable time, to enter into and upon the Premises for the purpose of
examining the condition thereof or for any other lawful purpose.
7. Repair and Maintenance
----------------------
Tenant, at Tenant's sole expense, shall keep and maintain the Premises in a
neat, clean, and sightly condition at all times, and shall maintain the Premises
and improvements thereon (including all sidewalks, parking lots, grounds,
equipment, wiring, plumbing, floors, glass, heating, air conditioning, and
mechanical), other than the roof and structural walls of such improvements, in a
good state of repair, and at the end of the term hereof shall deliver the
Premises to Lessor "broom clean" and in their present condition and state of
repair, ordinary wear and tear and damage by fire, and other hazards to the
extent covered by insurance, excepted. In this regard, Tenant shall maintain
all heating, air conditioning and other machinery and equipment on the Premises
in good working order and make such repairs and replacements as may be necessary
to keep the same in good working order. Lessor, at Lessor's sole expense, shall
maintain and keep in a good state of repair the roof and structural walls of
such improvements unless damage thereto is caused by the fault or negligence of
Tenant or Tenant's agents or employees, under which circumstances the expense
thereof, to the extent the same is not covered by the proceeds of insurance as
required in this Lease, shall be borne by Tenant.
8. Alterations
-----------
Tenant agrees that Tenant will make no alterations or additions to the
Premises without the prior written consent of Lessor. Any such alternations or
additions will, in any event, be done at the sole cost and expense of Tenant.
Lessor's consent for alterations shall not be unreasonably withheld, but may
contain conditions, including, without limitation, requirements concerning the
quality and compatibility of alterations, evidence of financial responsibility
or bonding of Tenant and the contractor, and restoration of the Premises at
Tenant's expense upon the termination of this Lease. Lessor may withhold
consent for any addition at Lessor's sole and uncontrolled discretion. Unless
Tenant is required to restore the premises as a condition to Lessor's consent to
any alteration, all alterations made to the Premises during the term of this
Lease will remain as a part of the Premises and Tenant will have no further
interest in such alterations or additions at the conclusion of this Lease.
-3-
<PAGE>
9. Trade Fixtures
--------------
All trade fixtures installed by Tenant in connection with its use of the
Premises shall remain the property of Tenant and may be removed by Tenant at any
time during the term of this Lease or at the expiration hereof. Any damage
caused by such removal, however, shall be repaired by Tenant at Tenant's sole
cost and expense.
10. Liens
-----
Tenant shall not permit any liens to come into existence against the
Premises by reason of any repairs or alterations or other activities conducted
by Tenant. In the event of any breach of this covenant and the incurring of any
expense by Lessor to remove such liens, Lessor shall in addition to any other
remedies or rights provided herein, be entitled to recover any costs or expenses
incurred in removing such liens.
11. Taxes and Special Assessments
-----------------------------
As a part of the consideration of this Lease, Tenant agrees to pay all ad
valorem taxes and all special assessments or other lawful impositions or public
charges of any kind and nature which now or hereafter may be levied, assessed,
or imposed upon the Premises (or any personal property located thereon) during
the term hereof at such time that none of such taxes, special assessments,
impositions, or charges shall become delinquent. In this regard, the taxes,
annual installments of special assessments, or other impositions or charges
shall be prorated for the year in which the term of this Lease commences as of
the date of the commencement of this Lease; and for the year in which this Lease
terminates, as of the date of such termination. Tenant agrees to furnish to
Lessor original receipts evidencing payment of all such taxes, assessments,
impositions, or charges at least fifteen (15) days prior to the date the same
become delinquent.
12. Hazard Insurance and Destruction of Premises
--------------------------------------------
Tenant agrees during the term of this Lease that Tenant will procure and
maintain at Tenant's cost and expense policies of insurance on forms and with
companies satisfactory to Lessor, insuring the Premises against loss due to any
damage to plate glass, any betterments or improvements to the premises done by
Tenant and insuring the Premises for its full insurable value against loss by
fire and extended coverage or, at Lessor's election, Lessor shall procure such
insurance and Lessee shall reimburse Lessor for the cost thereof. Such policies
shall name Lessor as a named insured and shall be delivered and deposited with
Lessor, and Lessor shall own all policies and other benefits paid under such
policies. In the event the Premises shall be destroyed or damaged by causes or
casualties covered by such insurance so as to render the same unfit for use and
occupancy for the purposes leased hereunder, Lessor shall have fifteen (15) days
after such damage or destruction to elect in writing whether to rebuild or
repair the damage at Lessor's cost and expense; and if Lessor so elects, then
this Lease shall remain in force and Lessor shall rebuild and repair the
Premises with reasonable dispatch after making such election so as to place the
Premises in as good a condition as they were at the time of destruction; and the
rent shall abate during the time that the Premises are untenantable. If Lessor
does not elect to rebuild or repair within such time, then this Lease shall
terminate as of the date of such destruction or damage, and the Lessee shall
then deliver and surrender the Premises to Lessor.
-4-
<PAGE>
In the event the Premises are damaged, but not to the extent to render the same
unfit for use and occupancy for the purposes leased herein, then Lessor shall
repair such damage at Lessor's cost and expense, except that Lessee shall pay
such cost to the extent of any deductible amount under such policies. There
shall be no abatement of rent during the time of repair of such partial damage.
13. Public Liability
----------------
Tenant covenants and agrees to protect and defend Lessor against and
indemnify and save Lessor harmless from any and all claims for injuries to
persons or property in or about the Premises. Tenant further agrees at all
times during the term hereof at Tenant's own expense to maintain, keep in force,
furnish and deliver to Lessor liability insurance policies or properly executed
certificates of insurance on a form and with an insurer satisfactory to Lessor,
insuring both the Lessor and Tenant against all liability for damage to person
or property in or about the Leased Premises; the amount of said liability
insurance shall not be less than $500,000 for injury to one person, $1,000,000
for injuries arising out of any one accident, and $1,000,000 for property damage
or, at Lessor's election, Lessor shall procure such insurance and Lessee shall
reimburse Lessor for the cost thereof. Tenant shall deliver such policies or
properly executed certificates of insurance to Lessor upon execution of this
Lease and thereafter at least ten (10) days prior to expiration of any prior
coverage. In the event Lessor hereafter reasonably believes that the foregoing
policy limits are no longer standard in the industry for businesses of
comparable risk, Lessor may at Lessor's discretion and by notice in writing to
Tenant increase the amount of liability insurance to be maintained at Tenant's
expense.
14. Mutual Releases
---------------
Lessor and Tenant hereby release each other from any claim or liability for
loss or damage caused by fire or other casualty to the extent that such damage
is covered by insurance, and any insurance carriers shall not be entitled to
subrogation against any party to this lease and waiver of subrogation,
irrespective of whether such fire or casualty should be caused by the act or
omission on the part of Lessor or Tenant or their respective agents or
employees; provided, however, that this release shall be valid and binding only
in the event it is recognized and accepted by the hazard insurance companies
under the policies carried pursuant to this Lease. Tenant agrees to use
Tenant's best efforts to obtain the necessary acceptance on any insurance policy
obtained pursuant to this Lease.
15. Condemnation
------------
If the whole or any part of the Premises or any building which forms a part
thereof shall be condemned or taken under any power of eminent domain by any
municipal, county, state, federal, or other authority, this Lease shall
terminate with respect to the part of the Premises so taken on the day the
possession of that part shall be required by the acquiring authority. In event
any part of said building or more than ninety percent (90%) of the land not
occupied by the building is so taken, then Lessor or Tenant may elect within
thirty (30) days thereafter to terminate this lease by giving written notice
thereof to the other of the exercise of such option.
-5-
<PAGE>
If this Lease is not so terminated, the rent shall abate proportionately based
on the fair market value of the Premises before and after the taking as finally
determined by agreement or litigation in the condemnation proceeding.
16. Default by Tenant
-----------------
In the event that (i) Tenant shall default in the payment of rent and
Tenant shall continue in default of rent after ten days' written notice by
Lessor to Tenant specifying rent due; or (ii) Tenant shall be in default of any
covenant or condition of this Lease other than payment of rent and shall
continue in default of such covenant or condition after thirty (30) days' notice
in writing by Lessor to Tenant of the existence of such default; or (iii) if any
adjudication of bankruptcy or insolvency be rendered against Tenant or if a
receiver of the assets or business of Tenant shall be appointed or if any sale
or attempted sale of the leasehold interest hereby created shall be made under
or by virtue of any execution or judicial process against Tenant, or if Tenant
dies or is dissolved or the existence of Tenant is otherwise terminated; then,
and upon the occurrence of any such event, Lessor shall, at Lessor's election
and without further notice to Tenant, have the right to cancel this Lease and
have immediate possession of the leased premises, without waiving or
relinquishing any claim for rent or damages then due, and Tenant shall remain
liable as hereinafter provided. In such event Lessor, without prejudice to any
other right or remedy which Lessor may have hereunder or by law, may re-enter
the leased premises either by force or otherwise, or dispossess Tenant, any
legal representative of Tenant or other occupant of the leased premises by
appropriate suit, action or proceeding, and remove Tenant's effects and hold the
leased premises as if this Lease had not been made. Notwithstanding such
termination, and during the full period which would otherwise have constituted
the balance of the term of this Lease, Tenant shall continue to be liable for
the performance of all of the covenants of Tenant under this Lease, including
Tenant's covenant to pay the full amount of rent reserved hereunder, and Lessor
at Lessor's option may rent the leased premises for a term or terms which may
have been the balance of the term hereof, in which event or events Lessor shall
apply any monies collected, FIRST, to the expense of resuming or obtaining
possession of and reletting the leased premises, and SECOND, to the payment of
the rent due and to become due to Lessor hereunder, and Tenant shall be and
remain liable for any deficiency. Should Lessor fail to exercise any remedy
Lessor may have for default against Tenant, such failure shall not be deemed to
be a waiver of Lessor's right to exercise such remedy for such default at a
later time or for subsequent defaults, or otherwise to insist upon strict
compliance with the terms hereof. Without limiting the generality of the
foregoing, Lessor shall be entitled to recover all costs of regaining possession
of the premises and the reletting thereof, including, without limitation,
reasonable attorneys' fees.
17. Assignment and Subletting
-------------------------
Tenant shall not have the right to assign this Lease in whole or in part or
to sublet the Premises in whole or in part without the prior written consent of
Lessor. Tenant shall remain liable for the rent and the performance of other
obligations of Tenant hereunder irrespective of any assignment or subletting to
which Lessor may consent.
-6-
<PAGE>
18. Environmental Issues
--------------------
Tenant shall not cause, permit or suffer any hazardous or toxic material,
substance or waste which is subject to applicable federal, state or local law or
regulation to be brought upon, treated, kept, stored, disposed of, discharged,
released, produced, manufactured, generated, refined or used upon, about or
beneath the Premises or any portion thereof by Tenant, its agents, employees,
contractors, tenants or invitees, or any other person.
19. Surrender
---------
Tenant will, at the end of the term hereof, peacefully surrender the
Premises to Lessor in good repair. In the event Tenant for any reason shall
hold over after the expiration of this Lease with the express or implied consent
of Lessor, such holding over shall not be deemed to operate as a renewal or
extension of this Lease, but shall only create a tenancy from month to month
which shall be on the same terms and conditions except (i) the Lease may be
terminated at will at any time by either party upon thirty (30) days' written
notice and, (ii) unless otherwise agreed in writing, the monthly rent during any
such period of holding over shall be 150 percent of the monthly rent being paid
immediately prior to such holding over.
20. Miscellaneous
-------------
(a) Lessor-Tenant Relationship. Nothing contained herein shall be
--------------------------
deemed or construed by the parties hereto or any third parties as creating the
relationship of principal and agent or partnership or joint venture between the
parties hereto.
(b) Notices. All notices to be given under this Lease shall be given
-------
in writing and shall be deemed to be properly served only if personally
delivered or sent postage prepaid, by Registered or Certified Mail with return
receipt requested, to the parties as follows:
To Lessor: Hutch Realty, L.L.C.
630 East Iron
Salina, Kansas, 67401
To Tenant: Petroglyph Operating Company, Inc.
6209 N. Highway 61
Hutchinson, Kansas, 67504
or at such other places as either party may hereafter from time to time
designate by notice. Such notice shall be deemed to have been given on the date
when personally delivered or on the date upon which the same is deposited in the
United States mail with postage prepaid.
(c) Headings. The headings contained in this Lease shall be deemed to
--------
be for the convenience of the parties only and shall not be considered in
construing this Lease.
-7-
<PAGE>
(d) Attorneys' Fees. Tenant covenants and agrees to reimburse Lessor
---------------
for any attorneys' fees that it may incur as a direct or indirect result of
Tenant's breach of this Lease.
(e) Acceptance of Premises. Tenant acknowledges (i) that Tenant has
----------------------
examined and knows the condition of the Premises; (ii) that no representation or
warranty as to the condition, repair, or fitness thereof for any purpose or as
to the environmental quality thereof or absence of hazardous or toxic materials
or substances thereon has been made by Lessor or Lessor's agent that is not
expressed herein; and (iii) that Tenant accepts the Premises in their present
condition. Lessor shall not be liable for any damage occasioned by or from any
leaks or other defects in the Premises and Lessor shall not be required to
effect any repairs required hereunder until receipt of written notice from
Tenant concerning the need for such repairs.
(f) Indemnification. Tenant shall indemnify, defend and hold harmless
---------------
Lessor from and against any and all claims, loss, liability or damage (including
attorney fees and costs of defence) arising from (i) Tenant's use of the
premises, and from the conduct of Tenant's business, and from any activity,
work, or things done, permitted, or suffered by Tenant in or about the premises
or elsewhere; (ii) any penalty, cleanup, treatment or other remedial work
required by any governmental authority having jurisdiction and related to
contamination of the Premises or its groundwater by any hazardous or toxic
material, substance or waste which is subject to regulation by applicable local
state or federal law or regulation; and (iii) any breach or default in the
performance of any obligation on Tenant's part to be performed under the terms
of this Lease, or arising from any negligence of the Tenant, or any of Tenant's
agents, contractors, or employees. The obligations of Tenant in this paragraph
shall survive indefinitely, notwithstanding the expiration or termination of
this Lease, or the discharge of all other obligations owed by the parties to
each other.
(g) Tenant's Certificates. Tenant shall promptly upon request of
---------------------
Lessor, without charge, at any time and from time to time, deliver to Lessor or
any other person specified by Lessor, any modification to this Lease Agreement,
the status of rent, the existence of any setoffs or defenses in favor of Tenant,
and such other matters in connection with this Lease as Lessor may request.
(h) Binding Effect. This Lease shall be binding upon and inure to the
--------------
benefit of the parties hereto and their respective heirs, personal and legal
representatives, successors, and permitted assigns.
-8-
<PAGE>
IN WITNESS WHEREOF, the parties have signed this Lease Agreement effective
the day and year first above written.
HUTCH REALTY, L.L.C.
By
----------------------------------------------
Name:
----------------------------------------
Title:
---------------------------------------
LESSOR
PETROGLYPH OPERATING COMPANY, INC.
By /s/ Robert C. Murdock
----------------------------------------------
Name: Robert C. Murdock
----------------------------------------
Title: Vice President
---------------------------------------
TENANT
GUARANTY
--------
______________________________, President and major stockholder of Tenant
in the foregoing Lease, in consideration of the execution of said Lease and to
induce the Lessor to enter into the same with Tenant, does hereby guarantee the
performance when due of all obligations contained in said Lease.
Dated ____________________.
-------------------------------------------------
-9-
<PAGE>
EXHIBIT 10.19
[Letterhead of Morris, Laing, Evans, Brock & Kennedy, Chartered]
August 21, 1997
Mr. Ken Smith Petroglyph Operating Company, Inc.
P.O. Box 1839
Hutchinson, KS 67504-1839
Re: Hutch Realty, L.L.C. Lease on Office Building
Dear Ken:
Pursuant to our recent conversation, we have agreed that the lease dated
April 7, 1994 between Hutch Realty, L.L.C. and Petroglyph Operating Company,
Inc. Has been extended beyond its two-year primary term and one-year extension
term for an additional one-year period beginning May 7, 1997 through May 6,
1998. The parties have agreed that the rent will remain the same at $2000 per
month.
If you have any questions, please feel free to give me a call.
Sincerely,
HUTCH REALTY, L.L.C.
By The Lee Company, Managing Member
By: /s/ A.J. Schwartz
----------------------------------------------------
A.J. Schwartz, Agent and Attorney
AJS:se
xc: Norb Schwartz
<PAGE>
EXHIBIT 10.20
WARRANT AGREEMENT
AMONG
THE CHASE MANHATTAN BANK,
PETROGLYPH GAS PARTNERS, L.P.
AND
PETROGLYPH ENERGY, INC.
September 15, 1997
<PAGE>
ARTICLE I TERMS DEFINED...................................................... 1
SECTION 1.1. Definitions.......................................... 1
SECTION 1.2. Accounting Terms and Determinations.................. 5
SECTION 1.3. Gender and Number.................................... 5
SECTION 1.4. References to Agreement.............................. 5
ARTICLE II PURCHASE AND SALE OF THE WARRANTS................................. 5
SECTION 2.1. Purchase and Sale.................................... 5
SECTION 2.2. Closing.............................................. 5
SECTION 2.3. Delivery............................................. 5
SECTION 2.4. Payment.............................................. 5
ARTICLE III CERTAIN TERMS APPLICABLE TO WARRANTS............................. 5
SECTION 3.1. Exercise of Warrants................................. 5
SECTION 3.2. Adjustment to Number of Warrant Shares Purchase
after Repayment of Tranche B Revolving Loan.......... 6
SECTION 3.3. Adjustment of Number of Warrant Shares Purchasable... 6
SECTION 3.4. Notices to Warrant Holders........................... 7
SECTION 3.5. Put Rights........................................... 8
SECTION 3.6. Reservation and Issuance of Warrant Shares........... 8
ARTICLE IV TRANSFER OF THE WARRANTS.......................................... 9
SECTION 4.1. Restrictions on Transfer............................. 9
SECTION 4.2. Registration, Transfer and Exchange of Warrants...... 9
SECTION 4.3. Mutilated or Missing Warrant Certificates............ 10
ARTICLE V REPRESENTATIONS AND WARRANTIES..................................... 10
SECTION 5.1. Existence and Power.................................. 10
SECTION 5.2. Corporate and Governmental Authorization............. 10
SECTION 5.3. Binding Effect....................................... 10
SECTION 5.4. Capitalization....................................... 11
SECTION 5.5. Issuance of Warrants................................. 11
SECTION 5.6. Compliance with Law.................................. 11
SECTION 5.7. Securities Laws...................................... 11
SECTION 5.8. Full Disclosure...................................... 11
ARTICLE VI AFFIRMATIVE COVENANTS............................................. 12
SECTION 6.1. Information.......................................... 12
SECTION 6.2. Right of Inspection.................................. 13
SECTION 6.3. Compliance with Laws and Documents................... 13
SECTION 6.4. Additional Documents................................. 13
<PAGE>
ARTICLE VIII MISCELLANEOUS................................................... 13
SECTION 7.1. Notices.............................................. 13
SECTION 7.2. No Waivers........................................... 14
SECTION 7.3. Expenses; Indemnification............................ 14
SECTION 7.4. Amendments and Waivers; Sale of Interest............. 14
SECTION 7.5. Survival............................................. 14
SECTION 7.6. Invalid Provisions................................... 15
SECTION 7.7. Successors and Assigns............................... 15
SECTION 7.8. GOVERNING LAW........................................ 15
SECTION 7.9. Counterparts; Effectiveness.......................... 15
SECTION 7.10. No Third Party Beneficiaries......................... 15
SECTION 7.11. FINAL AGREEMENT...................................... 15
SECTION 7.12. CONSENT TO JURISDICTION/VENUE........................ 15
SECTION 7.13. WAIVER OF RIGHT TO TRIAL BY JURY..................... 16
<PAGE>
WARRANT AGREEMENT
THIS WARRANT AGREEMENT is entered into effective as of the 15th day of
September, 1997, by and among The Chase Manhattan Bank, a New York banking
corporation ("Chase"), Petroglyph Energy, Inc., a Delaware corporation (the
-----
"Company"), and Petroglyph Gas Partners, L.P., a Delaware limited partnership
- --------
(the "Partnership").
-----------
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, the Company has authorized and desires to issue and sell to Chase
certain Common Stock Purchase Warrants; and
WHEREAS, Chase desires to purchase such Common Stock Purchase Warrants from
the Company on the terms and conditions set forth herein.
NOW, THEREFORE, in consideration of the premises and the mutual covenants
herein contained, and intending to be legally bound hereby, the parties hereto
agree as follows:
ARTICLE I
TERMS DEFINED
SECTION 1.1. Definitions. The following terms, as used herein, have the
-----------
following meanings:
"Agreement" means this Warrant Agreement.
"Authorized Officer" means, as to any Person, its Chairman, its Chief
Executive Officer, its President, its Chief Operating Officer, its Financial
Officer and any Vice President.
"Business Day" means any day excluding Saturday and Sunday and excluding
any other day on which Chase is required or authorized to close.
"Charter Documents" means, with respect to any Person, its certificate of
incorporation, articles of incorporation, bylaws, partnership agreement,
regulations, operating agreement and all other comparable charter documents.
"Chase" means The Chase Manhattan Bank, a national banking association.
"Commission" means the Securities and Exchange Commission or any entity
succeeding to any or all of its functions under the Securities Act or the
Securities Exchange Act of 1934, as amended.
"Common Stock" means the Company's common stock, par value $.01 per share.
1
<PAGE>
"Company" means Petroglyph Energy, Inc., a Delaware corporation.
"Exhibit" refers to an exhibit attached to this Agreement and incorporated
herein by reference, unless specifically provided otherwise.
"Financial Statements" means balance sheets, profit and loss statements,
statements of cash flows prepared in comparative form with respect to the
corresponding period of the preceding fiscal year and prepared in accordance
with GAAP.
"Financial Officer" means, as to any Person, its Chief Financial Officer,
or if no Person serves in such capacity, the highest ranking executive officer
of such Person with responsibility for accounting, financial reporting,
financial compliance and similar functions.
"Fully Diluted Basis" means, with reference to outstanding Common Stock,
the shares of Common Stock that would be outstanding assuming that all
outstanding options, warrants and other rights to acquire Common Stock had been
exercised (regardless of whether such rights are then exercisable) and all
securities convertible into Common Stock had then been converted (regardless of
whether such securities are then convertible) and had been issued. Any
reference in this Agreement or any of the other Transaction Documents to
"holder(s) of outstanding Common Stock on a Fully Diluted Basis" or words of
similar import shall be deemed to include holder(s) of outstanding options,
warrants or similar rights to acquire Common Stock or securities convertible
into Common Stock.
"GAAP" means generally accepted accounting principles, applied on a
consistent basis, set forth in Opinions of the Accounting Principles Board of
the American Institute of Certified Public Accountants and/or in statements of
the Financial Accounting Standards Board and/or their successors which are
applicable in the circumstances as of the date in question; and the requirement
that such principles be applied on a consistent basis means that the accounting
principles observed in a current period are comparable in all material respects
to those applied in a preceding period.
"Governmental Authority" means any government, any state or other political
subdivision thereof, or any Person exercising executive, legislative, judicial,
regulatory or administrative functions of or pertaining to government.
"Holder" with respect to any security of a Person shall mean the record or
beneficial owner of such security.
"IRC" means the Internal Revenue Code of 1986, as amended from time to
time, and any regulation promulgated thereunder.
"Laws" means all applicable statutes, laws, ordinances, regulations,
orders, writs, injunctions, or decrees of any state, commonwealth, nation,
territory, possession, county, township, parish, municipality, or Governmental
Authority.
2
<PAGE>
"Loan Agreement" means that certain Amended and Restated Loan Agreement of
even date herewith among the Partnership, PGP II and Chase pursuant to which,
among other things, Chase provides the Tranche B Revolving Commitment to the
Company.
"Majority Warrant Holder" means a Warrant Holder or Warrant Holders who
hold more than fifty percent (50%) of the outstanding Warrant Shares (for
purposes of this definition, all Warrants will be deemed to have been
exercised); provided, that in the event all Warrant Holders are not required to
participate in the exercise of the right in question and less than all Warrant
Holders elect to participate in the exercise of the right in question after
reasonable notice, "Majority Warrant Holder" shall mean a Warrant Holder or
Warrant Holders participating in the exercise of such right who hold more than
fifty percent (50%) of all Warrant Shares held by all Warrant Holders
participating in the exercise of such right.
"Material Adverse Effect" means, with respect to a Person, a material
adverse effect on the business, financial condition, operations, assets or
prospects of such Person or any of its Subsidiaries, and shall also mean, with
respect to the Company or any of its Subsidiaries, a material adverse effect on
such Person's ability to pay and perform its obligations under the Transaction
Documents.
"Person" means an individual, a corporation, a partnership, an association,
a trust or any other entity or organization, including a government or political
subdivision or an agency or instrumentality thereof and shall also mean the
Company.
"Partnership" means Petroglyph Gas Partners, L.P., a Delaware limited
partnership.
"PGP II" means PGP II, L.P., a Delaware limited partnership.
"Put" means the right of any Warrant Holder to require the Partnership to
repurchase the Warrants and Warrant Shares held by such Warrant Holder pursuant
to Section 3.5 hereof.
-----------
"Put Closing Date" has the meaning given such term in Section 3.5 hereof.
-----------
"Put Exercise Date" means the earliest of (a) the date on which the Tranche
B Commitment has been terminated and the Tranche B Revolving Loan has been paid
in full, (b) the date of an Event of Default (as defined in the Loan Agreement)
under the Loan Agreement or (c) March 15, 1999.
"Put Notice" has the meaning given such term in Section 3.5 hereof.
-----------
"Put Price" means $19.72 per Warrant Share unless the Tranche B Commitment
has been terminated and the Tranche B Revolving Loan has been paid in full prior
to September 15, 1998 (resulting in a reduction in the number of Warrant Shares
purchasable on the exercise of each Warrant pursuant to Section 3.2), in which
-----------
case the Put Price shall be $19.80 per Warrant Share. In the event at the time
of exercise of the Put, the Warrants have not been exercised, the Put Price
shall be payable in respect of the Warrants as if they had been exercised.
3
<PAGE>
"Qualified Appraiser" means an investment banking firm of recognized
national standing.
"Qualified Public Offering" means the first underwritten public offering
pursuant to an effective registration statement under the Securities Act
covering the offering and sale of Common Stock for the account of the Company on
a firm commitment basis in which the aggregate net proceeds received by the
Company at the public offering price is at least $25,000,000.
"Registration Rights Agreement" means a Registration Rights Agreement
acceptable in form and substance to Chase to be entered into by and between
Chase and the Company, pursuant to which the Company agrees to register the
Warrant Shares under the Securities Act.
"Schedule" means a "schedule" attached to this Agreement and incorporated
herein by reference, unless specifically indicated otherwise.
"Section" refers to a "section" or "subsection" of this Agreement unless
specifically indicated otherwise.
"Securities Act" means the Securities Act of 1933, as amended, or any
successor federal statute.
"Subsidiary" means, for any Person, any corporation or other entity of
which securities or other ownership interests having ordinary voting power to
elect a majority of the board of directors or other Persons performing similar
functions (including that of a general partner) are at the time directly or
indirectly owned, collectively, by such Person and any Subsidiaries of such
Person. The term Subsidiary shall include Subsidiaries of Subsidiaries (and so
on).
"Taxes" means all taxes, assessments, filing or other fees, levies,
imposts, duties, deductions, withholdings, stamp taxes, interest equalization
taxes, capital transaction taxes, foreign exchange taxes or other charges of any
nature whatsoever, from time to time or at any time imposed by law or any
federal, state or local governmental agency. "Tax" means any one of the
foregoing.
"Tranche B Commitment" has the meaning given such term in the Loan
Agreement.
"Tranche B Revolving Loan" has the meaning give such term in the Loan
Agreement.
"Transaction Documents" means this Agreement, the Registration Rights
Agreement the Loan Agreement and all other Loan Documents as that term is
defined in the Loan Agreement and all other agreements, certificates, documents
or instruments now or at any time hereafter delivered in connection with this
Agreement, as the foregoing may be renewed, extended, modified, amended or
restated from time to time.
"Warrant Certificate" means the Warrant Certificate to be issued by the
Company evidencing Warrants issued to Chase hereunder which shall be in the form
of Exhibit A attached hereto.
---------
4
<PAGE>
"Warrant Exercise Price" means $.01 per share (subject to adjustment as
provided in Section 3.3).
-----------
"Warrant Expiration Date" means September 15, 2007.
"Warrant Holder" means any Person (a) in whose name any Warrant is
registered on the Warrant Register, or (b) in whose name any Warrant Shares are
registered on the books and records of the Company.
"Warrant Register" means a register maintained by the Company setting forth
the name and address of each Warrant Holder, the number of Warrants held by such
Warrant Holder and the certificate number of each Warrant Certificate held by
such Warrant Holder.
"Warrant Shares" means the shares of Common Stock issuable upon exercise of
the Warrants.
"Warrants" means Nine Thousand Two Hundred Eighty (9,280) warrants to be
issued by the Company to Chase pursuant to Section 2.1 of this Agreement, each
-----------
of which shall entitle the holder thereof to purchase one (1) share of Common
Stock at the Warrant Exercise Price (subject to adjustment as provided in
Sections 3.2 and 3.3).
- --------------------
SECTION 1.2. Accounting Terms and Determinations. Unless otherwise
-----------------------------------
specified herein, all accounting terms used herein shall be interpreted, all
accounting determinations hereunder shall be made, and all financial statements
required to be delivered hereunder shall be prepared in accordance with GAAP as
in effect from time to time, applied on a basis consistent with the most recent
annual audited, consolidated financial statements of the Company delivered to
Chase prior to the date hereof.
SECTION 1.3. Gender and Number. Words of any gender used in this
-----------------
Agreement shall be held and construed to include any other gender and words in
the singular number shall be held to include the plural, and vice versa, unless
the context requires otherwise.
SECTION 1.4. References to Agreement. Use of the words "herein",
-----------------------
"hereof", "hereinabove", and the like are and shall be construed as references
to this Agreement.
ARTICLE II
PURCHASE AND SALE OF THE WARRANTS
SECTION 2.1. Purchase and Sale. Subject to the satisfaction of the terms
-----------------
and conditions set forth herein and in reliance upon the representations and
warranties of the parties set forth herein and in the other Transaction
Documents, Chase agrees to purchase from the Company and the Company agrees to
issue and sell to Chase the Warrants for $10.00 and other good and valuable
consideration, including, without limitation, the agreement of Chase to provide
the Tranche B Revolving Commitment.
5
<PAGE>
SECTION 2.2. Closing. Closing of the purchase and sale of the Warrants
-------
(the "Closing") shall take place at the offices of Gardere & Wynne, L.L.P., 1601
-------
Elm Street, Suite 3000, Dallas, Texas 75201 at 10:00 a.m. on September 26,
1997, or at such other time, date and place as may be agreed upon in writing by
the Company and Chase.
SECTION 2.3. Delivery. At the Closing, the Company shall deliver to
--------
Chase the Warrant Certificate against payment therefor duly issued and in form
sufficient to vest title thereto fully in Chase, free and clear of all liens,
claims and encumbrances of any kind.
SECTION 2.4. Payment. At the Closing, Chase shall pay to the Company by
-------
wire transfer of immediately available funds the purchase price for the
Warrants.
ARTICLE III
CERTAIN TERMS APPLICABLE TO WARRANTS
SECTION 3.1. Exercise of Warrants. (a) The Warrants may be exercised in
--------------------
whole or in part at any time until the applicable Warrant Expiration Date at
which time the Warrants shall expire and shall thereafter no longer be
exercisable. The Warrants shall be exercised by presentation of the Warrant
Certificate evidencing the Warrants to be exercised, with the form of election
to purchase on the reverse thereof duly completed and signed, to the Company at
the offices of the Company as set forth on the signature page of this Agreement,
together with payment of the aggregate Warrant Exercise Price for the number of
Warrant Shares in respect of which such Warrants are being exercised in lawful
money of the United States of America; provided, that, to the extent the Warrant
--------
Holder exercising such Warrants is also the holder of Note B (as defined in the
Loan Agreement), such Warrant Holder may elect, by written notice to the Company
delivered with such presentation, to pay the applicable Warrant Exercise Price
by offsetting the principal balance of the Tranche B Revolving Loan by an amount
equal to the aggregate Warrant Exercise Price payable in connection with such
exercise of Warrants. Upon such presentation, the Company shall issue and cause
to be delivered to or upon the written order of the registered Holder of such
Warrants and in such name or names as such registered Holder may designate, a
certificate or certificates for the aggregate number of Warrant Shares issued
upon such exercise of such Warrants. Any Person so designated to be named
therein shall be deemed to have become holder of record of such Warrant Shares
as of the date of exercise of such Warrants; provided, that, no Warrant Holder
--------
will be permitted to designate that such Warrant Shares be issued to any Person
other than such Warrant Holder unless each condition to transfer contained in
Article IV hereof which would be applicable to a transfer of Warrants or Warrant
- ----------
Shares has been satisfied.
(b) If less than all of the Warrants evidenced by a Warrant
Certificate are exercised at any time, a new Warrant Certificate or Certificates
shall be issued for the remaining number of Warrants evidenced by such Warrant
Certificate. All Warrant Certificates surrendered upon exercise of Warrants
shall be canceled.
(c) The Company shall not be required to issue fractional shares of
Common Stock upon exercise of any Warrants issued by it, but shall pay for any
such fraction of a share an
6
<PAGE>
amount in cash equal to the value of such fractional share determined by the
Company's board of directors in good faith.
(d) The Company will pay all Taxes attributable to the initial
issuance of Warrant Shares upon the exercise of the Warrants issued by it;
provided, that, each Warrant Holder shall use its reasonable efforts to avoid
- --------
any such Tax on the issuance of Warrant Shares; and provided, further that, the
--------
Company shall not be required to pay (i) any income Tax assessed on the overall
net income of Chase (including any portion thereof attributable to gain on the
Warrants or Warrant Shares) or any other Tax which may be payable in respect of
any transfer involved in the issue of any Warrant Certificate or any certificate
for Warrant Shares in a name other than that of the registered holder of a
Warrant Certificate surrendered upon the exercise of such a Warrant, and the
Company shall not be required to issue or deliver such certificates unless or
until the Person or Persons requesting the issuance thereof shall have paid to
the Company the amount of such Tax or shall have established to the satisfaction
of the Company that such Tax has been paid.
(e) Every certificate issued pursuant to this Agreement shall bear the
following legend:
THE OFFER AND SALE OF THE SHARES EVIDENCED BY THIS CERTIFICATE HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR UNDER THE SECURITIES
LAWS OF ANY STATE OR OTHER JURISDICTION AND SUCH SECURITIES MAY NOT BE
SOLD OR TRANSFERRED UNLESS THERE IS AN EFFECTIVE REGISTRATION STATEMENT
UNDER SUCH ACT COVERING SUCH SALE OR TRANSFER OR THE COMPANY RECEIVES AN
OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE COMPANY (WHICH MAY BE
COUNSEL FOR THE COMPANY) STATING THAT SUCH SALE OR TRANSFER IS EXEMPT FROM
THE REGISTRATION AND PROSPECTUS DELIVERY REQUIREMENTS OF SUCH ACT.
SECTION 3.2. Adjustment to Number of Warrant Shares Purchasable after
--------------------------------------------------------
Repayment of Tranche B Revolving Loan. In the event the Tranche B Commitment
- -------------------------------------
has been terminated and the Tranche B Revolving Loan has been paid in full prior
to September 15, 1998, the number of Warrant Shares purchasable upon an exercise
of each Warrant shall be reduced from one (1) Warrant Share to .70 Warrant
Shares.
SECTION 3.3. Adjustment of Number of Warrant Shares Purchasable for Other
------------------------------------------------------------
Events. If, prior the consummation of a Qualified Public Offering, the Company
- ------
shall issue (the "Issuance") any shares of Common Stock (other than the Warrant
Shares and shares of Common Stock issuable pursuant to the exercise of
agreements described on Schedule 3.3 hereto), securities convertible into shares
------------
of Common Stock or any options, rights or warrants to subscribe for or purchase
shares of Common Stock (or securities convertible into shares of Common Stock),
the number of Warrant Shares purchasable upon the exercise of each Warrant shall
increase to such a number that upon the exercise of all Warrants, the Warrant
Shares will represent (a) 0.30% of the outstanding shares of Common Stock on a
Fully Diluted Basis immediately after the Issuance, if the Tranche B Revolving
Commitment has not been terminated and the Tranche B Revolving Loan has
7
<PAGE>
not been paid in full on or prior to September 15, 1998, or (b) 0.21% of the
outstanding shares of Common Stock on a Fully Diluted Basis immediately after
such issuance if the Tranche B Revolving Commitment is terminated and the
Tranche B Revolving Loan is paid in full on or before September 15, 1998;
provided, however, that in the event that any adjustment is made to the number
of Warrant Shares purchasable upon the exercise of each Warrant as the result of
the issuance of options, warrants or other rights to acquire Common Stock or
securities convertible into Common Stock and any of such options, warrants,
rights or convertible securities expire, the number of Warrant Shares
purchasable upon the exercise of each Warrant shall be readjusted to such number
as would have been purchasable had such expired options, warrants, rights or
convertible securities not been issued.
SECTION 3.4. Notices to Warrant Holders. Upon any adjustment of the
--------------------------
number of Warrant Shares issuable upon an exercise of the Warrants or any
adjustment of the Warrant Exercise Price pursuant to Section 3.3, the Company
-----------
shall promptly, but in any event within thirty (30) days thereafter, cause to be
given to each Warrant Holder, at its address appearing on the Warrant Register,
by first class mail, postage prepaid, a certificate signed by the Company's
Financial Officer setting forth the number of Warrant Shares issuable upon the
exercise of each Warrant as so adjusted and the Warrant Exercise Price as so
adjusted, and describing in reasonable detail the facts accounting for such
adjustment and the method of calculation used. Where appropriate, such
certificate may be given in advance and included as part of the notice required
to be mailed under the other provisions of this Section 3.4.
-----------
In the event:
(a) that the Company shall authorize the issuance to all holders of
its Common Stock of rights or warrants to subscribe for or purchase capital
stock of the Company or of any other subscription rights or warrants; or
(b) that the Company shall authorize the distribution to all holders
of its Common Stock of evidences of its indebtedness or assets; or
(c) of any consolidation or merger to which the Company is a party and
for which approval of any stockholders of the Company is required, or of the
conveyance or transfer of the properties and assets of the Company substantially
as an entirety, or of any capital reorganization or reclassification or change
of the Common Stock (other than a change in par value, or from par value to no
par value, or from no par value to par value, or as a result of a subdivision or
combination); or
(d) of the voluntary dissolution, liquidation or winding up of the
Company; or
(e) that the Company proposes to take any other action which would
require an adjustment of the Warrant Exercise Price of the Warrants issued by it
pursuant to Section 3.3;
-----------
then the Company shall cause to be given to each Warrant Holder at such Warrant
Holder's address appearing on the Warrant Register, at least twenty (20) days
prior to the applicable date hereinafter specified, by first class mail, postage
prepaid, a written notice stating (i) the date as of which the
8
<PAGE>
holders of record of Common Stock to be entitled to receive any such rights,
warrants or distribution are to be determined, or (ii) the date on which any
such consolidation, merger, conveyance, transfer, dissolution, liquidation or
winding up is expected to become effective, and the date as of which it is
expected that the holders of record of Common Stock shall be entitled to
exchange their shares for securities or other property, if any, deliverable upon
such reclassification, consolidation, merger, conveyance, transfer, dissolution,
liquidation or winding up.
SECTION 3.5. Put Rights. At any time on or after the Put Exercise Date
----------
and provided that a Qualified Public Offering has not then occurred, any Warrant
Holder may, by written notice of such intent to the Company and the Partnership
(the "Put Notice"), require the Partnership to purchase all of the Warrants and
Warrant Shares then outstanding and held by such holder at the Put Price. The
Put Notice shall set forth a date (which shall be not less than ten (10) days,
nor more than ninety (90) days after the date of the Put Notice and which shall
be a Business Day) (the "Put Closing Date") for the purchase and sale of all of
the Warrants and Warrant Shares (the "Put Shares"). On the Put Closing Date,
each Warrant Holder shall deliver the certificates evidencing the Put Shares
held by such Warrant Holder to the Partnership duly endorsed, free and clear of
all Liens (other than any arising under this Agreement or under applicable
Securities Laws), and the Partnership shall pay to such Warrant Holder, in cash,
an amount equal to the sum of (i) the Put Price multiplied by the number of
Warrant Shares included in such Put Shares, plus (ii) (A) the Put Price
multiplied by the number of Warrant Shares which would be purchased upon an
exercise of all Warrants included in such Put Shares, less (B) the aggregate
Warrant Exercise Price which would be required to be paid by such Warrant Holder
to exercise all Warrants held by such Warrant Holder. The amount payable by the
Partnership to any Warrant Holder upon exercise of the Put shall be paid by
certified or cashier's check, by wire transfer or other immediately available
funds. In the event the Put Notice is delivered prior to the Warrant Expiration
Date, the Put shall remain enforceable with respect to the applicable Put Shares
notwithstanding that the Warrant Expiration Date may occur prior to the Put
Closing Date. The failure of any Warrant Holder to deliver the certificates
evidencing Put Shares held by such Warrant Holder to the Partnership shall not
limit or impair the right of such Warrant Holder to receive the consideration to
be paid to such Warrant Holder upon exercise of the Put. However, the
Partnership may withhold payment of such consideration pending receipt from such
Warrant Holder of such certificates or evidence that such certificates have been
mutilated, lost, stolen or destroyed as contemplated by Section 4.3 hereof.
-----------
Pending delivery of such certificate(s) (or other evidence), the consideration
to be paid to such Warrant Holder shall be held in trust by the Partnership for
such Warrant Holder and shall be set aside in a separate account for the benefit
of such Warrant Holder, segregated from the other assets of the Partnership.
SECTION 3.6. Reservation and Issuance of Warrant Shares. (a) The Company
------------------------------------------
will at all times have authorized, and reserve and keep available, free from
preemptive rights, for the purpose of enabling it to satisfy any obligation to
issue Warrant Shares upon the exercise of the Warrants, the number of shares of
Common Stock deliverable upon exercise of all outstanding Warrants.
(b) The Company covenants that all Warrant Shares issued by it will,
upon issuance in accordance with the terms of this Agreement, be fully paid and
nonassessable and free from all Taxes with respect to the issuance thereof and
free from all liens, claims or encumbrances
9
<PAGE>
of any kind other than liens arising by, through or under the Warrant Holder to
whom such Warrant Shares were issued.
ARTICLE IV
TRANSFER OF THE WARRANTS
SECTION 4.1. Restrictions on Transfer. Chase understands and agrees that
------------------------
the Warrants and the Warrant Shares have not been registered under the
Securities Act or any state securities Laws, and that accordingly, they will not
be fully transferable except as permitted under various exemptions contained in
the Securities Act and applicable state securities Laws, or upon satisfaction of
the registration and prospectus delivery requirements of the Securities Act and
applicable state securities Laws. Chase acknowledges that it must bear the
economic risk of its investment in the Warrants and the Warrant Shares for an
indefinite period of time (subject, however, to the Company's obligations with
respect to the Put and to register the Warrants and Warrant Shares pursuant to
the Registration Rights Agreement) since they have not been registered under the
Securities Act and applicable state securities Laws and therefore cannot be sold
unless they are subsequently registered or an exemption from registration is
available. Absent an effective notification under Regulation A or registration
under the Securities Act and applicable state securities Laws covering the
disposition of the Warrants and Warrant Shares, Chase will not sell, transfer,
assign, pledge, hypothecate or otherwise dispose of any or all of the warrants
or the Warrant Shares unless the Company has determined that the transaction
complies with and does not violate any federal or state securities Law. The
Company may demand from Chase an opinion of counsel, in form and substance
reasonably satisfactory to the Company, with respect to such compliance.
SECTION 4.2. Registration, Transfer and Exchange of Warrants. (a) The
-----------------------------------------------
Company shall maintain at the offices of the Company as set forth on the
signature pages of this Agreement, the Warrant Register for registration of the
Warrants and Warrant Certificates and transfers thereof. On the Closing Date,
the Company shall register the outstanding Warrants and Warrant Certificates
issued to Chase. The Company may deem and treat the registered Warrant Holders
as the absolute owners of the Warrants registered to such holders and
(notwithstanding any notation of ownership or other writing on the Warrant
Certificates made by any Person) for the purpose of any exercise thereof or any
distribution to the Warrant Holders, and for all other purposes.
(b) Upon satisfaction of each condition set forth in Section 4.1
-----------
hereof, the Company shall register the transfer of any outstanding Warrants in
the Warrant Register upon surrender of the Warrant Certificate(s) evidencing
such Warrants to the Company at the offices of the Company as set forth on the
signature pages of this Agreement, accompanied (if so required by it) by a
written instrument or instruments of transfer in form satisfactory to it, duly
executed by the registered Warrant Holder or by the duly appointed legal
representative thereof. Upon any such registration of transfer, new Warrant
Certificate(s) evidencing such transferred Warrants shall be issued to the
transferee(s) and the surrendered Warrant Certificate(s) shall be canceled. If
less than all the Warrants evidenced by a Warrant Certificate(s) surrendered for
transfer are to be transferred, a new Warrant Certificate(s) shall be issued to
the Warrant Holder surrendering such Warrant Certificate(s) evidencing such
remaining number of Warrants.
10
<PAGE>
(c) Warrant Certificates may be exchanged at the option of the Warrant
Holder(s) thereof, when surrendered to the Company at the offices of the Company
as set forth on the signature pages of this Agreement, for another Warrant
Certificate or other Warrant Certificates of like tenor and representing in the
aggregate a like number of Warrants. Warrant Certificates surrendered for
exchange shall be canceled.
(d) No charge shall be made for any such transfer or exchange except
for any Tax or other governmental charge imposed in connection therewith.
SECTION 4.3. Mutilated or Missing Warrant Certificates. If any Warrant
-----------------------------------------
Certificate shall be mutilated, lost, stolen or destroyed, the Company shall
issue, in exchange and substitution for and upon cancellation of the mutilated
Warrant Certificate, or in lieu of and substitution for the Warrant Certificate
lost, stolen or destroyed, a new Warrant Certificate of like tenor and
representing an equivalent number of Warrants, but only upon receipt of evidence
satisfactory to the Company of such loss, theft or destruction of such Warrant
Certificate and, if requested, indemnity satisfactory to it. No service charge
shall be made for any such substitution, but all expenses and reasonable charges
associated with procuring such indemnity and all stamp, Tax and other
governmental duties that may be imposed in relation thereto shall be borne by
the holder of such Warrant Certificate.
ARTICLE V
REPRESENTATIONS AND WARRANTIES
In order to induce Chase to purchase the Warrants to be purchased by it
hereunder, the Company hereby represents and warrants to Chase each of the
following statements (a) is true and correct on the date hereof, and (b) will be
true and correct after giving effect to the transactions contemplated herein.
SECTION 5.1. Existence and Power. Each of the Company and the
-------------------
Partnership (i) is a corporation or (limited partnership, in the case of the
Partnership), duly organized, validly existing and in good standing under the
Laws of its jurisdiction of incorporation set forth on Schedule 5.4 attached
------------
hereto, (ii) has all corporate or partnership power and authority necessary to
carry on its business as now conducted and as proposed to be conducted, and
(iii) is duly qualified as a foreign corporation or partnership in each
jurisdiction set forth on Schedule 5.4 which constitutes all jurisdictions where
------------
a failure to be so qualified could have a Material Adverse Effect on the Company
or the Partnership.
SECTION 5.2. Corporate and Governmental Authorization; Contravention.
-------------------------------------------------------
The execution, delivery and performance of this Agreement and the other
Transaction Documents by the Company and the Partnership are within its
corporate or partnership powers, have been duly authorized by all necessary
corporate or partnership action, require no action by or in respect of, or
filing with, any Governmental Authority (other than filings with any applicable
securities regulatory authorities to perfect exemptions from the registration or
qualification requirements of applicable securities Laws and which will be made
immediately following the Closing), and, except for matters which have been
waived in writing by the appropriate Person, do not contravene, or constitute a
11
<PAGE>
default under, any provision of applicable Law or of the Charter Documents or of
any material judgment, injunction, order, decree or Material Agreement binding
upon the Company or the Partnership or its respective assets, or result in the
creation or imposition of any Lien on any asset of the Company or the
Partnership.
SECTION 5.3. Binding Effect. This Agreement constitutes the valid and
--------------
binding agreement of the Company; each other Transaction Document when executed
and delivered in accordance with this Agreement, will constitute the valid and
binding obligation of the Company enforceable in accordance with its terms
except as (i) the enforceability thereof may be limited by bankruptcy,
insolvency or similar Laws affecting creditors rights generally, and (ii) the
availability of equitable remedies may be limited by equitable principles of
general applicability.
SECTION 5.4. Capitalization. Schedule 5.4 attached hereto accurately and
-------------- ------------
completely sets forth for each of the Company and the Partnership (a) its
jurisdiction of formation and current existence, (b) each jurisdiction in which
it is qualified to transact business as a foreign corporation or partnership,
(c) its authorized, issued and outstanding capital stock or partnership
interests of every class, and (d) the names of the record, and to the Company's
knowledge, beneficial owner, of its capital stock or partnership interests of
every class, including the number and class of shares held by each such
shareholder or partner. Except as set forth on Schedule 5.4 and for the
------------
Warrants and registration rights provided the Registration Rights Agreement, (x)
there are not outstanding any options, warrants or other rights to acquire
capital stock of any class of the Company or the Partnership or securities
convertible into capital stock or partnership of the Company or the Partnership
of any class, (y) no Person has any preemptive or similar rights with respect to
any subsequent issue of stock or partnership interests by the Company or the
Partnership, and (z) no Person has any right to require the Company or the
Partnership to register any securities of the Company or any of its Subsidiaries
under the Securities Act.
SECTION 5.5. Issuance of Warrants. The Warrants, when issued upon
--------------------
payment of the applicable purchase price in accordance with Section 2.1, will be
-----------
duly authorized, validly issued, fully paid and non-assessable and will be free
and clear of all liens, claims and encumbrances of any kind including preemptive
rights. The Warrant Shares, when issued upon payment of the applicable purchase
price in accordance with this Agreement, will be duly authorized, validly
issued, fully paid and non-assessable and will be free and clear of all liens,
claims and encumbrances of any kind including preemptive rights.
SECTION 5.6. Compliance with Law . The business and operations of the
--------------------
Company and the Partnership have been and are being conducted in all material
respects in accordance with all applicable Laws.
SECTION 5.7. Securities Laws. The offer, issuance and sale of the
---------------
Warrants and the Warrant Shares (a) are and will be exempt from the registration
and prospectus delivery requirements of the Securities Act, (b) have been
registered or qualified (or are exempt from registration and qualification)
under the registration, permit or qualification requirements of all applicable
state securities Laws, and (c) are and will be accomplished in conformity with
all other federal and applicable state securities Laws.
12
<PAGE>
SECTION 5.8. Full Disclosure. No information heretofore furnished by or
---------------
on behalf of the Company or the Partnership to Chase for the purposes of this
Agreement or any other Transaction Document or any transaction contemplated
hereby or thereby, contained, and no written information hereafter furnished by
or on behalf of the Company or the Partnership to Chase for purposes of this
Agreement or any other Transaction Document or any transaction contemplated
hereby or thereby will contain, any untrue statement of a material fact or omit
a material fact necessary to make the statements therein not misleading. There
is no fact or circumstance known to the Company or the Partnership which may
have a Material Adverse Effect on the Company or the Partnership which has not
been disclosed to Chase.
ARTICLE VI
AFFIRMATIVE COVENANTS
The Company agrees to comply in every respect with each covenant contained
in this Article VII until such time as Chase shall no longer own any Warrants or
-----------
Warrant Shares or the covenant provides otherwise.
SECTION 6.1. Information. Until the completion of a Qualified Public
-----------
Offering, the Company will deliver, or cause to be delivered, to each Warrant
Holder:
(a) Annual Statements. As soon as available, but no later than ninety
-----------------
(90) days after the last day of each fiscal year of Parent, audited consolidated
Financial Statements and unaudited consolidating Financial Statements showing
the financial condition and results of operations of Parent and its Consolidated
Subsidiaries as of, and for the year ended on, such last day, accompanied by the
opinion, without material qualification of Arthur Andersen or another firm of
independent certified public accountants reasonably acceptable to Lender, based
on an audit using generally accepted auditing standards, that such Financial
Statements were prepared in accordance with GAAP and present fairly the
financial condition and result of operations of Parent and its Consolidated
Subsidiaries.
(b) Quarterly Statements. As soon as available, but no later than
--------------------
forty-five (45) days after the last day of each fiscal quarter (A) consolidated
and consolidating Financial Statements showing the financial condition and
results of operations of Parent as of, and for the period from the beginning of
the current fiscal year, to such last day.
(c) Financial Officer's Certificate. Together with the financial
-------------------------------
statements and related information required to be delivered to the Warrant
Holders pursuant to Sections 6.1(a) and (b) hereof, a certificate of the
--------------- ---
Financial Officer of the Company which shall state whether or not such financial
statements fairly reflect the consolidated business and financial condition of
the Company and its Consolidated Subsidiaries as of the date of the delivery of
such financial statements;
(d) Accountant's Letters. In addition to the audit report required by
--------------------
Section 6.1(a) hereof, copies of all "management letters", reports or other
- --------------
material information or correspondence provided to the Company by its auditors
in connection with such audit;
13
<PAGE>
(e) Shareholder Information. Promptly upon the mailing thereof to the
-----------------------
shareholders of the Company generally, copies of all financial statements,
reports and proxy statements so mailed;
(f) SEC Reports. Promptly upon the filing thereof, copies of all
-----------
registration statements, amendments and supplements thereto and annual,
quarterly or special reports and amendments thereto which the Company may file
with the Commission;
(g) Litigation. Promptly upon any Authorized Officer of the Company
----------
becoming aware thereof, notice (i) of the commencement of any litigation,
arbitration or similar proceeding by or against the Company or any of its
Subsidiaries which could reasonably be expected to have a Material Adverse
Effect on the Company or any of its Subsidiaries, (ii) of the occurrence of any
event or existence of any condition which could reasonably be anticipated to
have a Material Adverse Effect on the Company or any of its Subsidiaries, or
(iii) of the occurrence of a default under any Debt owing by the Company or any
of its Subsidiaries or any default under any material agreement to which the
Company or any of its Subsidiaries is a party or by which the Company or any of
its Subsidiaries or any of their properties is bound; and
(h) Other Information. From time to time such additional information
-----------------
regarding the financial position or businesses of the Company or any of its
Subsidiaries as any Warrant Holder may reasonably request.
SECTION 6.2. Right of Inspection. The Company will, and will cause each
-------------------
of its Subsidiaries to, permit any officer, employee or agent of any Warrant
Holder or any of its officers, directors, employees, agents, representatives,
attorneys, accountants or affiliates upon reasonable notice and during normal
business hours to visit and inspect any of the assets of the Company or any of
its Subsidiaries, to examine the Company's or any of its Subsidiaries' books,
records, accounts and correspondence, take copies and extracts therefrom, and
discuss the affairs, finances and accounts of the Company or any of its
Subsidiaries with their respective officers, accountants and auditors, including
the review of any assets of the Company or any of its Subsidiaries located at
third-party locations.
SECTION 6.3. Compliance with Laws and Documents. The Company will, and
----------------------------------
will cause each of its Subsidiaries to, comply in all material respects with the
provisions of (a) all Laws, (b) its Charter Documents, and (c) every material
agreement to which the Company or any of its Subsidiaries is a party or by which
the Company's or any of its Subsidiaries' properties are bound.
SECTION 6.4. Additional Documents. The Company will, and will cause each
--------------------
of its Subsidiaries to, cure promptly any defects in the creation and issuance
of the Warrants and the Warrant Shares, and the execution and delivery of this
Agreement and the other Transaction Documents, and, at the Company's sole
expense, promptly and duly execute and deliver, and cause each of its
Subsidiaries to promptly execute and deliver, to the Warrant Holders, upon
reasonable request, all such other and further documents, agreements and
instruments in compliance with or accomplishment of the covenants and agreements
of the Company and each of its Subsidiaries in this
14
<PAGE>
Agreement and the other Transaction Documents, all as may be reasonably
necessary or appropriate in connection therewith.
ARTICLE VIII
MISCELLANEOUS
SECTION 7.1. Notices. All notices, requests and other communications to
-------
any party hereunder shall be in writing and shall be given to such party at its
address, telex or telecopy number set forth on the signature pages hereof or
such other address, telex or telecopy number as such party may hereafter specify
for the purpose by notice to the other party. Each such notice, request or
other communication shall be effective (i) if given by telex or telecopy, when
such telex or telecopy is transmitted to the telex or telecopy number specified
in this Section 7.1 and a confirmation of receipt (which may be telephonic) is
-----------
given by the recipient, (ii) if given by mail, on the fourth day after deposited
in the mails as a certified letter, return receipt requested, addressed as
aforesaid, or (iii) if given by any other means (including, without limitation,
by air courier), when delivered at the address specified in this Section 7.1.
-----------
SECTION 7.2. No Waivers. No failure or delay on the part of any Warrant
----------
Holder in exercising any right or remedy hereunder and no course of dealing
between the Company or the Partnership and the Warrant Holder shall operate as a
waiver thereof, nor shall any single or partial exercise of any other right or
remedy hereunder preclude any other or further exercise thereof or the exercise
of any other right or remedy hereunder. The rights and remedies herein
expressly provided are cumulative and not exclusive of any rights or remedies
which the Warrant Holder would otherwise have.
SECTION 7.3. Expenses; Indemnification. (a) The Company shall pay on
-------------------------
demand (i) all out-of-pocket expenses incurred by Chase, including reasonable
fees and disbursements of counsel for Chase, in connection with (A) Chase's due
diligence investigation and analysis of the Company through and including the
date of issue and sale of the Warrants to Chase hereunder, (B) the preparation
and negotiation of this Agreement and the other Transaction Documents and the
closing of the transactions contemplated hereby and thereby, and (C) any waiver
or consent which may be granted in connection herewith, or any amendment hereof
or of any other Transaction Document, and (ii) if any breach occurs hereunder,
all out-of-pocket expenses incurred by each Warrant Holder, including (A)
reasonable fees and disbursements of counsel to each Warrant Holder in
connection with such breach and the enforcement proceedings resulting therefrom,
and (B) reasonable fees of auditors and consultants incurred by each Warrant
Holder in connection therewith.
(b) The Company agrees to indemnify and hold harmless, Chase and each
subsequent Warrant Holder and their respective directors, officers, employees,
agents, successors and assigns (collectively, the "Indemnified Parties") from
-------------------
and against any and all liabilities, losses, damages, costs and expenses of any
kind (including, without limitation, the reasonable fees and disbursements of
counsel for the Indemnified Parties in connection with any investigative,
administrative or judicial proceeding, whether or not any such Indemnified Party
shall be designated a party thereto) which may be incurred by any Indemnified
Party relating to or arising out of (a) this
15
<PAGE>
Agreement, the other Transaction Documents and all other transactions
contemplated hereby or thereby and (b) any actual or proposed use of proceeds of
the issuance and sale of the Warrants hereunder; provided, that, no Indemnified
--------
Party shall have the right to be indemnified hereunder for its own gross
negligence or willful misconduct, IT BEING THE INTENTION HEREBY THAT THE
INDEMNIFIED PARTIES SHALL BE INDEMNIFIED FOR THE CONSEQUENCES OF THEIR OWN
NEGLIGENCE.
SECTION 7.4. Amendments and Waivers; Sale of Interest. Any provision of
----------------------------------------
this Agreement and the other Transaction Documents may be amended or waived if,
but only if, such amendment or waiver is in writing and is signed by the Company
and the Majority Warrant Holder. The Company hereby consents to any
participation, sale, assignment, transfer or other disposition which complies
with Article IV, at any time or times hereafter, of any Warrants or Warrant
----------
Shares, this Agreement and any of the other Transaction Documents, or of any
portion hereof or thereof, including, without limitation, Chase's rights, title,
interests, remedies, powers, and duties hereunder or thereunder.
SECTION 7.5. Survival. All representations, warranties and covenants
--------
made by the Company herein or in any certificate or other instrument delivered
by it or in its behalf under the Transaction Documents shall be considered to
have been relied upon by Chase and shall survive the delivery to the Chase of
such Transaction Documents and the purchase of the Warrants, regardless of any
investigation made by or on behalf of Chase.
SECTION 7.6. Invalid Provisions. If any provision of the Transaction
------------------
Documents is held to be illegal, invalid, or unenforceable under present or
future Laws effective during the term thereof, such provision shall be fully
severable, the Transaction Documents shall be construed and enforced as if such
illegal, invalid, or unenforceable provision had never comprised a part thereof,
and the remaining provisions thereof shall remain in full force and effect and
shall not be affected by the illegal, invalid, or unenforceable provision or by
its severance therefrom. Furthermore, in lieu of such illegal, invalid, or
unenforceable provision there shall be added automatically as a part of the
Transaction Documents a provision as similar in terms to such illegal, invalid,
or unenforceable provision as may be possible and be legal, valid and
enforceable.
SECTION 7.7. Successors and Assigns. The provisions of this Agreement
----------------------
shall be binding upon and inure to the benefit of the parties hereto and their
respective successors and permitted assigns, except that the Company may not
assign or otherwise transfer any of its rights or obligations under this
Agreement.
SECTION 7.8. GOVERNING LAW. PURSUANT TO NEW YORK GENERAL OBLIGATIONS LAW
-------------
SECTION 5-1401, THIS AGREEMENT SHALL BE CONSTRUED IN ACCORDANCE WITH AND
GOVERNED BY THE LAWS OF THE STATE OF NEW YORK.
SECTION 7.9. Counterparts; Effectiveness. This Agreement may be signed
---------------------------
in any number of counterparts, each of which shall be an original, with the same
effect as if the signatures thereto and hereto were upon the same instrument.
This Agreement shall become effective when Chase shall have received
counterparts hereof signed by all of the parties hereto.
16
<PAGE>
SECTION 7.10. No Third Party Beneficiaries. It is expressly intended that
----------------------------
there shall be no third party beneficiaries of the covenants, agreements,
representations or warranties herein contained other than transferees or
assignees of all or any part of Chase's interest hereunder.
SECTION 7.11. FINAL AGREEMENT. THIS AGREEMENT AND THE OTHER TRANSACTION
---------------
DOCUMENTS COLLECTIVELY REPRESENT THE FINAL AGREEMENT AMONG THE PARTIES AND MAY
NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL
AGREEMENTS BETWEEN THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN
THE PARTIES.
SECTION 7.12. CONSENT TO JURISDICTION/VENUE. EACH OF THE COMPANY AND THE
-----------------------------
PARTNERSHIP, FOR ITSELF, ITS RESPECTIVE SUCCESSORS AND ASSIGNS, HEREBY (A)
IRREVOCABLY SUBMITS TO THE NONEXCLUSIVE JURISDICTION OF THE STATE AND FEDERAL
COURTS OF THE STATE OF TEXAS AND AGREES AND CONSENTS THAT SERVICE OF PROCESS MAY
BE MADE UPON IT IN ANY LEGAL PROCEEDING ARISING OUT OR IN CONNECTION WITH THIS
AGREEMENT BY SERVICE OF PROCESS AS PROVIDED BY TEXAS LAW, (B) IRREVOCABLY
WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, ANY OBJECTION WHICH IT MAY NOW
OR HEREAFTER HAVE TO THE LAYING OF VENUE OF ANY LITIGATION ARISING OUT OF OR IN
CONNECTION WITH THIS AGREEMENT AND THE OBLIGATIONS BROUGHT IN THE COURTS OF
DALLAS COUNTY, TEXAS, OR IN ANY UNITED STATES DISTRICT COURT FOR THE NORTHERN
DISTRICT OF TEXAS, (C) IRREVOCABLY WAIVES ANY CLAIMS THAT ANY LITIGATION BROUGHT
IN ANY SUCH COURT HAS BEEN BROUGHT IN AN INCONVENIENT FORUM, (D) AGREES TO
DESIGNATE AND MAINTAIN AN AGENT FOR SERVICE OF PROCESS IN DALLAS COUNTY, TEXAS
IN CONNECTION WITH ANY SUCH LITIGATION AND TO DELIVER CHASE EVIDENCE THEREOF,
(E) IRREVOCABLY CONSENTS TO THE SERVICE OF PROCESS OUT OF ANY OF THE
AFOREMENTIONED COURTS IN ANY SUCH LITIGATION BY THE MAILING OF COPIES THEREOF BY
CERTIFIED MAIL, RETURN RECEIPT REQUESTED, POSTAGE PREPAID, TO CHASE AT ITS
ADDRESS SET FORTH HEREIN AND (F) IRREVOCABLY AGREES THAT ANY LEGAL PROCEEDING
AGAINST ANY LENDER ARISING OUT OF OR IN CONNECTION WITH THIS AGREEMENT SHALL BE
BROUGHT IN THE COURTS OF DALLAS COUNTY, TEXAS, OR IN ANY UNITED STATES DISTRICT
COURT FOR THE NORTHERN DISTRICT OF TEXAS. NOTHING HEREIN SHALL AFFECT THE RIGHT
OF CHASE TO COMMENCE ANY LEGAL PROCEEDINGS OR OTHERWISE PROCEED AGAINST THE
COMPANY AND THE PARTNERSHIP IN ANY JURISDICTION OR TO SERVE PROCESS IN ANY
MATTER PERMITTED BY APPLICABLE LAW.
SECTION 7.13. WAIVER OF RIGHT TO TRIAL BY JURY. THE COMPANY, THE
--------------------------------
PARTNERSHIP AND CHASE HEREBY (A) KNOWINGLY, VOLUNTARILY, INTENTIONALLY, AND
IRREVOCABLY WAIVE, TO THE MAXIMUM EXTENT NOT PROHIBITED BY LAW, ANY RIGHT IT MAY
HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION BASED HEREIN, OR DIRECTLY
OR INDIRECTLY AT ANY TIME ARISING OUT OR, UNDER OR IN CONNECTION WITH THIS
AGREEMENT OR ANY OF THE TRANSACTIONS CONTEMPLATED HEREIN OR ASSOCIATED HEREWITH,
(B)
17
<PAGE>
IRREVOCABLY WAIVE, TO THE MAXIMUM EXTEND NOT PROHIBITED BY LAW, ANY RIGHT IT MAY
HAVE TO CLAIM OR RECOVER IN ANY SUCH LITIGATION ANY "SPECIAL DAMAGES," AS
DEFINED BELOW, (C) CERTIFY THAT NO PARTY HERETO NOR ANY REPRESENTATIVE OR AGENT
OR COUNSEL FOR ANY PARTY HERETO HAS REPRESENTED, EXPRESSLY OR OTHERWISE, OR
IMPLIED THAT SUCH PARTY WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE
THE FOREGOING WAIVERS, AND (D) ACKNOWLEDGE THAT IT HAS BEEN INDUCED TO ENTER
INTO THIS AGREEMENT AND THE TRANSACTIONS CONTEMPLATED HEREIN BY, AMONG OTHER
THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS CONTAINED IN THIS SECTION. AS USED
IN THIS SECTION, "SPECIAL DAMAGES" INCLUDES ALL SPECIAL AND CONSEQUENTIAL,
EXEMPLARY, OR PUNITIVE DAMAGES (REGARDLESS OF HOW NAMED), BUT DOES NOT EXPRESSLY
INCLUDE ANY PAYMENT OR FUNDS WHICH ANY PARTY HERETO HAS EXPRESSLY PROMISED TO
PAY OR DELIVER TO ANY OTHER PARTY HERETO.
[SIGNATURE PAGE FOLLOWS]
18
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly
executed by their respective Authorized Officers as of the day and year first
above written.
COMPANY:
PETROGLYPH ENERGY, INC., Address for Notice:
a Delaware corporation
Petroglyph Energy, Inc.
6209 North Highway 61
By:/s/Robert C. Murdock Hutchinson, Kansas 67502
------------------------------ Fax No. (316) 665-8500
Robert C. Murdock, President Attn: Robert C. Murdock
PETROGLYPH GAS PARTNERS, L.P. Address for Notice:
By: Petroglyph Energy, Inc.,
its general partner Petroglyph Energy, Inc.
6209 North Highway 61
By:/s/Robert C. Murdock Hutchinson, Kansas 67502
------------------------------ Fax No. (316) 665-8500
Robert C. Murdock, President Attn: Robert C. Murdock
CHASE:
THE CHASE MANHATTAN BANK Address for Notice:
The Chase Manhattan Bank
One Chase Manhattan Place
Eighth Floor
New York, New York 10081
Fax No. (212) 522-5777
Attn: Lynnette Lang
By: /s/ Mary E. Gherty
------------------------------
Name: Mary E. Gherty
------------------------------
Title: Managing Director
------------------------------
19
<PAGE>
EXHIBIT A
FORM OF WARRANT CERTIFICATE
---------------------------
THE OFFER AND SALE OF THE WARRANTS EVIDENCED BY THIS CERTIFICATE AND THE
SECURITIES ISSUABLE UPON AN EXERCISE OF SUCH WARRANT HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933 OR UNDER THE SECURITIES LAWS OF ANY STATE OR
OTHER JURISDICTION AND SUCH SECURITIES MAY NOT BE SOLD OR TRANSFERRED UNLESS
THERE IS AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT COVERING SUCH SALE
OR TRANSFER OR THE COMPANY RECEIVES AN OPINION OF COUNSEL REASONABLY
SATISFACTORY TO THE COMPANY (WHICH MAY BE COUNSEL FOR THE COMPANY) STATING THAT
SUCH SALE OR TRANSFER IS EXEMPT FROM THE REGISTRATION AND PROSPECTUS DELIVERY
REQUIREMENTS OF SUCH ACT.
No. W-1 9,280 Warrants
WARRANT CERTIFICATE
This Warrant Certificate ("Warrant Certificate") certifies that The Chase
Manhattan Bank, a New York banking corporation ("Chase"), or registered assigns,
is the registered holder of Nine Thousand Two Hundred Eighty (9,280) Warrants
("Warrants") to purchase Common Stock of Petroglyph Energy, Inc., a Delaware
corporation (the "Company"). Each Warrant entitles the holder, subject to the
conditions set forth herein and in the Warrant Agreement referred to below, to
purchase from the Company before 5:00 P.M., New York, New York time, on the
Warrant Expiration Date (as defined in the Warrant Agreement), one fully paid
and nonassessable share of the Common Stock of the Company (the "Warrant
Shares") at a price (the "Warrant Exercise Price") of $.01 per Warrant Share,
subject to adjustment as provided in Sections 3.2 and 3.3 of the Warrant
--------------------
Agreement, payable in lawful money of the United States of America (or, subject
to the terms of Section 3.1 of the Warrant Agreement, by offsetting the Tranche
-----------
B Revolving Loan, upon surrender of this Warrant Certificate, execution of the
form of Election to Purchase on the reverse hereof, and payment of the Warrant
Exercise Price (in lawful money of the United States of America or by offsetting
the principal balance of the Obligations) to the Company, at its offices located
at 6209 North Highway 61, Hutchinson, Kansas 67502, or at such other address as
the Company may specify in writing to the registered holder of the Warrants
evidenced hereby (the "Warrant Office"). The Warrant Exercise Price and number
of Warrant Shares purchasable upon exercise of the Warrants are subject to
adjustment prior to the Warrant Expiration Date upon the occurrence of certain
events as set forth in Section 3.3 of the Warrant Agreement.
-----------
No Warrant may be exercised after 5:00 P.M., New York, New York time, on
the Warrant Expiration Date, except as provided in Section 3.5 of the Warrant
-----------
Agreement, all rights of the registered holders of the Warrants shall cease
after 5:00 P.M., New York, New York time, on such date.
The Company may deem and treat the registered holder(s) of the Warrants
evidenced hereby as the absolute owner(s) thereof (notwithstanding any notation
of ownership or other writing hereon made by anyone), for the purpose of any
exercise hereof and of any distribution to the holder(s) hereof, and for all
other purposes, and the Company shall not be affected by any notice to the
contrary.
20
<PAGE>
Warrant Certificates, when surrendered at the office of the Company at the
above-mentioned address by the registered holder hereof in person or by a legal
representative duly authorized in writing, may be exchanged, in the manner and
subject to the limitations provided in the Warrant Agreement, but without
payment of any service charge, for another Warrant Certificate or Warrant
Certificates of like tenor evidencing in the aggregate a like number of
Warrants.
Upon due presentment for registration of transfer of this Warrant
Certificate at the office of the Company at the above-mentioned address and
subject to the conditions set forth on this Certificate and in Section 4.1 of
-----------
the Warrant Agreement, a new Warrant Certificate or Warrant Certificates of like
tenor and evidencing in the aggregate a like number of Warrants shall be issued
in exchange for this Warrant Certificate to the transferee(s) and, if less than
all the Warrants evidenced hereby are to be transferred, to the registered
holder hereof, subject to the limitations provided in the Warrant Agreement,
without charge except for any tax or other governmental charge imposed in
connection therewith.
This Warrant Certificate is one of the Warrant Certificates referred to in
the Warrant Agreement, dated as of September 15, 1997, among the Company,
Petroglyph Gas Partners, L.P. and Chase. Said Warrant Agreement is hereby
incorporated by referenced in and made a part of this instrument and is hereby
referred to for a description of the rights, limitation of rights, obligations,
duties and immunities thereunder of the Company and the holders.
IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to be
signed by its duly authorized officers and has caused its corporate seal to be
affixed hereunto.
PETROGLYPH ENERGY, INC.,
a Delaware corporation
By:
-----------------------------------------
Robert C. Murdock, President
21
<PAGE>
FORM OF ELECTION TO PURCHASE
----------------------------
(To be executed upon exercise of Warrant)
The undersigned hereby irrevocably elects to exercise the right,
represented by this Warrant Certificate, to purchase ______ Warrant Shares and
herewith [ ] tenders payment for such Warrant Shares to the order of the Company
in the amount of $_______ in accordance with the terms hereof, or [ ] represents
and warrants to the Company that the undersigned is the legal and beneficial
owner of the Shares and hereby advises the Company has offset the principal
balance of the Tranche B Revolving Loan in the amount of $__________ in payment
for the Warrant Shares. The undersigned requests that a certificate for such
Warrant Shares be registered in the name of ___________ whose address is
________ _____________ and that such certificate be delivered to __________
whose address is ____________________. If said number of Warrant Shares is less
than all of the Warrant Shares purchased hereunder, the undersigned requests
that a new Warrant Certificate be registered in the name of ______________ whose
address is ______________ and that such Warrant Certificate is to be delivered
to _______________ whose address is __________________.
Signature:
----------------------------------------
(Signature must conform in all respects to name as
specified on the face of the Warrant Certificate.)
Date:
--------------------------
22
<PAGE>
SCHEDULE 3.3
1. Registration Rights Agreement
2. Exchange Agreement
3. Registration Rights Agreement between Parent and Natural Gas Partners,
L.P., Natural Gas Partners II, L.P., Natural Gas Partners III, L.P., Robert
C. Murdock, Robert A. Christensen, Sidney Kennard Smith, the Albin Income
Trust, R. Gamble Baldwin, John S. Foster, Kenneth A. Hersh and Bruce B.
Selkirk, III.
4. 1997 Incentive Stock Option Plan of Parent pursuant to which an aggregate
375,000 shares of common stock have been authorized and reserved for
issuance to eligible participants. Options on a total of 260,000 shares
have been granted at an exercise price equal to the price to the public set
forth in the Parent's Prospectus filed with the SEC on August 22, 1997.
23
<PAGE>
EXHIBIT 10.21
REGISTRATION RIGHTS AGREEMENT
BETWEEN
THE CHASE MANHATTAN BANK
AND
PETROGLYPH ENERGY, INC.
September 15, 1997
<PAGE>
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT ("Agreement") is entered into as of the
---------
15th day of September, 1997, between The Chase Manhattan Bank, a New York
banking corporation ("Chase"), and Petroglyph Energy, Inc., a Delaware
-----
corporation (the "Company").
-------
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, Chase and the Company are parties to a Warrant Agreement of even
date herewith (the "Warrant Agreement") pursuant to which the Company will issue
and sell to Chase 9,280 warrants (the "Warrants") each of which entitles Chase
to purchase one (1) share of the Company's common stock par value $.01 per share
(the "Common Stock"); and
WHEREAS, in connection with the Warrant Agreement, Chase has required that
the Company enter into this Agreement.
NOW, THEREFORE, in consideration of the premises and the mutual covenants
herein contained, the parties hereto agree as follows:
ARTICLE I
TERMS DEFINED
SECTION 1.1. Definitions. All terms used herein which are defined in the
-----------
preamble or recitals hereto shall have the meanings given to such terms therein,
and each of the following terms, as used herein, shall have the following
meanings:
"Authorized Officer" means, as to any Person, its Chairman, its Chief
Executive Officer, its President, its Chief Operating Officer, its Financial
Officer, any Vice President or its Secretary.
"Business Day" means any day excluding Saturday and Sunday and excluding
any other day on which Chase is required or authorized to close.
"Commission" means the Securities and Exchange Commission or any entity
succeeding to any or all of its functions under the Securities Act or the
Exchange Act.
"Exchange Act" means the Securities Exchange Act of 1934, as amended, or
any successor federal statute.
"Fair Market Value" means, as of any date of determination, with respect to
Common Stock of the Company (including any Common Stock issuable upon exercise
of any warrant (including the Warrant Shares)), or option to acquire such Common
Stock, the value per share determined pursuant to clause (i) or (ii) below of
this definition.
1
<PAGE>
(i) if such Common Stock is listed on a national securities exchange or
admitted to unlisted trading privileges on such an exchange, the average last
reported sale price (as report in The Wall Street Journal) of a share of such
equity security over the 21 trading day period immediately prior to the date of
determination or if no such sale is made on any such day, the mean of the
closing bid and asked prices for such day on such exchange; or
(ii) if such Common Stock is not so listed or admitted to unlisted trading
privileges, the average mean of the last bid and asked prices reported for a
share of Common Stock over the 21 trading day period immediately prior to the
date of determination (A) by the National Association of Securities Dealers
Automatic Quotation System or (B) if reports are unavailable under clause (A)
above by the National Quotation Bureau Incorporated.
"Governmental Authority" means any government, any state or other political
subdivision thereof, or any Person exercising executive, legislative, judicial,
regulatory or administrative functions of or pertaining to government.
"Holder" with respect to any security of a Person, shall mean the record or
beneficial owner of such security.
"Other Securities" means Registrable Securities which are not Restricted
Securities.
"Person" means an individual, a corporation, a partnership, an association,
a trust or any other entity, organization or division, including a government or
political subdivision or an agency or instrumentality thereof and shall also
mean the Company.
"Qualified Public Market" shall mean with respect to Common Stock in the
Company, a trading market on a national securities exchange or over-the-counter
market which consists of publicly held Common Stock, with a total company market
capitalization of at least $15,000,000 calculated based on the Fair Market Value
of the Common Stock. A "Qualified Public Market" shall be deemed to exist if
the financial parameters set forth in the immediately preceding sentence have
been met for the Common Stock for any period of 21 consecutive days.
"Registrable Securities" means (a) all Common Stock now or at any time
hereafter owned by Chase, (b) the Warrant Shares, and (c) any Common Stock
issued with respect to the Warrant Shares by way of a stock dividend or stock
split or in connection with a merger, recapitalization, combination of shares,
consolidation or other reorganization.
"Restricted Securities" means (a) the Warrant Shares, and (b) any
securities issued with respect to the Warrant Shares by way of a stock dividend,
a stock split or in connection with a merger, recapitalization, combination of
shares, consolidation or other reorganization.
"Section" refers to a "section" or "subsection" of this Agreement unless
specifically indicated otherwise.
2
<PAGE>
"Securities Act" means the Securities Act of 1933, as amended, or any
successor federal statute.
"Taxes" means all taxes, assessments, filing or other fees, levies,
imposts, duties, deductions, withholdings, stamp taxes, interest equalization
taxes, capital transaction taxes, foreign exchange taxes or other charges of any
nature whatsoever, from time to time or at any time imposed by law or any
federal, state or local governmental agency. "Tax" means any one of the
foregoing.
"Warrant Holder" means any Person (i) in whose name any Warrant is
registered on the register referenced in Section 4.2 of the Warrant Agreement,
-----------
or (ii) in whose name any Warrant Shares are registered on the books and records
of the Company.
"Warrant Shares" means the shares of Common Stock issuable upon exercise of
the Warrants.
SECTION 1.2. Forms. All references in this Agreement to particular forms
-----
of registration statements are intended to include, and shall be deemed to
include, references to all successor forms which are intended to replace, or to
apply to similar transactions as, the forms herein referenced.
SECTION 1.3. Gender and Number. Words of any gender used in this
-----------------
Agreement shall be held and construed to include any other gender and words in
the singular number shall be held to include the plural, and vice versa, unless
the context requires otherwise.
SECTION 1.4. References to Agreement. Use of the words "herein",
-----------------------
"hereof", "hereinabove", and the like are and shall be construed as references
to this Agreement.
ARTICLE II
REGISTRATION RIGHTS
SECTION 2.1. Demand Registration. (a) Subject to the limitations
-------------------
provided herein, at any time three (3) years after the effective date of the
Company's first issuance of securities to the public pursuant to a registration
statement under the Securities Act, upon the written request (specifying that it
is being made pursuant to this Section 2.1) of one or more Holders of Restricted
-----------
Securities representing 51% or more of the Restricted Securities at the time
outstanding, requesting that the Company effect the registration under the
Securities Act of all or part of such Holders' Registrable Securities, and
specifying (x) the intended method of disposition thereof, (y) whether or not
such requested registration is to be an underwritten offering, and (z) the price
range (net of underwriting discount and commissions) acceptable to such Holder
or Holders to be received for such Registrable Securities, the Company will
within ten (10) business days after the Company receives such written request
give written notice of such requested registration to all other Holders of
Registrable Securities and thereupon the Company will use reasonable efforts to
effect an effective registration under the Securities Act of:
(i) the Registrable Securities which the Company has been so
requested to register by such Holders; and
3
<PAGE>
(ii) all other Registrable Securities which the Company has
been requested to register by the other Holders thereof by written request given
to the Company within 30 days after the giving of such written notice by the
Company (which request shall specify the same information called for by the
original request to effect registration described above), all to the extent
requisite to permit the disposition (in accordance with Section 2.1(b) hereof)
--------------
of the Registrable Securities so to be registered.
If the Company is required to effect a registration pursuant to this Section 2.1
-----------
and the Company furnishes to the Holders of Registrable Securities requesting
such registration a certificate signed by the President of the Company stating
that in the good faith judgment of the Board of Directors of the Company it
would be seriously detrimental to the Company and its stockholders for such
registration statement to be filed on or before the date such filing would
otherwise be required hereunder and it is therefore necessary to defer the
filing of such registration statement, the Company shall have the right to defer
such filing for a period of not more than one hundred twenty (120) days after
receipt of the request for such registration from the Holder or Holders of
Registrable Securities requesting such registration; provided that during such
time the Company may not file a registration statement for securities to be
issued and sold for its own account or that of anyone other than the Holder or
Holders of Registrable Securities requesting such registration.
(b) The Holders of a majority of the Registrable Securities to be
included in such registration statement shall determine the method of
distribution of the Registrable Securities so included; provided, however, that
if no agreement of Holders of a majority of the Registrable Securities to be
included in such registration statement is obtained, then if Holders of thirty
percent (30%) of the Registrable Securities to be included in such registration
statement request an underwritten public offering, an underwritten public
offering shall be the method of distribution with other methods permitted to the
extent the managing underwriter for such offering, in its sole discretion,
agrees to other methods of distribution being covered by such registration
statement.
(c) Whenever the Company shall effect a registration pursuant to this
Section 2.1 in connection with an underwritten offering, no securities other
- -----------
than Registrable Securities shall be included among the securities covered by
such registration unless (i) the managing underwriter of such offering shall
have advised each Holder of Registrable Securities to be covered by such
registration in writing that the inclusion of such other securities would not
adversely affect such offering or (ii) the Holders of a majority or more of all
Registrable Securities to be covered by such registration shall have consented
in writing to the inclusion of such other securities.
(d) Registrations under this Section 2.1 shall be on such appropriate
-----------
registration form of the Commission (i) as shall be selected by the Company and
as shall be reasonably acceptable to the Holders of a majority or more of the
Registrable Securities to be registered, and (ii) as shall permit the
disposition of such Registrable Securities in accordance with the method or
methods of disposition selected pursuant to Section 2.1(b).
--------------
(e) Except as otherwise provided in this Section 2.1 or in Section
----------- -------
2.2, all expenses incurred in connection with each registration requested
- ---
pursuant to Section 2.1 and each registration requested pursuant to Section 2.2
----------- -----------
(excluding in each case underwriter's discounts and
4
<PAGE>
commissions applicable to Registrable Securities), including, without
limitation, in each case, all registration, filing and National Association of
Securities Dealer, Inc. fees; all fees and expenses of complying with securities
or blue sky laws; all word processing, duplicating and printing expenses,
messenger, delivery and shipping expenses; fees and disbursements of the
accountants and counsel for the Company including the expenses of any special
audits or "cold comfort" letters or opinions required by or incident to such
registrations; and the reasonable fees and disbursements of one firm of counsel
retained by Holders of such Registrable Securities, premiums and other costs of
policies of insurance against liabilities arising out of the public offering of
the Registrable Securities, any fees and disbursements of underwriters
customarily paid by issuers or sellers of securities, but excluding underwriting
discounts and commissions, if any, shall be borne by the Company. In all cases,
each Holder of Registrable Securities shall pay the underwriter's discounts and
commissions applicable to the securities sold by such Holder.
(f) A registration requested pursuant to this Section 2.1 shall not be
-----------
deemed to have been effected (i) unless a registration statement with respect
thereto has become effective (unless a substantial cause of the failure of such
registration statement to become effective shall be attributable to one or more
Holders of Registrable Securities whose Restricted Securities were to have been
included in such registration statement), (ii) if after it has become effective,
such registration is interfered with by any stop order, injunction or other
order or requirement of the Commission or other governmental agency or court for
any reason, resulting in a failure to consummate the offering of Registrable
Securities offered thereby, (iii) if after a registration statement with respect
thereto has become effective, the offering of Registrable Securities offered
thereby is not consummated due to factors beyond the control of the Holders of
such Registrable Securities, including without limitation in the context of a
proposed firm commitment underwriting, the fact that the underwriters have
advised the Holders of such Registrable Securities that such Registrable
Securities cannot be sold at a net price equal to or above the net price
anticipated at the time of filing of the preliminary prospectus or (iv) if the
conditions to closing specified in the purchase agreement or underwriting
agreement entered into in connection with such registration are not satisfied
(unless a substantial cause of such conditions to closing not being satisfied
shall be attributable to one or more Holders of Registrable Securities whose
Registrable Securities were included in such registration statement).
(g) If a requested registration pursuant to this Section 2.1 involves
-----------
an underwritten offering, the underwriter or underwriters thereof shall be
selected by the Company with the approval of the Holders of a majority or more
of the Registrable Securities to be so registered.
(h) If a requested registration pursuant to this Section 2.1 involves
-----------
an underwritten offering, and the managing underwriter shall advise the Company
in writing (with a copy to each Person requesting registration) that, in its
opinion, the number of securities requested to be included in such registration
exceeds the number which can be sold in such offering within a price range
acceptable to the Holders of a majority or more of the Registrable Securities
requested to be included in such registration, then the Registrable Securities
requested to be registered pursuant to this Section 2.1 shall be reduced to the
-----------
number of Registrable Securities which the Company is so advised can be sold in
(or during the time of) such offering by (i) first decreasing the Other
Securities requested to be registered (pro rata among the Persons requesting
such registration on the
5
<PAGE>
basis of the percentage of Other Securities held by such Person immediately
prior to the filing of the registration statement with respect to such
registration), then (ii) by decreasing the Restricted Securities requested to be
registered (such decrease to be made ratably among the Persons requesting such
registration on the basis of the percentage of Restricted Securities held by
such Person immediately prior to the filing of the registration statement with
respect to such registration). In connection with any registration as to which
the provisions of this clause (h) apply, no securities other than Registrable
Securities shall be covered by such registration.
(i) Notwithstanding the other provisions of this Section 2.1, the
-----------
Company shall not be required by this Section 2.1 to effect (A) more than one
-----------
effective registration at the Company's expense under this Section 2.1 requested
-----------
by Holders of Restricted Securities. The Company shall also be required by this
Section 2.1, to effect, at the sole expense of the holders of Registrable
- -----------
Securities requesting registration (unless such registration is a demand
registration exercised pursuant to the other provisions of this Section 2.1 in
-----------
which case the Company will bear the expenses of such registration in accordance
with Section 2.1(e)), an unlimited number of registrations on Form S-3 (or any
--------------
successor similar form).
SECTION 2.2. Piggyback Registration. (a) If the Company at any time
----------------------
proposes to register any of its securities under the Securities Act (other than
by a registration on Form S-8, S-4 or any successor similar forms or any other
form not available for registering the Registrable Securities) for sale to the
public and other than pursuant to Section 2.1, whether or not for sale for its
-----------
own account, it will at such time, at least 30 days prior to filing the
registration statement, give written notice to all Holders of Registrable
Securities of its intention to do so. Upon the written request of any such
Holder made within 15 days after the receipt of any such notice (which request
shall specify the Registrable Securities intended to be disposed of by such
Holder and the intended method of disposition thereof), the Company will use
reasonable efforts to effect the registration under the Securities Act of all
Registrable Securities which the Company has been so requested to register by
the Holders of such Registrable Securities, to the extent requisite to permit
the disposition (determined pursuant to the provisions of Section 2.1(b)) of the
--------------
Registrable Securities so to be registered, provided that if, at any time after
--------
giving written notice of its intention to register any securities and prior to
the effective date of the registration statement filed in connection with such
registration, the Company shall determine for any reason not to register or to
delay registration of such securities, the Company may, at its election, give
written notice of such determination to each Holder of Registrable Securities
and, thereupon, (i) in the case of a determination not to register, shall be
relieved of its obligation to register any Registrable Securities in connection
with such registration (but not from its obligation to pay expenses in
accordance with Section 2.1(e)), without prejudice, however, subject to the
--------------
rights of any Holder or Holders of Registrable Securities entitled to do so, to
request that such registration be effected as a registration under Section 2.1,
-----------
and (ii) in the case of a determination to delay registering, shall be permitted
to delay registering any Registrable Securities being registered pursuant to
this Section 2.2, for the same period as the delay in registering such other
-----------
securities. No registration effected under this Section 2.2 shall relieve the
-----------
Company of its obligation to effect any registration upon request under Section
-------
2.1.
- ---
(b) If (i) a registration pursuant to this Section 2.2 involves an
-----------
underwritten offering of the securities so being registered, whether or not for
sale for the account of the Company,
6
<PAGE>
to be distributed (on a firm commitment basis) by or through one or more
underwriters of recognized standing, whether or not the Registrable Securities
so requested to be registered for sale for the account of Holders of Registrable
Securities are also to be included in such underwritten offering, and (ii) the
managing underwriter of such underwritten offering shall inform the Company and
the Holders of the Registrable Securities requesting such registration by letter
of its belief that the number of securities requested to be included in such
registration exceeds the number which can be sold in (or during the time of)
such offering, then the Company may include in such offering all securities
proposed by the Company to be sold for its own account and may decrease the
number of Registrable Securities and other securities of the Company requested
to be included in such registration by (i) first decreasing the number of other
securities requested to be included in such registration to zero, and (ii) then
decreasing the number of Registrable Securities requested to be included in such
registration (pro rata on the basis of the number of shares of such securities
held by such Person immediately prior to the filing of the registration
statement with respect to such registration) to the extent necessary to reduce
the number of securities to be included in the registration to the level
recommended by the managing underwriter.
SECTION 2.3. Registration Procedures. If and whenever the Company is
-----------------------
required to use reasonable efforts to effect the registration of any Registrable
Securities under the Securities Act as provided in Sections 2.1 and 2.2, the
--------------------
Company will, subject to the limitations provided herein, as expeditiously as
possible:
(a) prepare and (as soon thereafter as possible or in any event no
later than 60 days after the end of the period within which requests for
registration may be given to the Company or such longer period as the Company
shall in good faith require to produce the financial statements required in
connection with such registration) file with the Commission the requisite
registration statement to effect such registration and thereafter use reasonable
efforts to cause such registration statement to become effective, provided that
--------
the Company may discontinue any registration of its securities which are not
Registrable Securities (and, under the circumstances specified in Section
-------
2.1(f)(iii) its securities which are Registrable Securities) at any time prior
- -----------
to the effective date of the registration statement relating thereto;
(b) prepare and file with the Commission such amendments and
supplements to such registration statement and the prospectus used in connection
therewith as may be necessary to keep such registration statement effective and
to comply with the provisions of the Securities Act with respect to the
disposition of all securities covered by such registration statement until such
time as all of such securities have been disposed of in accordance with the
intended methods of disposition by the seller or sellers thereof set forth in
such registration statement; provided, however, that the Company shall not in
any event be required to keep the registration statement effective for a period
of more than nine months after such registration statement becomes effective;
(c) furnish to each seller of Registrable Securities covered by such
registration statement such number of conformed copies of such registration
statement and of each such amendment and supplement thereto (in each case
including all exhibits), such number of copies of the prospectus contained in
such registration statement (including each preliminary prospectus and
7
<PAGE>
any summary prospectus) and any other prospectus filed under Rule 424 under the
Securities Act, and such other documents, as such seller may reasonably request;
(d) use its reasonable best efforts to register or qualify all
Registrable Securities and other securities covered by such registration
statement under such other securities or blue sky laws of such jurisdictions as
each seller thereof shall reasonably request, to keep such registration or
qualification in effect for so long as such registration statement remains in
effect (provided, however, that the Company shall not in any event be required
to keep such registration or qualification in effect for a period of more than
nine months after such registration or qualification becomes effective), and
take any other action which may be reasonably necessary or advisable to enable
such seller to consummate the disposition in such jurisdictions of the
securities owned by such seller, except that the Company shall not for any such
purpose be required to qualify generally to do business as a foreign corporation
in any jurisdiction wherein it would not but for the requirements of this
subsection (d) be obligated to be so qualified or to consent to general service
of process in any such jurisdiction;
(e) use its reasonable best efforts to cause all Registrable
Securities covered by such registration statement to be registered with or
approved by such other United States Federal or state governmental agencies or
authorities as may be necessary to enable the seller or sellers thereof to
consummate the disposition of such Registrable Securities;
(f) furnish to each seller of Registrable Securities a copy, or, upon
request, a signed counterpart, addressed to such seller (and the underwriters,
if any) of:
(i) an opinion of counsel for the Company, dated the effective
date of such registration statement (and, if such registration includes an
underwritten public offering, dated the date of the closing under the
underwriting agreement), and
(ii) a "comfort" letter, dated the effective date of such
registration statement (and, if such registration includes an underwritten
public offering, dated the date of the closing under the underwriting
agreement), signed by the independent public accountants who have audited the
Company's financial statements included in such registration statement, covering
substantially the same matters with respect to such registration statement (and
the prospectus included therein) and, in the case of the accountants' letter,
with respect to events subsequent to the date of such financial statements, as
are customarily covered in opinions of issuer's counsel and in accountants'
letters delivered to the underwriters in underwritten public offerings of
securities and, in the case of the accountants' letter, such other financial
matters, and, in the case of the legal opinion such other legal matters, as such
seller or such Holder (or the underwriters, if any) may reasonably request;
(g) notify each seller of Registrable Securities covered by such
registration statement, at any time when a prospectus relating thereto is
required to be delivered under the Securities Act, upon discovery that, or upon
the happening of any event as a result of which, the prospectus included in such
registration statement, as then in effect, includes an untrue statement of a
material fact or omits to state any material fact required to be stated therein
or necessary to make
8
<PAGE>
the statements therein not misleading in the light of the circumstances under
which they were made, and at the request of any such seller, prepare and furnish
to such seller a reasonable number of copies of a supplement to or an amendment
of such prospectus as may be necessary so that, as thereafter delivered to the
purchasers of such securities, such prospectus shall not include an untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein not misleading in the
light of the circumstances under which they were made;
(h) otherwise use reasonable efforts to comply with all applicable
rules and regulations of the Commission, and make available to its security
Holders, as soon as reasonably practicable, an earnings statement covering the
period of at least twelve months beginning with the first full calendar month
after the effective date of such registration statement, which earnings
statement shall satisfy the provisions of Section 11(a) of the Securities Act,
and will furnish to each such seller, upon request of such seller, at least five
days prior to the filing thereof a copy of any amendment or supplement to such
registration statement or prospectus and shall not file any thereof to which any
such seller shall have delivered to the Company an opinion of counsel that such
amendment or supplement does not comply in all material respects with the
requirements of the Securities Act or of the rules or regulations thereunder;
(i) provide and cause to be maintained a transfer agent for all
Registrable Securities covered by such registration statement from and after a
date not later than the effective date of such registration statement;
(j) use its reasonable best efforts to list all Registrable Securities
covered by such registration statement on any securities exchange on which any
of the Registrable Securities is then listed; and
(k) except with respect to registrations made pursuant to Section
-------
2.1(i), refrain from making any sale or distribution of any equity securities of
- ------
the Company, except pursuant to any employee stock option plan and any
preexisting agreement for the sale of such securities, for at least one hundred
(180) days after the closing of the public offering pursuant to such
registration.
It shall be a condition precedent to the obligations of the Company to
take any action with respect to registering a Holder's Registrable Securities
pursuant to this Section 2.3 that such seller of Registrable Securities as to
-----------
which any registration is being effected furnish the Company in writing such
information regarding such seller, the Registrable Securities and other
securities of the Company held by such seller, and the distribution of such
securities as the Company may from time to time reasonably request in writing.
If a Holder refuses to provide the Company with any of such information on the
grounds that it is not necessary to include such information in the registration
statement, the Company may exclude such Holder's Registrable Securities from the
registration statement if the Company provides such Holder with an opinion of
counsel to the effect that such information must be included in the registration
statement and such Holder thereafter continues to withhold such information.
The deletion of such Holder's Registrable Securities from a registration
statement shall not affect the registration of the other Registrable Securities
to be included in such registration statement.
9
<PAGE>
Each Holder of Registrable Securities agrees by acquisition of such
Registrable Securities that upon receipt of any notice from the Company of the
happening of any event of the kind described in Section 2.3(g), such Holder will
--------------
forthwith discontinue such Holder's disposition of Registrable Securities
pursuant to the registration statement relating to such Registrable Securities
until such Holder's receipt of the copies of the supplemented or amended
prospectus contemplated by Section 2.3(g) and, if so directed by the Company,
--------------
will deliver to the Company (at the Company's expense) all copies, other than
permanent file copies then in such Holder's possession, of the prospectus
relating to such Registrable Securities current at the time of receipt of such
notice.
SECTION 2.4. Underwritten Offerings. (a) If requested by the
----------------------
underwriters for any underwritten offering of Registrable Securities pursuant to
a registration requested under Section 2.1 except the second sentence of Section
----------- -------
2.1(i), the Company will enter into an underwriting agreement with such
- ------
underwriters for such offering, such agreement to be reasonably satisfactory in
substance and form to each Holder of Registrable Securities being registered and
the underwriters and to contain such representations and warranties by the
Company and such other terms as are generally prevailing in agreements of this
type, including, without limitation, indemnities to the effect and to the extent
provided in Section 2.6. Each such Holder of Registrable Securities will
-----------
cooperate with the Company in the negotiation of the underwriting agreement and
will give consideration to the reasonable requests of the Company regarding the
form thereof, provided, that nothing herein contained shall diminish the
--------
foregoing obligations of the Company. The Holders of Registrable Securities to
be distributed by such underwriters shall be parties to such underwriting
agreement and may, at their option, require that any or all of the
representations and warranties by, and the other agreements on the part of, the
Company to and for the benefit of such underwriters shall also be made to and
for the benefit of such Holders and that any or all of the conditions precedent
to the obligations of such underwriters under such underwriting agreement be
conditions precedent to the obligations of such Holders. Any such Holder shall
not be required to make any representations or warranties to or agreements with
the Company or the underwriters other than representations, warranties or
agreements regarding such Holder, such Holder's Registrable Securities and other
securities of the Company, such Holder's intended method of distribution, and
any representations, warranties or agreements required by law.
(b) If the Company at any time proposes to register any of its
securities under the Securities Act as contemplated by Section 2.2 and such
-----------
securities are to be distributed by or through one or more underwriters, the
Company will, if requested by any Holder of Registrable Securities as provided
in Section 2.2 and subject to the provisions of Section 2.2(b), arrange for such
----------- --------------
underwriters to include all the Registrable Securities to be offered and sold by
such Holder owning the securities to be distributed by such underwriters. In
such event, the Holders of Registrable Securities to be distributed by such
underwriters shall be parties to the underwriting agreement between the Company
and such underwriters and may, at their option, require that any or all of the
representations and warranties by, and the other agreements on the part of, the
Company to and for the benefit of such underwriters shall also be made to and
for the benefit of such Holders and that any or all of the conditions precedent
to the obligations of such underwriters under such underwriting agreement be
conditions precedent to the obligations of such Holders. Any such Holder shall
not be required to make any representations or warranties to or agreements with
the Company or the underwriters other than representations, warranties or
agreements regarding such Holder, such
10
<PAGE>
Holder's Registrable Securities or other securities of the Company, such
Holder's intended method of distribution and any representations, warranties or
agreements required by law.
SECTION 2.5. Preparation; Reasonable Investigation. In connection with
-------------------------------------
the preparation and filing of each registration statement under the Securities
Act pursuant to this Agreement, the Company will give the Holders of Registrable
Securities registered under such registration statement, their underwriters, if
any, and one counsel or firm of counsel and one accountant or firm of
accountants representing all the Holders of Registrable Securities to be
registered under such registration statement, the opportunity to participate in
the preparation of such registration statement, each prospectus included therein
or filed with the Commission, and each amendment thereof or supplement thereto,
and will give each of them such access to its books and records and such
opportunities to discuss the business of the Company with its officers and the
independent public accountants who have certified its financial statements as
shall be necessary, in the opinion of such Holders' and such underwriters'
respective counsel, to conduct a reasonable investigation within the meaning of
the Securities Act.
SECTION 2.6. Purchase Option. Notwithstanding anything contained herein to
---------------
the contrary, upon any request by Holders of Registrable Securities for
registration of Registrable Securities pursuant to Section 2.1 or 2.2 hereof (a
----------- ---
"Registration Request"), if at the time such request is made, a Qualified Public
Market exists for the Common Stock, the Company shall have the option to
purchase all Registrable Securities with respect to which such Registration
Request is made for a cash purchase price equal to the Fair Market Value of such
Registrable Securities. In the event the Company elects to exercise such
option, it shall deliver written notice of such election to the Holders
requesting registration not less than ten (10) Business Days after receipt of
such Registration Request, and the closing of such purchase and sale of
Registrable Securities shall occur on a date mutually acceptable to the Company
and such Holders, but in no event more than thirty (30) days after the date of
the Registrable Request. At the closing of such sale and purchase, such Holders
shall deliver the certificates evidencing the Registrable Securities to be sold
subject to receipt from the Company of the purchase price therefor payable by
certified check, wire transfer or other immediately available funds.
ARTICLE III
INDEMNIFICATION
SECTION 3.1. Indemnification. In the event any Registrable Securities
---------------
are included in a registration statement under Section 2.1 or 2.2, to the extent
----------- ---
permitted by law, the Company will, and hereby does, indemnify and hold harmless
the seller of any Registrable Securities covered by such registration statement,
its directors and officers, each other Person who participates as an underwriter
in the offering or sale of such securities and each other Person, if any, who
controls such seller or any such underwriter within the meaning of the
Securities Act, against any losses, claims, damages or liabilities, joint or
several, to which such seller or any such director or officer or underwriter or
controlling person may become subject under the Securities Act or otherwise,
insofar as such losses, claims, damages or liabilities (or actions or
proceedings, whether commenced or threatened, in respect thereof) arise out of
or are based upon any untrue statement or alleged untrue
11
<PAGE>
statement of any material fact contained in any registration statement under
which such securities were registered under the Securities Act, any preliminary
prospectus, final prospectus or summary prospectus contained therein, or any
amendment or supplement thereto, or any omission or alleged omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein not misleading, and the Company will reimburse such seller
and each such director, officer, underwriter and controlling person for any
legal or any other expenses reasonably incurred by them in connection with
investigating or defending any such loss, claim, liability, action or
proceeding; provided that the Company shall not be liable in any such case to
--------
to the extent that any such loss, claim, damage, liability (or action or
proceeding in respect thereof) or expense arises solely out of or is based
solely upon an untrue statement or alleged untrue statement or omission or
alleged omission made in such registration statement, any such preliminary
prospectus, final prospectus, summary prospectus, amendment or supplement in
reliance upon and in conformity with written information furnished to the
Company by such seller expressly for use in the preparation thereof, and
provided further that the Company shall not be liable to any person who
- ----------------
participates as an underwriter in the offering or sale of Registrable Securities
or any other Person, if any, who controls such underwriter within the meaning of
the Securities Act, in any such case to the extent that any such loss, claim,
damage, liability (or action or proceeding in respect thereof) or expense arises
out of such Person's failure to send or give a copy of the final prospectus, as
the same may be then supplemented or amended, to the Person asserting an untrue
statement or alleged untrue statement or omission or alleged omission at or
prior to the written confirmation of the sale of Registrable Securities to such
Person if such statement or omission was corrected in such final prospectus.
Such indemnity shall remain in full force and effect regardless of any
investigation made by or on behalf of such seller or any such director, officer,
underwriter or controlling person and shall survive the transfer of such
securities by such seller.
SECTION 3.2. Indemnification by the Sellers. The Company may require, as
------------------------------
a condition to including any Registrable Securities in any registration
statement filed pursuant to Section 2.3, that the Company shall have received an
-----------
undertaking satisfactory to it from the prospective seller of such securities,
to indemnify and hold harmless (in the same manner and to the same extent as set
forth in Section 3.1) each underwriter, each Person who controls such
-----------
underwriter within the meaning of the Securities Act, the Company, each director
of the Company, each officer of the Company and each other Person, if any, who
controls the Company within the meaning of the Securities Act, with respect to
any statement or alleged statement in or omission or alleged omission from such
registration statement, any preliminary prospectus, final prospectus or summary
prospectus contained therein, or any amendment or supplement thereto, if such
statement or alleged statement or omission or alleged omission was made in
reliance upon and in strict conformity with written information furnished to the
Company by such seller expressly for use in the preparation of such registration
statement, preliminary prospectus, final prospectus, summary prospectus,
amendment or supplement; provided that such prospective seller shall not be
--------
liable to any Person who participates as an underwriter in the offering or sale
of Registrable Securities or any other Person, if any, who controls such
underwriter within the meaning of the Securities Act, in any such case to the
extent that any such loss, claim, damage, liability (or action or proceeding in
respect thereof) or expense arises out of such Person's failure to send or give
a copy of the final prospectus, as the same may be then supplemented or amended,
to the Person asserting an untrue statement or alleged untrue statement or
omission or alleged omission at or prior to the written confirmation of
12
<PAGE>
the sale of Registrable Securities to such Person if such statement or omission
was corrected in such final prospectus. Such indemnity shall remain in full
force and effect, regardless of any investigation made by or on behalf of any
underwriter, the Company or any such director, officer or controlling Person and
shall survive the transfer of such securities by such seller. In no event shall
the liability of any selling holder of Registrable Securities under this Section
-------
3.2 be greater in amount than the dollar amount of the proceeds received by such
- ---
holder upon the sale of the Registrable Securities giving rise to such
indemnification obligation.
SECTION 3.3. Notices of Claims, etc. Promptly after receipt by an
----------------------
indemnified party of notice of the commencement of any action or proceeding
involving a claim referred to in Section 3.1 or 3.2, such indemnified party
----------- ---
will, if a claim in respect thereof is to be made against an indemnifying party,
give written notice to the latter of the commencement of such action, provided
--------
that the failure of any indemnified party to give notice as provided herein
shall not relieve the indemnifying party of its obligations under Section 3.1 or
-----------
3.2, except to the extent that the indemnifying party is actually prejudiced by
- ---
such failure to give notice. In case any such action is brought against an
indemnified party, unless in such indemnified party's reasonable judgment a
conflict of interest between such indemnified and indemnifying parties shall
exist in respect of such claim, the indemnifying parties shall be entitled to
participate in and to assume the defense thereof, jointly with any other
indemnifying party similarly notified to the extent that it may wish, with
counsel reasonably satisfactory to such indemnified party, and after notice from
the indemnifying party to such indemnified party of its election so to assume
the defense thereof, the indemnifying party shall not be liable to such
indemnified party for any legal or other expenses subsequently incurred by the
latter in connection with the defense thereof other than reasonable costs of
investigation. No indemnifying party shall, without the consent of the
indemnified party, consent to entry of any judgment or enter into any settlement
which does not include as an unconditional term thereof the giving by the
claimant or plaintiff to such indemnified party of a release from all liability
in respect to such claim or litigation.
SECTION 3.4. Other Indemnification. Indemnification similar to that
---------------------
specified in Section 3.1 or 3.2 (with appropriate modifications) shall be given
----------- ---
by the Company and each seller of Registrable Securities with respect to any
required registration or other qualification of securities under any Federal or
state law or regulation of any governmental authority other than the Securities
Act.
SECTION 3.5. Indemnification Payments. The indemnification required by
------------------------
Section 3.1 and 3.2 shall be made by periodic payments of the amount thereof
- ----------- ---
during the course of the investigation or defense, as and when bills are
received or expense, loss, damage or liability is incurred.
SECTION 3.6. Contribution. If the indemnification provided for in
------------
Section 3.1 and 3.2 from the indemnifying party is unavailable to an indemnified
- ----------- ---
party hereunder in respect of any losses, claims, damages, liabilities or
expenses referred to therein, then the indemnifying party, in lieu of
indemnifying such indemnified party, shall contribute to the amount paid or
payable by such indemnified party as a result of such loss, claims, damages,
liabilities or expenses in such proportion as is appropriate to reflect the
relative fault of the indemnifying party and indemnified parties
13
<PAGE>
in connection with the actions which resulted in such losses, claims, damages,
liabilities or expenses, as well as any other relevant equitable considerations.
The relative fault of such indemnifying party and indemnified parties shall be
determined by reference to, among other things, whether any action in question,
including any untrue statement of material fact or omission or alleged omission
to state a material fact, has been made by, or relates to information supplied
by, such indemnifying party or indemnified parties, and the parties' relative
intent, knowledge, access to information and opportunity to correct or prevent
such action. The amount paid or payable by a party as a result of the losses,
claims, damages, liabilities and expenses referred to above shall be deemed to
include, subject to the limitations set forth in Section 3.3, any legal or other
-----------
fees or expenses reasonably incurred by such party in connection with any
investigation or proceeding.
The parties hereto agree that it would not be just and equitable if
contribution pursuant to this Section 3.6 were determined by pro rata allocation
-----------
or by any other method of allocation which does not take account of the
equitable considerations referred to in the immediately preceding paragraph.
Notwithstanding the provisions of this Section 3.6, no underwriter shall be
-----------
required to contribute any amount in excess of the amount by which the total
price at which the Registrable Securities underwritten by it and distributed to
the public were offered to the public exceeds the amount of any damages which
such underwriter has otherwise been required to pay by reason on such untrue or
alleged untrue statement or omission or alleged omission, and no selling holder
shall be required to contribute any amount in excess of the amount by which the
total price at which the Registrable Securities of such selling holder were
offered to the public exceeds the amount of any damages which such selling
holder has otherwise been required to pay by reason of such untrue statement or
omission. No Person guilty of fraudulent misrepresentation (within the meaning
of Section 11(f) of the Securities Act) shall be entitled to contribution from
any Person who was not guilty of such fraudulent misrepresentation.
If indemnification is available under this Article III, the
-----------
indemnifying parties shall indemnify each indemnified party to the full extent
provided in this Article III without regard to the relative fault of said
-----------
indemnifying party or indemnified party or any other equitable consideration
provided for in this Section 3.6.
-----------
ARTICLE IV
REPORTING REQUIREMENTS
SECTION 4.1. Reporting Requirements Under Securities Exchange Act of
-------------------------------------------------------
1934. When it is first legally required to do so, the Company shall register
- ----
its Common Stock under Section 12 of the Exchange Act (as hereinafter defined)
and shall keep effective such registration and shall timely file such
information, documents and reports as the Commission may require or prescribe
under Section 13 of the Exchange Act. From and after the effective date of the
first registration statement filed by the Company under the Securities Act, the
Company shall (whether or not it shall then be required to do so) timely file
such information, documents and reports which a corporation, partnership or
other entity subject to Section 13 or 15(d) (whichever is applicable) of the
Exchange Act is required to file.
14
<PAGE>
SECTION 4.2. Delivery of Company Information. Immediately upon becoming
-------------------------------
subject to the reporting requirements of either Section 13 or 15(d) of the
Exchange Act, the Company shall forthwith upon request furnish any Holder of
Registrable Securities (a) a written statement by the Company that it has
complied with such reporting requirements, (b) a copy or the most recent annual
or quarterly report of the Company, and (c) such other reports and documents
filed by the Company with the Commission as such Holder may reasonably request
in availing itself of an exemption for the sale of Registrable Securities
without registration under the Securities Act. The Company acknowledges and
agrees that the purposes of the requirements contained in this Section 4.2 are
-----------
(i) to enable any such Holder to comply with the current public information
requirement contained in Paragraph (c) of Rule 144 under the Securities Act
should such Holder ever wish to dispose of any of the securities of the Company
acquired by it without registration under the Securities Act in reliance upon
Rule 144 (or any other similar exemptive provision) and (ii) to qualify the
Company for the use of registration statements on Form S-3. In addition, the
Company shall take such other measures and file such other information,
documents and reports, as shall hereafter be required by the Commission as a
condition to the availability of Rule 144 under the Securities Act (or any
similar exemptive provision hereafter in effect) and the use of Form S-3. The
Company also covenants to use its best efforts, to the extent that it is
reasonably within its power to do so, to qualify for the use of Form S-3.
SECTION 4.3. Stockholder Information. The Company may require each
-----------------------
Holder of Registrable Securities as to which any registration is to be effected
pursuant to this Article IV to furnish the Company such information in writing
----------
with respect to such Holder and the distribution of such Registrable Securities
as the Company may from time to time reasonably request in writing and as shall
be required by law or by the Commission in connection therewith.
ARTICLE V
MISCELLANEOUS
SECTION 5.1. Notices. All notices, requests and other communications to
-------
any party hereunder shall be in writing (including bank wire, telex, telecopy or
similar writing) and shall be given to such party at its address, telex or
telecopy number set forth on the signature pages hereof or such other address,
telex or telecopy number as such party may hereafter specify for the purpose by
notice to the other party. Each such notice, request or other communication
shall be effective (i) if given by telex or telecopy, when such telex or
telecopy is transmitted to the telex or telecopy number specified in this
Section 5.1 and the appropriate answer back is received or receipt is otherwise
- -----------
confirmed, (ii) if given by certified mail, return receipt requested, three (3)
Business Days after deposit in the mails with first class postage prepaid,
addressed as aforesaid, or (iii) if given by any other means, when delivered at
the address specified in this Section 5.1.
-----------
SECTION 5.2. Amendments and Waivers. Any provision of this Agreement and
----------------------
the other Transaction Documents may be amended or waived if, but only if, such
amendment or waiver is in writing and signed by the Company and a majority of
the holders of Restricted Securities.
15
<PAGE>
SECTION 5.3. Successors and Assigns. The provisions of this Agreement
----------------------
shall be binding upon and inure to the benefit of the parties hereto, each
holder of Registrable Securities and their respective permitted successors and
assigns, except that the Company may not assign or otherwise transfer any of its
rights under this Agreement.
SECTION 5.4. Governing Law. PURSUANT TO THE NEW YORK GENERAL OBLIGATIONS
-------------
LAW SECTION 5-1401, THIS AGREEMENT SHALL BE CONSTRUED IN ACCORDANCE WITH AND
GOVERNED BY THE LAWS OF THE STATE OF NEW YORK.
SECTION 5.5. Counterparts; Effectiveness. This Agreement may be signed
---------------------------
in any number of counterparts, each of which shall be an original, with the same
effect as if the signatures thereto and hereto were upon the same instrument.
This Agreement shall become effective when Chase shall have received
counterparts hereof signed by the Company.
SECTION 5.6. FINAL AGREEMENT. THIS AGREEMENT AND THE OTHER TRANSACTION
---------------
DOCUMENTS COLLECTIVELY REPRESENT THE FINAL AGREEMENT AMONG THE PARTIES AND MAY
NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL
AGREEMENTS BETWEEN THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN
THE PARTIES.
SECTION 5.7. WAIVER OF RIGHT TO TRIAL BY JURY. THE COMPANY AND CHASE
--------------------------------
HEREBY (A) KNOWINGLY, VOLUNTARILY, INTENTIONALLY, AND IRREVOCABLY WAIVE, TO THE
MAXIMUM EXTENT NOT PROHIBITED BY LAW, ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY
IN RESPECT OF ANY LITIGATION BASED HEREIN, OR DIRECTLY OR INDIRECTLY AT ANY TIME
ARISING OUT OR, UNDER OR IN CONNECTION WITH THIS AGREEMENT OR ANY OF THE
TRANSACTIONS CONTEMPLATED HEREIN OR ASSOCIATED HEREWITH, (B) IRREVOCABLY WAIVE,
TO THE MAXIMUM EXTEND NOT PROHIBITED BY LAW, ANY RIGHT IT MAY HAVE TO CLAIM OR
RECOVER IN ANY SUCH LITIGATION ANY "SPECIAL DAMAGES," AS DEFINED BELOW, (C)
CERTIFY THAT NO PARTY HERETO NOR ANY REPRESENTATIVE OR AGENT OR COUNSEL FOR ANY
PARTY HERETO HAS REPRESENTED, EXPRESSLY OR OTHERWISE, OR IMPLIED THAT SUCH PARTY
WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVERS,
AND (D) ACKNOWLEDGE THAT IT HAS BEEN INDUCED TO ENTER INTO THIS AGREEMENT AND
THE TRANSACTIONS CONTEMPLATED HEREIN BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS
AND CERTIFICATIONS CONTAINED IN THIS SECTION. AS USED IN THIS SECTION, "SPECIAL
DAMAGES" INCLUDES ALL SPECIAL AND CONSEQUENTIAL, EXEMPLARY, OR PUNITIVE DAMAGES
(REGARDLESS OF HOW NAMED), BUT DOES NOT EXPRESSLY INCLUDE ANY PAYMENT OR FUNDS
WHICH ANY PARTY HERETO HAS EXPRESSLY PROMISED TO PAY OR DELIVER TO ANY OTHER
PARTY HERETO.
SECTION 5.8. CONSENT TO JURISDICTION/VENUE. THE COMPANY, FOR ITSELF, ITS
-----------------------------
SUCCESSORS AND ASSIGNS, HEREBY (A) IRREVOCABLY SUBMITS TO THE NONEXCLUSIVE
JURISDICTION OF THE STATE AND FEDERAL COURTS OF THE STATE OF TEXAS AND AGREES
AND CONSENTS THAT SERVICE OF PROCESS MAY BE MADE
16
<PAGE>
UPON IT IN ANY LEGAL PROCEEDING ARISING OUT OR IN CONNECTION WITH THIS AGREEMENT
AND THE OBLIGATION BY SERVICE OF PROCESS AS PROVIDED BY TEXAS LAW, (B)
IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, ANY OBJECTION WHICH
IT MAY NOW OR HEREAFTER HAVE TO THE LAYING OF VENUE OF ANY LITIGATION ARISING
OUT OF OR IN CONNECTION WITH THIS AGREEMENT AND THE OBLIGATIONS BROUGHT IN THE
COURTS OF DALLAS COUNTY, TEXAS, OR IN ANY UNITED STATES DISTRICT COURT FOR THE
NORTHERN DISTRICT OF TEXAS, (C) IRREVOCABLY WAIVES ANY CLAIMS THAT ANY
LITIGATION BROUGHT IN ANY SUCH COURT HAS BEEN BROUGHT IN AN INCONVENIENT FORUM,
(D) AGREES TO DESIGNATE AND MAINTAIN AN AGENT FOR SERVICE OF PROCESS IN DALLAS,
TEXAS IN CONNECTION WITH ANY SUCH LITIGATION AND TO DELIVER CHASE EVIDENCE
THEREOF, (E) IRREVOCABLY CONSENTS TO THE SERVICE OF PROCESS OUT OF ANY OF THE
AFOREMENTIONED COURTS IN ANY SUCH LITIGATION BY THE MAILING OF COPIES THEREOF BY
CERTIFIED MAIL, RETURN RECEIPT REQUESTED, POSTAGE PREPAID, TO CHASE AT ITS
ADDRESS SET FORTH HEREIN AND (F) IRREVOCABLY AGREES THAT ANY LEGAL PROCEEDING
AGAINST ANY LENDER ARISING OUT OF OR IN CONNECTION WITH THIS AGREEMENT SHALL BE
BROUGHT IN THE COURTS OF DALLAS COUNTY, TEXAS, OR IN ANY UNITED STATES DISTRICT
COURT FOR THE NORTHERN DISTRICT OF TEXAS. NOTHING HEREIN SHALL AFFECT THE RIGHT
OF CHASE TO COMMENCE ANY LEGAL PROCEEDINGS OR OTHERWISE PROCEED AGAINST THE
COMPANY IN ANY JURISDICTION OR TO SERVE PROCESS IN ANY MATTER PERMITTED BY
APPLICABLE LAW.
[SIGNATURE PAGE FOLLOWS]
17
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed by their respective authorized officers on the day and year first
above written.
COMPANY:
PETROGLYPH ENERGY, INC.,
a Delaware corporation Address for Notice:
Petroglyph Energy, Inc..
By: /s/ Robert C. Murdock 6209 North Highway 61
--------------------------------- Hutchinson, Kansas 67502
Robert C. Murdock, President Fax No. (316) 665-8500
Attn: Robert C. Murdock
CHASE:
THE CHASE MANHATTAN BANK
By: /s/ Mary E. Gherty Address for Notice:
---------------------------------
Name: Mary E. Gherty The Chase Manhattan Bank
------------------------------- One Chase Manhattan Place
Title: Managing Director Eighth Floor
------------------------------ New York, New York 10081
Fax No. (212) 522-5777
Attn: Lynnette Lang
18
<PAGE>
EXHIBIT 10.22
GUARANTY
This GUARANTY (this "Guaranty") is dated as of the 15th day of September,
--------
1997, by Petroglyph Energy, Inc., a Delaware corporation ("Guarantor"), in favor
---------
of The Chase Manhattan Bank, a New York state banking corporation ("Lender", and
------
each of its successors and assigns are collectively referred to herein as
"Noteholders").
- ------------
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, PGP II, L.P., a Delaware limited partnership ("PGP II"),
------
Petroglyph Gas Partners, L.P., a Delaware limited partnership ("PGP", together
---
with PGP II, "Borrowers"), Guarantor and Lender are parties to that certain
---------
Amended and Restated Loan Agreement dated of even date herewith (as amended, the
"Loan Agreement"), pursuant to which Lender has provided Borrowers with certain
--------------
revolving and term credit facilities (unless otherwise defined herein, all terms
used herein with their initial letter capitalized shall have the meaning given
such terms in the Loan Agreement); and
WHEREAS, Lender has required as a condition to entering into the Loan
Agreement, that Guarantor execute and deliver this Guaranty; and
WHEREAS, Guarantor has determined that valuable benefits, either directly
or indirectly, will be derived by it as a result of the Loan Agreement and the
extensions of credit to be made by Lender under the Loan Agreement; and
WHEREAS, Guarantor has further determined that the benefits accruing to it
from the Loan Agreement exceed Guarantor's anticipated liability under this
Guaranty.
NOW, THEREFORE, for valuable consideration, the receipt and sufficiency of
which are hereby acknowledged and confessed, Guarantor hereby covenants and
agrees as follows:
1. Guarantor hereby absolutely and unconditionally guarantees the prompt,
complete and full payment when due, no matter how such shall become due, of the
Guaranteed Debt (as hereinafter defined), and further guarantees that Borrowers
will properly and timely perform each and all of the Obligation. This Guaranty
shall remain in effect until the Guaranteed Debt is fully paid and performed.
Guarantor may not rescind or revoke its obligations with respect to this
Guaranty and the Guaranteed Debt. Notwithstanding any contrary provision in
this Guaranty, however, the maximum liability of Guarantor under this Guaranty
shall not exceed the Maximum Liability Amount (as hereinafter defined). As used
herein, the term "Guaranteed Debt" means the Obligation, as defined in the Loan
---------------
Agreement, and all present and future costs, attorneys' fees and expenses
reasonably incurred by each of the Noteholders to enforce Borrowers', any
guarantor's (including Guarantor's), or any other obligor's payment of any of
the Obligation, including, without limitation (to the extent lawful) all present
and future accrued and unpaid interest (including, without limitation, all post-
petition interest if Borrowers or any Subsidiary voluntarily or involuntarily
1
<PAGE>
becomes subject to any Debtor Relief Law). As used herein, the term "Debtor
------
Relief Law" means the Bankruptcy Code of the United States of America and all
- ----------
other applicable liquidation, conservatorship, bankruptcy, moratorium,
rearrangement, receivership, insolvency, reorganization, suspension of payments,
or similar laws affecting creditor's rights. As used herein, the term "Maximum
-------
Liability Amount" means $1.00 less than the amount of the lowest claim on this
- ----------------
Guaranty which would render it void or voidable under any Debtor Relief Law as
against Guarantor.
2. If Guarantor is or becomes liable for any indebtedness owing by
Borrowers to any Noteholder by endorsement or otherwise than under this
Guaranty, such liability shall not be in any manner impaired or affected hereby,
and the rights of each Noteholder hereunder shall be cumulative of any and all
other rights that each Noteholder may ever have against Guarantor. The exercise
by any Noteholder of any right or remedy hereunder or under any other
instrument, at law or in equity, shall not preclude the concurrent or subsequent
exercise of any other right or remedy.
3. In the event of default by Borrowers in payment of the Guaranteed
Debt, or any part thereof, when such Guaranteed Debt becomes due, either by its
terms or as the result of the exercise of any power to accelerate, Guarantor
shall, on demand, and without further notice of dishonor and without any notice
having been given to Guarantor previous to such demand of the acceptance by each
Noteholder of this Guaranty, and without any notice having been given to such
Guarantor previous to such demand of the creating or incurring of such
Guaranteed Debt, pay the amount due thereon to each Noteholder as set forth in
the Loan Agreement, and it shall not be necessary for any Noteholder, in order
to enforce such payment by Guarantor, first, to institute suit or exhaust its
remedies against Borrowers or others liable on such Guaranteed Debt, to have
Borrowers joined with Guarantor in any suit brought under this Guaranty or to
enforce its rights against any security which shall ever have been given to
secure such indebtedness; provided, however, that in the event any Noteholder
elects to enforce and/or exercise any remedies it may possess with respect to
any security for the Guaranteed Debt prior to demanding payment from Guarantor,
Guarantor shall nevertheless be obligated hereunder for any and all sums still
owing to any of the Noteholders on the Guaranteed Debt and not repaid or
recovered incident to the exercise of such remedies.
4. Notice to Guarantor of the acceptance of this Guaranty and of the
making, renewing or assignment of the Guaranteed Debt and each item thereof, are
hereby expressly waived by Guarantor.
5. Each payment on the Guaranteed Debt shall be deemed to have been made
by Borrowers unless express written notice is given to each Noteholder at the
time of such payment that such payment is made by Guarantor as specified in such
notice.
6. If all or any part of the Guaranteed Debt at any time be secured,
Guarantor agrees that any Noteholder may at any time and from time to time, at
its discretion and with or without valuable consideration, allow substitution or
withdrawal of collateral or other security and release collateral or other
security or compromise or settle any amount due or owing under the Loan
Agreement or amend or modify in whole or in part the Loan Agreement or any Loan
Document executed in connection with same without impairing or diminishing the
obligations of Guarantor hereunder. Guarantor further agrees that if Borrowers
execute in favor of any Noteholder any collateral
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agreement, mortgage or other security instrument, the exercise by any Noteholder
of any right or remedy thereby conferred on any such Noteholder shall be wholly
discretionary with such Noteholder, and that the exercise or failure to exercise
any such right or remedy shall in no way impair or diminish the obligations of
Guarantor hereunder. Guarantor further agrees that none of the Noteholders shall
be liable for its failure to use diligence in the collection of the Guaranteed
Debt or in preserving the liability of any Person liable for the Guaranteed
Debt, and Guarantor hereby waives presentment for payment, notice of nonpayment,
protest and notice thereof (including, notice of acceleration), and diligence in
bringing suits against any Person liable on the Guaranteed Debt, or any part
thereof.
7. Guarantor agrees that any Noteholder, in its discretion, may (i) bring
suit against all guarantors (including, without limitation, Guarantor hereunder)
of the Guaranteed Debt jointly and severally or against any one or more of them,
(ii) compound or settle with any one or more of such guarantors for such
consideration as Noteholders may deem proper, and (iii) release one or more of
such guarantors from liability hereunder, and that no such action shall impair
the rights of any such Noteholder to collect the Guaranteed Debt (or the unpaid
balance thereof) from other such guarantors of the Guaranteed Debt, or any of
them, not so sued, settled with or released.
8. Guarantor represents and warrants to each Noteholder that (i)
Guarantor is a corporation, partnership or limited liability company (as
applicable) duly organized and validly existing under the laws of the
jurisdiction of its incorporation or formation; (ii) Guarantor possesses all
requisite authority and power to authorize, execute, deliver and comply with the
terms of this Guaranty; (iii) this Guaranty has been duly authorized and
approved by all necessary action on the part of Guarantor and constitutes a
valid and binding obligation of Guarantor enforceable in accordance with its
terms, except as (a) the enforcement thereof may be limited by applicable Debtor
Relief Laws, and (b) the availability of equitable remedies may be limited by
equitable principles of general applicability; (iv) no approval or consent of
any court or Governmental Authority is required for the authorization,
execution, delivery or compliance with this Guaranty which has not been obtained
(and copies thereof delivered to each Noteholder); and (v) Guarantor is not
involved in, nor aware of the threat of, any Litigation (as defined in Paragraph
---------
23(a) hereinbelow) which, in the event of an outcome unfavorable to Guarantor,
- -----
could have a material adverse effect on the financial position, business,
operations or prospects of Guarantor nor are there any outstanding or unpaid
judgments against Guarantor. Guarantor further acknowledges that certain (A)
representations and warranties in the Loan Agreement are applicable to it and
confirms that each such representation and warranty is true and correct in all
material respects, and (B) covenants and other provisions in the Loan Agreement
are applicable to it or are imposed upon it and agrees to promptly comply with
or be bound by each of them.
9. Guarantor covenants and agrees that until the Guaranteed Debt is paid
and performed in full, except as otherwise provided in the Loan Agreement or
unless each Noteholder gives its prior written consent to any deviation
therefrom, it will (i) at all times maintain its existence and authority to
transact business in any State or jurisdiction where Guarantor has assets and
operations, (ii) promptly deliver to any Noteholder such information respecting
its business affairs, assets and liabilities as any Noteholder may reasonably
request, and (iii) duly and punctually observe and perform all covenants
applicable to Guarantor under the Loan Agreement and the other Loan
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Documents. The failure of Guarantor to comply with the terms of this paragraph
shall be an Event of Default under the Loan Agreement.
10. This Guaranty is for the benefit of each Noteholder, its successors
and assigns, and in the event of an assignment by any Noteholder (or its
successors or assigns) of the Guaranteed Debt, or any part thereof, the rights
and benefits hereunder, to the extent applicable to the Guaranteed Debt so
assigned, may be transferred with such Guaranteed Debt. This Guaranty is
binding upon Guarantor and its legal representatives, successors and assigns.
11. No modification, consent, amendment or waiver of any provision of this
Guaranty, nor consent to any departure by Guarantor therefrom, shall be
effective unless the same shall be in writing and signed by each Noteholder, and
then shall be effective only in the specific instance and for the purpose for
which given. No notice to or demand on Guarantor in any case shall, of itself,
entitle Guarantor to any other or further notice or demand in similar or other
circumstances. No delay or omission by any Noteholder in exercising any power
or right hereunder shall impair any such right or power or be construed as a
waiver thereof or any acquiescence therein, nor shall any single or partial
exercise of any such power preclude other or further exercise thereof, or the
exercise of any other right or power hereunder. All rights and remedies of each
Noteholder hereunder are cumulative of each other and of every other right or
remedy which any of the Noteholders may otherwise have at law or in equity or
under any other contract or document, and the exercise of one or more rights or
remedies shall not prejudice or impair the concurrent or subsequent exercise of
other rights or remedies.
12. No provision herein or in any promissory note, instrument or any other
Loan Document executed by either Borrower or Guarantor evidencing the Guaranteed
Debt shall require the payment or permit the collection of interest in excess of
the Maximum Lawful Rate. If any excess of interest in such respect is provided
for herein or in any such promissory note, instrument, or any other Loan
Document, the provisions of this paragraph shall govern, and none of the
Borrowers nor Guarantor shall be obligated to pay the amount of such interest to
the extent that it is in excess of the amount permitted by law. The intention
of the parties being to conform strictly to any applicable federal or state
usury laws now in force, all promissory notes, instruments and other Loan
Documents executed by Borrowers or Guarantor evidencing the Guaranteed Debt
shall be held subject to reduction to the amount allowed under said usury laws
as now or hereafter construed by the courts having jurisdiction.
13. If Guarantor should breach or fail to perform any provision of this
Guaranty, Guarantor agrees to pay each Noteholder all costs and expenses
(including court costs and reasonable attorneys fees) incurred by such
Noteholder in the enforcement hereof.
14. (a) The liability of Guarantor under this Guaranty shall in no manner
be impaired, affected or released by the insolvency, bankruptcy, making of an
assignment for the benefit of creditors, arrangement, compensation, composition
or readjustment of either Borrower, or any proceedings affecting the status,
existence or assets of either Borrower or other similar proceedings instituted
by or against either Borrower and affecting the assets of either Borrower.
Furthermore, no obligations of Guarantor under this Guaranty may be released,
diminished or affected by the
4
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occurrence of any one or more of the following events: (a) any taking or
accepting of any other security or assurance for any Guaranteed Debt; (b) any
release, surrender, exchange, subordination, impairment or loss of any
collateral securing any Guaranteed Debt; (c) any full or partial release of the
liability of any other guarantor or any other obligor on the Guaranteed Debt;
(d) the modification of, or waiver of compliance with, any terms of any other
Loan Document; (e) the insolvency, bankruptcy or lack of corporate, partnership
or limited liability company (as applicable) power of Guarantor or any other
obligor at any time liable for any of the Guaranteed Debt, whether now existing
or occurring in the future; (f) any renewal, extension or rearrangement of any
Guaranteed Debt or any adjustment, indulgence, forbearance, or compromise that
may be granted or given by any Noteholder to any guarantor (including Guarantor)
or any other obligor on the Guaranteed Debt; (g) any neglect, delay, omission,
failure or refusal of any Noteholder to take or prosecute any action in
connection with the Guaranteed Debt; (h) any failure of any Noteholder to notify
Guarantor of any renewal, extension, or assignment of any Guaranteed Debt, or
the release of any security or of any other action taken or refrained from being
taken by any Noteholder against Borrowers or any new agreement between any
Noteholder and Borrowers, it being understood that none of the Noteholders are
required to give Guarantor any notice of any kind under any circumstances
whatsoever with respect to or in connection with any Guaranteed Debt, other than
any notice required to be given to Guarantor by law or elsewhere in this
Guaranty; (i) the unenforceability of any Guaranteed Debt against Guarantor or
any other obligor because it exceeds the amount permitted by law, the act of
creating it is ultra vires, the officers creating it exceeded their authority or
-----------
violated their fiduciary duties in connection with it, or otherwise; or (j) any
payment of the Guaranteed Debt to any Noteholder is held to constitute a
preference under any Debtor Relief Law or for any other reason any Noteholder is
required to refund that payment or make payment to someone else (and in each
such instance this Guaranty will be reinstated in an amount equal to that
payment).
(b) Guarantor acknowledges and agrees that any interest on any
portion of the Obligation which accrues after the commencement of any proceeding
referred to in clause (a) above (or, if interest on any portion of the
Obligation ceases to accrue by operation of law by reason of the commencement of
said proceeding, such interest as would have accrued on such portion of the
Obligation if said proceedings had not been commenced) shall be included in the
Guaranteed Debt because it is the intention of Guarantor and Noteholders that
the Guaranteed Debt which is guaranteed by Guarantor pursuant to this Guaranty
should be determined without regard to any rule of law or order which may
relieve Borrowers of any portion of such Guaranteed Debt. Guarantor will permit
any trustee in bankruptcy, receiver, debtor in possession, assignee for the
benefit of creditors or similar person to pay Noteholders, or allow the claim of
Noteholders in respect of, any such interest accruing after the date on which
such proceeding is commenced.
(c) In the event that all or any portion of the Guaranteed Debt is
paid by Borrowers or any other obligor, the obligations of Guarantor hereunder
shall continue and remain in full force and effect or be reinstated, as the case
may be, in the event that all or any part of such payment(s) are rescinded or
recovered directly or indirectly from any Noteholder as a preference, fraudulent
transfer or otherwise, and any such payments which are so rescinded or recovered
shall constitute Guaranteed Debt for all purposes under this Guaranty.
5
<PAGE>
15. Guarantor understands and agrees that any amounts of Guarantor on
account with any Noteholder may be offset to satisfy the obligations of
Guarantor hereunder.
16. Guarantor hereby subordinates and makes inferior any and all
indebtedness now or at any time hereafter owed by Borrowers to Guarantor to the
Guaranteed Debt evidenced by the Loan Agreement and agrees after the occurrence
of a Default under the Loan Agreement, or any event which with notice, lapse of
time, or both, would constitute a Default under the Loan Agreement, not to
permit either Borrower to repay, or to accept payment from either Borrower of,
such indebtedness or any part thereof without the prior written consent of each
Noteholder.
17. Guarantor hereby waives any and all rights of subrogation to which
Guarantor may otherwise be entitled against Borrowers, or any other guarantor of
the Guaranteed Debt, as a result of any payment made by Guarantor pursuant to
this Guaranty.
18. After giving effect to the Exchange, (i) the fair value of the
property of Guarantor is greater than the total amount of liabilities including,
without limitation, contingent liabilities, of Guarantor, (ii) the present fair
saleable value of the assets of Guarantor (including, without limitation,
intangible assets such as goodwill) is not less than the amount that will be
required to pay the probable liability of Guarantor on its debts as they become
absolute and matured, (iii) Guarantor is able to realize upon its assets and pay
its debts and other liabilities, contingent obligations and other commitments as
they mature in the normal course of business, (iv) Guarantor does not intend to,
nor does Guarantor believe that it will, incur debts or liabilities beyond its
ability to pay as such debts and liabilities mature, and (v) Guarantor is not
engaged in a business or transaction, nor is Guarantor about to engage in a
business or transaction for which its property would constitute unreasonably
small capital after giving due consideration to the prevailing practice in the
industry in which Guarantor is engaged. For purposes of this Section 18,
----------
"contingent liabilities" shall be computed at the amount which, in light of all
relevant facts and circumstances, represents the amount that can reasonably be
expected to become an actual or matured liability.
19. Guarantor confirms that it has executed and delivered this Guaranty
after reviewing the terms and conditions of the Loan Documents and such other
information as it has deemed appropriate in order to make its own credit
analysis and decision to execute and deliver this Guaranty. Guarantor confirms
that it has made its own independent investigation with respect to each
Borrower's creditworthiness and is not executing and delivering this Guaranty in
reliance on any representation or warranty by any Noteholder as to that
creditworthiness. Guarantor expressly assumes all responsibilities to remain
informed of the financial condition of Borrowers and any circumstances affecting
each Borrower's ability to perform under the Loan Documents to which it is a
party or any collateral securing any Guaranteed Debt.
20. The Guaranteed Debt may not be reduced, discharged or released because
or by reason of any existing or future offset, claim, or defense (except for the
defense of complete and final payment of the Guaranteed Debt) of Borrowers or
any other obligor against any Noteholder or against payment of the Guaranteed
Debt, whether that offset, claim or defense arises in connection with the
Guaranteed Debt or otherwise. Those claims and defenses include, without
limitation, failure of consideration, breach of warranty, fraud, bankruptcy,
incapacity/infancy, statute of
6
<PAGE>
limitations, lender liability, accord and satisfaction, usury, forged
signatures, mistake, impossibility, frustration of purpose, and
unconscionability.
21. All notices, requests and other communications to any party hereunder
shall be in writing (including bank wire, telex, telecopy or similar writing)
and shall be given to such party at its address, telex or telecopy number set
forth, in the case of any Noteholder, in the Loan Agreement, or, in the case of
Guarantor, on the signature pages hereof, or such other address, telex or
telecopy number as such party may hereafter specify for the purpose by notice to
the other party. Each such notice, request or other communication shall be
effective (a) if given by telex or telecopy, when such telex or telecopy is
transmitted to the telex or telecopy number specified in this Section 21 and the
----------
appropriate answer back is received or receipt is otherwise confirmed, (ii) if
given by certified mail, return receipt requested, on the fourth day after such
communication is deposited in the mails with first class postage prepaid,
addressed as aforesaid, or (iii) if given by any other means, when delivered at
the address specified in this Section 21.
----------
22. If any provision of this Guaranty is held to be illegal, invalid, or
unenforceable, such provision shall be fully severable; this Guaranty shall be
construed and enforced as if such illegal, invalid, or unenforceable provision
had never comprised a part hereof; and the remaining provisions hereof shall
remain in full force and effect and shall not be affected by the illegal,
invalid, or unenforceable provision or by its severance herefrom. Furthermore,
in lieu of such illegal, invalid, or unenforceable provision there shall be
added automatically as a part of this Guaranty a provision as similar in terms
to such illegal, invalid, or unenforceable provision as may be possible and be
legal, valid and enforceable.
23. (a) VENUE; SERVICE OF PROCESS. GUARANTOR, FOR ITSELF, ITS SUCCESSORS
-------------------------
AND ASSIGNS, HEREBY (A) IRREVOCABLY SUBMITS TO THE NONEXCLUSIVE JURISDICTION OF
THE STATE AND FEDERAL COURTS OF THE STATE OF TEXAS AND AGREES AND CONSENTS THAT
SERVICE OF PROCESS MAY BE MADE UPON IT IN ANY LEGAL PROCEEDING ARISING OUT OF OR
IN CONNECTION WITH THE LOAN DOCUMENTS AND THE OBLIGATION BY SERVICE OF PROCESS
AS PROVIDED BY TEXAS LAW, (B) IRREVOCABLY WAIVES, TO THE FULLEST EXTENT
PERMITTED BY LAW, ANY OBJECTION WHICH IT MAY NOW OR HEREAFTER HAVE TO THE LAYING
OF VENUE OF ANY LITIGATION ARISING OUT OF OR IN CONNECTION WITH THE LOAN
DOCUMENTS AND THE OBLIGATION BROUGHT IN THE COURTS OF DALLAS COUNTY, TEXAS, OR
IN THE UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF TEXAS, (C)
IRREVOCABLY WAIVES ANY CLAIMS THAT ANY LITIGATION BROUGHT IN ANY SUCH COURT HAS
BEEN BROUGHT IN AN INCONVENIENT FORUM, (D) AGREES TO DESIGNATE AND MAINTAIN AN
AGENT FOR SERVICE OF PROCESS IN DALLAS COUNTY, TEXAS, IN CONNECTION WITH ANY
SUCH LITIGATION AND TO DELIVER TO LENDER EVIDENCE THEREOF, (E) IRREVOCABLY
CONSENTS TO THE SERVICE OF PROCESS OUT OF ANY OF THE AFOREMENTIONED COURTS IN
ANY SUCH LITIGATION BY THE MAILING OF COPIES THEREOF BY CERTIFIED MAIL, RETURN
RECEIPT REQUESTED, POSTAGE PREPAID, TO GUARANTOR AT ITS ADDRESS SET FORTH
HEREIN, AND (F) IRREVOCABLY AGREES THAT ANY LEGAL PROCEEDING AGAINST LENDER
ARISING OUT OF OR IN
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CONNECTION WITH THE LOAN DOCUMENTS OR THE OBLIGATION SHALL BE BROUGHT IN THE
COURTS OF DALLAS COUNTY, TEXAS, OR IN THE UNITED STATES DISTRICT COURT FOR THE
NORTHERN DISTRICT OF TEXAS. NOTHING HEREIN SHALL AFFECT THE RIGHT OF LENDER TO
COMMENCE LEGAL PROCEEDINGS OR OTHERWISE PROCEED AGAINST GUARANTOR IN ANY
JURISDICTION OR TO SERVE PROCESS IN ANY MANNER PERMITTED BY APPLICABLE LAW. As
used herein, the term "Litigation" means any proceeding, claim, lawsuit or
----------
investigation (i) conducted or threatened by or before any court or governmental
department, commission, board, bureau, agency or instrumentality of the United
States or of any state, commonwealth, nation, territory, possession, county,
parish, or municipality, whether now or hereafter constituted or existing, or
(ii) pending before any public or private arbitration board or panel.
(b) Nothing in this Paragraph 23 shall affect any right of any
------------
Noteholder to serve legal process in any other manner permitted by law or affect
the right of any Noteholder to bring any action or proceeding against Guarantor
in the courts of any other jurisdictions.
(c) To the extent that Guarantor has or hereafter may acquire any
immunity from jurisdiction of any court or from any legal process (whether
through service or notice, attachment prior to judgment, attachment in aid of
execution, execution or otherwise) with respect to itself or its property,
Guarantor hereby irrevocably waives such immunity in respect of its obligations
under this Guaranty and the other Loan Documents.
24. THIS GUARANTY AND THE OTHER LOAN DOCUMENTS COLLECTIVELY REPRESENT THE
FINAL AGREEMENT BY AND BETWEEN NOTEHOLDERS AND GUARANTOR AND MAY NOT BE
CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL
AGREEMENTS OF NOTEHOLDERS AND GUARANTOR. THERE ARE NO UNWRITTEN ORAL AGREEMENTS
BETWEEN NOTEHOLDERS AND GUARANTOR.
25. WAIVER OF JURY TRIAL PUNITIVE DAMAGES, ETC. GUARANTOR AND LENDER
------------------------------------------
HEREBY (a) KNOWINGLY, VOLUNTARILY, INTENTIONALLY, AND IRREVOCABLY WAIVE, TO THE
MAXIMUM EXTENT NOT PROHIBITED BY LAW, ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY
IN RESPECT OF ANY LITIGATION BASED HEREIN, OR DIRECTLY OR INDIRECTLY AT ANY TIME
ARISING OUT OF, UNDER OR IN CONNECTION WITH THE LOAN DOCUMENTS OR ANY
TRANSACTION CONTEMPLATED THEREBY OR ASSOCIATED THEREWITH, BEFORE OR AFTER
MATURITY; (b) IRREVOCABLY WAIVE, TO THE MAXIMUM EXTENT NOT PROHIBITED BY LAW,
ANY RIGHT IT MAY HAVE TO CLAIM OR RECOVER IN ANY SUCH LITIGATION ANY "SPECIAL
DAMAGES," AS DEFINED BELOW; (c) CERTIFY THAT NO PARTY HERETO NOR ANY
REPRESENTATIVE OR AGENT OR COUNSEL FOR ANY PARTY HERETO HAS REPRESENTED,
EXPRESSLY OR OTHERWISE, OR IMPLIED THAT SUCH PARTY WOULD NOT, IN THE EVENT OF
LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVERS, AND (d) ACKNOWLEDGE THAT IT
HAS BEEN INDUCED TO ENTER INTO THIS GUARANTY, THE OTHER LOAN DOCUMENTS AND THE
TRANSACTIONS CONTEMPLATED HEREBY AND THEREBY BY, AMONG OTHER
8
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THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS CONTAINED IN THIS SECTION. AS USED
IN THIS SECTION, "SPECIAL DAMAGES" INCLUDES ALL SPECIAL, CONSEQUENTIAL,
EXEMPLARY, OR PUNITIVE DAMAGES (REGARDLESS OF HOW NAMED), BUT DOES NOT INCLUDE
ANY PAYMENT OR FUNDS WHICH ANY PARTY HERETO HAS EXPRESSLY PROMISED TO PAY OR
DELIVER TO ANY OTHER PARTY HERETO.
26. PURSUANT TO NEW YORK GENERAL OBLIGATIONS LAW SECTION 5-1401, THIS
GUARANTY AND THE OTHER LOAN DOCUMENTS SHALL BE CONSTRUED IN ACCORDANCE WITH AND
GOVERNED BY THE LAWS OF THE STATE OF NEW YORK, OTHER THAN CONFLICT OF LAWS RULES
THEREOF.
EXECUTED and effective as of the date first above written.
GUARANTOR:
PETROGLYPH ENERGY, INC.
By: /s/ Robert C. Murdock
------------------------------------
Name: Robert C. Murdock
Title: President
Address:
Petroglyph Energy, Inc.
6209 North Highway 61
Hutchinson, Kansas 67502
Attn: Robert C. Murdock
Fax No. (316) 665-8500
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EXHIBIT 23.2
As independent public accountants, we hereby consent to the use of our report
and to all references to our Firm included in or made a part of this
registration statement.
Arthur Andersen LLP
September 30, 1997
<PAGE>
EXHIBIT 23.3
[LETTERHEAD OF LEE KEELING AND ASSOCIATES, INC. APPEARS HERE]
CONSENT OF PETROLEUM ENGINEERS
As Petroleum Engineers, we hereby consent to the inclusion of the information
included in this Registration Statement with respect to the oil and gas reserves
of Petroglyph Energy, Inc., the future net revenues from such reserves and the
present value thereof, which information has been included in this Registration
Statement in reliance upon the report of this firm and upon the authority of
this firm as experts in petroleum engineering. We hereby further consent to all
references to our firm included in this Registration Statement.
LEE KEELING AND ASSOCIATES, INC.
By: /s/ Kenneth Renberg
-----------------------------
Kenneth Renberg
Vice President
Tulsa, Oklahoma
September 29, 1997
