<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 22, 1997
REGISTRATION NO. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
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)
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]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
================================================================================
PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AGGREGATE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED PRICE(1)(2) REGISTRATION FEE
- -------------------------------------------------------------------------------
<S> <C> <C>
Common Stock, par value $.01 per
share.......................... $42,933,328 $13,011
================================================================================
</TABLE>
(1) In accordance with Rule 457(o) under the Securities Act of 1933, the
number of shares being registered and the proposed maximum offering price
per share are not included in this table.
(2) Estimated for purposes of calculating registration fee.
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 AUGUST 22, 1997
PROSPECTUS
- --------------------------------------------------------------------------------
2,333,333 Shares
[LOGO APPEARS HERE]
PETROGLYPH ENERGY, INC.
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 Company intends to apply for inclusion of the Common Stock 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 , 1997.
PRUDENTIAL SECURITIES INCORPORATED
OPPENHEIMER & CO., INC.
JOHNSON RICE & COMPANY L.L.C.
, 1997
<PAGE>
[MAPS OF THE COMPANY'S PRINCIPAL PROPERTIES APPEARS HERE]
----------------
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
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 $3 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 $2.80 per BOE. As of June 30, 1997, the Company had estimated net proved
reserves of approximately 9.6 MMBbls of oil and 25.9 Bcf of natural gas, or an
aggregate of 13.9 MMBOE with a PV-10 of $42.9 million. Of the Company's
estimated proved reserves, 96% 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 the second largest
onshore basin 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 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 135 MBOE of net proved undeveloped reserves
per proved undeveloped well location in the Uinta Basin, with an approximate
average PV-10 per well of $304,000. 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 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 southeast Colorado and
northeast 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 $1.0 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 $3 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 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.
4
<PAGE>
. 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 5,166,666 shares(1)
Offering..................................
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."
Proposed Nasdaq National Market Symbol.... PGEI
- --------
(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. See "Capitalization," "Executive Compensation and Other
Information--1997 Incentive Plan" 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
---------------------------------- ------------ ---------- ------------ ----------
1993 1994 1995 1996 1996 1996 1996 1997
------- ------- ------- ------- ------------ ---------- ------------ ----------
(UNAUDITED) (UNAUDITED)
(IN THOUSANDS)
<S> <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
Natural gas sales..... 182 796 1,016 999 878 592 471 513
Other................. 86 45 36 -- -- -- -- 69
------- ------- ------- ------- ------ ------ ------ -------
Total operating
revenues........... 492 2,485 4,269 5,458 4,401 3,136 2,079 2,307
------- ------- ------- ------- ------ ------ ------ -------
Operating expenses:
Lease operating....... 238 1,601 2,260 2,369 1,954 1,329 914 841
Production taxes...... 9 89 188 249 205 121 77 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
Impairments........... -- -- 109 -- -- -- -- --
General and
administrative....... 278 956 1,064 902 902 590 590 546
------- ------- ------- ------- ------ ------ ------ -------
Total operating
expenses........... 678 4,693 6,299 6,395 5,489 3,359 2,453 2,505
------- ------- ------- ------- ------ ------ ------ -------
Operating loss......... (186) (2,208) (2,030) (937) (1,088) (223) (374) (198)
Other income
(expenses):
Interest income
(expense), net....... -- (93) (216) 40 147 15 122 19
Gain (loss) on sales
of property and
equipment, net....... 63 44 (138) 1,384 70 1,174 (140) 6
------- ------- ------- ------- ------ ------ ------ -------
Net income (loss)
before income taxes... (123) (2,257) (2,384) 487 (871) 966 (392) (173)
Pro forma tax
expense(2)............ -- -- -- (190) -- (377) -- --
------- ------- ------- ------- ------ ------ ------ -------
Net income (loss)...... $ (123) $(2,257) $(2,384) $ 297 $ (871) $ 589 $ (392) $ (173)
======= ======= ======= ======= ====== ====== ====== =======
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
EBITDA(3).............. 30 (117) 619 3,322 $1,410 2,270 $ 358 828
Operating cash
flow(4)............... (33) (233) 608 2,024 1,628 795
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1997
-------------------------
HISTORICAL AS ADJUSTED(5)
---------- --------------
<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 the
disposition of the 50% interest in the Antelope Creek properties had
occurred on January 1, 1996.
(2) 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.
(3) 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. EBITDA should not be
considered as an alternative to net income (loss), or operating income
(loss), as defined by generally accepted accounting principles, as an
indicator of the Company's financial performance or to cash flows as a
measure of liquidity.
(4) 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.
(5) 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 Estimates of Oil and Natural Gas Reserves," "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. Reserve volumes presented throughout this
Prospectus are prior to reduction for royalty interests.
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
------------------------------------ AS OF JUNE 30,
1994 1995 1996 1997
----------- ----------- ------------ --------------
<S> <C> <C> <C> <C>
ESTIMATED PROVED RESERVES:
Oil (Bbls)............... 1,437,078 1,882,540 7,581,571 9,568,889
Natural gas (Mcf)........ 9,123,512 8,311,883 23,371,277 25,947,155
BOE (6 Mcf per Bbl)...... 2,957,663 3,267,854 11,476,784 13,893,415
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(3)
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 $14.95 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 $1.63 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
prior to June 30, 1997 of $17.19 per Bbl of oil and $2.12 per Mcf of
natural gas, the future net cash before income tax would be $110.6 million
and the present value of estimated net cash flows before income taxes would
be $57.0 million as of June 30, 1997.
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 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.................. $ 6.52 $ 8.38 $ 2.25(1) $2.19(1) $2.79(1)
Other................. 1.80 2.43 * * 2.94
Total................. 3.12 7.26 2.39 2.22 2.80
</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
$16,456,000, $1,690,000, and $18,146,000, respectively. Average finding
costs per BOE for Utah excluding these amounts were $0.64, $1.54 and $1.54
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.
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 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.
11
<PAGE>
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 this decline was
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.
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
12
<PAGE>
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 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
13
<PAGE>
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.
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 leased
by the Company from the Ute Indian Tribe and the Ute Distribution Corporation,
which may
14
<PAGE>
impose a greater deal of regulatory uncertainty than on leases subject to
state and federal leases. 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."
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."
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 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
15
<PAGE>
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 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.
16
<PAGE>
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--
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 outstanding to purchase
260,000 shares of Common Stock. See "Executive Compensation and Other
Information," "Shares Eligible for Future Sale" and "Description of Capital
Stock--Registration Rights."
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 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
17
<PAGE>
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 Company intends to apply to have the Common Stock
approved for inclusion in the Nasdaq National Market, there can be no
assurance that if the Common Stock is approved for inclusion 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 $1.0 million. 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 $3
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 transactions
contemplated by the Exchange Agreement will be consummated immediately prior
to the closing of the Offering.
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 Credit Agreement, dated May 25, 1995, with
Texas Commerce Bank National Association, 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 June 30, 1997, the outstanding principal balance of indebtedness under
the Credit Agreement was $5.0 million. The outstanding principal balance on
this indebtedness had increased to $7.5 million at August 22, 1997. For the
six months ended June 30, 1997, the Credit Agreement had an average interest
rate of 8.875% per annum, and the indebtedness has a final maturity of October
1999.
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. See "Executive Compensation and Other Information."
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)................. $ 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) Excludes 375,000 shares of Common Stock reserved for issuance under the
Company's 1997 Incentive Plan. See "Executive Compensation and Other
Information--1997 Incentive Plan."
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 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. The effective date of the sale was June 1, 1996. See "The Company--
Company History--Uinta Basin." Pro forma financial statements for the six
month period ended June 30, 1997 are not required as no significant
acquisitions or dispositions occurred during the period. 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 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>
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ----------
<S> <C> <C> <C>
Oil and natural gas revenues........... $5,457,689 $(1,057,000)(1) $4,400,689
Other revenues.........................
---------- ----------- ----------
Total operating revenues............. 5,457,689 (1,057,000) 4,400,689
Lease operating expenses............... 2,368,973 (415,000)(1) 1,953,973
Production taxes....................... 248,848 (44,000)(1) 204,848
Exploration costs...................... 68,818 68,818
Depreciation, depletion and
amortization.......................... 2,805,693 (447,000)(2) 2,358,693
General and administrative expenses.... 902,409 902,409
---------- ----------- ----------
Total operating expenses............. 6,394,741 (906,000) 5,488,741
Interest income, net................... 40,580 107,000 (3) 147,580
Gain on sales of property and
equipment, net........................ 1,383,766 (1,314,000)(4) 69,766
---------- ----------- ----------
Net income (loss) before taxes......... 487,294 (1,358,000) (870,706)
Pro forma tax expense(5)............... 190,044 (190,044) --
---------- ----------- ----------
Net income (loss)...................... $ 297,250 $(1,167,956) $ (870,706)
========== =========== ==========
</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.
24
<PAGE>
PETROGLYPH ENERGY, INC.
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ----------
<S> <C> <C> <C>
Oil and natural gas revenues........... $3,135,717 $(1,057,000)(1) $2,078,717
---------- ----------- ----------
Total operating revenues............. 3,135,717 (1,057,000) 2,078,717
Lease operating expense................ 1,328,971 (415,000)(1) 913,971
Production taxes....................... 120,841 (44,000)(1) 76,841
Exploration costs...................... 41,610 41,610
Depreciation, depletion &
amortization.......................... 1,277,317 (447,000)(2) 830,317
General & administrative expenses...... 590,248 590,248
---------- ----------- ----------
Total operating expenses............. 3,358,987 (906,000) 2,452,987
Interest income, net................... 15,543 107,000 (3) 122,543
Gain (loss) on sales of property and
equipment, net........................ 1,173,801 (1,314,000)(4) (140,199)
---------- ----------- ----------
Net income (loss) before taxes......... 966,074 (1,358,000) (391,926)
Pro forma tax expense(5)............... 376,769 (376,769) --
---------- ----------- ----------
Net income (loss)...................... $ 589,305 $(981,231) $ (391,926)
========== =========== ==========
</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.
25
<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
----------------------------------- ------------ ---------- ------------ ----------
1993 1994 1995 1996 1996 1996 1996 1997
------- ------- -------- ------- ------------ ---------- ------------ ----------
(UNAUDITED) (UNAUDITED)
(IN THOUSANDS)
<S> <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
Natural gas sales...... 182 796 1,016 999 878 592 471 513
Other.................. 86 45 36 -- -- -- -- 69
------- ------- -------- ------- ------ ------ ------ -------
Total operating
revenues............. 492 2,485 4,269 5,458 4,401 3,136 2,079 2,307
------- ------- -------- ------- ------ ------ ------ -------
Operating expenses:
Lease operating........ 238 1,601 2,260 2,369 1,954 1,329 914 841
Production taxes....... 9 89 188 249 205 121 77 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
Impairments............ -- -- 109 -- -- -- -- --
General and
administrative........ 278 956 1,064 902 902 590 590 546
------- ------- -------- ------- ------ ------ ------ -------
Total operating
expenses............. 678 4,693 6,299 6,395 5,489 3,359 2,453 2,505
------- ------- -------- ------- ------ ------ ------ -------
Operating loss......... (186) (2,208) (2,030) (937) (1,088) (223) (374) (198)
Other income
(expenses):
Interest income
(expense), net........ -- (93) (216) 40 147 15 122 19
Gain (loss) on sales of
property and
equipment, net........ 63 44 (138) 1,384 70 1,174 (140) 6
------- ------- -------- ------- ------ ------ ------ -------
Net income (loss)
before income taxes... (123) (2,257) (2,384) 487 (871) 966 (392) (173)
Pro forma tax
expense(2)............ -- -- -- (190) -- (377) -- --
------- ------- -------- ------- ------ ------ ------ -------
Net income (loss)...... $ (123) $(2,257) $ (2,384) $ 297 $ (871) $ 589 $ (392) $ (173)
======= ======= ======== ======= ====== ====== ====== =======
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
EBITDA(3).............. 30 (117) 619 3,322 $1,410 2,270 $ 358 828
Operating cash
flow(4)............... (33) (233) 608 2,024 1,628 795
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1997
-------------------------
DECEMBER 31, 1996 HISTORICAL AS ADJUSTED(5)
----------------- ---------- --------------
<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>
- -------
(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 properties had
occurred on January 1, 1996.
(2) 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.
(3) 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. EBITDA should not be considered
as an alternative to income (loss), or operating income (loss), as defined
by generally accepted accounting principles, as an indicator of the
Company's financial performance or to cash flows as a measure of
liquidity.
(4) 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.
(5) 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."
26
<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 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.. 3.12 7.26 2.39(4) 2.39 -- -- 2.10(4)
</TABLE>
- --------
(1) The 1996 Pro Forma amounts reflect results of operations as if the
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, the six months ended June 30, 1997 and for the period from January
1, 1994 to June 30, 1997, includes future development costs of
$16,456,000, $1,690,000, and $18,146,000, respectively. Average finding
costs per BOE excluding these amounts were $0.64, $1.54 and $1.54 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.
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.
27
<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.
28
<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.
29
<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.
30
<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.
31
<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 ($995,996) 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
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 base, including the overdraft facility, will
be sufficient to meet its estimated capital expenditure requirements until
such time as the net proceeds from the Offering became 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.
32
<PAGE>
Financing
In May 1995, the Company entered into the Credit Agreement. The Credit
Agreement is 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 converted 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. 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. The Company is currently negotiating and has agreed to terms with its
bank to provide an additional $2.5 million to the Company through an amendment
to the loan facility. The Company had no balances outstanding under the Credit
Agreement at December 31, 1996.
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
33
<PAGE>
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>
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.
34
<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
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 $3 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 $2.80 per BOE. As of June 30, 1997, the Company had estimated net
proved reserves of approximately 9.6 MMBbls of oil and 25.9 Bcf of natural
gas, or an aggregate of 13.9 MMBOE with a PV-10 of $42.9 million. Of the
Company's estimated proved reserves, 96% 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 the second largest
onshore basin 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 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 135 MBOE of net proved undeveloped reserves
per proved undeveloped well location in the Uinta Basin, with an approximate
average PV-10 per well of $304,000. As of June 30, 1997, full development of
the Company's 38,685 gross undeveloped acres within the Uinta Basin would
support approximately 820
35
<PAGE>
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 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 southeast Colorado and
northeast 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 $1.0 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 $3 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.
. 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
36
<PAGE>
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 9,357 24,446 13,431
Colorado-Raton Basin..................... 55,927 -- -- --
Other.................................... 6,279 212 1,501 462
------- ----- ------ ------
Total.................................. 107,731 9,569 25,947 13,893
======= ===== ====== ======
</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
37
<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 Ensearch 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.
38
<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
39
<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 13,250 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
40
<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 southeast Colorado and
northeast 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. Approximately 140 coalbed methane wells have produced approximately 7.9
Bcf of natural gas through December 31, 1996. 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
41
<PAGE>
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 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 form federal units for much of its acreage in
this area. Petroglyph's acreage position in the Raton Basin may support up to
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<PAGE>
wells on 160-acre spacing. Initially, the Company plans to spend up to
approximately $3 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 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 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 to purchase all or any portion of the oil
produced from the Antelope Creek field at the purchaser's posted 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.
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.
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
43
<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................... 301 1,411 1,064 1,490 711 2,006 2,058 4,514
Other.................. 1,136 7,713 819 6,822 356 1,824 212 1,501
----- ----- ----- ----- ----- ------ ----- ------
Total................. 1,437 9,124 1,883 8,312 1,067 3,830 2,270 6,015
Proved undeveloped:
Utah................... -- -- -- -- 6,515 19,541 7,299 19,932
Other.................. -- -- -- -- -- -- -- --
----- ----- ----- ----- ----- ------ ----- ------
Total................. -- -- -- -- 6,515 19,541 7,299 19,932
----- ----- ----- ----- ----- ------ ----- ------
Total proved.......... 1,437 9,124 1,883 8,312 7,582 23,371 9,569 25,947
===== ===== ===== ===== ===== ====== ===== ======
</TABLE>
44
<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."
45
<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.
46
<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 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>
47
<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
Raton Basin........................... -- -- 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
48
<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.
49
<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
50
<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.
51
<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 August 22, 1997, the Company had 35 full-time employees, none of whom
is represented by any labor union. Included in the total were 14 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.
52
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information regarding the directors
and executive officers of the Company as of August 15, 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........................... 37 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.
53
<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 served as 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 partner 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
54
<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 "Security Ownership of Certain Beneficial Owners and
Management."
55
<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.
56
<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 partner. For the six
months ended June 30, 1997, the Company paid legal fees of $81,000 to Morris,
Laing, Evans, Brock & Kennedy, Chartered.
57
<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 August 22,
1997, assuming in each case the Conversion had been consummated on August 22,
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 August 22, 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.
58
<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 August 22, 1997 the Company had
outstanding 2,833,333 shares of Common Stock held of record by 11 stockholders
and had outstanding stock options for an aggregate of 260,000 shares.
COMMON STOCK
The holders of Common Stock are entitled to one vote for each share held of
record on all matters submitted to the stockholders. 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.
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 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.
59
<PAGE>
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.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock is .
60
<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.
61
<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 .
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.
62
<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.
63
<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.
64
<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.
65
<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
66
<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.
67
<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 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 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, 1996, 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 is amortized on a unit-of-production basis
over the remaining proved reserves attributable to the properties served by
the gathering system. 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.
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 Partnership
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. A value of
$570,000 has been assigned to the sale of the NPI and recorded as deferred
revenue. As these barrels of equivalent production are produced and NPI
proceeds are disbursed to the Partnership's partner, 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, 1997
----------- ---------- -------------
<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, 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. 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. Interest on the revolver is at TCB's prime plus .375% and on the
term loan will be at TCB prime plus .75%.
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 is 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 is 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.
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 purchaser's posted price for the
gravity and type of oil produced and delivered by the Company. The Call
Agreement has no expiration date. The price at which this purchaser could
purchase the Company's oil production approximates market price for the oil
produced by the Company.
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 was 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....................................... 583,529 3,164,812
Revisions.............................................. (399,663) (953,915)
Extensions, additions and discoveries.................. 231,549 1,280,156
Production............................................. (110,373) (485,062)
Purchases of reserves.................................. 1,163,951 6,328,068
Sales in place......................................... (31,915) (210,547)
--------- ----------
December 31, 1994....................................... 1,437,078 9,123,512
Revisions.............................................. 2,296 (598,044)
Extensions, additions and discoveries.................. 364,776 221,869
Production............................................. (182,704) (659,202)
Purchases of reserves.................................. 725,513 829,869
Sales in place......................................... (464,419) (606,121)
--------- ----------
December 31, 1995....................................... 1,882,540 8,311,883
Revisions.............................................. 331,452 (240,607)
Extensions, additions and discoveries.................. 6,440,869 18,448,489
Production............................................. (262,910) (553,770)
Purchases of reserves.................................. -- --
Sales in place......................................... (810,380) (2,594,718)
--------- ----------
December 31, 1996....................................... 7,581,571 23,371,277
Revisions.............................................. 1,683,006 2,058,926
Extensions, additions and discoveries.................. 578,757 760,047
Production............................................. (117,770) (243,095)
Purchases of reserves.................................. -- --
Sales in place......................................... (156,675) --
--------- ----------
June 30, 1997........................................... 9,568,889 25,947,155
========= ==========
PROVED DEVELOPED RESERVES:
December 31, 1993...................................... 1,110,998 3,164,812
========= ==========
December 31, 1994...................................... 1,437,078 9,123,512
========= ==========
December 31, 1995...................................... 1,882,540 8,311,883
========= ==========
December 31, 1996...................................... 1,067,146 3,829,703
========= ==========
June 30, 1997.......................................... 2,270,815 6,015,201
========= ==========
</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 $14.95 per Bbl and $1.63 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, 1993 of $17.19 per Bbl of oil and $2.12 per Mcf of natural gas, were
14,100,087 BOE, as compared to 13,893,415 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 is $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> <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]
, 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>
WORKING INTEREST RESERVES NET RESERVES FUTURE NET REVENUES
------------------------------------------------- -----------------------------
OIL NATURAL GAS OIL NATURAL GAS PRESENT WORTH
CATEGORY (BBLS) (MCF) (BBLS) (MCF) TOTAL DISCOUNTED AT 10%
- -------- ------------ ------------------------ ----------- ----------- -----------------
<S> <C> <C> <C> <C> <C> <C> <C>
Proved Developed:
Producing.............. 1,210,171 3,678,811 994,193 2,924,633 $10,434,000 $ 7,826,000
Non-Producing.......... 1,060,644 2,336,390 855,219 1,926,262 7,998,000 4,564,000
Proved Undeveloped...... 7,298,074 19,931,954 5,874,725 16,059,170 65,963,000 30,481,000
------------ ------------- --------- ---------- ----------- -----------
Total Proved........ 9,568,889 25,947,155 7,724,137 20,910,065 $84,395,000 $42,871,000
============ ============= ========= ========== =========== ===========
</TABLE>
The working interest reserves shown above are the total volumes attributable
to Petroglyph's working interest. These volumes have not been reduced to
account for royalty and overriding royalty interest burdens. Adjustments in
our evaluation have been made in the determination of the net reserves and
future net revenue to account for the various royalty and overriding interest
burdens.
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.
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
A-1
<PAGE>
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
posted price of $ 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 price of $ 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, because Petroglyph generates all of the properties
lease and well operating costs for the 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 overdelivery 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 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,
A-2
<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..................................... 26
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 27
Business and Properties.................................................. 35
Management............................................................... 53
Executive Compensation and Other Information............................. 56
Certain Transactions..................................................... 57
Principal Stockholders................................................... 58
Description of Capital Stock............................................. 59
Shares Eligible for Future Sale.......................................... 61
Underwriting............................................................. 62
Legal Matters............................................................ 63
Experts.................................................................. 63
Available Information.................................................... 64
Glossary of Oil and Natural Gas Terms.................................... 65
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.
, 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.............................. *
Blue Sky Qualification Fees and Expenses........................ *
Accounting Fees and Expenses.................................... *
Legal Fees and Expenses......................................... *
Engineering Fees and Expenses................................... *
Transfer Agent and Registrar Fees............................... *
Printing and Engraving Expenses................................. *
Miscellaneous................................................... *
-------
Total....................................................... $ *
=======
</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 Loan Agreement, dated May 25, 1995, between PGP II, L.P. and Texas
Commerce Bank National Association.
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.
Lease Agreement between Hutch Realty, L.L.C. and Petroglyph Operating
10.18+ Company, Inc.
21 Subsidiaries of the Registrant.
23.1 Consent of Thompson & Knight, A Professional Corporation (included in
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 (included on the signature page to this
Registration Statement).
27 Financial Data Schedule.
</TABLE>
- --------
+ To be filed by amendment.
(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 Registration Statement on Form S-1 to be
signed on its behalf by the undersigned, thereunto duly authorized, in
Hutchinson, Kansas, on August 22, 1997.
Petroglyph Energy, Inc.
By: /s/ Robert C. Murdock
---------------------------------
ROBERT C. MURDOCK (PRESIDENT,
CHIEF EXECUTIVE OFFICER AND
CHAIRMAN OF THE BOARD)
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned directors and officers
of Petroglyph Energy, Inc., a Delaware corporation, which is filing a
Registration Statement on Form S-1 with the Securities and Exchange
Commission, Washington, D.C. 20549 under the provisions of the Securities Act
of 1933, as amended (the "Securities Act"), hereby constitute and appoint
Robert C. Murdock and Robert A. Christensen, and each of them, the
individual's true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution, for the person and in his or her name, place
and stead, in any and all capacities, to sign such Registration Statement and
any or all amendments, including post-effective amendments, to the
Registration Statement, including a Prospectus or an amended Prospectus
therein and any registration statement for the same offering that is to be
effective upon filing pursuant to Rule 462(b) under the Securities Act, and
all other documents in connection therewith to be filed with the Securities
and Exchange Commission, granting unto said attorneys-in-fact and agents, and
each of them, full power and authority to do and perform each and every act
and thing requisite and necessary to be done in and about the premises, as
fully to all intents and purposes as he might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact as agents or any of
them, or their substitute or substitutes, may lawfully do or cause to be done
by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
SIGNATURE TITLE DATE
/s/ Robert C. Murdock President, Chief August 22, 1997
- ------------------------------------- Executive Officer
ROBERT C. MURDOCK and Chairman of the
Board (principal
executive officer)
/s/ Robert A. Christensen Executive Vice August 22, 1997
- ------------------------------------- President, Chief
ROBERT A. CHRISTENSEN Technical Officer
and Director
/s/ Tim A. Lucas Vice President and August 22, 1997
- ------------------------------------- Chief Financial
TIM A. LUCAS Officer (principal
financial and
accounting officer)
/s/ David R. Albin Director August 22, 1997
- -------------------------------------
DAVID R. ALBIN
/s/ Kenneth A. Hersh Director August 22, 1997
- -------------------------------------
KENNETH A. HERSH
/s/ A. J. Schwartz Director August 22, 1997
- -------------------------------------
A. J. SCHWARTZ
II-5
<PAGE>
EXHIBIT 1
PETROGLYPH ENERGY, INC.
2,333,333 Shares
Common Stock
UNDERWRITING AGREEMENT
----------------------
_________ ___, 1997
PRUDENTIAL SECURITIES INCORPORATED
OPPENHEIMER & CO., INC.
JOHNSON RICE & COMPANY, L.L.C.
As Representatives of the several Underwriters
% Prudential Securities Incorporated
One New York Plaza
New York, New York 10292
Dear Sirs:
Petroglyph Energy, Inc., a Delaware corporation (the "Company"),
hereby confirms its agreement with the several underwriters named in Schedule 1
hereto (the "Underwriters"), for whom you have been duly authorized to act as
representatives (in such capacity, the "Representatives"), as set forth below.
If you are the only Underwriters, all references herein to the Representatives
shall be deemed to be to the Underwriters. For purposes of the representations,
warranties, covenants, obligations and agreements of the Company in this
Agreement, references to the Company shall include Petroglyph Gas Partners,
L.P., a Delaware limited partnership ("Partner").
1. Securities. Subject to the terms and conditions herein contained,
----------
the Company agrees to issue and sell to the several Underwriters an aggregate of
2,333,333 shares (the "Firm Securities") of the Company's Common Stock, par
value $.01 per share ("Common Stock"). The Company also proposes to issue and
sell to the several Underwriters not more than 350,000 additional shares of
Common Stock if requested by the Representatives as provided in Section 3 of
this Agreement. Any and all shares of Common Stock to be purchased by the
Underwriters pursuant to such option are referred to herein as the "Option
Securities," and the Firm Securities and any Option Securities are collectively
referred to herein as the "Securities."
2. Representations and Warranties of the Company. The Company
---------------------------------------------
represents and warrants to, and agrees with, each of the several Underwriters
that:
(a) A registration statement on Form S-1 (File No. 333- _______) with
respect to the Securities, including a prospectus subject to completion, has
been filed by the Company with the
<PAGE>
Securities and Exchange Commission (the "Commission") under the Securities Act
of 1933, as amended (the "Act"), and one or more amendments to such registration
statement may have been so filed. After the execution of this Agreement, the
Company will file with the Commission either (i) if such registration statement,
as it may have been amended, has been declared by the Commission to be effective
under the Act, either (A) if the Company relies on Rule 434 under the Act, a
Term Sheet (as hereinafter defined) relating to the Securities, that shall
identify the Preliminary Prospectus (as hereinafter defined) that it supplements
containing such information as is required or permitted by Rules 434, 430A and
424(b) under the Act or (B) if the Company does not rely on Rule 434 under the
Act, a prospectus in the form most recently included in an amendment to such
registration statement (or, if no such amendment shall have been filed, in such
registration statement), with such changes or insertions as are required by Rule
430A under the Act or permitted by Rule 424(b) under the Act, and in the case of
either clause (i)(A) or (i)(B) of this sentence as have been provided to and
approved by the Representatives prior to the execution of this Agreement, or
(ii) if such registration statement, as it may have been amended, has not been
declared by the Commission to be effective under the Act, an amendment to such
registration statement, including a form of prospectus, a copy of which
amendment has been furnished to and approved by the Representatives prior to the
execution of this Agreement. The Company may also file a related registration
statement with the Commission pursuant to Rule 462(b) under the Act for the
purpose of registering certain additional Securities, which registration shall
be effective upon filing with the Commission. As used in this Agreement, the
term "Original Registration Statement" means the registration statement
initially filed relating to the Securities, as amended at the time when it was
or is declared effective, including all financial schedules and exhibits thereto
and including any information omitted therefrom pursuant to Rule 430A under the
Act and included in the Prospectus (as hereinafter defined); the term "Rule
462(b) Registration Statement" means any registration statement filed with the
Commission pursuant to Rule 462(b) under the Act (including the Registration
Statement and any Preliminary Prospectus or Prospectus incorporated therein at
the time such Registration Statement becomes effective); the term "Registration
Statement" includes both the Original Registration Statement and any Rule 462(b)
Registration Statement; the term "Preliminary Prospectus" means each prospectus
subject to completion filed with such registration statement or any amendment
thereto (including the prospectus subject to completion, if any, included in the
Registration Statement or any amendment thereto at the time it was or is
declared effective); the term "Prospectus" means:
(A) if the Company relies on Rule 434 under the Act, the Term Sheet
relating to the Securities that is first filed pursuant to Rule
424(b)(7) under the Act, together with the Preliminary Prospectus
identified therein that such Term Sheet supplements;
(B) if the Company does not rely on Rule 434 under the Act, the
prospectus first filed with the Commission pursuant to Rule 424(b)
under the Act; or
(C) if the Company does not rely on Rule 434 under the Act and if no
prospectus is required to be filed pursuant to Rule 424(b) under the
Act, the prospectus included in the Registration Statement;
-2-
<PAGE>
and the term "Term Sheet" means any term sheet that satisfies the requirements
of Rule 434 under the Act. Any reference herein to the "date" of a Prospectus
that includes a Term Sheet shall mean the date of such Term Sheet.
(b) The Commission has not issued any order preventing or suspending
use of any Preliminary Prospectus. When any Preliminary Prospectus subsequent
to the Preliminary Prospectus in the Original Registration Statement was filed
with the Commission it (i) contained all statements required to be stated
therein in accordance with, and complied in all material respects with the
requirements of, the Act and the rules and regulations of the Commission
thereunder and (ii) did not include any untrue statement of a material fact or
omit to state any material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading. When the Registration Statement or any amendment thereto was or is
declared effective, it (i) contained or will contain all statements required to
be stated therein in accordance with, and complied or will comply in all
material respects with the requirements of, the Act and the rules and
regulations of the Commission thereunder and (ii) did not or will not include
any untrue statement of a material fact or omit to state any material fact
necessary to make the statements therein not misleading. When the Prospectus or
any Term Sheet that is a part thereof or any amendment or supplement to the
Prospectus is filed with the Commission pursuant to Rule 424(b) (or, if the
Prospectus or part thereof or such amendment or supplement is not required to be
so filed, when the Registration Statement or the amendment thereto containing
such amendment or supplement to the Prospectus was or is declared effective) and
on the Firm Closing Date and any Option Closing Date (both as hereinafter
defined), the Prospectus, as amended or supplemented at any such time, (i)
contained or will contain all statements required to be stated therein in
accordance with, and complied or will comply in all material respects with the
requirements of, the Act and the rules and regulations of the Commission
thereunder and (ii) did not or will not include any untrue statement of a
material fact or omit to state any material fact necessary in order to make the
statements therein, in the light of the circumstances under which they were
made, not misleading. The foregoing provisions of this paragraph (b) do not
apply to statements or omissions made in any Preliminary Prospectus, the
Registration Statement or any amendment thereto or the Prospectus or any
amendment or supplement thereto in reliance upon and in conformity with written
information furnished to the Company by any Underwriter through the
Representatives specifically for use therein.
(c) If the Company has elected to rely on Rule 462(b) and the Rule
462(b) Registration Statement has not been declared effective (i) the Company
has filed a Rule 462(b) Registration Statement in compliance with and that is
effective upon filing pursuant to Rule 462(b) and has received confirmation of
its receipt and (ii) the Company has given irrevocable instructions for
transmission of the applicable filing fee in connection with the filing of the
Rule 462(b) Registration Statement, in compliance with Rule 111 promulgated
under the Act or the Commission has received payment of such filing fee.
(d) The Company and each of its subsidiaries have been duly
incorporated or organized and are validly existing as corporations or
partnerships in good standing under the laws of their respective jurisdictions
of incorporation or organization and are duly qualified to transact business as
foreign corporations or partnerships and are in good standing under the laws of
all other jurisdictions where the ownership or leasing of their respective
properties or the conduct of their
-3-
<PAGE>
respective businesses requires such qualification, except where the failure to
be so qualified does not amount to a material liability or disability to the
Company and its subsidiaries, taken as a whole.
(e) The Company and each of its subsidiaries have full power
(corporate and other) to own or lease their respective properties and conduct
their respective businesses as described in the Registration Statement and the
Prospectus or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus; and the Company has full power (corporate and other) to
enter into this Agreement and to carry out all the terms and provisions hereof
to be carried out by it.
(f) The issued shares of capital stock of each of the Company's
corporate subsidiaries have been duly authorized and validly issued, are fully
paid and nonassessable and are owned beneficially by the Company free and clear
of any security interests, liens, encumbrances, equities or claims. The issued
units of each of the Company's partnership subsidiaries have been duly
authorized and validly issued in accordance with the governing partnership
agreement and are owned beneficially by the Company free and clear of any
security interests, liens, encumbrances, equities or claims.
(g) The Company has an authorized, issued and outstanding
capitalization as set forth in the Prospectus or, if the Prospectus is not in
existence, the most recent Preliminary Prospectus. All of the issued shares of
capital stock of the Company have been duly authorized and validly issued and
are fully paid and nonassessable. The Firm Securities and the Option Securities
have been duly authorized and at the Firm Closing Date or the related Option
Closing Date (as the case may be), after payment therefor in accordance
herewith, will be validly issued, fully paid and nonassessable. No holders of
outstanding shares of capital stock of the Company are entitled as such to any
preemptive or other rights to subscribe for any of the Securities, and no holder
of securities of the Company has any right which has not been fully exercised or
waived to require the Company to register the offer or sale of any securities
owned by such holder under the Act in the public offering contemplated by this
agreement.
(h) The capital stock of the Company conforms to the description
thereof contained in the Prospectus or, if the Prospectus is not in existence,
the most recent Preliminary Prospectus.
(i) Except as disclosed in the Prospectus (or, if the Prospectus is
not in existence, the most recent Preliminary Prospectus), there are no
outstanding (A) securities or obligations of the Company or any of its
subsidiaries convertible into or exchangeable for any capital stock or unit of
the Company or any such subsidiary, (B) warrants, rights or options to subscribe
for or purchase from the Company or any such subsidiary any such capital stock
or any such convertible or exchangeable securities or obligations, or (C)
obligations of the Company or any such subsidiary to issue any shares of capital
stock or units, any such convertible or exchangeable securities or obligations,
or any such warrants, rights or options.
(j) The consolidated financial statements and schedules included in
the Registration Statement and the Prospectus (or, if the Prospectus is not in
existence, the most recent Preliminary Prospectus) fairly present the financial
position of the Company (or its predecessor) and its consolidated subsidiaries
and the results of operations and changes in financial condition as of the dates
and for the periods therein specified. Such financial statements and schedules
have been
-4-
<PAGE>
prepared in accordance with generally accepted accounting principles
consistently applied throughout the periods involved (except as otherwise noted
therein). The selected financial data set forth under the caption "Selected
Consolidated Financial Information" in the Prospectus (or, if the Prospectus is
not in existence, the most recent Preliminary Prospectus) fairly present, on the
basis stated in the Prospectus (or such Preliminary Prospectus), the information
included therein.
(k) Arthur Andersen LLP, who have certified certain financial
statements of the Company (and its predecessor) and its consolidated
subsidiaries and delivered their report with respect to the audited consolidated
financial statements and schedules included in the Registration Statement and
the Prospectus (or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus), are independent public accountants as required by the
Act and the applicable rules and regulations thereunder.
(l) The execution and delivery of this Agreement have been duly
authorized by the Company and this Agreement has been duly executed and
delivered by the Company, and is the valid and binding agreement of the Company,
enforceable against the Company in accordance with its terms, except as rights
to indemnity and contribution may be limited under applicable law.
(m) The Company and its subsidiaries possess all certificates,
authorities, licenses or permits issued by the appropriate local, state,
federal, Ute tribal or foreign regulatory agencies or bodies necessary to
conduct their respective businesses, except for such certificates, authorities,
licenses or permits the failure of which to obtain would not have a material
adverse effect on the condition (financial or otherwise) earnings, affairs or
business prospects of the Company and its subsidaries taken as a whole, and
neither the Company nor any of its subsidiaries has received any notice of
proceedings relating to the revocation or modification of any such certificate,
authority, license or permit which, singly or in the aggregate, if the subject
of an unfavorable decision, ruling or finding, would reasonably be expected to
materially adversely affect the condition (financial or otherwise), earnings or
affairs or business prospects of the Company and its subsidiaries considered as
a whole.
(n) No legal or governmental proceedings are pending to which the
Company or any of its subsidiaries is a party or to which the property of the
Company or any of its subsidiaries is subject that are required to be described
in the Registration Statement or the Prospectus and are not described therein
(or, if the Prospectus is not in existence, the most recent Preliminary
Prospectus), and to the Company's knowledge, no such proceedings have been
threatened against the Company or any of its subsidiaries or with respect to any
of their respective properties; and no contract or other document is required to
be described in the Registration Statement or the Prospectus or to be filed as
an exhibit to the Registration Statement that is not described therein (or, if
the Prospectus is not in existence, the most recent Preliminary Prospectus) or
filed as required.
(o) The Company and each of its subsidiaries owns title (consistent
with customary practice in the oil and gas industry for the types and location
of the relevant properties and assets) to the material oil and gas properties
owned by each of them, in each case free and clear of any security interests,
liens, encumbrances, equities, claims and other defects, except such as do not
materially and adversely affect the value of such property and do not interfere
with the use made or proposed to be made of such property by the Company or such
subsidiary, and any real property and
-5-
<PAGE>
buildings held under lease by the Company or any such subsidiary are held under
valid, subsisting and enforceable leases, with such exceptions as are not
material and do not interfere with the use made or proposed to be made of such
property and buildings by the Company or such subsidiary, in each case except as
described in or contemplated by the Prospectus (or, if the Prospectus is not in
existence, the most recent Preliminary Prospectus).
(p) The issuance, offering and sale of the Securities to the
Underwriters by the Company pursuant to this Agreement, the compliance by the
Company with the other provisions of this Agreement and the consummation of the
other transactions herein contemplated do not (i) require the consent, approval,
authorization, registration or qualification of or with any governmental
authority, except such as have been obtained, such as may be required under
state securities or blue sky laws and, if the Registration Statement is not
effective under the Act as of the time of execution hereof, such as may be
required (and shall be obtained as provided in this Agreement) under the Act, or
(ii) conflict with or result in a breach or violation of any of the terms and
provisions of, or constitute a default under, any indenture, mortgage, deed of
trust, lease or other agreement or instrument to which the Company or any of its
subsidiaries is a party or by which the Company or any of its subsidiaries or
any of their respective properties are bound, or the charter documents, by-laws
or other organizational documents of the Company or any of its subsidiaries, or
any statute or any judgment, decree, order, rule or regulation of any court or
other governmental authority or any arbitrator applicable to the Company or any
of its subsidiaries.
(q) Subsequent to the respective dates as of which information is
given in the Registration Statement and the Prospectus or, if the Prospectus is
not in existence, the most recent Preliminary Prospectus, neither the Company
nor any of its subsidiaries has sustained any material loss or interference with
their respective businesses or properties from fire, flood, hurricane, accident
or other calamity, whether or not covered by insurance, or from any labor
dispute or any legal or governmental proceeding and there has not been any
material adverse change, or any development involving a prospective material
adverse change, in the condition (financial or otherwise), management, business
prospects, net worth, or results of the operations of the Company or any of its
subsidiaries, except in each case as described in or contemplated by the
Prospectus or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus.
(r) The Securities are duly authorized for listing, subject to
official notice of issuance, on the Nasdaq Stock Markets' National Market
("Nasdaq National Market").
(s) The Company and each of its subsidiaries maintain a system of
internal accounting controls sufficient to provide reasonable assurances that
(i) transactions are executed in accordance with management's general or
specific authorizations; (ii) transactions are recorded as necessary to permit
preparation of financial statements in conformity with generally accepted
accounting principles and to maintain asset accountability; (iii) access to
assets is permitted only in accordance with management's general or specific
authorization; and (iv) the recorded accountability for assets is compared with
the existing assets at reasonable intervals and appropriate action is taken with
respect to any differences.
(t) The Company and its subsidiaries own, otherwise possess or can
acquire on reasonable terms the right to use in accordance with the terms of the
licenses, agreements and other
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<PAGE>
instruments pertaining thereto all patents, trademarks, service marks, trade
names and copyrights, all applications and registrations for each of the
foregoing, and all other proprietary rights and confidential information used in
the conduct of their respective businesses as currently conducted; and neither
the Company nor any of its subsidiaries has received any notice or is otherwise
aware, of any infringement of or conflict with the rights of any third party
with respect to any of the foregoing which, singly or in the aggregate, if the
subject of an unfavorable decision, ruling or finding, would reasonably be
expected to result in a material adverse effect on the Company.
(u) The Company and each of its subsidiaries are insured by insurers
of recognized financial responsibility against such losses and risks and in such
amounts as are prudent and customary in the businesses in which they are
engaged; neither the Company nor any of its subsidiaries have been refused any
insurance coverage sought or applied for; and neither the Company nor any of its
subsidiaries have any reason to believe that they will not be able to renew
their existing insurance coverage as and when such coverage expires or to obtain
similar coverage from similar insurers as may be necessary to continue its
business at a cost that would not materially and adversely affect the condition
(financial or otherwise), business prospects, net worth or results of operations
of the Company and its subsidiaries, except as described in or contemplated by
the Prospectus.
(v) The Company has not, directly or indirectly, (i) taken any action
designed to cause or to result in, or that has constituted or which might
reasonably be expected to constitute, the stabilization or manipulation of the
price of any security of the Company to facilitate the sale or resale of the
Securities or (ii) since the filing of the Registration Statement (A) sold, bid
for, purchased, or paid anyone any compensation for soliciting purchases of, the
Securities or (B) paid or agreed to pay to any person any compensation for
soliciting another to purchase any other securities of the Company.
(w) Neither the Company nor any of its subsidiaries is in violation of
any federal, state, local or Ute tribal law or regulation relating to
occupational safety and health or to the storage, handling or transportation of
hazardous or toxic materials and the Company and its subsidiaries have received
all permits, licenses or other approvals required of them under applicable
federal, state, local and Ute tribal occupational safety and health and
environmental laws and regulations to conduct their respective businesses, and
the Company and each such subsidiary is in compliance with all terms and
conditions of any such permit, license or approval, except any such violation of
law or regulation, failure to receive required permits, licenses or other
approvals or failure to comply with the terms and conditions of such permits,
licenses or approvals which would not, singly or in the aggregate, reasonably be
expected to result in a material adverse change in the condition (financial or
otherwise), business prospects, net worth or results of operations of the
Company and its subsidiaries, except as described in or contemplated by the
Prospectus (or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus).
(x) Each certificate signed by any officer of the Company and
delivered to the Representatives or counsel for the Underwriters shall be deemed
to be a representation and warranty by the Company to each Underwriter as to the
matters covered thereby.
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<PAGE>
(y) There are no holders of securities of the Company, who, by reason
of the filing of the Registration Statement, have the right (and have not waived
such right) to request the Company to register under the Act, or to include in
the Registration Statement, securities held by them except as described in the
Prospectus.
(z) The Company has not distributed and, prior to the later of (i) the
Closing Date and (ii) the completion of the distribution of the Securities, will
not distribute any offering material in connection with the offering and sale of
the Securities other than the Registration Statement or any amendment thereto,
any Preliminary Prospectus or the Prospectus or any amendment or supplement
thereto, or other materials, if any, permitted by the Act.
(aa) No labor dispute with the employees of the Company or any of its
subsidiaries exists or, to the knowledge of the Company, is imminent that could
reasonably be expected to result in a material adverse change in the condition
(financial or otherwise), business prospects, net worth or results of operations
of the Company and its subsidiaries, except as described in or contemplated by
the Prospectus (or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus).
(bb) No subsidiary of the Company is currently prohibited, directly or
indirectly, from paying any dividends to the Company, from making any other
distribution on such subsidiary's capital stock, from repaying to the Company
any loans or advances to such subsidiary from the Company or from transferring
any of such subsidiary's property or assets to the Company or any other
subsidiary of the Company, except as described in or contemplated by the
Prospectus (or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus).
(cc) The Company is not an investment company as defined in the
Investment Company Act of 1940, as amended, and this transaction will not cause
the Company to become an investment company subject to registration under such
act.
(dd) The Company has filed all foreign, federal, state and local tax
returns that are required to be filed or has requested extensions thereof
(except in any case in which the failure so to file would not have a material
adverse effect on the Company and its subsidiaries) and has paid all taxes
required to be paid by it and any other assessment, fine or penalty levied
against it, to the extent that any of the foregoing is due and payable, except
for any such assessment, fine or penalty that is currently being contested in
good faith or as described in or contemplated by the Prospectus (or, if the
Prospectus is not in existence, the most recent Preliminary Prospectus).
(ee) Except for the shares of capital stock of each of the
subsidiaries owned by the Company and such subsidiaries, neither the Company nor
any such subsidiary owns any shares of stock or any other equity securities of
any corporation or has any equity interest in any firm, partnership, association
or other entity, except as described in or contemplated by the Prospectus (or,
if the Prospectus is not in existence, the most recent Preliminary Prospectus).
(ff) No default by the Company exists, and no event with respect to
the Company has occurred which, with notice or lapse of time or both, would
constitute a default in the due performance and observance of any term, covenant
or condition of any indenture, mortgage, deed of trust, lease or other agreement
or instrument to which the Company or any of its subsidiaries is
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<PAGE>
a party or by which the Company or any of its subsidiaries or any of their
respective properties is bound or may be affected in any material adverse
respect with regard to property, business or operations of the Company and its
subsidiaries.
3. Purchase, Sale and Delivery of the Securities. (a) On the basis
---------------------------------------------
of the representations, warranties, agreements and covenants herein contained
and subject to the terms and conditions herein set forth, the Company agrees to
issue and sell to each of the Underwriters, and each of the Underwriters,
severally and not jointly, agrees to purchase from the Company, at a purchase
price of $____ per share, the number of Firm Securities set forth opposite the
name of such Underwriter in Schedule 1 hereto. One or more certificates in
definitive form for the Firm Securities that the several Underwriters have
agreed to purchase hereunder, and in such denomination or denominations and
registered in such name or names as the Representatives request upon notice to
the Company at least 48 hours prior to the Firm Closing Date, shall be delivered
by or on behalf of the Company to the Representatives for the respective
accounts of the Underwriters, against payment by or on behalf of the
Underwriters of the purchase price therefor by wire transfer in same-day funds
(the "Wired Funds") to the account of the Company. Such delivery of and payment
for the Firm Securities shall be made at the offices of Baker & Botts, L.L.P.
("Counsel for the Underwriters"), One Shell Plaza, 910 Louisiana, Houston, Texas
77002, at 10:00 a.m., Houston, time, on ___, 1997, or at such other place, time
or date as the Representatives and the Company may agree upon or as the
Representatives may determine pursuant to Section 9 hereof, such time and date
of delivery against payment being herein referred to as the "Firm Closing Date."
The Company will make such certificate or certificates for the Firm Securities
available for checking and packaging by the Representatives at the offices in
New York, New York of the Company's transfer agent or registrar or of Prudential
Securities Incorporated at least 24 hours prior to the Firm Closing Date.
(b) For the purpose of covering any over-allotments in connection with
the distribution and sale of the Firm Securities as contemplated by the
Prospectus, the Company hereby grants to the several Underwriters an option to
purchase, severally and not jointly, the Option Securities. The purchase price
to be paid for any Option Securities shall be the same price per share as the
price per share for the Firm Securities set forth above in paragraph (a) of this
Section 3. The option granted hereby may be exercised as to all or any part of
the Option Securities from time to time within 30 days after the date of the
Prospectus (or, if such 30th day shall be a Saturday or Sunday or a holiday, on
the next business day thereafter when the New York Stock Exchange is open for
trading). The Underwriters shall not be under any obligation to purchase any of
the Option Securities prior to the exercise of such option. The Representatives
may from time to time exercise the option granted hereby by giving notice in
writing or by telephone (confirmed in writing) to the Company setting forth the
aggregate number of Option Securities as to which the several Underwriters are
then exercising the option and the date and time for delivery of and payment for
such Option Securities. Any such date of delivery shall be determined by the
Representatives but shall not be earlier than two business days or later than
five business days after such exercise of the option and, in any event, shall
not be earlier than the Firm Closing Date. The time and date set forth in such
notice, or such other time on such other date as the Representatives and Company
may agree upon or as the Representatives may determine pursuant to Section 9
hereof, is herein called the "Option Closing Date" with respect to such Option
Securities. Upon exercise of the option as provided herein, subject to the
terms and conditions herein set forth, the Company shall become obligated to
sell to each of the several Underwriters, and, each of the Underwriters
(severally and not jointly) shall
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<PAGE>
become obligated to purchase from the Company, the same percentage of the total
number of the Option Securities as to which the several Underwriters are then
exercising the option as such Underwriter is obligated to purchase of the
aggregate number of Firm Securities, as adjusted by the Representatives in such
manner as they deem advisable to avoid fractional shares. If the option is
exercised as to all or any portion of the Option Securities, one or more
certificates in definitive form for such Option Securities, and payment
therefor, shall be delivered on the related Option Closing Date in the manner,
and upon the terms and conditions, set forth in paragraph (a) of this Section 3,
except that reference therein to the Firm Securities and the Firm Closing Date
shall be deemed, for purposes of this paragraph (b), to refer to such Option
Securities and Option Closing Date, respectively.
(c) The Company hereby acknowledges that the wire transfer by or on
behalf of the Underwriters of the purchase price for any Securities does not
constitute closing of a purchase and sale of the Shares. Only execution and
delivery of a receipt for Securities by the Underwriters indicates completion of
the closing of a purchase of the Securities from the Company. Furthermore, in
the event that the Underwriters wire funds to the Company prior to the
completion of the closing of a purchase of Securities, the Company hereby
acknowledges that until the Underwriters execute and deliver a receipt for the
Securities, by facsimile or otherwise, the Company will not be entitled to the
wired funds and shall return the wired funds to the Underwriters as soon as
practicable (by wire transfer of same-day funds) upon demand. In the event that
the closing of a purchase of Securities is not completed and the wired funds are
not returned by the Company to the Underwriters on the same day the wired funds
were received by the Company, the Company agrees to pay to the Underwriters in
respect of each day the wired funds are not returned by it, in same-day funds,
interest on the amount of such wire funds in an amount representing the
Underwriters' cost of financing as reasonably determined by Prudential
Securities Incorporated.
(d) It is understood that either of you, individually and not as one
of the Representatives, may (but shall not be obligated to) make payment on
behalf of any Underwriter or Underwriters for any of the Securities to be
purchased by such Underwriter or Underwriters. No such payment shall relieve
such Underwriter or Underwriters from any of its or their obligations hereunder.
4. Offering by the Underwriters. Upon your authorization of the
----------------------------
release of the Firm Securities, the several Underwriters propose to offer the
Firm Securities for sale to the public upon the terms set forth in the
Prospectus.
5. Covenants of the Company. The Company covenants and agrees with
------------------------
each of the Underwriters that:
(a) The Company will use its best efforts to cause the Registration
Statement, if not effective at the time of execution of this Agreement, and any
amendments thereto to become effective as promptly as possible. If required,
the Company will file the Prospectus or any Term Sheet that constitutes a part
thereof and any amendment or supplement thereto with the Commission in the
manner and within the time period required by Rules 434 and 424(b) under the
Act. During any time when a prospectus relating to the Securities is required
to be delivered under the Act, the Company (i) will comply with all requirements
imposed upon it by the Act and the rules and regulations of the Commission
thereunder to the extent necessary to permit the continuance of sales
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<PAGE>
of or dealings in the Securities in accordance with the provisions hereof and of
the Prospectus, as then amended or supplemented, and (ii) will not file with the
Commission the Prospectus, Term Sheet or the amendment referred to in the second
sentence of Section 2(a) hereof, any amendment or supplement to such Prospectus,
Term Sheet or any amendment to the Registration Statement or any Rule 462(b)
Registration Statement of which the Representatives previously have been advised
and furnished with a copy for a reasonable period of time prior to the proposed
filing and as to which filing the Representatives shall not have given their
consent. The Company will prepare and file with the Commission, in accordance
with the rules and regulations of the Commission, promptly upon request by the
Representatives or counsel for the Underwriters, any amendments to the
Registration Statement or amendments or supplements to the Prospectus that may
be necessary or advisable in connection with the distribution of the Securities
by the several Underwriters, and will use its best efforts to cause any such
amendment to the Registration Statement to be declared effective by the
Commission as promptly as possible; provided, however, that the Company shall
not be required to file any such amendments to the Registration Statement or
such amendments or supplements to the Prospectus after 30 days following the
date of the Prospectus. The Company will advise the Representatives, promptly
after receiving notice thereof, of the time when the Registration Statement or
any amendment thereto has been filed or declared effective or the Prospectus or
any amendment or supplement thereto has been filed and will provide evidence
satisfactory to the Representatives of each such filing or effectiveness.
(b) The Company will advise the Representatives, promptly after
receiving notice or obtaining knowledge thereof, of (i) the issuance by the
Commission of any stop order suspending the effectiveness of the Original
Registration Statement or any Rule 462(b) Registration Statement or any
amendment thereto or any order preventing or suspending the use of any
Preliminary Prospectus or the Prospectus or any amendment or supplement thereto,
(ii) the suspension of the qualification of the Securities for offering or sale
in any jurisdiction, (iii) the institution, threatening or contemplation of any
proceeding for any such purpose or (iv) any request made by the Commission for
amending the Original Registration Statement or any Rule 462(b) Registration
Statement, for amending or supplementing the Prospectus or for additional
information. The Company will use its best efforts to prevent the issuance of
any such stop order and, if any such stop order is issued, to obtain the
withdrawal thereof as promptly as possible.
(c) The Company will arrange for the qualification of the Securities
for offering and sale under the securities or blue sky laws of such
jurisdictions as the Representatives may designate and will continue such
qualifications in effect for as long as may be necessary to complete the
distribution of the Securities, provided, however, that in connection therewith
-----------------
the Company shall not be required to qualify as a foreign corporation or to
execute a general consent to service of process in any jurisdiction.
(d) If, at any time prior to the later of (i) the final date when a
prospectus relating to the Securities is required to be delivered under the Act
or (ii) the Option Closing Date, any event occurs as a result of which the
Prospectus, as then amended or supplemented, would include any untrue statement
of a material fact or omit to state a material fact in order to make the
statements therein, in the light of the circumstances under which they were
made, not misleading, or if for any other reason it is necessary at any time to
amend or supplement the Prospectus to comply with the Act or the rules or
regulations of the Commission thereunder, the Company will promptly notify the
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Representatives thereof and, subject to Section 5(a) hereof, will prepare and
file with the Commission, at the Company's expense, an amendment to the
Registration Statement or an amendment or supplement to the Prospectus that
corrects such statement or omission or effects such compliance.
(e) The Company will, without charge, provide (i) to the
Representatives and to Counsel for the Underwriters a conformed copy of the
registration statement originally filed with respect to the Securities and each
amendment thereto (in each case including exhibits thereto) or any Rule 462(b)
Registration Statement filed with the Commission by electronic transmission,
(ii) to each other Underwriter, a conformed copy of such registration statement
or any Rule 462(b) Registration Statement and each amendment thereto (in each
case without exhibits thereto) and (iii) so long as a prospectus relating to the
Securities is required to be delivered under the Act, as many copies of each
Preliminary Prospectus or the Prospectus or any amendment or supplement thereto
as the Representatives may reasonably request; without limiting the application
of clause (iii) of this sentence, the Company, not later than (A) 6:00 P.M., New
York City time, on the date of determination of the public offering price, if
such determination occurred at or prior to 10:00 A.M., New York City time, on
such date or (B) 2:00 P.M., New York City time, on the business day following
the date of determination of the public offering price, if such determination
occurred after 10:00 A.M., New York City time, on such date, will deliver to the
Underwriters, without charge, as many copies of the Prospectus and any amendment
or supplement thereto as the Representatives may reasonably request for purposes
of confirming orders that are expected to settle on the Firm Closing Date. The
Company will provide or cause to be provided to each of the Representatives, and
to each Underwriter that so requests in writing, a copy of each report on Form
SR filed by the Company as required by Rule 463 under the Act.
(f) The Company, as soon as practicable, will make generally available
to its securityholders and to the Representatives a consolidated earnings
statement of the Company and its subsidiaries that satisfies the provisions of
Section 11(a) of the Act and Rule 158 thereunder.
(g) The Company will apply the net proceeds from the sale of the
Securities as set forth under "Use of Proceeds" in the Prospectus.
(h) The Company will not, directly or indirectly, without the prior
written consent of Prudential Securities Incorporated, on behalf of the
Underwriters, 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 of sale, pledge, grant of any option to purchase or
other sale or disposition) of any shares of Common Stock or any securities
convertible into, or exchangeable or exercisable for, shares of Common Stock for
a period of 180 days after the date hereof, except pursuant to this Agreement
and except for the grant of options pursuant to the Company's employee stock
option plans described in the Prospectus and issuance upon exercise of such
options.
(i) The Company will not, directly or indirectly, (i) take any action
designed to cause or to result in, or that has constituted or which might
reasonably be expected to constitute, the stabilization or manipulation of the
price of any security of the Company to facilitate the sale or resale of the
Securities or (ii) (A) sell, bid for, purchase, or pay anyone any compensation
for soliciting purchases of, the Securities or (B) pay or agree to pay to any
person any compensation for
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<PAGE>
soliciting another to purchase any other securities of the Company (except for
the sale of Securities by the Selling Securityholders under this Agreement).
(j) The Company will obtain the agreements described in Section 7(f)
hereof prior to the Firm Closing Date.
(k) If at any time during the 25-day period after the Registration
Statement becomes effective or the period prior to the Option Closing Date, any
rumor, publication or event relating to or affecting the Company shall occur as
a result of which in your opinion the market price of the Common Stock has been
or is likely to be materially affected (regardless of whether such rumor,
publication or event necessitates a supplement to or amendment of the
Prospectus), the Company will, after notice from you advising the Company to the
effect set forth above, forthwith prepare, consult with you concerning the
substance of, and disseminate a press release or other public statement,
reasonably satisfactory to you, responding to or commenting on such rumor,
publication or event.
(l) If the Company elects to rely on Rule 462(b), the Company shall
both file a Rule 462(b) Registration Statement with the Commission in compliance
with Rule 462(b) and pay the applicable fees in accordance with Rule 111
promulgated under the Act by the earlier of (i) 10:00 P.M. Eastern time on the
date of this Agreement and (ii) the time confirmations are sent or given, as
specified by Rule 462(b)(2).
(m) The Company will cause the Securities to be duly included for
quotation on the Nasdaq National Market prior to the Firm Closing Date. The
Company will ensure that the Securities remain included for quotation on the
Nasdaq National Market following the Firm Closing Date.
(n) Prior to the Firm Closing, the Company will consummate the
Conversion (as such term is defined in the Registration Statement).
6. Expenses. The Company will pay all costs and expenses incident to
--------
the performance of its obligations under this Agreement, whether or not the
transactions contemplated herein are consummated or this Agreement is terminated
pursuant to Section 11 hereof, including all costs and expenses incident to (i)
the printing or other production of documents with respect to the transactions,
including any costs of printing the registration statement originally filed with
respect to the Securities and any amendments thereto, any Rule 462(b)
Registration Statement any Preliminary Prospectus and the Prospectus and any
amendment or supplement thereto, this Agreement and any Blue Sky memoranda, (ii)
all arrangements relating to the delivery to the Underwriters of copies of the
foregoing documents, (iii) the fees and disbursements of the counsel, the
accountants and any other experts or advisors retained by the Company, (iv)
preparation, issuance and delivery to the Underwriters of any certificates
evidencing the Securities, including transfer agent's and registrar's fees, (v)
the qualification of the Securities under state securities and Blue Sky laws,
including filing fees and fees and disbursements of counsel for the Underwriters
relating thereto, (vi) the filing fees of the Commission and the National
Association of Securities Dealers, Inc. relating to the Securities and (vii) any
quotation of the Securities on the Nasdaq National Market, (viii) any meetings
with prospective investors in the Securities (other than as shall have been
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specifically approved by the Representatives to be paid for by the Underwriters)
and (ix) advertising relating to the offering of the Securities (other than as
shall have been specifically approved by the Representatives to be paid by the
Underwriters). If the sale of the Securities provided for herein is not
consummated because any condition to the obligations of the Underwriters set
forth in Section 7 hereof is not satisfied, because this Agreement is terminated
pursuant to Section 11 hereof or because of any failure, refusal or inability on
the part of the Company to perform all obligations and satisfy all conditions on
its part to be performed or satisfied hereunder other than by reason of a
default by any of the Underwriters, the Company will reimburse the Underwriters
severally upon demand for all out-of-pocket expenses (including counsel fees and
disbursements) that shall have been incurred by them in connection with the
proposed purchase and sale of the Securities. The Company shall not in any
event be liable to any of the Underwriters for the loss of anticipated profits
from the transactions covered by this Agreement.
7. Conditions of the Underwriters' Obligations. The obligations of
-------------------------------------------
the several Underwriters to purchase and pay for the Firm Securities shall be
subject, in the Representatives' sole discretion, to the accuracy of the
representations and warranties of the Company contained herein as of the date
hereof and as of the Firm Closing Date, as if made on and as of the Firm Closing
Date, to the accuracy of the statements of the Company's officers made pursuant
to the provisions hereof, to the performance by the Company of its covenants and
agreements hereunder and to the following additional conditions:
(a) If the Original Registration Statement or any amendment thereto
filed prior to the Firm Closing Date has not been declared effective as of the
time of execution hereof, the Registration Statement or such amendment and, if
the Company has elected to rely upon Rule 462(b), the Rule 462(b) Registration
Statement shall have been declared effective not later than the earlier of (i)
11:00 A.M., New York City time, on the date on which the amendment to the
registration statement originally filed with respect to the Securities or to the
Registration Statement, as the case may be, containing information regarding the
initial public offering price of the Securities has been filed with the
Commission and (ii) the time confirmations are sent or given as specified by
Rule 462(b)(2), or with respect to the Original Registration Statement, or such
later time and date as shall have been consented to by the Representatives; if
required, the Prospectus and any amendment or supplement thereto shall have been
filed with the Commission, or such later time and date as shall have been
consented to by the Representatives; if required, the Prospectus or any Term
Sheet that constitutes a part thereof and any amendment or supplement thereto
shall have been filed with the Commission in the manner and within the time
period required by Rules 434 and 424(b) under the Act; no stop order suspending
the effectiveness of the Registration Statement or any amendment thereto shall
have been issued, and no proceedings for that purpose shall have been instituted
or threatened or, to the knowledge of the Company or the Representatives, shall
be contemplated by the Commission; and the Company shall have complied with any
request of the Commission for additional information (to be included in the
Registration Statement or the Prospectus or otherwise).
(b) The Representatives shall have received an opinion, dated the Firm
Closing Date, of Thompson & Knight, P.C., counsel for the Company, to the effect
that:
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(i) the Company and each of its subsidiaries listed on Schedule 2
hereto (the "Subsidiaries") have been duly incorporated or organized and
are validly existing as corporations or partnerships in good standing under
the laws of their respective jurisdictions of incorporation or
organization;
(ii) the Company and each of the Subsidiaries have power to own or
lease their respective properties and conduct their respective businesses
as described in the Registration Statement and the Prospectus, and the
Company has power to enter into this Agreement and to carry out all the
terms and provisions hereof to be carried out by it;
(iii) except as described in the Prospectus, the issued shares of
capital stock of each of the corporate Subsidiaries have been duly
authorized and validly issued, are fully paid and nonassessable and are
owned beneficially by the Company free and clear of any perfected security
interests or, to the best knowledge of such counsel, any other security
interests, liens, encumbrances, equities or claims; the issued units of
each of the Company's partnership subsidiaries have been duly authorized
and validly issued in accordance with the governing partnership agreements
and are owned by the Company free and clear of any perfected security
interests or, to the best knowledge of such counsel, any other security
interests, liens, encumbrances, equities or claims.
(iv) the Company has an authorized, issued and outstanding
capitalization as set forth in the Prospectus; all of the issued shares of
capital stock of the Company have been duly authorized and validly issued
and are fully paid and nonassessable, have been issued in compliance with
all applicable federal and state securities laws and were not issued in
violation of or subject to any preemptive rights or other rights to
subscribe for or purchase securities; the Firm Securities have been duly
authorized by all necessary corporate action of the Company and, when
issued and delivered to and paid for by the Underwriters pursuant to this
Agreement, will be validly issued, fully paid and nonassessable; the
Securities have been duly included for trading on the Nasdaq National
Market; no holders of outstanding shares of capital stock of the Company
are entitled as such to any preemptive or, to the knowledge of such
counsel, other rights to subscribe for any of the Securities; and to the
knowledge of such counsel no holders of Securities of the Company are
entitled to have such securities registered under the Registration
Statement that have not been waived;
(v) the statements set forth under the heading "Description of
Capital Stock" in the Prospectus, insofar as such statements purport to
summarize certain provisions of the capital stock of the Company, provide a
fair summary of such provisions; and the statements set forth under the
headings "Business and Properties -- Regulation," "Description of Capital
Stock," "Certain Relationships and Related Transactions" and "Shares
Eligible for Future Sale" in the Prospectus, insofar as such statements
constitute a summary of the legal matters, documents or proceedings
referred to therein, provide a fair summary of such legal matters,
documents and proceedings;
(vi) the execution and delivery of this Agreement have been duly
authorized by all necessary corporate action of each of the Company and
Partner and this Agreement has been duly executed and delivered by each of
the Company and Partner;
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<PAGE>
(vii) the issuance, offering and sale of the Securities to the
Underwriters by the Company pursuant to this Agreement, the compliance by
the Company with the other provisions of this Agreement and the
consummation of the other transactions herein contemplated do not (A)
require the consent, approval, authorization, registration or qualification
of or with any governmental authority, except such as have been obtained
and such as may be required under state securities or Blue Sky laws, or (B)
conflict with or result in a breach or violation of any of the terms and
provisions of, or constitute a default under, any indenture, mortgage, deed
of trust, lease or other agreement or instrument, known to such counsel, to
which the Company or any of the Subsidiaries is a party or by which the
Company or any of the Subsidiaries or any of their respective properties
are bound, or the charter documents, by-laws or other organizational
documents of the Company or any of the Subsidiaries, or any statute or any
judgment, decree, order, rule or regulation of any court or other
governmental authority or any arbitrator known to such counsel and
applicable to the Company or Subsidiaries;
(viii) After due inquiry, such counsel does not know of any legal or
governmental proceeding pending or threatened to which the Company or any
of its subsidiaries is a party or to which any of the properties of the
Company is subject that is required to be described in the Registration
Statement or the Prospectus and is not so described or of any contract or
other document that is required to be described in the Registration
Statement or the Prospectus or to be filed as an exhibit to the
Registration Statement that is not so described or filed as required.
(ix) Such counsel has been advised by the staff of the Commission
that the Registration Statement is effective under the Act; any required
filing of the Prospectus, or any Term Sheet that constitutes a part
thereof, pursuant to Rules 434 and 424(b) has been made in the manner and
within the time period required by Rules 434 and 424(b); and to the
knowledge of such counsel no stop order suspending the effectiveness of the
Registration Statement or any amendment thereto has been issued, and to the
knowledge of such counsel no proceedings for that purpose have been
instituted or threatened or, to the best knowledge of such counsel, are
contemplated by the Commission;
(x) the Original Registration Statement and each amendment thereto,
any Rule 462(b) Registration Statement and the Prospectus (in each case,
other than the financial statements and other financial information any
reserve engineering data contained therein, as to which such counsel need
express no opinion) comply as to form in all material respects with the
applicable requirements of the Act and the rules and regulations of the
Commission thereunder;
(xi) if the Company elects to rely on Rule 434, the Prospectus is
not "materially different," as such term is used in Rule 434, from the
prospectus included in the Registration Statement at the time of its
effectiveness or an effective post-effective amendment thereto (including
such information that is permitted to be omitted pursuant to Rule 430A);
and
(xii) The Company has consummated the Conversion.
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<PAGE>
Such counsel shall also include, in a separate paragraph of its
opinion, statements to the following effect: Such counsel has participated in
conferences with directors, officers and other representatives of the Company,
representatives of the independent public accountants of the Company and your
representatives and counsel, at which conferences the contents of the
Registration Statement and related matters were discussed. Although such
counsel is not passing upon, and does not assume any responsibility for, the
accuracy, completeness or fairness of the statements contained in the
Registration Statement, such counsel advises you that, on the basis of the
foregoing, no facts have come to the attention of such counsel that leads such
counsel to believe that the Registration Statement (other than (i) the financial
statements and schedules (including the notes thereto and the auditor's report
thereon) included therein, (ii) the other financial, statistical and reserve
engineering information included therein and (iii) the exhibits thereto, as to
which such counsel has not been asked to comment), as of the time it became
effective, contained any untrue statement of a material fact or omitted to state
any material fact required to be stated therein or necessary to make the
statements therein not misleading or that the Prospectus (other than (i) the
financial statements (including the notes thereto and the auditor's report
thereon) included therein and (ii) the other financial, statistical and reserve
engineering data included therein; as to which such counsel has not been asked
to comment), as of its date or the date of such opinion, included or includes
any untrue statement of a material fact or omitted or omits to state a material
fact necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading.
In rendering any such opinion, such counsel may rely, as to matters of
fact, to the extent such counsel deems proper, on certificates of officers of
the Company and public officials. Such counsel shall also be entitled to state
that its opinion is limited to the laws of the United States of America, and the
State of Texas and the corporation law of the State of Delaware.
References to the Registration Statement and the Prospectus in this
paragraph (b) shall include any amendment or supplement thereto at the date of
such opinion.
(c) The Representatives shall have received an opinion, dated the Firm
Closing Date, of Counsel for the Underwriters, with respect to the issuance and
sale of the Firm Securities, the Registration Statement and the Prospectus, and
such other related matters as the Representatives may reasonably require, and
the Company shall have furnished to such counsel such documents as they may
reasonably request for the purpose of enabling them to pass upon such matters.
(d) The Representatives shall have received from Arthur Andersen LLP a
letter or letters dated, respectively, the date hereof and the Firm Closing
Date, in form and substance satisfactory to the Representatives, to the effect
that:
(i) they are independent accountants with respect to the Company
and its consolidated subsidiaries within the meaning of the Act and
the applicable rules and regulations thereunder;
(ii) in their opinion, the audited consolidated financial
statements and schedules examined by them and included in the
Registration Statement and the Prospectus comply in form in all
material respects with the applicable accounting requirements of the
Act and the related published rules and regulations;
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<PAGE>
(iii) on the basis of a reading of the latest available interim
unaudited consolidated condensed financial statements of the Company
and its consolidated subsidiaries, carrying out certain specified
procedures (which do not constitute an examination made in accordance
with generally accepted auditing standards) that would not necessarily
reveal matters of significance with respect to the comments set forth
in this paragraph (iii), a reading of the minute books of the
stockholders, the board of directors and any committees thereof of the
Company and each of its consolidated subsidiaries, and inquiries of
certain officials of the Company and its consolidated subsidiaries who
have responsibility for financial and accounting matters, nothing came
to their attention that caused them to believe that:
(A) the unaudited consolidated condensed financial statements of
the Company and its consolidated subsidiaries included in the
Registration Statement and the Prospectus do not comply in
form in all material respects with the applicable accounting
requirements of the Act and the related published rules and
regulations thereunder or are not in conformity with
generally accepted accounting principles applied on a basis
substantially consistent with that of the audited
consolidated financial statements included in the
Registration Statement and the Prospectus;
(B) at a specified date not more than five business days prior to
the date of such letter, there was any change in the capital
stock or any increase in long-term debt of the Company and
its consolidated subsidiaries or any decrease in the net
current assets or stockholder's equity of the Company and its
consolidated subsidiaries, in each case as compared with the
amounts shown on the most recent consolidated balance sheet
of the Company and its subsidiaries included in the
Registration Statement and Prospectus or, for the period from
the date of such balance sheet to such specified date there
were any decreases, as compared with the corresponding period
in the preceding year, in sales, net revenues, net income
before income taxes or net income of the Company and its
consolidated subsidiaries, except in all instances as set
forth in or contemplated by the Registration Statement and
Prospectus or except for changes, decreases or increases set
forth in such letters as shall have been agreed to by the
Underwriters and the Company; and
(iv) They have carried out certain specified procedures, not
constituting an audit, with respect to certain amounts, percentages
and financial information that are derived from the general accounting
records of the Company and its consolidated subsidiaries and are
included in the Registration Statement and Prospectus and which are
specified by the Underwriters, and have compared such amounts,
percentages and financial information with such records of the Company
and its consolidated subsidiaries and with information derived from
such records and have found them to be in agreement, excluding any
questions of legal interpretation.
In the event that the letters referred to above set forth any such
changes, decreases or increases, it shall be a further condition to the
obligations of the Underwriters that (A) such letters shall be accompanied by a
written explanation of the Company as to the significance thereof, unless
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<PAGE>
the Representatives deem such explanation unnecessary, and (B) such changes,
decreases or increases do not, in the sole judgment of the Representatives, make
it impractical or inadvisable to proceed with the purchase and delivery of the
Securities as contemplated by the Registration Statement, as amended as of the
date hereof.
References to the Registration Statement and the Prospectus in this
paragraph (d) with respect to either letter referred to above shall include any
amendment or supplement thereto at the date of such letter.
(e) The Representatives shall have received a certificate, dated the
Firm Closing Date, of the principal executive officer and the principal
financial or accounting officer of the Company to the effect that:
(i) the representations and warranties of the Company in this
Agreement are true and correct as if made on and as of the Firm
Closing Date; the Registration Statement, as amended as of the Firm
Closing Date, does not include any untrue statement of a material fact
or omit to state any material fact necessary to make the statements
therein not misleading, and the Prospectus, as amended or supplemented
as of the Firm Closing Date, does not include any untrue statement of
a material fact or omit to state any material fact necessary in order
to make the statements therein, in the light of the circumstances
under which they were made, not misleading; and the Company has
performed all covenants and agreements and satisfied all conditions on
its part to be performed or satisfied at or prior to the Firm Closing
Date;
(ii) no stop order suspending the effectiveness of the
Registration Statement or any amendment thereto has been issued, and
no proceedings for that purpose have been instituted or threatened or,
to the best of the Company's knowledge, are contemplated by the
Commission; and
(iii) subsequent to the respective dates as of which information
is given in the Registration Statement and the Prospectus, neither the
Company nor any of its subsidiaries has sustained any material loss or
interference with their respective businesses or properties from fire,
flood, hurricane, accident or other calamity, whether or not covered
by insurance, or from any labor dispute or any legal or governmental
proceeding, and there has not been any material adverse change, or any
development involving a prospective material adverse change, in the
condition (financial or otherwise), management, business prospects,
net worth or results of operations of the Company or any of its
subsidiaries, except in each case as described in or contemplated by
the Prospectus (exclusive of any amendment or supplement thereto).
(f) The Representatives shall have received from each person who is a
director or officer of the Company or who owns any of the outstanding shares of
Common Stock an agreement to the effect that such person will not, directly or
indirectly, without the prior written consent of Prudential Securities
Incorporated, on behalf of the Underwriters, 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 of sale, pledge,
grant of an option to purchase or other sale or disposition) of any
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<PAGE>
shares of Common Stock or any securities convertible into, or exchangeable or
exercisable for, shares of Common Stock for a period of 180 days after the date
of this Agreement.
(g) On or before the Firm Closing Date, the Representatives and
counsel for the Underwriters shall have received such further certificates,
documents or other information as they may have reasonably requested from the
Company.
(h) Prior to the commencement of the offering of the Securities, the
Securities shall have been included for trading on the Nasdaq National Market.
(i) Prior to the Firm Closing, the Company shall have consummated the
Conversion.
All opinions, certificates, letters and documents delivered pursuant
to this Agreement will comply with the provisions hereof only if they are
reasonably satisfactory in all material respects to the Representatives and
Counsel for the Underwriters. The Company shall furnish to the Representatives
such conformed copies of such opinions, certificates, letters and documents in
such quantities as the Representatives and Counsel for the Underwriters shall
reasonably request.
The respective obligations of the several Underwriters to purchase and
pay for any Option Securities shall be subject, in their discretion, to each of
the foregoing conditions to purchase the Firm Securities, except that all
references to the Firm Securities and the Firm Closing Date shall be deemed to
refer to such Option Securities and the related Option Closing Date,
respectively.
8. Indemnification and Contribution. (a) The Company agrees to
---------------------------------
indemnify and hold harmless each Underwriter and each person, if any, who
controls any Underwriter within the meaning of Section 15 of the Act or Section
20 of the Securities Exchange Act of 1934 (the "Exchange Act"), against any
losses, claims, damages or liabilities, joint or several, to which such
Underwriter or such controlling person may become subject under the Act or
otherwise, insofar as such losses, claims, damages or liabilities (or actions in
respect thereof) arise out of or are based upon:
(i) any untrue statement or alleged untrue statement made by the
Company in Section 2 of this Agreement,
(ii) any untrue statement or alleged untrue statement of any
material fact contained in (A) the Registration Statement or any
amendment thereto, any Preliminary Prospectus or the Prospectus or any
amendment or supplement thereto or (B) any application or other
document, or any amendment or supplement thereto, executed by the
Company or based upon written information furnished by or on behalf of
the Company filed in any jurisdiction in order to qualify the
Securities under the securities or Blue Sky laws thereof or filed with
the Commission or any securities association or securities exchange
(each an "Application"),
(iii) the omission or alleged omission to state in the
Registration Statement or any amendment thereto, any Preliminary
Prospectus or the Prospectus or any amendment or
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<PAGE>
supplement thereto, or any Application a material fact required to be
stated therein or necessary to make the statements therein not
misleading or
(iv) any untrue statement or alleged untrue statement of any
material fact contained in any audio or visual materials used in
connection with the marketing of the Securities, including without
limitation, slides, videos, films, tape recordings, which is based on
information provided by the Company.
and will reimburse, as incurred, each Underwriter and each such
controlling person for any legal or other expenses reasonably incurred by such
Underwriter or such controlling person in connection with investigating,
defending against or appearing as a third-party witness in connection with any
such loss, claim, damage, liability or action; provided, however, that the
-----------------
Company will not be liable in any such case to the extent that any such loss,
claim, damage or liability arises out of or is based upon any untrue statement
or alleged untrue statement or omission or alleged omission made in such
registration statement or any amendment thereto, any Preliminary Prospectus, the
Prospectus or any amendment or supplement thereto or any Application in reliance
upon and in conformity with written information furnished to the Company by such
Underwriter through the Representatives specifically for use therein; and
provided, further, that the Company will not be liable to any Underwriter or any
- -----------------
person controlling such Underwriter with respect to any such untrue statement or
omission made in any Preliminary Prospectus that is corrected in the Prospectus
(or any amendment or supplement thereto) if the person asserting any such loss,
claim, damage or liability purchased Securities from such Underwriter but was
not sent or given a copy of the Prospectus (as amended or supplemented) at or
prior to the written confirmation of the sale of such Securities to such person
in any case where such delivery of the Prospectus (as amended or supplemented)
is required by the Act, unless such failure to deliver the Prospectus (as
amended or supplemented) was a result of noncompliance by the Company with
Section 5(b), (d) or (e) of this Agreement. This indemnity agreement will be in
addition to any liability which the Company may otherwise have. The Company will
not, without the prior written consent of the Underwriter or Underwriters
purchasing, in the aggregate, more than fifty percent (50%) of the Securities,
settle or compromise or consent to the entry of any judgment in any pending or
threatened claim, action, suit or proceeding in respect of which indemnification
may be sought hereunder (whether or not any such Underwriter or any person who
controls any such Underwriter within the meaning of Section 15 of the Act or
Section 20 of the Exchange Act is a party to such claim, action, suit or
proceeding), unless such settlement, compromise or consent includes an
unconditional release of all of the Underwriters and such controlling persons
from all liability arising out of such claim, action, suit or proceeding.
(b) Each Underwriter, severally and not jointly, will indemnify and
hold harmless the Company, each of its directors, each of its officers who
signed the Registration Statement and each person, if any, who controls the
Company within the meaning of Section 15 of the Act or Section 20 of the
Exchange Act against any losses, claims, damages or liabilities to which the
Company or any such director, officer or controlling person may become subject
under the Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon (i)
any untrue statement or alleged untrue statement of any material fact contained
in the Registration Statement or any amendment thereto, any Preliminary
Prospectus or the Prospectus or any amendment or supplement thereto, or any
Application or (ii) the omission or the alleged omission to state therein a
material fact required to be stated in the Registration Statement or any
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<PAGE>
amendment thereto, any Preliminary Prospectus or the Prospectus or any amendment
or supplement thereto, or any Application or necessary to make the statements
therein not misleading, in each case to the extent, but only to the extent, that
such untrue statement or alleged untrue statement or omission or alleged
omission was made in reliance upon and in conformity with written information
furnished to the Company by such Underwriter through the Representatives
specifically for use therein; and, subject to the limitation set forth
immediately preceding this clause, will reimburse, as incurred, any legal or
other expenses reasonably incurred by the Company or any such director, officer
or controlling person in connection with investigating or defending any such
loss, claim, damage, liability or any action in respect thereof. This indemnity
agreement will be in addition to any liability which such Underwriter may
otherwise have.
(c) Promptly after receipt by an indemnified party under this Section
8 of notice of the commencement of any action, such indemnified party will, if a
claim in respect thereof is to be made against the indemnifying party under this
Section 8, notify the indemnifying party of the commencement thereof; but the
omission so to notify the indemnifying party will not relieve it from any
liability which it may have to any indemnified party otherwise than under this
Section 8. In case any such action is brought against any indemnified party,
and it notifies the indemnifying party of the commencement thereof, the
indemnifying party will be entitled to participate therein and, to the extent
that it may wish, jointly with any other indemnifying party similarly notified,
to assume the defense thereof, with counsel satisfactory to such indemnified
party; provided, however, that if the defendants in any such action include both
-----------------
the indemnified party and the indemnifying party and the indemnified party shall
have reasonably concluded that there may be one or more legal defenses available
to it and/or other indemnified parties which are different from or additional to
those available to the indemnifying party, the indemnifying party shall not have
the right to direct the defense of such action on behalf of such indemnified
party or parties and such indemnified party or parties shall have the right to
select separate counsel to defend such action on behalf of such indemnified
party or parties. After notice from the indemnifying party to such indemnified
party of its election so to assume the defense thereof and approval by such
indemnified party of counsel appointed to defend such action, the indemnifying
party will not be liable to such indemnified party under this Section 8 for any
legal or other expenses, other than reasonable costs of investigation,
subsequently incurred by such indemnified party in connection with the defense
thereof, unless (i) the indemnified party shall have employed separate counsel
in accordance with the proviso to the next preceding sentence (it being
understood, however, that in connection with such action the indemnifying party
shall not be liable for the expenses of more than one separate counsel (in
addition to local counsel) in any one action or separate but substantially
similar actions in the same jurisdiction arising out of the same general
allegations or circumstances, designated by the Representatives in the case of
paragraph (a) of this Section 8, representing the indemnified parties under such
paragraph (a) who are parties to such action or actions) or (ii) the
indemnifying party does not promptly retain counsel satisfactory to the
indemnified party or (iii) the indemnifying party has authorized the employment
of counsel for the indemnified party at the expense of the indemnifying party.
After such notice from the indemnifying party to such indemnified party, the
indemnifying party will not be liable for the costs and expenses of any
settlement of such action effected by such indemnified party without the consent
of the indemnifying party.
(d) In circumstances in which the indemnity agreement provided for in
the preceding paragraphs of this Section 8 is unavailable or insufficient, for
any reason, to hold harmless an
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<PAGE>
indemnified party in respect of any losses, claims, damages or liabilities (or
actions in respect thereof), each indemnifying party, in order to provide for
just and equitable contribution, shall contribute to the amount paid or payable
by such indemnified party as a result of such losses, claims, damages or
liabilities (or actions in respect thereof) in such proportion as is appropriate
to reflect (i) the relative benefits received by the indemnifying party or
parties on the one hand and the indemnified party or parties on the other from
the offering of the Securities or (ii) if the allocation provided by the
foregoing clause (i) is not permitted by applicable law, not only such relative
benefits but also the relative fault of the indemnifying party or parties on the
one hand and the indemnified party or parties on the other in connection with
the statements or omissions or alleged statements or omissions that resulted in
such losses, claims, damages or liabilities (or actions in respect thereof), as
well as any other relevant equitable considerations. The relative benefits
received by the Company on the one hand and the Underwriters on the other shall
be deemed to be in the same proportion as the total proceeds from the offering
(before deducting expenses) received by the Company bear to the total
underwriting discounts and commissions received by the Underwriters. The
relative fault of the parties shall be determined by reference to, among other
things, whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to information
supplied by the Company or the Underwriters, the parties' relative intents,
knowledge, access to information and opportunity to correct or prevent such
statement or omission, and any other equitable considerations appropriate in the
circumstances. The Company and the Underwriters agree that it would not be
equitable if the amount of such contribution were determined by pro rata or per
capita allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation that does not take into account
the equitable considerations referred to above in this paragraph (d).
Notwithstanding any other provision of this paragraph (d), no Underwriter shall
be obligated to make contributions hereunder that in the aggregate exceed the
total public offering price of the Securities purchased by such Underwriter
under this Agreement, less the aggregate amount of any damages that such
Underwriter has otherwise been required to pay in respect of the same or any
substantially similar claim, and no person guilty of fraudulent
misrepresentation (within the meaning of Section 11 (f) of the Act) shall be
entitled to contribution from any person who was not guilty of such fraudulent
misrepresentation. The Underwriters' obligations to contribute hereunder are
several in proportion to their respective underwriting obligations and not
joint, and contributions among Underwriters shall be governed by the provisions
of the Prudential Securities Incorporated Master Agreement Among Underwriters.
For purposes of this paragraph (d), each person, if any, who controls an
Underwriter within the meaning of Section 15 of the Act or Section 20 of the
Exchange Act shall have the same rights to contribution as such Underwriter, and
each director of the Company, each officer of the Company who signed the
Registration Statement and each person, if any, who controls the Company within
the meaning of Section 15 of the Act or Section 20 of the Exchange Act, shall
have the same rights to contribution as the Company.
9. Default of Underwriters. If one or more Underwriters default in
-----------------------
their obligations to purchase Firm Securities or Option Securities hereunder and
the aggregate number of such Securities that such defaulting Underwriter or
Underwriters agreed but failed to purchase is ten percent or less of the
aggregate number of Firm Securities or Option Securities to be purchased by all
of the Underwriters at such time hereunder, the other Underwriters may make
arrangements satisfactory to the Representatives for the purchase of such
Securities by other persons (who may include one or more of the non-defaulting
Underwriters, including the Representatives), but if no such
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<PAGE>
arrangements are made by the Firm Closing Date or the related Option Closing
Date, as the case may be, the other Underwriters shall be obligated severally in
proportion to their respective commitments hereunder to purchase the Firm
Securities or Option Securities that such defaulting Underwriter or Underwriters
agreed but failed to purchase. If one or more Underwriters so default with
respect to an aggregate number of Securities that is more than ten percent of
the aggregate number of Firm Securities or Option Securities, as the case may
be, to be purchased by all of the Underwriters at such time hereunder, and if
arrangements satisfactory to the Representatives are not made within 36 hours
after such default for the purchase by other persons (who may include one or
more of the non-defaulting Underwriters, including the Representatives) of the
Securities with respect to which such default occurs, this Agreement will
terminate without liability on the part of any non-defaulting Underwriter or the
Company other than as provided in Section 10 hereof. In the event of any
default by one or more Underwriters as described in this Section 9, the
Representatives shall have the right to postpone the Firm Closing Date or the
Option Closing Date as the case may be, established as provided in Section 3
hereof for not more than seven business days in order that any necessary changes
may be made in the arrangements or documents for the purchase and delivery of
the Firm Securities or Option Securities, as the case may be. As used in this
Agreement, the term "Underwriter" includes any person substituted for an
Underwriter under this Section 9. Nothing herein shall relieve any defaulting
Underwriter from liability for its default.
10. Survival. The respective representations, warranties,
--------
agreements, covenants, indemnities and other statements of the Company, its
officers and the several Underwriters set forth in this Agreement or made by or
on behalf of them, respectively, pursuant to this Agreement shall remain in full
force and effect, regardless of (i) any investigation made by or on behalf of
the Company, any of its officers or directors, any Underwriter or any
controlling person referred to in Section 8 hereof and (ii) delivery of and
payment for the Securities. The respective agreements, covenants, indemnities
and other statements set forth in Sections 6 and 8 hereof shall remain in full
force and effect, regardless of any termination or cancellation of this
Agreement.
11. Termination. (a) This Agreement may be terminated with respect
-----------
to the Firm Securities or any Option Securities in the sole discretion of the
Representatives by notice to the Company given prior to the Firm Closing Date or
the related Option Closing Date, respectively, in the event that the Company
shall have failed, refused or been unable to perform all obligations and satisfy
all conditions on its part to be performed or satisfied hereunder at or prior
thereto or, if at or prior to the Firm Closing Date or such Option Closing Date,
respectively,
(i) the Company or any of its subsidiaries shall have, in the
sole judgment of the Representatives, sustained any material loss or
interference with their respective businesses or properties from fire,
flood, hurricane, accident or other calamity, whether or not covered
by insurance, or from any labor dispute or any legal or governmental
proceeding or there shall have been any material adverse change, or
any development involving a prospective material adverse change
(including without limitation a change in management or control of the
Company), in the condition (financial or otherwise), business
prospects, net worth or results of operations of the Company and its
subsidiaries, except in each case as described in or contemplated by
the Prospectus (exclusive of any amendment or supplement thereto);
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(ii) trading in the Common Stock on the Nasdaq National Market
shall have been suspended by the Commission or trading in securities
generally on the New York Stock Exchange or Nasdaq National Market
shall have been suspended or minimum or maximum prices shall have been
established on such exchange or market system;
(iii) a banking moratorium shall have been declared by New York
or United States authorities; or
(iv) there shall have been (A) an outbreak or escalation of
hostilities between the United States and any foreign power, (B) an
outbreak or escalation of any other insurrection or armed conflict
involving the United States or (C) any other calamity or crisis or
material adverse change in general economic, political or financial
conditions having an effect on the U.S. financial markets that, in the
sole judgment of the Representatives, makes it impractical or
inadvisable to proceed with the public offering or the delivery of the
Securities as contemplated by the Registration Statement, as amended
as of the date hereof.
(b) Termination of this Agreement pursuant to this Section 11 shall be
without liability of any party to any other party except as provided in Section
10 hereof.
12. Information Supplied by Underwriters. The statements set forth
------------------------------------
in the last paragraph on the front cover page, the paragraph in bold on the
inside front cover and under the heading "Underwriting" in any Preliminary
Prospectus or the Prospectus (to the extent such statements relate to the
Underwriters) and the "Per Share" numbers set forth under the columns "Price to
the Public" and "Underwriting Discounts and Commission" in the table on the
cover page in any Preliminary Prospectus or the Prospectus constitute the only
information furnished by any Underwriter through the Representatives to the
Company for the purposes of Sections 2(b) and 8 hereof. The Underwriters
confirm that such statements (to such extent) are correct.
13. Notices. All communications hereunder shall be in writing and,
-------
if sent to any of the Underwriters, shall be delivered or sent by mail, telex or
facsimile transmission and confirmed in writing to Prudential Securities
Incorporated, One New York Plaza, New York, New York 10292, Attention: Equity
Transactions Group; and if sent to the Company, shall be delivered or sent by
mail, telex or facsimile transmission and confirmed in writing to the Company at
Petroglyph Energy, Inc., 6209 North Highway 61, Hutchinson, Kansas 67502,
Attention: President.
14. Successors. This Agreement shall inure to the benefit of and
----------
shall be binding upon the several Underwriters, the Company, Petroglyph Gas
Partners, L.P. and their respective successors and legal representatives.
Petroglyph Gas Partners, L.P. is a party to this Agreement to confirm to the
Underwriters that it shall be jointly and severally responsible for all
representations, warranties, covenants and obligations of the Company hereunder
as original obligor. Nothing expressed or mentioned in this Agreement is
intended or shall be construed to give any other person any legal or equitable
right, remedy or claim under or in respect of this Agreement, or any provisions
herein contained, this Agreement and all conditions and provisions hereof being
intended to be and being for the sole and exclusive benefit of such persons and
for the benefit of no other person except that (i) the indemnities of the
Company contained in Section 8 of this Agreement shall also be for the benefit
of any person or persons who control any Underwriter within the meaning of
Section 15 of
-25-
<PAGE>
the Act or Section 20 of the Exchange Act and (ii) the indemnities of the
Underwriters contained in Section 8 of this Agreement shall also be for the
benefit of the directors of the Company, the officers of the Company who have
signed the Registration Statement and any person or persons who control the
Company within the meaning of Section 15 of the Act or Section 20 of the
Exchange Act. No purchaser of Securities from any Underwriter shall be deemed a
successor because of such purchase.
15. Applicable Law. The validity and interpretation of this
--------------
Agreement, and the terms and conditions set forth herein, shall be governed by
and construed in accordance with the laws of the State of New York, without
giving effect to any provisions relating to conflicts of laws.
16. Counterparts. This Agreement may be executed in two or more
------------
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
-26-
<PAGE>
If the foregoing correctly sets forth our understanding, please
indicate your acceptance thereof in the space provided below for that purpose,
whereupon this letter shall constitute an agreement binding the Company and each
of the several Underwriters.
Very truly yours,
PETROGLYPH ENERGY, INC.
By
------------------------------------
Name:
Title:
PETROGLYPH GAS PARTNERS, L.P.
By
------------------------------------
Name:
Title:
The foregoing Agreement is hereby
confirmed and accepted as of the
date first above written.
PRUDENTIAL SECURITIES INCORPORATED
OPPENHEIMER & CO., INC.
JOHNSON RICE & COMPANY, L.L.C.
By PRUDENTIAL SECURITIES INCORPORATED
By
------------------------------
Name:
Title:
For itself and on behalf of the Representatives.
-27-
<PAGE>
SCHEDULE 1
UNDERWRITERS
Number of Firm
Securities to
Underwriter be Purchased
- ----------- ------------
Prudential Securities Incorporated.......
Oppenheimer & Co., Inc.
Johnson Rice & Company, L.L.C.
-------------
Total .............. 2,333,333
=============
-28-
<PAGE>
SCHEDULE 2
SUBSIDIARIES
Name Jurisdiction of Organization
- ---- ----------------------------
Petroglyph Operating Company, Inc. Delaware
PGP II, L.P. Delaware
-29-
<PAGE>
EXHIBIT 2
Execution Copy
EXCHANGE AGREEMENT
This Exchange Agreement (this "Agreement") is entered into as of the 22nd
day of August, 1997 by and among Petroglyph Energy, Inc., a Delaware corporation
("Petroglyph"), Petroglyph Energy, Inc., a Kansas corporation ("PEI"), Robert C.
Murdock, Robert A. Christensen and S. Kennard Smith (the "PEI Stockholders"),
Natural Gas Partners, L.P., Natural Gas Partners II, L.P., Natural Gas Partners
III, L.P., each a Delaware limited partnership (collectively, "NGP"), R. Gamble
Baldwin, Albin Income Trust, John S. Foster, Kenneth A. Hersh and Bruce B.
Selkirk, III (collectively, NGP and such other limited partners are the "Limited
Partners").
R E C I T A L S
- - - - - - - -
WHEREAS, PEI owns a general partnership interest in Petroglyph Gas
Partners, L.P., a Delaware limited partnership (the "Partnership"), in the pre-
Payout and post-Payout distribution percentage set forth on Exhibit A, and each
of the PEI Stockholders own the number of shares of common stock of PEI, par
value $1.00 per share, that correlate to the indirect pre-Payout and post-Payout
percentages in the Partnership as set forth on Exhibit A; and
WHEREAS, the Limited Partners, in the aggregate, own the limited
partnership interests in the Partnership in the respective pre-Payout and post-
Payout distribution percentages set forth on Exhibit A; and
WHEREAS, PEI, the PEI Stockholders and the Limited Partners desire to
consolidate in Petroglyph their direct and indirect interests in the Partnership
by means of the Exchange (as defined herein); and
WHEREAS, the parties hereto intend that Section 351(a) of the Internal
Revenue Code of 1986, as amended, will apply to the Exchange;
NOW, THEREFORE, in consideration of the foregoing and the mutual agreement
and conditions contained herein, the parties hereto agree as follows:
ARTICLE I
DEFINITIONS
1.1 Definitions. As used herein, the terms defined above shall have the
-----------
meaning set forth above and the following terms shall have the following
meanings:
"Aggregate Exchange Shares" shall equal 2,833,333, which number constitutes
the number of shares of Petroglyph Common Stock that Petroglyph shall issue in
the Exchange.
<PAGE>
"Closing" has the meaning set forth in Section 5.2 hereof.
"Closing Date" means the date on which the Closing occurs.
"Encumbrances" means all security interests, liens, encumbrances, options,
calls, pledges, trusts, voting trusts and other stockholder agreements,
assessments, covenants, restrictions, reservations, commitments, obligations and
other burdens.
"Exchange" means, collectively, the transactions contemplated by Sections
2.1 and 2.2.
"Exchange Ratio" has the meaning set forth in Section 2.3 hereof.
"Partnership Agreement" means the Amended and Restated Limited Partnership
Agreement of the Partnership dated as of September 28, 1995.
"Payout Threshold" shall mean an amount that represents the aggregate
distributions that the Partners would be required to receive from the
Partnership in order to cause the occurrence of Payout on such date. The Payout
Threshold on October 31, 1997 shall mean $23,668,843, and on each day subsequent
to October 31, 1997, shall mean $23,668,843 plus interest on such amount to such
subsequent date calculated at 11% per annum, compounded annually.
"Permitted Encumbrances" means restrictions imposed by applicable federal
and state securities laws, and arising under the Partnership Agreement.
"Petroglyph Common Stock" means the Common Stock, $.01 par value per share,
of Petroglyph.
"Public Offering" has the meaning set forth for such term in Section 3.1.
"Public Offering Equity Value" shall mean the product of (i) the price per
share at which the underwriters shall initially offer Petroglyph Common Stock to
the public in the Public Offering times (ii) the Aggregate Exchange Shares.
"Securities" means the shares of common stock that each PEI Stockholder
owns of PEI and the Partnership interests of the Limited Partners in the
Partnership.
"Securities Act" means the Securities Act of 1933, as amended.
"Security Holders" means collectively, the PEI Stockholders and the Limited
Partners.
"Transfer Letter" means a letter from a Security Holder stating that such
person is transferring Securities to Petroglyph pursuant to this Agreement and
confirming the continuing accuracy of such Security Holder's representations and
warranties set forth herein.
1.2 Additional Definitions. Capitalized terms which are used but not
----------------------
defined herein shall have the meanings set forth for such terms in the
Partnership Agreement.
2
<PAGE>
ARTICLE II
THE EXCHANGE
2.1 Exchange of Limited Partnership Interests. At the Closing, each of
-----------------------------------------
the Limited Partners shall transfer to Petroglyph all of the limited partnership
interests held by such Limited Partner. Such transfer shall be effected by
delivery to Petroglyph of a duly executed Transfer Letter by each Limited
Partner.
2.2 Exchange of Shares of PEI. At the Closing, each of the PEI
-------------------------
Stockholders shall transfer to Petroglyph all of their shares of common stock of
PEI. As a consequence of such transfer, Petroglyph shall become the sole
stockholder of PEI. Such transfer shall be effected by delivery to Petroglyph of
a duly executed Transfer Letter by each PEI Stockholder together with the
certificates representing such shares duly endorsed for transfer to Petroglyph.
2.3 Exchange Calculation. In exchange for the respective transfers of the
--------------------
Limited Partners and the PEI Stockholders as contemplated in Section 2.1 and
Section 2.2, respectively, Petroglyph shall issue to each such Security Holder
the number of Petroglyph Common Shares equal to such Security Holder's "Exchange
Ratio" (as such term is defined below) times the Aggregate Exchange Shares. As
used in this Section 2.3, the "Exchange Ratio" for each Security Holder shall be
equal to the sum of:
(a) Such Security Holder's pre-Payout percentage multiplied by the ratio
of (i) Payout Threshold divided by (ii) Public Offering Equity Value,
plus
(b) Such Security Holder's post-Payout percentage multiplied by the ratio
of (i) divided by (ii), where (i) is the difference between Public
Offering Equity Value and Payout Threshold and (ii) is Public Offering
Equity Value.
The number of shares of Petroglyph Common Stock issued to each Security Holder
shall be rounded up or down, as applicable, to the nearest whole number, and no
fractional shares shall be issued. In the event that the Public Offering Equity
Value does not exceed the Payout Threshold, the number of shares of Petroglyph
Common Stock that each Security Holder shall receive in the Exchange shall be
calculated only pursuant to subclause (a) above. An illustrative example of the
foregoing calculation is set forth in Exhibit A.
2.4 Issuance of Certificates. Petroglyph shall cause certificates
------------------------
representing the shares of Petroglyph Common Stock issued to the Security
Holders pursuant to this Article II to be delivered as promptly as possible
following the Closing.
3
<PAGE>
ARTICLE III
CONDITION TO THE EXCHANGE
3.1 Condition to the Exchange. The obligations of the parties hereto to
-------------------------
consummate the Exchange are subject to the satisfaction on or before the Closing
Date of the consummation by Petroglyph of a firm underwritten public offering of
Petroglyph Common Stock registered pursuant to the filing of a registration
statement on Form S-1 pursuant to the Securities Act on terms satisfactory to
Petroglyph in its sole discretion (the "Public Offering") contemporaneously with
the Closing.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES
4.1 Security Holder Representations. Each Security Holder hereby
-------------------------------
represents and warrants to, and covenants and agrees with, Petroglyph as
follows:
(a) Such Security Holder has been afforded access to, and given an
opportunity to review, all information relating to Petroglyph and the Exchange
which such Security Holder deemed necessary in order to make an informed
decision concerning participation in the Exchange.
(b) Such Security Holder acknowledges that (i) the shares of Petroglyph
Common Stock to be issued in the Exchange are being issued under exemptions from
registration provided for in the Securities Act and that further transfers of
such shares will not be permitted except pursuant to an effective registration
under the Securities Act or in a transaction pursuant to which Petroglyph has
received evidence reasonably satisfactory to it of compliance with the
Securities Act and other applicable securities laws, and (ii) a legend
indicating that the shares of Petroglyph Common Stock have not been registered
under applicable federal and state securities laws and referring to the
restrictions on transferability and sale of the shares of Petroglyph Common
Stock may be placed on any certificate(s) for such shares.
(c) Such Security Holder has no present plan or intent to sell, transfer
or otherwise dispose of the shares of Petroglyph Common Stock to be received by
such person in the Exchange.
(d) Such Security Holder has (i) valid title to the Securities to be
transferred by such person in the Exchange, free and clear of all Encumbrances,
except for Permitted Encumbrances, and (ii) full right, power and authority to
assign, transfer and deliver the Securities hereunder. Upon the issuance and
delivery to Petroglyph of the Securities, Petroglyph will acquire valid title to
such Securities, subject to no Encumbrances other than Permitted Encumbrances.
4
<PAGE>
(e) This Agreement has been duly executed and delivered by such Security
Holder and constitutes a valid and legally binding obligation of such Security
Holder enforceable against such Security Holder in accordance with its terms,
except to the extent enforcement may be limited by (i) applicable bankruptcy,
insolvency, moratorium, reorganization, fraudulent conveyance or similar laws
from time to time in effect which affect creditors' rights generally, and (ii)
legal and equitable limitations on the availability of equitable remedies.
4.2 Petroglyph Representations. Petroglyph represents and warrants to,
--------------------------
and covenants and agrees with, each Security Holder as follows:
(a) The shares of Petroglyph Common Stock have been duly authorized for
issuance pursuant to this Agreement and, when issued and delivered to the
Security Holders in exchange for the Securities transferred pursuant hereto,
will be validly issued, fully paid and nonassessable. The issuance of Petroglyph
Common Stock under this Agreement is not subject to any preemptive rights.
(b) Petroglyph is a corporation duly incorporated, validly existing and in
good standing under the laws of the State of Delaware. Petroglyph has the
corporate power to enter into and be bound by the terms and conditions of this
Agreement, and to carry out its obligations hereunder, and the execution and
delivery by Petroglyph of this Agreement and the performance by Petroglyph of
its obligations hereunder have been duly authorized by all necessary corporate
action. This Agreement has been duly executed and delivered by Petroglyph and
constitutes a valid and legally binding obligation of Petroglyph enforceable
against it in accordance with its terms, except to the extent enforcement may be
limited (i) by applicable bankruptcy, insolvency, moratorium, reorganization,
fraudulent conveyance or similar laws from time to time in effect which affect
creditors' rights generally and (ii) by legal and equitable limitations on the
availability of equitable remedies.
(c) The execution, delivery and performance of this Agreement by
Petroglyph will not (i) conflict with or result in a violation of any provision
of Petroglyph's charter or bylaws, (ii) conflict with or result in a violation
of any provision of, or constitute (with or without the giving of notice or the
passage of time or both) a default under, or give rise (with or without the
giving of notice or the passage of time or both) to any right of termination,
cancellation, or acceleration under, any bond, debenture, note, mortgage,
indenture, lease, agreement or other instrument or obligation to which
Petroglyph is a party or by which it or any of its properties or assets may be
bound, or (iii) result in a violation by Petroglyph of any statute or law or any
judgment, order, decree, rule or regulation of any court or governmental entity
to which Petroglyph is subject.
4.3 PEI Representations. PEI hereby represents and warrants to, and
-------------------
covenants and agrees with, Petroglyph as follows:
(a) PEI has valid title to its general partnership interest in the
Partnership, free and clear of all Encumbrances, except for Permitted
Encumbrances.
5
<PAGE>
(b) This Agreement has been duly executed and delivered by PEI and
constitutes a valid and legally binding obligation of PEI enforceable against
PEI in accordance with its terms, except to the extent enforcement may be
limited by (i) applicable bankruptcy, insolvency, moratorium, reorganization,
fraudulent conveyance or similar laws from time to time in effect which affect
creditors' rights generally, and (ii) legal and equitable limitations on the
availability of equitable remedies.
4.4 Survival of Representations and Warranties. The representations,
------------------------------------------
warranties and covenants of the parties hereto shall not survive the Closing.
ARTICLE V
MISCELLANEOUS
5.1 Consent of the Partners. By their execution of this Agreement, each
-----------------------
of PEI and the Limited Partners hereby consent to the transactions contemplated
hereby pursuant to which the Partners are effecting the Exchange in accordance
with the Partnership Agreement in accordance with Article 9 of the Partnership
Agreement. Without limitation of the foregoing, the parties consent to the
substitution of Petroglyph as a Limited Partner pursuant to Section 9.1 of the
Partnership Agreement and the transfer of the shares of PEI by the PEI
Stockholders pursuant to Section 9.3 of the Partnership Agreement.
5.2 Closing. The closing of the Exchange (the "Closing") shall occur on
-------
the date and at the time and place as the closing of the Public Offering occurs.
5.3. Limited Power of Attorney. Each of the Limited Partners, by execution
-------------------------
of this Agreement, constitutes and appoints Kenneth A. Hersh, with full power of
substitution, its agent and attorney-in-fact in its name, place and stead to
make, execute, swear to, verify, acknowledge, amend, file, record, deliver and
publish (a) any amendment of the Partnership Agreement, (b) any waiver or
consent required pursuant to the Partnership Agreement, (c) any agreement,
instrument or document necessary to effectuate the Exchange pursuant to this
Agreement, (d) any agreement, instrument or document which is now or which may
hereafter be required by law to be filed on behalf of such Limited Partner with
respect to the Petroglyph Common Stock acquired pursuant to this Agreement, and
(e) any other certificates or instruments necessary, advisable or appropriate in
connection with the foregoing and which do not increase the obligations of any
such Limited Partner. The existence of such power of attorney will not preclude
execution of any such instrument by any such Limited Partner individually with
respect to any such matter. The limited power of attorney granted by each
Limited Partner in this Section 5.3 may be revoked by any such Limited Partner
at any time upon thirty (30) days notice to Petroglyph, provided that any such
revocation will not affect actions taken pursuant to this power of attorney
pursuant prior to such time.
6
<PAGE>
5.4 Termination. This Agreement may be terminated at any time by the
-----------
mutual consent in writing of all of the parties hereto or by any such party if
the Exchange shall not have been consummated by December 31, 1997.
5.5 Modification or Amendment. Subject to applicable law, at any time
-------------------------
prior to the Closing, this Agreement may be modified or amended by the mutual
consent in writing of all of the parties hereto.
5.6 Waiver of Conditions. The conditions to the parties' obligations to
--------------------
consummate the Exchange may be waived in whole or in part, to the extent
permitted by applicable law, by the mutual consent in writing of all of the
parties hereto.
5.7 Additional Agreements. Each of the parties hereto shall have entered
---------------------
into a Registration Rights Agreement and a Stockholders Agreement with
Petroglyph, in substantially the forms set forth in Exhibit B and Exhibit C
hereto, and NGP shall have entered into the Financial Advisory Services
Agreement in substantially the form set forth in Exhibit D hereto.
5.8 Indebtedness of PEI. The Partnership loaned to PEI on February 25,
-------------------
1994 the original principal amount of $234,210.53, and as of August 25, 1997,
the outstanding balance of the indebtedness under such loan will be $346,745.63.
At the Closing, the parties shall take the following concurrent actions with
respect to the outstanding indebtedness of PEI to the Partnership pursuant to
such loan on and as of the Closing Date (the "Closing Indebtedness"):
(a) Each PEI Stockholder shall borrow from the Partnership, and the
Partnership shall loan to each such PEI Stockholder, an amount that in the
aggregate shall equal the Closing Indebtedness.
(b) Each of Robert C. Murdock and Robert A. Christensen shall execute a
promissory note in favor of the Partnership, the principal of which shall equal
42.5% of the Closing Indebtedness, and Sidney Kennard Smith shall execute a
promissory note in favor of the Partnership, the principal of which shall equal
15.0% of the Closing Indebtedness. Each such promissory note shall be in
substantially the form set forth in Exhibit E hereto.
(c) Each PEI Stockholder shall severally, and not jointly, make a
contribution in cash to the capital of PEI of an amount that in the aggregate
shall equal the Closing Indebtedness.
(d) Concurrently with the making of the capital contributions described in
Section 5.8(c) above, the PEI Stockholders shall be released and forever
discharged from their respective guarantees of the Closing Indebtedness.
5.9 Other Actions. The parties hereto shall take such other actions as
-------------
shall be necessary to effect the Exchange and to satisfy the condition set forth
in Article III of this Agreement.
7
<PAGE>
5.10 Expenses. Whether or not the Exchange contemplated by this Agreement
--------
shall be consummated, any fees and expenses incurred by a Security Holder in
connection with this Agreement shall be borne by the Partnership.
5.11 Entire Agreement. This Agreement and the agreements referred to in
----------------
Section 5.7 and Section 5.8 hereof constitute the entire agreement between the
parties with respect to the transactions contemplated hereby and shall be
binding upon and inure to the benefit of the parties hereto and their respective
successors and assigns. This Agreement and the agreements referred to in Section
5.7 and Section 5.8 hereof supersede all prior agreements, arrangements and
understandings related to the subject matter hereof.
5.12 Counterparts. For the convenience of the parties hereto, this
------------
Agreement may be executed in any number of counterparts, each such counterpart
being deemed to be an original instrument, and all such counterparts shall
together constitute the same agreement.
5.13 Governing Law. This Agreement shall be governed by and construed in
-------------
accordance with the laws of the State of Delaware without giving effect to the
principles of conflict of laws thereof.
8
<PAGE>
IN WITNESS WHEREOF, this Agreement has been executed as of the date first
written above.
PETROGLYPH:
PETROGLYPH ENERGY, INC., a
Delaware corporation
By: /s/ Robert C. Murdock
-----------------------------------------
Robert C. Murdock, President
PEI:
PETROGLYPH ENERGY, INC., a Kansas
corporation
By: /s/ Robert C. Murdock
-----------------------------------------
Robert C. Murdock, President
PEI STOCKHOLDERS:
/s/ Robert C. Murdock
--------------------------------------------
Robert C. Murdock
/s/ Robert A. Christensen
--------------------------------------------
Robert A. Christensen
/s/ S. Kennard Smith
--------------------------------------------
S. Kennard Smith
9
<PAGE>
THE LIMITED PARTNERS:
NATURAL GAS PARTNERS, L.P.
By: G.F.W. Energy, L.P.,
its general partner
By: /s/ R. Gamble Baldwin
-------------------------------------
Name:
Title: General Partner
NATURAL GAS PARTNERS II, L.P.
By: GFW II, L.L.C.,
its general partner
By: /s/ Kenneth A. Hersh
-------------------------------------
Name: Kenneth A. Hersh
Title: Authorized Member
NATURAL GAS PARTNERS III, L.P
By: Rainwater Energy Investors, L.P.,
its general partner
By: GFW III, L.L.C.,
its general partner
By: /s/ Kenneth A. Hersh
-------------------------------------
Name: Kenneth A. Hersh
Title: Authorized Member
/s/ R. Gamble Baldwin
----------------------------------------
R. Gamble Baldwin
10
<PAGE>
ALBIN INCOME TRUST
By: /s/ Donald Shore
-------------------------------------
Donald Shore, Trustee
/s/ John S. Foster
----------------------------------------
John S. Foster
/s/ Kenneth A. Hersh
----------------------------------------
Kenneth A. Hersh
/s/ Bruce B. Selkirk, III
----------------------------------------
Bruce B. Selkirk, III
11
<PAGE>
Exhibit A
Distribution Percentages of the Partners and PEI Stockholders
<PAGE>
Petroglyph Energy, Inc.
----------------------------
Reorganization Ownership Calculation - Partnership Distribution
===============================================================
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------
OFFERING ASSUMPTIONS
- ----------------------------------------------------------------------------------------
Low Middle High
--- ------ ----
<S> <C> <C> <C>
Fully-Distributed Equity Value Range $72,300,000 $77,500,000 $82,700,000
Offering Size $35,000,000 $35,000,000 $35,000,000
----------- ----------- -----------
Pre Money Equity Value $37,300,000 $42,500,000 $47,700,000
----------- ----------- -----------
- ----------------------------------------------------------------------------------------
</TABLE>
<TABLE>
- ---------------------------------------------------------------------------
IPO ASSUMPTIONS
- ---------------------------------------------------------------------------
<S> <C>
Pre-Offering Shares 2,833,333
Gross Proceeds from IPO $35,000,000
Pre-Money Valuation/Pre-Offering Shares $15.000
Shares to Be Sold 2,333,333
Total Post Offering Shares 5,166,666
% of Company Sold to Public 45.16129%
- ---------------------------------------------------------------------------
</TABLE>
<TABLE>
- ------------------------------------------------------------------------------------------------------------------
TOTAL PROFIT CALCULATION
- ------------------------------------------------------------------------------------------------------------------
<S> <C>
Valuation Applied Middle
Market Equity Value (Pre-Money) $42,500,000
-----------
LP Payout Threshold $22,569,299 (Note: Threshold as of: October 31, 1997
LP Payout Threshold / Distribution % Until Payout $23,668,843 ("Grossed Up" Payout #)
Market Equity Value less Grossed Up Payout # $18,831,157 ("Profit")
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
- ---------------------------------------------------------------------------
VALUATION CHECK
- ---------------------------------------------------------------------------
<S> <C>
Mgmt & NGP Post Deal Ownership 54.839%
New Shareholders Ownership 45.161%
-------
Mgmt & NGP shares 2,833,333
Price Per Share $15.000
-------
Equity Value $42,500,000
- ---------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Total Investment % of General Partner % of Limited Partner % of Total Partnership
================= ================== ================== ====================
<S> <C> <C> <C> <C>
Robert C. Murdock $ 191,016.48 42.5000% 0.00000% 1.12435%
Robert A. Christensen $ 191,016.48 42.5000% 0.00000% 1.12435%
Sidney Kennard Smith $ 67,417.58 15.0000% 0.00000% 0.39683%
----------------- ----------------- ------------------ --------------------
Subtotal General Partner $ 449,450.53 100.0000% 0.00000% 2.64554%
----------------- ----------------- ------------------ --------------------
NGP $ 7,218,094.32 43.64139% 42.48684%
NGP II $ 4,116,382.62 24.88810% 24.22968%
NGP III $ 4,619,867.38 27.93223% 27.19327%
R. Gamble Baldwin $ 110,418.05 0.66760% 0.64994%
David R. Albin $ 331,254.16 2.00280% 1.94981%
John S. Foster $ 55,209.03 0.33380% 0.32497%
Kenneth A. Hersh $ 82,813.54 0.50070% 0.48745%
Bruce B. Selkirk, III $ 5,520.90 0.03338% 0.03250%
----------------- ----------------- ------------------ --------------------
Subtotal limited Partner $16,539,560.00 100.00000% 100.00000% 97.35446%
----------------- ----------------- ------------------ --------------------
Total $16,989,010.5 100.00000% 100.00000% 100.00000%
----------------- ----------------- ------------------ --------------------
<CAPTION>
Distribution % Distribution % Distribution $ Distribution $
Until Payout After Payout Until Payout After Payout
================ ================= ================ ================
<S> <C> <C> <C> <C>
Robert C. Murdock 1.97435% 6.22435% $467,305.85 $1,172,117.19
Robert A. Christensen 1.97435% 6.22435% $467,305.85 $1,172,117.19
Sidney Kennard Smith 0.69683% 2.19683% $164,931.48 $413,688.42
---------------- ----------------- ---------------- ----------------
Subtotal General Partner 4.64553% 14.64553% $1,099,543.18 $2,757,922.81
---------------- ----------------- ---------------- ----------------
NGP 41.61402% 37.24988% $9,849,556.57 $7,014,583.42
NGP II 23.73192% 21.24311% $5,617,070.33 $4,000,323.08
NGP III 26.63463% 23.84140% $6,304,107.85 $4,489,612.31
R. Gamble Baldwin 0.63659% 0.56983% $150,672.57 $107,304.86
David R. Albin 1.90976% 1.70948% $452,017.73 $321,914.60
John S. Foster 0.31829% 0.28491% $75,336.29 $53,652.44
Kenneth A. Hersh 0.47744% 0.42737% $113,004.43 $80,478.65
Bruce B. Selkirk, III 0.03183% 0.02849% $7,533.63 $5,365.24
---------------- ----------------- ---------------- ----------------
Subtotal limited Partner 95.35447% 85.35447% $22,569,299.40 $16,073,234.61
---------------- ----------------- ---------------- ----------------
Total 100.00000% 100.00000% $23,668,842.59 $18,831,157.41
---------------- ----------------- ---------------- ----------------
<CAPTION>
Total Total Pre-Offering
Dollars Ownership Shares
================= ============== ================
<S> <C> <C> <C>
Robert C. Murdock $1,639,423.05 3.85747% 109,295
Robert A. Christensen $1,639,423.05 3.85747% 109,295
Sidney Kennard Smith $578,619.90 1.36146% 38,575
----------------- -------------- ----------------
Subtotal General Partner $3,857,465.99 9.07639% 257,164
----------------- -------------- -----------------
$16,864,139.99 39.68033% 1,124,276
NGP $9,617,393.41 22.62916% 641,160
NGP II $10,793,720.17 25.39699% 719,581
NGP III $257,977.43 0.60701% 17,198
R. Gamble Baldwin $773,932.33 1.82102% 51,595
David R. Albin $128,988.73 0.30350% 8,599
John S. Foster $193,483.08 0.45525% 12,899
Kenneth A. Hersh $12,898.87 0.03035% 860
Bruce B. Selkirk, III ----------------- -------------- ----------------
$38,642,534.01 90.92361% 2,576,169
Subtotal limited Partner ----------------- -------------- ----------------
$42,500,000.00 100.00000% 2,833,333
Total ----------------- -------------- ----------------
</TABLE>
<PAGE>
Exhibit B, C and D
Form of Registration Rights Agreement (See Exhibit 10.2)
Form of Stockholders Agreement (See Exhibit 10.1)
Form of Financial Advisory Services Agreement (See Exhibit 10.3)
<PAGE>
Exhibit 3.1
CERTIFICATE OF INCORPORATION
OF
PETROGLYPH ENERGY, INC.
FIRST: The name of the corporation is PETROGLYPH ENERGY, INC. (the
"Corporation").
SECOND: The address of its registered office in the State of Delaware is
Corporation Trust Center, 1209 Orange Street, Wilmington, Delaware 19801. The
name of its registered agent at such address is The Corporation Trust Company.
THIRD: The nature of the business or purpose to be conducted or promoted
is to engage in any lawful act or activity for which corporations may be
organized under the Delaware General Corporation Law.
FOURTH: The total number of shares of all classes of stock which the
Corporation shall have authority to issue is 30,000,000 shares, consisting
solely of 5,000,000 shares of preferred stock, par value $.01 per share (the
"Preferred Stock"), and 25,000,000 shares of common stock, par value $.01 per
share (the "Common Stock").
The following is a statement of the designations and the powers,
preferences and rights, and the qualifications, limitations or restrictions
thereof, of the classes of stock of the Corporation:
(a) Preferred Stock.
---------------
Shares of Preferred Stock may be issued from time to time in one or more
series as from time to time may be determined by the Board of Directors of the
Corporation. Each series shall be distinctly designated. The Board of
Directors is hereby expressly granted authority to fix, by resolution or
resolutions adopted by the affirmative vote of at least eighty percent of the
entire Board of Directors (the "Requisite Vote") prior to the issuance of any
shares of each particular series of Preferred Stock, the designation, powers,
preferences and relative, participating, optional or other special rights, and
the qualifications, limitations or restrictions thereof, if any, of such series,
including, but without limiting the generality of the foregoing, the following:
(i) the designation of, and the number of shares of Preferred Stock that
shall constitute, the series, which number may be increased (except as
otherwise fixed by the Board of Directors, and in any event not above the
total number of authorized shares of the class) or decreased (but not below
the number of shares thereof then outstanding) from time to time by
Requisite Vote of the Board of Directors;
(ii) the rate and times at which (or the method of determination thereof),
and the terms and conditions upon which, dividends, if any, on shares of
the series shall be paid, the nature of any preferences or the relative
rights of priority of such dividends to the dividends payable on any other
class or classes of stock of the Corporation or on any
<PAGE>
other series of Preferred Stock, and a statement whether such dividends
shall be cumulative;
(iii) whether shares of the series shall be convertible into or
exchangeable for shares of capital stock or other securities or property of
the Corporation or of any other corporation or entity, and, if so, the
terms and conditions of such conversion or exchange, including any
provisions for the adjustment of the conversion or exchange rate in such
events as the Board of Directors shall determine;
(iv) whether shares of the series shall be redeemable, and, if so, the
terms and conditions of such redemption, including the date or dates upon
or after which they shall be redeemable, and the amount and type of
consideration payable in case of redemption, which amount may vary under
different conditions and at different redemption dates;
(v) the rights, if any, of the holders of shares of the series upon
voluntary or involuntary liquidation, merger, consolidation, distribution
or sale of assets, dissolution or winding-up of the Corporation;
(vi) whether shares of the series shall have a sinking fund or purchase
account for the redemption or purchase of shares of the series, and, if so,
the terms, conditions and amount of such sinking fund or purchase account;
(vii) whether shares of the series shall have voting rights in addition to
the voting rights provided by law, which may, without limiting the
generality of the foregoing, include (A) the right to more or less than one
vote per share on any or all matters voted upon by the Corporation's
stockholders and (B) the right to vote, as a series by itself or together
with other series of Preferred Stock or together with all series of
Preferred Stock as a class or with the Common Stock as a class, upon such
matters, under such circumstances and upon such conditions as the Board of
Directors may fix, including, without limitation, the right, voting as a
series by itself or together with other series of Preferred Stock or
together with all series of Preferred Stock as a class, to elect one or
more directors of the Corporation in the event there shall have been a
default in the payment of dividends on any one or more series of Preferred
Stock or under such other circumstances and upon such conditions as the
Board of Directors may determine; and
(viii) any other powers, preferences and relative, participating, optional
or other special rights, and qualifications, limitations or restrictions,
of shares of that series.
The relative powers, preferences and rights of each series of Preferred Stock in
relation to the powers, preferences and rights of each other series of Preferred
Stock shall, in each case, be as fixed from time to time by the Board of
Directors in the resolution or resolutions adopted by the Requisite Vote of the
Board of Directors pursuant to the authority granted in this subsection (a), and
the consent, by class or series vote or otherwise, of the holders of Preferred
Stock or such of the series of the Preferred Stock as are from time to time
outstanding shall not be required for the issuance by the Corporation of any
other series of Preferred Stock, whether the powers, preferences and rights of
such other series shall be fixed by the Board of Directors as senior to, or on a
parity with, the powers, preferences and rights of such outstanding series, or
any of them; provided, however, that the Board of Directors may provide in such
resolution or resolutions
2
<PAGE>
adopted by the Requisite Vote with respect to any series of Preferred Stock that
the consent of the holders of a majority (or such greater proportion as shall be
therein fixed) of the outstanding shares of such series voting thereon shall be
required for the issuance of any or all other series of Preferred Stock.
(b) Common Stock.
------------
(i) Dividends. After the requirements with respect to preferential
---------
dividends on Preferred Stock, if any, shall have been met and after the
Corporation shall have complied with all the requirements, if any, with
respect to the setting aside of sums as sinking funds or redemption or
purchase accounts and subject further to any other conditions which may be
fixed in accordance with the provisions of this Certificate of
Incorporation, then, but not otherwise, the holders of Common Stock shall
be entitled to receive such dividends, if any, as may be declared from time
to time by the Board of Directors on the Common Stock, which dividends
shall be paid out of assets legally available for the payment of dividends
and shall be distributed among the holders of shares of the Common Stock
pro rata in accordance with the number of shares of such stock held by each
such holder.
(ii) Liquidation. After distribution in full of the preferential amount,
-----------
if any, to be distributed to the holders of Preferred Stock in the event of
voluntary or involuntary liquidation, distribution or sale of assets,
dissolution or winding-up of the Corporation, the holders of the Common
Stock shall be entitled to receive all the remaining assets of the
Corporation, tangible and intangible, of whatever kind available for
distribution to stockholders in accordance with Delaware General
Corporation Law, which assets shall be distributed pro rata in accordance
with the number of shares of such stock held by each such holder.
(iii) Voting. Except as may otherwise be required by law, this
------
Certificate of Incorporation or the provisions of the resolution or
resolutions as may be adopted by the Board of Directors pursuant to
subsection (a) of this Article FOURTH, each holder of Common Stock shall
have one vote in respect of each share of Common Stock held by such holder
on each matter voted upon by the stockholders. Elections of directors
shall be by non-cumulative voting of the holders of Common Stock, and those
persons receiving the greatest number of votes shall be the directors.
FIFTH: The following provisions are inserted for the management of the
business and for the conduct of the affairs of the Corporation, and for further
definition, limitation and regulation of the powers of the Corporation and of
its directors and stockholders:
(a) Management. The business and affairs of the Corporation shall be
----------
managed by or under the direction of the Board of Directors.
(b) Number of Directors. Subject to the rights of the holders of any
-------------------
series of Preferred Stock to elect additional directors under specified
circumstances, the number of directors of the Corporation shall be as fixed from
time to time by or pursuant to the Bylaws of the Corporation. Each director,
other than a director who may be elected by the holders of any series of
Preferred Stock under specified circumstances, shall hold office until his
successor is
3
<PAGE>
elected and qualified or until his earlier resignation or removal. Election of
directors need not be by written ballot unless the Bylaws of the Corporation so
provide.
(c) Initial Directors. The names and mailing addresses of the persons who
-----------------
are to serve as directors until the first annual meeting of the holders of
capital stock of the Corporation or until their successors are duly elected and
qualified are:
<TABLE>
<CAPTION>
Name: Mailing Address:
- ----- ---------------
<S> <C>
Robert C. Murdock 6209 N. Highway 61
Hutchinson, Kansas 67502
Robert A. Christensen 6209 N. Highway 61
Hutchinson, Kansas 67502
Kenneth A. Hersh 777 Main St. Suite 2700
Fort Worth, Texas 76102
David R. Albin 100 N. Guadalupe Street, Suite 205
Santa Fe, New Mexico 87501
A.J. Schwartz, Jr. c/o Petroglyph Energy, Inc.
6209 N. Highway 61
Hutchinson, Kansas 67502
</TABLE>
(d) Stockholder Nomination of Directors and Introduction of Business.
----------------------------------------------------------------
Advance notice of stockholder nominations for the election of directors and of
business to be brought by stockholders before any meeting of the stockholders of
the Corporation shall be given in the manner and to the extent provided in the
Bylaws of the Corporation.
(e) Bylaws. In furtherance and not in limitation of the powers conferred
------
by law, the Board of Directors is expressly authorized to adopt, alter, amend
and repeal the Bylaws of the Corporation by the affirmative vote of at least
eighty percent (80%) of the entire Board of Directors. The stockholders of the
Corporation shall have the power to adopt, alter, amend and repeal the Bylaws by
the affirmative vote of a majority of all outstanding shares of Common Stock of
the Corporation.
(f) Powers of Directors. In addition to the powers and authority
-------------------
hereinbefore or by statute expressly conferred upon them, the directors are
hereby empowered to exercise all such powers and do all such acts and things as
may be exercised or done by the Corporation, subject, nevertheless, to the
provisions of the statutes of Delaware, this Certificate of Incorporation and
any Bylaws adopted in the manner provided herein; provided, however, that no
Bylaws thereafter adopted by the stockholders shall invalidate any prior act of
the directors which would have been valid if such Bylaws had not been adopted.
4
<PAGE>
SIXTH: Whenever a compromise or arrangement is proposed between the
Corporation and its creditors or any class of them and/or between the
Corporation and its stockholders or any class of them, any court of equitable
jurisdiction within the State of Delaware may, on the application in a summary
way of the Corporation or of any creditor or stockholder thereof or on the
application of any receiver or receivers appointed for the Corporation under the
provisions of Section 291 of Title 8 of the Delaware Code or on the application
of trustees in dissolution or of any receiver or receivers appointed for the
Corporation under the provisions of Section 279 of Title 8 of the Delaware Code
order a meeting of the creditors or class of creditors, and/or of the
stockholders or class of stockholders of the Corporation, as the case may be, to
be summoned in such manner as the said court directs. If a majority in number
representing three-fourths in value of the creditors or class of creditors,
and/or of the stockholders or class of stockholders of the Corporation, as the
case may be, agree to any compromise or arrangement and to any reorganization of
the Corporation as a consequence of such compromise or arrangement, the said
compromise arrangement and the said reorganization shall, if sanctioned by the
court to which the said application has been made, be binding on all the
creditors or class of creditors and/or on all the stockholders or class of
stockholders, of the Corporation, as the case may be, and also on the
Corporation.
SEVENTH: (a) Elimination of Certain Liability of Directors. To the
---------------------------------------------
fullest extent permitted by the Delaware General Corporation Law as the same
exists or may hereafter be amended, a director of the Corporation shall not be
personally liable to the Corporation or its stockholders for monetary damages
for breach of duty as a director. Without limiting the foregoing in any
respect, a director of the Corporation shall not be personally liable to the
Corporation or its stockholders for monetary damages for breach of duty as a
director, except for liability (i) for any breach of the director's duty of
loyalty to the Corporation or its stockholders, (ii) for acts or omissions not
in good faith or which involve intentional misconduct or a knowing violation of
law, (iii) under Section 174 of the Delaware General Corporation Law, or (iv)
for any transaction from which the director derived an improper personal
benefit. If the Delaware General Corporation Law is amended to authorize
corporate action further eliminating or limiting the personal liability of
directors, then the liability of a director of the Corporation shall be
eliminated or limited to the fullest extent permitted by the Delaware General
Corporation Law, as so amended. Any repeal or modification of this provision
shall not adversely affect any right or protection of a director of the
Corporation existing at the time of such repeal or modification.
(b) Indemnification and Insurance.
-----------------------------
(i) Mandatory Indemnification and Advancement of Expenses. Each person who
-----------------------------------------------------
was or is made a party or is threatened to be made a party to or is
involved in any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative, arbitrative or
investigative (a "Proceeding"), by reason of the fact that he is or was an
officer or a director of the Corporation, or who, while a director or
officer of the Corporation, is or was serving at the request of the
Corporation as a director, officer, partner, venturer, proprietor, trustee,
employee, agent, or similar functionary of another corporation,
partnership, joint venture, sole proprietorship, trust, employee benefit
plan or other enterprise, shall be indemnified and held harmless by the
Corporation to the fullest extent permitted by the Delaware General
Corporation Law against all judgments, penalties (including excise and
similar taxes), fines, settlements, and reasonable expenses (including
attorneys' fees) actually incurred by such person in connection with such
5
<PAGE>
Proceeding. Such right shall be a contract right and shall include the
right to require advancement by the Company of reasonable expenses
(including attorneys' fees) incurred in defending any such Proceeding in
advance of its final disposition; provided, however, that the payment of
such expenses in advance of the final disposition of such Proceeding shall
be made by the Corporation only upon delivery to the Corporation of a
written affirmation by such person of his good faith belief that he has met
the standard of conduct necessary for indemnification under the Delaware
General Corporation Law and a written undertaking, by or on behalf of such
person, to repay all amounts so advanced if it should be ultimately
determined that such person has not satisfied such standard of conduct.
(ii) Nature of Indemnification. The indemnification and advancement of
-------------------------
expenses provided for herein shall not be deemed exclusive of any other
rights permitted by law to which a person seeking indemnification may be
entitled under any Bylaw, agreement, vote of stockholders or otherwise, and
shall continue as to a person who has ceased to be a director or officer of
the Corporation and shall inure to the benefit of the heirs, executors and
administrators of such a person.
(iii) Insurance. The Corporation shall have power to purchase and
---------
maintain insurance or another arrangement on behalf of any person who is or
was a director, officer, employee or agent of the Corporation, or is or was
serving at the request of the Corporation as a director, officer, partner,
venturer, proprietor, trustee, employee, agent, or similar functionary of
another corporation, partnership, joint venture, sole proprietorship,
trust, employee benefit plan or other enterprise against any liability
asserted against him and incurred by him in any such capacity, or arising
out of his status as such, whether or not the Corporation would have the
power to indemnify him against such liability under the provisions of this
Article or the Delaware General Corporation Law.
(iv) Severability. If any subsection of this Article Seventh (b) shall be
------------
deemed to be invalid or ineffective in any proceedings, the remaining
subsections hereof shall not be affected and shall remain in full force and
effect.
EIGHTH: The name of the incorporator of the Corporation is Grant C.
Lightle, and the mailing address of such incorporator is 1700 Pacific Avenue,
Suite 3300, Dallas, Texas 75201.
6
<PAGE>
IN WITNESS WHEREOF, the undersigned, being the incorporator hereinbefore
named, for the purpose of forming a corporation pursuant to the General
Corporation Law of the State of Delaware, does hereby make and file this
Certificate of Incorporation, hereby declaring and certifying that the facts
herein stated are true, and accordingly has hereunto set the incorporator's hand
this 15th day of April, 1997.
/s/ Grant C. Lightle
----------------------
Grant C. Lightle
7
<PAGE>
EXHIBIT 3.2
BYLAWS
OF
PETROGLYPH ENERGY, INC.
EFFECTIVE APRIL 15, 1997
<PAGE>
TABLE OF CONTENTS
ARTICLE I
<TABLE>
<S> <C>
OFFICES ................................................................................. 1
Section 1. Registered Office ..................................................... 1
Section 2. Other Offices ......................................................... 1
ARTICLE II
MEETINGS OF STOCKHOLDERS ................................................................ 1
Section 1. Place of Meeting....................................................... 1
Section 2. Annual Meetings ....................................................... 1
Section 3. Special Meetings ...................................................... 2
Section 4. Notice of Meetings .................................................... 2
Section 5. Quorum ................................................................ 2
Section 6. Adjournments........................................................... 2
Section 7. Order of Business ..................................................... 2
Section 8. List of Stockholders .................................................. 3
Section 9. Voting ................................................................ 3
Section 10. Inspectors of Election................................................. 3
ARTICLE III
BOARD OF DIRECTORS....................................................................... 4
Section 1. General Powers......................................................... 4
Section 2. Number, Qualification and Election .................................... 4
Section 3. Notification of Nominations ........................................... 5
Section 4. Quorum and Manner of Acting ........................................... 5
Section 5. Place of Meeting ...................................................... 5
Section 6. Regular Meetings ...................................................... 5
Section 7. Special Meetings ...................................................... 5
Section 8. Notice of Meetings .................................................... 5
Section 9. Rules and Regulations ................................................. 6
Section 10. Participation in Meeting by Means of Communication Equipment .......... 6
Section 11. Action Without Meeting ................................................ 6
Section 12. Resignations .......................................................... 6
Section 13. Removal of Directors .................................................. 6
Section 14. Vacancies ............................................................. 6
Section 15. Compensation .......................................................... 6
Section 16. Advisory Directors .................................................... 7
ARTICLE IV
EXECUTIVE AND OTHER COMMITTEES .......................................................... 7
Section 1. Executive Committee ................................................... 7
Section 2. Other Committees ...................................................... 8
Section 3. Procedure; Meetings; Quorum ........................................... 8
</TABLE>
-i-
<PAGE>
<TABLE>
ARTICLE V
<S> <C>
OFFICERS ................................................................................ 8
Section 1. Number; Term of Office ............................................... 8
Section 2. Removal .............................................................. 9
Section 3. Resignation .......................................................... 9
Section 4. Vacancies ............................................................ 9
Section 5. The President ........................................................ 9
Section 6. Chairman of the Board ................................................ 9
Section 7. Vice Presidents ...................................................... 9
Section 8. Treasurer ............................................................ 9
Section 9. Secretary ............................................................ 9
Section 10. Assistant Treasurers and Secretaries ................................. 10
ARTICLE VI
INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES AND AGENTS ............................ 10
Section 1. Mandatory Indemnification ............................................ 10
Section 2. Determination of Indemnification ..................................... 11
Section 3. Advance of Expenses .................................................. 11
Section 4. Permissive Indemnification ........................................... 11
Section 5. Nature of Indemnification ............................................ 11
Section 6. Insurance ............................................................ 11
Section 7. Continuation and Successors .......................................... 12
Section 8. Exclusive Jurisdiction ............................................... 12
ARTICLE VII
CAPITAL STOCK ........................................................................... 12
Section 1. Certificates for Shares .............................................. 12
Section 2. Transfer of Shares ................................................... 13
Section 3. Address of Stockholders .............................................. 13
Section 4. Lost, Destroyed and Mutilated Certificates ........................... 13
Section 5. Regulations .......................................................... 13
Section 6. Fixing Date for Determination of Stockholders of Record .............. 13
ARTICLE VIII
SEAL..................................................................................... 14
ARTICLE IX
FISCAL YEAR ............................................................................. 14
</TABLE>
-ii-
<PAGE>
<TABLE>
ARTICLE X
<S> <C>
WAIVER OF NOTICE ............................................................................... 14
ARTICLE XI
AMENDMENTS ..................................................................................... 14
ARTICLE XII
MISCELLANEOUS .................................................................................. 15
Section 1. Execution of Documents ...................................................... 15
Section 2. Deposits .................................................................... 15
Section 3. Checks ..................................................................... 15
Section 4. Proxies in Respect of Stock or Other Securities of Other Corporations ....... 15
</TABLE>
-iii-
<PAGE>
BYLAWS
OF
PETROGLYPH ENERGY, INC.
ARTICLE I
OFFICES
Section 1. Registered Office. The registered office of Petroglyph
Energy, Inc. (hereinafter called the "Corporation") in the State of Delaware
shall be at Corporation Trust Center, 1209 Orange Street, in the City of
Wilmington, County of New Castle, 19801 and the registered agent in charge
thereof shall be The Corporation Trust Company.
Section 2. Other Offices. The Corporation may also have an office or
offices, and keep the books and records of the Corporation, except as may
otherwise be required by law, at such other place or places, either within or
without the State of Delaware, as the Board of Directors may from time to time
determine or the business of the Corporation may require.
ARTICLE II
MEETINGS OF STOCKHOLDERS
Section 1. Place of Meeting. All meetings of the stockholders of the
Corporation shall be held at the office of the Corporation or at such other
places, within or without the State of Delaware, as may from time to time be
fixed by the Board of Directors, the Chairman of the Board or the President.
Section 2. Annual Meetings. Annual meetings of the stockholders of the
Corporation for the election of directors and for the transaction of such other
business as may properly come before such meetings shall be held during each
calendar year on a date and at such hour as may be fixed by the Board of
Directors, the Chairman of the Board or the President. Failure to designate a
time for the annual meeting or to hold the annual meeting at the designated time
shall not work a dissolution of the Corporation.
In order for business to be properly brought before the meeting by a
stockholder, the business must be legally proper and written notice thereof must
have been filed with the Secretary of the Corporation not less than 60 nor more
than 120 days prior to the meeting. Each such notice shall set forth: (a) the
name and address of the stockholder who intends to make the proposal as the same
appears in the Corporation's records; (b) the class and number of shares of
stock of the Corporation that are beneficially owned, directly or indirectly, by
such stockholder; and (c) a clear and concise statement of the proposal and the
stockholder's reasons for supporting it.
The filing of a stockholder notice as required above shall not, in and of
itself, constitute the making of the proposal described therein.
-1-
<PAGE>
If the chairman of the meeting determines that any proposed business has
not been properly brought before the meeting, he shall declare such business out
of order; and such business shall not be conducted at the meeting.
Section 3. Special Meetings. Except as otherwise required by law and
subject to the rights of the holders of any class or series of stock having a
preference over the Common Stock as to dividends or upon liquidation, special
meetings of the stockholders for any purpose or purposes may be called only by
(i) the Chairman of the Board, (ii) the President, (iii) a majority of the
entire Board of Directors, or (iv) a majority of the votes entitled to be cast
by the stockholders entitled to vote at such a meeting, or (v) not more
frequently than once during each calendar year, by ten percent of the votes
entitled to be cast by the stockholders entitled to vote at such a meeting.
Only such business as is specified in the notice of any special meeting of the
stockholders shall come before such meeting.
Section 4. Notice of Meetings. Except as otherwise provided by law,
written notice of each meeting of the stockholders, whether annual or special,
shall be given, either by personal delivery or by mail, not less than 10 nor
more than 60 days before the date of the meeting to each stockholder of record
entitled to notice of the meeting. If mailed, such notice shall be deemed given
when deposited in the United States mail, postage prepaid, directed to the
stockholder at such stockholder's address as it appears on the records of the
Corporation. Each such notice shall state the place, date and hour of the
meeting, and the purpose or purposes for which the meeting is called. Notice of
any meeting of stockholders shall not be required to be given to any stockholder
who shall attend such meeting in person or by proxy without protesting, prior to
or at the commencement of the meeting, the lack of proper notice to such
stockholder, or who shall waive notice thereof as provided in Article X of these
Bylaws. Notice of adjournment of a meeting of stockholders need not be given if
the time and place to which it is adjourned are announced at such meeting,
unless the adjournment is for more than 30 days or, after adjournment, a new
record date is fixed for the adjourned meeting.
Section 5. Quorum. Except as otherwise provided by law or by the
Certificate of Incorporation of the Corporation, the holders of a majority of
the votes entitled to be cast by the stockholders entitled to vote, which if any
vote is to be taken by classes shall mean the holders of a majority of the votes
entitled to be cast by the stockholders of each such class, present in person or
represented by proxy, shall constitute a quorum for the transaction of business
at any meeting of the stockholders.
Section 6. Adjournments. In the absence of a quorum, the holders of a
majority of the votes present in person or represented by proxy, may adjourn the
meeting from time to time. At any such adjourned meeting at which a quorum may
be present, any business may be transacted which might have been transacted at
the meeting as originally called.
Section 7. Order of Business. At each meeting of the stockholders, the
Chairman of the Board, or, in the absence of the Chairman of the Board, the
President, shall act as chairman. The order of business at each such meeting
shall be as determined by the chairman of the meeting. The chairman of the
meeting shall have the right and authority to prescribe such rules, regulations
and procedures and to do all such acts and things as are necessary or desirable
for the proper conduct of the meeting, including, without limitation, the
establishment of procedures for the maintenance of order and safety, limitations
on the time allotted to questions or comments on the affairs of the Corporation,
restrictions on entry to such meeting after the time prescribed for the
commencement thereof, and the opening and closing of the voting polls. The
chairman of the meeting shall announce at each such meeting the date and time of
the opening and the closing of the voting polls for each matter upon which the
stockholders will vote at such meeting.
-2-
<PAGE>
Section 8. List of Stockholders. It shall be the duty of the Secretary
or other officer of the Corporation who has charge of the stock ledger to
prepare and make, at least 10 days before each meeting of the stockholders, a
complete list of the stockholders entitled to vote thereat, arranged in
alphabetical order, and showing the address of each stockholder and the number
of shares registered in such stockholder's name. Such list shall be produced
and kept available at the times and places required by law.
Section 9. Voting. Except as otherwise provided by law or by the
Certificate of Incorporation of the Corporation, each stockholder of record of
any class or series of stock having a preference over the Common Stock of the
Corporation as to dividends or upon liquidation shall be entitled at each
meeting of stockholders to such number of votes for each share of such stock as
may be fixed in the Certificate of Incorporation or in the resolution or
resolutions adopted by the Board of Directors providing for the issuance of such
stock, and each stockholder of record of Common Stock shall be entitled at each
meeting of stockholders to one vote for each share of such stock, in each case,
registered in such stockholder's name on the books of the Corporation:
(a) on the date fixed pursuant to Section 6 of Article VII of
these Bylaws as the record date for the determination of stockholders
entitled to notice of and to vote at such meeting; or
(b) if no such record date shall have been so fixed, then at the
close of business on the day next preceding the date on which notice of
such meeting is given, or, if notice is waived, at the close of business
on the day next preceding the day on which the meeting is held.
Each stockholder entitled to vote at any meeting of stockholders may
authorize not in excess of three persons to act for such stockholder by a proxy
signed by such stockholder or such stockholder's attorney-in-fact. Any such
proxy shall be delivered to the secretary of such meeting at or prior to the
time designated for holding such meeting but, in any event, not later than the
time designated in the order of business for so delivering such proxies. No
such proxy shall be voted or acted upon after three years from its date, unless
the proxy provides for a longer period.
At each meeting of the stockholders, all corporate actions, other than the
election of directors, to be taken by vote of the stockholders (except as
otherwise required by law and except as otherwise provided in the Certificate of
Incorporation) shall be authorized by a majority of the votes cast by the
stockholders entitled to vote thereon, present in person or represented by
proxy. Where a separate vote by a class or classes is required, the affirmative
vote of the majority of shares of such class or classes present in person or
represented by proxy at the meeting shall be the act of such class.
Unless required by law or determined by the chairman of the meeting to be
advisable, the vote on any matter, including the election of directors, need not
be by written ballot. In the case of a vote by written ballot, each ballot
shall be signed by the stockholder voting, or by such stockholder's proxy, and
shall state the number of shares voted.
Section 10. Inspectors of Election. Either the Board of Directors or,
in the absence of an appointment of inspectors by the Board, the Chairman of the
Board or the President shall, in advance of each meeting of the stockholders,
appoint one or more inspectors to act at such meeting and make a written report
thereof. In connection with any such appointment, one or more persons may, in
the discretion of the body or person making such appointment, be designated as
alternate inspectors to replace any inspector who fails to act. If no inspector
or alternate is able to act at any meeting of stockholders, the chairman of such
meeting shall appoint one or more inspectors to act at such meeting. Each such
inspector shall perform such duties as are required by law and as shall be
specified by the Board, the Chairman of the Board, the President or
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the chairman of the meeting. Each such inspector, before entering upon the
discharge of his duties, shall take and sign an oath faithfully to execute the
duties of inspector with strict impartiality and according to the best of his
ability. Inspectors need not be stockholders. No director or nominee for the
office of director shall be appointed such an inspector.
ARTICLE III
BOARD OF DIRECTORS
Section 1. General Powers. The business and affairs of the Corporation
shall be managed by or under the direction of the Board of Directors, which may
exercise all such powers of the Corporation and do all such lawful acts and
things as are not by law or by the Certificate of Incorporation of the
Corporation directed or required to be exercised or done by the stockholders.
Section 2. Number, Qualification and Election. Except as otherwise
provided in any resolution or resolutions adopted by the Board of Directors
pursuant to the provisions of Article FOURTH of the Certificate of Incorporation
of the Corporation relating to the rights of the holders of any class or series
of stock having a preference over the Common Stock as to dividends or upon
liquidation, the number of directors of the Corporation shall be fixed from time
to time by resolution adopted by vote of a majority of the entire Board of
Directors, provided that the number so fixed shall not be less than four nor
more than nine.
At each annual meeting of stockholders, the stockholders shall elect
directors to hold office until the next succeeding annual meeting. At each
election, the persons receiving the greatest number of votes shall be the
directors. The directors, other than those who may be elected by the holders of
shares of any class or series of stock having a preference over the Common Stock
as to dividends or upon liquidation pursuant to the terms of any resolution or
resolutions providing for the issuance of such stock adopted by the Board, shall
hold office until his successor is elected and qualified or until his earlier
resignation or removal.
Each director elected shall hold office for the term for which he is
elected and until his successor shall have been elected and qualified or until
his earlier death, resignation, retirement, disqualification or removal.
Each director shall be at least 21 years of age. Directors need not be
stockholders of the Corporation.
Subject to the rights of the holders of any class or series of stock
having a preference over the Common Stock as to dividends or upon liquidation,
at each annual meeting of the stockholders, all directors of the Corporation
shall be elected.
Section 3. Notification of Nominations. Subject to the rights of the
holders of any class or series of stock having a preference over the Common
Stock as to dividends or upon liquidation, nominations for the election of
directors may be made by the Board of Directors or by any stockholder entitled
to vote for the election of directors. Any stockholder entitled to vote for the
election of directors at a meeting may nominate persons for election as
directors only if written notice of such stockholder's intent to make such
nomination is given, either by personal delivery or by United States mail,
postage prepaid, to the Secretary of the Corporation not later than (i) with
respect to an election to be held at an annual meeting of stockholders, 90 days
in advance of such meeting, and (ii) with respect to an election to be held at a
special meeting of stockholders for the election of directors, the close of
business on the seventh day following the
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date on which notice of such meeting is first given to stockholders. Each such
notice shall set forth: (a) the name and address of the stockholder who intends
to make the nomination of the person or persons to be nominated; (b) a
representation that the stockholder is a holder of record of stock of the
Corporation entitled to vote at such meeting and intends to appear in person or
by proxy at the meeting to nominate the person or persons specified in the
notice; (c) a description of all arrangements or understandings between the
stockholder and each nominee and any other person or persons (naming such person
or persons) pursuant to which the nomination or nominations are to be made by
the stockholder; (d) such other information regarding each nominee proposed by
such stockholder as would have been required to be included in a proxy statement
filed pursuant to the proxy rules of the Securities and Exchange Commission had
each nominee been nominated, or intended to be nominated, by the Board of
Directors; and (e) the consent of each nominee to serve as a director of the
Corporation if so elected. The chairman of the meeting may refuse to acknowledge
the nomination of any person not made in compliance with the foregoing
procedure.
Section 4. Quorum and Manner of Acting. Except as otherwise provided
by law, the Certificate of Incorporation of the Corporation or these Bylaws, a
majority of the entire Board of Directors shall constitute a quorum for the
transaction of business at any meeting of the Board, and, except as so provided,
the vote of a majority of the directors present at any meeting at which a quorum
is present shall be the act of the Board. In the absence of a quorum, a
majority of the directors present may adjourn the meeting to another time and
place. At any adjourned meeting at which a quorum is present, any business that
might have been transacted at the meeting as originally called may be
transacted.
Section 5. Place of Meeting. The Board of Directors may hold its
meetings at such place or places within or without the State of Delaware as the
Board may from time to time determine or as shall be specified or fixed in the
respective notices or waivers of notice thereof.
Section 6. Regular Meetings. Regular meetings of the Board of
Directors shall be held at such times and places as the Board shall from time to
time by resolution determine. If any day fixed for a regular meeting shall be a
legal holiday under the laws of the place where the meeting is to be held, the
meeting that would otherwise be held on that day shall be held at the same hour
on the next succeeding business day.
Section 7. Special Meetings. Special meetings of the Board of
Directors shall be held whenever called by the Chairman of the Board or the
President or by a majority of the directors.
Section 8. Notice of Meetings. Notice of regular meetings of the Board
of Directors or of any adjourned meeting thereof need not be given. Notice of
each special meeting of the Board shall be mailed or transmitted by delivery
service to each director, addressed to such director at such director's
residence or usual place of business, at least two days before the day on which
the meeting is to be held or shall be sent to such director at such place by
telegraph or facsimile telecommunication or be given personally or by telephone,
not later than the day before the meeting is to be held, but notice need not be
given to any director who shall, either before or after the meeting, submit a
signed waiver of such notice or who shall attend such meeting without
protesting, prior to or at its commencement, the lack of notice to such
director. Every such notice shall state the time and place but need not state
the purpose of the meeting.
Section 9. Rules and Regulations. The Board of Directors may adopt
such rules and regulations not inconsistent with the provisions of law, the
Certificate of Incorporation of the Corporation or these Bylaws for the conduct
of its meetings and management of the affairs of the Corporation as the Board
may deem proper.
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Section 10. Participation in Meeting by Means of Communication
Equipment. Any one or more members of the Board of Directors or any committee
thereof may participate in any meeting of the Board or of any such committee by
means of conference telephone or similar communications equipment by means of
which all persons participating in the meeting can hear each other, and such
participation in a meeting shall constitute presence in person at such meeting.
Section 11. Action Without Meeting. Any action required or permitted to
be taken at any meeting of the Board of Directors or any committee thereof may
be taken without a meeting if all of the members of the Board or of any such
committee consent thereto in writing and the writing or writings are filed with
the minutes of proceedings of the Board or of such committee.
Section 12. Resignations. Any director of the Corporation may at any
time resign by giving written notice to the Board of Directors, the Chairman of
the Board, the President or the Secretary of the Corporation. Such resignation
shall take effect at the time specified therein or, if the time be not
specified, upon receipt thereof; and unless otherwise specified therein, the
acceptance of such resignation shall not be necessary to make it effective.
Section 13. Removal of Directors. Any director or the entire board of
directors may be removed, with or without cause, by the holders of a majority of
the shares then entitled to vote at an election of directors, except that if
less than the entire board is to be removed, no director may be removed without
cause if the votes cast against that director's removal would be sufficient to
elect such director if then cumulatively voted at an election of the entire
board.
Section 14. Vacancies. Subject to the rights of the holders of any
class or series of stock having a preference over the Common Stock as to
dividends or upon liquidation, any vacancies on the Board of Directors and any
newly created directorship resulting from an increase in the authorized number
of directors, may be filled by election at an annual or special meeting of
stockholders called for that purpose or by the affirmative vote of a majority of
the remaining directors, though less than a quorum of the entire Board, and the
directors so chosen shall hold office until the next annual meeting of
stockholders and until their successors are duly elected and shall qualify,
unless sooner displaced.
Section 15. Compensation. Each director who shall not at the time also
be a salaried officer or employee of the Corporation or any of its subsidiaries
(hereinafter referred to as an "outside director"), in consideration of such
person serving as a director, shall be entitled to receive from the Corporation
$5,000 per annum and any fees for attendance at meetings of the Board of
Directors or of committees of the Board, or both, as the Board may from time to
time determine. In addition, each director, whether or not an outside director,
shall be entitled to receive from the Corporation reimbursement for the
reasonable expenses incurred by such person in connection with the performance
of such person's duties as a director. Nothing contained in this Section 15
shall preclude any director from serving the Corporation or any of its
subsidiaries in any other capacity and receiving proper compensation therefor.
Section 16. Advisory Directors. The Board of Directors may appoint one
or more advisory directors as it shall from time to time determine. Each
advisory director appointed shall hold office at the pleasure of the Board of
Directors. An advisory director shall be entitled, but shall have no
obligation, to attend and be present at the meetings of the Board of Directors,
although a meeting of the Board of Directors may be held without notice to any
advisory director and no advisory director shall be considered in determining
whether a quorum of the Board of Directors is present. An advisory director
shall advise and counsel the Board of Directors on the business and operations
of the Corporation as requested by the Board of Directors; however, an advisory
director shall not be entitled to vote on any matter presented to the Board
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of Directors. An advisory director, in consideration of such person serving as
an advisory director, shall be entitled to receive from the Corporation such
fees for attendance at meetings of the Board of Directors as the Board shall
from time to time determine. In addition, an advisory director shall be entitled
to receive from the Corporation reimbursement for the reasonable expenses
incurred by such person in connection with the performance of such person's
duties as an advisory director.
ARTICLE IV
EXECUTIVE AND OTHER COMMITTEES
Section 1. Executive Committee. The Board of Directors may, by
resolution adopted by (i) a majority of the entire Board of Directors if members
of Natural Gas Partners constitute a majority of the Board, or (ii) an 80% vote
of the entire Board if members of Natural Gas Partners constitute less than a
majority of the Board, designate annually three or more of its members to
constitute members or alternate members of an Executive Committee, which
Committee shall have and may exercise, between meetings of the Board, all the
powers and authority of the Board in the management of the business affairs of
the Corporation, including, if such Committee is so empowered and authorized by
resolution adopted by a majority of the entire Board, the power and authority to
declare a dividend and to authorize the issuance of stock, and may authorize the
seal of the Corporation to be affixed to all papers that may require it, except
that the Executive Committee shall not have such power or authority in reference
to:
(a) amending the Certificate of Incorporation of the
Corporation;
(b) adopting an agreement of merger or consolidation involving
the Corporation;
(c) recommending to the stockholders the sale, lease or exchange
of all or substantially all of the property and assets of the Corporation;
(d) recommending to the stockholders a dissolution of the
Corporation or a revocation of a dissolution;
(e) adopting, amending or repealing any Bylaw;
(f) filling vacancies on the Board or on any committee of the
Board of Directors, including the Executive Committee; or
(g) amending or repealing any resolution of the Board which by
its terms may be amended or repealed only by the Board.
The Board shall have power at any time to change the membership of the Executive
Committee, to fill all vacancies in it and to discharge it, either with or
without cause, by resolution adopted by (i) a majority of the entire Board of
Directors if members of Natural Gas Partners constitute a majority of the Board,
or (ii) an 80% vote of the entire Board if members of Natural Gas Partners
constitute less than a majority of the Board.
Section 2. Other Committees. The Board of Directors may, by resolution
adopted by a majority of the entire Board, designate from among its members one
or more other committees, each of which shall, except as otherwise prescribed by
law, have such authority of the Board as may be specified in the resolution of
the Board designating such committee. A majority of all the members of such
committee may determine
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its action and fix the time and place of its meetings, unless the Board shall
otherwise provide. The Board shall have power at any time to change the
membership of, to fill all vacancies in and to discharge any such committee,
either with or without cause.
Section 3. Procedure; Meetings; Quorum. Regular meetings of the
Executive Committee or any other committee of the Board of Directors, of which
no notice shall be necessary, may be held at such times and places as shall be
fixed by resolution adopted by a majority of the members thereof. Special
meetings of the Executive Committee or any other committee of the Board shall be
called at the request of any member thereof. Notice of each special meeting of
the Executive Committee or any other committee of the Board shall be sent by
mail, delivery service, facsimile telecommunication, telegraph or telephone, or
be delivered personally to each member thereof not later than the day before the
day on which the meeting is to be held, but notice need not be given to any
member who shall, either before or after the meeting, submit a signed waiver of
such notice or who shall attend such meeting without protesting, prior to or at
its commencement, the lack of such notice to such member. Any special meeting
of the Executive Committee or any other committee of the Board shall be a legal
meeting without any notice thereof having been given, if all the members thereof
shall be present thereat. Notice of any adjourned meeting of any committee of
the Board need not be given. The Executive Committee or any other committee of
the Board may adopt such rules and regulations not inconsistent with the
provisions of law, the Certificate of Incorporation of the Corporation or these
Bylaws for the conduct of its meetings as the Executive Committee or any other
committee of the Board may deem proper. A majority of the Executive Committee
or any other committee of the Board shall constitute a quorum for the
transaction of business at any meeting, and the vote of a majority of the
members thereof present at any meeting at which a quorum is present shall be the
act of such committee. The Executive Committee or any other committee of the
Board of Directors shall keep written minutes of its proceedings and shall
report on such proceedings to the Board.
ARTICLE V
OFFICERS
Section 1. Number; Term of Office. The officers of the Corporation
shall be a Chairman of the Board, a President, one or more Vice Presidents, a
Treasurer, a Secretary and such other officers or agents with such titles and
such duties as the Board of Directors may from time to time determine, each to
have such authority, functions or duties as in these Bylaws provided or as the
Board may from time to time determine, and each to hold office for such term as
may be prescribed by the Board and until such person's successor shall have been
chosen and shall qualify, or until such person's death or resignation, or until
such person's removal in the manner hereinafter provided. The Chairman of the
Board and the President shall be elected from among the directors. One person
may hold the offices and perform the duties of any two or more of said officers;
provided, however, that no officer shall execute, acknowledge or verify any
instrument in more than one capacity if such instrument is required by law, the
Certificate of Incorporation of the Corporation or these Bylaws to be executed,
acknowledged or verified by two or more officers. The Board may from time to
time authorize any officer to appoint and remove any such other officers and
agents and to prescribe their powers and duties. The Board may require any
officer or agent to give security for the faithful performance of such person's
duties.
Section 2. Removal. Any officer may be removed, either with or without
cause, by the Board of Directors at any meeting thereof called for that purpose,
or, except in the case of any officer elected by the Board, by any committee or
superior officer upon whom such power may be conferred by the Board.
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Section 3. Resignation. Any officer may resign at any time by giving
notice to the Board of Directors, the President or the Secretary of the
Corporation. Any such resignation shall take effect at the date of receipt of
such notice or at any later date specified therein; and, unless otherwise
specified therein, the acceptance of such resignation shall not be necessary to
make it effective.
Section 4. Vacancies. A vacancy in any office because of death,
resignation, removal or any other cause may be filled for the unexpired portion
of the term in the manner prescribed in these Bylaws for election to such
office.
Section 5. The President. The President shall be the chief executive
officer of the Corporation and as such shall have general supervision and
direction of the business and affairs of the Corporation, subject to the control
of the Board of Directors. The President shall, if present and in the absence
of the Chairman of the Board, preside at meetings of the stockholders, meetings
of the Board and meetings of the Executive Committee. The President shall
perform such other duties as the Board may from time to time determine. The
President may sign and execute in the name of the Corporation deeds, mortgages,
bonds, contracts or other instruments authorized by the Board or any committee
thereof empowered to authorize the same.
Section 6. Chairman of the Board. The Chairman of the Board shall, if
present, preside at meetings of the stockholders, meetings of the Board and
meetings of the Executive Committee. The Chairman of the Board shall counsel
with and advise the President and perform such other duties as the President or
the Board or the Executive Committee may from time to time determine.
Section 7. Vice Presidents. Each Vice President shall have such powers
and duties as shall be prescribed by the President, the Chairman of the Board or
the Board of Directors. Any Vice President may sign and execute in the name of
the Corporation deeds, mortgages, bonds, contracts or other instruments
authorized by the Board or any committee thereof empowered to authorize the
same.
Section 8. Treasurer. The Treasurer shall be the chief financial
officer of the Corporation and shall perform all duties incident to the office
of Treasurer and such other duties as from time to time may be assigned to the
Treasurer by the President, the Chairman of the Board or the Board of Directors.
Section 9. Secretary. It shall be the duty of the Secretary to act as
secretary at all meetings of the Board of Directors, of the Executive Committee
and of the stockholders and to record the proceedings of such meetings in a book
or books to be kept for that purpose; the Secretary shall see that all notices
required to be given by the Corporation are duly given and served; the Secretary
shall be custodian of the seal of the Corporation and shall affix the seal or
cause it to be affixed to all certificates of stock of the Corporation (unless
the seal of the Corporation on such certificates shall be a facsimile, as
hereinafter provided) and to all documents, the execution of which on behalf of
the Corporation under its seal is duly authorized in accordance with the
provisions of these Bylaws. The Secretary shall have charge of the stock ledger
and also of the other books, records and papers of the Corporation and shall see
that the reports, statements and other documents required by law are properly
kept and filed; and the Secretary shall in general perform all the duties
incident to the office of Secretary and such other duties as from time to time
may be assigned to such person by the President, the Chairman of the Board or
the Board of Directors.
Section 10. Assistant Treasurers and Secretaries. The Assistant
Treasurers and the Assistant Secretaries shall perform such duties as shall be
assigned to them by the Treasurer, Secretary or Controller, respectively, or by
the President, the Chairman of the Board or the Board of Directors.
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ARTICLE VI
INDEMNIFICATION
Section 1. Mandatory Indemnification. Each person who was or is made a
party or is threatened to be made a party to or is involved in any threatened,
pending or completed action, claim, suit or proceeding, whether civil, criminal,
administrative, arbitrative or investigative (a "Proceeding"), by reason of the
fact that such individual is or was a director or officer of the Corporation, or
while a director or officer of the Corporation is or was serving at the request
of the Corporation as a director, officer, partner, venturer, proprietor,
trustee, employee, agent or similar functionary of another corporation,
partnership, trust, employee benefit plan or other enterprise, shall be
indemnified and held harmless by the Corporation from and against any judgments,
penalties (including excise taxes), fines, amounts paid in settlement and
reasonable expenses (including court costs and attorneys' fees) actually
incurred by such person in connection with such Proceeding if it is determined
that such person acted in good faith and reasonably believed (i) in the case of
conduct in his official capacity on behalf of the Corporation that his conduct
was in the Corporation's best interests, (ii) in all other cases, that his
conduct was not opposed to the best interests of the Corporation, and (iii) with
respect to any Proceeding which is a criminal action, that he had no reasonable
cause to believe his conduct was unlawful; provided, however, that in the event
a determination is made that such person is liable to the Corporation, no
indemnification shall be made in respect of any claim, issue or matter as to
which such person shall have been adjudged to be liable to the Corporation
except and only to the extent that the Court of Chancery of Delaware or the
court in which such action or suit was brought shall determine upon application
that, despite the adjudication of liability but in view of all the circumstances
of the case, such person is fairly and reasonably entitled to indemnity for such
expenses which the Court of Chancery of Delaware or such other court shall deem
proper. The termination of any Proceeding by judgment, order, settlement,
conviction, or upon a plea of nolo contendere or its equivalent, shall not, of
itself be determinative of whether the person did not act in good faith and in a
manner which he reasonably believed to be in or not opposed to the best
interests of the Corporation, and, with respect to any Proceeding which is a
criminal action, had reasonable cause to believe that his conduct was unlawful.
A person shall be deemed to have been found liable in respect of any claim,
issue or matter only after the person shall have been so adjudged by a court of
competent jurisdiction after exhaustion of all appeals therefrom.
Section 2. Determination of Indemnification. Any indemnification under
the foregoing Section 1 of this Article (unless ordered by a court of competent
jurisdiction) shall be made by the Corporation only upon a determination that
indemnification of such person is proper in the circumstances by virtue of the
fact that it shall have been determined that such person has met the applicable
standards of conduct. Such determination shall be made (1) by a majority vote
of a quorum consisting of directors who at the time of the vote are not named
defendants or respondents in the Proceeding; (2) if such quorum cannot be
obtained, by a majority vote of a committee of the Board of Directors,
designated to act in the matter by a majority of all directors, consisting of
two or more directors who at the time of the vote are not named defendants or
respondents in the Proceeding; (3) by special legal counsel (in a written
opinion) selected by the Board of Directors or a committee of the Board by a
vote as set forth in Subsection (1) or (2) of this Section, or, if such quorum
cannot be established, by a majority vote of all directors (in which Directors
who are named defendants or respondents in the Proceeding may participate); or
(4) by the stockholders of the Corporation in a vote that excludes the shares
held by directors who are named defendants or respondents in the Proceeding.
Section 3. Advance of Expenses. Reasonable expenses, including court
costs and attorneys' fees, incurred by a person who was or is a witness or who
was or is named as a defendant or respondent or was or is otherwise involved in
a Proceeding, by reason of the fact that such individual is or was a director
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or officer of the Corporation, or while a director or officer of the Corporation
is or was serving at the request of the Corporation as a director, officer,
partner, venturer, proprietor, trustee, employee, agent or similar functionary
of another corporation, partnership, trust, employee benefit plan or other
enterprise, shall be paid by the Corporation at reasonable intervals in advance
of the final disposition of such Proceeding, and without the determination set
forth in Section 2 of this Article upon receipt by the Corporation of a written
affirmation by such person of his good faith belief that he has met the standard
of conduct necessary for indemnification under this Article VI, and a written
undertaking by or on behalf of such person to repay the amount paid or
reimbursed by the Corporation if it is ultimately determined that he is not
entitled to be indemnified by the Corporation as authorized in this Article
Seventh. Such written undertaking shall be an unlimited obligation of such
person and it may be accepted without reference to financial ability to make
repayment.
Section 4. Permissive Indemnification. The Board of Directors of the
Corporation may authorize the Corporation to indemnify employees or agents of
the Corporation, and to advance the reasonable expenses of such persons, to the
same extent, following the same determinations and upon the same conditions as
are required for the indemnification of and advancement of expenses to directors
and officers of the Corporation.
Section 5. Nature of Indemnification. The indemnification and
advancement of expenses provided hereunder shall not be deemed exclusive of any
other rights to which those seeking indemnification may be entitled under the
Certificate of Incorporation, these Bylaws, any agreement, vote of stockholders
or disinterested directors or otherwise, both as to actions taken in an official
capacity and as to actions taken in any other capacity while holding such
office, shall continue as to a person who has ceased to be a director, officer,
employee or agent of the Corporation and shall inure to the benefit of the
heirs, executors and administrators of such person.
Section 6. Insurance. The Corporation shall have the power and
authority to purchase and maintain insurance or another arrangement on behalf of
any person who is or was a director, officer, employee or agent of the
Corporation, or who is or was serving at the request of the Corporation as a
director, officer, partner, venturer, proprietor, trustee, employee, agent, or
similar functionary of another foreign or domestic corporation, partnership,
joint venture, sole proprietorship, trust, employee benefit plan or other
enterprise, against any liability, claim, damage, loss or risk asserted against
such person and incurred by such person in any such capacity or arising out of
the status of such person as such, irrespective of whether the Corporation would
have the power to indemnify and hold such person harmless against such liability
under the provisions hereof. If the insurance or other arrangement is with a
person or entity that is not regularly engaged in the business of providing
insurance coverage, the insurance or arrangement may provide for payment of a
liability with respect to which the Corporation would not have the power to
indemnify the person only if including coverage for the additional liability has
been approved by the stockholders of the Corporation. Without limiting the power
of the Corporation to procure or maintain any kind of insurance or other
arrangement, the Corporation may, for the benefit of persons indemnified by the
Corporation, (1) create a trust fund; (2) establish any form of self-insurance;
(3) secure its indemnity obligation by grant of a security interest or other
lien on the assets of the Corporation; or (4) establish a letter of credit,
guaranty, or surety arrangement. The insurance or other arrangement may be
procured, maintained, or established within the Corporation or with any insurer
or other person deemed appropriate by the Board of Directors regardless of
whether all or part of the stock or other securities of the insurer or other
person are owned in whole or part by the Corporation. In the absence of fraud,
the judgment of the Board of Directors as to the terms and conditions of the
insurance or other arrangement and the identity of the insurer or other person
participating in the arrangement shall be conclusive and the insurance or
arrangement shall not be voidable and shall not subject the Directors approving
the insurance or arrangement to liability, on any ground,
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regardless of whether the Directors participating in the approval is a
beneficiary of the insurance or arrangement.
Section 7. Continuation and Successors. The indemnification and
advancement of expenses provided by, or granted pursuant to, this Article VI
shall, unless otherwise provided when authorized or ratified, continue as to a
person who has ceased to be a director, officer, employee or agent and shall
inure to the benefit of the heirs, executors and administrators of such a
person.
Section 8. Exclusive Jurisdiction. The Delaware Court of Chancery is
vested with exclusive jurisdiction to hear and determine all actions for
advancement of expenses or indemnification brought under this Article VI or
under any statute, agreement, vote of stockholders or disinterested directors,
or otherwise. The Delaware Court of Chancery may summarily determine the
Corporation's obligation to advance expenses (including attorneys' fees).
ARTICLE VII
CAPITAL STOCK
Section 1. Certificates for Shares. Certificates representing shares
of stock of each class of the Corporation, whenever authorized by the Board of
Directors, shall be in such form as shall be approved by the Board. The
certificates representing shares of stock of each class shall be signed by, or
in the name of, the Corporation by the Chairman of the Board or the President or
a Vice President and by the Secretary or an Assistant Secretary or the Treasurer
or an Assistant Treasurer of the Corporation, and sealed with the seal of the
Corporation, which may be by a facsimile thereof. Any or all such signatures
may be facsimiles if countersigned by a transfer agent or registrar. Although
any officer, transfer agent or registrar whose manual or facsimile signature is
affixed to such a certificate ceases to be such officer, transfer agent or
registrar before such certificate has been issued, it may nevertheless be issued
by the Corporation with the same effect as if such officer, transfer agent or
registrar were still such at the date of its issue.
The stock ledger and blank share certificates shall be kept by the
Secretary or by a transfer agent or by a registrar or by any other officer or
agent designated by the Board.
Section 2. Transfer of Shares. Transfer of shares of stock of each
class of the Corporation shall be made only on the books of the Corporation by
the holder thereof, or by such holder's attorney thereunto authorized by a power
of attorney duly executed and filed with the Secretary of the Corporation or a
transfer agent for such stock, if any, and on surrender of the certificate or
certificates for such shares properly endorsed or accompanied by a duly executed
stock transfer power and the payment of all taxes thereon. The person in whose
name shares stand on the books of the Corporation shall be deemed the owner
thereof for all purposes as regards the Corporation; provided, however, that
whenever any transfer of shares shall be made for collateral security and not
absolutely, and written notice thereof shall be given to the Secretary or to
such transfer agent, such fact shall be stated in the entry of the transfer. No
transfer of shares shall be valid as against the Corporation, its stockholders
and creditors for any purpose, except to render the transferee liable for the
debts of the Corporation to the extent provided by law, until it shall have been
entered in the stock records of the Corporation by an entry showing from and to
whom transferred.
Section 3. Address of Stockholders. Each stockholder shall designate
to the Secretary or transfer agent of the Corporation an address at which
notices of meetings and all other corporate notices may be served or mailed to
such person, and, if any stockholder shall fail to designate such address,
corporate
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<PAGE>
notices may be served upon such person by mail directed to such person at such
person's post office address, if any, as the same appears on the share record
books of the Corporation or at such person's last known post office address.
Section 4. Lost, Destroyed and Mutilated Certificates. The holder of
any share of stock of the Corporation shall immediately notify the Corporation
of any loss, theft, destruction or mutilation of the certificate therefor; the
Corporation may issue to such holder a new certificate or certificates for
shares, upon the surrender of the mutilated certificate or, in the case of loss,
theft or destruction of the certificate, upon satisfactory proof of such loss,
theft or destruction; the Board of Directors, or a committee designated thereby,
or the transfer agents and registrars for the stock, may, in their discretion,
require the owner of the lost, stolen or destroyed certificate, or such person's
legal representative, to give the Corporation a bond in such sum and with such
surety or sureties as they may direct to indemnify the Corporation and said
transfer agents and registrars against any claim that may be made on account of
the alleged loss, theft or destruction of any such certificate or the issuance
of such new certificate.
Section 5. Regulations. The Board of Directors may make such
additional rules and regulations as it may deem expedient concerning the issue
and transfer of certificates representing shares of stock of each class of the
Corporation and may make such rules and take such action as it may deem
expedient concerning the issue of certificates in lieu of certificates claimed
to have been lost, destroyed, stolen or mutilated.
Section 6. Fixing Date for Determination of Stockholders of Record. In
order that the Corporation may determine the stockholders entitled to notice of
or to vote at any meeting of stockholders or any adjournment thereof, or
entitled to receive payment of any dividend or other distribution or allotment
of any rights, or entitled to exercise any rights in respect of any change,
conversion or exchange of stock or for the purpose of any other lawful action,
the Board of Directors may fix a record date, which record date shall not
precede the date upon which the resolution fixing the record date is adopted by
the Board of Directors, and which record date shall not be more than 60 nor less
than 10 days before the date of such meeting, nor more than 60 days prior to any
other action. A determination of stockholders entitled to notice of or to vote
at a meeting of the stockholders shall apply to any adjournment of the meeting;
provided, however, that the Board of Directors may fix a new record date for the
adjourned meeting.
ARTICLE VIII
SEAL
The Board of Directors shall provide a corporate seal, which shall be in
the form of a circle and shall bear the full name of the Corporation and the
words and figures "Corporate Seal 1997 Delaware", or such other words or figures
as the Board of Directors may approve and adopt. The seal may be used by
causing it or a facsimile thereof to be impressed or affixed or in any other
manner reproduced.
ARTICLE IX
FISCAL YEAR
The fiscal year of the Corporation shall be fixed by resolution of the
Board of Directors.
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<PAGE>
ARTICLE X
WAIVER OF NOTICE
Whenever any notice whatsoever is required to be given by these Bylaws, by
the Certificate of Incorporation of the Corporation or by law, the person
entitled thereto may, either before or after the meeting or other matter in
respect of which such notice is to be given, waive such notice in writing, which
writing shall be filed with or entered upon the records of the meeting or the
records kept with respect to such other matter, as the case may be, and in such
event such notice need not be given to such person and such waiver shall be
deemed equivalent to such notice.
ARTICLE XI
AMENDMENTS
Any Bylaw (including this Article XI) may be adopted, repealed, altered or
amended at any meeting of the Board of Directors by the affirmative vote of at
least eighty percent of the entire Board of Directors, provided that such
proposed action in respect thereof shall be stated in the notice of such
meeting. The stockholders of the Corporation shall have the power to adopt,
repeal, alter or amend any provision of these Bylaws only to the extent and in
the manner provided in the Certificate of Incorporation of the Corporation.
ARTICLE XII
MISCELLANEOUS
Section 1. Execution of Documents. The Board of Directors or any
committee thereof shall designate the officers, employees and agents of the
Corporation who shall have power to execute and deliver deeds, contracts,
mortgages, bonds, debentures, notes, checks, drafts and other orders for the
payment of money and other documents for and in the name of the Corporation and
may authorize such officers, employees and agents to delegate such power
(including authority to redelegate) by written instrument to other officers,
employees or agents of the Corporation. Such delegation may be by resolution or
otherwise and the authority granted shall be general or confined to specific
matters, all as the Board or any such committee may determine. In the absence
of such designation referred to in the first sentence of this Section 1, the
officers of the Corporation shall have such power so referred to, to the extent
incident to the normal performance of their duties.
Section 2. Deposits. All funds of the Corporation not otherwise
employed shall be deposited from time to time to the credit of the Corporation
or otherwise as the Board of Directors or any committee thereof or any officer
of the Corporation to whom power in that respect shall have been delegated by
the Board or any such committee shall select.
Section 3. Checks. All checks, drafts and other orders for the payment
of money out of the funds of the Corporation, and all notes or other evidence of
indebtedness of the Corporation, shall be signed
-14-
<PAGE>
on behalf of the Corporation in such manner as shall from time to time be
determined by resolution of the Board of Directors or of any committee thereof.
Section 4. Proxies in Respect of Stock or Other Securities of Other
Corporations. The Board of Directors or any committee thereof shall designate
the officers of the Corporation who shall have authority from time to time to
appoint an agent or agents of the Corporation to exercise in the name and on
behalf of the Corporation the powers and rights that the Corporation may have as
the holder of stock or other securities in any other corporation, and to vote or
consent in respect of such stock or securities; such designated officers may
instruct the person or persons so appointed as to the manner of exercising such
powers and rights; and such designated officers may execute or cause to be
executed in the name and on behalf of the Corporation and under its corporate
seal, or otherwise, such written proxies, powers of attorney or other
instruments as they may deem necessary or proper in order that the Corporation
may exercise its said powers and rights.
-15-
<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 are members of the Bar of the State of Texas only and do not purport
to be experts on the laws of any state or jurisdiction other than the State of
Texas and the United States. Insofar as the opinions expressed herein relate to
matters governed by Delaware law, we have relied solely upon a reading of the
applicable statutes and the corporate records of the Company and certificates of
public officials and officers of the Company referenced above with respect to
the opinions given herein.
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 10.1
STOCKHOLDERS AGREEMENT
This STOCKHOLDERS AGREEMENT, dated as of August 22, 1997, by and among
Petroglyph Energy, Inc., a Delaware corporation (the "Company"), the persons
identified as Management Owners below on the signature pages of this Agreement
(such persons, together with their successors and assigns, are collectively
referred to herein as "Management Owners"), Natural Gas Partners, L.P., Natural
Gas Partners II, L.P., Natural Gas Partners III, L.P., each a Delaware limited
partnership (collectively, "NGP"), and the persons and entities identified as
NGP Owners below on the signature pages of this Agreement (NGP and such persons
and entities, together with their successors and assigns, are collectively
referred to herein as "NGP Owners") (collectively, the Management Owners and the
NGP Owners are the "Owners").
1. Background. The Company has been recently created and organized to
----------
engage in the oil and gas business, either directly or though one or more
subsidiaries. Pursuant to an Exchange Agreement dated as of August 22, 1997, (i)
the Management Owners have agreed to exchange shares Petroglyph Energy, Inc., a
Kansas corporation, for shares of the Company's Common Stock, par value $.01
("Common Stock"), and (ii) the NGP Owners have agreed to exchange limited
partnership interests in Petroglyph Gas Partners, L.P., a Delaware limited
partnership, for shares of Common Stock. The proposed exchanges are to be
effectuated in connection with the Company's public offering of shares of Common
Stock pursuant to the filing of a registration statement on Form S-1 with the
Securities and Exchange Commission (collectively, the "Proposed Transaction").
The execution and delivery of this Agreement is being made in connection with
the consummation of the Proposed Transaction.
2. Pro-Rata Sale Rights
--------------------
2.1 General Rights. If a Management Owner, an NGP Owner or a Permitted
--------------
Assignee of either (a "Transferring Owner") proposes to Transfer any Owner
Shares (a "Proposed Transfer") in a single transaction or a series of related
transactions (other than Transfers permitted under subsection 2.4 below), then
the Transferring Owner shall refrain from effecting such Proposed Transfer
unless, prior to the consummation thereof, the other Owners and their respective
successors and Permitted Assignees ("Tag Along Owners") shall have been afforded
the opportunity to join in such Proposed Transfer on a Pro-Rata basis, as
hereinafter provided in subsections 2.2 or 2.3.
2.2 Procedures for Public Sales.
---------------------------
(a) If a Proposed Transfer is to be effectuated through an established
brokerage firm and utilizing the public securities markets (e.g., the New York
Stock Exchange, the American Stock Exchange or the NASDAQ National Market
System), such Transferring Owner shall provide prior written notice of the
following (a "Public Sale Notice") to all the Tag Along Owners:
(i) The number of shares proposed to be made available for sale (the
"Initial Shares");
<PAGE>
(ii) The pricing and other instructions pursuant to which the
selected broker will be operating;
(iii) The name, address, telephone number and facsimile number of the
selected broker and the name of the selected registered representative at
the broker; and
(iv) Confirmation that the selected broker and selected registered
representative have been advised that the Tag Along Owners may desire to
elect to participate, on a Pro-Rata basis, in the Proposed Transfer.
(b) After receiving a Public Sale Notice, a Tag Along Owner shall be
entitled to elect to participate in the Proposed Transfer through the broker,
subject to such Tag Along Owner (i) meeting all of the broker's requirements to
establish a customer account and execute transactions for such Tag Along Owner,
(ii) meeting all of the requirements imposed by applicable securities laws in
order to execute such transaction (including Rule 144), and (iii) responding in
writing within the five business days after receipt of the Public Sale Notice
(the "Public Offering Response") to the Transferring Owner, to the Tag Along
Owners and to the selected broker. The number of Owner Shares which each Tag
Along Owner may elect to add to the Proposed Transfer shall be determined in
accordance with the following formula: (i) the Initial Shares, times (ii) a
fraction the numerator of which is the total of the Owners Shares owned by such
Tag Along Owner, and the denominator of which is the total Owner Shares owned by
the Transferring Owner.
(c) If the broker is unable to sell all of the Owner Shares which are
available for sale, the aggregate amount of shares which the broker is able to
sell shall be allocated on a Pro-Rata basis among the Transferring Owner and the
Tag Along Owners electing to participate in the Proposed Transfer.
2.3 Procedures for Other Sales.
--------------------------
(a) If a Proposed Transfer is to be effectuated in a manner other than as
described in subsection 2.2., then the Transferring Owner shall cause the person
or group that proposes to acquire Owner Shares held by the Transferring Owner
(the "Proposed Purchaser") to send a written offer ("Purchase Offer") to the Tag
Along Owners, offering to purchase Owner Shares held by the Tag Along Owners on
a Pro-Rata basis.
(b) Each purchase of Tag Along Shares shall be made at the highest price
per share and on such other terms and conditions as the Proposed Purchaser has
offered to purchase Owner Shares from the Transferring Owner. Each Tag Along
Owner shall have at least 20 days from the receipt of the Purchase Offer in
which to accept such Purchase Offer, in whole or in part, and if accepted, the
closing of the sale of any Tag Along Shares pursuant thereto shall occur within
30 days after such acceptance or at such other time as the parties to such
transaction may mutually agree. If the Tag Along Owners shall decline to
Transfer all of the shares that they would be entitled to Transfer
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<PAGE>
under this subsection 2.3, the Transferring Owner shall have the right to
include additional Owner Shares in the Transfer to the extent of the deficiency.
2.4 Excluded Transfers. The provisions of subsections 2.1 through 2.3 do
------------------
not apply to the Transfer by an Owner of any Owner Shares held by such Owner on
the date hereof to (i) such Owner's spouse or consanguinal relatives, (ii) to a
trust for estate or testamentary purposes, (iii) to any partners or other
affiliates of such Owner, or (iv) any transfer occurring by operation of law
upon the death, dissolution or liquidation of an Owner; provided that, as a
condition to the transfer of any Owner Shares pursuant to this subsection 2.4,
the transferee must acknowledge and agree to be bound by the restrictions in
this agreement with respect to any subsequent Transfer of Owner Shares (any such
transferee of Owner Shares pursuant to this subsection 2.4 is referred to herein
as a "Permitted Assignee" and after obtaining such status shall thereafter be
treated as an Owner).
3. Definitions. As used in this Agreement, the following terms shall
-----------
have the meanings assigned to them below:
"Common Stock" as defined in Section 1 hereof.
------------
"Owner Shares" means with respect to any Owner (i) all shares of Common
------------
Stock held by such Owner, (ii) any equity securities issued or issuable directly
or indirectly to a Owner with respect to the Common Stock referred to in clause
(i) above by way of stock dividend or stock split or in connection with a
combination of shares, conversion, recapitalization, merger, consolidation or
other reorganization, and (iii) any other shares of any class or series of
voting security of the Company currently held or held in the future by a Owner.
As to any particular shares constituting Owner Shares, such shares will cease to
be Owner Shares when they have been transferred in accordance with the
restrictions set forth in Section 2 to any person who is not a Permitted
Assignee.
"Permitted Assignee" as defined in subsection 2.4.
------------------
"Pledge" means any pledge of an interest in, or other encumbrance placed
------
upon, Owner Shares as security for indebtedness or for other purposes.
"Pro-Rata basis" means with respect to the calculation of the number of
--------------
Owner Shares which a Tag Along Owner may Transfer upon electing to participate
in a Proposed Transfer hereunder, the amount equal to the total number of Owner
Shares to be Transferred in the Proposed Transfer multiplied by a fraction equal
to (i) the number of Owner Shares owned by such Tag Along Owner, divided by (ii)
the total number of Owner Shares owned by (A) the Transferring Owner and (B) all
Tag Along Owners (except that for purposes of the calculation under subsection
2.2(c), only those Owner Shares owned by the Tag Along Owners electing to
participate in the Proposed Transfer shall be included).
"Proposed Purchaser" as defined in subsection 2.3.
------------------
"Purchase Offer" as defined in subsection 2.3.
--------------
-3-
<PAGE>
"Tag Along Owners" as defined in subsection 2.1.
----------------
"Transfer" means any sale, assignment or other disposition of Owner Shares,
--------
other than a Pledge.
"Transferring Owner" as defined in subsection 2.1.
------------------
4. Enforcement; Legends. No Owner Shares shall be transferred on the
--------------------
books of the Company nor shall any sale, assignment, transfer, pledge or other
disposition thereof be effective unless and until the terms and provisions of
this Agreement are first complied with and, in case of violation of this
Agreement by the attempted transfer of Owner Shares without compliance with the
terms and provisions hereof, such sale, assignment, transfer, pledge or other
disposition shall be invalid and of no effect. The Owners will cause the Company
to imprint a legend on any certificates evidencing Owner Shares which are
subject to this Agreement referring to the restrictions on transfer of the Owner
Shares imposed hereunder. Any such legend shall be removed from the certificates
evidencing any shares which cease to be "Owner Shares", as set forth in
definition of such term in Section 3 hereof.
5. Termination.
-----------
(a) This Agreement shall terminate upon the earlier of (i) the first date
on which the NGP Owners and their Permitted Assignees shall no longer own any
Owner Shares, or (ii) the fifth anniversary of the date hereof, or (iii) by
mutual agreement of the parties, as provided in accordance with subsection 6(h)
below.
(b) This Agreement shall terminate with respect to any particular
Management Owner, and the Common Stock of such Management Owner shall cease to
be considered Owner Shares for all purposes of this Agreement, in the event that
the Company shall terminate the employment of such Management Owner for any
reason other than for "cause". As used in this subsection 5(b), "cause" will
include any of the following: (i) Management Owner's conviction of, or plea of
nolo contendere to, any felony or to any crime or offense causing substantial
harm to the Company or its affiliates or involving acts of theft, fraud,
embezzlement, moral turpitude or similar conduct; (ii) Management Owner's
repeated intoxication by alcohol or drugs during the performance of his duties
in a manner that materially and adversely affects Management Owner's performance
of such duties; (iii) malfeasance in the conduct of Management Owner's duties,
including, but not limited to, (A) willful and intentional misuse or diversion
of funds of the Company or its affiliates that constitutes willful misconduct or
gross negligence on the part of such Management Owner, (B) embezzlement, or (C)
fraudulent or willful and material misrepresentations or concealments on any
written reports submitted to the Company or its affiliates; (iv) Management
Owner's violation of any provision of this Agreement or any other agreement
between Management Owner and the Company (including any confidentiality and non-
compete agreement) that causes or that could cause substantial harm to the
Company or its affiliates; (v) Management Owner's material failure to perform
the duties of his employment or material failure to follow or comply with the
reasonable and
-4-
<PAGE>
lawful written directives of the Board of Directors of the Company, in either
case after Management Owner shall have been informed, in writing, of such
material failure and given a period of not more than 60 days to remedy same.
6. Miscellaneous.
-------------
(a) Benefit. This Agreement will only bind and inure to the benefit of,
-------
and will only be enforceable by and against, the Company, the Management Owners
and the NGP Owners and their respective Permitted Assignees.
(b) Notices. Whenever in this Agreement notice is required to be given it
-------
shall be given in writing, and if such notice is given by registered mail, it
shall be deemed to have been received on the second business day after the date
such notice is posted. All notices hereunder to the Company shall be mailed to
it at the address of its principal place of business and all notices to the
Owners shall be mailed to them at their last known address as shown on the books
and records of the Company. Any party may change its or his or her mailing
address by giving written notice of such change to all other parties. All
notices under this Agreement which are to the provided to (i) the Management
Owners shall be sent to Robert C. Murdock at 6209 North Highway 61, Hutchinson,
Kansas 67502 or such other representative designated from time to time in
writing to the Company and the NGP Owners, and (ii) the NGP Owners shall be sent
to Kenneth A. Hersh at NGP, 777 Main Street, Suite 2700, Fort Worth, TX 76102,
or such other representative designated from time to time in writing to the
Company and the Management Owners.
(c) Governing Law. This Agreement and the rights and duties of the parties
-------------
hereto shall be governed by and construed in accordance with the laws of the
State of Delaware.
(d) Number. Words in the singular shall be construed to include the plural
------
and vice versa, unless the context otherwise requires.
(e) Headings. The headings appearing in this Agreement are inserted only
--------
for convenience of reference and in no way shall be construed to define, limit
or describe the scope or intent of any provision of this Agreement.
(f) Severability. Every provision in this Agreement is intended to be
------------
severable. In the event that any provision in this Agreement shall be held
invalid, the same shall not affect in any respect whatsoever the validity of the
remaining provisions of this Agreement; provided, however, that if any such
provision may be made enforceable by limitation thereof, then such provision
shall be deemed to be so limited and shall be enforceable to the maximum extent
permitted by applicable law.
(g) Counterparts. This Agreement may be executed in one or more
------------
counterparts, each of which shall be deemed an original and all of which shall
constitute but one and the same instrument.
-5-
<PAGE>
(h) Entirety and Modification. This Agreement constitutes the entire
-------------------------
agreement of the parties hereto with respect to the subject matter hereof and
may not be modified, supplemented or amended in any respect except by written
instrument executed by Management Owners holding a majority of the Owner Shares
held by all Management Owners and by NGP Owners holding a majority of the Owner
Shares held by all NGP Owners.
-6-
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed and delivered by their respective officers thereunto duly authorized as
of the date first above written.
COMPANY
PETROGLYPH ENERGY, INC.,
a Delaware corporation
By: /s/ Robert C. Murdock
------------------------------------------
Robert C. Murdock, President
OWNERS
NGP OWNERS
----------
NATURAL GAS PARTNERS, L.P.,
By: G.F.W. ENERGY, L.P.,
its general partner
By: /s/ David R. Albin
------------------------------------------
David R. Albin, Authorized Signatory
NATURAL GAS PARTNERS II, L.P.
By: GFW II, L.L.C.,
its general partner
By: /s/ Kenneth A. Hersh
------------------------------------------
Kenneth A. Hersh, Authorized Signatory
NATURAL GAS PARTNERS III, L.P
By: Rainwater Energy Investors, L.P.,
its general partner
By: GFW III, L.L.C.,
its general partner
By: /s/ David R. Albin
------------------------------------------
David R. Albin, Authorized Signatory
-7-
<PAGE>
ALBIN INCOME TRUST
By: /s/ Donald Shore
--------------------------------------
Donald Shore, Trustee
/s/ R. Gamble Baldwin
-------------------------------------------
R. Gamble Baldwin
/s/ John S. Foster
-------------------------------------------
John S. Foster
/s/ Kenneth A. Hersh
-------------------------------------------
Kenneth A. Hersh
/s/ Bruce B. Selkirk, III
-------------------------------------------
Bruce B. Selkirk, III
MANAGEMENT OWNERS
-----------------
/s/ Robert C. Murdock
-------------------------------------------
Robert C. Murdock
/s/ Robert A. Christensen
-------------------------------------------
Robert A. Christensen
/s/ S. Kennard Smith
-------------------------------------------
S. Kennard Smith
-8-
<PAGE>
EXHIBIT 10.2
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT (this "Agreement"), is made and entered
into as of August 22, 1997, by and among Petroglyph Energy, Inc., a Delaware
corporation (the "Company"), and Robert C. Murdock, Robert A. Christensen,
Sidney Kennard Smith, Natural Gas Partners, L.P., Natural Gas Partners II, L.P.,
Natural Gas Partners III, L.P., each a Delaware limited partnership, the Albin
Income Trust, R. Gamble Baldwin, John S. Foster, Kenneth A. Hersh, Bruce B.
Selkirk, III (collectively, the "Owners").
1. Background. The Owners are holders of common stock (the "PEI
----------
Common Stock") of Petroglyph Energy, Inc., a Kansas corporation (the "General
Partner"), or limited partnership interests (the "Partnership Interests") in
Petroglyph Gas Partners, L.P., a Delaware limited partnership (the
"Partnership"). The Company and the Owners are parties to that certain Exchange
Agreement dated as of August 22, 1997 (the "Exchange Agreement"), pursuant to
which the Owners will exchange all of the outstanding PEI Common Stock and
Partnership Interests, respectively, for shares of the Company's common stock,
par value $.01 per share (the "Company Common Stock"), as more fully described
in the Exchange Agreement (the "Proposed Transaction"). In connection with the
Owners' entry into the Exchange Agreement, the parties hereto desire to enter
into this Agreement in order to grant to the Owners registration rights with
respect to the Company Common Stock. The execution and delivery of this
Agreement is a condition to the consummation of the Proposed Transaction. This
Agreement shall be effective as of the date of the closing of the Proposed
Transaction.
2. Registration under Securities Act, etc.
--------------------------------------
2.1. Registration on Request.
-----------------------
(a) Concurrently with or from time to time after the Initial Registration
Date, upon the written request of one or more holders of Registrable Securities,
requesting that the Company effect the registration under the Securities Act of
all or a portion of such holders' Registrable Securities and specifying the
intended method of disposition thereof and whether or not such requested
registration is to be an underwritten offering, the parties hereto agree as
follows:
(i) The Company will promptly give written notice of such requested
registration to all other holders of Registrable Securities, if any;
(ii) Promptly after providing the notice required by clause (i) of
this Section 2.1(a), and subject to the limitations set forth in subsection
(e) of this Section 2.1, the Company will use its best efforts to effect
the registration under the Securities Act of:
<PAGE>
(A) the Registrable Securities which the Company has been so
requested to register by such holders, and
(B) all other Registrable Securities which the Company has been
requested to register by the 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 intended method of disposition of
such Registrable Securities), all to the extent requisite to permit the
disposition (in accordance with the intended methods thereof as aforesaid)
of the Registrable Securities so to be registered.
(b) Registration of Other Securities. Whenever the Company shall effect a
--------------------------------
registration pursuant to this Section 2.1 in connection with an underwritten
offering by one or more holders of Registrable Securities, 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 all Registrable Securities
to be covered by such registration shall have consented in writing to the
inclusion of such other securities.
(c) Registration Statement Form. 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 Requisite
Holders, and (ii) as shall permit the disposition of such Registrable Securities
in accordance with the intended method or methods of disposition specified in
their request for such registration. The Company agrees to include in any such
registration statement all information which holders of Registrable Securities
being registered shall reasonably request.
(d) Expenses. The Company will pay all Registration Expenses in connection
--------
with any registration requested pursuant to this Section 2.1. Any Selling
Expenses in connection with any registration requested under this Section 2.1
shall be allocated among all Persons on whose behalf securities of the Company
are included in such registration, on the basis of the respective amounts of the
securities then being registered on their behalf.
(e) Limitations on Requested Registrations. The Company's obligation to
--------------------------------------
take or continue any action to effect a requested registration under this
Section 2.1 shall be subject to the following:
(i) The Company shall not be required to effect more than three
registrations requested pursuant to this Section 2.1; provided that, a
registration requested pursuant to this Section 2.1 shall not be deemed to
have been effected (A) unless a registration statement with respect thereto
has been declared effective for a period of at least 90 days, (B) if after
a registration statement has become effective, such registration is
interfered with by any stop order, injunction or other order or requirement
of the Commission or other governmental
2
<PAGE>
agency or court for any reason, or (C) if the conditions to closing
specified in the purchase agreement or underwriting agreement entered into
in connection with such registration are not satisfied, other than as a
result of the voluntary termination of such offering by the Requisite
Holders;
(ii) The Company shall not be required to effect a registration
pursuant to this Section 2.1 unless such registration has been requested by
the holders of Registrable Securities which (A) represent at least 35% (by
number of shares) of the Registrable Securities then outstanding, and (B)
have an estimated aggregate offering price to the public of at least
$5,000,000; and
(iii) The Company shall not be required to effect a registration
pursuant to this Section 2.1 during the 180 day period after a registration
statement shall have been filed and declared effective under the Securities
Act with respect to the public offering of any class of the Company's
equity securities (which shall exclude a registration of securities with
respect to an employee benefit, retirement or similar plan).
(f) Selection of Underwriters. 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
Requisite Holders.
(g) Priority in Requested Registrations. 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 holder of
Registrable Securities 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
Requisite Holders, the Company will include in such registration to the extent
of the number which the Company is so advised can be sold in such offering,
Registrable Securities requested to be included in such registration, pro rata
among the holders thereof requesting such registration on the basis of the
percentage of the Registrable Securities of the Company held by the holders of
Registrable Securities which have requested that such Securities be included. In
connection with any registration as to which the provisions of this clause (g)
apply, no securities other than Registrable Securities shall be covered by such
registration.
2.2. Incidental Registration.
-----------------------
(a) Right to Include Registrable Securities. If the Company at any
---------------------------------------
time proposes to register any of its securities under the Securities Act (other
than (i) in connection with a registration of any employee benefit, retirement
or similar plan, or (ii) with respect to a Rule 145 transaction, or (iii)
pursuant to Section 2.1), whether or not for sale for its own account, it will
each such time give prompt written notice to all holders of Registrable
Securities of its intention to do so and of such holders' rights under this
Section 2.2. Upon the written request of any such holder made within 30 days
after the receipt of any such notice (which request shall specify the
Registrable
3
<PAGE>
Securities intended to be disposed of by such holder and the intended method of
disposition thereof), the Company will use its best 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 thereof, to the extent
requisite to permit the disposition (in accordance with the intended methods
thereof as aforesaid) 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 the Registration Expenses in connection
therewith), without prejudice, however, 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, for the same period as the delay in registering such
other securities. No registration effected under this Section 2.2 shall be
deemed to have been effected pursuant to Section 2.1 or shall relieve the
Company of its obligation to effect any registration upon request under Section
2.1. The Company will pay all Registration Expenses in connection with each
registration of Registrable Securities requested pursuant to this Section 2.2
and any Selling Expenses shall be allocated among all Persons on whose behalf
securities of the Company are included in such registration, on the basis of the
respective amounts of the securities then being registered on their behalf.
(b) Priority in Incidental Registrations. 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, to
be distributed (on a firm commitment basis) by or through one or more
underwriters of recognized standing under underwriting terms appropriate for
such a transaction, 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
will include in such registration, to the extent of the number which the Company
is so advised can be sold in (or during the time of) such offering, first, all
securities proposed by the Company to be sold for its own account, second, such
Registrable Securities requested to be included in such registration pro rata on
the basis of the number of shares of such securities so proposed to be sold and
so requested to be included, and third, all other securities of the Company
requested to be included in such registration pro rata on the basis of the
number of shares of such securities so proposed to be sold and so requested to
be included.
2.3. Registration Procedures. If and whenever the Company is required
-----------------------
to use its best 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
as expeditiously as possible:
4
<PAGE>
(i) 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) file with the Commission the
requisite registration statement to effect such registration and thereafter
use its best 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 2.2(a), its securities which are
Registrable Securities) at any time prior to the effective date of the
registration statement relating thereto;
(ii) 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;
(iii) 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 any summary prospectus) and any other prospectus
filed under Rule 424 under the Securities Act, in conformity with the
requirements of the Securities Act, and such other documents, as such
seller may reasonably request;
(iv) use its 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, 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 subdivision (iv) be obligated to be so
qualified or to consent to general service of process in any such
jurisdiction;
(v) use its best efforts to cause all Registrable Securities covered
by such registration statement to be registered with or approved by such
other governmental agencies or authorities as may be necessary to enable
the seller or sellers thereof to consummate the disposition of such
Registrable Securities;
(vi) furnish to each seller of Registrable Securities a signed
counterpart, addressed to such seller (and underwriters, if any) of:
5
<PAGE>
(A) 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), reasonably satisfactory in
form and substance to such seller, and
(B) 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 certified 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 may reasonably
request;
(vii) 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 the statements therein
not misleading in the light of the circumstances under which they were
made, and at the request of any such seller promptly 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;
(viii) otherwise use its best 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, but not more than eighteen 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 at least five business 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
reasonably objected on the grounds that such amendment or supplement does
not
6
<PAGE>
comply in all material respects with the requirements of the Securities
Act or of the rules or regulations thereunder;
(ix) provide and cause to be maintained a transfer agent and
registrar for all Registrable Securities covered by such registration
statement from and after a date not later than the effective date of such
registration statement;
(x) use its 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
(xi) enter into such agreements and take such other actions as the
Requisite Holders shall reasonably request in order to expedite or
facilitate the disposition of such Registrable Securities.
The Company may require each seller of Registrable Securities as to which any
registration is being effected to furnish the Company such information regarding
such seller and the distribution of such securities as the Company may from time
to time reasonably request in writing.
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 the subdivision (vii) of this
Section 2.3, 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 subdivision (vii) of this
Section 2.3 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.
2.4 Underwritten Offerings.
----------------------
(a) Requested Underwritten Offerings. If requested by the
--------------------------------
underwriters for any underwritten offering by holders of Registrable Securities
pursuant to a registration requested under Section 2.1, the Company will enter
into an underwriting agreement with such underwriters for such offering, such
agreement to be satisfactory in substance and form to each such holder 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 2.7. 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 of Registrable Securities and that any or all of the conditions
precedent to the obligations of such underwriters under such underwriting
agreement be
7
<PAGE>
conditions precedent to the obligations of such holders of Registrable
Securities. Any such holder of Registrable Securities 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 such holder's intended method
of distribution and any other representation required by law.
(b) Incidental Underwritten Offerings. 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 among the
securities to be distributed by such underwriters. 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 of
Registrable Securities 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 of Registrable Securities. Any
such holder of Registrable Securities shall not be required to made 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 such holder's intended method
of distribution and any other representation required by law.
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, and their counsel and
accountants, 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' counsel, to conduct a reasonable investigation
within the meaning of the Securities Act.
2.6. Additional Rights of Owners. If any registration statement
---------------------------
prepared under this Agreement refers to any Owner by name or otherwise as the
holder of any securities of the Company, then such Owner shall have the right to
require (x) the insertion therein of language, in form and substance
satisfactory to such Owner, to the effect that the holding by such Owner of such
securities does not necessarily make such Owner a "controlling person" of the
Company within the meaning of the Securities Act and is not to be construed as a
recommendation by such Owner of the investment quality of the Company's debt or
equity securities covered thereby and that such holding does not imply that such
Owner will assist in meeting any future financial requirements of the
8
<PAGE>
Company, or (y) in the event that such reference to such Owner by name or
otherwise is not required by the Securities Act or any rules and regulations
promulgated thereunder, the deletion of the reference to such Owner.
2.7. Indemnification.
---------------
(a) Indemnification by the Company. In the event of any registration
------------------------------
of any securities of the Company under the Securities Act, the Company will, and
hereby does, in the case of any registration statement filed pursuant to Section
2.1 or 2.2, indemnify and hold harmless the seller of any Registrable Securities
covered by such registration statement, its directors and officers, each other
Person who participates in the offering or sale of such securities and each
other Person, if any, who controls such seller 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 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 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, 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 the extent that any such loss, claim, damage, liability (or
action or proceeding in respect thereof) or expense arises out of or is based
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 through an
instrument duly executed by such seller specifically stating that it is 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.
(b) 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
9
<PAGE>
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 subdivision (a) of this
Section 2.7) 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
conformity with written information furnished to the Company through an
instrument duly executed by such seller specifically stating that it is for use
in the preparation of such registration statement, preliminary prospectus, final
prospectus, summary prospectus, amendment or supplement. Such indemnity shall
remain in full force and effect, regardless of any investigation made by or on
behalf of the Company or any such director, officer or controlling Person and
shall survive the transfer of such securities by such seller.
(c) 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 the preceding subdivisions of this Section 2.7, 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 the preceding subdivisions of this Section 2.7, 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 may exist in respect of such claim, the
indemnifying party 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.
(d) Other Indemnification. Indemnification similar to that specified
---------------------
in the preceding subdivisions of this Section 2.7 (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.
10
<PAGE>
(e) Indemnification Payments. The indemnification required by this
------------------------
Section 2.7 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.
2.8. Adjustments Affecting Registrable Securities. The Company will
--------------------------------------------
not effect or permit to occur any combination or subdivision of Registrable
Securities which would adversely affect the ability of the holders of
Registrable Securities to include such Registrable Securities in any
registration of its securities contemplated by this Section 2, or the
marketability of such Registrable Securities under any such registration.
3. Definitions. As used herein, unless the context otherwise
-----------
requires, the following terms have the following respective meanings:
Commission: The Securities and Exchange Commission or any other
----------
Federal agency at the time administering the Securities Act.
Company: As defined in the introductory paragraph of this Agreement.
-------
For purposes of this Agreement, all references to the Company shall be
deemed to include any successor entity or transferee.
Exchange Act: The Securities Exchange Act of 1934, or any similar
------------
Federal statute, and the rules and regulations of the Commission
thereunder, all as the same shall be in effect at the time. Reference
to a particular section of the Securities Exchange Act of 1934 shall
include a reference to the comparable section, if any, of any such
similar Federal statute.
Initial Registration Date: The 180th day after a registration
-------------------------
statement shall have been filed and declared effective under the
Securities Act with respect to the initial public offering of the
Company's securities.
Majority Holders: At any time, the holder or holders of more than 50%
----------------
(by number of shares) of all Registrable Securities then outstanding.
Person: A corporation, an association, a partnership, a business, an
------
individual, a governmental or political subdivision thereof or a
governmental agency.
Registrable Securities: any Company Common Stock owned by an Owner
----------------------
and any securities issued or issuable with respect to any such Company
Common Stock by way of distribution or in connection with any
reorganization, recapitalization, merger, consolidation or otherwise.
As to any particular Registrable Securities, once issued such
securities shall cease to be Registrable Securities when (a) a
registration statement with respect to the sale of such securities
shall have become effective under the Securities Act and such
securities shall have been disposed of in accordance with
11
<PAGE>
such registration statement, (b) they shall have been distributed to
the public pursuant to Rule 144 or Rule 144A (or any successor
provision) under the Securities Act, (c) they shall have been
otherwise transferred, new certificates for them not bearing a legend
restricting further transfer shall have been delivered by the Company
and subsequent disposition of them shall not require registration or
qualification of them under the Securities Act or any similar state
law then in force, or (d) they shall have ceased to be outstanding.
Registration Expenses: All expenses incident to the Company's
---------------------
performance of or compliance with Section 2.1, including, without
limitation, all registration, filing and National Association of
Securities Dealers fees, all fees and expenses of complying with
securities or blue sky laws, all word processing, duplicating and
printing expenses, messenger and delivery expenses, the fees and
disbursements of counsel for the Company and of its independent public
accountants, including the expenses of any special audits or "cold
comfort" letters required by or incident to such performance and
compliance, the fees and disbursements incurred by the holders of
Registrable Securities to be registered (including the fees and
disbursements of not more than one special counsel to the 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 being registered and any fees and
disbursements of underwriters customarily paid by issuers or sellers
of securities, but excluding Selling Expenses, if any, provided that,
in any case where Registration Expenses are not to be borne by the
Company, such expenses shall not include salaries of Company personnel
or general overhead expenses of the Company, auditing fees, premiums
or other expenses relating to liability insurance required by
underwriters of the Company or other expenses for the preparation of
financial statements or other data normally prepared by the Company in
the ordinary course of its business or which the Company would have
incurred in any event.
Requisite Holders: With respect to any registration of Registrable
-----------------
Securities pursuant to Section 2.1, any holder or holders of more than
50% (by number of shares) of the Registrable Securities to be so
registered.
Securities Act: The Securities Act of 1933, or any similar Federal
--------------
statute, and the rules and regulations of the Commission thereunder,
all as of the same shall be in effect at the time. References to a
particular section of the Securities Act of 1933 shall include a
reference to the comparable section, if any, of any such similar
Federal Statute.
Selling Expenses: underwriting discounts and commissions and stock
----------------
transfer taxes relating to securities registered by the Company.
12
<PAGE>
4. Rule 144 and Rule 144A: If the Company shall have filed a
----------------------
registration statement pursuant to the requirements of Section 12 of the
Exchange Act or a registration statement pursuant to the requirements of the
Securities Act, the Company will file the reports required to be filed by it
under the Securities Act and the Exchange Act and the rules and regulations
adopted by the Commission thereunder (or, if the Company is not required to file
such reports, will, upon the request of any holder of Registrable Securities,
make publicly available other information) and will take such further action as
any holder of Registrable Securities may reasonably request, all to the extent
required from time to time to enable such holder to sell Registrable Securities
without registration under the Securities Act within the limitation of the
exemptions provided by (a) Rule 144 under the Securities Act, as such Rule may
be amended from time to time or (b) any similar rule or regulation hereafter
adopted by the Commission. Upon the request of any holder of Registrable
Securities, the Company will deliver to such holder a written statement as to
whether it has complied with such requirements. After any sale of Registrable
Securities pursuant to this Section 4, the Company will, to the extent allowed
by law, cause any restrictive legends to be removed and any transfer
restrictions to be rescinded with respect to such Registrable Securities. In
order to permit the holders of Registrable Securities to sell the same, if they
so desire, pursuant to Rule 144A promulgated by the Commission (or any successor
to such rule), the Company will comply with all rules and regulations of the
Commission applicable in connection with use of Rule 144A (or any successor
thereto). Prospective transferees of Registrable Securities that are Qualified
Institutional Buyers (as defined in Rule 144A) which would be purchasing such
Registrable Securities in reliance upon Rule 144A may request from the Company
information regarding the business, operations and assets of the Company.
Within five business days of any such request, the Company shall deliver to any
such prospective transferee copies of annual audited and quarterly unaudited
financial statements of the Company and such other information as may be
required to be supplied by the Company for it to comply with Rule 144A.
5. Amendments and Waivers. This Agreement may be amended and the
----------------------
Company may take any action herein prohibited or omit to perform any act herein
required to be performed by it, only if the Company shall have obtained the
written consent to such amendment, action or omission to act, of the Majority
Holders; provided, however, that no amendment to this Agreement that would
adversely affect the rights of a party hereto may be made without the prior
written consent of such party, with the exception that temporary waivers and
suspensions of the rights of all of the Owners pursuant to customary terms at
the request of the managing underwriter in connection with any underwritten
offering of the Company's securities, may be authorized by consent of the
Majority Holders. Each holder of any Registrable Securities at the time or
thereafter outstanding shall be bound by any consent authorized by this Section
5, whether or not such Registrable Securities shall have been marked to indicate
such consent.
6. Nominees for Beneficial Owners. In the event that any
------------------------------
Registrable Securities are held by a nominee for the beneficial owner thereof,
the beneficial owner thereof may, at its election, be treated as the holder of
such Registrable Securities for purposes of any request or other action by any
holder or holders of Registrable Securities pursuant to this Agreement or any
determination of any number or percentage of shares of Registrable Securities
held by any holder
13
<PAGE>
or holders of Registrable Securities contemplated by this Agreement. If the
beneficial owner of any Registrable Securities so elects, the Company may
require assurances reasonably satisfactory to it of such owner's beneficial
ownership of such Registrable Securities.
7. Notices. All communications provided for hereunder shall be sent
-------
by first-class mail and (a) if addressed to a party other than the Company,
addressed to such party at the address set forth opposite such parties name on
the execution page hereof, or (b) if addressed to the Company, at 6209 North
Highway 61, Hutchinson, Kansas 67502 or at such other address, or to the
attention of such other officer, as the Company shall have furnished to each
holder of Registrable Securities at the time outstanding; provided, however,
-------
that any such communication to the Company may also, at the option of any of the
parties hereunder, be either delivered to the Company at its address set forth
above or to any officer of the Company.
8. Assignment. This Agreement shall be binding upon and inure to
----------
the benefit of and be enforceable by the parties hereto and their respective
successors and assigns. In addition, and whether or not any express assignment
shall have been made, the provisions of this Agreement which are for the benefit
of the parties hereto other than the Company shall also be for the benefit of
and enforceable by any subsequent holder of any Registrable Securities, subject
to the provisions respecting the minimum numbers or percentages of shares of
Registrable Securities required in order to be entitled to certain rights, or
take certain actions, contained herein.
9. Termination. This Agreement shall terminate when no Registrable
-----------
Securities remain outstanding.
10. Termination of Original Agreement. The parties hereto, as
---------------------------------
applicable, who are parties to the Original Agreement, agree that the Original
Agreement is hereby terminated and of no further force or effect.
11. Descriptive Headings. The descriptive headings of the several
--------------------
sections and paragraphs of this Agreement are inserted for reference only and
shall not limit or otherwise affect the meaning hereof.
12. Specific Performance. The parties hereto recognize and agree
--------------------
that money damages may be insufficient to compensate the holders of any
Registrable Securities for breaches by the Company of the terms hereof and,
consequently, that the equitable remedy of specific performance of the terms
hereof will be available in the event of any such breach.
13. Governing Law. This Agreement shall be construed and enforced in
-------------
accordance with, and the rights of the parties shall be governed by, the laws of
the State of Delaware.
14. Counterparts. This Agreement may be executed simultaneously in
------------
any number of counterparts, each of which shall be deemed an original, but all
such counterparts shall together constitute one and the same instrument.
14
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed and delivered by their respective officers thereunto duly authorized as
of the date first above written.
COMPANY
PETROGLYPH ENERGY, INC.,
a Delaware corporation
By: /s/ Robert C. Murdock
------------------------------------------
Robert C. Murdock, President
OWNERS
NATURAL GAS PARTNERS, L.P.,
By: G.F.W. ENERGY, L.P.,
its general partner
By: /s/ David R. Albin
------------------------------------------
David R. Albin, Authorized Signatory
NATURAL GAS PARTNERS II, L.P.
By: GFW II, L.L.C.,
its general partner
By: /s/ Kenneth A. Hersh
------------------------------------------
Kenneth A. Hersh, Authorized Signatory
NATURAL GAS PARTNERS III, L.P
By: Rainwater Energy Investors, L.P.,
its general partner
By: GFW III, L.L.C.,
its general partner
By: /s/ Kenneth A Hersh
------------------------------------------
Kenneth A. Hersh, Authorized Signatory
15
<PAGE>
ALBIN INCOME TRUST
By: /s/ Donald Shore
---------------------------------------------
Donald Shore, Trustee
/s/ R. Gamble Baldwin
--------------------------------------------------
R. Gamble Baldwin
/s/ John S. Foster
--------------------------------------------------
John S. Foster
/s/ Kenneth A. Hersh
--------------------------------------------------
Kenneth A. Hersh
/s/ Bruce B. Selkirk, III
--------------------------------------------------
Bruce B. Selkirk, III
/s/ Robert C. Murdock
--------------------------------------------------
Robert C. Murdock
/s/ Robert A. Christensen
--------------------------------------------------
Robert A. Christensen
/s/ S. Kennard Smith
--------------------------------------------------
S. Kennard Smith
16
<PAGE>
EXHIBIT 10.3
FINANCIAL ADVISORY SERVICES AGREEMENT
-------------------------------------
This Financial Advisory Services Agreement (this "Agreement"), dated as of
August 22, 1997, is between Petroglyph Energy, Inc., a Delaware corporation
(the "Company"), and Natural Gas Partners, L.P., a Delaware limited partnership
("NGP I"), Natural Gas Partners II, L.P., a Delaware limited partnership ("NGP
II"), and Natural Gas Partners III, L.P., a Delaware limited partnership ("NGP
III") (NGP I, NGP II and NGP III are collectively, "NGP"), and sets forth the
terms and conditions pursuant to which the Company will retain NGP to act as its
financial advisor.
The Company and NGP agree as follows:
1. Retention of Financial Advisor; Scope of Services.
-------------------------------------------------
(a) Subject to the terms and conditions set forth herein, the Company
hereby retains NGP to act as a financial advisor to the Company during the
Contract Period (as defined in paragraph 2 below).
(b) As financial advisor to the Company, NGP will, from time to time, as
requested by the Company, provide consultation, assistance and advice to the
Company with respect to the Company's financial operations, including without
limitation the following:
(i) assistance in the public equity or debt offering process,
including drafting of documents, road show planning and participation and
general oversight of legal accounting and underwriting issues;
(ii) assistance in bank loan and credit agreement negotiation,
documentation and compliance;
(iii) assistance in upgrading and implementing a long-term budgeting
and planning process;
(iv) assistance in all public reporting and disclosure issues;
(v) assistance in developing and maintaining an investor relations
program, which will include preparation of presentations, planning meetings
and attending meetings with analysts; and
(vi) ongoing advice on business acquisitions, including negotiation
strategies and financing alternatives.
<PAGE>
(c) The parties hereto acknowledge that (i) NGP is not regularly engaged
in the business of providing financial advisory services and that the services
to be performed by NGP hereunder are provided as an incident to NGP's activities
as an owner of a significant portion of the stock of the Company, (ii) the fees
to be paid to NGP hereunder were established at an amount which is believed to
be approximately equal to the amount of indirect costs and expenses NGP will
incur in providing such services, (iii) NGP is not an "investment advisor",
within the meaning of the Investment Advisors Act of 1940, as amended, or
applicable state laws, or a "broker" or "dealer" under the Securities Exchange
Act of 1934, as amended, or applicable state laws, (iv) the nature of the
services to be provided by NGP under this Agreement do not include those of an
"investment advisor" (i.e. providing advice as to the value of securities or the
advisability of investing in, purchasing or selling securities), or those of a
"broker" or "dealer" (i.e. effecting transaction in securities for the account
of the Company or others), and (v) it is specifically intended by the parties
hereto that NGP's activities hereunder not subject NGP to any regulation or
registration under federal or state laws.
(d) The parties hereto acknowledge and agree that NGP will make available
any and all of its employees, agents and other resources, which NGP, it its sole
discretion, determines is necessary for it to perform its services hereunder.
The parties further acknowledge that unless and until NGP provides notice to the
contrary, all decisions with respect to staffing, scheduling and allocating
NGP's resources for purposes of this Agreement will be coordinated on behalf of
NGP by its employees Kenneth A. Hersh or David R. Albin, and any request by the
Company for the performance of services hereunder shall be directed to Kenneth
A. Hersh or David R. Albin.
2. Contract Period and Termination. NGP shall act as the Company's
--------------------------------
financial advisor under this Agreement, effective as of the date of the
consummation of the Company's first issuance of securities pursuant to a public
offering (the "Effective Date") and continuing (unless otherwise extended by the
mutual agreement of the parties) until the first anniversary of the Effective
Date (the period from the Effective Date of this Agreement until the date of its
termination is referred to herein as the "Contract Period"). Notwithstanding the
immediately preceding sentence, this Agreement may be terminated effective as of
the end of any fiscal quarter of the Company at any time in the sole discretion
of NGP, if NGP provides written notice of its election to terminate this
Agreement to the Company not less than 30 days before the date on which
termination is to be effective. Upon termination, neither party will have any
further obligation under this Agreement, except for (i) the Company's obligation
to pay to NGP the fees and reimbursements then due pursuant to Paragraph 3,
which shall continue after such termination until such amounts are paid in full,
and (ii) the Company's obligation to provide the indemnification contained in
Paragraph 5, which shall continue in effect for a period of three years after
such termination.
3. Fees and Expenses. NGP shall be entitled to the following fees for
-----------------
its services provided during the Contract Period:
(a) An annual fee of $55,000 per year (pro-rated for any portion of a
year), which amount shall be payable quarterly in arrears on the last day
of each fiscal quarter of the Company.
-2-
<PAGE>
(b) In addition to the fees described above in Paragraph 3(a), the
Company shall promptly reimburse NGP for all reasonable out-of-pocket
expenses incurred by NGP and its partners, employees and agents (including
any legal fees incurred by NGP, whether from in-house or outside counsel)
in connection with NGP's activities pursuant to this Agreement during the
Contract Period.
All fees and expenses payable to NGP shall be allocated pro rata among NGP I,
NGP II and NGP III based on their relative ownership of common stock of the
Company, provided that in the discretion of the Company, the Company may make
one payment of the fees and expenses then owing to NGP, and NGP shall have the
responsibility to allocate such payment accordingly. In addition to the fees
described above in this Paragraph 3, each representative of NGP that serves on
the Board of Directors of the Company (of which there are currently two NGP
representatives on the Board of Directors) shall be entitled to receive the
compensation to which outside directors are entitled pursuant to the bylaws of
the Company.
4. Furnishing of Company Information; Confidentiality.
--------------------------------------------------
(a) In connection with NGP's activities hereunder on the Company's behalf,
the Company shall furnish NGP with all information concerning the Company and
its operations that NGP deems appropriate or necessary (the "Company
Information") and will provide NGP with access to the Company's books and
records, and the Company's officers, directors, employees, accountants and
counsel. The Company represents and warrants that all Company Information
(including, without limitation, the Company's financial statements) will, to the
best of its knowledge, be complete and correct in all material respects and will
not contain any untrue statement of a material fact or omit to state a material
fact necessary in order to make the statements therein not misleading in the
light of the circumstances under which such statements are or will be made. The
Company acknowledges and agrees that in rendering its services hereunder, NGP
will be using and relying on the Company information without independent
verification thereof or independent appraisal of any of the Company's assets and
may, in its sole discretion, use additional information contained in public
reports or other information furnished by the Company or third parties. The
Company further acknowledges and agrees that it has sole responsibility for the
accuracy and completeness of the Company Information, any additional information
supplied by the Company to NGP or to any other party contacted by NGP on behalf
of the Company, and that NGP does not assume any such responsibility.
(b) NGP agrees that the Company Information will be used solely for the
purpose of performing its services hereunder. Subject to the limitations set
forth in subparagraph 4(c) below, NGP will keep the Company Information provided
to its hereunder confidential and will not disclose such Company Information or
any portion thereof except (i) to a third party contacted by NGP on behalf of
the Company pursuant hereto who has agreed to be bound by a confidentiality
agreement satisfactory in form and substance to the Company, or (ii) to any
other person for which the Company's consent to disclose such Company
Information has been obtained.
-3-
<PAGE>
(c) NGP's confidentiality obligations under this Agreement shall not apply
to any portion of the Company's Information which (i) at the time of disclosure
or thereafter is generally available to and known by the public (other than as a
result of a disclosure directly or indirectly by NGP), (ii) was available to NGP
on a nonconfidential basis from a source other than the Company, provided that
such source is not and was not bound by a confidentiality agreement with the
Company, (iii) has been independently acquired or developed by NGP without
violating any of its obligations under this Agreement, or (iv) the disclosure of
which is legally compelled (whether by deposition, interrogatory, request for
documents, subpoena, civil or administrative investigative demand or other
similar process). In the event that NGP becomes legally compelled to disclose
any of the Company Information, NGP shall provide the Company with prompt prior
written notice of such requirement so that the Company may seek a protective
order or other appropriate remedy and/or waive compliance with the terms of this
Agreement.
5. Indemnification. In consideration of the services performed and to be
---------------
performed by NGP for the Company, and for other good and valuable consideration,
the Company and NGP hereby agree as follows:
(a) The Company shall indemnify and hold harmless NGP its affiliates and
affiliated entities, each of its partners, officers, employees, agents and each
person, if any, who "controls" NGP (within the meaning of the federal securities
laws) (collectively the "Indemnified Parties" and individually, an "Indemnified
Party") from and against any and all actions or claims and any and all losses,
claims, damages, liabilities, costs or expenses (including, without limitation,
reasonable attorneys' fees and any legal or other expenses in giving testimony
or furnishing documents in response to a subpoena or otherwise or the costs of
investigating, preparing or defending any action or claim, whether or not in
connection with any action or litigation in which any Indemnified Party is a
party), joint or several, to which any Indemnified Party may become subject
under the Securities Act of 1933 or any other federal or state securities law or
otherwise as and when incurred, directly or indirectly, caused by, relating to,
based upon or arising out of any matter related to this Agreement, including,
without limitation, any act or omission by NGP in connection with its role as
financial advisor and its acceptance of or the performance or non-performance of
its obligations under this Agreement, except insofar as such losses, claims,
damages, liabilities, costs or expenses arise out of or are based upon any
untrue statement or alleged untrue statement of material fact contained in any
registration statement, preliminary prospectus, final prospectus, placement
memorandum, or in any amendment or supplement thereto, or upon the omission or
alleged omission therefrom of any such statement which has been made therein or
omitted therefrom in reliance upon and in conformity with information furnished
in writing to the Company by or on behalf of NGP expressly for use therein.
(b) The indemnity provided for in subparagraph (a) above shall cover any
loss, claim, damage, liability, cost or expense incurred by an Indemnified Party
REGARDLESS OF THE ORDINARY NEGLIGENCE OF SUCH INDEMNIFIED PARTY, but shall not
cover any loss, claim, damage, liability, cost or expense to the extent it is
found in a final judgment by a court of
-4-
<PAGE>
competent jurisdiction (not subject to further appeal) to have resulted from an
Indemnified Party's gross negligence or willful misconduct.
(c) The indemnity provided for in subparagraph (a) shall be in addition to
any liability that the Company may otherwise have to the Indemnified Parties and
shall be subject to the following:
(i) Promptly after receipt by an Indemnified Party under subparagraph
(a) above of notice of the commencement of any action, proceeding,
investigation or other event with respect to which any Indemnified Party
demands indemnification hereunder, such Indemnified Party shall, if a claim
in respect thereof is to be made against the Company, notify the Company in
writing of the commencement thereof, provided that the failure to so notify
the Company shall not relieve it from any liability that it may have to any
Indemnified Party, except to the extent the Company is prejudiced by such
failure.
(ii) Notwithstanding anything expressed or implied herein to the
contrary, the indemnity provided for herein shall cover the amount of any
settlements entered into in connection with any claim for which an
Indemnified Party may be indemnified hereunder, if and only if such
settlement is consented to by the Company.
(iii) No settlement binding on an Indemnified Party may be made
without the consent of such Indemnified Party (which consent shall not be
unreasonably withheld).
(iv) If the claim for indemnification arises out of a claim for
damages by a person other than an Indemnified Party, the Company, after
giving notice to the Indemnified Party, may undertake to defend or settle
such claim for damages and may employ counsel for such purpose. The
Indemnified Party, at its own expense, shall have the right to employ
separate counsel with respect to such claim and to participate in, but not
control, such settlement or defense; provided that, if the Company is also
a defendant in respect of any such claim and a potential conflict exists
between the interests of the Company and those of an Indemnified Party or
if the Company does not elect to undertake the settlement or defense of
such claim, the Indemnified Parties shall, at the expense of the Company,
have the right to employ not more than one counsel to represent the
Indemnified Parties with respect to such claim and the Indemnified Parties
may control any settlement or defense applicable to the claims brought
against such Indemnified Parties.
(v) Expenses and other costs incurred by an Indemnified Party in
connection with any suit, action or other proceeding relating to this
Agreement shall be advanced by the Company to such Indemnified Party prior
to any final determination of whether an Indemnified Party is entitled to
be indemnified for such costs and expenses hereunder, if the Indemnified
Party provides to the Company an undertaking to return any amounts so
received to the extent that it is ultimately determined that he was not
entitled to be indemnified for such costs and expenses hereunder.
-5-
<PAGE>
(vi) In order to provide for just and equitable contribution, if a
claim for indemnification is made hereunder but a court of competent
jurisdiction finds in a final judgment (not subject to appeal) that such
indemnification may not be enforced in such case, even though the express
provisions hereof provide for indemnification, then in such case, the
Company on the one hand, and the Indemnified Parties on the other hand,
shall contribute to the losses, claims, damages, liabilities or costs so
that the Indemnified Parties are responsible in the aggregate for a
percentage of the losses, claims, damages, liabilities or costs equal to a
fraction, the numerator of which is the fees (but not expenses) previously
received by NGP pursuant to Paragraph 3 of this Agreement, and the
denominator of which is the sum of total aggregate amount of all
consideration received by the Company in respect of transactions giving
rise to such claim for indemnification, or, if no such transaction exists
or has not been completed, the fair market value of the outstanding units
of the Company's partnership interests on the date hereof, and the Company
shall be responsible for the remainder of such losses, claims, damages,
liabilities or costs; provided, however, that if such allocation is not
------------------
permitted by applicable law then the relative fault of the Company, on the
one hand, and the Indemnified Parties, on the other hand, in connection
with the statements, acts or omissions that resulted in such losses,
claims, damages, liabilities or costs and relevant equitable considerations
shall also be considered. No person found liable for a fraudulent
misrepresentation shall be entitled to contribution from any person who is
not also found liable for such fraudulent misrepresentation.
Notwithstanding the foregoing, the Indemnified Parties, in the aggregate,
shall not be obligated to contribute any amount hereunder that exceeds the
amount of fees (but not expenses) NGP received previously pursuant to this
Agreement.
(vii) The Company agrees that the Indemnified Parties shall not have
any liability (whether direct or indirect, in contract, tort or otherwise)
to the Company for or in connection with any matter related to this
Agreement, except for liabilities or expenses that are found in a final
judgment by a court of competent jurisdiction (not subject to further
appeal) to have resulted primarily and directly from NGP or such other
Indemnified Party's gross negligence or willful misconduct.
6. GOVERNING LAW. THE VALIDITY AND INTERPRETATION OF THIS AGREEMENT
-------------
SHALL BE GOVERNED BY THE INTERNAL LAWS OF THE STATE OF TEXAS APPLICABLE TO
CONTRACTS MADE AND TO BE FULLY PERFORMED THEREIN.
7. Successors and Assigns. The benefits of this Agreement shall inure to
----------------------
the parties hereto, their respective successors and assigns, and to the
indemnified parties hereunder and their successors and representatives, and the
obligations and liabilities assumed in this Agreement by the parties hereto
shall be binding upon their respective successors and assigns. This Agreement
may not be assigned by any party to an unaffiliated party without the express
written consent of the other party hereto.
-6-
<PAGE>
8. Notices. All communications under this Agreement shall be in writing
-------
and shall be delivered personally or sent by personal delivery, expedited
delivery, certified mail, return receipt requested or by telecopy as follows:
If to NGP:
100 N. Guadalupe Street, Suite 205
Santa Fe, New Mexico 87501
Telecopy Number: (505) 983-8120
Attention: David R. Albin
777 Main Street, Suite 2700
Fort Worth, Texas 76102-5304
Telecopy Number: (817) 820-6650
Attention: Kenneth A. Hersh
If to the Company:
6209 North Highway 61
Hutchinson, Kansas 67502
P.O. Box 1839
Hutchinson, Kansas 67504-1839
Telecopy Number: (316) 665-8500
Attention: Robert C. Murdock
Either party may change its address or telecopy number set forth above by
giving the other party notice of such change in accordance with the provisions
of this Paragraph 8. A notice shall be deemed given, if by personal delivery or
expedited delivery service, on the date of such delivery to such address, if by
certified mail, on the date shown on the applicable return receipt, or if by
telecopy, on the date of receipt of the transmission of such notice at such
telecopy number.
9. Nature of Relationship. The parties hereto intend that the services
----------------------
provided by NGP to the Company pursuant to this Agreement are being provided as
an independent contractor. Nothing contained in this Agreement shall constitute
or be construed to be or create a general partnership or joint venture between
NGP and the Company or their respective successors or assigns.
10. Captions. The Paragraph titles herein are for reference purposes only
--------
and do not control or affect the meaning or interpretation of any term or
provision hereof.
-7-
<PAGE>
11. Amendments. No alteration, amendment, change or addition hereto shall
----------
be binding or effective unless the same is set forth in writing signed by a duly
authorized representative of each party.
12. Partial Invalidity. If the final determination of a court of
------------------
competent jurisdiction declares, after the expiration of the time within which
judicial review (if permitted) of such determination may be perfected, that any
term or provision hereof is invalid or unenforceable, (i) the remaining terms
and provisions hereof shall be unimpaired and (ii) the invalid or unenforceable
term or provision shall be replaced by a term or provision that is valid and
enforceable and that comes closest to expressing the intention of the invalid or
unenforceable term or provision.
13. Survival. All representations, warranties and agreements contained
--------
herein, or contained in certificates submitted pursuant to this Agreement, shall
remain operative and in full force and effect regardless of any investigation
made by or on behalf of any party hereto, and shall survive the execution and
delivery hereof.
14. Counterparts. This Agreement may be executed in one or more
------------
counterparts, each of which shall be an original, but all of which together
shall be considered one and the same agreement.
-8-
<PAGE>
This Agreement is executed as of the date first written above by a duly
authorized representative of each of the Company and NGP.
COMPANY
PETROGLYPH ENERGY, INC.
By: /s/ Robert C. Murdock
-------------------------------------
Name: Robert C. Murdock
---------------------------------
Title: President
--------------------------------
NGP
NATURAL GAS PARTNERS, L.P.
By: G.F.W. Energy, L.P., its
general partner
By: /s/ David R. Albin
-------------------------------------
Name: David R. Albin
---------------------------------
Title: Authorized Signatory
--------------------------------
NATURAL GAS PARTNERS II, L.P.
By: GFW II, L.L.C.,
its general partner
By: /s/ Kenneth A. Hersh
-------------------------------------
Name: Kenneth A. Hersh
---------------------------------
Title: Authorized Signatory
--------------------------------
-9-
<PAGE>
NATURAL GAS PARTNERS III, L.P
By: Rainwater Energy Investors, L.P.,
its general partner
By: GFW III, L.L.C.,
its general partner
By: /s/ Kenneth A. Hersh
-------------------------------------
Name: Kenneth A. Hersh
Title: Authorized Signatory
-10-
<PAGE>
EXHIBIT 10.4
1997 INCENTIVE PLAN
of
PETROGLYPH ENERGY, INC.
1. Plan. This 1997 Incentive Plan of Petroglyph Energy, Inc. (the "Plan")
was adopted by the Board of Directors of Petroglyph Energy, Inc. (the "Company")
to reward certain corporate officers and key employees of the Company and its
consolidated subsidiaries by enabling them to acquire shares of Common Stock,
par value $.01 per share, of the Company and/or to be compensated for individual
performances.
2. Objectives. That Plan is designed to attract and retain key employees
of the Company and its Subsidiaries (as hereinafter defined), to encourage the
sense of proprietorship of such employees and to stimulate the active interest
of such persons in the development and financial success of the Company and its
Subsidiaries. These objectives are to be accomplished by making Awards (as
hereinafter defined) under this Plan and thereby providing Participants (as
hereinafter defined) with a proprietary interest in the growth and performance
of the Company and its Subsidiaries.
3. Definitions. As used herein, the terms set forth below shall have the
following respective meanings:
"Authorized Officer" means the Chairman of the Board or the Chief Executive
Officer of the Company (or any other senior officer of the Company to whom
either of them shall delegate the authority to execute any Award Agreement).
"Award" means the grant of any Option, SAR, Stock Award, Cash Award or
Performance Award, whether granted singly, in combination or in tandem, to a
Participant pursuant to such applicable terms, conditions and limitations as the
Committee may establish in order to fulfill the objectives of the Plan.
"Award Agreement" means a written agreement between the Company and a
Participant setting forth the terms, conditions and limitations applicable to an
Award.
"Board" means the Board of Directors of the Company.
"Cash Award" means an award denominated in cash.
"Code" means the Internal Revenue Code of 1986, as amended from time to
time.
"Committee" means the Compensation Committee of the Board or such other
committee of the Board as is designated by the Board to administer the Plan.
"Common Stock" means the Common Stock, par value $.01 per share, of the
Company.
"Company" means Petroglyph Energy, Inc., a Delaware corporation.
"Dividend Equivalents" means, with respect to shares of Restricted Stock
that are to be issued at the end of the Restriction Period, an amount equal to
all dividends and other distributions (or the
<PAGE>
economic equivalent thereof) that are payable to stockholders of record during
the Restriction Period on a like number of shares of Common Stock.
"Effective Date" has the meaning set forth in paragraph 18 hereof.
"Employee" means an employee of the Company or any of its Subsidiaries.
"Fair Market Value" of a share of Common Stock means, as of a particular
date, (i) if shares of Common Stock are listed on a national securities
exchange, the mean between the highest and lowest sales price per share of
Common Stock on the consolidated transaction reporting system for the principal
national securities exchange on which shares of Common Stock are listed on that
date, or, if there shall have been no such sale so reported on that date, on the
last preceding date on which such a sale was so reported, (ii) if shares of
Common Stock are not so listed but are quoted on the Nasdaq National Market, the
mean between the highest and lowest sales price per share of Common Stock
reported by the Nasdaq National Market on that date, or, if there shall have
been no such sale so reported on that date, on the last preceding date on which
such a sale was so reported, (iii) if the Common Stock is not so listed or
quoted, the mean between the closing bid and asked price on that date, or, if
there are no quotations available for such date, on the last preceding date on
which such quotations shall be available, as reported by the Nasdaq National
Market, or, if not reported by the Nasdaq National Market, by the National
Quotation Bureau Incorporated or (iv) if shares of Common Stock are not publicly
traded, the most recent value determined by an independent appraiser appointed
by the Company for such purpose.
"Incentive Option" means an Option that is intended to comply with the
requirements set forth in Section 422 of the Code.
"Nonqualified Stock Option" means an Option that is not an Incentive
Option.
"Option" means a right to purchase a specified number of shares of Common
Stock at a specified price.
"Participant" means an Employee to whom an Award has been made under this
Plan.
"Performance Award" means an award made pursuant to this Plan to a
Participant who is subject to the attainment of one or more Performance Goals.
"Performance Goal" means a standard established by the Committee to
determine in whole or in part whether a Performance Award shall be earned.
"Restricted Stock" means any Common Stock that is restricted or subject to
forfeiture provisions.
"Restriction Period" means a period of time beginning as of the date upon
which an Award of Restricted Stock is made pursuant to this Plan and ending as
of the date upon which the Common Stock subject to such Award is no longer
restricted or subject to forfeiture provisions.
"SAR" means a right to receive a payment, in cash or Common Stock, equal to
the excess of the Fair Market Value or other specified valuation of a specified
number of shares of Common Stock on the date the right is exercised over a
specified strike price, in each case, as determined by the Committee.
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<PAGE>
"Stock Award" means an award in the form of shares of Common Stock or units
denominated in shares of Common Stock.
"Subsidiary" means (i) in the case of a corporation, any corporation in
which the Company directly or indirectly owns shares representing more than 50%
of the combined voting power of the shares of all classes or series of capital
stock of such corporation which have the right to vote generally on matters
submitted to a vote of the stockholders of such corporation and (ii) in the case
of a partnership or other business entity not organized as a corporation, any
such business entity of which the Company directly or indirectly owns more than
50% of the voting, capital or profits interests (whether in the form of
partnership interests, membership interests or otherwise).
4. Eligibility. Key Employees eligible for Awards under this Plan are
those who hold positions of responsibility and whose performance, in the
judgment of the Committee, can have a significant effect on the success of the
Company and its Subsidiaries.
5. Common Stock Available for Awards. Subject to the provisions of
paragraph 14 hereof, there shall be available for Awards under this Plan granted
wholly or partly in Common Stock (including rights or options that may be
exercised for or settled in Common Stock) an aggregate of 375,000 shares of
Common Stock. The number of shares of Common Stock that are subject to Awards
under this Plan, that are forfeited or terminated, expire unexercised, are
settled in cash in lieu of Common Stock or in a manner such that all or some of
the shares covered by an Award are not issued to a Participant or are exchanged
for Awards that do not involve Common Stock, shall again immediately become
available for Awards hereunder. The Committee may from time to time adopt and
observe such procedures concerning the counting of shares against the Plan
maximum as it may deem appropriate. The Board and the appropriate officers of
the Company shall from time to time take whatever actions are necessary to file
any required documents with governmental authorities, stock exchanges and
transaction reporting systems to ensure that shares of Common Stock are
available for issuance pursuant to Awards.
6. Administration.
(a) This Plan shall be administered by the Committee.
(b) Subject to the provisions hereof, the Committee shall have full and
exclusive power and authority to administer this Plan and to take all actions
that are specifically contemplated hereby or are necessary or appropriate in
connection with the administration hereof. The Committee shall also have full
and exclusive power to interpret this Plan and to adopt such rules, regulations
and guidelines for carrying out this Plan as it may deem necessary or proper,
all of which powers shall be exercised in the best interests of the Company and
in keeping with the objectives of this Plan. The Committee may, in its
discretion, provide for the extension of the exercisability of an Award,
accelerate the vesting or exercisability of an Award, eliminate or make less
restrictive any restrictions contained in an Award, waive any restrictions or
other provision of this Plan or an Award or otherwise amend or modify an Award
in any manner that is either (i) not adverse to the Participant to whom such
Award was granted or (ii) consented to by such Participant. The Committee may
correct any defect or supply any omission or reconcile any inconsistency in this
Plan or in any Award in the manner and to the extent the Committee deems
necessary or desirable to further the Plan purposes. Any decision of the
Committee in the interpretation and administration of this Plan shall lie within
its sole and absolute discretion and shall be final, conclusive and binding on
all parties concerned.
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<PAGE>
(c) No member of the Committee or officer of the Company to whom the
Committee has delegated authority in accordance with the provisions of paragraph
7 of this Plan shall be liable for anything done by him or her, by any member of
the Committee or by any officer of the Company in connection with the
performance of any duties under this Plan, except for his or her own willful
misconduct or as expressly provided by statute.
7. Delegation of Authority. The Committee may delegate to the Chief
Executive Officer and to other senior officers of the Company its duties under
this Plan pursuant to such conditions or limitations as the Committee may
establish.
8. Awards. The Committee shall determine the type or types of Awards to
be made under this Plan and shall designate from time to time the Employees who
are to be the recipients of such Awards. Each Award may be embodied in an Award
Agreement, which shall contain such terms, conditions and limitations as shall
be determined by the Committee in its sole discretion and shall be signed by the
Participant to whom the Award is made and by an Authorized Officer for and on
behalf of the Company. Awards may consist of those listed in this paragraph 8
hereof and may be granted singly, in combination or in tandem. Awards may also
be made in combination or in tandem with, in replacement of, or as alternatives
to, grants or rights under this Plan or any other employee plan of the Company
or any of its Subsidiaries, including the plan of any acquired entity. An Award
may provide for the grant or issuance of additional, replacement or alternative
Awards upon the occurrence of specified events, including the exercise of the
original Award granted to a Participant. All or part of an Award may be subject
to conditions established by the Committee, which may include, but are not
limited to, continuous service with the Company and its Subsidiaries,
achievement of specific business objectives, increases in specified indices,
attainment of specified growth rates and other comparable measurements of
performance. Upon the termination of employment by a Participant, any
unexercised, deferred, unvested or unpaid Awards shall be treated as set forth
in the applicable Award Agreement.
(a) Stock Option. An Award may be in the form of an Option. An Option
awarded pursuant to this Plan may consist of an Incentive Option or a
Nonqualified Option. The price at which shares of Common Stock may be
purchased upon the exercise of any Incentive Option shall be not less than
the Fair Market Value of the Common Stock on the date of grant. The price at
which shares of Common Stock may be purchased upon the exercise of a
Nonqualified Option shall be not less than the greater of 50 percent of the
Fair Market Value of the Common Stock on the date of grant or its par value.
The maximum number of shares of Common Stock with respect to which any Option
may be granted to an Employee hereunder is the number of shares available for
Awards, pursuant to paragraph 5 hereof, at the time such Option is granted.
Subject to the foregoing provisions, the terms, conditions and limitations
applicable to any Options awarded pursuant to this Plan, including the term
of any Options and the date or dates upon which they become exercisable,
shall be determined by the Committee.
(b) Stock Appreciation Right. An Award may be in the form of an SAR. The
terms, conditions and limitations applicable to any SARs awarded pursuant to
this Plan, including the term of any SARs and the date or dates upon which
they become exercisable, shall be determined by the Committee.
(c) Stock Award. An Award may be in the form of a Stock Award. The terms,
conditions and limitations applicable to any Stock Awards granted pursuant to
this Plan shall be determined by the Committee.
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<PAGE>
(d) Cash Award. An Award may be in the form of a Cash Award. The terms,
conditions and limitations applicable to any Cash Awards granted pursuant to
this Plan shall be determined by the Committee.
(e) Performance Award. Without limiting the type or number of Awards that
may be made under the other provisions of this Plan, an Award may be in the
form of a Performance Award. A Performance Award shall be paid, vested or
otherwise deliverable solely on account of the attainment of one or more pre-
established, objective Performance Goals established by the Committee.
9. Payment of Awards.
(a) General. Payment of Awards may be made in the form of cash or Common
Stock, or a combination thereof, and may include such restrictions as the
Committee shall determine, including, in the case of Common Stock,
restrictions on transfer and forfeiture provisions. If payment of an Award is
made in the form of Restricted Stock, the Award Agreement relating to such
shares shall specify whether they are to be issued at the beginning or end of
the Restriction Period. In the event that shares of Restricted Stock are to
be issued at the beginning of the Restriction Period, the certificates
evidencing such shares (to the extent that such shares are so evidenced)
shall contain appropriate legends and restrictions that describe the terms
and conditions of the restrictions applicable thereto. In the event that
shares of Restricted Stock are to be issued at the end of the Restriction
Period, the right to receive such shares shall be evidenced by book entry
registration or in such other manner as the Committee may determine.
(b) Deferral. With the approval of the Committee, payments in respect of
Awards may be deferred, either in the form of installments or a future lump-
sum payment. The Committee may permit selected Participants to elect to defer
payments of some or all types of Awards in accordance with procedures
established by the Committee. Any deferred payment of an Award, whether
elected by the Participant or specified by the Award Agreement or by the
Committee, may be forfeited if and to the extent that the Award Agreement so
provides.
(c) Dividends and Interest. Rights to dividends or Dividend Equivalents
may be extended to and made part of any Award consisting of shares of Common
Stock or units denominated in shares of Common Stock, subject to such terms,
conditions and restrictions as the Committee may establish. The Committee may
also establish rules and procedures for the crediting of interest on deferred
cash payments and Dividend Equivalents for Awards consisting of shares of
Common Stock or units denominated in shares of Common Stock.
(d) Substitution of Awards. At the discretion of the Committee, a
Participant may be offered an election to substitute an Award for another
Award or Awards of the same or different type.
10. Stock Option Exercise. The price at which shares of Common Stock may
be purchased under an Option shall be paid in full at the time of exercise in
cash or, if elected by the optionee, the optionee may purchase such shares by
means of tendering Common Stock or surrendering another Award, including
Restricted Stock, valued at Fair Market Value on the date of exercise, or any
combination thereof. The Committee shall determine acceptable methods for
Participants to tender Common Stock or other Awards. The Committee may provide
for procedures to permit the exercise or purchase of such Awards by use of the
proceeds to be received from the sale of Common Stock issuable pursuant to an
Award. Unless otherwise provided in the applicable Award Agreement, in the
event shares
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<PAGE>
of Restricted Stock are tendered as consideration for the exercise of an Option,
a number of the shares issued upon the exercise of the Option, equal to the
number of shares of Restricted Stock used as consideration therefor, shall be
subject to the same restrictions as the Restricted Stock so submitted as well as
any additional restrictions that may be imposed by the Committee.
11. Tax Withholding. The Company shall have the right to deduct
applicable taxes from any Award payment and withhold, at the time of delivery or
vesting of cash or shares of Common Stock under this Plan, an appropriate amount
of cash or number of shares of Common Stock or a combination thereof for payment
of taxes required by law or to take such other action as may be necessary in the
opinion of the Company to satisfy all obligations for withholding of such taxes.
The Committee may also permit withholding to be satisfied by the transfer to the
Company of shares of Common Stock theretofore owned by the holder of the Award
with respect to which withholding is required. If shares of Common Stock are
used to satisfy tax withholding, such shares shall be valued based on the Fair
Market Value when the tax withholding is required to be made. The Committee may
provide for loans, on either a short-term or demand basis, from the Company to a
Participant to permit the payment of taxes required by law.
12. Amendment, Modification, Suspension or Termination. The Board may
amend, modify, suspend or terminate this Plan for the purpose of meeting or
addressing any changes in legal requirements or for any other purpose permitted
by law, except that no amendment or alteration that would adversely affect the
rights of any Participant under any Award previously granted to such Participant
shall be made without the consent of such Participant.
13. Assignability. The Committee may prescribe and include in applicable
Award Agreements restrictions on transfer. Any attempted assignment of an Award
or any other benefit under this Plan in violation of this paragraph 13 shall be
null and void.
14. Adjustments.
(a) The existence of outstanding Awards shall not affect in any manner the
right or power of the Company or its stockholders to make or authorize any or
all adjustments, recapitalizations, reorganizations or other changes in the
capital stock of the Company or its business or any merger or consolidation
of the Company, or any issue of bonds, debentures, preferred or prior
preference stock (whether or not such issue is prior to, on a parity with or
junior to the Common Stock) or the dissolution or liquidation of the Company,
or any sale or transfer of all or any part of its assets or business, or any
other corporate act or proceeding of any kind, whether or not of a character
similar to that of the acts or proceedings enumerated above.
(b) In the event of any subdivision or consolidation of outstanding shares
of Common Stock, declaration of a dividend payable in shares of Common Stock
or other stock split, then (i) the number of shares of Common Stock reserved
under this Plan, (ii) the number of shares of Common Stock covered by
outstanding Awards in the form of Common Stock or units denominated in Common
Stock, (iii) the exercise or other price in respect of such Awards and (iv)
the appropriate Fair Market Value and other price determinations for such
Awards shall each be proportionately adjusted by the Board to reflect such
transaction. In the event of any other recapitalization or capital
reorganization of the Company, any consolidation or merger of the Company
with another corporation or entity, the adoption by the Company of any plan
of exchange affecting the Common Stock or any distribution to holders of
Common Stock of securities or property (other than normal cash dividends or
dividends payable in Common Stock), the Board shall make appropriate
adjustments to (i) the number of shares of Common Stock covered by
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<PAGE>
Awards in the form of Common Stock or units denominated in Common Stock, (ii)
the exercise or other price in respect of such Awards and (iii) the
appropriate Fair Market Value and other price determinations for such Awards
to give effect to such transaction shall each be proportionately adjusted by
the Board to reflect such transaction; provided that such adjustments shall
only be such as are necessary to maintain the proportionate interest of the
holders of the Awards and preserve, without exceeding, the value of such
Awards. In the event of a corporate merger, consolidation, acquisition of
property or stock, separation, reorganization or liquidation, the Board shall
be authorized to issue or assume Awards by means of substitution of new
Awards, as appropriate, for previously issued Awards or to assume previously
issued Awards as part of such adjustment.
15. Restrictions. No Common Stock or other form of payment shall be
issued with respect to any Award unless the Company shall be satisfied based on
the advice of its counsel that such issuance will be in compliance with
applicable federal and state securities laws. Certificates evidencing shares of
Common Stock delivered under this Plan (to the extent that such shares are so
evidenced) may be subject to such stop transfer orders and other restrictions as
the Committee may deem advisable under the rules, regulations and other
requirements of the Securities and Exchange Commission, any securities exchange
or transaction reporting system upon which the Common Stock is then listed or to
which it is admitted for quotation and any applicable federal or state
securities law. The Committee may cause a legend or legends to be placed upon
such certificates (if any) to make appropriate reference to such restrictions.
16. Unfunded Plan. Insofar as it provides for Awards of cash, Common
Stock or rights thereto, this Plan shall be unfunded. Although bookkeeping
accounts may be established with respect to Participants who are entitled to
cash, Common Stock or rights thereto under this Plan, any such accounts shall be
used merely as a bookkeeping convenience. The Company shall not be required to
segregate any assets that may at any time be represented by cash, Common Stock
or rights thereto, nor shall this Plan be construed as providing for such
segregation, nor shall the Company, the Board or the Committee be deemed to be a
trustee of any cash, Common Stock or rights thereto to be granted under this
Plan. Any liability or obligation of the Company to any Participant with
respect to an Award of cash, Common Stock or rights thereto under this Plan
shall be based solely upon any contractual obligations that may be created by
this Plan and any Award Agreement, and no such liability or obligation of the
Company shall be deemed to be secured by any pledge or other encumbrance on any
property of the Company. Neither the Company nor the Board nor the Committee
shall be required to give any security or bond for the performance of any
obligation that may be created by this Plan.
17. Governing Law. This Plan and all determinations made and actions
taken pursuant hereto, to the extent not otherwise governed by mandatory
provisions of the Code or the securities laws of the United States, shall be
governed by and construed in accordance with the laws of the State of Delaware.
18. Effectiveness. This Plan shall be effective upon the consummation by
the Company of a firm underwritten public offering of the Company's Common Stock
registered pursuant to the filing of a registration statement on Form S-1
pursuant to the Securities Act, (the "Effective Date"), the date on which it was
approved by the Board of Directors of the Company. Notwithstanding the
foregoing, the ability of the Company to issue any Incentive Options under this
Plan is expressly conditioned upon the approval of the Plan by the holders of a
majority of shares of Common Stock on or before December 31, 1997. If the
Stockholders of the Company should fail to so approve this Plan prior to such
date, the Company's ability to issue Incentive Options under this Plan shall
terminate and cease to be of any further force or effect and any and all grants
of Incentive Options hereunder shall be null and void.
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EXHIBIT 10.5
CONFIDENTIALITY AND NON-COMPETE AGREEMENT
CONFIDENTIALITY AND NON-COMPETE AGREEMENT (this "Agreement"), dated as of
August 22, 1997, between Petroglyph Energy, Inc., a Delaware corporation (the
"Company"), and_______________, an individual residing in Hutchinson, Kansas
("Employee").
WHEREAS, the Company has been recently created and organized to serve as
the holding company of Petroglyph Gas Partners, L.P., a Delaware limited
partnership (the "Partnership"), and Petroglyph Energy, Inc., a Kansas
corporation (the "General Partner"), in connection with a proposed transaction
in which the Company will acquire all of the limited partnership interests of
the Partnership and all of the outstanding shares of Common Stock of the General
Partner (the "Proposed Transaction");
WHEREAS, after the consummation of the Proposed Transaction, the Company
intends to offer its common stock, par value $0.01 ("Common Stock"), in an
underwritten public offering (the "IPO");
WHEREAS, Employee has been employed by the Partnership since its formation;
WHEREAS, promptly after the consummation of the Proposed Transaction, the
Company plans to employ Employee, and Employee desires to be employed by the
Company;
WHEREAS, Employee acknowledges that in the course of his employment by the
Company and performance of services on behalf of the Partnership, the General
Partner, the Company and its subsidiaries (collectively, the "Related Parties"),
he has and will become privy to various business opportunities, economic and
trade secrets and relationships of the Related Parties;
NOW, THEREFORE, in consideration of, and as a material inducement to, the
consummation of the Proposed Transaction and the employment of Employee by the
Related Parties, the Company and Employee intending to be legally bound, hereby
agree as follows:
1. Business Opportunities and Intellectual Property; Personal Investments;
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Confidentiality; Covenant not to Compete.
- ----------------------------------------
(a) Employee shall promptly disclose to the Company all "Business
Opportunities" and "Intellectual Property" (as defined below).
(b) Employee hereby assigns and agrees to assign to the Company, its
successors, assigns, or designees, all of Employee's right, title, and interest
in and to all "Business Opportunities" and "Intellectual Property" (as defined
below), and further acknowledges and agrees that all Business Opportunities and
Intellectual Property constitute the exclusive property of the Company.
(c) For purposes hereof "Business Opportunities" shall mean all business
ideas, prospects, proposals or other opportunities pertaining to the lease,
acquisition, exploration, production, gathering or marketing of hydrocarbons and
related products and the exploration potential of geographical areas on which
hydrocarbon exploration prospects are located, which are, or have been,
developed by Employee during the period that Employee is, or has been, employed
by any of the Related Parties (the "Employment Term") or originated by any third
party and brought to the attention of Employee during the Employment Term,
together with information relating thereto (including, without limitation,
geological and seismic data and interpretations thereof, whether in the form of
maps, charts, logs, seismographs, calculations, summaries, memoranda, opinions
or other written or charted means); provided, however, that this definition
shall not include any interests listed on Exhibit A hereto.
<PAGE>
(d) For purposes hereof "Intellectual Property" shall mean all ideas,
inventions, discoveries, processes, designs, methods, substances, articles,
computer programs and improvements (including, without limitation, enhancements
to, or further interpretation or processing of, information that was in the
possession of Employee prior to the formation of the Partnership), whether or
not patentable or copyrightable, which do not fall within the definition of
Business Opportunities, which are, or have been, discovered, conceived,
invented, created, or developed, by Employee, alone or with others, during the
Employment Term, if such discovery, conception, invention, creation, or
development (A) occurred or occurs in the course of Employee's employment with
the Related Parties, or (B) occurred or occurs with the use of any of the
Related Parties' time, materials or facilities, and (C) relates or pertains in
any way to the Related Parties' purposes, activities or affairs as conducted in
the oil and gas industry;
2. Non-Compete Obligations During Employment Term. Employee agrees that
----------------------------------------------
during the Employment Term:
(i) Employee will not, other than through the Related Parties, engage
or participate in any manner, whether directly or indirectly through any
family member or as an employee, employer, consultant, agent, principal,
partner, more than one percent shareholder, officer, director, licensor,
lender, lessor or in any other individual or representative capacity, in
any business or activity which is engaged in leasing, acquiring, exploring,
producing, gathering or marketing hydrocarbons and related products;
provided, however, that this subsection 2(i) shall not be applicable to
Employee's ownership or operation of the properties listed on Exhibit A
attached hereto or his or any family member's inheritance of oil and gas
properties in the future; and
(ii) all investments made by Employee (whether in his own name or in
the name of any family members or made by Employee's controlled
affiliates), which relate to the lease, acquisition, exploration,
production, gathering or marketing of hydrocarbons and related products
shall be made solely through the Related Parties; and Employee will not
(directly or indirectly through any family members), and will not permit
any of his controlled affiliates to: (A) invest or otherwise participate
alongside the Related Parties in any Business Opportunities, or (B) invest
or otherwise participate in any business or activity relating to a Business
Opportunity, regardless of whether any of the Related Parties ultimately
participates in such business or activity.
3. Confidentiality Obligations.
---------------------------
(a) Employee hereby acknowledges that all trade secrets and confidential or
proprietary information of the Related Parties (collectively referred to herein
as "Confidential Information") constitute valuable, special and unique assets of
the Related Parties' business, and that access to and knowledge of such
Confidential Information is essential to the performance of Employee's duties.
Employee agrees that during the Employment Term and during the two-year period
following the date of termination of Employee's employment (the "Termination
Date"), Employee will hold the Confidential Information in strict confidence and
will not publish, disseminate or otherwise disclose, directly or indirectly, to
any person other than the Related Parties and their respective officers,
directors, employees, agents and consultants, any Confidential Information or
use any Confidential Information for Employee's own personal benefit or for the
benefit of anyone other than the Related Parties.
(b) For purposes of this Section 3, it is agreed that Confidential
Information includes, without limitation, any information heretofore or
hereafter acquired, developed or used by any of the Related Parties relating to
Business Opportunities or Intellectual Property or other geological,
geophysical, economic, financial or management aspects of the business,
operations, properties or prospects of the
2
<PAGE>
Related Parties whether oral or in written form in a "Related Parties' Business
Records" (as defined in Section 5 below), but shall exclude any information
which (A) has become part of common knowledge or understanding in the oil and
gas industry or otherwise in the public domain (other than from disclosure by
Employee in violation of this Agreement), or (B) was rightfully in the
possession of Employee, as shown by Employee's records, prior to the formation
of the Partnership; provided, however, that this Section 3 shall not be
applicable to the extent Employee is required to testify in a judicial or
regulatory proceeding pursuant to the order of a judge or administrative law
judge after Employee requests that such Confidential Information be preserved.
4. Post Employment Non-Compete Covenant.
------------------------------------
(a) Employee agrees that if he voluntarily resigns or otherwise terminates
his position of employment with the Company or if his employment is terminated
by the Company for cause (as defined below), he will not engage or participate
in any manner, whether directly or indirectly through any family member or as an
employee, employer, consultant, agent, principal, partner, more than one percent
shareholder, officer, director, licensor, lender, lessor or in any other
individual or representative capacity:
(i) during the six-month period following the Termination Date, in any
business or activity which is engaged in leasing, acquiring, exploring,
producing, gathering or marketing hydrocarbons and related products within
the States of Utah, Colorado, Oklahoma, Texas and Kansas; and
(ii) during the eighteen-month period following the Termination Date,
in any business or activity which is in engaged in leasing, acquiring,
exploring, producing, gathering or marketing hydrocarbons and related
products within the boundaries of, or within a twenty mile radius of the
boundaries of, any mineral property interest of any of the Related Parties
(including, without limitation, a mineral lease, overriding royalty
interest, production payment, net profits interest, mineral fee interest,
or option or right to acquire any of the foregoing, or an area of mutual
interest as designated pursuant to contractual agreements between the
Related Party and any third party) or any other property on which the
Related Parties have an option, right, license, or authority to conduct or
direct exploratory activities, such as three dimensional seismic
acquisition or other seismic, geophysical and geochemical activities (but
not including any preliminary geological mapping), as of the Termination
Date;
provided that, this Section 4 shall not preclude Employee from making personal
investments in securities of oil and gas companies which are registered on a
national stock exchange, if the aggregate amount owned by Employee and all
family members and affiliates does not exceed 5% of such company's outstanding
securities.
(b) Employee and Company agree that, if the Company terminates Employee's
employment other than for cause, the Company shall have five days after the
Termination Date to elect, at its sole option, to make "Severance Payments" (as
defined below) to Employee. If the Company elects to make Severance Payments,
then during the "Severance Period" (as defined below), Employee will not engage
or participate in any manner, whether directly or indirectly through any family
member or as an employee, employer, consultant, agent, principal, partner, more
than one percent shareholder, officer, director, licensor, lender, lessor or in
any other individual or representative capacity, in any business or activity
which is engaged in leasing, acquiring, exploring, producing, gathering or
marketing hydrocarbons and related products within the States of Utah, Colorado,
Oklahoma, Texas or Kansas. For purposes hereof, "Severance Payments" shall be
Employee's regular salary immediately before termination and shall be payable at
the same times as Employee's regular salary immediately before termination. For
purposes hereof, the
3
<PAGE>
"Severance Period" shall be the period during which the Company makes severance
payments to Employee, the length of which shall be determined by the Company at
its discretion, but in no event shall such period be less than six months or
greater than 18 months. Notwithstanding anything herein to the contrary, the
Company shall not be obligated to make Severance Payments for any length of time
and shall be entitled to cease making Severance Payments at any time for any
reason or for no reason.
(c) Employee will not during the two-year period following the Termination
Date, solicit, entice, persuade or induce, directly or indirectly, any employee
(or person who within the preceding ninety (90) days was an employee) of any of
the Related Parties or any other person who is under contract with or rendering
services to any of the Related Parties, to (i) terminate his or her employment
by, or contractual relationship with, any of the Related Parties, (ii) refrain
from extending or renewing the same (upon the same or new terms), (iii) refrain
from rendering services to or for any of the Related Parties, or (iv) enter into
a relationship with a competitor of any of the Related Parties.
(d) For purposes hereof, a termination for "cause" will include any of the
following: (A) Employee's conviction of, or plea of nolo contendere to, any
felony or to any crime or offense causing substantial harm to the Company or its
affiliates or involving acts of theft, fraud, embezzlement, moral turpitude or
similar conduct; (B) Employee's repeated intoxication by alcohol or drugs during
the performance of his duties in a manner that materially and adversely affects
Employee's performance of such duties; (C) malfeasance in the conduct of
Employee's duties, including, but not limited to, (1) willful and intentional
misuse or diversion of funds of the Company, or its affiliates, that constitutes
willful misconduct or gross negligence on the part of Employee, (2)
embezzlement, or (3) fraudulent or willful and material misrepresentations or
concealments on any written reports submitted to the Company or its affiliates;
(D) Employee's violation of any provision of any other agreement between
Employee and the Company (including any confidentiality and non-compete
agreement and voting and shareholders agreement) causing or which could cause
substantial harm to the Company or its affiliates; (E) Employee's material
failure to perform the duties of Employee's employment or material failure to
follow or comply with the reasonable and lawful written directives of the Board
of Directors of the Company, in either case after Employee shall have been
informed, in writing, of such material failure and given a period of not more
than 60 days to remedy same.
5. Business Records.
----------------
(a) Employee agrees to promptly deliver to the Company, upon termination of
his employment by the Related Parties, or at any other time when the Company so
requests, all documents relating to the business of the Related Parties,
including, without limitation: all geological and geophysical reports and
related data such as maps, charts, logs, seismographs, seismic records and other
reports and related data, calculations, summaries, memoranda and opinions
relating to the foregoing, production records, electric logs, core data,
pressure data, lease files, well files and records, land files, abstracts, title
opinions, title or curative matters, contract files, notes, records, drawings,
manuals, correspondence, financial and accounting information, customer lists,
statistical data and compilations, patents, copyrights, trademarks, trade names,
inventions, formulae, methods, processes, agreements, contracts, manuals or any
other documents relating to the business of the Related Parties, (collectively,
the "Related Parties' Business Records"), and all copies thereof and therefrom.
(b) Employee confirms that all of the Related Parties' Business Records
(and all copies thereof and therefrom) which are required to be delivered to the
Company pursuant to this Section constitute the exclusive property of the
Company and the other Related Parties.
4
<PAGE>
(c) The obligation of confidentiality set forth in Section 3 shall continue
notwithstanding Employee's delivery of any such documents to the Company.
(d) Notwithstanding the foregoing provisions of this Section 5 or any other
provision of this Agreement, Employee shall be entitled to retain any written
materials which (i) constitute agreements to which Employee is a party, (ii) are
materials given or distributed to stockholders of the Company generally or (iii)
as shown by Employee's records, were in Employee's possession prior to the
formation of the Partnership, subject to the Company's right to receive a copy
of all such materials.
6. Miscellaneous.
-------------
(a) The invalidity or non-enforceability of any provision of this Agreement
in any respect shall not affect the validity or enforceability of this Agreement
in any other respect or of any other provision of this Agreement. In the event
that any provision of this Agreement shall be held invalid or unenforceable by a
court of competent jurisdiction by reason of the geographic or business scope or
the duration thereof, such invalidity or unenforceability shall attach only to
the scope or duration of such provision and shall not affect or render invalid
or unenforceable any other provision of this Agreement, and, to the fullest
extent permitted by law, this Agreement shall be construed as if the geographic
or business scope or the duration of such provision had been more narrowly
drafted so as not to be invalid or unenforceable.
(b) Employee acknowledges that the Company's remedy at law for any breach
of the provisions of this Agreement is and will be insufficient and inadequate
and that the Company shall be entitled to equitable relief, including by way of
temporary and permanent injunction, in addition to any remedies the Company may
have at law.
(c) The representations and covenants contained in this Agreement on the
part of Employee will be construed as ancillary to and independent of any other
agreement between the Company and Employee, and the existence of any claim or
cause of action of Employee against the Company or any of the other Related
Parties or any officer, director or shareholder of the Company or any of the
other Related Parties, whether predicated on Employee's employment or otherwise,
shall not constitute a defense to the enforcement by the Company of the
covenants of Employee contained in this Agreement. In addition, the provisions
of this Agreement shall continue to be binding upon Employee in accordance with
their terms, notwithstanding the termination of Employee's employment for any
reason.
(d) The parties to this Agreement agree that the limitations contained in
Section 4 with respect to time, geographical area, and scope of activity are
reasonable. However, if any court shall determine that the time, geographical
area, or scope of activity of any restriction contained in Section 4 is
unenforceable, it is the intention of the parties that such restrictive covenant
set forth herein shall not thereby be terminated but shall be deemed amended to
the extent required to render it valid and enforceable.
(e) Any notices or other communications required or permitted to be sent
hereunder shall be in writing and shall be duly given if personally delivered or
sent postage pre-paid by certified or registered
5
<PAGE>
mail, return receipt requested, at the addresses set forth on the signature page
hereof. Either party may change his or its address for the sending of notice to
such party by written notice to the other party sent in accordance with the
provisions hereof.
(f) This Agreement may not be altered or amended except by a writing, duly
executed by the party against whom such alteration or amendment is sought to be
enforced.
(g) This Agreement may be executed in counterparts, each of which shall be
an original and all of which together shall constitute one and the same
instrument.
6
<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has executed this Agreement in
multiple counterparts as of the day and year first above written.
COMPANY
PETROGLYPH ENERGY, INC.
6209 North Highway 61
Hutchinson, Kansas 67502
By:
-------------------------------------------
Robert C. Murdock, President
EMPLOYEE
- --------------------------
Hutchinson, Kansas
-------
----------------------------------------------
-------------------------
7
<PAGE>
EXHIBIT 10.6
INDEMNITY AGREEMENT
-------------------
This Agreement made and entered into as of this 22nd day of August, 1997,
by and between PETROGLYPH ENERGY, INC., a Delaware corporation (the "Company"),
and _____________________ ("Indemnitee"), who is currently serving the Company
in the capacity of a director and/or officer thereof;
W I T N E S S E T H:
WHEREAS, the Company and Indemnitee recognize that the interpretation of
ambiguous statutes, regulations and court opinions and of the Certificate of
Incorporation and Bylaws of the Company, and the vagaries of public policy, are
too uncertain to provide the directors and officers of the Company with adequate
or reliable advance knowledge or guidance with respect to the legal risks and
potential liabilities to which they become personally exposed as a result of
performing their duties in good faith for the Company; and
WHEREAS, the Company and the Indemnitee are aware that highly experienced
and capable persons are often reluctant to serve as directors or officers of a
corporation unless they are protected to the fullest extent permitted by law by
comprehensive insurance or indemnification, especially since the legal risks and
potential liabilities, and the very threat thereof, associated with lawsuits
filed against the officers and directors of a corporation, and the resultant
substantial time, expense, harassment, ridicule, abuse and anxiety spent and
endured in defending against such lawsuits, whether or not meritorious, bear no
reasonable or logical relationship to the amount of compensation received by the
directors or officers from the corporation; and
WHEREAS, Section 145 of the General Corporation Law of the State of
Delaware, which sets forth certain provisions relating to the mandatory and
permissive indemnification of, and advancement of expenses to, officers and
directors (among others) of a Delaware corporation by such corporation, is
specifically not exclusive of other rights to which those indemnified thereunder
may be entitled under any bylaw, agreement, vote of stockholders or
disinterested directors or otherwise, and, thus, does not by itself limit the
extent to which the Company may indemnify persons serving as its officers and
directors (among others); and
WHEREAS, after due consideration and investigation of the terms and
provisions of this Agreement and the various other options available to the
Company and the Indemnitee in lieu thereof, the board of directors of the
Company has determined that the following Agreement is not only reasonable and
prudent but necessary to promote and ensure the best interests of the Company
and its stockholders; and
WHEREAS, the Company desires to have Indemnitee serve or continue to serve
as an officer and/or director of the Company, free from undue concern for
unpredictable, inappropriate or unreasonable legal risks and personal
liabilities by reason of his acting in good faith in the performance of his duty
to the Company; and Indemnitee desires to serve, or to continue to serve
(provided that he is furnished the indemnity provided for hereinafter), in
either or both of such capacities;
<PAGE>
NOW, THEREFORE, in consideration of the premises and the mutual agreements
herein set forth and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the Company and Indemnitee,
intending to be legally bound, do hereby agree as follows:
1. Agreement to Serve. Indemnitee agrees to serve or continue to serve as
director and/or officer of the Company, at the will of the Company or under
separate contract, if such exists, for so long as he is duly elected or
appointed and qualified in accordance with the provisions of the Bylaws of the
Company or until such time as he tenders his resignation in writing.
2. Definitions. As used in this Agreement:
(a) The term "Proceeding" shall mean any action, suit or proceeding,
whether civil, criminal, administrative, arbitrative or investigative, any
appeal in such an action, suit or proceeding, and any inquiry or
investigation that could lead to such an action, suit or proceeding, except
one initiated by Indemnitee to enforce his rights under this Agreement.
(b) The term "Expenses" includes, without limitation, all reasonable
attorneys' fees, retainers, court costs, transcript costs, fees of experts,
witness fees, travel expenses, duplicating costs, printing and binding
costs, telephone charges, postage, delivery service fees and all other
disbursements or expenses of the types customarily incurred in connection
with prosecuting, defending, preparing to prosecute or defend,
investigating, or being or preparing to be a witness in a Proceeding.
(c) References to "other enterprise" shall include employee benefit
plans; references to "fines" shall include any (i) excise taxes assessed
with respect to any employee benefit plan and (ii) penalties; references to
"serving at the request of the Company" shall include any service as a
director, officer, employee or agent of the Company which imposes duties
on, or involves services by, such director, officer, employee or agent with
respect to an employee benefit plan, its participants or beneficiaries; and
a person who acts in good faith and in a manner he reasonably believes to
be in the interest of the participants and beneficiaries of an employee
benefit plan shall be deemed to have acted in a manner "not opposed to the
best interests of the Company" as referred to in this Agreement.
3. Indemnity in Third Party Proceedings. The Company shall indemnify
Indemnitee in accordance with the provisions of this Section 3 if Indemnitee is
a party to or is threatened to be made a party to or otherwise involved in any
threatened, pending or completed Proceeding (other than a Proceeding by or in
the right of the Company to procure a judgment in its favor) by reason of the
fact that Indemnitee is or was a director and/or officer of the Company, or is
or was serving at the request of the Company as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise, against all Expenses, judgments, fines and amounts paid in
settlement actually and reasonably incurred by Indemnitee in connection
2
<PAGE>
with such Proceeding, provided it is determined pursuant to Section 7 of this
Agreement or by the court having jurisdiction in the matter, that Indemnitee
acted in good faith and in a manner that he reasonably believed to be in or not
opposed to the best interests of the Company, and, with respect to any criminal
Proceeding, had no reasonable cause to believe his conduct was unlawful. The
termination of any Proceeding by judgment, order, settlement or conviction, or
upon a plea of nolo contendere or its equivalent, shall not, of itself, create a
presumption that Indemnitee did not act in good faith and in a manner that he
reasonably believed to be in or not opposed to the best interests of the
Company, and, with respect to any criminal Proceeding, had reasonable cause to
believe that his conduct was unlawful.
4. Indemnity in Proceedings By or In the Right of the Company. The
Company shall indemnify Indemnitee in accordance with the provisions of this
Section 4 if Indemnitee is a party to or is threatened to be made a party to or
otherwise involved in any threatened, pending or completed Proceeding by or in
the right of the Company to procure a judgment in its favor by reason of the
fact that Indemnitee is or was a director and/or officer of the Company, or is
or was serving at the request of the Company as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise, against all Expenses actually and reasonably incurred by Indemnitee
in connection with the defense, settlement or other disposition of such
Proceeding, but only if he acted in good faith and in a manner that he
reasonably believed to be in or not opposed to the best interests of the
Company, except that no indemnification shall be made under this Section 4 in
respect of any claim, issue or matter as to which Indemnitee shall have been
adjudged to be liable to the Company unless and only to the extent that the
Delaware Court of Chancery or the court in which such Proceeding was brought
shall determine upon application that, despite the adjudication of liability but
in view of all the circumstances of the case, Indemnitee is fairly and
reasonably entitled to indemnity for such Expenses as the Delaware Court of
Chancery or such other court shall deem proper.
5. Indemnification for Expenses of Successful Party. Notwithstanding any
other provision of this Agreement to the contrary, to the extent that Indemnitee
has been successful on the merits or otherwise in defense of any Proceeding
referred to in Sections 3 and/or 4 of this Agreement, or in defense of any
claim, issue or matter therein, including dismissal without prejudice,
Indemnitee shall be indemnified against all Expenses actually and reasonably
incurred by Indemnitee in connection therewith.
6. Advances of Expenses. The Expenses incurred by Indemnitee pursuant to
Sections 3 and/or 4 of this Agreement in connection with any Proceeding shall,
at the written request of the Indemnitee, be paid by the Company in advance of
the final disposition of such Proceeding upon receipt by the Company of an
undertaking by or on behalf of Indemnitee ("Indemnitee's Undertaking") to repay
such amount to the extent that it is ultimately determined that Indemnitee is
not entitled to be indemnified by the Company. The request for advancement of
Expenses by Indemnitee and the undertaking to repay of Indemnitee, which need
not be secured, shall be substantially in the form of Exhibit A to this
Agreement.
3
<PAGE>
7. Right of Indemnitee to Indemnification or Advancement of Expenses Upon
Application; Procedure Upon Application.
(a) Any indemnification under Sections 3 and/or 4 of this Agreement
shall be made no later than 45 days after receipt by the Company of the
written request of Indemnitee, unless a determination is made within said
45-day period by (i) a majority vote of the directors of the Company who
are not parties to the involved Proceeding, even though less than a quorum,
or (ii) independent legal counsel in a written opinion (which counsel shall
be appointed by the Board of Directors if there are no disinterested
directors or by the disinterested directors at their discretion), that the
Indemnitee has not met the applicable standards for indemnification set
forth in Section 3 or 4, as the case may be. No determination that an
Indemnitee is not entitled to Indemnification pursuant to this Section 7(a)
shall affect the right of an Indemnitee to receive indemnification pursuant
to Section 5 hereof.
(b) Any advancement of Expenses under Section 6 of this Agreement shall
be made no later than 10 days after receipt by the Company of Indemnitee's
Undertaking.
(c) In any action to establish or enforce the right of indemnification
or to receive advancement of Expenses as provided in this Agreement, the
burden of proving that indemnification or advancement of Expenses is not
appropriate shall be on the Company. Neither the failure of the Company
(including its board of directors or independent legal counsel) to have
made a determination prior to the commencement of such action that
indemnification or advancement of Expenses is proper in the circumstances
because Indemnitee has met the applicable standard of conduct, nor an
actual determination by the Company (including its board of directors or
independent legal counsel) that Indemnitee has not met such applicable
standard of conduct, shall be a defense to the action or create a
presumption that Indemnitee has not met the applicable standard of conduct.
Expenses incurred by Indemnitee in connection with successfully
establishing or enforcing his right of indemnification or to receive
advancement of Expenses, in whole or in part, under this Agreement shall
also be indemnified by the Company.
8. Indemnification and Advancement of Expenses Under this Agreement Not
Exclusive. The rights of indemnification and to receive advancement of Expenses
as provided by this Agreement shall not be deemed exclusive of any other rights
to which Indemnitee may be entitled under the Certificate of Incorporation or
Bylaws of the Company, any other agreement, any vote of stockholders or
disinterested directors, the General Corporation Law of the State of Delaware,
or otherwise, both as to action in his official capacity and as to action in
another capacity while holding such office.
9. Partial Indemnification. If Indemnitee is entitled under any provision
of this Agreement to indemnification or to receive advancement by the Company
for some or a portion of the Expenses, judgments, fines or amounts paid in
settlement actually and reasonably incurred by Indemnitee in the investigation,
defense, appeal, settlement or other disposition of any
4
<PAGE>
Proceeding but not, however, for the total amount thereof, the Company shall
nevertheless indemnify Indemnitee for the portion thereof to which Indemnitee is
entitled.
10. Rights Continued. The rights of indemnification and to receive
advancement of Expenses as provided by this Agreement shall continue as to
Indemnitee even though Indemnitee may have ceased to be a director or officer of
the Company and shall inure to the benefit of Indemnitee's personal or legal
representatives, executors, administrators, successors, heirs, distributees,
devisees and legatees.
11. No Construction as an Employment Agreement or Any Other Commitment.
Nothing contained in this Agreement shall be construed as giving Indemnitee any
right to be retained in the employ of the Company or any of its subsidiaries, if
Indemnitee currently serves as an officer of the Company, or to be renominated
as a director of the Company, if Indemnitee currently serves as a director of
the Company.
12. Liability Insurance. To the extent the Company maintains an insurance
policy or policies providing directors' and officers' liability insurance,
Indemnitee shall be covered by such policy or policies in accordance with its or
their terms, to the maximum extent of the coverage available for any director or
officer of the Company under such policy or policies.
13. No Duplication of Payments. The Company shall not be liable under
this Agreement to make any payment of amounts otherwise indemnifiable under this
Agreement if, and to the extent that, Indemnitee has otherwise actually received
such payment under any contract, agreement or insurance policy, the Certificate
of Incorporation or Bylaws of the Company, or otherwise.
14. Subrogation. In the event of payment under this Agreement, the
Company shall be subrogated to the extent of such payment to all the rights of
recovery of Indemnitee, who shall execute all papers required and shall do
everything that may be necessary to secure such rights, including without
limitation the execution of such documents as may be necessary to enable the
Company effectively to bring suit to enforce such rights.
15. Exceptions. Notwithstanding any other provision in this Agreement,
the Company shall not be obligated pursuant to the terms of this Agreement, to
indemnify or advance Expenses to the Indemnitee with respect to any Proceeding,
or any claim therein, (i) brought or made by Indemnitee against the Company, or
(ii) in which final judgment is rendered against the Indemnitee for an
accounting of profits made from the purchase and sale or the sale and purchase
by Indemnitee of securities of the Company pursuant to the provisions of Section
16(b) of the Securities Exchange Act of 1934, as amended, or similar provisions
of any federal, state or local statute.
16. Notices. Any notice or other communication required or permitted to
be given or made to the Company or Indemnitee pursuant to this Agreement shall
be given or made in writing by depositing the same in the United States mail,
with postage thereon prepaid, addressed to the person to whom such notice or
communication is directed at the address of such person on the
5
<PAGE>
records of the Company, and such notice or communication shall be deemed given
or made at the time when the same shall be so deposited in the United States
mail. Any such notice or communication to the Company shall be addressed to the
Secretary of the Company.
17. Contractual Rights. The right to be indemnified or to receive
advancement of Expenses under this Agreement (i) is a contract right based upon
good and valuable consideration, pursuant to which Indemnitee may sue, (ii) is
and is intended to be retroactive and shall be available as to events occurring
prior to the date of this Agreement and (iii) shall continue after any
rescission or restrictive modification of this Agreement as to events occurring
prior thereto.
18. Severability. If any provision or provisions of this Agreement shall
be held to be invalid, illegal or unenforceable for any reason whatsoever, the
validity, legality and enforceability of the remaining provisions shall not in
any way be affected or impaired thereby; and, to the fullest extent possible,
the provisions of this Agreement shall be construed so as to give effect to the
intent manifested by the provisions held invalid, illegal or unenforceable.
19. Successors; Binding Agreement. The Company shall require any
successor to all or substantially all of the business and/or assets of the
Company (whether direct or indirect, by purchase, merger, consolidation or
otherwise), by agreement in form and substance reasonably satisfactory to
Indemnitee, to expressly assume and agree to perform this Agreement in the same
manner and to the same extent that the Company would be required to perform if
no such succession had taken place. As used in this Agreement, "Company" shall
mean the Company as hereinbefore defined and any successor to its business
and/or assets as aforesaid which executes and delivers the agreement provided
for in this Section 19 or which otherwise becomes bound by the terms and
provisions of this Agreement by operation of law.
20. Counterparts, Modification, Headings, Gender.
(a) This Agreement may be executed in any number of counterparts, each
of which shall constitute one and the same instrument, and either party
hereto may execute this Agreement by signing any such counterpart.
(b) No provisions of this Agreement may be modified, waived or
discharged unless such waiver, modification or discharge is agreed to in
writing and signed by Indemnitee and an appropriate officer of the Company.
No waiver by any party at any time of any breach by any other party of, or
compliance with, any condition or provision of this Agreement to be
performed by any other party shall be deemed a waiver of similar or
dissimilar provisions or conditions at the same time or at any prior or
subsequent time.
(c) Section headings are not to be considered part of this Agreement,
are solely for convenience of reference, and shall not affect the meaning
or interpretation of this Agreement or any provision set forth herein.
6
<PAGE>
(d) Pronouns in masculine, feminine and neuter genders shall be
construed to include any other gender, and words in the singular form shall
be construed to include the plural and vice versa, unless the context
otherwise requires.
21. Assignability. This Agreement shall not be assignable by either
party without the consent of the other.
22. Exclusive Jurisdiction; Governing Law. The Company and Indemnitee
agree that all disputes in any way relating to or arising under this Agreement,
including, without limitation, any action for advancement of Expenses or
indemnification, shall be litigated, if at all, exclusively in the Delaware
Court of Chancery, and, if necessary, the corresponding appellate courts. This
Agreement shall be governed by and construed and enforced in accordance with the
laws of the State of Delaware applicable to contracts made and to be performed
in such state without giving effect to the principles of conflicts of laws. The
Company and Indemnitee expressly submit themselves to the personal jurisdiction
of the State of Delaware.
23. Termination.
(a) This Agreement shall terminate upon the mutual agreement of the
parties that this Agreement shall terminate or upon the death of Indemnitee
or the resignation, retirement, removal or replacement of Indemnitee from
all of his positions as a director and/or officer of the Company.
(b) The termination of this Agreement shall not terminate:
(i) the Company's liability for claims or actions against
Indemnitee arising out of or related to acts, omissions, occurrences,
facts or circumstances occurring or alleged to have occurred prior to
such termination; or
(ii) the applicability of the terms and conditions of this
Agreement to such claims or actions.
7
<PAGE>
IN WITNESS WHEREOF, the Company and Indemnitee have executed this Agreement
as of the date and year first above written.
PETROGLYPH ENERGY, INC.
By:
-------------------------------
Name:
-----------------------------
Title:
----------------------------
INDEMNITEE
----------------------------------
Name:
8
<PAGE>
EXHIBIT A
INDEMNITEE'S UNDERTAKING
___________, 19__
Petroglyph Energy, Inc.
6209 North Highway 61
Hutchinson, Kansas 67502
Re: Indemnity Agreement
Gentlemen:
Reference is made to the Indemnity Agreement dated as of ____________, 1997
by and between Petroglyph Energy, Inc. and the undersigned Indemnitee, and
particularly to Section 6 thereof relating to advance payment by the Company of
certain Expenses incurred by the undersigned Indemnitee. Capitalized terms used
and not otherwise defined in this Indemnitee's Undertaking shall have the
respective meanings ascribed to such terms in the Agreement.
The undersigned Indemnitee has incurred Expenses pursuant to Section 3
and/or 4 of the Agreement in connection with a Proceeding. The types and
amounts of Expenses are itemized on Attachment I to this Indemnitee's
Undertaking. The undersigned Indemnitee hereby requests that the total amount
of these Expenses (the "Advanced Amount") be paid by the Company in advance of
the final disposition of such Proceeding in accordance with the Agreement.
The undersigned Indemnitee hereby agrees to repay the Advanced Amount to
the Company to the extent that it is ultimately determined that the undersigned
Indemnitee is not entitled to be indemnified by the Company. This agreement of
Indemnitee to repay shall be unsecured.
Very truly yours,
---------------------------------
Signature
---------------------------------
Name of Indemnitee (Type or Print)
<PAGE>
ATTACHMENT I TO
INDEMNITEE'S UNDERTAKING
ITEMIZATION OF
TYPES AND AMOUNTS OF EXPENSES
-----------------------------
Attached hereto are receipts, statements or invoices for the following
qualifying Expenses which Indemnitee represents have been incurred by Indemnitee
in connection with a Proceeding:
<TABLE>
Type Amount
---- ------
<S> <C>
1.
------
Total Advanced Amount ======
</TABLE>
<PAGE>
Exhibit 10.7
------------
LOAN AGREEMENT
BETWEEN
PGP II, L.P.
Borrower
and
TEXAS COMMERCE BANK NATIONAL ASSOCIATION
Lender
$10,000,000 Converting Loan
Dated as of
May 25, 1995
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
Page
----
<C> <S> <C>
SECTION 1. CERTAIN DEFINITIONS AND TERMS.....................................1
SECTION 2. REVOLVING CREDIT FACILITY AND TERM LOAN FACILITY .................8
2.1. Revolving Credit Commitment.......................................8
2.2. Borrowing Procedure; Disbursement.................................9
2.3. Term Loan Commitment.............................................11
2.4. Note.............................................................12
2.5. Manner of Payments...............................................12
2.6. Interest.........................................................12
2.7. Computation of Interest..........................................12
2.8. Default Rate.....................................................12
2.9. Principal Payments...............................................12
2.10. Mandatory Payment of Revolving Credit Loans......................12
2.11. Voluntary Designation of Borrowing Base or Mandatory
Cancellation of Revolving Credit Facility........................13
2.12. Voluntary Principal Prepayments..................................13
2.13. Order of Application.............................................13
2.14. Use of Proceeds..................................................14
2.15. Capital Adequacy.................................................14
2.16. Closing Fee......................................................14
2.17. Commitment Fee...................................................14
2.18 Clawback.........................................................14
SECTION 3. CONDITIONS PRECEDENT.............................................15
3.1. Initial Loans....................................................15
3.2. Each Loan........................................................15
3.3. Waiver of Conditions.............................................15
SECTION 4. REPRESENTATIONS AND WARRANTIES...................................15
4.1. Organization and Powers..........................................16
4.2. Validity and Binding Nature......................................16
4.3. Compliance with Laws and Documents...............................16
4.4. Prior Names......................................................16
4.5. Relationship with Lender.........................................16
4.6. Financial Statements and Reserve Reports.........................16
4.7. Labor Matters....................................................17
4.8. Litigation.......................................................17
4.9. Taxes and Claims.................................................17
4.10. Government Regulation............................................17
4.11. Employee Benefit Plans...........................................17
</TABLE>
i
<PAGE>
<TABLE>
<S> <C> <C>
4.12. Purpose of Loan................................17
4.13. Properties; Liens; Debt........................17
4.14. Material Agreements............................18
4.15. No Consents....................................18
4.16. Environmental Laws; Hazardous Materials........18
4.17. Subsidiaries...................................19
4.18. Capitalization and Control.....................19
4.19. General........................................19
4.20. Mortgage Properties Same as Properties
Engineered.....................................19
4.21. Operation of Business..........................19
4.22. Operator of Working Interest...................19
SECTION 5. COVENANTS......................................19
5.1. Affirmative Covenants..........................19
5.2. Negative Covenants.............................23
5.3. Reporting Requirements.........................26
SECTION 6. EVENTS OF DEFAULT..............................27
6.1. Payment of Obligation..........................27
6.2. Certain Covenants..............................27
6.3. Other Covenants................................27
6.4. Loan Documents and Security Documents..........27
6.5. Bankruptcy.....................................27
6.6. Attachment.....................................28
6.7. Payment of Judgments...........................28
6.8. Default Under Other Debt.......................28
6.9. Material Adverse Effect........................28
6.10. Impairment of Collateral or Ability to Pay.....28
6.11. Misrepresentation..............................28
SECTION 7. RIGHTS AND REMEDIES............................28
7.1. Remedies.......................................28
7.2. Performance by Lender..........................29
7.3. Delegation of Duties and Rights................29
7.4. Expenditures by Lender.........................29
SECTION 8. MISCELLANEOUS..................................29
8.1. Notices........................................29
8.2. Amendments, Etc................................29
8.3. No Waiver; Remedies Cumulative.................29
8.4. Successors and Assigns.........................30
8.5. Number and Gender of Words.....................30
8.6. Headings.......................................30
8.7. Exhibits and Schedules.........................30
8.8. Form and Number of Documents...................30
</TABLE>
ii
<PAGE>
<TABLE>
<S> <C> <C>
8.9. Conflicts......................................30
8.10. Waivers by the Borrower........................30
8.11. Changes in the Accounting Standard.............31
8.12. Exceptions to Covenants........................31
8.13. Survival.......................................31
8.14. Governing Law..................................31
8.15. Venue; Service of Process......................31
8.16. Waiver of Jury Trial...........................32
8.17. Maximum Interest Rate..........................32
8.18. Severability...................................33
8.19. Lender Not in Control..........................33
8.20. Entirety and Amendments........................33
8.21. Multiple Counterparts..........................34
8.22. Petroleum Terms................................34
8.23 DTPA Waiver....................................34
8.24 Nonrecourse of Lender..........................34
</TABLE>
Schedules
---------
3.1 - Closing Documents
4.4 - Prior Names
4.8 - Litigation
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 Note
C Oil and Gas Mortgage
D Mortgaged Properties
E Well Certificate
F Transfer Order Letters
G Solvency Certificate
H Local Counsel Opinion
I Form of Interest Notice
J Opinion of Counsel
K Financial Report Certificate
iii
<PAGE>
LOAN AGREEMENT
--------------
THIS LOAN AGREEMENT is entered into as of May 25 1995, between PGP
--
II, L.P., a Delaware limited partnership (the "Borrower"), and TEXAS COMMERCE
--------
BANK NATIONAL ASSOCIATION, a national banking association ("Lender").
------
W I T N E S S E T H:
WHEREAS, the Borrower desires to borrow funds from the Lender to
finance the acquisition, development and exploration of certain oil and gas
reserves and to finance the Borrower's working capital needs and to allow
Borrower to finance up to $300,000 of POC's (as hereinafter defined) working
capital needs; and
WHEREAS, the Lender is willing to make such loans upon the terms and
subject to the conditions hereinafter set forth;
NOW, THEREFORE, in consideration of the premises and the mutual
covenants herein contained, the parties hereby agree as follows:
SECTION 1. CERTAIN DEFINITIONS AND TERMS.
- --------- -----------------------------
As used herein, the following terms shall have the meanings herein
indicated:
Accounting Standard means the income tax basis of accounting, which is
-------------------
a comprehensive basis of accounting other than generally accepted accounting
principles, as used and in effect on the date of the Current Financials and the
financial statements of PGP dated as of December 31, 1993 and September 30,
1994, consistently applied throughout the term of this Agreement.
Advance Request has the meaning set forth in Section 2.2 and shall be
--------------- -----------
substantially in the form of Exhibit A.
---------
Affiliate means any Person who (a) would be an "affiliate" of 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, is a director or officer of
Borrower, or is a relative of any of the Persons described in this clause (b).
Agreement means this 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.
1
<PAGE>
Borrowing Base means, as of the date of determination thereof, an
--------------
amount equal to the difference of (a) an amount as determined by the Lender in
accordance with the terms and conditions of Section 2.2(d), 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 $1,700,000. The Borrowing Base shall
periodically be redetermined in accordance with the terms and conditions set
forth in Section 2.2.
-----------
Business Day means any day excluding Saturday and Sunday and excluding
------------
any other day on which Lender is required or authorized to close.
Closing Date means the date of the initial advance hereunder.
------------
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) or this Agreement.
Commitment shall mean the commitment of the Lender to make Revolving
----------
Credit Loans to the Borrower pursuant to Section 2.1 hereof in an aggregate
-----------
principal amount at any one time outstanding not to exceed $10,000,000 or such
lower amount as may be provided for pursuant to the terms of this Agreement.
Commitment Period means the period from and including the Closing Date
-----------------
to but not including the Commitment Termination Date.
Commitment Termination Date shall mean the earliest of (i) the second
---------------------------
anniversary of the Closing Date, (ii) Noon, Central Standard Time May 25, 1997,
--
and (iii) the date on which the Commitment is otherwise terminated in accordance
with the terms of this Agreement.
Current Financials means a pro forma balance sheet of Borrower to be
------------------
delivered at closing dated as of the Closing Date.
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 the Accounting Standard.
Debt of any Person includes, without duplication, (i) all obligations,
----
contingent or otherwise, which in accordance with the Accounting Standard 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
2
<PAGE>
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 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 the Accounting Standard, 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 Debt of the types referred to in clauses (i) through (viii)
above directly or indirectly guaranteed by such Person, and (x) 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.
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) four percent (4.0%) 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 Borrower is conducting or at any time has conducted
business, or where any property of Borrower is located, or where any hazardous
substances generated by or disposed of by 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, the Texas Health and Safety Code, the Texas Water Code and other
environmental conservation or protection laws. The terms "hazardous substance,"
"release" and "threatened release" have the meanings specified in CERCLA, and
the terms "solid waste" and "disposal" (or "disposed") have the meanings
specified in RCRA; provided, however, 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 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.
3
<PAGE>
ERISA Affiliate means any Person who for purposes of Title IV of ERISA
---------------
is a member of Borrower's controlled group, or under common control with the
Borrower, within the meaning of Section 414 of the Code and the regulations
promulgated and rulings issued thereunder.
Event of Default shall have the meaning set forth in Section 6 of this
----------------
Agreement.
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 the Borrower in and to the Mortgaged Property as set forth in
Exhibit A to the Oil and Gas Mortgage, (b) reserved by the grantor in an
assignment of an Oil and Gas Lease to Borrower after the Closing Date or
reserved by a lessor in any Oil and Gas Lease entered into with the Borrower
after the Closing Date, (c) assigned or transferred by the 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.
Financial Report Certificate means a certificate substantially in the
----------------------------
form of Exhibit K and containing such other certifications, statements,
---------
calculations, explanations, and conclusions as Lender may request concerning
compliance with the Loan Documents.
Financial Statements means consolidated and consolidating 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 the Accounting Standard.
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
4
<PAGE>
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.
JEDI means Joint Energy Development Investments Limited Partnership, a
----
Delaware limited partnership.
Index Rate means, for any period, the prime rate most recently
----------
announced by Lender in effect at its principal office in Dallas, Texas, which
prime rate may not necessarily represent the lowest or best rate actually
charged to a customer. Any change in the Index Rate shall become effective as
of the date of such change in the prime rate.
Law means all applicable statutes, laws, ordinances, regulations,
---
orders, writs, injunctions or decrees of any Governmental Authority.
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 Security Documents,
--------------
the Note and 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, and (c) all future renewals, extensions, or
restatements of, or amendments, modifications or supplements to, all or any part
of the foregoing.
Loans has the meaning set forth in Section 2.3.
----- -----------
Long Term Debt shall mean, as of any applicable date of determination,
--------------
all Debt of Borrower (other than the outstanding principal balance of all
Revolving Credit Loans) which should be classified as "funded indebtedness" or
"long-term indebtedness" on a balance sheet of Borrower prepared as of such date
in accordance with the Accounting Standard.
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 Borrower, as represented to
Lender in the Current Financials, or to the prospects of Borrower, (c)
materially impair Borrower'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
5
<PAGE>
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
business, operations or Properties of such Person, as the same shall be amended,
modified and supplemented and in effect from time to time.
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 the Borrower
may now have or hereafter acquire in and to those Oil and Gas Properties listed
on Exhibit D attached hereto, and all other properties in which the 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.
Multiemployer Plan means a multiemployer plan as defined in Sections
------------------
3(37) or 4001(a) (3) of ERISA or Section 414 of the Code.
Note has the meaning set forth in Section 2.4.
---- -----------
Obligation means (i) the obligation of the Borrower for the due and
----------
punctual payment of the 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 the Borrower to the Lender under this Agreement, (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, (iv) the obligations of each of the pledgors, debtors, grantors,
mortgagors, guarantors or other Person obligated to Lender under the Security
Documents, and (v) all obligations of the Borrower under Section 5.1(f) hereof.
--------------
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 Borrower has or obtains the
right
6
<PAGE>
to enter upon lands and explore for, drill, develop and exploit such lands for
the production of Hydrocarbons.
Oil and Gas Mortgage means the Mortgage, Assignment of Proceeds of
--------------------
Production, Security Agreement and Financing Statement substantially in the form
of Exhibit C hereto, to be executed and delivered by Borrower to the Lender, as
---------
the same may be amended, modified, supplemented and in effect from time to time.
PEI means Petroglyph Energy, Inc., a Kansas corporation, and the
---
general partner of Borrower.
Permitted Liens shall mean the Liens permitted by Lender to be listed
---------------
on Schedule 4.13.
-------------
Person means any individual, sole proprietorship, partnership, joint
------
venture, trust, unincorporated organization, association, corporation,
institution, entity, party, or Governmental Authority.
PGP means Petroglyph Gas Partners, L.P., a Delaware limited
---
partnership.
Plan means any employee pension benefit plan as defined in Section
----
3(2) of ERISA that is covered by Title IV of ERISA (including a Multi-employer
Plan) or subject to the minimum funding standards of Section 412 of the Code
which is or has been maintained for the employees of the Borrower or any ERISA
Affiliate.
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).
Reserve Report means a report, in form and substance satisfactory to
--------------
the Lender, prepared by the Borrower evaluating the oil and gas reserves
attributable to the Mineral Interests of the Borrower which shall, among other
things, (a) identify the wells covered thereby, (b) specify the Borrower's
opinions with respect to the total volume of Proven Reserves (using the terms of
categories "proved developed producing reserves," "proved development
nonproducing reserves" and "proved undeveloped reserves") which the Borrower has
the right to produce (or cause to be produced) for its own account, (c) set
forth the Borrower's 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 Borrower's 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
7
<PAGE>
such reserves and production therefrom, and (f) contain a statement of the price
and escalation parameters, procedures and assumptions upon which such
determinations were based.
Revolving Credit Loans has the meaning set forth in Section 2.1.
---------------- -----------
Rights means rights, remedies, powers, privileges and benefits.
------
Security Documents shall mean the Oil and Gas Mortgage, and all other
------------------
mortgages, deeds of trust, assignments, security agreements, financing
statements and other documents, certificates and instruments from time to time
securing or guaranteeing the Obligations, in each case as the same may be
amended, modified, restated, supplemented, increased, renewed, extended,
substituted for or replaced from time to time.
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 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.
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.
--------- -------------
Transfer Order Letters has the meaning set forth in paragraph (g) of
---------------------- -------------
Schedule 3.1.
- ------------
UCC means the Uniform Commercial Code as enacted in the State of Texas
---
or other applicable jurisdiction, as amended.
Well Certificate 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 Borrower in one or more advances
("Revolving Credit Loans") so long as
-----------------------
8
<PAGE>
the aggregate of the Revolving Credit Loans outstanding never exceeds the lesser
of (a) the Borrowing Base or (b) the Commitment. Lender shall have no obligation
to make any Revolving Credit Loan (a) on a non-Business Day, or (b) after, and
Lender's commitment to make Revolving Credit Loans shall expire on, the
Commitment Termination Date; provided that Borrower's 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 Commitment Period,
Borrower may borrow, repay and reborrow the 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 Borrower's 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 shall be accompanied by a Reserve
---------
Report with respect to any Mineral Interests to be acquired by Borrower, 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 Borrowing Base
-----------------------------------------
shall be redetermined by the Lender as of January 1 and July 1 of each year
(each a "Determination Date") commencing July 1, 1995, until the Commitment
------------------
Termination Date. The Borrowing Base, as redetermined, 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 Borrower may designate the Borrowing Base pursuant
-------- -------
to Section 2.11(a).
---------------
(b) Engineering Data to be Provided Prior to Scheduled Determination
----------------------------------------------------------------
Dates.
- -----
(i) At least forty-five (45) days prior to July 1 and January 1 of
each calendar year, commencing with July 1, 1995, Borrower shall deliver to
the Lender, at Borrower's expense, a Reserve Report certified by the chief
financial officer of 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 the Borrower's working interest or net
revenue interest in the Mortgaged Properties, (D) be accompanied by a
certification of the Borrower to the effect that no Material Adverse
Effects have occurred since the date of the last Reserve Report, 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 January 1 or July 1 of such year, as the
case may be, the Lender shall redetermine the Borrowing Base in accordance
with Section 2.2(d) and the Lender shall promptly notify Borrower of the
--------------
amount of the Borrowing Base as so determined.
9
<PAGE>
(ii) In the event that the Borrower does 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
Borrowing Base and redesignate the 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
Borrowing Base as otherwise specified in this Section 2.2.
------------
(iii) Each delivery of a Reserve Report by the Borrower to the
Lender shall constitute a representation and warranty by the Borrower to
the Lender that, unless otherwise disclosed to the Lender in writing on or
prior to the date of such delivery, (A) the Borrower owns the Mineral
Interests described in the Reserve Report free and clear of any Liens
(except Permitted Liens) and (B) each of the Mineral Interests described in
such Reserve Report constitute at least eighty percent (80%) of the value
of Borrower's Proven Reserves in the Mineral Interests which are a part of
the Mortgaged Property.
(c) Special Determinations of Borrowing Base. Special determinations of
----------------------------------------
the Borrowing Base may be requested by the Borrower or the Lender at any time
during the term hereof; provided, however, (i) there shall be no more than an
-------- -------
aggregate of two (2) scheduled redeterminations and special determinations of
the Borrowing Base during the period from the Closing Date through December 31,
1995, and (ii) for the period beginning January 1, 1996 through the remaining
term of this Agreement, 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 Borrower, it shall be accompanied
by such information regarding the Borrower's 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 45 days prior to the requested date of redetermination. On
and after January 1, 1996, Borrower shall pay the Lender an engineering fee of
$5,000 with respect to the third, if any, determination or redetermination to
occur in each calendar year. If any special determination is requested by the
Lender, the Borrower shall provide the Lender with a Reserve Report as soon as
possible following the request; provided, however, (x) in no event shall
-------- -------
Borrower 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
subpart (i) and (ii) in this Section 2.2(c). The determination whether to
--------------
increase or decrease the 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 Borrower of the redetermination of
Borrowing Base pursuant to Section 2.2(d) and the amount of the Borrowing Base
--------------
as so redetermined. In the event of any special determination of the 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
Borrowing Base.
(d) Standards for Redetermination. Each redetermination of the 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,
10
<PAGE>
(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 Borrower in the Oil and Gas
Leases of the Borrower which secure the Loans, and (iv) based upon the estimated
value of the Proven Reserves owned by the Borrower in the Oil and Gas Leases of
the Borrower which secure the Loans as determined by the Lender; provided,
--------
however, no Proven Reserves shall be included or considered for inclusion in the
- -------
Borrowing Base unless (A) 100% of such Proven Reserves are (or will become
simultaneously with a Revolving Credit Loan hereunder) Collateral or are subject
to a negative pledge in favor of the Lender, and (B) the Lender shall have
received, at the Borrower's 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 Borrower notification of
a redetermination of the Borrowing Base under this Section 2.2, the Borrowing
-----------
Base shall be equal to the redetermined amount until the 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, Borrower shall pay Lender a borrowing base increase fee
equal to one-half of one percent (.50%) on the difference between (i) the
Borrowing Base on the day immediately preceding the day of any such increase of
the 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 Closing Date,
---------------
commencing on the second anniversary of the Closing Date, the Borrower shall pay
the Lender an engineering fee of $10,000. The Borrower and the Lender
acknowledge that the 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 Borrower in connection with the
determination of the Borrowing Base and for no other purpose.
2.3 Term Loan Commitment. Subject to and in reliance upon the terms,
--------------------
conditions, representations and warranties contained in this Agreement, the
unpaid balance of the Revolving Loans on the Commitment Termination Date shall
convert into a term loan (the "Term Loan") (the Revolving Credit Loan and the
---------
Term Loan are herein called the "Loans"). On and after the Commitment
-----
Termination Date, the Lender shall have no obligation to make a Revolving Credit
Loan (the aggregate amount of the same having been converted into the Term
Loan), and Borrower shall repay the principal and interest then outstanding
under the Term Loan in accordance with the terms and conditions of the Note,
which shall be fully due and payable on October 1, 1999.
2.4 Note. All Revolving Credit Loans and the Term Loan shall be evidenced
----
by one promissory note executed by the Borrower, substantially in the form of
Exhibit B attached hereto with appropriate insertions (the "Note"), payable to
- --------- ----
the order of Lender, representing the obligation of Borrower to pay the
aggregate unpaid principal amount of all Revolving Credit Loans and the Term
Loan made by Lender, together with interest thereon as prescribed by this
Agreement.
11
<PAGE>
2.5 Manner of Payments. All payments made by Borrower to the Lender
------------------
hereunder on account of principal, interest or otherwise shall be made not later
than 2:00 P.M., Central Standard Time, to Lender in Dallas, Texas or at such
other place as Lender shall direct, in immediately available United States
funds. If any payment by Borrower under this Agreement or the 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. The Revolving Credit Loans and the Term Loan shall bear
--------
interest as provided in the Note. Such interest shall be due and payable as
provided in the Note.
2.7 Computation of Interest.
-----------------------
(a) Interest on the 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 Index Rate shall become effective as of the day
on which such change in the Index Rate becomes effective. Lender shall as soon
as practicable notify Borrower of the effective date and the amount of each 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
Borrower in the absence of manifest error, subject, however, to the provisions
of Section 8.17 below.
------------
(b) Notwithstanding anything to the contrary in the Note or herein
contained, in the event that the rate of interest under the Note should ever
exceed the Maximum Rate, thereby causing the interest accruing on any of the
indebtedness evidenced by the Note to be limited to such Maximum Rate, then any
subsequent reduction in the Index 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 the 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 Revolving Credit Loans
------------------
shall convert to the Term Loan on the Commitment Termination Date as described
in Section 2.3. The principal amount of the Term Loan shall be payable as
------------
provided in the Note; provided, however, the entire unpaid principal balance of
-------- -------
the Term Loan, together with all accrued and unpaid interest, shall be due and
payable on October 1, 1999.
2.10 Mandatory Payment of Revolving Credit Loans. If, at any time during
-------------------------------------------
the Commitment Period, (i) the unpaid principal balance of the Note shall exceed
the lesser of (a) the Borrowing Base, and (b) the Commitment or (ii) the total
amount of all Obligations owed to Lender
12
<PAGE>
hereunder and under the other Loan Documents shall exceed the Commitment, then,
Borrower shall repay within seven (7) Business Days after the date of the
occurrence of such excess, without premium or penalty, Revolving Credit Loans in
an amount equal to such excess, along with accrued unpaid interest on the amount
so repaid to the date of such repayment. On or after the Commitment Termination
Date, if at any time (i) the unpaid principal balance of the Note shall exceed
the Borrowing Base, or (ii) the total amount of all Obligations owed to Lender
hereunder and under the other Loan Documents shall exceed the Borrowing Base,
then, Borrower shall repay within seven (7) Business Days after the date of the
occurrence of such excess, without premium or penalty, Loans in an amount equal
to such excess, along with accrued unpaid interest on the amount so repaid to
the date of such repayment.
2.11 Voluntary Designation of Borrowing Base or Mandatory Cancellation of
--------------------------------------------------------------------
Revolving Credit Facility .
- --------------------------
(a) Subject to Sections 2.18 and 2.2(e), Borrower may from time to time
------------- ------
and at any time during the Commitment Period, upon two 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
highest permissible Borrowing Base as periodically redetermined by Lender
pursuant to Section 2.2. Any such designation shall be effective as of the date
------------
of the notice.
(b) The Commitment shall, at the election of Lender, terminate upon the
occurrence and continuance of an Event of Default, provided, however, that the
-------- -------
Commitment shall automatically terminate upon the occurrence of an Event of
Default pursuant to Section 6.5(i) - (vi) and (ix) (with respect to Section
--------------------- ---- -------
6.5(i) - (vi)) inclusive.
- -------------
2.12 Voluntary Principal Prepayments. The Borrower 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. Upon giving Lender one
Business Day's notice, Borrower 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 prepayment shall equal or exceed the principal amount of
$200,000, and (b) Borrower 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 Commitment
Termination Date, the Revolving Credit Loans 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. Neither the Term Loan nor,
after the Commitment Termination Date, Revolving Credit Loans, may be reborrowed
hereunder. Amounts prepaid under the Term Loan may not be reborrowed.
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
13
<PAGE>
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 for, the Mineral Interests in the
Mortgaged Properties, (b) to finance the working capital needs of Borrower
including, without limitation, to pay interest on the Loans and fees and
expenses hereunder, and (c) to allow Borrower to finance no more than an
aggregate amount equal to $300,000 of the working capital needs of POC. All
Loan proceeds shall be used by Borrower only for legal and proper partnership
purposes (duly authorized by its 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, Borrower 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 Borrower and shall be conclusive and
binding, absent manifest error. Borrower shall pay Lender the amount shown as
due on any certificate within 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 Closing Fee. On the Closing Date, Borrower shall pay to Lender a
-----------
closing fee in the amount of $15,000 in immediately available funds.
2.17 Commitment Fee. During the Commitment Period, Borrower shall pay to
--------------
Lender a commitment fee, as it accrues at maturity and on each Determination
Date, equal to three-eighths of one percent (.375%) per annum, on the difference
between the Borrowing Base and the average daily outstanding amount of Revolving
Credit Loans.
2.18 Clawback Fee. During the Commitment Period and upon any increase in
------------
the Borrowing Base pursuant to Section 2.11(a), Borrower 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
14
<PAGE>
then requested by Borrower 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 Borrower be
obligated to pay such clawback fee based on any designation of the Borrowing
Base pursuant to Section 2.2.
-----------
SECTION 3. CONDITIONS PRECEDENT.
- --------- --------------------
3.1 Initial Loans. Lender will not be obligated to make the initial
-------------
Revolving Credit Loan or the Term Loan 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 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 Borrower in its 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 Borrower which
could have 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, Borrower shall have delivered to Lender evidence
substantiating any of the matters contained in this Agreement which are
necessary to enable Borrower 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 Borrower and the acceptance by the
Borrower of the proceeds of any Loan hereunder shall each be deemed to
constitute a representation and warranty by the Borrower 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.
SECTION 4. REPRESENTATIONS AND WARRANTIES. Borrower represents and warrants to
- --------- ------------------------------
Lender as follows:
15
<PAGE>
4.1 Organization and Powers. Borrower (i) is a limited partnership duly
-----------------------
organized, validly existing and in good standing under the laws of the State of
Delaware, (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. PEI is a corporation duly organized, validly existing and in
good standing under the laws of the State of Kansas and has taken all corporate
action necessary to authorize the execution, delivery and performance of each
Loan Document to which it is a party on behalf or Borrower.
4.2 Validity and Binding Nature. This Agreement has been duly executed
---------------------------
and delivered by the Borrower and by PEI, as the general partner of, and on
behalf of, Borrower and is, and each other Loan Document when executed and
delivered by the Borrower will be, a legal, valid and binding obligation of the
Borrower 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. Borrower is not, nor will the
----------------------------------
execution, delivery and the performance of and compliance with the terms of the
Loan Documents cause Borrower to be, in violation of (a) any Laws, or (b) its
agreement of limited partnership (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 Borrower pursuant to the terms of, any indenture, mortgage, lease,
deed of trust, agreement, contract, instrument or Law to which Borrower is a
party or by which Borrower or any of Borrower's property, assets or revenue is
bound or to which it is subject.
4.4 Prior Names. In the last five years, Borrower has not transacted
-----------
business under any other 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 Borrower 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 the Accounting Standard and present fairly the
financial condition and the result of operations of Borrower 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 Borrower as of the date
or dates of the Current Financials are reflected 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
16
<PAGE>
financial condition of Borrower, nor has Borrower 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. Borrower has no employees.
-------------
4.8 Litigation. Except for the Litigation described on Schedule 4.8,
---------- ------------
Borrower is not involved in, nor is Borrower aware of any Litigation, nor are
there any outstanding or unpaid judgments against Borrower. None of the
Litigation described on Schedule 4.8 could, collectively or individually, have a
------------
Material Adverse Effect if determined adversely against Borrower.
4.9 Taxes and Claims. All Tax returns and reports of Borrower 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 Borrower which are due and payable have been paid.
4.10 Government Regulation. Neither Borrower 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. Borrower does not currently sponsor or
----------------------
contribute to, nor has any contract or other obligation to contribute to (nor
has Borrower in the preceding 60 calendar months sponsored or contributed to, or
contracted to or become otherwise obligated to contribute to) any Plan or any
Multiemployer Plan.
4.12 Purpose of Loan. The proceeds of the advances will be used for
---------------
general working capital and partnership 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. The Borrower has fee simple legal title to
-----------------------
or valid leasehold interest in, and the Borrower is the beneficial owner of, all
the Mineral Interests in and to the Oil and Gas Leases which comprise the
Mortgaged Properties. Except for Permitted Liens and the Lender's Lien, there
is no Lien on any of Borrower's Mineral Interests in and to the Oil and Gas
Leases which comprise the Mortgaged Properties. The Borrower has no Debt other
than that listed on Schedule 5.2(a). JEDI has no right or interest under any
---------------
agreement, instrument or other document entitling JEDI to look to any Mineral
Interest of Borrower located outside the State of Utah or to seek or obtain any
money judgment, deficiency or otherwise, against PEI with respect to the Mineral
Interests of Borrower located outside the State of Utah.
17
<PAGE>
4.14 Material Agreements. Borrower is not, nor will the execution,
-------------------
delivery and performance of and compliance with the terms of the Loan Documents
cause Borrower 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 Borrower, neither any property of the
Borrower 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 the Borrower
and no operations currently conducted thereon or, to the best knowledge of
Borrower, 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
Borrower, 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 Borrower, 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 the Borrower, 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 Borrower, all Hazardous Material generated
at any and all property of the Borrower have 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) The Borrower has taken all steps necessary and reasonable to
determine and has determined that no Hazardous Material has been disposed of or
otherwise released and, to the best knowledge of Borrower, that there has been
no threatened release of any Hazardous Material on or to any property of the
Borrower except in compliance with Environmental Laws;
(f) To the best knowledge of Borrower, the Borrower does not have any
contingent liability in connection with any release or, threatened release of
any Hazardous Material into the environment.
18
<PAGE>
4.17 Subsidiaries and Partnerships. Except as set forth on Schedule 4.17
----------------------------- -------------
the Borrower has no Subsidiaries and no interest in any general or limited
partnerships.
4.18 Capitalization and Control. The capitalization of Borrower on the
--------------------------
Closing Date is set forth on Schedule 4.18. There are no options, warrants,
-------------
rights, calls, commitments, plans, contracts or other agreements granted or
issued regarding any equity interest in the Borrower and none are authorized.
4.19 General. There are no material facts or conditions known to
-------
Borrower relating to the Loan Documents, any of the Collateral or the financial
condition and business of Borrower 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 Borrower 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
Borrower contains any material misstatement of fact or, to Borrower'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. All of the
--------------------------------------------------
Mortgaged Properties described in Exhibit D attached hereto and covered by the
---------
engineering reports which have previously been delivered to and relied upon by
the Lender in connection with this Loan Agreement are part of the Mortgaged
Properties described in the Oil and Gas Mortgage.
4.21 Operation of Business. The Borrower 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, and
Borrower is not in violation of any valid rights of others with respect to any
of the foregoing.
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 Borrower.
SECTION 5. COVENANTS.
- --------- ---------
5.1 Affirmative Covenants. 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, as follows:
(a) Compliance with Law; Maintenance of Properties. The Borrower will
----------------------------------------------
do or cause to be done all things necessary (i) to preserve and keep in full
force and effect at all times its existence as a limited partnership 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
19
<PAGE>
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. The Borrower 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 Mortgaged Property in which the Borrower 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 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
energy business), 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
Borrower, 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. Borrower 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 30 days' prior notice to the
Lender of any proposed termination or cancellation of such policy,
whether on account of default or otherwise. The 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.
20
<PAGE>
(c) Use of Proceeds. The proceeds of the Loans will be used by the
---------------
Borrower solely as provided herein.
(d) Inspection. The Borrower 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 such Lender may reasonably request.
(e) Further Assurances. The Borrower 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. THE BORROWER 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") 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 BORROWER 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 THE BORROWER 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,
21
<PAGE>
DEFENDING OR PREPARING TO DEFEND ANY SUCH INDEMNITY MATTER. THE BORROWER 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 BORROWER WRITTEN NOTICE THEREOF. THE BORROWER'S
OBLIGATIONS UNDER THIS SECTION ARE SUBJECT TO SECTION 8.13 HEREOF.
------------
(g) Books and Records. Borrower shall (i) keep, in accordance with the
-----------------
Accounting Standard , proper and complete books, records and accounts and (ii)
permit Lender to inspect the same and make and take away copies thereof.
(h) Taxes. Borrower 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. Borrower 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 the Accounting
Standard shall have been made, but Borrower will not, directly or indirectly,
make any prepayment of principal of or interest on any Debt other than the
Obligation.
(j) Expenses of Lender. Any provision to the contrary notwithstanding,
------------------
and whether or not the transactions contemplated by this Agreement shall be
consummated, Borrower 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; provided, however, that
----------- -------- -------
the fees and expenses of primary counsel for Lender to be paid by Borrower in
connection with the closing of the Loans shall not exceed $17,500, excluding
local counsel fees.
(k) Environmental Laws. Borrower 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. Borrower 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) Accounts. Borrower shall maintain its primary operating accounts at
--------
the Lender.
22
<PAGE>
5.2 Negative Covenants. 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, as follows:
(a) Debt. Borrower will not, 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) other Debt up to $50,000 in the aggregate from time to
time, (vi) salaries and wages, (vii) accrued expenses, deferred credits and loss
contingencies which are properly classified as liabilities or indebtedness under
the Accounting Standard, (viii) Subordinated Debt, and (ix) Hydrocarbon Hedges
permitted pursuant to Section 5.2(s).
--------------
(b) Liens. Borrower will not, 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 Borrower from creating or
incurring any Lien on any of its assets.
(c) Acquisitions, Mergers and Dissolutions. Borrower 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, (ii) liquidate, wind up,
or dissolve itself (or suffer any liquidation or dissolution), or (iii)
otherwise undergo a change in control.
(d) Loans, Advances and Investments. Except as permitted by Section
------------------------------- -------
5.2(c),
- ------
Borrower will not 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, and (iv)
loans to POC up to $300,000 in the aggregate from time to time.
(e) Employee Benefit Plans. Borrower will not, directly or indirectly,
----------------------
sponsor or contribute to, or create or suffer to exist any contractual or other
obligation to contribute to, any Plan or Multiemployer Plan.
(f) Distributions. Borrower will not, directly or indirectly, (i)
-------------
retire, redeem, purchase or otherwise acquire for value any equity interest of
Borrower or (ii) declare, make or pay any distribution on or with respect to any
such interest; provided, however, that so long as there has not
-------- -------
23
<PAGE>
occurred, and after giving effect thereto there does not exist, a Default or
Event of Default, Borrower may declare or pay such distributions up to an amount
equal to, in any fiscal year of Borrower, Borrower's partners' aggregate tax
obligation with respect to the net income of Borrower at all times during which
Borrower is a limited partnership.
(g) Capital Expenditures; Exploration Expenses. Borrower will not,
------------------------------------------
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 Borrower, or (ii) incur exploration expenses
in excess of $250,000 during any six month period commencing upon the applicable
Determination Date.
(h) Issuance of Equity Interests. Borrower will not, directly or
----------------------------
indirectly, issue, sell or otherwise dispose of (i) any equity interest in
Borrower, (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. No new partners shall be admitted
to Borrower's partnership.
(i) Transactions with Affiliates. Borrower will not, 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 in the ordinary course of business of Borrower and upon fair and
reasonable terms no less favorable to Borrower than Borrower could obtain or
could become entitled to in an arm's-length transaction with a Person which was
not an Affiliate.
(j) Sale of Assets. Without the prior written consent of Lender,
--------------
Borrower will not, 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, and (ii)
sales of Proven Reserves which do not exceed $250,000 in the aggregate during
any six month period commencing upon any Determination Date, provided that upon
--------
prior written consent of Lender, Borrower may sell Proven Reserves with an
aggregate sales price in excess of $250,000 during such period, and provided
--------
further that (x) to the extent the aggregate amount of proceeds from such sales
- -------
do not exceed $250,000 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 $250,000 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 determined by
Lender in its sole discretion.
(k) Hazardous Materials. Borrower shall not 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 Borrower. Without the prior written consent
-------------------------------
of Lender, (i) PGP shall own no less than 99% of the Borrower, as the sole
limited partner, and PEI shall own no less than 1% of the Borrower, as the sole
general partner, and (ii) Natural Gas Partners, L.P. and Natural Gas Partners
II, L.P., individually or collectively, shall own no less than fifty-one percent
(51%) of the limited partnership interest of PGP.
24
<PAGE>
(m) Fixed Charge Coverage Ratio. For each period set forth below,
---------------------------
Borrower will not permit its ratio of (i) net income, plus (to the extent
deducted therefrom in arriving at net income) depreciation, depletion and
amortization, interest expense, federal income taxes actually paid (or
distributions to partners of Borrower for the payment of taxes pursuant to
Section 5.2(f)), cash capital contributions to Borrower from Borrower's
- --------------
partners, intangible drilling costs, and intangible completion costs, 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:
(1) for the fiscal quarter ending June 30, 1995;
(2) for the two consecutive fiscal quarters ending September 30,
1995; and
(3) for the three consecutive fiscal quarters ending December 31,
1995 and for any fiscal quarter ending thereafter, on a rolling four-
quarter basis.
(n) Capitalization. Borrower will not permit, at any time, its
--------------
capitalization to be less than $3,200,000. For purposes hereof, in determining
net income for the calculation of capitalization, net income shall include (to
the extent deducted therefrom in arriving at net income) depreciation,
amortization, depletion, intangible drilling costs and intangible completion
costs.
(o) Current Ratio. On a consolidated basis, Borrower will not permit,
-------------
at any time, the ratio of (i) current assets to (ii) current liabilities to be
less than 1.25 to 1.0. For purposes hereof, current assets shall include an
amount equal to the Borrowing Base less then unpaid balance of the Loan.
(p) Compliance with Laws and Documents. Borrower will not, 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.
(q) New Businesses. Borrower will not, directly or indirectly, engage
--------------
in any business other than 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. Borrower will not change its
----------------------------------
fiscal year (which currently is December 31) or method of accounting (other than
immaterial changes in methods).
(s) Hydrocarbon Hedges. Borrower will not enter into any Hydrocarbon
------------------
Hedge without the prior written consent of the Bank 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.
25
<PAGE>
5.3 Reporting Requirements. Borrower shall cause the following to be
----------------------
furnished to Lender:
(a) (i) As soon as available, but no later than 90 days after the last
day of each fiscal year of Borrower, audited Financial Statements
showing the financial condition and result of operations of Borrower
as of, and for the year ended on, such last day, accompanied by (i)
the opinion, without material qualification, of a firm of
independent certified public accountants reasonably acceptable to
Lender, based on an audit using generally accepted auditing
standards, that the portions of such Financial Statements were
prepared in accordance with the Accounting Standard and present
fairly the financial condition and result of operations of Borrower,
and (ii) a Financial Report Certificate with respect to such
Financial Statements.
(ii) As soon as available, but no later than 90 days after the last
day of each fiscal year of PGP, audited Financial Statements showing
the financial condition and result of operations of PGP and POC on a
consolidated and consolidating basis as of, and for the year ended
on, such last day, accompanied by (i) the opinion, without material
qualification, of a firm of independent certified public accountants
reasonably acceptable to Lender, based on an audit using generally
accepted auditing standards, that the portions of such Financial
Statements were prepared in accordance with the Accounting Standard
and present fairly the financial condition and result of operations
of PGP.
(b) (i) As soon as available, but no later than 45 days after the last
day of each fiscal quarter (A) Financial Statements showing the
financial condition and result of operations of Borrower 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.
(ii) As soon as available, but no later than 45 days after the last
day of each fiscal quarter, Financial Statements showing the
financial condition and result of operations of POC as of, and for
the period from the beginning of the current fiscal year, to such
last day.
(iii) As soon as available, but no later than 45 days after the last
day of each fiscal quarter, Financial Statements showing the
financial condition and result of operations of PGP as of, and for
the period from the beginning of the current fiscal year, to such
last day.
(c) The Reserve Reports described in Section 2.2 at the times prescribed
-----------
therein.
(d) As soon as available, but not later than 90 days after the last day
of each six month period commencing upon the applicable Determination Date, an
exploration expenditure summary showing the exploration expenses incurred by
Borrower for such six month period.
26
<PAGE>
(e) Notice, promptly after Borrower knows or has good faith reason to
believe, of (i) the existence and status of any Litigation with respect to
Borrower which could have a Material Adverse Effect, (ii) any change in any
material fact or circumstance represented or warranted in any Loan Document,
(iii) a Default or Event of Default, specifying the nature thereof and what
action Borrower has taken, is taking, or proposed to take with respect thereto.
(f) 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 Borrower 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 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 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 five (5) days after Borrower has, or, with the
exercise of reasonable investigation, should have, notice thereof.
6.3 Other Covenants. The failure or refusal of 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) The Borrower 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 the Borrower and the petition is not controverted
within 10 days, or is not dismissed within 30 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 the Borrower, (iv) the Borrower commences
any other proceeding under any reorganization, arrangement, adjustment of debt,
relief of debtors, dissolution, insolvency or liquidation or similar law of any
jurisdiction whether now or hereafter in effect relating to the Borrower or
there is commenced against the Borrower any such proceeding which remains
undismissed for a period of 30 days, (v) the Borrower is adjudicated insolvent
or bankrupt, (vi) the Borrower makes a general assignment for the benefit of
creditors, (vii) the Borrower 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) the Borrower shall call a meeting of its creditors with a view to
arranging a composition or adjustment of its debts, or (ix) the Borrower shall
by any act or failure to act indicate its consent to, approval of or
acquiescence in any of the foregoing;
27
<PAGE>
6.6 Attachment. The failure to have discharged within a period of 30
----------
days after the commencement thereof any attachment, sequestration or similar
proceeding against any assets of Borrower, which assets have a value,
individually or collectively, in excess of $50,000.
6.7 Payment of Judgments. Borrower shall fail to pay any money judgment
--------------------
in excess of $50,000 against it or its assets at least ten days prior to the
date on which Borrower's assets may be sold lawfully to satisfy such judgment.
6.8 Default Under Other Debt. Borrower shall default in the due and
------------------------
punctual payment of the principal of or the interest on any Debt in excess of
$50,000 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 20 days after notice thereof from Lender to Borrower.
6.11 Misrepresentation. Any statement, representation, or warranty in
-----------------
the Loan Documents or in any writing ever delivered by Borrower or on behalf of
Borrower to Lender pursuant to the Loan Documents is false, misleading or
erroneous in any material respect when made or deemed to be repeated.
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 Borrower: (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 Section 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 Borrower in and to every account and other property of 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 or equitable Rights
afforded by the Loan
28
<PAGE>
Documents, the Laws of the State of Texas or any other jurisdiction as Lender
shall deem appropriate.
7.2 Performance by Lender. If any covenant, duty or agreement of
---------------------
Borrower 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 Borrower. In such event, any amount expended by Lender in
such performance or attempted performance shall be payable by 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 Borrower.
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 Note) 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 Lender and the
Borrower. 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 mail, 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 the Borrower therefrom,
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 the Borrower 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 exercise of any other right or
29
<PAGE>
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 the Borrower and the Lender and their respective
successors and permitted assigns. Neither the Borrower 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. 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.
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 the Borrower. Except as otherwise provided for in this
-----------------------
Agreement, the 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. The Borrower acknowledges that it has been advised by counsel
with respect to this Agreement and the transactions evidenced by this Agreement.
30
<PAGE>
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 the Accounting Standard, except to the extent that
a deviation therefrom is expressly stated in such Loan Documents. Should a
change in the Accounting Standard 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 Borrower;
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
Financing Statements as adjusted to reflect compliance with such former method
or methods of accounting.
8.12 Exceptions to Covenants. Borrower shall not 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 Borrower'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 Borrower in connection
with the Loan Documents. If and to the extent that the obligations of the
Borrower under Section 5.1(f) and 5.1(j) are unenforceable for any reason, the
-------------- ------
Borrower hereby agrees to make the maximum contribution to the payment and
satisfaction of such obligations that is permissible under applicable law.
8.14 GOVERNING LAW. THIS AGREEMENT AND ALL OTHER LOAN DOCUMENTS AND
-------------
COLLATERAL DOCUMENTS SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE
LAWS OF THE STATE OF TEXAS.
8.15 VENUE; SERVICE OF PROCESS. BORROWER, 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
31
<PAGE>
LITIGATION ARISING OUT OF OR IN CONNECTION WITH THE LOAN DOCUMENTS AND THE
OBLIGATION BROUGHT IN DISTRICT COURTS OF DALLAS COUNTY, TEXAS, OR IN THE UNITED
STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF TEXAS, DALLAS DIVISION, (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 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 ON THE OBLIGATION SHALL BE BROUGHT
IN THE DISTRICT COURTS OF DALLAS COUNTY, TEXAS, OR IN THE UNITED STATES DISTRICT
COURT FOR THE NORTHERN DISTRICT OF TEXAS, DALLAS DIVISION. NOTHING HEREIN SHALL
AFFECT THE RIGHT OF LENDER TO COMMENCE LEGAL PROCEEDINGS OR OTHERWISE PROCEED
AGAINST BORROWER IN ANY JURISDICTION OR TO SERVE PROCESS IN ANY MANNER PERMITTED
BY APPLICABLE LAW.
8.16 WAIVER OF JURY TRIAL. BORROWER FOR ITSELF AND ITS SUCCESSORS AND
--------------------
ASSIGNS, HEREBY IRREVOCABLY WAIVES TO THE FULLEST EXTENT PERMITTED BY LAW, ITS
RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR
ARISING OUT OF THIS AGREEMENT OR ANY OF THE LOAN DOCUMENTS, OR ANY DEALINGS WITH
LENDER RELATING TO THE SUBJECT MATTER OF THE LOAN TRANSACTIONS CONTEMPLATED
HEREBY AND THEREBY AND THE RELATIONSHIP THAT IS BEING ESTABLISHED. IN THE EVENT
OF LITIGATION, THIS AGREEMENT MAY BE FILED AS A WRITTEN CONSENT TO A TRIAL BY
THE COURT.
8.17 Maximum Interest Rate. It is the intention of the parties hereto to
---------------------
comply with applicable usury laws (now or hereafter enacted); accordingly,
notwithstanding any provision to the contrary in this Agreement, the Note, the
other Loan Documents, or any other document relating hereto, in no event shall
this Agreement or any such other document require the payment or permit the
collection of interest in excess of the maximum amount permitted by such laws.
If from any circumstances whatsoever, fulfillment of any provision of this
Agreement or of any other document pertaining hereto or thereto, shall involve
transcending the limit of validity prescribed by law for the collection or
charging of interest, then, ipso facto, the obligation to be fulfilled shall be
reduced to the limit of such validity, and if from any such circumstances Lender
shall ever receive anything of value as interest or deemed interest by
applicable law under this Agreement, the Note, the other Loan Documents, or any
other document pertaining hereto or otherwise an amount that would exceed the
highest lawful rate, such amount that would be excessive interest shall be
applied to the reduction of the principal amount owing under the Note or on
account of any other indebtedness of
32
<PAGE>
Borrower to Lender, and not to the payment of interest, or if such excessive
interest exceeds the unpaid balance of principal of such indebtedness, such
excess shall be refunded to Borrower. In determining whether or not the interest
paid or payable with respect to any indebtedness of Borrower to Lender, under
any specific contingency, exceeds the highest lawful rate, Borrower and Lender
shall, to the maximum extent permitted by applicable law, (a) characterize any
non-principal payment as an expense, fee or premium rather than as interest, (b)
exclude voluntary prepayments and the effects thereof, (c) amortize, prorate,
allocate and spread the total amount of interest throughout the full term of
such indebtedness so that the actual rate of interest on account of such
indebtedness does not exceed the maximum amount permitted by applicable law,
and/or (d) allocate interest between portions of such indebtedness, to the end
that no such portion shall bear interest at a rate greater than that permitted
by applicable law.
To the extent the Laws of the State of Texas are applicable for purposes of
determining the "Maximum Rate," such term shall mean the "indicated rate
ceiling" from time to time in effect under Article 1.04, Title 79, Revised Civil
Statutes of Texas, as amended, or, if permitted by applicable Law and effective
upon the giving of the notices required by such Article 1.04 (or effective upon
any other date otherwise specified by applicable Law), the "monthly ceiling,"
the "quarterly ceiling," or "annualized ceiling" from time to time in effect
under such Article 1.04, whichever that Lender shall elect to substitute for the
"indicated rate ceiling," and vice versa, each such substitution to have the
----------
effect provided in such Article 1.04; and Lender shall be entitled to make such
election from time to time and one or more times and, without notice to
Borrower, to leave any such substitute rate in effect for subsequent periods in
accordance with subsection (h)(1) of such Article 1.04. Pursuant to Article
15.10(b) of Chapter 15, Subtitle 79, Revised Civil Statutes of Texas, 1925, as
amended, Borrower agrees that such Chapter 15 (which regulates certain revolving
credit loan accounts and revolving tri-party accounts) shall not govern or in
any manner apply to the Obligation.
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 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 embodies the entire agreement between Borrower and
Lender and supersedes all prior proposals, agreement and understandings relating
to the subject matter hereof. Borrower 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.
33
<PAGE>
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 DTPA WAIVER. BORROWER HEREBY WAIVES ALL PROVISIONS OF THE DECEPTIVE
-----------
TRADE PRACTICES - CONSUMER PROTECTION ACT (TEX. BUS. & COM. CODE ANN. (S)17.01
ET SEQ. (VERNON SUPP. 1987)), OTHER THAN SECTION 17.555 THEREOF PERTAINING TO
- -- ---
CONTRIBUTION AND INDEMNITY, AND EXPRESSLY WARRANTS AND REPRESENTS THAT BORROWER
(A) HAS ASSETS OF $5,000,000 OR MORE, (B) HAS KNOWLEDGE AND EXPERIENCE IN
FINANCIAL AND BUSINESS MATTERS THAT ENABLE BORROWER TO EVALUATE THE MERITS AND
RISKS OF THIS TRANSACTION, (C) IS NOT IN A SIGNIFICANTLY DISPARATE BARGAINING
POSITION RELATIVE TO LENDER, AND (D) HAS BEEN REPRESENTED BY LEGAL COUNSEL IN
CONNECTION WITH THE TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT.
8.24 Non-recourse against Utah Mineral Interests. Lender shall not look to
-------------------------------------------
any Mineral Interest of PGP located within the State of Utah nor will seek or
obtain any money judgment, deficiency or otherwise, against PEI with respect to
the Mineral Interests of PGP located within the State of Utah; provided,
--------
however, the foregoing limitation shall only apply so long as JEDI shall not
- -------
look to any Mineral Interest of Borrower located outside the State of Utah nor
will seek or obtain any money judgment, deficiency or otherwise, against PEI
with respect to the Mineral Interests of Borrower located outside the State of
Utah.
[THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]
34
<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
TEXAS COMMERCE BANK NATIONAL
ASSOCIATION
By: /s/ Timothy E. Perry
---------------------------------------------
Timothy E. Perry
Senior Vice President
DTPA Waiver. The undersigned, legal counsel to Borrower, executes
-----------
this Agreement solely to acknowledge the waiver of the Texas Deceptive Trade
Practices - Consumer Protection Act contained in Section 8.23 of the Agreement.
------------
Borrower's Counsel:
Morris, Laing, Evans, Brock & Kennedy,
Chartered
By: /s/ A.J. Schwartz
---------------------------------------------
A.J. Schwartz, Esq.
35
<PAGE>
SCHEDULE 3.1
CLOSING DOCUMENTS AND CONDITIONS
--------------------------------
(a) Loan Agreement. This Agreement shall have been duly executed and
--------------
delivered to Lender by Borrower.
(b) Note. Lender shall have received the Note dated the Closing Date,
----
conforming to the requirements of the Agreement and executed by Borrower.
(c) Well Certificates. The Borrower 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 Oil and Gas
Mortgage, which Well Certificates shall be in the form of Exhibit E attached
---------
hereto containing the information as provided for therein, which shall be
satisfactory to the Lender.
(d) Gas Contracts. 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.
(e) Oil and Gas Mortgage. The Oil and Gas Mortgage substantially in
--------------------
the form and upon the terms of Exhibit C, dated the Closing Date, should be
---------
executed and delivered by Borrower to Lender and create a first lien on Proven
Reserves constituting at least 80% of discounted present value of all Proven
Reserves, as determined by Lender in its sole discretion.
(f) 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
Borrower.
(g) Transfer Order Letters. The Borrower shall have delivered to the
----------------------
Lender transfer order letters (the "Transfer Order Letters") for each producing
----------------------
unit described in each Well Certificate, which Transfer Order Letters shall be
in the form of Exhibit F attached hereto containing the information as provided
---------
for therein, which shall be satisfactory to the Lender.
(h) UCC Searches. The results of Uniform Commercial Code searches
------------
showing all filings on file against Borrower (and its predecessors) in the
offices of the Secretary of State of Texas, Kansas, and Colorado and such other
offices as Lender may require, each such search dated a date reasonably close to
the Closing Date.
1
<PAGE>
(i) Releases and/or Assignments. Releases and/or assignments of all
---------------------------
existing Liens on the Collateral (other than Liens shown on Schedule 4.13),
-------------
including without limitation, those held by Sunflower Bank, N.A. against assets
of Borrower.
(j) Legal Opinion. Lender shall have received the opinion dated the
-------------
Closing Date and addressed to Lender, of legal counsel to Borrower, such opinion
to be substantially in the form of Exhibit J to the Agreement, subject to
---------
modifications as Lender in its sole discretion may permit.
(k) Opinion of Local Counsel. Lender shall have received favorable
------------------------
opinions dated the Closing Date and addressed to Lender, of local counsel to the
Borrower in Kansas and Colorado. Such opinion to be substantially in the form
of Exhibit H to the Agreement, subject to modifications as Lender in its sole
---------
discretion may permit; and
(l) Solvency Certificates. Lender shall have received a solvency
---------------------
certificate in the form of Exhibit G to the Agreement executed by an executive
----------
officer the general partner of Borrower.
(m) Representations and Warranties, Defaults and Judgments. Lender
------------------------------------------------------
shall have received a certificate from the chief executive officer of the
general partner of Borrower dated the Closing Date to the effect that: (i) the
representations and warranties made by Borrower in the Agreement and the other
Loan Documents to which Borrower is a party or which are contained in any
certificate, document or financial or other statement of Borrower 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 Borrower is a Party are pending or to the best of its knowledge,
threatened against such entity.
(n) Partnership Proceedings. Lender shall have received a copy of the
-----------------------
resolutions (in form and substance reasonably satisfactory to Lender) of the
partners of Borrower authorizing (i) the execution, delivery and performance of
the Agreement, the Note, and the other Loan Documents to which Borrower is a
party, (ii) the consummation of the transactions contemplated by the Agreement
and the other Loan Documents to which Borrower is a party, and (iii) the
borrowings and grants of Liens under the Agreement and the other Loan Documents,
all certified by the Secretary of the general partner of Borrower on the Closing
Date. Such certificates shall state that the resolutions set forth therein have
not been amended, modified, revoked or rescinded as of the date of such
certificates.
(o) Incumbency Certificates. Lender shall have received a certificate
-----------------------
of the Secretary of the general partner of Borrower dated the Closing Date, as
to the incumbency and signature of the officers of the general partner of
Borrower executing the Agreement, the Note and the other Loan Documents to
which Borrower is a party, and any certificate or other documents to be
delivered pursuant thereto, together with evidence of the incumbency of such
Secretary.
2
<PAGE>
(p) Organizational Documents. Borrower shall have delivered to Lender
------------------------
(i) a copy, certified as of the Closing Date by the Secretary of the general
partner of Borrower, of its agreement of limited partnership as in effect on the
Closing Date, (ii) a certificate or telex confirmation as of the Closing Date
from the Secretary of State of the State of Delaware as to the existence of
Borrower as a limited partnership, (iii) a certificate or telex confirmation as
of a date reasonably close to the Closing Date from the office of the Secretary
of the State of Delaware certifying that Borrower is in good standing, (iv) a
certificate dated the Closing Date from the Secretary of the general partner of
Borrower to the effect that the document delivered pursuant to (i) above is a
true and correct copy of such document and as on file with the Secretary of
State of the State of Delaware and no action has been taken to amend, modify or
repeal such document, the same being in full force and effect in such form on
the Closing Date, (v) a certificate or telex confirmation within thirty (30)
days of the Closing Date from the Secretary of State of each jurisdiction in
which each Borrower is required to qualify as a foreign limited partnership as
to the good standing of each Borrower as a foreign limited partnership, (vi) a
copy, certified as of a date reasonably close to the Closing Date by the
Secretary of State of the State of Kansas, of the articles of incorporation,
together with all amendments thereto, of PEI, (vii) a copy, certified as of the
Closing Date by the Secretary or an Assistant Secretary of PEI, of its By-Laws
in effect on the Closing Date, (viii) a certificate or telex confirmation as of
the Closing Date from the Secretary of State of the State of Kansas as to the
existence of PEI as a corporation, (ix) a certificate or telex confirmation as
of a date reasonably close to the Closing Date from the office of the
comptroller of the State of Kansas certifying that PEI is in good standing, (x)
a certificate dated the Closing Date from the Secretary or Assistant Secretary
of PEI to the effect that the documents delivered pursuant to (vi) and (vii) are
a true and correct copy of such documents and, as relates to the documents
delivered pursuant to (vi), as on file with the Secretary of State of the State
of Kansas and no action has been taken to amend, modify or repeal such documents
delivered pursuant to (vi) and (vii), the same being in full force and effect in
such form on the Closing Date and (xi) a certificate or telex confirmation as a
date reasonably close to the Closing Date from the Secretary of State of each
jurisdiction in which PEI is required to qualify as a foreign corporation as to
the good standing of PEI as a foreign corporation.
(q) Copies of Material Contracts. A copy of each Material Contract
----------------------------
pertaining to the Mortgaged Property which either (i) affects the Borrower's
title to the Mortgaged Property or otherwise affects the value, use or operation
of the Mortgaged Property in any material respect or (ii) creates or evidences a
material obligation or liability on the part of the Borrower.
(r) Subordinated Debt. The Subordinated Debt will be subordinated to
-----------------
the Obligation on terms and conditions satisfactory to Lender.
(s) Title Opinions. Borrower shall have caused to be delivered to the
--------------
Lender current favorable title opinions with respect to the Mortgaged Property
containing at least 80% of the value of Borrower's Proven Reserves in the
Mineral Interests. Each title opinion (i) shall be addressed to Lender and
issued by counsel to the Borrower that is experienced in the examination of
title to oil and gas properties, (ii) shall be updated through the date of the
filing of the Oil and Gas Mortgage to confirm the priority of the Lien created
by the Oil and Gas Mortgage and (iii) shall opine as to
3
<PAGE>
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) The Borrower has good and marketable title to such oil and gas
properties to the extent of its Mineral Interests as specified therein,
free and clear of all Liens.
(B) The 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) The 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) 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 Borrower to the Lender in connection with its credit evaluation for this
credit facility.
(u) Location of Producing Wells. The Borrower 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 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 Borrower evidence
---------
satisfactory to Lender as to the satisfaction of the requirements relating to
insurance set forth in Section 5.1(b) of the Agreement.
(w) Equity Interests of Borrower. No Person other than the Persons listed
----------------------------
on Schedule 4.18 to the Agreement shall hold any shares of the equity of
-------------
Borrower, 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 (including
without limitation, evidence of compliance with the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended), 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.
4
<PAGE>
(z) Absence of Changes. Lender shall have received evidence satisfactory
------------------
to Lender including, without limitation, a certificate executed by the chief
financial officer of Borrower, to such effect, that no material adverse change
has occurred in the business, assets, operations, prospects or financial or
other condition of Borrower since the date of the most recent Current Financial.
(aa) Current Financials. Lender shall have received copies of the Current
------------------
Financials, each certified by an appropriate executive officer of the general
partner of Borrower and a letter from Borrower addressed to Borrower's
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 Borrower.
(ab) Fees and Expenses. Subject to Section 5.1(j), Borrower shall have
-----------------
paid to Lender (i) all fees to be received by Lender pursuant to this Agreement
or any other agreement, 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) Other Documents. Such other agreements, documents, instruments,
---------------
opinions, certificates, and evidences as Lender may request.
5
<PAGE>
Exhibit 10.8
------------
ASSET PURCHASE AND SALE AGREEMENT
---------------------------------
This Asset Purchase and Sale Agreement (hereinafter "Agreement") is
effective as of the 1st day of July, 1995, ("Effective Date") between INLAND
RESOURCES INC., a Washington corporation, hereinafter referred to as "Inland"),
and PETROGLYPH GAS PARTNERS, L. P., a Delaware limited partnership (hereinafter
referred to as "PGP").
WHEREAS, Inland and PGP each own an undivided 50% interest in and to
certain oil and gas properties known as the "Duchesne Field" and the "Antelope
Creek Field", as more particularly set forth in Exhibit "A" attached hereto,
together with like interests in and to all related oil and gas sales contracts,
dedicated acreage, easements, rights-of-way, attendant equipment, operating
rights, and all other incidents associated therewith, and other assets;
WHEREAS, Inland and PGP each own an undivided 50% interest in and to that
certain gas gathering system consisting of the rights-of-way and easements set
forth in Exhibit "B" attached hereto, together with like interests in and to all
related contracts, easements, rights-of-way, attendant equipment, operating
rights, and all other incidents associated therewith, and other assets
(hereinafter referred to as the "Gathering System");
WHEREAS, Inland and PGP each own undivided interests in and to certain oil
and gas properties known as the "Ashley Federal Unit", as more particularly set
forth in Exhibit "E" attached hereto, together with like interests in and to all
related oil and gas sales contracts, dedicated acreage, easements, rights-of-
way, attendant equipment, operating rights, and all other incidents associated
therewith, and other assets;
WHEREAS, Inland and PGP desire to sell and to purchase from each other
certain interests in the Duchesne Field, Antelope Creek Field, Ashley Federal
Unit, Gas Gathering System, and related assets; 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:
<PAGE>
ARTICLE I
SALE OF ASSETS BY INLAND
------------------------
1.1 Purchase and Sale. PGP agrees to purchase and Inland agrees to sell
-----------------
all its right, title and interest in and to (a) the oil and gas leases and other
assets described on Exhibit "A" attached hereto, in not less than the percentage
working interest and net revenue interest as specified in Exhibit "A", and (b)
the rights-of-way, easements, and other assets described on Exhibit "B",
together with all right, title, and interest in and to the Cooperative Plan of
Development of the Antelope Creek Field, all oil and gas sales contracts,
dedicated acreage, easements, rights-of-way, pipelines, gathering systems,
processing plants, compressors, wells, pipeline and other yard inventory, water
trucks, furniture, fixtures, attendant equipment, machinery, operating rights,
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,
and only insofar as such items are attendant or relate solely to the Exhibit "A"
and Exhibit "B" properties, including without limitation the particular items
described on Exhibit "C" attached hereto (all of which shall hereinafter be
referred to as the "Duchesne/Antelope Creek Assets"). At Closing, Inland 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 in the Duchesne/Antelope Creek Assets to PGP.
1.2 Purchase Price. PGP agrees to pay to Inland the total sum of Three
--------------
Million Dollars ($3,000,000) in readily available funds by wire transfer to an
account to be designated by Inland, at Closing for the Duchesne/Antelope Creek
Assets, based on the working interest and net revenue interest in the oil and
gas leases, more fully described on Exhibit "A". The allocation of the purchase
price among the various leases and other Duchesne/Antelope Creek Assets is set
forth on Exhibit "D" attached hereto. In the event Inland's interest is less
than the interest stated in Exhibit "A", the purchase price shall be adjusted
accordingly. The purchase price set forth in this paragraph shall be subject to
the adjustments set forth in paragraph 1.3 below.
1.3 Adjustments to Purchase Price. The purchase price set forth in
-----------------------------
paragraph 1.2 above shall be adjusted at Closing, as follows:
a) Any amounts due and owing from Inland to PGP or its subsidiary,
Petroglyph Operating Company, Inc. ("POCI"),
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<PAGE>
as of the Effective Date, resulting from capital costs, operating
expenses, or unpaid revenue, if any, from the sale of production
related to the acquisition, development, or operation of the Duchesne
Field, Antelope Creek Field, or Ashley Federal Unit shall be deducted
from the purchase price. In addition, there shall also be deducted
from the purchase price the value of all oil in storage above the
pipeline connection and all gas that has passed through the meter at
or before the Effective Date that is credited to PGP's interest in the
Ashley Federal Unit and that is attributable to June, 1995 production.
The total of these amounts is estimated to be approximately
$323,552.40 as of June 30, 1995.
b) Any amounts due and owing from PGP or POCI to Inland as of the
Effective Date shall be added to the purchase price. These amounts
shall include any monies owing due to capital costs, operating
expenses, or unpaid revenues, if any, from sale of production related
to the acquisition, development, or operation of the Duchesne Filed,
Antelope Creek Field, or Ashley Federal Unit. In addition, there
shall also be added to the purchase price the value of all oil in
storage above the pipeline connection and all gas that has passed
through the meter at or before the Effective Date that is credited to
Inland's interest in both the Duchesne Field and the Antelope Creek
Field and that is attributable to June, 1995 production. The total of
these amounts is estimated to be approximately $77,525.00 as of June
30, 1995.
c) Inland's pro rata share of ad valorem taxes assessed against the
Duchesne/Antelope Creek Assets for the tax year 1995, prorated as of
the Effective Date, shall be deducted from the purchase price.
d) PGP's pro rata share of ad valorem taxes assessed against the Ashley
Federal Unit for the tax year 1995, prorated as of the Effective Date,
shall be added to the purchase price.
e) The positive or negative value of the Price Protection Agreement
(described in paragraph 1.5 below), as of the day before Closing,
shall be added to or deducted from the purchase price; provided,
---------
however, that in no event shall the adjustment to the purchase price,
-------
resulting from the Price Protection Agreement whether positive or
negative, be more than $100,000. The value of the Price Protection
Agreement shall be determined by Enron Risk Management Services Corp.
- 3 -
<PAGE>
A final accounting of the foregoing adjustments shall be had within sixty (60)
days after Closing of this Agreement. Any and all amounts due from one party to
another in accordance with such final accounting shall be paid within ten (10)
days after receipt of such final accounting.
1.4 Additional Consideration. As additional consideration for the
------------------------
transfer of the Duchesne/Antelope Creek Assets, PGP shall sell, assign, and
transfer to Inland or, if Inland shall so request, to Inland Production Company,
at Closing all of PGP's right, title, and interest in and to the following:
a) The Ashley Federal Unit oil and gas leases, more particularly
described on Exhibit "E" attached hereto, together with all equipment,
leases, easements and rights of way, contracts, farmout agreement, and
other agreements, and other assets related thereto, including without
limitation the particular items described on Exhibit "F" attached
hereto;
b) All warrants for the purchase of the common stock of Inland held by
PGP, which are more particularly described on Exhibit "F"; and
c) That certain water truck previously owned by Evertson Oil Company, as
more particularly described on Exhibit "F".
The foregoing assets are hereinafter referred to as the "Ashley Unit Assets".
1.5 Assumption of Debt. PGP shall assume all obligations, liabilities,
------------------
and rights of Inland under that certain Loan Agreement dated August 24, 1994
between Joint Energy Development Investments Limited Partnership ("JEDI") as
lender and Inland as borrower (hereinafter referred to as the "JEDI Loan"), and
all documents related thereto, including without limitation, the Production
Note, Development Note, Assignment of Overriding Royalty Interests, Deed of
Trust, Mortgage, Security Agreement, Assignment of Production of Proceeds,
Financing Statement and Fixture Filing, and ISDA Master Agreement and
confirmations thereunder ("Price Protection Agreement") related to production of
oil or gas from the Duchesne/Antelope Creek Assets, to the extent and only to
the extent that said agreements relate to the Duchesne/Antelope Creek Assets.
Except as set forth in this paragraph, PGP assumes no debts, obligations, or
liabilities of Inland.
1.6 Gas Transportation Contract. The parties agree to enter into a
---------------------------
standard gas transportation contract, in substantially the
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<PAGE>
form of Exhibit "G" attached hereto, which will provide Inland access to the
high pressure natural gas pipeline currently owned by the parties that crosses
the Ashley Federal Unit and interconnects with Questar's pipeline at the
Monument Butte interconnection. Said gas transportation contract shall provide,
among other things, that Inland shall have access up to but not exceeding 50% of
the maximum operating capacity of the pipeline, but in any case not to exceed
3,500 Mcf per day. The price to be charged Inland for transporting gas shall be
not more than the amount that PGP charges itself for the transportation of gas
through said pipeline which in no event shall exceed $.50/MCF. The term of this
agreement shall be for five (5) years from Closing.
1.7 Water Agreement. PGP shall cause POCI to enter into an agreement with
---------------
Inland, in substantially the form of Exhibit "H" attached hereto, providing for
the allocation to Inland for use in developing the Ashley Federal Unit the
following volumes of water available to POCI pursuant to that certain agreement,
as may be amended from time to time, dated October 1, 1994 by and between East
Duchesne Culinary Water Improvement District and POCI concerning the purchase of
water for use in oil and gas operations (the "Water Agreement"):
Year One - not to exceed 4,000 barrels per day
Year Two - not to exceed 3,000 barrels per day
Year Three - not to exceed 2,000 barrels per day
Year Four - not to exceed 1,000 barrels per day
Year Five and
beyond - 0 barrels per day
The agreement shall provide further that Inland's use of water shall at all
times be totally subject to and subordinate to the needs of PGP, POCI, and/or
their affiliates; that in the event PGP, POCI, and/or their affiliates shall
require the use of all or a portion of the amount allocated to Inland, Inland
shall have no recourse against PGP, POCI, and/or their affiliates for such
shortfall; that PGP, POCI, and/or their affiliates shall not be obligated or
liable for the water district's failure to perform under the Water Agreement;
that Inland shall pay for the use of water the amount set forth in the Water
Agreement; and that Inland shall further pay all costs and expenses caused by,
or necessary to, Inland's use of such water, including without limitation the
cost for the purchase or construction of any equipment or facilities.
1.8 Letters-in-Lieu. Inland shall prepare and the parties shall execute
---------------
letters-in-lieu of transfer and division orders at the time of closing, which
shall be sent to each purchaser of production, instructing said purchasers to
distribute proceeds of
- 5 -
<PAGE>
the Duchesne/Antelope Creek Assets to PGP as of the Effective Date, with respect
to production from the Duchesne/Antelope Creek Assets which occurs on and after
the Effective Date. PGP shall prepare and the parties shall execute letters-in-
lieu of transfer and division orders at the time of closing, which shall be sent
to each purchaser of production, instructing said purchasers to distribute
proceeds of the Ashley Federal Unit leases to Inland as of the Effective Date,
with respect to production from the Ashley Federal Unit leases which occurs on
and after the Effective Date.
1.9 Right to Terminate Agreement. Prior to Closing, if PGP or Inland have
----------------------------
not performed all those acts necessary for all of the conditions precedent to
have occurred prior to Closing, then PGP or Inland, 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. Provided, however, that in
the event that a title defect is discovered as to any of the assets being
transferred pursuant to this Agreement then, at the option of the party
receiving such assets, it may elect to terminate this Agreement or, as the
parties can agree, then the parties may adjust the purchase price by deleting
the asset from this Agreement and closing on the balance of the assets according
to the terms hereof.
1.10 Conditions Precedent. The party's obligations hereunder are subject
--------------------
to the following:
a) Confirmation of clear and marketable title in Inland to the
Duchesne/Antelope Creek Assets (the cost of such title confirmation to
be paid by PGP);
b) Confirmation of clear and marketable title in PGP to the Ashley Unit
Assets (the cost of such title confirmation to be paid by Inland);
c) Receipt of any and all required consents, waivers, and approvals from
third parties including any governmental, regulatory, or tribal
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, 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 -
<PAGE>
d) Consent and approval of JEDI to PGP's assumption of debt as provided
for in paragraph 1.5 above, and acceptance of the substitution of PGP
for Inland under the agreements described in that paragraph to the
extent that said agreements relate to the Duchesne/Antelope Creek
Assets;
e) Absence of the existence of any default or event of default under the
agreements described in paragraph 1.5 above;
f) Approval of the transactions contemplated by this Agreement by all
parties whose approval is necessary under PGP's partnership agreement;
and
g) Approval of the transactions contemplated by this Agreement by
Inland's board of directors.
h) At Closing, Inland and PGP shall each deliver to the other appropriate
opinion of counsel letters evidencing the authority of such party to
enter into this Agreement and comply with the terms thereof.
The approvals contemplated by paragraphs f) and g) shall be obtained by the
respective party at or before the time it executes this Agreement. All other
Conditions Precedent shall be satisfied prior to Closing; provided, however,
-----------------
that PGP in its discretion may waive the conditions set forth in paragraphs a),
c), and f), insofar as such conditions pertain to the transfer of the
Duchesne/Antelope Creek Assets, and that Inland in its discretion may waive the
conditions set forth in paragraphs b) and c) insofar as such conditions pertain
to the transfer of the Ashley Unit Assets.
1.11 Conditions Subsequent. The party's obligations hereunder are subject
---------------------
to receipt of any and all required consents, waivers, and approvals to the
transfers, conveyances, and assignments necessary to complete the transactions
contemplated under this Agreement, and all other acts contemplated by this
Agreement, 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. The
parties have agreed to close this Agreement without first obtaining all such
consents, waivers, and approvals; provided, however, that in the event any
-----------------
requests for required consents, waivers, and approvals from such governmental
entities are denied, then PGP and Inland agree to negotiate in good faith to
attempt to determine the value of the assets affected by such denial. If these
parties mutually agree as to the value of
- 7 -
<PAGE>
the affected asset(s), the recipient of this asset shall reconvey such asset to
its assignor, and shall further return the agreed value to such assigning party.
However, if no mutual agreement as to value can be reached, or the value of such
affected assets exceeds 20% of the purchase price, then either Inland or PGP
shall have the right, but not the obligation, to declare this Agreement null and
void, and the parties shall take such actions as are necessary to return the
parties to the same position they had prior to the execution of this Agreement,
including without limitation, the reconveyance of all properties conveyed at
Closing, and the return of all funds paid hereunder.
1.12 Mutual Release. Each party hereby releases the other party and the
--------------
other party's affiliated entities, and the officers, employees, shareholders,
partners, representatives, and agents of the other party and the other party's
affiliated entities, from any and all claims of every kind whatsoever, whether
contingent or liquidated, direct or indirect, related or unrelated to the assets
that are the subject of this Agreement, arising before Closing, except claims
arising from or under the provisions of this Agreement or the transactions
contemplated hereby.
1.13 Closing. Closing shall occur as soon as all conditions precedent have
-------
been met, at a time and place mutually agreed on by the parties. The parties
shall reasonably endeavor to take all actions necessary for Closing to occur on
or before September 1, 1995, or as soon thereafter as is practicable, but in no
event later than the close of business on September 20, 1995. If Closing does
not occur by this later date, either party shall have the right, but not the
obligation, to cancel this Agreement without penalty.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF INLAND
----------------------------------------
2.1 Power and Authority to Enter Into Agreement; Further Assurances.
----------------------------------------------------------------
Inland is fully authorized to enter into and perform this Agreement and to
convey or cause to be conveyed all of its rights, title and interest in the
Duchesne/Antelope Creek Assets. The consummation of this Agreement will not
violate or conflict with any governmental order, judgment or decree applicable
to Inland. This Agreement has been duly executed and delivered on behalf of
Inland, and at the Closing, all documents and instruments required hereunder to
be executed and delivered by Inland will be duly authorized, executed and
delivered. Inland shall furnish at Closing a resolution of its Board of
Directors authorizing the execution of this Agreement and all documents and
instruments
- 8 -
<PAGE>
required hereunder, together with a certificate of Inland's Secretary
identifying Inland's officers.
2.2 Ownership. Inland owns the working interests and net revenue
----------
interests in and to the oil and gas leases more fully described on Exhibit "A",
together with like interests in the other Duchesne/Antelope Creek Assets, and
warrants and represents that at Closing it shall sell and transfer marketable
title to PGP in not less than the percentage working interest and net revenue
interest as specified in Exhibit "A" in and to the oil and gas leases and other
Duchesne/Antelope Creek Assets; and that Inland has not caused by its acts or
omissions the filing of any liens, mortgages or financing statements against the
Duchesne/Antelope Creek Assets being sold hereunder, except the JEDI Loan; nor
has Inland assigned to any other party any of the Duchesne/Antelope Creek Assets
being sold hereunder, since acquisition of said Duchesne/Antelope Creek Assets
by Inland; and that Inland will warrant and forever defend title to the
Duchesne/Antelope Creek Assets, including the percentage working and net revenue
interests shown to be owned by such Inland on Exhibit "A", against all persons
whomsoever lawfully claiming or to claim the same by, through, or under Inland,
but not otherwise.
2.3 Conditions of Property. PGP hereby acknowledges and accepts that on
----------------------
the Closing date the equipment to be sold and transferred by Inland to PGP will
be sold in its then "as is, where is" condition without any warranties, written
or verbal, expressed or implied, as to the condition of such equipment sold.
Inland makes no warranty as to the condition, safety, or operating condition of
the equipment sold to PGP which will survive the date of Closing.
2.4 Consents. Inland has obtained, as of Closing, all necessary consents
--------
and authorizations to the transfer of the Duchesne/Antelope Creek Assets and
attendant rights to PGP, 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.
2.5 Judgments. Inland represents, covenants and warrants to PGP, its
---------
successors and assigns, that on the Closing date there will be no judgment,
injunction, court order, or adverse administrative ruling in existence against
Inland; and that PGP will be indemnified by Inland against any and all
judgments, lawsuits, court orders and/or administrative rulings existing,
- 9 -
<PAGE>
pending or threatened against Inland arising out of Inland's actions prior to
the Closing Date.
2.6 Preferential Rights. There is no preferential right of any third
-------------------
party to purchase any of the Duchesne/Antelope Creek Assets, other than
preferential rights which have expired or been waived as of the time of Closing.
ARTICLE III
REPRESENTATIONS OF PGP
----------------------
3.1 Power and Authority to Enter Into Agreement; Further Assurances. PGP
----------------------------------------------------------------
is fully authorized to enter into and perform this Agreement and to convey or
cause to be conveyed all of its rights, title and interest in the Ashley Unit
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 PGP's partnership
agreement; a resolution of 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.
3.2 Ownership. PGP owns the working interests and net revenue interests
----------
in and to the oil and gas leases more fully described on Exhibit "E", together
with like interests in the other Ashley Unit Assets, and warrants and represents
that at Closing it shall sell and transfer marketable title to Inland in not
less than the percentage working interest and net revenue interest as specified
in Exhibit "E" in and to the oil and gas leases and other Ashley Unit Assets;
and that PGP has not caused by its acts or omissions the filing of any liens,
mortgages or financing statements against the Ashley Unit Assets being sold
hereunder; nor has PGP assigned to any other party any of the Ashley Unit Assets
being sold hereunder, since acquisition of said Ashley Unit Assets by PGP; and
that PGP will warrant and forever defend title to the Ashley Unit Assets,
including the percentage working and net revenue interests shown to be owned by
such PGP on Exhibit "E", against all persons whomsoever lawfully claiming or to
claim the same by, through, and under PGP, but not otherwise.
- 10 -
<PAGE>
3.3 Conditions of Property. Inland hereby acknowledges and accepts that
----------------------
on the Closing date the equipment to be sold and transferred by PGP to Inland
will be sold in its then "as is, where is" condition without any warranties,
written or verbal, expressed or implied, as to the condition of such equipment
sold. Inland makes no warranty as to the condition, safety, or operating
condition of the equipment sold to Inland which will survive the date of
Closing.
3.4 Consents. PGP has obtained, as of Closing, all necessary consents and
--------
authorizations to the transfer of the Ashley Unit Assets and attendant rights to
Inland, 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.
3.5 Judgments. PGP represents, covenants and warrants to Inland, its
---------
successors and assigns, that on the Closing date there will be no judgment,
injunction, court order, or adverse administrative ruling in existence against
PGP; and that Inland will be indemnified by PGP against any and all judgments,
lawsuits, court orders and/or administrative rulings existing, pending or
threatened against PGP arising out of PGP's actions prior to the Closing Date.
3.6 Preferential Rights. There is no preferential right of any third
-------------------
party to purchase any of the Ashley Unit Assets, other than preferential rights
which have expired or been waived as of the time of Closing.
ARTICLE IV
INDEMNIFICATION
---------------
4.1 By Inland Production Company. Upon consummation of the Closing, and
----------------------------
to the extent permissible under applicable law, Inland Production Company agrees
to indemnify and hold harmless PGP, its employees, partners, and agents from and
against any and all liens, judgments, costs, reasonable attorney's fees, and
claims of any kind or character relating to periods during which Inland
Production Company is or was the operator of the Ashley Unit insofar as and to
the extent such claims become a final non-appealable order(s) or judgment(s)
determining that Inland Production Company's actions or failure to act caused
the damages or injuries which are the subject of such claims, including, but not
limited to claims for damages to land, stock, crops, fences,
- 11 -
<PAGE>
buildings, structures, claims for personal injury to, and death of persons, and
alleged violations of any environmental laws.
4.2 By POCI. Upon consummation of the Closing, and to the extent
-------
permissible under applicable law, POCI agrees to indemnify and hold harmless
Inland, its employees, officers, directors, and agents from and against any and
all liens, judgments, costs, reasonable attorney's fees, and claims of any kind
or character relating to periods during which POCI is or was the operator of the
Duchesne Field and/or Antelope Creek Field insofar as and to the extent such
claims become a final non-appealable order(s) or judgment(s) determining that
POCI's actions or failure to act caused the damages or injuries which are the
subject of such claims, including, but not limited to claims for damages to
land, stock, crops, fences, buildings, structures, claims for personal injury
to, and death of persons, and alleged violations of any environmental laws.
ARTICLE V
MISCELLANEOUS PROVISIONS
------------------------
5.1 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.
5.2 Governing Laws. The laws of the State of Kansas shall govern this
--------------
Agreement in proceedings in court (law and/or equity) and proceedings in
arbitration.
5.3 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.
5.4 Titles of Articles, Sections and Subsections. The titles and
--------------------------------------------
subtitles of Articles, Section and Subsections of this Agreement are for
convenience only; are not part of the terms of this Agreement; are without legal
or contractual significance; and,
- 12 -
<PAGE>
as such, shall not govern the terms of this Agreement or in any way influence
the interpretation of this Agreement.
5.5 Notices. Any and all written notices hereunder shall be delivered in
-------
person or via registered mail, return receipt requested, postage prepaid, to the
following individuals at the following address:
PGP: PETROGLYPH ENERGY, INC.
Attn: Robert C. Murdock
6209 North Highway 61
P. O. Box 1839
Hutchinson, KS 67504-1839
FAX: 316-665-8577
Inland: INLAND RESOURCES INC.
Attn: Kyle R. Miller
475 17th Street, Suite 1500
Denver, CO 80202
FAX: 303-296-4070
Such agents and/or addresses may be unilaterally altered by either party upon
providing written notice thereof to the other party.
5.6 Duplicate Originals. This Agreement shall be executed in
-------------------
duplicate originals, with Inland and PGP each receiving an original.
5.7 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 or as may be necessary to assign and convey marketable title to the
Duchesne/Antelope Creek Assets to PGP or to assign and convey marketable title
to the Ashley Unit Assets to Inland.
5.8 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.
- 13 -
<PAGE>
5.9 Assignment. This Agreement may not be assigned by the parties,
----------
except to affiliated entities, without the written consent of the other party.
This Agreement shall be binding the parties hereto and their respective
successors and assigns.
5.10 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.
5.11 Required Financial Information. Inland agrees that, until
------------------------------
January 1, 1999, at PGP's cost and expense, Inland will provide PGP and its
representatives with such financial and other information, and such access to
its books and records, insofar as such financial and other information and books
and records pertains to the Duchesne/Antelope Creek Assets, as may be necessary
for PGP to comply with any laws or governmental rules or regulations applicable
to it, in such form as is necessary to comply with any such law, rule or
regulation, including without limitation rules and regulations of the Securities
and Exchange Commission or any successor body. Such information shall be
provided to PGP or its representatives as promptly as is reasonably practicable.
PGP agrees that, until January 1, 1999, at Inland's cost and expense, PGP
will provide Inland and its representatives with such financial and other
information, and such access to its books and records, insofar as such financial
and other information and books and records pertains to the Ashley Unit Assets,
as may be necessary for Inland to comply with any laws or governmental rules or
regulations applicable to it, in such form as is necessary to comply with any
such law, rule or regulation, including without limitation rules and regulations
of the Securities and Exchange Commission or any successor body. Such
information shall be provided to Inland or its representatives as promptly as is
reasonably practicable.
5.12 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. Nothing herein shall be construed as
obligating PGP to accept title to or purchase of any Asset which does not comply
with the representations and warranties contained herein.
5.13 Final Agreement. This Agreement constitutes the final agreement of
---------------
the parties, and supersedes any and all prior agreements among the parties.
Upon Closing of this Agreement, all
- 14 -
<PAGE>
prior agreements among the parties, including without limitation those
agreements listed on Exhibit "I" attached hereto, shall become null and void as
between PGP and Inland. The unit agreement and unit operating agreement for the
Ashley Unit shall remain in full force and effect as between Inland and the
other parties to these Ashley agreements; however, at and after Closing, these
agreements shall be of no further force and effect whatsoever with regard to
PGP, and the leasehold interests assigned by PGP within the Ashley Unit shall be
made specifically subject to the Ashley unit agreement and the unit operating
agreement for this unit, and Inland shall assume all of PGP's responsibilities,
rights, liabilities, and obligations created by these agreements which arise
after the Effective Date. Any other agreements, contracts, letter arrangements,
or other formal or informal contracts, whether written, oral, or existing in
quantum meruit, shall be deemed terminated, and extinguished at and as of
Closing between Inland and PGP.
5.14 Arbitration. All claims, counterclaims, disputes, and other
-----------
matters in question arising out of or relating to this Agreement or the breach
hereof, or any transactions contemplated hereby, will be decided by arbitration
in accordance with the Rules of the American Arbitration Association then in
effect. This agreement to arbitrate will be specifically enforceable under the
prevailing laws of any court having jurisdiction.
Notice of Demand for Arbitration must be filed in writing with the other
party to this Agreement and with the American Arbitration Association within a
reasonable time after the claim, dispute, or other matter in question has
arisen. In no event may the Demand for Arbitration be made after the time when
institution of legal or equitable proceedings based on such claim, dispute, or
other matter in question would be barred by the applicable statute of
limitations.
Within thirty (30) days of the filing of Notice of Demand for Arbitration,
the parties shall jointly select a single arbitrator to hear any dispute arising
under this Agreement.
All arbitration proceedings shall be had in the city of Salt Lake City,
Utah. In all proceedings under this Agreement, the arbitrator shall be bound by
the Federal Rules of Evidence in effect at the time of arbitration. Any award
of the arbitrator shall be in writing and shall state the findings of fact, the
conclusions of law, and the reasons for the award. A decision of the arbitrator
shall be binding.
- 15 -
<PAGE>
The costs of any proceeding shall be shared equally by the parties. Each
party shall otherwise bear its own costs, including without limitation any
attorneys' fees.
IN WITNESS WHEREOF, the parties have executed this Agreement this _____ day
of August, 1995, but effective as of the 1st day of July, 1995.
Inland: INLAND RESOURCES INC.
By_________________________________
Name: Kyle R. Miller
Title: President
INLAND PRODUCTION COMPANY
By_________________________________
Name: Kyle R. Miller
Title: President
PGP: PETROGLYPH GAS PARTNERS, L. P.
By: PETROGLYPH ENERGY, INC.
its general partner
By_________________________________
Name: Robert C. Murdock
Title: President
POCI: PETROGLYPH OPERATING COMPANY, INC.
By_________________________________
Name:__________________________
Title: President
- 16 -
<PAGE>
Exhibit 10.9
------------
FIRST AMENDMENT
TO
ASSET PURCHASE AND SALE AGREEMENT
This First Amendment to the Asset Purchase and Sale Agreement (herein called
this "Amendment") is made and entered into as of the date of execution for each
party, effective as set forth herein, by and between Inland Resources Inc., a
Washington corporation ("Inland") and Petroglyph Gas Partners, L.P., a Delaware
limited partnership ("PGP");
WITNESSETH:
WHEREAS, pursuant to that certain Asset Purchase and Sale Agreement dated
effective July 1, 1995, by and among Inland and PGP, among others (the "Original
Agreement"), Inland agreed to sell and PGP agreed to purchase various assets
described therein;
WHEREAS, as additional consideration for this purchase as described in
Section 1.4(b) of the Original Agreement, PGP agreed to transfer to Inland all
of POP's right, title, and interest in and to all warrants for the purchase of
the common stock of Inland held by PGP, which warrants were more particularly
described on Exhibit F attached to and made a part of the Original Agreement;
and
WHEREAS, PGP has received an offer to purchase these warrants from a third
party, and Inland has no objection to the sale of these warrants to such third
party subject to the terms and conditions hereof.
NOW, THEREFORE, for and in consideration of the mutual promises set forth
herein, the undersigned parties agree to amend the Original Agreement in the
following respects:
1. Section 1.4(b) of the Original Agreement is hereby deleted and the
Purchase Price described in Section 1.2 of the Original Agreement is
increased by the sum of $25,000.00.
2. The undersigned parties agree that should this sale of the
warrants for Inland stock by PGP to this third party fail to close on or
before the closing contemplated by the Original Agreement, that this
Amendment shall become null and void and of no further force or effect,
with the result being that the Original Agreement will be as originally set
forth between the undersigned parties as if this Amendment had never been
made. Thus, the additional consideration contemplated by Section 1.4(b) of
the Original Agreement will be reinstated and the warrants will be
transferred to Inland at its closing with PGP, and the Purchase Price set
forth in Section 1.2 of the Original Agreement will revert to the
$3,000,000.00 price as originally set forth.
-1-
<PAGE>
Except as hereby amended, the Original Agreement is ratified and confirmed
to be in full force and effect in accordance with its original terms.
This Amendment may be executed in counterparts, each of which shall be an
original and all of which shall constitute but one and the same instrument. It
shall not be necessary for all parties (or any party) to execute the same
counterpart. The parties may elect to execute telecopied counterparts of this
Amendment and upon the execution of counterparts hereof by the parties, this
Amendment shall constitute a valid and binding agreement. Copies containing
original signatures shall be subsequently exchanged by the parties.
IN WITNESS WHEREOF, this First Amendment to Asset Purchase and Sale
Agreement is executed by the parties hereto on the dates set forth under their
names, effective September 1, 1995.
Date: September 1, 1995
-----------------
INLAND RESOURCES INC.
By: /s/ Kyle R. Miller
----------------------------------
Name: Kyle R. Miller
Title: President
Date: September 5, 1995
-----------------
PETROGLYPH GAS PARTNERS, L.P.
By: PETROGLYPH ENERGY, INC.
its general partner
By: /s/ Robert C. Murdock
----------------------------------
Name: Robert C. Murdock
Title: President
-2-
<PAGE>
Exhibit 10.10
ASSET PURCHASE AND SALE AGREEMENT
---------------------------------
This Asset Purchase and Sale Agreement (hereinafter "Agreement") is
effective as of the 1st day of June, 1996, ("Effective Date") by and among
PETROGLYPH GAS PARTNERS, L. P., a Delaware limited partnership (hereinafter
referred to as "PGP"), CoENERGY ENHANCED PRODUCTION, INC., a Michigan
corporation (hereinafter referred to as "CEPI"), and PETROGLYPH OPERATING
COMPANY, INC. ("POCI"), a Kansas corporation.
WHEREAS, PGP owns certain oil and gas properties known as the "Antelope
Creek Field," as more particularly set forth in Exhibit "A" attached hereto,
together with related oil and gas sales contracts, dedicated acreage, easements,
rights-of-way, attendant equipment, operating rights, and all other incidents
associated therewith, and POCI is operator of such properties;
WHEREAS, PGP owns that certain gas gathering system consisting of the
rights-of-way and easements set forth in Exhibit "B" attached hereto, together
with like interests in and to all related contracts, easements, rights-of-way,
attendant equipment, operating rights, and all other incidents associated
therewith, and other assets (hereinafter referred to as the "Gathering System");
WHEREAS, PGP desires to sell to CEPI and CEPI desires to purchase from PGP,
an undivided fifty percent (50%) interest in and to the Antelope Creek Field and
the Gathering System (insofar as the Gathering System covers lands and equipment
located in the Antelope Creek Field); 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
SALE OF ASSETS BY PGP
---------------------
1.1 Purchase and Sale. CEPI agrees to purchase and PGP agrees to
-----------------
sell an undivided fifty percent (50%) interest in and to (a) the oil and gas
leases and other assets described on Exhibit "A" attached hereto, at not less
than fifty percent (50%) of the net revenue interests as specified in Exhibit
"A", (b) the rights-of-way, easements, and other assets described on Exhibit "B"
attached hereto, insofar as such rights-of-way, easements, and other assets
described on Exhibit "B" cover or are located on lands described on Exhibit "A",
(c) the Cooperative Plan of Development and Operation for the Antelope Creek
Enhanced Recovery Project,
<PAGE>
Duchesne County, Utah dated February 17, 1994, by and among Petroglyph Operating
Company, Inc., Inland Resources Inc., Petroglyph Gas Partners, L.P., Ute Indian
Tribe, and Ute Distribution Corporation, as approved by the Bureau of Indian
Affairs ("BIA"), and (d) all oil and gas sales contracts, dedicated acreage,
easements, rights-of-way, pipelines, gathering systems, processing plants,
compressors, 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, and
only insofar as such items are attendant or relate to the Exhibit "A" and
Exhibit "B" properties (the assets listed at (a), (b), (c), and (d) shall
hereinafter be referred to collectively as the "Antelope Creek Assets"). At
Closing, PGP 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 a fifty percent (50%) interest in the Antelope
Creek Assets to CEPI.
1.2 Net Profits Interest. CEPI agrees to purchase and PGP agrees to
--------------------
sell, in addition to the interest in the Antelope Creek Assets described in
section 1.1 above, an undivided twenty-five percent (25%) interest in and to the
"net proceeds" from the sale of production from the Antelope Creek Field until
such time as CEPI has received the net proceeds from the sale of Sixty-Seven
Thousand Three Hundred Eighty-Nine (67,389) barrels of oil equivalent ("BOE")
(hereinafter referred to as the "Net Profits Interest"), such Net Profits
Interest to be paid out of PGP's fifty percent (50%) interest in and to the
Antelope Creek Field. For purposes of this section 1.2, six (6) MMBtus of gas
shall equal one (1) BOE. For purposes of this section 1.2, "net proceeds" shall
mean gross proceeds from the sale of production from the Antelope Creek Field
(excluding any proceeds received pursuant to any Non-Funding or Non-Consent
provisions of the Antelope Creek Unit Operating Agreement) less (a) royalties
and overriding royalty interests payable therefrom, except interests that burden
only one party's working interest, (b) operating expenses, (c) severance and
like taxes arising from such production, and (d) other costs and expenses
related to the operation and maintenance of the Antelope Creek Assets
customarily incurred in the operation and maintenance of oil and gas properties,
excluding capital expenditures. At Closing, PGP shall execute and deliver in
sufficient and recordable form an assignment of the Net Profits Interest to
CEPI.
1.3 Purchase Price. CEPI agrees to pay to PGP the total sum of Seven
--------------
Million Three Hundred Five Thousand Two Hundred Fifty Dollars ($7,305,250), to
be paid at Closing in readily available funds by wire transfer to an account to
be designated by PGP, such designation to be made no later than three (3)
business days prior
-2-
<PAGE>
to Closing. The entire purchase price shall be allocated to Class III assets,
as defined in Temp. Treas. Reg. (S) 1.1060-1T(d)(2)(ii).
1.4 Accounting Adjustments. All expenses which are incurred in the
----------------------
operation of the Antelope Creek Assets before the Effective Date will be borne
by PGP and PGP shall be entitled to all proceeds (net of applicable production,
severance, and similar taxes) from the sale before the Effective Date of oil,
gas and/or other minerals produced from the Antelope Creek Assets (and any other
revenues arising out of the operation thereof), and all expenses which are
incurred in the operation of the Antelope Creek Assets on and after the
Effective Date will be charged fifty percent (50%) to CEPI and CEPI shall be
entitled to fifty percent (50%) of all proceeds (net of applicable production,
severance, and similar taxes) from the sale after the Effective Date of oil, gas
and/or other minerals produced from the Antelope Creek Assets (and any other
revenues arising out of the operation thereof). It is agreed that, in making
such adjustments: (i) with respect to expenses incurred in the operation of the
Antelope Creek Assets between the Effective Date and Closing, only Direct
Expenses (defined below) incurred by PGP (net of all applicable credits, which
shall be determined on the same basis provided below for Direct Expenses) will
be chargeable to CEPI and all other expenses incurred by PGP will be chargeable
to PGP as if the same had been incurred in operations prior to the Effective
Date; (ii) oil which was produced from the Antelope Creek Field and which was,
on the Effective Date, stored in tanks located on the Antelope Creek Field (or
located elsewhere but used by PGP to store oil produced from the Antelope Creek
Field prior to delivery to oil purchasers) and above pipeline connections shall
be deemed to have been produced before the Effective Date and shall belong to
PGP; (iii) ad valorem taxes for 1996 shall be based on 1995 ad valorem taxes,
and prorated between PGP and CEPI as of the Effective Date; and (iv) no
consideration shall be given to the state or federal income tax liabilities of
any party. For the purposes of this section, "Direct Expenses" shall mean those
expenses properly charged to PGP by the operator of each property. Nothing
herein shall be construed as requiring CEPI to bear any casualty losses
occurring prior to closing (even though the same may occur after the Effective
Date), which losses shall be the sole risk of PGP up to Closing, or as requiring
CEPI to bear expenses which result from the operation of the Antelope Creek
Assets other than in accordance with the covenants, representations and
warranties of PGP contained herein.
1.5 Settlement of Accounting. Settlement with respect to the
------------------------
accounting matters set forth in section 1.4 above shall be made as soon as
records become available, but in no event later than sixty (60) days after
Closing. PGP shall prepare a statement of proceeds and expenses between the
Effective Date and the Closing date, and CEPI shall have thirty (30) days to
review such statement. If the net amount of adjustments so determined would
result in payment to
-3-
<PAGE>
CEPI, PGP shall promptly pay such sum to CEPI, and if the converse is true, CEPI
shall promptly pay such sum to PGP.
1.6 Letters-in-Lieu. PGP shall prepare, with CEPI's consent, and the
---------------
parties shall execute letters-in-lieu of transfer and division orders at the
time of closing, which shall be sent to each purchaser of production,
instructing said purchasers to distribute proceeds of the Antelope Creek Assets
seventy-five percent (75%) to CEPI and twenty-five percent (25%) to PGP with
respect to production from the Antelope Creek Field which occurs on and after
the Effective Date until termination of CEPI's Net Profits Interest, and to
distribute the proceeds of the Antelope Creek Assets fifty percent (50%) to CEPI
and fifty percent (50%) to PGP with respect to production after termination of
CEPI's Net Profits Interest.
1.7 Right to Terminate Agreement. Prior to Closing, if PGP or CEPI
----------------------------
have not performed all those acts necessary for all of the conditions precedent
to have occurred prior to Closing, then PGP or CEPI, 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. In the event that a
title defect is discovered as to any of the assets being transferred pursuant to
this Agreement then, at the option of CEPI, it may elect to terminate this
Agreement or, if the parties can agree, then the parties may adjust the purchase
price by deleting the asset from this Agreement and closing on the balance of
the assets according to the terms hereof.
1.8 Conditions Precedent. The party's obligations hereunder are
--------------------
subject to the following:
a) Confirmation of clear and marketable title in PGP to the Antelope
Creek Assets (the cost of such title confirmation to be paid by
CEPI);
b) Receipt of any and all required consents, waivers, and approvals
from third parties including any governmental, regulatory, or
tribal 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, 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;
-4-
<PAGE>
c) Approval of the transactions contemplated by this Agreement by
all parties whose approval is necessary under PGP's partnership
agreement;
d) Approval of the assignment of interests in the Antelope Creek
Field to CEPI by the Ute Indian Tribe and the Ute Distribution
Corporation;
e) Execution and delivery of the Unit Operating Agreement by the
parties; and
f) At Closing, CEPI and PGP shall each deliver to the other
appropriate opinion of counsel letters evidencing the authority
of such party to enter into this Agreement and comply with the
terms thereof.
The approval contemplated by paragraph c) shall be obtained by PGP at or before
the time it executes this Agreement. All other Conditions Precedent shall be
satisfied prior to or at Closing; provided, however, that CEPI in its discretion
-----------------
may waive the conditions set forth in paragraphs a), b), and d).
1.9 Conditions Subsequent. The parties' obligations hereunder are
---------------------
subject to receipt of any and all required consents, waivers, and approvals to
the transfers, conveyances, and assignments necessary to complete the
transactions contemplated under this Agreement, and all other acts contemplated
by this Agreement, 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. The parties have agreed to close this Agreement without first
obtaining all such consents, waivers, and approvals; provided, however, that in
-----------------
the event any requests for required consents, waivers, and approvals from such
governmental entities are denied, then PGP and CEPI agree to negotiate in good
faith to attempt to determine the value of the assets affected by such denial.
If the parties mutually agree to the value of the affected assets, CEPI shall
reconvey such assets to PGP, and the value of such assets shall be deducted from
the project costs to be contributed by CEPI to development of the Antelope Creek
Field pursuant to the provisions of section 1.3 b) above. However, if no mutual
agreement as to value can be reached, or the value of such affected assets
exceeds 20% of the purchase price, then either CEPI or PGP shall have the right,
but not the obligation, to declare this Agreement null and void, and the parties
shall take such actions as are necessary to return the parties to the same
position they had prior to the execution of this Agreement, including without
limitation, the reconveyance of all properties conveyed at
-5-
<PAGE>
Closing, and the return of all funds paid hereunder (except that each party
shall bear its own costs incurred in connection with this Agreement).
1.10 Closing. 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 June 28, 1996. 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) CEPI shall pay to PGP the purchase price as set forth in section 1.3
above, adjusted as provided herein;
b) PGP shall execute and deliver to CEPI the assignments of the Antelope
Creek Assets;
c) PGP shall execute and deliver to CEPI the assignment of the Net
Profits Interest;
d) PGP shall execute and deliver to CEPI the letters-in-lieu required
under section 1.6 above;
e) The parties shall deliver to each other the opinions of counsel
required under section 1.8 above;
f) The parties shall execute and deliver to each other the Unit Operating
Agreement; and
g) The parties shall execute and deliver such other instruments as are
necessary to give effect to this Agreement.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF CEPI
--------------------------------------
2.1 Power and Authority to Enter Into Agreement; Further Assurances.
----------------------------------------------------------------
CEPI 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 CEPI. This Agreement has
been duly executed and delivered on behalf of CEPI, and at the Closing, all
documents and instruments required hereunder to be executed and delivered by
CEPI will be duly authorized, executed and delivered. CEPI shall
-6-
<PAGE>
furnish at Closing a certificate of CEPI's Secretary identifying CEPI's
officers.
2.2 Access and Inspection. CEPI represents and acknowledges that it has
---------------------
conducted its own due diligence review of all of the "Files" and "Information"
(as those terms are defined in section 3.11 below) furnished to it by PGP; that
it has inspected the Antelope Creek Assets and satisfied itself of the condition
of same; and that it has engaged independent counsel to review title to the
Antelope Creek Assets.
ARTICLE III
REPRESENTATIONS OF PGP AND POCI
-------------------------------
3.1 Power and Authority to Enter Into Agreement; Further Assurances. PGP
----------------------------------------------------------------
and POCI are fully authorized to enter into and perform this Agreement, and PGP
is fully authorized to convey or cause to be conveyed the Net Profits Interest
and fifty percent (50%) of its rights, title and interest in the Antelope Creek
Assets. The consummation of this Agreement will not violate or conflict with
any governmental order, judgment or decree applicable to PGP or POCI. This
Agreement has been duly executed and delivered on behalf of PGP and POCI, and at
the Closing, all documents and instruments required hereunder to be executed and
delivered by PGP and POCI will be duly authorized, executed and delivered. PGP
shall furnish at Closing the consents of all parties whose consents are required
under PGP's partnership agreement; a resolution of PGP'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. POCI shall furnish at Closing a resolution of its Board of Directors
authorizing the execution of this Agreement and all documents and instruments
required hereunder, and a certificate of POCI's Secretary identifying POCI's
officers.
3.2 Ownership. PGP owns one hundred percent (100%) of the working
----------
interests and the net revenue interests set forth on Exhibit "A" in and to the
oil and gas leases more fully described on Exhibit "A," and warrants and
represents that at Closing it shall sell and transfer marketable title to CEPI
in not less than a fifty percent (50%) of the working interest and the
corresponding net revenue interests as specified in Exhibit "A" in and to the
oil and gas leases and other Antelope Creek Assets; and that PGP has not caused
or permitted the filing of any liens, encumbrances, mortgages or financing
statements against the Antelope Creek Assets being sold hereunder; nor has PGP
assigned to any other party any of the Antelope Creek Assets being sold
hereunder, since
-7-
<PAGE>
acquisition of said Antelope Creek Assets by PGP; and that PGP will warrant and
forever defend title to the Antelope Creek Assets, including fifty percent (50%)
of the percentage working and net revenue interests shown to be owned by such
PGP on Exhibit "A," against all persons whomsoever lawfully claiming or to claim
the same by, through, and under PGP, but not otherwise.
3.3 Conditions of Property. CEPI hereby acknowledges and accepts that on
----------------------
the Closing date the equipment to be sold and transferred by PGP to CEPI will be
sold in its then "as is, where is" condition without any warranties, written or
verbal, expressed or implied, as to the condition of such equipment sold. CEPI
has been given free and unencumbered access to the Antelope Creek Field and has
inspected the equipment prior to Closing. PGP makes no warranty as to the
condition, safety, or operating condition of the equipment sold to CEPI which
will survive the date of Closing.
3.4 Consents. PGP has obtained, as of Closing, all necessary consents and
--------
authorizations to the transfer of the Antelope Creek Assets and attendant rights
to CEPI, 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.
3.5 Judgments. PGP and POCI represent, covenant and warrant to CEPI, its
---------
successors and assigns, that on the date hereof there is, and on the Closing
date there will be, no claim, demand, judgment, injunction, court order, or
adverse administrative ruling in existence or threatened against PGP or POCI;
and that CEPI will be indemnified by PGP against any and all judgments,
lawsuits, court orders and/or administrative rulings existing, pending or
threatened against PGP or POCI arising out of PGP's or POCI's actions prior to
the Closing Date.
3.6 Compliance With Governmental Regulations. PGP and POCI represent to
----------------------------------------
CEPI, its successors and assigns, that to the best of their knowledge and
belief, up to the date of Closing, PGP's and POCI's operation of the Antelope
Creek Assets shall have 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. PGP represents and
warrants that POCI and PGP have used and operated the Antelope Creek Assets in
compliance with all applicable environmental laws, rules, regulations and orders
(the "Environmental Laws") and no conditions exist at the Effective Date that
would subject PGP or CEPI to any damages, or any other liabilities, penalties,
injunctive relief or remedial or cleanup costs under any such Environmental Laws
or that require, or are
-8-
<PAGE>
likely to require, cleanup, removal, remedial action or other response by PGP or
CEPI to any such Environmental Laws. PGP and POCI further represent and warrant
that they have not received any notification of any asserted present or past
failure of PGP or POCI to comply with such Environmental Laws and that PGP and
POCI have not disposed of any hazardous material on the real property included
in the Antelope Creek Assets except in accordance with applicable laws and
regulations. No oral or written notification of a release of hazardous material
has been filed by or on behalf of PGP or POCI with regard to the Antelope Creek
Assets, and PGP and POCI have not received a Potentially Responsible Party
notice that the Antelope Creek 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.
3.7 Preferential Rights. There is no preferential right of any third
-------------------
party to purchase any of the Antelope Creek Assets or production therefrom,
other than preferential rights which have expired or been waived as of the time
of Closing, and other than a call on production by Chevron U.S.A. which may
exist on such production.
3.8 Contracts. PGP represents and warrants that, except as specifically
---------
set forth on Exhibit "C", there are no existing and valid contracts which affect
the Antelope Creek Assets, and that PGP is not materially in breach or default
of its obligations under any of said contracts.
3.9 Taxes and Assessments. All material ad valorem, real property,
---------------------
personal property, excise and similar taxes and assessments based upon or
relating to the ownership of the Antelope Creek Assets which have become due and
payable have been properly paid, all applicable tax returns have been filed, and
PGP knows of no actual or proposed claim by any applicable taxing authority
against PGP in connection with the payment of such taxes, and knows of no basis
for any such claim. As used herein, "material" shall mean any amount in excess
of $5,000.
3.10 Operations. POCI has all governmental licenses and permits necessary
----------
or appropriate to own and operate the Antelope Creek Assets to the extent that
they are presently being owned and operated by PGP and POCI, and such licenses,
permits and filings are in full force and effect and neither POCI nor PGP has
received, nor is it aware of, written notice of any violations in respect of any
such licenses or permits. To the best of PGP's and POCI's knowledge, the
ownership and operation of the Antelope Creek 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
-9-
<PAGE>
of all governmental agencies having jurisdiction, relating to the Antelope Creek
Assets.
3.11 Accuracy of Information. PGP has provided CEPI access to all lease
-----------------------
files, abstracts and title opinions, production records, maintenance records,
specification records, accounting records, surveys, design drawings and maps,
and other files, documents and records relating to the Antelope Creek Assets
(herein called the "Files"). Such Files constitute all of PGP's files relating
to the Antelope Creek Assets. To the best of PGP's knowledge, all information
contained in the Files (herein called the "Information") is accurate, true and
correct, as of the date furnished, in all material respects. To the best of
PGP'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.
ARTICLE IV
MISCELLANEOUS PROVISIONS
------------------------
4.1 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.
4.2 Governing Laws. The laws of the State of Utah shall govern this
--------------
Agreement in proceedings in court (law and/or equity) and proceedings in
arbitration.
4.3 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.
4.4 Titles of Articles, Sections and Subsections. The titles and
--------------------------------------------
subtitles of Articles, Section and Subsections of this 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.
-10-
<PAGE>
4.5 Notices. Any and all written notices hereunder shall be delivered in
-------
person or via registered mail, return receipt requested, postage prepaid, to the
following individuals at the following address:
PGP: PETROGLYPH ENERGY, INC.
Attn: Robert C. Murdock
6209 North Highway 61
P. O. Box 1839
Hutchinson, KS 67504-1839
FAX: 316-665-8577
CEPI: CoENERGY ENHANCED PRODUCTION, INC.
Attn: Pauline E. Doohan, Esq.
500 Griswold St.
Detroit, MI 48226
FAX: 313-965-0009
Such agents and/or addresses may be unilaterally altered by either party upon
providing written notice thereof to the other party.
4.6 Duplicate Originals. This Agreement shall be executed in duplicate
-------------------
originals, with CEPI and PGP each receiving an original.
4.7 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.
4.8 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.
4.9 Assignment. This Agreement may not be assigned by the parties, except
----------
in the case of CEPI to affiliated entities, without the written consent of the
other party. This Agreement shall be binding the parties hereto and their
respective successors and assigns.
4.10 Incidental Costs. Each party to this Agreement shall bear its
----------------
respective expenses incurred in connection with the
-11-
<PAGE>
Closing of this transaction, including its own consultant's and broker's fee,
attorneys' fees, accountants' fees and other similar costs and expenses.
4.11 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.
4.12 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.
4.13 Public Announcements. CEPI, PGP, and POCI shall obtain the written
--------------------
consent of the other parties prior to any public announcement by such party
regarding this Agreement and the transactions contemplated hereby; provided,
however, the foregoing shall not restrict disclosures by any party to comply
with applicable securities or other laws, subject to the other parties being
given prior written notice.
IN WITNESS WHEREOF, the parties have executed this Agreement this 26th day
of June, 1996, but effective as of the 1st day of June, 1996.
PGP: PETROGLYPH GAS PARTNERS, L. P.
By: PETROGLYPH ENERGY, INC.
its general partner
By /s/ Robert C. Murdock
----------------------------------
Name: Robert C. Murdock
Title: President
CEPI: CoENERGY ENHANCED PRODUCTION, INC.
By /s/ P. E. Doohan
----------------------------------
Name: P. E. Doohan
Title: Attorney-in-Fact
POCI: PETROGLYPH OPERATING COMPANY, INC.
By /s/ Robert A. Christensen
----------------------------------
Name: Robert A. Christensen
Title: Vice-President
-12-
<PAGE>
EXHIBIT A
Asset Purchase and Sale Agreement dated effective June 1, 1996
by and among Petroglyph Gas Partners, L.P., Petroglyph Operating
Company, Inc., and CoEnergy Enhanced Production, Inc.
Antelope Creek Field Oil and Gas Leases
---------------------------------------
All oil and gas leases described in this Exhibit A, together with all right,
title, and interest in and to all gas sales contracts, dedicated acreage,
easements, rights-of-way, attendant equipment, machinery, permits, franchises,
licenses, servitudes, surface leases, and other personal property, agreements
and incidents associated therewith.
<PAGE>
PAGE 1
ANTELOPE CREEK LEASES
DUCHESNE COUNTY, UTAH EXHIBIT A
---------
<TABLE>
<CAPTION>
SYSTEM LSE & LESSOR # & NAME ORIGINAL LESSEE # LEASE EXPIRATION RECORDING DATE LESSOR
DOCUMENT NO AND NAME DATE DATE BOOK PAGE GROSS ACRES NET ACRES
<C> <S> <C> <C> <C> <C> <C> <C>
00066 09000 00229 11/02/83 649.3400 649.3400
10451002.000 UTE 14-20-H62-3502 GULF OIL EXPL. & PROD. CO 10/29/76 11/21/86 184 740
(NOW CHEVRON)
LEGAL DESCRIPTION .8314905 NRI
T58-R3W, USM
SECTION 2: LOT 1
SECTION 3: LOTS 1-14, SW/4 (ALL)
00067 09001 00229 3/14/83 727.8000 727.8000
10451003.000 UTE 14-20-H62-3503 GULF OIL EXPL. & PROD. CO 10/29/76 11/21/86 178 420
(NOW CHEVRON)
LEGAL DESCRIPTION .8314905 NRI
T58-R3W, USM
SECTION 4: ALL (FRACTIONAL)
00068 09002 00229 8/18/83 722.8000 722.8000
10451004.000 UTE 14-20-H62-3504 GULF OIL EXPL. & PROD. CO 10/29/76 11/22/86 182 254
(NOW CHEVRON)
LEGAL DESCRIPTION .8314905 NRI
T58-R3W, USM
SECTION 5: ALL (FRACTIONAL)
00069 09003 00229 8/18/83 498.0100 498.0100
10451005.000 UTE 14-20-H62-3505 GULF OIL EXPL. & PROD. CO 10/29/76 11/21/86 182 260
(NOW CHEVRON)
LEGAL DESCRIPTION .8314905 NRI
T58-R3S, USM
SECTION 6: LOTS 1, 3, 4, 5, 6, 8, 9, 11, 12, SW/4, SE/4SE/4
00070 09004 00229 2/22/82 640.0000 640.0000
10451006.000 UTE 14-20-H62-3506 GULF OIL EXPL. & PROD. CO 10/29/76 11/21/86 170 707
(NOW CHEVRON)
LEGAL DESCRIPTION .8314905 NRI
T58-R3W, USM
SECTION 7: ALL
00071 09005 00229 1/27/82 640.0000 640.0000
10451007.000 UTE 14-20-H62-3507 GULF OIL EXPL. & PROD. CO 10/29/76 11/21/86 169 877
(NOW CHEVRON)
LEGAL DESCRIPTION .8314905 NRI
T58-R3W, USM
SECTION 8: ALL
00072 09006 00229 1/27/82 640.0000 640.0000
10451008.000 UTE 14-20-H62-3508 GULF OIL EXPL. & PROD. CO 10/29/76 11/21/86 169 871
(NOW CHEVRON)
.8314905 NRI
LEGAL DESCRIPTION
</TABLE>
<PAGE>
PAGE 2
ANTELOPE CREEK LEASES
DUCHESNE COUNTY, UTAH
<TABLE>
<CAPTION>
SYSTEM LSE & LESSOR # & NAME ORIGINAL LESSEE # LEASE EXPIRATION RECORDING DATE LESSOR
DOCUMENT NO AND NAME DATE DATE BOOK PAGE GROSS ACRES NET ACRES
<S> <C> <C> <C> <C> <C> <C> <C> <C>
T5S-R3W, USM
SECTION 9: ALL
00073 09007 00229 11/02/83 331.4800 331.4800
10451009.000 UTE 14-20-H62-3509 GULF OIL EXPL. & PROD. CO 10/29/76 11/21/86 184 746 .8314905 NRI
(NOW CHEVRON)
LEGAL DESCRIPTION
T5S-A3W, USM
SECTION 10: LOTS 1, 2, 3, 4, NW/4, W/2SW/4
00074 09008 00229 11/02/83 112.2800 112.2800
10451010.000 UTE 14-20-H62-3510 GULF OIL EXPL. & PROD. CO 10/29/76 11/21/86 184 782 .0314905 NRI
(NOW CHEVRON)
LEGAL DESCRIPTION
T5S-A3W, USM
SECTION 15: LOTS 1, 2, 3, 4
00075 09009 00229 1/27/82 640.0000 640.0000
10451011.000 UTE 14-20-H62-3511 GULF OIL EXPL. & PROD. CO 10/29/76 11/21/86 169 865 .8314905 NRI
(NOW CHEVRON)
LEGAL DESCRIPTION
T5S-R3W, USM
SECTION 16: ALL
00076 09058 00230 3/28/94 640.0000 640.0000
10451012.000 UTE 14-20-H62-4633 EVERTSON OIL COMPANY, INC 2/09/94 2/09/95 261 165 .8314905 NRI
LEGAL DESCRIPTION From the surface to the
T5S-A3W, USM base of the Greenriver
SECTION 17: ALL Formation
00077 09010 00229 1/27/82 640.0000 640.0000
10451013.000 UTE 14-20-H62-3513 GULF OIL EXPL. & PROD. CO 10/29/76 11/21/86 169 859 .8314905 NRI
(NOW CHEVRON)
LEGAL DESCRIPTION
T5S-R3W, USM
SECTION 18: ALL
00078 09011 00229 1/27/82 640.0000 640.0000
10451014.000 UTE 14-20-H62-3514 GULF OIL EXPL. & PROD. CO 10/29/76 11/21/86 169 853 .8314905 NRI
(NOW CHEVRON)
LEGAL DESCRIPTION
T5S-R3W, USM
SECTION 19: ALL
00079 09012 00229 1/27/82 640.0000 640.0000
10451015.000 UTE 14-20-H62-3515 GULF OIL EXPL. & PROD. CO 10/29/76 11/21/86 169 847 .8314905 NRI
(NOW CHEVRON)
LEGAL DESCRIPTION
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ANTELOPE CREEK LEASES
DUCHESNE COUNTY, UTAH
SYSTEM LSE & LESSOR # & NAME ORIGINAL LESSEE # LEASE EXPIRATION RECORDING DATE LESSOR
DOCUMENT NO AND NAME DATE DATE BOOK PAGE GROSS ACRES NET ACRES
<S> <C> <C> <C> <C> <C> <C> <C> <C>
T5S-R3W, USM
SECTION 20: ALL
00080 09013 00229 1/28/82 533.3300 533.3300
10451016.000 UTE 14-20-H62-3516 GULF OIL EXPL. & PROD. CO 10/29/76 11/21/86 169 841 .8314905 NRI
(NOW CHEVRON)
LEGAL DESCRIPTION
T5S-R3W, USM
SECTION 21: LOTS 1, 2, 3, 4, W/2NE/4, W/2
SECTION 22: LOT 1
00081 0914 00229 11/02/83 409.4000 409.4000
10451017.000 UTE 14-20-H62-3517 GULF OIL EXPL. & PROD. CO 10/29/76 11/21/86 184 776 .8314905 NRI
(NOW CHEVRON)
LEGAL DESCRIPTION
T5S-R3W, USM
SECTION 28: LOTS 1, 2, 3, 4, W/2
00082 0915 00229 3/14/83 640.0000 640.0000
10451018.000 UTE 14-20-H62-3518 GULF OIL EXPL. & PROD. CO 10/29/76 11/21/86 178 434 .8314905 NRI
(NOW CHEVRON)
LEGAL DESCRIPTION
T5S-R3W, USM
SECTION 29: ALL
00083 0916 00229 11/02/83 640.0000 640.0000
10451019.000 UTE 14-20-H62-3519 GULF OIL EXPL. & PROD.CO 10/29/76 11/21/86 184 770 .8314905 NRI
(NOW CHEVRON)
LEGAL DESCRIPTION
T5S-R3W, USM
SECTION 30: ALL
00084 0917 00229 11/02/83 640.0000 640.0000
10451020.000 UTE 14-20-H62-3520 GULF OIL EXPL. & PROD.CO 10/29/76 11/21/86 184 764 .8314905 NRI
(NOW CHEVRON)
LEGAL DESCRIPTION
T5S-R3W, USM
SECTION 32: ALL
00085 09018 00229 11/02/83 640.0000 640.0000
10451021.000 UTE 14-20-H62-3521 GULF OIL EXPL. & PROD.CO 10/29/76 11/21/86 184 758 .8314905 NRI
(NOW CHEVRON)
LEGAL DESCRIPTION
T5S-R3W, USM
SECTION 32: ALL
00086 09019 00029 11/02/83 369.9200 369.9200
10451022.000 UTE 14-20-H62-3522 GULF OIL EXPL. & PROD.CO 10/29/76 11/21/86 184 752 .8314905 NRI
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PAGE 4
ANTELOPE CREEK, LEASES
DUCHESNE COUNTY UTAH
SYSTEM LSE LESSOR # & NAME ORIGINAL LESSEE # LEASE EXPIRATION RECORDING DATE LESSOR
DOCUMENT NO AND NAME DATE DATE BOOK PAGE GROSS ACES NET ACRES
(NOW CHEVRON)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
LEGAL DESCRIPTION
T5S-R3W, USM
SECTION 33:
LOTS 1, 2, 3, 4, W/2
</TABLE>
<PAGE>
Page 5
ANTELOPE CREEK LEASES
<TABLE>
<CAPTION>
ALL IN DUSHESNE COUNTY, UTAH
====================================================================================================================================
ORIGINAL LESSOR LEASE DATE EXPIRATION RECORDING GROSS ACRES LESSOR NET
DATE DATE ACRES
BOOK PAGE
====================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
UTE 14-20-H62- UTE INDIAN TRIBE and 237.96 237.96
LEGAL DESCRIPTION UTE DISTRIBUTION
T4S-R3W, USH CORPORATION .8314905 NRI
Section 35: NWMW, including
Lots 1, 2, 3, 4, 5 and 6
FROM SURFACE TO THE BASE OF THE
WASATCH FORMATION
- ------------------------------------------------------------------------------------------------------------------------------------
UTE 14-20-H62- UTE INDIAN TRIBE and 616.00 616.00
LEGAL DESCRIPTION UTE DISTRIBUTION
T4S-R3W, USH CORPORATION .8314905 NRI
Section 34: N/2, N/25W, N/2SE,
including Lots 1, 2, 3 and 4
FROM SURFACE TO THE BASE OF THE
WASATCH FORMATION
- ------------------------------------------------------------------------------------------------------------------------------------
UTE 14-20-H62- UTE INDIAN TRIBE and 617.20 617.20
LEGAL DESCRIPTION UTE DISTRIBUTION
T4S-R3W, USH CORPORATION .8314905 NRI
Section 33: N/2, N/2SW, N/2SE,
including Lots 1, 2, 3 and 4
FROM SURFACE TO THE BASE OF THE
WASATCH FORMATION
- ------------------------------------------------------------------------------------------------------------------------------------
UTE 14-20-H62- UTE INDIAN TRIBE and 582.40 582.40
LEGAL DESCRIPTION UTE DISTRIBUTION
T4S-R3W, USH CORPORATION .8314905 NRI
Section 32: NE, E/2NW, SWNW,
N/2SW, N/2SE, including
Lots 1, 2, 3 and 4
FROM SURFACE TO THE BASE OF THE
WASATCH FORMATION
- ------------------------------------------------------------------------------------------------------------------------------------
UTE 14-20-H62- UTE INDIAN TRIBE and 480.01 480.01
LEGAL DESCRIPTION UTE DISTRIBUTION
T4S-R3W, USH CORPORATION .8314905 NRI
Section 31: E/2NW, NWNE, NESW,
NESE, including Lots 1, 2, 3 and 4
5, 6 and 7
FROM SURFACE TO THE BASE OF THE
WASATCH FORMATION
====================================================================================================================================
</TABLE>
<PAGE>
EXHIBIT B
Asset Purchase and Sale Agreement dated effective June 1, 1996
by and among Petroglyph Gas Partners, L.P., Petroglyph Operating
Company, Inc., and CoEnergy Enhanced Production, Inc.
Gathering System
----------------
The gas gathering system shown on the map included in this Exhibit B, insofar as
such gathering system covers lands located in the following sections:
Sections 3, 4, 5, 6, 7, 8, 9, 10, 15, 16, 17, 18, 19, 20, 21, 28, 29, 30,
31, 32, and 33, all in Township 5 South, Range 3 West, U.S.M., Duchesne
County, Utah
Sections 31, 32, 33, 34, and 35, all in Township 4 South, Range 3 West,
U.S.M., Duchesne County, Utah
together with all right, title, and interest in and to all gas sales contracts,
dedicated acreage, easements, rights-of-way, attendant equipment, machinery,
permits, franchises, licenses, servitudes, surface leases, and other personal
property, agreements and incidents associated therewith, including without
limitation the following easement:
Easement dated March 15, 1989, recorded in Book A181 at page 400, from
Elmer Moon to Coors Energy Company, covering the following lands:
Northwest Quarter (NW/4), Northeast Quarter (NE/4), and Southeast
Quarter (SE/4) of Section 6, Township 5 South, Range 3 West, U.S.M.,
Duchesne County, Utah
<PAGE>
EXHIBIT C
Asset Purchase and Sale Agreement dated effective June 1, 1996
by and among Petroglyph Gas Partners, L.P., Petroglyph Operating
Company, Inc., and CoEnergy Enhanced Production, Inc.
Contracts
---------
Cooperative Plan of Development and Operation for the Antelope Creek Enhanced
Recovery Project, Duchesne County, Utah, dated February 17, 1994, effective
February 1, 1995.
Agreement dated April 2, 1994 between East Duchesne Culinary Water Improvement
District and Petroglyph Operating Company, Inc. (Option Agreement)
Water Agreement dated effective July 1, 1995, between Inland Production Company
and Petroglyph Operating Company, Inc.
Agreement dated October 1, 1994 between East Duchesne Culinary Water Improvement
District and Petroglyph Operating Company, Inc.
Interruptible Intrastate Gas Transportation Agreement between Petroglyph Gas
Partners, L.P. and Petroglyph Gas Partners, L.P. as Shipper dated February 1,
1996.
Agreement for Call on Production dated August 31, 1988, between Chevron U.S.A.
Inc. and Coors Energy Company, affecting the Antelope Creek leases.
Gas Purchase/Sale Agreement dated January 1, 1996 between Petroglyph Operating
Company, Inc. and Wasatch Oil & Gas Corp.
Oil Purchase/Sale Agreement dated June 15, 1994, between Petroglyph Operating
Company, Inc. and EOTT Energy Corp.
Oil Purchase/Sale Agreement between Petroglyph Gas Partners, L.P. and Amoco
Exploration & Production, for a term beginning February 1, 1996.
<PAGE>
Exhibit 10.11
-------------
Lease No. 14-20-H62-4650
--------------
5-5429 UNITED STATES Contract No. N/A
-----------
(August 1961) DEPARTMENT OF THE INTERIOR
Bureau of Indian Affairs
ASSIGNMENT OF MINING LEASE
Whereas, the Secretary of the Interior or his authorized
representative has heretofore approved Cooperative Plan of Development and
Operation for the Antelope Creek enhanced Recovery Project, dated February 17
, 1994, entered into by and between Ute Indian Tribe and Ute Distribution
-------------------------------------
Corporation, lessor, and PETROGLYPH OPERATING COMPANY, INC., as Operator, and
- ----------- ----------------------------------------------------
PETROGLYPH GAS/, lessee, covering the following lands in the UINTAH AND OURAY
- --------------- ----------------
RESERVATION in the State of UTAH, COUNTY OF DUCHESNE:
- ----------- ------------------------
TOWNSHIP 5 SOUTH, RANGE 3 WEST, U.S.M.
- ------------------------------------------------------------------------------
ALL of Lots 2, 3, 4, 5, 6, 7, 8, 9, 10, 15, 16, 17, 18, 19, 20, 21, 28,
- ------------------------------------------------------------------------------
29, 30, 31, 32, and 33
- ------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Now, Therefore, for and in consideration of TEN dollars ($ 10.00 ), the
--- --------
receipt of which is hereby acknowledged, the said PETROGLYPH GAS PARTNERS, L.P.
----------------------------
100% Working Interest Owner Agreement
the owner of the above-described lease, hereby bargains, sells, transfers,
assigns, and conveys Fifty percent (50%) of all Working Interest Owner's right,
---------------------------------------------------
title and interest in and to said lease, Agreement
subject to the approval of the Secretary of the Interior or his authorized
representative to CoENERGY ENHANCED PRODUCTION, INC., of 150 W. Jefferson
---------------------------------- ----------------
Avenue, Suite 1900, Detroit, Michigan 48226. Said assignment to be effective
- --------------------------------------------
from date of approval hereby by the Secretary of the Interior or his authorized
representative.
In Witness Whereof, the said assignor has hereunto set its hand and seal,
---
this 26 day of June , 1996
-- ---- ----
PETROGLYPH GAS PARTNERS, L.P. by
Petroglyph Energy, Inc., General Partner
----------------------------------------
By: /s/ Robert C. Murdock
----------------------
Robert C. Murdock, President
<PAGE>
Exhibit 10.12
COOPERATIVE PLAN OF DEVELOPMENT AND OPERATION
FOR THE ANTELOPE CREEK ENHANCED RECOVERY PROJECT
DUCHESNE COUNTY, UTAH
THIS AGREEMENT, entered into as of the 17 day of February, 1994, by
and between the parties subscribing, ratifying or consenting hereto, and herein
referred to as the "parties",
W I T N E S S E T H:
WHEREAS, the parties are the owners of working, royalty or other oil
and gas interests in the Project Area subject to this Agreement;
WHEREAS, the term "Working Interest" as used herein shall mean the
interest held in Project Substances or in land containing Project Substances by
virtue of a lease, operating agreement, fee title or otherwise, which is
chargeable with and obligated to pay or bear all or a portion of the costs of
drilling, developing, producing and operating the land under this Agreement.
"Royalty Interest" as used herein shall mean a right to, or interest in, any
portion of the Project Substances or proceeds thereof other than a Working
Interest;
WHEREAS, the Indian Mineral Development Act of 1982, 25 U.S.C.
(S)2101, et seq. authorizes, among other things, the lessors and lessees of
lands owned by an Indian tribe, and their representatives to unite with each
other, or jointly or separately with others, in collectively adopting and
operating a cooperative plan of development or operation of any oil or gas pool,
field or like area, or any part thereof for the purposes of more properly
conserving the natural resources thereof whenever determined and certified by
the Secretary of the Interior to be necessary or advisable in the best interest
of the Indian tribe owning such lands; and
WHEREAS, the Ute Indian Tribe, the Ute Distribution Corporation, and
all of their lessees under the affected leases, the parties hereto, have
negotiated and agreed to a plan to conserve natural resources, prevent waste and
secure other benefits obtainable through
-1-
<PAGE>
development and operation of the area subject to this Agreement under the terms,
conditions, and limitations herein set forth.
WHEREAS, the Secretary of Interior or his authorized representative is
charged with the power and responsibility to approve and oversee activities
under this Agreement. This responsibility is carried out by representatives of
the Secretary of Interior including the Bureau of Indian Affairs for the
administration of this Agreement and the leases affected hereby, the Bureau of
Land Management regarding well operations and reclamation of the affected lands,
and the Minerals Management Service for royalty administration and valuation,
all of which entities are hereinafter either collectively or individually, as
appropriate, referred to as the "Secretary".
NOW, THEREFORE, in consideration of the premises and the promises
herein contained, the parties commit to this Agreement their respective
interests in the below-defined Project Area, and agree severally among
themselves as follows:
1. ENABLING ACT AND REGULATIONS. This Agreement is entered into
pursuant to the Indian Mineral Development Act of 1982, as amended. Activities
conducted pursuant to this Agreement shall also be subject to all valid,
pertinent regulations including, but not limited to, operating and cooperative
plan regulations set forth in 43 C.F.R. 3160, et seq. lease administration
-- ---
regulations at 25 C.F.R. 211, et seq., and royalty valuation regulations at 30
-- ---
C.F.R. 206, et seq., together with all valid, pertinent and reasonable
-- ---
regulations issued hereafter. These regulations are accepted and made a part of
this Agreement as to the Project Area.
Further, prior to the Secretary taking any approval actions required
by this Agreement or the applicable statutes and regulations, the Secretary
shall consult with and acquire the concurrence in such approval by the Ute
Indian Tribe and the Ute Distribution Corporation.
-2-
<PAGE>
2. PROJECT AREA. The area specified on the plat attached hereto
marked Exhibit "A" is hereby designated and recognized as constituting the
Project Area containing 11576.35 acres, more or less.
Exhibit "A" shows in addition to the boundary of the Project Area, the
boundaries and identity of tracts and leases in said area to the extent known to
the Project Operator. Exhibit "B" attached hereto is a schedule showing to the
extent known to the Project Operator the acreage, percentage and kind of
ownership of oil and gas interests in all land in the Project Area. (Tract means
each parcel of land described as such and given a Tract Number in Exhibit "B".)
However, nothing herein or in said schedule or map shall be construed as a
representation by any party as to the ownership of any interest other than such
interest or interests as are shown in said map or schedule as owned by such
party. Exhibits "A" and "B" shall be revised by the Project Operator whenever
changes in the Project Area render such revision necessary, or when requested by
the Secretary. In such case not less than six (6) copies of the revised exhibits
shall be filed with the Secretary.
3. EXPANSION OF PROJECT AREA. Any enlargement of the Project Area
shall require approval by the Secretary of the Interior or his authorized
representative, hereinafter referred to as the "Secretary". The Project Area
may, with the approval of the Secretary, be expanded to include therein any
additional lands whenever such expansion is necessary or advisable to conform
with the purposes of this Agreement. Such approval by the Secretary of any such
expansion may be accomplished pursuant to an agreement fixing the royalty
interest share in production for production from the Project Area and providing
for the commitment of the interests of the owners thereof to this Agreement, and
if applicable, to the Project Operating Agreement. The Project Operator acting
on behalf of the Working Interest Owners collectively shall negotiate with such
new owners after it has been duly authorized as provided in the Project
-3-
<PAGE>
Operating Agreement. Whenever the Project Area is enlarged so as to admit
additional land qualified for participation, the royalty interest share of
production shall be revised as set forth in Section 12, Participation and
Allocation of Production. Any such expansion shall be effected in the following
manner:
(a) Project Operator, on its own motion, after preliminary concurrence
by the Secretary, shall prepare a notice of proposed expansion describing
the contemplated changes in the boundaries of the Project Area, the reasons
therefore, and the proposed effective date thereof, preferably the first
day of the month subsequent to the date of notice.
(b) Said notice shall be delivered to the Secretary and copies thereof
mailed to the last known address of each Working Interest Owner, lessee,
and lessor whose interests are affected, advising that thirty (30) days
will be allowed for submission to the Project Operator of any objections.
(c) Upon expiration of the thirty (30) day period provided in the
preceding item (b) hereof, Project Operator shall file with the Secretary
evidence of mailing of the notice of expansion and a copy of any objections
thereto which have been filed with the Project Operator, together with an
application and appropriate joinder in sufficient number for approval of
such expansion.
(d) After due consideration of all pertinent information, the
expansion shall, upon approval by the Secretary, become effective as of the
date prescribed in the notice thereof.
4. PROJECT LAND AND PROJECT SUBSTANCES. All lands committed to this
Agreement as provided in Section 5, Tracts Qualified for Participation, as to
the Project Formations defined immediately below, shall constitute land referred
to herein as "Project Land"
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or land subject to this Agreement. All oil and gas in and produced from the
Project Formations are combined under the terms of this Agreement and are called
"Project Substances."
The Project Formations shall mean all formations lying under the lands
committed to this Agreement.
5. TRACTS QUALIFIED FOR PARTICIPATION. Inasmuch as the objective of this
Agreement is to have lands in the Project Area operated and entitled to
participation under the terms hereof, no joinder shall be considered a
commitment to this Agreement unless the Tract involved is qualified under this
section. On or after the effective date hereof, the Tracts within the Project
Area which are entitled to participation in the production of Project Substances
therefrom shall be those Tracts within the Project Area, more particularly
described in Exhibit "B", that are qualified by the commitment to this Agreement
of one hundred percent (100%) of both the Working Interest and Royalty Interest
in the affected lease.
6. PROJECT OPERATOR. Petroglyph Operating Company, Inc. is hereby
designated as Project Operator, and by its signature hereto agrees and consents
to accept the duties and obligations of Project Operator for the development and
production of Project Substances as herein provided. Whenever reference is made
herein to the Project Operator, such reference means the Project Operator acting
in that capacity and not as an owner of interest in Project Substances, and the
term "Working Interest Owner" when used herein shall include or refer to Project
Operator as the owner of a Working Interest when such an interest is owned by
it.
7. RESIGNATION OR REMOVAL OF PROJECT OPERATOR. Project Operator shall
have the right to resign at any time, but such resignation shall not become
effective so as to release Project Operator from the duties and obligations of
Project Operator and terminate the Project Operator's rights as such for a
period of six (6) months after notice
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of intention to resign has been served by Project Operator on all Working
Interest Owners and the Secretary, and until all wells are placed in a
satisfactory condition for suspension or abandonment, whichever is required by
the Secretary in accordance with the applicable provisions of 43 C.F.R. and
Onshore Order requirements, unless a new Project Operator shall have been
selected and accepted and shall have taken over and assumed the duties and
obligations of Project Operator prior to the expiration of said period.
The resignation of Project Operator shall not release the Project Operator
from any liability for default by it hereunder occurring prior to the effective
date of its resignation.
The Project Operator may, upon default or failure in the performance of its
duties or obligations hereunder, be subject to removal by an affirmative vote of
the Working Interest Owners of at least ninety percent (90%) of the voting
interest remaining after excluding the voting interest of the Project Operator.
Such removal shall be effective upon notice thereof to the Secretary. In all
such instances of resignation or removal, until a successor Project Operator is
selected and accepted as hereinafter provided, the Working Interest Owners shall
be jointly responsible for performance of the duties of Project Operator, and
shall, not later than thirty (30) days before such resignation or removal
becomes effective, appoint a common agent to represent them in any action to be
taken hereunder.
The resignation or removal of Project Operator under this Agreement shall
not terminate its right, title, or interest as the owner of a Working Interest
or other interest in Project Substances, but upon the resignation or removal of
Project Operator becoming effective, such Project Operator shall deliver
possession of all wells, equipment, materials, and appurtenances used in
conducting the project operations and owned by the Working Interest Owners to
the new duly qualified successor Project Operator or other owners thereof if no
such new Project Operator is elected, to be used for the purposes of conducting
operations hereunder. Nothing
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herein shall be construed as authorizing removal of any material, equipment or
appurtenances needed for the preservation of any wells.
8. SUCCESSOR PROJECT OPERATOR. Whenever the Project Operator shall
tender his or its resignation as Project Operator, or shall be removed as
hereinabove provided, or a change of Project Operator is negotiated by the
Working Interest Owners, a successor Project Operator shall be selected by the
Working Interest Owners voting according to their share of the Working Interest
in the Project Area by a majority vote; provided, that if a majority but less
than 75 percent of the Working Interest Owners qualified to vote are owned by
one party to this Agreement, a concurring vote of one more additional Working
Interest Owners shall be required to select a new Operator. Such selection shall
not become effective until:
(a) a Project Operator so selected shall accept in writing the duties
and responsibilities of Project Operator; and
(b) The selection shall have been approved by the Secretary.
9. ACCOUNTING PROVISIONS AND PROJECT OPERATING AGREEMENT. If the Project
Operator is not the sole owner of the Working Interest, costs and expenses
incurred by Project Operator in conducting project operations hereunder shall be
paid and apportioned among and borne by all owners of the Working Interests, all
in accordance with the agreement or agreements, whether one or more, separately
or collectively, entered into by and between the Project Operator and all
Working Interests Owners. Any agreement or agreements, whether one or more,
entered into between the Working Interest Owners and the Project Operator as
provided in this section are herein referred to as the "Project Operating
Agreement."
Such Project Operating Agreement shall also set forth such other rights and
obligations as between Project Operator and the Working Interest Owners as may
be agreed upon by Project
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Operator and the Working Interest Owners, however no such Project Operating
Agreement shall be deemed either to modify any of the terms and conditions of
this Agreement or the leases committed hereto or to relieve the Project Operator
of any right or obligation established under this Agreement, and in case of any
inconsistency or conflict between this Agreement and the Project Operating
Agreement, this Agreement shall prevail. Three (3) true copies of any Project
Operating Agreement executed pursuant to this section shall be filed with the
Secretary prior to approval of this Agreement, and thereafter promptly after any
revision or amendment.
10. RIGHTS AND OBLIGATIONS OF PROJECT OPERATOR. Except as otherwise
specifically provided herein, the exclusive right, privilege and duty of
exercising any and all rights of the parties, including surface rights, which
are necessary or convenient for prospecting for, producing, storing, allocating,
and distributing the Project Substances are hereby delegated to and shall be
exercised by the Project Operator as herein provided. Acceptable evidence of
title to said rights shall be deposited with said Project Operator and, together
with this Agreement, shall constitute and define the rights, privileges, and
obligations of Project Operator. Nothing herein, however, shall be construed to
transfer title to any land or to any lease or operating agreement, it being
understood that under this Agreement the Project Operator, in its capacity as
Project Operator, shall exercise the rights of possession and use vested in the
parties hereto only for the purposes herein specified.
11. PLAN OF OPERATION. It is recognized and agreed by the parties hereto
that the Project Area has been partially developed and is productive. It is
contemplated that the Project Operator will drill numerous additional wells
within the Project Area. These wells shall include exploratory wells,
development wells, and injection wells, all of which are necessary in the
opinion of the Project Operator for obtaining the greatest ultimate yield of
Project Substances from the Project Area. It is recognized and understood by the
parties that it may be necessary
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to recomplete existing wells in additional or other zones than those currently
producing, convert existing wells from a producing status to injection wells, or
deepen existing wells to include additional members of the Project Formations.
Inasmuch as the primary purpose of this Agreement is to permit the
institution and consummation of a secondary recovery or pressure maintenance
program for the maximum economic production of Project Substances consistent
with good engineering and conservation practices, Project Operator, concurrently
with the filing of this Agreement, shall submit to the Secretary for approval a
plan of operations for the Project Lands for operations to be conducted during
the first year of this Project, and upon approval thereof by the Secretary, such
plan shall constitute the future operating objectives of the Project Operator
under this Agreement for the period specified therein. Thereafter, from time to
time, but at least once each year during the term of this Agreement, and before
the expiration of any existing plan, the Project Operator shall submit a plan
for an additional specified period of operations. Said plan or plans shall be
modified or supplemented when necessary to meet changed conditions, or to
protect the interests of all parties to this Agreement. Reasonable diligence
shall be exercised in complying with any approved plan of operation.
Project Operator shall have the right to drill and maintain water supply
wells on the Project Area and to inject into the Project Formations any
substances for secondary recovery or pressure maintenance purposes in accordance
with a plan of operation approved by the Secretary, including the right to drill
and maintain injection wells on the Project Land and completed in the
Project Formations for said purpose, and the parties hereto, to the extent of
their rights and interests, hereby grant to the Project Operator the right to
use as much of the surface of the land within the Project Area as may be
reasonably necessary for the operation and the development of the Project Area
hereunder. Project Operator shall have free use of water from the Project
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Land for operations hereunder except water from surface owner's and Royalty
Owner's fresh water wells, private lakes, ponds, streams or irrigation ditches.
12. PARTICIPATION AND ALLOCATION OF PRODUCTION. Beginning at 7:00 a.m.,
on the effective date hereof, the Royalty Owners shall be entitled to receive an
undivided 16.85095% of either (i) all Project Substances irrespective from which
Tract such production actually occurred, or (ii) of the value of all oil, gas,
and/or natural gasoline, and/or all other Project Substances produced and saved
from the Project Area in accordance with the existing lease terms, 30 C.F.R.
206, et seq. and 25 C.F.R. 211, et seq., save and except oil and/or gas used by
-- --- -- ---
the Project Operator for development and operation purposes on the Project Area,
which oil or gas shall be royalty free. The Working Interest Owners shall be
entitled to the balance of the Project Substances produced from the Project
Area.
After this Agreement has been in effect for four years, the royalty rate
prescribed in this paragraph 12 shall increase to 18.5%. After this Agreement
has been in effect for nine years, this royalty rate shall increase to 20%.
If after the effective date of this Agreement, any Tract or Tracts are
subsequently committed hereto because of an expansion of the Project Area under
Section 3, Expansion of Project Area, and Section 29, Subsequent Joinder, the
Royalty Owners' undivided share of production or the value thereof of Project
Substances shall be recalculated. This calculation shall be accomplished by
multiplying the then prevailing royalty rate hereunder for the Project Area
times a fraction composed of the number of acres within the before expansion
Project Area as the numerator and the total number of acres within the expanded
Project Area as the denominator and combining this product with that yielded by
multiplying the royalty rate for the lease or leases to be added to the Project
Area by a fraction composed of the number of acres within the expansion area as
the numerator and the total number of acres within the Project
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<PAGE>
Area, as expanded, as the denominator. Upon approval of any such expansion by
the Secretary, this recomputed royalty interest share shall govern the
allocation of production from the effective date thereof until a new schedule is
so approved.
On the effective date of this Agreement and thereafter, all Project
Substances (except any part thereof used in conformity with good operating
practices for drilling, operating, and other production or development purposes,
for pressure maintenance or secondary recovery operations, or in accordance with
a plan of operation approved by the Secretary, or unavoidably lost), shall be
deemed to be produced from each and every Tract within the Project Area
irrespective of the location of the wells from which the same is produced and
regardless of depletion of any particular well or Tract. Thus, production of
Project Substances from any well located upon the Project Lands shall maintain
the leases within the Project Area, with the Royalty Owners to share in such
production in the percentage set forth in this Section 12.
13. ROYALTY SETTLEMENT. The Ute Indian Tribe and the Ute Distribution
Corporation are entitled to the entire royalty share of production produced from
the Project Area. In accordance with the applicable leases, these Royalty Owners
are entitled to take in kind a share of the Project Substances now combined
hereunder and produced from any Tract. Such right to take in kind as to the
Royalty Owner's share of production set forth in paragraph 12 shall continue
with regard to the production of Project Substances. If these Royalty Owners so
elect to take in kind, the Project Operator shall make deliveries of such
Royalty Share in kind in conformity with the applicable contracts, laws and
regulations. Settlement for the royalty share not taken in kind shall be made by
the Project Operator and the Working Interest Owners hereby designate the
Project Operator to make all such payments and file all required production
reports. The Working Interest Owners and Project Operator will execute any
necessary division orders. These payments and all production reports shall be
prepared and filed in accordance with
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<PAGE>
the existing leases, laws and regulations on or before the last day of each
month for oil produced during the preceding calendar month and on or before
sixty days from the end of the month during which gas was produced; provided,
however, that nothing herein contained shall operate to relieve the lessees of
any Project Land from their respective lease obligations for the payment of any
royalties due under their leases.
14. RENTAL SETTLEMENT. Rental or minimum royalties due on leases
committed hereto shall be paid by the Working Interest Owners responsible
therefore under existing leases, laws and regulations, provided, that nothing
herein contained shall operate to relieve the lessees of any Project Land from
their respective lease obligations for the payment of any rental or minimum
royalty in lieu thereof due under their leases. Rental and minimum royalty for
lands of the Ute Indian Tribe subject to this Agreement shall be paid at the
rate specified in the respective leases unless such rental or minimum royalty is
waived, suspended or reduced by law or by approval of the Secretary. The parties
hereto agree that the Project Operator may on behalf of the Working Interest
Owners prepay all lease rentals by a single remittance at any time during a
lease year prior to the due date for such rental payments; provided, however,
that nothing herein contained shall operate to relieve the lessees of any
Project Land from their respective lease obligations for the payment of any
rentals due under their leases. The parties hereby agree that beginning with
calendar year 1994, each of the leases within the Prospect Area is hereby
amended to provide that any lease rental due thereunder for any year shall be
due and payable on or before September 1 of each year.
15. CONSERVATION. Operations hereunder and production of Project
Substances shall be conducted to provide for the most economical and efficient
recovery of said substances without waste, as defined by or pursuant to
applicable Tribal, State or Federal law, order, rule, or regulation.
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<PAGE>
16. DRAINAGE. The Project Operator shall take appropriate and adequate
measures to protect the Project Area from drainage by wells on land not subject
to this Agreement.
17. GAUGE OF MERCHANTABLE OIL. Project Operator shall make a proper and
timely gauge of all leases and other tanks within the Project Area and
associated with the operation of Project Land in order to ascertain the amount
of merchantable oil above the pipeline connections in such tanks at 7:00 a.m. on
the effective date hereof. All such oil shall be and remain the property of the
parties entitled thereto the same as if the Project had not been formed and such
parties shall promptly remove said oil from said tanks. Any such oil not so
removed shall be sold by Project Operator for the account of parties entitled
thereto, subject to the payment of all royalties, overriding royalties,
production payments and all other payments under the terms and provisions of the
applicable leases or other contracts.
18. LEASES AND CONTRACTS CONFORMED AND EXTENDED. The terms, conditions
and provisions of all leases, subleases and other contracts relating to
exploration, drilling, development or operation for oil or gas on lands
committed to this Agreement are hereby expressly modified and amended to the
extent necessary to make the same conform to the provisions hereof, but
otherwise to remain in full force and effect; and the parties consent that the
Secretary shall and by his approval hereof does hereby establish, alter, change
or revoke the drilling, producing, rental, minimum royalty and royalty
requirements of Tribal leases committed hereto and the regulations in respect
thereto to conform said requirements to the provisions of this Agreement, and,
without limiting the generality of the foregoing/ all leases, subleases and
contracts are particularly modified in accordance with the following:
(a) The development and operation of lands subject to this Agreement
under the terms hereof shall be deemed full performance of all obligations
for development and operation with respect to each and every part of
separately owned Tracts subject to this
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<PAGE>
Agreement, regardless of whether there is any development of or production
from any particular Tract of the Project Land, notwithstanding anything to
the contrary in any lease, operating agreement or other contract by and
between the parties hereto, or their respective predecessors in interest,
or any of them.
(b) Drilling and producing operations performed hereunder upon any
Tract of Project Land will be accepted and deemed to be performed upon and
for the benefit of each and every Tract of Project Land, and no lease shall
be deemed to expire by reason of failure to drill or produce wells situated
on the land therein embraced.
(c) Suspension of drilling and producing operations on all Project
Land pursuant to direction or consent of the Secretary or his duly
authorized representative shall be deemed to constitute such suspension
pursuant to such direction or consent as to each and every Tract of Project
Land.
(d) Each lease, sublease or contract relating to the exploration,
drilling, development or operation for oil or gas on lands committed to
this Agreement which, by its terms, might expire prior to the termination
of this Agreement, is hereby extended beyond any such term so provided
therein so that it shall be continued in full force and effect for and
during the term of this Agreement.
19. COVENANTS RUN WITH LAND. The covenants herein shall be construed to
be covenants running with the lands with respect to the interest of the parties
hereto and their successors in interest until this Agreement terminates, and any
grant, transfer or conveyance of an interest in lands or leases subject hereto
shall be and hereby is conditioned upon the assumption of all privileges and
obligations hereunder by the grantee, transferee or other successor in interest.
No assignment or transfer of any Working Interest shall be binding upon Project
Operator nor shall any transfer of any Royalty Interest or other interest be
binding on
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<PAGE>
the Working Interest owner responsible for payment or settlement thereof until
the first day of the calendar month after Project Operator or the responsible
Working Interest Owner, as the case may be, is furnished with the original,
photostat or certified copy of the recorded instrument of transfer.
Further, no assignment of any interest in this Agreement or the lands or
leases subject hereto shall be effective unless approved by the Secretary and
the Royalty Owners, such approval not to be unreasonably withheld.
20. EFFECTIVE DATE. This Agreement shall become binding upon each party
who executes or ratifies it as of the date of execution or ratification by such
party and shall become effective as of 7:00 a.m. on the first day of the
calendar month next following the approval of this Agreement by the Secretary.
Project Operator shall within thirty (30) days after the effective date of
this Agreement file of record in Duchesne County, Utah, a copy of this Agreement
and a certificate to the effect that this Agreement has become effective
according to its terms and stating further the effective date.
21. TERM. The term of this Agreement shall be for and during the time
that Project Substances can be produced in quantities sufficient to pay for the
cost of producing same from wells on Project Land and for as long thereafter as
drilling, reworking or other operations are prosecuted on Project Land without
cessation of more than sixty (60) consecutive days, and so long thereafter as
Project Substances can be produced as aforesaid, unless sooner terminated by the
Secretary as provided in Section 8, Successor Project Operator, or by the
Working Interest Owners as provided in Section 22.
If at any time after this Agreement has been in effect for ten (10) years,
there shall exist any section of land within the Project Area on which there is
not either (i) a well producing
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either oil and/or gas in paying quantities, or (ii) an injection well then being
used for project purposes, or (iii) a water source well providing water for
project purposes, then if no drilling, reworking, or other operations are
prosecuted on said section within 90 days from the date said section ceases to
have a well as described above, then as to that section only, this Agreement
shall terminate, and likewise the lease affecting such section of land shall
terminate. Provided, however, that, even if the lease expires or the land is no
longer within the Project Area, any then existing rights-of-way or other surface
uses of such land shall be allowed to continue for so long as they are being
used for project purposes.
22. TERMINATION BY WORKING INTEREST OWNERS. This Agreement may be
terminated at any time by Working Interest Owners owning ninety percent (90%) or
more of the participation percentage in the Project Land with the approval of
the Secretary. Notice of any such termination shall be given by the Project
Operator to all parties hereto.
Upon termination of this Agreement, the parties hereto shall be governed by
the terms and provisions of the leases, contracts, and regulations affecting the
separate Tracts, including abandonment and reclamation in accordance with
applicable regulations.
Notwithstanding the provisions of the leases combined under this Agreement,
the Royalty Owners hereby grant the Working Interest Owners a period of six (6)
months after termination of this Agreement in which to salvage, sell,
distribute, or otherwise dispose of the personal property and facilities used in
connection with operations under this Agreement.
Project Operator shall, within thirty (30) days after the termination of
this Agreement, file for record in the office or offices where a counterpart of
this Agreement is recorded, a certificate setting forth the fact of such
termination and the date thereof.
23. RATE OF PROSPECTING, DEVELOPMENT AND PRODUCTION. The Secretary is
hereby vested with authority to alter or modify from time to time in his
discretion
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the quantity and rate of production under this Agreement when such quantity and
rate is not fixed pursuant to applicable law or regulation or does not conform
to any statewide voluntary conservation or allocation program which is
established, recognized and generally adhered to by the majority of operators in
such state, such authority being hereby limited to alteration or modification in
the public interest, the purpose thereof and the public interest to be served
thereby to be stated in the order of alteration or modification. Without regard
to the foregoing, the Secretary is also hereby vested with authority to alter or
modify from time to time at his discretion the rate of prospecting and
development and the quantity and rate of production under this Agreement when
such alteration or modification is in the interest of attaining the conservation
objectives stated in this Agreement and is not in violation of any applicable
law.
Powers in this Section vested in the Secretary shall only be exercised
after notice to Project Operator and opportunity for hearing to be held not less
than fifteen (15) days after actual receipt of the notice.
24. APPEARANCE. Project Operator shall, after notice to other parties
affected, have the right to appear for and on behalf of any and all Working
Interest Owners before the Department of Interior and to appeal from orders
issued under the regulations of said Department or to apply for relief from any
of said regulations or in any proceedings relative to operations before the
Department of Interior, the Ute Indian Tribe, or any other legally constituted
authority; provided, however, that any other interested party shall also have
the right at his own expense to be heard in any such proceeding.
25. NOTICES. All notices, demands or statements required hereunder to be
given or rendered to the parties hereto shall be deemed fully given if given in
writing, and either personally delivered to the party or upon receipt being sent
by postpaid, registered or certified mail, return receipt requested, addressed
to such party at the address such party has furnished
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to the party sending the notice, demand or statement. Notices may also be sent
by facsimile and are deemed received upon receipt of such facsimile provided
that a true copy of such transmission is forwarded to the receiving party within
24 hours of such transmission in accordance with the other terms of this
Section.
26. NO WAIVER OF CERTAIN RIGHTS. Nothing in this Agreement shall be
construed as a waiver by any party hereto of the right to assert any legal or
constitutional right or defense as to the validity or invalidity of any law of
the Ute Indian Tribe, the state of Utah, or of the United States, or regulations
issued thereunder in any way affecting such party, or as a waiver by any such
party of any right beyond his or its authority to waive.
27. UNAVOIDABLE DELAY. All obligations under this Agreement, except the
payment of money, shall be suspended while, but only so long as Project
Operator, despite the exercise of due care and diligence, is prevented from
complying with obligations, in whole or in part, by strikes, acts of God,
applicable Tribal, Federal, State or municipal law or agencies, unavoidable
accidents, uncontrollable delays in transportation, inability to obtain
necessary materials in open market, or other matters beyond the reasonable
control of the Project Operator whether similar to matters herein enumerated or
not. Project Operator shall have the duration of the delay added to any time of
compliance for any affected obligation created by this Agreement.
28. LOSS OF TITLE. In the event title to any Tract of Project Land shall
fail and the true owner cannot be induced to join this Project Agreement, such
Tract shall be automatically regarded as not committed hereto and there shall be
such readjustment of future costs and benefits as may be required on account of
the loss of such title. In the event of a dispute as to title as to any Royalty
or Working Interest, or other interests subject hereto,
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payment or delivery on account of the amount or interest in dispute may be
withheld without liability for interest until the dispute is finally settled.
Project Operator as such is relieved from any responsibility for any defect or
failure of any title hereunder.
29. SUBSEQUENT JOINDER. After the effective date of this Agreement, the
commitment of any interest in any Tract within the Project Area shall be upon
such equitable terms as may be negotiated by Working Interest Owners and the
owner of such interest. After the effective date hereof, joinder by a Royalty
Owner must be consented to in writing by the Working Interest Owner committed
hereto and responsible for the payment of any benefits that may accrue hereunder
in behalf of such Royalty Interest. Joinder by any Royalty Owner at any time
must be accompanied or preceded by appropriate joinder by the owner of the
corresponding Working Interest in order for the interest to be regarded as
effectively committed. Joinder to this Agreement by a Working Interest Owner at
any time must be accompanied by appropriate joinder to the Project Operating
Agreement in order for the interest to be regarded as committed to this
Agreement. Except as may otherwise herein be provided, subsequent joinders to
this Agreement shall be effective as of the date of the filing with the
Secretary of duly executed counterparts of all or any paper necessary to
establish commitment of any Tract to this Agreement unless objection to such
joinder is made within sixty (60) days by the Project Operator.
30. COUNTERPARTS. This Agreement may be executed in any number of
counterparts, no one of which needs to be executed by all parties, or may be
ratified or consented by separate instrument in writing specifically referring
hereto which shall be binding upon all those parties who have executed such a
counterpart, ratification or consent hereto with
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the same force and effect as if all such parties had signed the same document;
provided, however, that parties owning or claiming an interest in the lands
within the Project Area.
31. NO PARTNERSHIP. It is expressly agreed that the relationship of the
parties hereto is that of independent contractors and nothing in this Agreement
contained, expressed or implied, nor any operations hereunder, shall create or
be deemed to have created a partnership or association between the parties
hereto or any of them.
32. BORDER AGREEMENTS. Project Operator, subject to the provisions of the
Project Operating Agreement and subject to approval of the Secretary, may enter
into an agreement or agreements with the owners of adjacent lands with respect
to operations designed to increase the ultimate recovery of oil and/or gas from
the Project Formations, prevent waste, and protect the correlative rights of the
parties.
33. CORRECTION OF ERRORS. It is hereby agreed by all parties to this
Agreement that Project Operator is empowered to correct any mathematical or
clerical errors which may exist in the pertinent Exhibits to this Agreement;
provided, however, that correction of any error other than mathematical or
clerical shall be made by Project Operator only after first having obtained
approval of Working Interest Owners and the Secretary. If any such corrections
are made, Project Operator shall file not less than six (6) copies of the
corrected pages of this Agreement or of the Exhibits hereto with the Secretary;
Project Operator shall also provide, in conformance with Section 25, Notices,
such corrected pages to the parties hereto.
34. SPECIAL SURFACE STIPULATIONS. Nothing in this Agreement shall modify
any lease stipulations attached to any individual lease included within the
Project Area.
35. RIGHTS-OF-WAY, EASEMENTS AND OTHER. The Royalty Owner with the
concurrence of the Secretary agrees that without cost to the Project Operator or
the Working Interest Owners, Royalty Owner shall promptly review, approve, and
grant reasonable requests
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of the Project Operator, from time to time, for permits necessary, or incident
to the conduct of its authorized activities, including without limitation
permits for seismic and other studies, water, easements and rights-of-way,
covering lands within or outside of the Project Area, necessary to conduct
operations authorized by this Agreement. Furthermore, without limitation, the
Royalty Owner grants to the Project Operator, and its subcontractors, the right
to build and maintain, subject to regulations governing construction and
maintenance thereof, transmission and other lines (including without limitation
oil, gas, power, and water lines, even if the water is obtained from a source
other than a well within the Project Area), storage and usual operational
facilities within the boundaries of the Project Area without further charge
therefor. The Royalty Owner shall conduct, at its own expense, all "on the
ground" archeology and threatened and endangered species surveys necessary for
the conduct of drilling operations on the Project Area. The Royalty Owner will
provide all reasonable assistance to the Project Operator regarding any
environmental assessment Project Operator must conduct. The Royalty Owner will
join and assist the Project Operator with regard to any injection well permits
it must seek from either the Environmental Protection Agency or the State of
Utah. These services together with the free use of water produced from water
source wells within the Project Area and the agreement not to charge for rights-
of-way have been granted by the Royalty Owner in consideration for the increased
royalty rates set forth in Section 12 hereof.
36. REPORTING. In addition to the reports required to be filed with the
Minerals Management Service by the applicable regulations, Project Operator
shall file with the Secretary and the Ute Indian Tribe the following:
a. Producing Wells
i. Monthly reports of Operation. (MMS Form 3160).
ii. Monthly Report of Sales and Royalty Remittance (MMS Form 2014).
-21-
<PAGE>
iii. A copy of Gas Sale Statement.
iv. A copy of Crude Oil Sales Statement.
b. Drilling
i. A copy of drilling time log kept in intervals not greater than 10
feet, from surface casing to total depth.
ii. A copy of any log, including but not limited to, any electrical,
radioactive, and diameter log.
iii. A copy of any drillstem test.
iv. A copy of any core analysis.
v. A copy of any special test.
vi. A copy of the completion report.
Further, the Project Operator agrees to meet with the Tribal Business
Council of the Ute Indian Tribe during every January and July during each year
this Agreement is in effect and present a review of operations and production
from the Project Area for the prior six month period. The Project Operator will
also discuss the next ensuing six month plan of operation, and will address any
other issues relating to the Project Area as requested by the Business Council.
37. INSURANCE. Project Operator shall maintain at all times during the
course of this Agreement, insurance with respect to the Project Land, as
follows:
a. Workmen's Compensation Insurance in accordance with applicable
laws on all employees of the Project Operator engaged in any manner under
this Agreement.
b. To the extent such coverage is available, Public Liability
Insurance insuring against liability for bodily injury, including death,
and property damage, in the amount of not less than $1,000,000.00 per
person and $1,000,000.00 per occurrence for property damage, as the
interests of the parties may appear, incurred or in any manner
-22-
<PAGE>
related to any and all operations or performance by the Project Operator or
any of its officers, agents, representatives or employees of any and all
obligations and provisions of this Agreement or any amendments or
modifications hereto.
38. UTE PREFERENCE (EMPLOYMENT AND CONTRACTING). The Project Operator
shall give preference in employment to qualified members of the Ute Indian Tribe
in all phases of operations performed, or to be performed under the terms of
this Agreement, as required by applicable Tribal and Federal laws, rules,
policies and regulations. The Project Operator agrees to abide by any applicable
provisions of the Tribal law, as amended from time to time. The Project Operator
shall contractually require its subcontractors and assignees to comply with all
provisions referred to in this paragraph.
39. ENVIRONMENT. The Project Operator acknowledges the concern of the Ute
Indian Tribe for the surface environment of its Lands and the reclamation and
protection thereof, and therefore, the Project Operator shall conduct itself
with prudence, caution, and care for the environment at all times, shall conduct
its operations in compliance with all applicable environmental laws, and shall
contractually require its subcontractors and assignees to do the same.
40. PRESERVATION OF ANTIQUITIES AND SACRED SHRINES. The Project Operator
shall take all reasonable steps necessary in connection with its operations to
preserve and protect Tribal antiquities and it shall further obtain all required
permits and clearances prior to conducting operations on land involving such
matters.
41. DEFAULT. Upon receipt of written notice, the Project Operator, shall
have thirty (30) days thereafter to cure a default existing under the provisions
of this Agreement. If such default is not cured within said thirty (30) days and
does not involve the Royalty Owner(s), either the Project Operator or the
complaining party, if such party is a Working Interest Owner,
-23-
<PAGE>
may submit the dispute to arbitration under the terms of this Agreement and
during the time the matter is subject to arbitration no further action shall be
taken by the moving party in connection with the alleged default. Neither the
Royalty Owner nor the Secretary shall be required to pursue arbitration, but
rather shall be entitled to pursue any remedies available to such party. Once
the matter has been arbitrated as between the Project Operator and/or Working
Interest Owners, and a decision entered therein that a default does exist, then
the defaulting party shall have thirty (30) days thereafter to cure the default;
however, should the default (other than one calling for the payment of money) be
of such a nature that same can not be reasonably cured within said period of
time, then the defaulting party shall not suffer any penalty, or damages because
thereof (including without limitation having its rights hereunder terminated),
provided the said party, in good faith, makes and continues to make reasonable
efforts to cure the default. If a default is determined to exist and is
pecuniary in nature, then the amounts due and owing shall bear interest at the
highest lawful rate not to exceed the prime rate then being charged by Chase
Manhattan Bank plus two (2%) percent.
42. ARBITRATION. The Working Interest Owners and Project Operator agree
that all matters of dispute under this Agreement between themselves shall be
submitted for determination to a Board of Arbitrators chosen as follows:
a. Upon written demand of either party, and within ten (10) days from
the date of demand, each party shall name an arbitrator and the two
arbitrators so named by the parties hereto shall promptly thereafter choose
a third arbitrator. If either party shall fail to name an arbitrator within
ten (10) days from the date of demand, or if the arbitrators appointed by
the parties shall fail to agree upon and appoint the third arbitrator, then
upon written application by either party such third arbitrator shall be
appointed by the President of the American Arbitration Association.
-24-
<PAGE>
b. The Board of Arbitrators so chosen shall proceed immediately to
hear and determine the questions in dispute in accordance with the rules
and procedures of the American Arbitration Association. The decision of the
Board of Arbitrators, or majority thereof, shall be made within thirty (30)
days after the appointment of the third arbitrator, subject to any
reasonable delay due to unforeseen circumstances. In the event the Board of
Arbitrators, or majority thereof, fail to make a decision within forty-five
(45) days after the appointment of the third arbitrator, new arbitrators
may, at the election of either party, be chosen in like manner as if no
arbitrator had been previously selected.
c. The decision of the arbitrators shall be rendered in writing and
signed by the arbitrators, or a majority of them, and shall be final and
binding on the parties thereto as to any questions or questions so
submitted, and said parties shall abide by such decision and perform
pursuant to the conditions thereof. All expenses in connection with such
arbitration, including a reasonable compensation to the arbitrators, shall
be divided equally between the parties hereto, with the exception of the
expenses of counsel, witnesses and employees of the parties hereto which
will be borne by the party incurring them.
d. The arbitrators selected to act hereunder shall be qualified by
education and training to pass upon the particular question in dispute.
Therefore, it is agreed that if an engineering question is involved,
qualified engineers shall be appointed, and similar procedure shall be
followed in connection with other questions.
43. BOND. The Project Operator agrees to provide sufficient evidence to
both the Secretary and the Secretary that it shall have in place and maintain
such operator's bond as required by the applicable regulations of the Secretary.
Likewise, the Project Operator agrees
-25-
<PAGE>
to maintain any and all bonds required of it as a lessee in accordance with the
applicable regulations.
IT WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed and have set opposite their respective names and date of execution.
PROJECT OPERATOR:
Dated: 7/15/94
PETROGLYPH OPERATING COMPANY, INC.
ATTEST:
/s/ [SIGNATURE APPEARS HERE] By: /s/ Robert A. Christensen
- ---------------------------- -------------------------
Secretary Robert A. Christensen, President
WORKING INTEREST OWNERS:
Dated: 7/14/94
INLAND RESOURCES INC.
ATTEST:
/s/ Robert C. Murdock By: /s/ Kyle R. Miller, President
- --------------------- -----------------------------
Secretary Kyle R. Miller, President
-26-
<PAGE>
PETROGLYPH GAS PARTNERS, L.P.,
Dated: 7/15/94 By: Its General Partner,
PETROGLYPH ENERGY, INC.
ATTEST:
/s/ Robert A. Christensen By: /s/ Robert C. Murdock, President
- ------------------------- --------------------------------
Secretary Robert C. Murdock, President
Date: 7/18/94
UTE INDIAN TRIBE UTE DISTRIBUTION CORPORATION
By: /s/ Stewart Pike By: /s/ Chris Denver
---------------- ----------------
Stewart Pike, Chairman Chris Denver
Uintah and Ouray Tribal
Business Committee
APPROVED:
Date: 1/27/95
UNITED STATES DEPARTMENT OF INTERIOR
By: /s/ Perry Baker
---------------
Perry Baker, Superintendent
Uintah and Ouray Agency
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<PAGE>
Exhibit 10.13
(U&O Agency) May 26, 1995
Drill-to Earn Agrmt
EXPLORATION AND DEVELOPMENT AGREEMENT
-------------------------------------
By and Between
THE UTE INDIAN TRIBE
and
THE UTE DISTRIBUTION CORPORATION
and
PETROGLYPH GAS PARTNERS, L.P.
THIS AGREEMENT IN ITS ENTIRETY AND ALL ATTACHED EXHIBITS MAY NOT BE ALTERED
WITHOUT THE PRIOR APPROVAL OF THE SECRETARY OF THE INTERIOR.
<PAGE>
INDEX FOR EXPLORATION AND DEVELOPMENT AGREEMENT
-----------------------------------------------
<TABLE>
<S> <C>
Article I. DEFINITIONS
Article II. REPRESENTATIONS OF THE UTE TRIBE AND THE UDC
Section 2.1 Representations of the Ute Tribe
Section 2.2 Representations of the UDC
Section 2.3 Joint Exercise
Article III. OBLIGATIONS
Section 3.1 Obligations of Company
3.1.A Opportunity Payment
3.1.B Filing Fee
3.1.C Corporate Information
3.1.D Bonds
3.1.E Wateruse for Drilling and Production
3.1.F Enhanced Recovery Operations
3.1.G Surface Use
3.1.H Drilling Permit
3.1.I Conduct of Operations
Section 3.2 Grant by and Obligations of the Ute Tribe
3.2.A Grant of Access to Contract Premises and of the Right
to Explore for, Develop and Produce Oil and Gas
3.2.B Issuance of Drilling Permits
3.2.C Approval of Agreement
3.2.D Approval of Leases
Article IV. EXPLORATION
Section 4.1 Obligation of Company to Drill Exploration Wells
4.1.A Option of Company to Drill Additional Exploration
Wells
4.1.B Additional Exploration Well(s) in an Exploration Year
4.1.C Well Payment Option
4.1.D Additional On-Lease Wells
</TABLE>
<PAGE>
<TABLE>
<S> <C>
Section 4.2 Agreement Lease Earned by Company by Drilling
Exploration Well
4.2.A Agreement Lease
4.2.B Royalties Due Under Agreement Leases
Section 4.3 Failure to Drill Exploration Well
Section 4.4 Expiration of Agreement Lease During Exploration Term
Section 4.5 Relinquishment of Contract Premises at the End of the
Exploration Term
Article V. DISPOSITION OF PRODUCING WELLS AT THE END OF AN
AGREEMENT LEASE
Section 5.1 Disposition of Well
Section 5.2 Plugging and Abandonment Responsibilities
Section 5.3 Conditions for Well Assumption the Ute Tribe and UDC
5.3.A Equipment on Wellsite
5.3.B Well Analysis
5.3.C Plugging and Abandonment Bond
Section 5.4 Disposition of Production
Article VI. EXTENSION OF AGREEMENT TERM
Article VII. DEEP RIGHTS LEASES
Article VIII. FORCE MAJEURE
Section 8.1 Force Majeure Events
Section 8.2 Commencement of Drilling
Article IX. SURRENDER AND RELINQUISHMENT
Article X. BREACH, CANCELLATION, AND RIGHT TO CURE
Section 10.1 Cancellation of Agreement Leases
Section 10.2 Cancellation of Agreement
Article XI. TAXATION
Article XII. PREFERENCE
Article XIII. ENVIRONMENTAL REQUIREMENTS
</TABLE>
ii
<PAGE>
<TABLE>
<S> <C>
Article XIV. MEMORANDUM OF AGREEMENT
Article XV. ASSIGNMENT
Article XVI. TRUST STATUS OF THE CONTRACT PREMISES
Article XVII. INDEMNIFICATION
Article XVIII. NOTICES
Article IXX. MISCELLANEOUS
Section 19.1 Waiver
Section 19.2 Conflict
Section 19.3 Headings
Section 19.4 Regulatory Authority
Section 19.5 Modification
</TABLE>
iii
<PAGE>
EXHIBITS TO EXPLORATION AGREEMENT
---------------------------------
Exhibit A Contract Premises
Exhibit B-1
through B-16 Agreement Leases
Exhibit C Permit for Use of Water
Exhibit D Ordinance No. 96-02
Exhibit E Mineral Access Agreement
Exhibit F Resolution No. 96-164
Exhibit G Deep Rights Lease Form
iv
<PAGE>
EXPLORATION AND DEVELOPMENT AGREEMENT
-------------------------------------
This Agreement is made and entered into in quintuplicate under authority of
the Indian Mineral Development Act of 1982 (25 U.S.C. (S)(S)2101-2108), and
other applicable acts, among the Ute Indian Tribe of the Uintah and Ouray
Reservation, Utah, pursuant to the Indian Reorganization Act (25 U.S.C. (S)461,
et seq>), hereafter called the "Ute Tribe", the Ute Distribution Corporation, a
Utah Corporation, organized with authority under the Ute Partition and
Termination Act (25 U.S.C. (S)(S)677-677aa) to receive certain proceeds from
minerals held in trust by the United States for the Ute Tribe, hereafter called
"UDC", and Petroglyph Gas Partners, L.P., hereafter called "Company".
WHEREAS, the Ute Tribe, the UDC, and Company have reached an agreement for
the exploration and development of oil and gas, as defined below, in and under
and that may be produced from lands located in Uintah County, Utah, such lands
being particularly described on Exhibit A attached hereto and made a part
hereof.
NOW, THEREFORE, in consideration of the mutual obligations and covenants
contained herein, and of other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the Ute Tribe, the UDC, and
Company hereby agree as follows:
1
<PAGE>
I. DEFINITIONS
For purposes of this Agreement, the terms and phrases set forth below are
defined as follows:
1.1 Agency - The Uintah and Ouray Agency of the Bureau of Indian Affairs
------
and any successor office thereof of the Bureau of Indian Affairs.
1.2 Agreement Lease - A lease from the Ute Tribe and the UDC to Company
---------------
covering one six hundred and forty (640) acre parcel, more-or-less, or a portion
thereof of the Contract Premises issued pursuant to Section 4.2 below on the
forms attached hereto as Exhibits B-1 through B-16 inclusive.
1.3 Agreement Term - This Agreement shall expire seven (7) years from its
--------------
approval by the Secretary at 11:59 P.M. or upon termination of the last
Agreement Lease issued under the Agreement, whichever is later.
1.4 Contract Premises - The lands located in Uintah County, Utah,
-----------------
described on Exhibit A attached hereto and made a part hereof.
1.5 Effective Date - The Effective Date of this Agreement shall be the
--------------
first day of the month immediately following the date of approval by the
Secretary.
1.6 Exploration Term - Unless sooner terminated or expiring as provided
----------------
for herein, the Exploration Term of this Agreement shall commence on the
effective date and shall end seven (7) years therefrom at 11:59 P.M.
2
<PAGE>
1.7 Exploration Well - A well drilled, re-entered or recompleted on the
----------------
Contract Premises, which well is drilled during the Exploration Term.
1.8 Exploration Year - A one-year period during the Exploration Term
----------------
commencing on the Effective Date and subsequent annual anniversaries of such
Effective Date and ending twelve (12) months thereafter at 11:59 P.M.
1.9 Gas - Natural gas deposits, either combustible or noncombustible,
---
recovered at the surface in the gaseous state, including helium gas, carbon
dioxide gas, and sulfur gas; and hydrocarbons recovered at the surface as
liquids which are the results of condensation caused by reduction of pressure
and temperature of hydrocarbons originally existing in a reservoir in a gaseous
state; excluding gaseous or liquid substances derived, produced or manufactured
from coal, oil shale, tar sands or other hydrocarbons classified as synthetic
hydrocarbons.
1.10 Net Acres or Net Mineral Acres - The exact mineral acreage of the
------------------------------
Contract Premises owned by the Ute Tribe and committed to this Agreement, such
mineral acreage to be determined through a title verification performed at
Company's sole expense.
1.11 Oil - Petroleum or liquid hydrocarbons originally existing in a
---
reservoir in a liquid state.
1.12 Operative Condition or In Good Working Repair -Materials and equipment
---------------------------------------------
transferred to the Ute Tribe and the UDC by Company shall be transferred "as
is". Company shall use reasonable efforts to have the materials and equipment in
a
3
<PAGE>
condition susceptible to immediate utilization by the Ute Tribe and the UDC for
the purpose such equipment or material was intended or shall be susceptible to
use by the Ute Tribe and the UDC upon the replacement or repair of parts thereof
that are unusable due to normal wear and tear associated with the material or
equipment.
1.13 Producing Well - A well which is completed as producing oil or gas in
--------------
quantities sufficient to pay the costs of operating and maintaining the well and
marketing the product after the payment of any royalties and rentals due under
the Agreement Lease covering lands upon which the well is located.
1.14 Secretary - The Secretary of the Interior or his duly authorized
---------
representative.
1.15 Superintendent - The Superintendent of the Uintah and Ouray Agency of
--------------
the Bureau of Indian Affairs.
II. REPRESENTATIONS OF THE UTE TRIBE AND THE UDC
--------------------------------------------
2.1 Representations of the Ute Tribe
--------------------------------
The Ute Tribe represents, but does not warrant, that oil and gas in and
under and that may be produced from the Contract Premises is owned by the Ute
Tribe or by the United States in trust for the Ute Tribe subject to the
provisions of the Ute Partition and Termination Act, 25 U.S.C. (S)(S)677-677aa.
The Ute Tribe further represents, but does not warrant, that it has the
authority to enter into this Agreement pursuant to the Indian Mineral
Development Act of 1982, 25 U.S.C. (S)(S)2101-2108, and other applicable Acts of
Congress. Finally, the Ute Tribe represents and warrants that no portion of the
Contract Premises is subject
4
<PAGE>
to any other agreement for the exploration and development of the oil and gas in
effect as of the Effective Date of this Agreement.
2.2 Representations of the UDC
--------------------------
The UDC represents, but does not warrant, that it is organized pursuant to
the Ute Partition and Termination Act, 25 U.S.C. (S)(S)677-677aa, and is
authorized to receive certain proceeds from minerals produced from the Contract
Premises. In this Agreement, the Ute Tribe grants certain rights and privileges
to Company to go upon the Contract Premises to explore for, develop and produce
oil and gas. To the extent that the UDC has an interest in the oil and gas in
the Contract Premises pursuant to the Ute Partition and Termination Act, 25
U.S.C. (S)(S)677-677aa, the grant herein of any right or privilege to Company by
the Ute Tribe shall be deemed as well to be a grant of the identical right or
privilege to Company by the UDC to explore for, develop and produce oil and gas.
It is the specific intent of the UDC by the execution of this Agreement that it
is consenting to the provisions hereof and is granting to Company any interest
of the UDC in the Contract Premises necessary to effect the provisions hereof.
Finally, the UDC represents and warrants that no portion of the Contract
Premises is subject to any other agreement for the exploration and development
of the oil and gas in effect as of the Effective Date of this Agreement.
2.3 Joint Exercise
--------------
The execution of this Agreement shall be deemed the joint management by the
Ute Tribe and the UDC of oil and gas rights in the Contract Premises retained in
trust by the United States
5
<PAGE>
required by the Ute Partition and Termination Act, 25 U.S.C. (S)(S)677-677aa.
III. OBLIGATIONS
-----------
3.1 Obligations of Company
----------------------
3.1.A Opportunity Payment
-------------------
In consideration of the rights granted to Company by the Ute Tribe and
the UDC in this Agreement, Company agrees to pay jointly to the Ute Tribe and to
the UDC as an opportunity payment the sum of $172,392.50. The opportunity
payment sum as herein stated is a best estimate based on the number of net
mineral acres owned by or held in trust for the Ute Tribe within the Contract
Premises times Seventeen Dollars and Fifty Cents ($17.50) per net acre. Should
the actual net acres change due to title verification by Company and upon mutual
agreement of the Ute Tribe and UDC, such agreement on the part of the Ute Tribe
and UDC not to be unreasonably withheld, the opportunity payment will be
adjusted accordingly. The payment to be made by Company pursuant to this Section
is to be made by certified check, cashier's check, or postal money order payable
to the Bureau of Indian Affairs and shall be delivered to the Superintendent
prior to the Ute Tribe's execution of this Agreement. In the event the Ute Tribe
or the UDC shall fail to execute this Agreement or if the Agreement is not
approved by the Secretary, that opportunity payment paid pursuant to this
Section shall be returned to Company by the Superintendent not later than sixty
(60) days from the Superintendent receiving written notice that the Ute Tribe or
the UDC has refused to execute this Agreement or not later than
6
<PAGE>
sixty (60) days from the date notice is provided to the Company that the
Secretary has declined to approve this Agreement, whichever is applicable.
Failure by Company to make the payment required in this Section shall
result in the termination of this Agreement and of all rights of Company to earn
Agreement Leases covering Contract Premises in accordance with Article IV of
this Agreement. However, Company shall incur no liability to the Ute Tribe or to
the UDC for failure to make any such payment. Upon termination of this Agreement
pursuant to this Section, the obligation of Company to make additional payments
under this Agreement shall also terminate.
3.1.B Filing Fee
----------
Prior to approval of this Agreement by the Secretary, Company shall
deliver to the Superintendent a certified check, cashier's check or postal money
order payable to the Bureau of Indian Affairs in the amount of $1,200.00 as a
one time filing fee to pay for training, travel and purchase of equipment for
the Ute Tribe's employees assigned to assist the Agency's mineral and mining
programs.
Failure by Company to make payment of the filing fee in the proper
amount at the proper time shall not result in cancellation of this Agreement
unless and until Company shall have failed to correct the error within thirty
(30) days after receipt of written notice from the Ute Tribe and the
Superintendent of such failure.
7
<PAGE>
3.1.C Corporate Information
---------------------
Company shall furnish to the Superintendent all corporate information
required by 25 C.F.R. (S)225.29, together with such other information as the
Superintendent may deem necessary.
3.1.D Bonds
-----
Company shall supply such bonds for performance and reclamation as the
Superintendent may require, or as otherwise may be required under 25 C.F.R.
(S)225.30.
3.1.E Water Use for Drilling and Production
-------------------------------------
Company shall purchase from the Ute Tribe a water permit for each well
drilled on the Contract Premises. The water permit fee shall be $-0- per well.
Water permits shall allow Company to utilize water of the Ute Tribe for the
drilling and the completion of wells and for production of oil and gas from the
Contract Premises, excluding such water as may be necessary in any enhanced
hydrocarbon recovery system. The water of the Ute Tribe used by Company pursuant
to a water permit has been appropriated and reserved for Indian water rights
lands owned by the Ute Tribe. Water permits under this Agreement shall follow
that form appearing as Exhibit C hereto.
3.1.F Enhanced Recovery Operations
----------------------------
It is recognized and understood by the parties that it may be
necessary for the Company to institute and consummate a secondary recovery or
pressure maintenance program to develop the Contract Premises to its maximum
economic potential. With respect
8
<PAGE>
to such a secondary recovery or pressure maintenance program, the UDC, Ute Tribe
and Company agree:
(i) Water Wells - Company shall have the right to drill and maintain water
-----------
supply wells on the Contract Premises and to inject into formations underlying
the Contract Premises any substances for secondary recovery or pressure
maintenance purposes in accordance with a plan of operation approved by the
Secretary. This right shall include Company drilling and maintaining injection
wells on the Contract Premises and completing the same in the formations
underlying the Contract Premises. The Company may, in connection with the
secondary recovery or pressure maintenance program the subject hereof, also use
as much of the surface of the Contract Premises as may be reasonably necessary
for the operation and the development of the Contract Premises.
(ii) Water Subject to Section and Well Transfer - Company shall have free
------------------------------------------
use of water from the Contract Premises for operations under this Section except
water from existing fresh water wells, private lakes, ponds, streams or
irrigation ditches located on the Contract Premises. In the event Company shall
drill water wells in connection with a secondary recovery or pressure
maintenance program and shall at any time cease using such well(s) for a
secondary recovery or pressure maintenance operation, Company shall promptly
notify the Ute Tribe in writing to that affect and shall thereafter transfer to
the Ute Tribe all of its right, title and interest to such well(s) upon written
request of the Ute Tribe.
9
<PAGE>
(iii) Plan of Operation - Prior to commencement of a secondary recovery or
-----------------
pressure maintenance program on the Contract Premises, Company shall submit to
the Secretary for approval a plan of operations for the first year of such a
program. Upon approval of the plan by the Secretary, such plan shall constitute
the future operating objectives of the Company under its secondary recovery or
pressure maintenance program for the period specified therein. Following
submission and approval of the initial plan of operations, the Company shall
from time to time, but not less than each year during the term of such secondary
recovery or pressure maintenance program, and before the expiration of any
existing plan, submit a plan for an additional specified period of operations.
Said plan or plans shall be modified or supplemented when necessary to meet
changed conditions, or to protect the interests of all parties to this
Agreement. Reasonable diligence shall be exercised in complying with any
approved plan of operation for a secondary recovery or pressure maintenance
program.
3.1.G Surface Use
-----------
Where Company desires to use any portion of the surface of the
Contract Premises owned by the Ute Tribe, or owned by the United States of
America in trust for the benefit of the Ute Tribe, in conjunction with its
operations for drilling and producing of one or more wells drilled pursuant to
this Agreement or on lands not covered by an Agreement Lease, Company shall
apply to the Ute Tribe for a Mineral Access Agreement for the use of those lands
on the form attached hereto as Exhibit E. Company
10
<PAGE>
agrees to construct and use any such mineral access so granted subject to and in
accordance with the conditions set forth by Ordinance No. 91-03, or any
successor Ordinance thereto, attached hereto as Exhibit D. With the exception of
actual surface damages, that payment identified in Section 3.1.A hereof shall be
deemed to have compensated the Ute Tribe for any access payment called for under
Ordinance No. 91-03, or any successor Ordinance thereto. Mineral Access
Agreements granted to Company under this subsection shall carry a term of twenty
(20) years and shall be renewable by Company for an additional twenty (20)
years.
3.1.H Drilling Permit
---------------
Prior to commencing operations upon Contract Premises for the drilling
of a well pursuant to Article IV, or the drilling of any well on the Contract
Premises subject to an Agreement Lease, Company shall apply to the Vernal Office
of the Bureau of Land Management for a permit to conduct operations upon the
Contract Premises. Company shall satisfy all lawful requirements for the
issuance of a permit made by the Bureau of Land Management.
3.1.I Conduct of Operations
---------------------
All operations associated with the exploration, development and
production of oil and gas from the Contract Premises shall be conducted in
accordance with 43 C.F.R. Part 3160.
As to any well drilled upon the Contract Premises pursuant to the
authority granted to Company under this Agreement
11
<PAGE>
but prior to issuance of an Agreement Lease, Company agrees as follows:
(i) To carry on all operations hereunder in a good and workmanlike
manner in accordance with approved methods and practice, having due regard
for the prevention of waste of oil or gas developed on the land, or the
entrance of water through wells drilled by Company to any strata containing
usable or potable water or to the productive sands or oil or gas-bearing
strata to the destruction or injury of the usable or potable water or of
the oil or gas deposits, the preservation and conservation of the property
for future productive operations, and to the health and safety of workmen
and employees;
(ii) To plug securely all wells before abandoning the same and to
effectually shut off all water from the oil or gas-bearing strata, from any
other strata containing mineral resources and from all strata containing
water of potential value;
(iii) Not to drill any well within five hundred (500) feet of any
house structure, or reservoir of water without the Ute Tribe's written
consent;
(iv) To bury all pipelines crossing tillable lands below plow depth
unless other arrangements therefore are made with the surface owner; and
(v) To pay the Ute Tribe all damages to crops, buildings, and other
improvements of the Ute Tribe occasioned by Company's operations, except,
that Company shall not be held responsible for casualties occasioned by
causes beyond Company's control.
12
<PAGE>
3.2 Grant by and Obligations of the Ute Tribe
-----------------------------------------
3.2.A Grant of Access to Contract Premises and of the Right to
--------------------------------------------------------
Explore for, Develop and Produce Oil and Gas
--------------------------------------------
Commencing with the Effective Date of this Agreement and ending with
the expiration of the Exploration Term, the Ute Tribe and the UDC grant to
Company the exclusive right to go upon Contract Premises to conduct operations
for the drilling of one or more wells, drilled pursuant to Article IV of this
Agreement, and to operate any such wells so drilled for the production of
oil and gas. Upon drilling a well to the depth specified in Section 4.1 such
that an Agreement Lease will be issued to Company, but prior to issuance of the
Agreement Lease and approval thereof by the Secretary, the right of Company
granted herein to operate such well for the production of oil and gas shall be
governed by the provisions of the Agreement Lease attached hereto as Exhibit B-1
through B-16 inclusive which covers the 640-acre parcel or portion thereof of
the Contract Premises on which the Exploration Well is located.
Upon receipt of an application by the Agency from Company for a
Mineral Access Agreement covering the Contract Premises to be used by Company
for drilling any well pursuant to this Agreement or any well on the Contract
Premises subject to an Agreement Lease, the Ute Tribe hereby gives its consent
for issuance of a Mineral Access Agreement to Company in accordance with the
application made on the form attached hereto as Exhibit E. In addition, such
easement shall be issued subject to the
13
<PAGE>
conditions set forth in the form of application attached hereto as Exhibit E,
and at no cost to Company.
3.2.B Issuance of Drilling Permits
----------------------------
Within thirty (30) days after receipt from Company of an application
to drill which is filed pursuant to Section 3.1.G, the Ute Tribe and the UDC
shall use their best efforts to have the Vernal Office of the Bureau of Land
Management issue to Company a permit allowing Company to enter upon the Contract
Premises for the purpose of drilling the well for which the application is made.
Failure of the Bureau of Land Management to issue the permit within the thirty
(30) day period shall be an instance of Force Majeure to which the provision of
-------------
Article IX shall apply.
3.2.C Approval of Agreement
---------------------
The Ute Tribe and the UDC shall use their best efforts to obtain
approval of this Agreement from the Secretary. Any such approval shall provide
that this Agreement shall be deemed effective on the first day of the month
immediately following the date of approval.
3.2.D Approval of Leases
------------------
After issuance by the Ute Tribe and the UDC of an Agreement Lease
pursuant to Article IV, the Ute Tribe and the UDC shall submit to and obtain the
approval of the Secretary of any such Lease. Notwithstanding the date of
approval by the Secretary, the approval of any Agreement Lease shall specify
that the effective date of the Agreement Lease is the first day of the
14
<PAGE>
month in which the well which earned the Agreement Lease is drilled to the depth
specified in Section 4.1.
IV. EXPLORATION
-----------
4.1 Obligation of Company to Drill Exploration Wells
------------------------------------------------
During the first Exploration Year, Company shall drill, or cause to be
drilled, two (2) Exploration Wells on the Contract Premises or on lands
communitized therewith at a location selected by Company in its sole discretion.
To earn an Agreement Lease pursuant to this Article IV, any such wells shall be
drilled by Company to a depth:
(i) sufficient to obtain production above 6,000 feet which results in the
completion of a Producing Well; or
(ii) to a depth of 6,000 feet or to a depth adequate to test the Green
River Formation, whichever is the lesser.
Any Exploration Well may be drilled to a deeper depth at the discretion of
Company, pursuant to Article VII, but in no event shall any Exploration Well be
drilled to a depth below the base of the Mesaverde Formation or its
stratigraphic equivalent. In the event the Mesaverde Formation is not
encountered in the Exploration Well, or cannot be identified, the well shall not
be drilled below the base of the Tertiary System. The cost, risk and expense of
drilling and completing any Exploration Well pursuant to this Section 4.1 shall
be borne solely by Company.
4.1.A Option of Company to Drill Additional Exploration Wells
-------------------------------------------------------
During the second Exploration Year of the Exploration Term, Company
shall have the option, but not the obligation, to drill, or cause to be drilled,
four (4) or more Exploration Wells
15
<PAGE>
in accordance with the terms of Section 4.1 of this Agreement. During each of
the third, fourth, fifth, sixth and seventh Exploration Years of the Exploration
Term, Company shall have the option, but not the obligation, to drill, or cause
to be drilled, three (3) or more Exploration Wells in accordance with the terms
of Section 4.1 of this Agreement.
4.1.B Additional Exploration Well(s) in an Exploration Year
-----------------------------------------------------
If Company should drill more than the required number of Exploration
Wells set out in Section 4.1.A of this Agreement during any Exploration Year,
all of which meet the requirements of Section 4.1, each Exploration Well drilled
during that Exploration Year in excess of the required number shall be deemed,
for purposes of this Agreement, as an Exploration Well drilled in a subsequent
Exploration Year, and shall be deemed an exercise of the option of Company to
drill Exploration Wells during subsequent Exploration Years. For example, if
Company shall drill three (3) Exploration Wells which meet the requirements of
Section 4.1 during the first Exploration Year, one (1) of those Exploration
Wells shall be deemed an Exploration Well drilled during the second Exploration
Year and Company will be required to drill only three (3) Exploration Wells to
satisfy the provisions of this Article calling for optional Exploration Wells
during the second Exploration Year. Any Exploration Well drilled during one
Exploration Year which is deemed pursuant to this paragraph as an Exploration
Well drilled in a subsequent Exploration Year shall be counted as an Exploration
Well drilled in the immediate Exploration Year for which Exploration Wells
16
<PAGE>
have not been drilled in determining the number of Exploration Wells drilled
during subsequent Exploration Years. Irrespective of whether a well drilled
during one Exploration Year is deemed to be a well drilled during a subsequent
Exploration Year pursuant to this Section, Company agrees that in order to
prevent expiration of this Agreement at the end of each Exploration Year of the
Exploration Term, it must have drilled a cumulative number of Exploration Wells
which satisfy the provisions of this Section 4.1 or made timely payment of the
monetary penalty as described in Section 4.1.C or a proper combination of
drilling and penalty payment(s).
4.1.C Well Payment Option
-------------------
In the event Company fails to drill any of the Exploration Wells
called for by 4.1 or 4.1.A, Company has the option to pay a Ten Thousand Dollar
($10,000.00) penalty payment for each well not drilled. Said penalty payment
shall be made by check payable to the Bureau of Indian Affairs and delivered to
the Superintendent on or before thirty (30) days from the last day of any
Exploration Year in which Company failed to drill the obligated number of wells.
Should Company make timely payment of the penalty payment described hereinabove,
the Ute Tribe and the UDC hereby agree that Company shall have complied with the
required Exploration Wells provision and this Agreement shall remain in full
force and effect according to its terms. Payment of the penalty called for
herein shall in no event, however, operate to allow Company to earn an Agreement
Lease, the earning
17
<PAGE>
of Agreement Leases being specifically governed by Section 4.2.A of this
Agreement.
4.1.D Additional On-Lease Wells
-------------------------
In the event Company drills, re-enters or reworks more than one (1)
well on an Agreement Lease, such additional wells drilled on an Agreement Lease
shall not be considered an Exploration Well(s) for the purpose of meeting the
number of Exploration Wells required by this Agreement, and shall not act to
earn leases on the Contract Premises.
4.2 Agreement Lease Earned by Company by Drilling Exploration Well
--------------------------------------------------------------
4.2.A Agreement Lease
---------------
If during any Exploration Year Company shall commence the drilling of
a Exploration Well and the well is drilled to the depth specified in Section
4.1, the Ute Tribe and the UDC shall issue to Company, without regard to whether
the Exploration Well is completed as a Producing Well, an Agreement Lease on the
applicable lease form attached hereto as Exhibit B-1 through B-16 covering the
lands of the Contract Premises upon which the Exploration Well is drilled.
Without regard to the depth to which the Exploration Well is drilled, the
Agreement Lease shall cover all formations between the surface of the earth down
to the base of the Mesaverde Formation or its stratigraphic equivalent. In the
event the Mesaverde Formation is not encountered, or cannot be identified, the
Agreement Lease shall cover all formations between the surface of the earth down
to the base of the Tertiary System. The Agreement Lease shall be executed by the
Ute Tribe and the UDC within forty-five (45) days of reaching the depth
18
<PAGE>
specified in Section 4.1, and shall be issued with an effective date of the
first day of the month in which the Exploration Well earning the Agreement Lease
reached the depth specified in Section 4.1.
4.2.B Royalties Due Under Agreement Leases
------------------------------------
The obligation of Company to pay royalty pursuant to the terms and
provision of any Agreement Lease issued to Company pursuant to this Article
shall commence with the first production of oil or gas from any well located
upon lands covered by the Agreement Lease and shall be remitted in accordance
with the provisions of 30 C.F.R. Parts 202, 210 and 218, as supplemented by Part
206, Valuation of Lease Products. The first royalty payment for any such well is
due within ninety (90) days of the date of delivery by the Ute Tribe and the UDC
to Company of the approved Agreement Lease covering the land upon which the well
is located, or ninety (90) days after the date of first production, whichever is
later. All subsequent royalty payments shall be made monthly in accordance with
the applicable Agreement Lease.
4.3 Failure to Drill Exploration Well
---------------------------------
If Company shall fail to drill two (2) Exploration Wells to the depth
specified in Section 4.1 above or to make timely payment of the monetary penalty
as determined in Section 4.1.C or a proper combination of drilling an penalty
payments during the first Exploration Year of the Exploration Term, then all
rights of Company to acquire Agreement Leases covering the Contract Premises
pursuant to Article IV of this Agreement shall terminate; however, any Agreement
Lease previously earned by or
19
<PAGE>
issued to Company as the result of drilling an Exploration Well during the first
Exploration Year shall remain in effect according to its terms. Similarly, if
Company shall fail to exercise its Exploration Well option to the depth
specified in Section 4.1 during the second, third, fourth, fifth, sixth or
seventh Exploration Years of the Exploration Term or make timely payment of the
monetary penalty as described in Section 4.1.C or a proper combination of
drilling and penalty payments, all rights of Company to acquire additional
Agreement Leases pursuant to Article IV of this Agreement shall terminate;
however, any Agreement Leases previously earned by or issued to Company as the
result of drilling an Exploration Well during the Exploration Term shall remain
in effect according to its terms.
All Contract Premises not covered by an Agreement Lease in effect at the
end of an Exploration Year in which the required number of Exploration Wells are
not drilled shall be deemed to be released from the provisions of this
Agreement. However, any Mineral Access Agreements issued by the Ute Tribe to
Company pursuant to Section 3.1.G covering Contract Premises so relinquished
shall remain in effect according to their terms. Company shall incur no
liability to the Ute Tribe or the UDC for failure to drill any Exploration Well
in accordance with Sections 4.1 or 4.1.A above except the termination of rights
as set forth in this Section.
4.4 Expiration of Agreement Lease During Exploration Term
-----------------------------------------------------
Should any Agreement Lease issued to Company by the Ute Tribe and the UDC
expire at the end of its Primary Term, as
20
<PAGE>
specified in such Agreement Lease, during the Exploration Term of this
Agreement, such expired lease lands shall no longer be considered as part of the
Contract Premises and shall not thereafter be subject to the lease earning
provisions of Section 4.2.A of this Agreement.
4.5 Relinquishment of Contract Premises at the End of the Exploration Term
----------------------------------------------------------------------
At the end of the Exploration Term of this Agreement, the rights of Company
to drill Exploration Wells and to acquire Agreement Leases covering the Contract
Premises shall expire. All Contract Premises which, at the end of the
Exploration Term, are not subject to an Agreement Lease which is in its primary
term or which is in its extended terms by reason of the existence of a Producing
Well located upon lands covered by the Agreement Lease or on land communitized
therewith, shall no longer be subject to the provision of Article IV of this
Agreement.
V. DISPOSITION OF PRODUCING WELLS AT THE END
-----------------------------------------
OF AN AGREEMENT LEASE
---------------------
5.1 Disposition of Well
-------------------
If an Agreement Lease expires or is cancelled, upon which there are one or
more wells that are capable of production in paying quantities, Company will, at
the request of the Ute Tribe and the UDC, relinquish its interest in any such
Producing Well to the Ute Tribe for the benefit of the Ute Tribe and the UDC in
accordance with the requirements of this Section. In addition, Company will upon
appropriate approvals assign operating rights to the Ute Tribe for the benefit
of the Ute Tribe and the UDC. The Ute Tribe and the UDC shall thereafter manage
any such well
21
<PAGE>
in accordance with the provisions of the Ute Partition and Termination Act, 25
U.S.C. (S)(S)677-677aa.
As to any such Producing Well in which Company relinquishes its interest to
the Ute Tribe for the benefit of the Ute Tribe and the UDC pursuant to this
Section, Company and the Ute Tribe agree to establish a fair salvage value for
the material and equipment associated with operating the well as a Producing
Well and if such value approximates Company's estimate of the cost of plugging
and abandoning such well(s) then Company shall exchange the salvage value of
Company's interest in all material and equipment associated with operating the
well as a Producing Well, excluding buildings, compressors or injection
facilities and equipment, in return for the Ute Tribe and the UDC assuming all
of Company's obligations with respect to operations conducted at the well,
including any obligation to plug and abandon the well and to restore any of the
Contract Premises used in operations on the Producing Well. It is understood
that no interest will be conveyed to the Ute Tribe and the UDC in any materials
or equipment which are utilized by or associated with operation of any other
well or wells located on the Contract Premises, e.g. electrical lines, injection
systems, oil or gas transmission lines. All materials and equipment transferred
to the Ute Tribe shall be in operative condition or in good working repair, to
avoid large expenditures of funds beyond economic values in order to continue
operations. Company shall have no obligation to plug and abandon any Producing
Well or restore any of the Contract Premises used in operations on any Producing
Well in which
22
<PAGE>
Company relinquishes its interest to the Ute Tribe for the benefit of the Ute
Tribe and the UDC pursuant to this Section. Finally, in the event Company and
the Ute Tribe cannot come to agreement that the value of the materials and
equipment to be exchanged approximates the estimated cost of plugging and
abandoning such well, unless Company and the Ute Tribe come to other terms
regarding the turnover, then Company shall remain obligated to plug and abandon
the well(s) pursuant to the terms hereof and applicable rules and regulations.
5.2 Plugging and Abandonment Responsibilities
-----------------------------------------
In the event the Ute Tribe and the UDC request that Company relinquish to
them a well or wells on the Contract Premises, the Ute Tribe and the UDC by that
request agree to assume all plugging and abandonment obligations of Company, and
the Ute Tribe and the UDC further agree that all plugging and abandonment
procedures to be utilized will be approved by and carried out to the
satisfaction of the Bureau of Land Management or the authorized representative
of the Secretary.
5.3 Conditions for Well Assumption by Ute Tribe and UDC
---------------------------------------------------
5.3.A Equipment on Wellsite
---------------------
Prior to the Superintendent consenting to Company relinquishing a
well(s) to the Ute Tribe and the UDC pursuant to this Article, the Ute Tribe and
the UDC shall provide to the Superintendent such assurances as he deems
appropriate that any equipment necessary for continued production operations
will remain:
(i) on the well location(s) for the beneficial use of the Ute Tribe and
the UDC; and
23
<PAGE>
(ii) available as collateral (salvage value) toward the cost of the
plugging and abandonment of the wellbore and wellsite.
5.3.B Well Analysis
-------------
Prior to the Superintendent consenting to a well(s) relinquishment by
Company to the Ute Tribe and the UDC and/or release of the well(s) from
Company's plugging and abandonment bond, the Superintendent shall be provided
with those items set forth below.
(i) Company shall deliver to the Superintendent, at its sole cost and
expense but with no liability to it for any reliance thereon:
- Results of a casing pressure test, if conducted by Company, to
determine the competency of the wellbore(s) to be relinquished.
- Its best estimate of the completeness and competency of the
wellsite(s) equipment to continue operations of the wellbore(s).
- An Affidavit of Fixed Expenditure (AFE) of all costs associated with
the plugging and abandonment procedures of the particular well(s), on
Form 3160.5, entitled Sundry Notice of the Intent to Plug and Abandon,
with an attached plan of such procedure, for review by the Bureau of
Land Management for engineering adequacy.
- Notification whether the equipment remaining for production
operations is of sufficient salvage value to offset the cost of the
plugging and abandonment.
(ii) A Reserves Analysis (remaining producible oil and gas) from the Bureau
of Land Management determining the ability of the well(s) to continue
production of oil and gas in economic quantities.
5.3.C Plugging and Abandonment Bond
-----------------------------
Failure of the Ute Tribe, the UDC or Company to provide that
information set out in 5.3.A or 5.3.B above or submission of information
indicating that the assets of the to-be-relinquished well(s) are insufficient to
defray the costs of plugging and
24
<PAGE>
abandonment may, in the Superintendent's discretion, require that the Ute Tribe
and the UDC post a plugging and abandonment bond prior to the issuance of any
approval related to such relinquishment(s).
5.4 Disposition of Production
-------------------------
After expiration or the final adjudication of cancellation of an Agreement
Lease, all production shall be owned by the Ute Tribe and the UDC as required by
25 U.S.C. (S)(S)677-677aa.
VI. EXTENSION OF AGREEMENT TERM
---------------------------
Contrary provisions of this Agreement notwithstanding, Company 24 shall
have the right to maintain this Agreement in effect one (1) year beyond the end
of the Exploration Term as to Contract Premises which would otherwise be
relinquished pursuant to Section 4.5 or as a result of its failure to drill
option wells pursuant to Section 4.1.A by the payment of a sum equal to $10.00
per net mineral acre as to Contract Premises desired by Company to be extended.
To retain lands within the coverage of this Agreement, Company shall, not later
than (30) days before the end of the Exploration Term or its omission to
exercise its drilling option or to make a penalty payment, (i) notify the Ute
Tribe and the UDC of the Contract Premises to which the extension is to apply,
and (ii) deposit with the Superintendent, for the benefit of the Ute Tribe and
the UDC, the amount of $10.00 per net mineral acre of the Contract Premises
which is to be maintained in effect. Any such payment shall be made by certified
check, cashier's check, or postal money order payable to the Bureau of Indian
Affairs.
25
<PAGE>
If Company shall timely notify the Ute Tribe and the UDC of an election to
maintain portions of the Contract Premises in effect which would otherwise be
relinquished, and shall make a timely payment of the necessary amount in
accordance with the preceding paragraph, then the Contract Premises and this
Agreement shall be maintained in effect not only as to any lands upon which
there is located a Producing Well but also as to all lands which have been
designated for extension by Company and for which an extension payment has been
made.
VII. DEEP RIGHTS
-----------
During the first ten (10) years following the Effective Date of this
Agreement, Company has the option, but not the obligation, to purchase from the
Ute Tribe and the UDC one (1) or more Oil and Gas Leases covering the Contract
Premises but only as to formations between the base of the Mesaverde Formation
or its stratigraphic equivalent and the top of the Jurassic System, or, if the
Mesaverde Formation is not encountered or cannot be identified, as to formations
between the base of the Tertiary System and the top of the Jurassic System. Any
lease covering these so-called deep rights shall cover one (1) entire section of
the Contract Premises or shall cover a partial section of the Contract Premises,
if the entire section is not owned by the Ute Tribe; shall provide for a primary
term of two (2) years and for a royalty of 18%; and shall be issued on the form
attached hereto as Exhibit G. Company may exercise its right to acquire an Oil
and Gas Lease covering "deep rights" as specified in this Article by paying a
bonus jointly to the Ute Tribe and the UDC of $15.00
26
<PAGE>
per net mineral acre in the section or partial section of the Contract Premises
to be covered by the Lease. Any such payment to be made by Company pursuant to
this Article is to be made by certified check, cashier's check, or postal money
order payable to the Bureau of Indian Affairs deposited with the Superintendent
prior to the end of the ten (10) year period specified in this Article. Upon
receipt of such payment, the Ute Tribe and the UDC shall cause the Lease or
Leases to be issued to Company, and shall obtain approval of the Lease(s) from
the Secretary. Any such Lease(s) shall be maintained in effect under its own
terms except as it might be amended pursuant to the provisions of this
Agreement.
Company's option to obtain Deep Right Leases under this Article shall
remain in force for the period set out herein if and only if this Agreement
remains in force by reason of the existence of a valid Agreement Lease.
VIII. FORCE MAJEURE
-------------
8.1 Force Majeure Events
--------------------
If Company, the Ute Tribe or the UDC, is prevented from complying with any
of its obligations as imposed herein, except for the payment of monies, by
reason of lack of water, equipment, labor or other material, by reason of fire,
storm, flood, explosion, act of God, by reason of rebellion, insurrection or
riot, by reason of differences with the workmen or material suppliers or labor
disputes, including strikes and walkouts, by reason of failure to receive timely
delivery of supplies, materials, or equipment, by reason of failure of carriers
to
27
<PAGE>
transport or to furnish facilities for transportation, by reason of non-
availability of drilling equipment including but not limited to drilling rigs,
and/or drilling crews, by reason of any federal, state, or tribal law, or any
order, rule or regulation of governmental authority, by reason of lack of
drilling permits or extreme weather conditions, or by reason of any other cause
or causes beyond Company's, the UDC's, or the Ute Tribe's control or any
operation of Force Majeure, then, while so prevented, this Agreement shall not
-------------
terminate in whole or in part and performance under this Agreement shall be
temporarily excused. The parties further agree that any delays caused by the
failure of the Ute Tribe and the UDC to respond when required pursuant to the
provisions of this Agreement, or delay occasioned by the United States of
America in granting any permit for the use or occupancy of any portion of the
Contract Premises, shall temporarily excuse performance under this Agreement for
the period of such delay and for so long as reasonable efforts are being used to
obtain any such necessary approval or response.
Notwithstanding the preceding paragraph, if at the end of any Exploration
Year Company is being prevented by a circumstance of Force Majeure from drilling
-------------
an Exploration Well, the period for the commencement of actual drilling
operations on such Exploration Well shall not be extended for more than six (6)
months from the end of the Exploration Year, and the period for performance to
drill the Exploration Well to a depth sufficient to satisfy the provisions of
Section 4.1 shall not be extended for more than ninety (90) days after the
commencement of actual
28
<PAGE>
drilling operations absent the written consent of the Ute Tribe and UDC to
extend such period of Force Majeure. Any Exploration Well drilled during an
-------------
extended period for performance resulting from a circumstance of Force Majeure,
-------------
subject to the limitations in this paragraph, shall be deemed an Exploration
Well drilled during the Exploration Year in which the event of Force Majeure
-------------
occurred.
8.2 Commencement of Drilling
------------------------
For purposes of this Article, actual drilling operations on an Exploration
Well shall be deemed to be commenced at such time as a spudding rig or drilling
rig begins actual drilling; provided, that in no event shall drilling be deemed
to have commenced if Company shall permit more than sixty (60) days to elapse
between the date on which a spudding rig is released and the date on which a
drilling rig capable of reaching the depth required under Section 4.1 of this
Agreement begins actual drilling of a well.
IX. SURRENDER AND RELINQUISHMENT
----------------------------
Company may, on approval of the Secretary, surrender any portion of the
Contract Premises subject to this Agreement from the provisions hereof by the
payment of the sum of $100.00 and all rentals, royalties and other obligations
then due; provided, that Company makes a showing to the Superintendent that full
provision has been made for conservation and protection of the surface and
mineral estates and the proper abandonment of all wells located on Contract
Premises to be surrendered. If the surrender of Contract Premises made by
Company pursuant to this
29
<PAGE>
Section is approved by the Secretary, the surrender shall be effective on the
date made without regard to the date of approval of the surrender.
X. BREACH CANCELLATION AND RIGHT TO CURE
-------------------------------------
10.1 Cancellation of Agreement Leases
--------------------------------
Failure of Company to comply with the regulations contained in 43 C.F.R.
Part 3160 with respect to operations conducted under any Agreement Lease shall
subject Company to the assessments and penalties set forth therein, but shall
not result in the cancellation of an Agreement Lease unless cancellation is the
appropriate remedy provided by the regulations in 43 C.F.R. Part 3160. Any
failure of Company to comply with these regulations shall not be deemed a breach
of this Agreement.
10.2 Cancellation of Agreement
-------------------------
If the Ute Tribe and the Superintendent shall deem any provisions of this
Agreement to be breached, the Ute Tribe and the Superintendent shall notify
Company in writing of the breach the Ute Tribe and the Superintendent believe to
exist. Company shall have sixty (60) days from receipt of such written notice to
cure or correct the alleged breach unless such other cure period is applicable
under other provisions of this Agreement or the breach cannot be correct within
sixty (60) days with reasonable diligence. If the breach cannot be corrected
within the sixty (60) day period, Company shall commence all reasonable and
necessary steps to correct the breach within the sixty (60) day period and shall
thereafter diligently pursue the matter until the breach has been corrected. If
the Ute Tribe and the
30
<PAGE>
Superintendent believe at the end of such sixty (60) day period that the alleged
breach has not been adequately corrected or that appropriate steps have not been
taken to correct the breach, then this Agreement shall be subject to
cancellation pursuant to the procedures contained at 25 C.F.R. (S)225.36. If
this Agreement is cancelled as a result of any such proceedings, all Agreement
Leases then in effect or earned shall remain in effect according to their terms.
XI. TAXATION
--------
During that period from the Effective Date hereof until expiration of this
Agreement and Agreement Leases issued pursuant hereto, the Ute Tribe hereby
agrees not to impose on Company's interest in the Contract Premises any taxes of
any sort or kind in addition to that severance tax established by the Ute Tribe
in Ordinance No. 88-07.
XII. PREFERENCE
----------
12.1 In connection with the performance of work done under this Agreement,
Company agrees:
(i) to actively recruit, train and employ members of the Ute Tribe with
the intent of maximizing employment and advancement opportunities for
members of the Ute Tribe;
(ii) with the intent of maximizing the number as such subcontracts awarded
to members of the Ute Tribe, to advertise all specifications for
subcontracts which exceed ten thousand dollars ($10,000.00) in amount
through one of the following methods: a) publication in a newspaper of
general circulation on the Reservation; b) publication [and] in the
Ute Bulletin or any successor tribal newspaper; or c) by posting a
notice at the same time as it posts notice of well permits to be
issued by the Superintendent; and
iii) with the intent of maximizing the amount of goods and services
purchased from members of the Ute Tribe, to advertise all requirements
for goods and services which
31
<PAGE>
exceed ten thousand dollars ($10,000.00) in amount in one of the
following methods: a) publication in a newspaper of general
circulation on the Reservation; b) publication in the Ute Bulletin, or
any successor tribal newspaper; or c) by posting a notice at the same
time as it posts notice of well permits to be issued by the
Superintendent.
Company further agrees to require all subcontractors engaged in the
performance of work under this Agreement to comply with the provisions of the
preceding paragraph.
12.2 Company shall permit the Ute Tribe to audit its records during
normal business hours to determine Company's compliance with the requirements of
this Article.
12.3 Company agrees and consents to the jurisdiction of the Ute Tribal
Court for the resolution of any dispute arising under this Article. If Company
is found to be in breach of this Article by the Ute Tribal Court, Company agrees
to pay to the Ute Tribe Scholarship Fund $1,000.00 as liquidated damages for
each violation and to reimburse the Ute Tribe for reasonable attorneys' fees and
costs associated with enforcement of this Article.
XIII. ENVIRONMENTAL REQUIREMENTS
--------------------------
Company is solely responsible for fulfilling any and all National
Environmental Policy Act requirements concerning the Contract Premises. The Ute
Tribe agrees to provide copies of existing Bureau of Land Management
environmental documents pertinent to the area for Company's use. Archaeological
activities of Company will include participation of the Ute Tribal Cultural
Resource Protection Program and, when warranted, the Tribal Preservation
Officer.
32
<PAGE>
XIV. MEMORANDUM OF AGREEMENT
-----------------------
Concurrent with the execution of this Agreement, the parties may execute a
short form memorandum of this Agreement to be placed of record in the Office of
the Register of Deeds of Uintah County, Utah. Costs of recording the Memorandum
of Agreement shall be borne by Company. In the event this Agreement is not
approved by the Secretary, the parties shall execute a Notice of Termination of
this Agreement which shall be recorded, at Company's expense, in Duchesne
County, Utah. Company agrees to record in Duchesne County, Utah, at its expense,
a release or releases of all Agreement Leases relinquished in whole or in part
under the provisions of this Agreement.
XV. ASSIGNMENT
----------
The rights and benefits granted and the obligations assumed pursuant to
this Agreement shall extend to and be binding upon the successors or assigns of
the parties hereto. Company agrees not to assign, sublet or transfer its rights
under this Agreement, or any leases which may be issued according to the
provision hereof, without the prior written consent of the Ute Tribe, the UDC
and the Superintendent. The Ute Tribe and the UDC agree that such consent will
not be unreasonably withheld.
XVI. TRUST STATUS OF THE CONTRACT PREMISES
-------------------------------------
Nothing contained in this Agreement shall operate to delay or prevent a
termination of federal trust responsibilities over the Contract Premises during
the term of this Agreement. However, termination of federal trust responsibility
shall not serve to abrogate this Agreement, or any Agreement Leases issued
pursuant
33
<PAGE>
to this Agreement. The Ute Tribe shall notify Company of any such change in the
status of the lands.
XVII. INDEMNIFICATION
---------------
Company, for itself and its successors, subrogees, assigns, representatives
and related or affiliated entities, covenants and agrees to indemnify and hold
harmless the Ute Tribe, the UDC and the United States for and from any and all
liabilities, rights, claims, demands, damages, costs, expenses, actions, causes
of action, suits or controversies of every kind and description whatsoever at
law or equity asserted by persons not parties to this Agreement which arise out
of Company's performance of this Agreement.
XVIII. NOTICES
-------
All Notices required to be given pursuant to this Agreement shall be sent
by certified mail, return receipt requested, with postage prepaid to the parties
at the following addresses:
Petroglyph Gas Partners, L.P.
P.O. Box 1839
Hutchinson, Kansas 67504-1839
Attn: Robert A. Christensen
Ute Indian Tribe of the Uintah and Ouray Reservation
P. O. Box 190
Fort Duchesne, UT 84026
Attn: Director, Energy and Minerals Dept.
Ute Distribution Corporation
P. O. Box 696
Roosevelt, UT 84066
Attn: Corporate President
Superintendent of the Uintah and Ouray Agency of the Bureau of Indian
Affairs
P.O. Box 130
Fort Duchesne, UT 84026
34
<PAGE>
Each party shall have the right to change the address to which notices required
under this Agreement are to be sent. However, no change of address shall become
effective until written notice of that change shall be given by the party
desiring the address change and the same has been received by the other party.
XIX. MISCELLANEOUS
-------------
19.1 Waiver
------
No waiver by either party of any one or more defaults by the other in the
performance of this Agreement shall operate or be construed as a waiver of any
future default or defaults, whether of a like or of a different nature.
19.2 Conflict
--------
If there is a conflict between the terms of this Agreement and an Agreement
Lease, the terms of this Agreement shall prevail.
19.3 Headings
--------
All headings used in this Agreement are inserted only for convenience and
ease of reference, and are not to be considered in the construction or
interpretation of any provision of this Agreement.
19.4 Regulatory Authority
--------------------
Company agrees to abide by and conform to 25 C.F.R., 30 C.F.R. and 43
C.F.R., and any and all other regulations and manuals of the Secretary now or
hereafter in force relative to oil and gas leases.
35
<PAGE>
19.5 Modification of Agreement
-------------------------
No provision of this Agreement may be changed, modified, assigned, waived
or discharged orally, unless approved by the parties hereto and no change,
modification, assignment, waiver or amendment of any provision will be effective
except by written instrument executed by said parties.
WHEREFORE, the Ute Tribe, the UDC and Company do hereby make and enter into
this Agreement on the dates below appearing, to be effective as of the Effective
Date as defined in Section 1.5.
36
<PAGE>
ATTEST: UTE INDIAN TRIBE
/s/ Dana West By: /s/ Ruby Atwine
- --------------------------- ---------------------------
Name: Dana West Name: Ruby Atwine
Date: 10/3/96 Title: Chairman
Date: 10/3/96
ATTEST: UTE DISTRIBUTION CORPORATION
By: /s/ Lois LaRose
- --------------------------- ---------------------------
Name: Name: Lois LaRose
Date: Title: President
Date: 10-30-96
ATTEST: PETROGLYPH GAS PARTNERS, L.P.
by Petroglyph Energy, Inc.,
general partner
/s/ Robert A. Christensen By: /s/ Robert C. Murdock
- --------------------------- ---------------------------
Name: ROBERT A. CHRISTENSEN, Secy Name: ROBERT C. MURDOCK
Date: August 28, 1996 Title: PRESIDENT
Date: August 28, 1996
It has been determined that approval of this document is not such a
major federal action significantly affecting the quality of the human
environment as to require the preparation of an environmental impact statement
under Section 102(2)(c) of the National Environmental Policy Act of 1969 (42
U.S.C. 4332(s)(c); AND Environmental Assessment of Oil and Gas Development,
---------------------------------------------------
Duchesne River Area; Environmental Assessment No. 3, Bureau of Land Management.
Vernal District, Vernal, Utah: prepared April, 1982.
APPROVED Bureau of Indian Affairs, Uintah and Ouray Agency, under
authority delegated to the Superintendent by Phoenix Area Redelegation Order No.
3, Amendment 6, Section 2.17, Part 2 (34 F.R.; 11108).
Date: 12/11/96 /s/ [SIGNATURE APPEARS HERE]
--------------- ----------------------------
Superintendent
37
<PAGE>
EXHIBIT A
Township 4 South, Range 2 East, USM
- -----------------------------------
Section 13: E/2NE, NESE, Lots 4, 5,, 8, & 9
Section 14: Lots 3, 4, 5, 6, E/2SW, SENW & SWSE
Section 15: NE/4
Section 23: W/2NE, SENE, W/2, Lots 6 & 11 (W/2SE)
Section 24: ScNW
Section 26: N/2 (less mining claim)
Section 35: S/2 (less mining claim)
Section 36: All (less mining claim)
Township 4 South, Range 3 East, USM
- -----------------------------------
Section 6: All Section 20: All (less mining claim)
Section 7: All Section 29: Lots 3 & 4
Section 17: All Section 30: E/2E/2, Lots 13 & 14
Section 18: All Section 28: All
Section 19: All Section 29: S/2
Section 31: All Section 33: All
Section 32: All
Township 5 South, Range 2 East, USM
- -----------------------------------
Section 1: Lots 2, 5, 6, 7, 8 & 9
Section 2: N/2, Lot 6 (less mining claim)
Section 3: All
Section 10: All
Section 11: Lots 3, 4, 5, 6, 7, 9, 10 & 11
Section 12: Lots 1, 2, 3 & 4
Section 14: All
Section 15: All
Section 22: All
Section 23: All
Township 5 South, Range 3 East, USM
- -----------------------------------
Section 5: Lots 4 & 5
Section 6: Lots 1 & 2, S/2NE, N/2SE
Section 7: Lots 5, 9, 10 & 11
Section 8: Lots 2, 3 & 4
TOTALING - 9,851 acres more-or-less
38
<PAGE>
Exhibit 10.14
ANTELOPE CREEK UNIT PARTICIPATION AGREEMENT
-------------------------------------------
This Unit Participation Agreement (hereinafter "Agreement") is effective as
of the 1st day of June, 1996, ("Effective Date") among PETROGLYPH GAS PARTNERS,
L.P., a Delaware limited partnership (hereinafter referred to as "PGP"),
CoENERGY ENHANCED PRODUCTION, INC., a Michigan corporation (hereinafter referred
to as "CEPI"), and PETROGLYPH OPERATING COMPANY, INC., a Kansas corporation
("POCI").
WHEREAS, PGP and CEPI each own an undivided fifty percent (50%) interest in
and to certain oil and gas properties known as the "Antelope Creek Field," as
more particularly set forth in Exhibit "A" attached hereto, together with
related oil and gas sales contracts, dedicated acreage, easements, rights-of-
way, attendant equipment, and all other incidents associated therewith, and an
undivided fifty percent (50%) interest in and to that certain gas gathering
system consisting of the rights-of-way and easements set forth in Exhibit "B"
attached hereto, together with like interests in and to all related contracts,
easements, rights-of-way, attendant equipment, and all other incidents
associated therewith, and other assets (hereinafter referred to as the
"Gathering System") (the Antelope Creek Field and the Gathering System are
hereinafter referred to collectively as the "Antelope Creek Assets");
WHEREAS, POCI is operator of the oil and gas leases comprising the Antelope
Creek Field pursuant to a Unit Operating Agreement of even date herewith by and
among PGP and CEPI, as Nonoperators, and POCI, as Operator (hereinafter referred
to as the "Operating Agreement"), and that certain Cooperative Plan of
Development and Operation for the Antelope Creek Enhanced Recovery Project,
Duchesne County, Utah dated February 17, 1994, by and among Petroglyph Operating
Company, Inc., Inland Resources Inc., Petroglyph Gas Partners, L.P., Ute Indian
Tribe, and Ute Distribution Corporation, as approved by the Bureau of Indian
Affairs (the "Cooperative Plan"); and
WHEREAS, the parties wish to enter into this Agreement governing the
contribution of project costs to the development of the Antelope Creek Field and
related matters;
NOW, THEREFORE, in consideration of the covenants and promises contained
herein, the parties hereby agree as follows:
1. Contribution of Project Costs. Subject to section 4 below, PGP and
-----------------------------
CEPI hereby agree to jointly (but not severally) contribute the amount of Twenty
Million Five Hundred Ninety-Three Thousand Dollars ($20,593,000) to the
development of the Antelope Creek Field, such amount to be contributed seventy-
five percent
<PAGE>
(75%) by CEPI and twenty-five percent (25%) by PGP. The parties anticipate that
such amount will fund the drilling of approximately fifty (50) wells and related
project infrastructure in the Antelope Creek Field.
2. Net Profits Interest. CEPI has purchased an undivided twenty-five
--------------------
percent (25%) interest in and to the "Net Proceeds" (as defined in section 14
below) from the sale of production from the Antelope Creek Field until such time
as CEPI has received the Net Proceeds from the sale of Sixty-Seven Thousand
Three Hundred Eighty-Nine (67,389) barrels of oil equivalent ("BOE")
(hereinafter referred to as the "Net Profits Interest"), such Net Profits
Interest to be paid out of PGP's fifty percent (50%) interest in and to the
Antelope Creek Field. CEPI shall be entitled to receive seventy-five percent
(75%) of the Net Proceeds from the sale of oil and gas produced from the
Antelope Creek Field for the period from the Effective Date through the
termination of the Net Profits Interest. From and after termination of the Net
Profits Interest, CEPI shall be entitled to fifty percent (50%) of the Net
Proceeds, except as otherwise provided in sections 5, 7, 9, and 10 below.
For purposes of this section 2, six (6) MMBtus of gas shall equal one (1) BOE.
3. Initial Development Plans. On or before Closing, POCI shall submit to
-------------------------
PGP and CEPI a plan for the development of the Antelope Creek Field from Closing
to December 31, 1996 (the "Initial Plan"). On or before October 31, 1996, POCI
shall submit to PGP and CEPI a plan for the development of the Antelope Creek
Field from January 1, 1997, through such date as the parties will have jointly
contributed Twenty Million Five Hundred Ninety-Three Thousand Dollars
($20,593,000) in project costs to the development of the Antelope Creek Field,
as provided in section 1 above (the "Secondary Plan"). POCI shall consult with
CEPI and PGP in formulating the Initial Plan and Secondary Plan. POCI shall, at
least thirty (30) days before the end of each month, submit to PGP and CEPI an
estimate of expenses to be incurred during the following month in carrying out
the Initial Plan and the Secondary Plan. PGP and CEPI shall pay their
respective shares of such expenses to POCI by the first day of the month in
which the expenses are to be incurred.
4. Project Reviews. With respect to each well drilled pursuant to this
---------------
Agreement, POCI shall furnish to CEPI and PGP as soon as is practicable after
such information has been obtained by POCI, all information necessary for
calculation of the "(Phi)h", "BOPD", and "Producer Percentage" (as those terms
are defined in this section). As soon as is practicable after completion of the
fifteenth (15th), thirtieth (30th), and forty-fifth (45th) wells pursuant to the
development plans prepared pursuant to the provisions of section 3 above, POCI
shall calculate and furnish to CEPI and PGP (a) the "average net porosity feet
of pay" per well
- 2 -
<PAGE>
("(Phi)h"), (b) the average barrels of oil produced per day per completed
producing oil well ("BOPD"), and (c) the percentage of wells drilled
successfully as completed producers or injection wells ("Producer Percentage")
for all wells drilled and completed pursuant to this Agreement. The calculations
shall be made according to the equations set forth on Exhibit "C" attached
hereto. For purposes of determining the BOPD, the first thirty (30) days after
first production for each well will be excluded. In the event the (Phi)h is at
least 7.5, the BOPD is at least 31.33, and the Producer Percentage is at least
93.33% at the time of each calculation provided for in this section, CEPI and
PGP shall be obligated to continue contributing their respective shares of
project costs as provided in section 1 above; provided, that in no event shall
CEPI and PGP be required to contribute an amount in excess of their respective
portions of the Twenty Million Five Hundred Ninety-Three Thousand Dollars
($20,593,000) in project costs anticipated hereunder. In the event any of the
following is true at the time of each calculation: (a) the (Phi)h is less than
7.5; or (b) the BOPD is less than 31.33; or (c) the Producer Percentage is less
than 93.33%; then CEPI shall have the right to elect not to participate in the
further development of the Antelope Creek Field. In the event CEPI so elects not
to participate in further development, CEPI's interest in the Antelope Creek
Assets shall terminate pursuant to the provisions of section 10 below.
5. Non-Funding of Initial Development. In the event that either party
----------------------------------
(the "Non-Funding Party") fails or refuses to pay its respective share o
expenses as required under the provisions of sections 3 and 4 above (such
failure or refusal to pay being referred to in this section 5 as "Nonpayment"),
POCI shall notify the Non-Funding Party in writing of its Nonpayment and the
acts necessary to cure such Nonpayment, and the Non-Funding Party shall have ten
(10) business days to cure such Nonpayment. If the Non-Funding Party fails to
cure such Nonpayment within such period, the Non-Funding Party shall be deemed
to have relinquished to the other party (the "Funding Party"), and the Funding
Party shall own and be entitled to receive, all of such Non-Funding Party's
interests to the production and proceeds of production in and from the Antelope
Creek Field, until the proceeds from the sale of such production (after
deducting production taxes, excise taxes, royalty, overriding royalty, and other
interests payable out of or measured by the production accruing to the Non-
Funding Party's interest until it reverts (except interests which burden only
Non-Funding Party's interest)) shall equal the total of the following:
a. One hundred percent (100%) of such Non-Funding Party's share of
the cost of any of the following acquired after Nonpayment: surface
equipment beyond the wellhead connection (including, but not limited to,
stock tanks, separators, treaters, wellhead pumping equipment, dehydrating
equipment, heaters), plus one hundred percent (100%) of such
- 3 -
<PAGE>
Non-Funding Party's share of the cost of operation of new wells drilled
after Nonpayment commencing with the first operations and continuing until
such Non-Funding Party's relinquished interest shall revert to it
hereunder, plus one hundred percent (100%) of the share of costs allocated
to the wells drilled after Nonpayment of both operating and constructing
and equipping any facility beyond the wellhead which is for the common
benefit of some or all of the lands and production from the Antelope Creek
Field. It is agreed that Non-Funding Party's share of such costs and
equipment will be that which would have been chargeable to it had
Nonpayment not occurred; and
b. Five hundred percent (500%) of that portion of the costs and
expenses of drilling, reworking, deepening, plugging back, testing, and
completing of wells for either production, water source, or injection
purposes, and five hundred percent (500%) of any portion of the cost of
equipment in the wells (to and including wellhead connections), water
injection equipment, piping, compression equipment, pipelines, gathering
systems, or other facilities necessary to the production and/or marketing
of oil and/or gas, acquired after Nonpayment, which would have been
chargeable to such Non-Funding Party had Nonpayment not occurred.
During the period of time a Funding Party is entitled to receive a Non-
Funding Party's share of production or the proceeds therefrom, the Funding Party
shall be responsible for the payment of all production, severance, excise,
gathering, and other taxes, and all royalty, overriding royalty, and other
burdens applicable to the Non-Funding Party's share of production, except
interests that burden only Non-Funding Party's interest. Both the Non-Funding
Party and the Funding Party hereby authorize POCI to collect or receive Non-
Funding Party's share of production from the Antelope Creek Field or the
proceeds therefrom directly from the purchaser and to disburse said proceeds to
the Funding Party.
With respect to operations concerning wells already in existence at the
time of Nonpayment, Funding Party shall be permitted to use, free of cost, all
casing, tubing, and other equipment, but the ownership of all such property
shall remain unchanged; and upon the abandonment of any such well, the Funding
Party shall account for all such property to the owners thereof, with each party
receiving its proportionate part in kind or in value, less cost of salvage.
During the period of time that a Non-Funding Party's share of production
from the Antelope Creek Field or the proceeds therefrom is subject to recoupment
of Non-Funding Party's share of costs, Funding Party shall be free to alter,
amend, or otherwise change the development plan to meet and/or address any newly
acquired
- 4 -
<PAGE>
information, whether geologic, engineering, or otherwise, directly affecting the
leases and lands covered by such development plan, to the extent necessary for
POCI to operate the Antelope Creek Field in accordance with the reasonably
prudent operator standard.
POCI shall within a reasonable time after the expenditure of funds or
acquisition of equipment, furnish Non-Funding Party with an inventory of
equipment in and connected to wells drilled after Nonpayment, together with any
new or additional equipment placed on or in wells in existence prior to
Nonpayment, and an itemized statement of all costs chargeable to Non-Funding
Party's interest. Each month thereafter, during the time Funding Party is being
reimbursed as provided above, POCI shall furnish Non-Funding Party with an
itemized statement of all costs and liabilities incurred in the operation of the
Antelope Creek Field, together with a statement of the quantities of oil and gas
produced therefrom and the amount of proceeds realized from the sale of such
production during the proceeding month.
If and when the Funding Party recovers from Non-Funding Party's
relinquished interest the amount provided for above, the relinquished interest
shall automatically revert to Non-Funding Party and, from and after such
reversion, Non-Funding Party shall own the same interest in the Antelope Creek
Field, including new wells drilled after Nonpayment, and the production
therefrom, as Non-Funding Party would have been entitled to had Nonpayment not
occurred. Thereafter, Non-Funding Party shall be charged with and shall pay its
proportionate part of the further cost of operation of the Antelope Creek Field,
including wells drilled after Nonpayment. Notwithstanding any other provision
in this Agreement to the contrary, the parties agree that a Non-Funding Party
shall have the right, at any time prior to the recoupment of the sums provided
for herein, to pay in cash to Funding Party the balance of the sums then due the
Funding Party under the terms of this section 5, including the amounts set
forth in paragraphs "a" and "b" above, to afford full recoupment of such Non-
Funding Party's share of costs and expenses. If such payment is made, Non-
Funding Party shall then be entitled to its rights in the Antelope Creek Field
in the same fashion as though Nonpayment had not occurred.
In the event that CEPI is the Non-Funding Party, PGP shall have the option
of terminating CEPI's interest in the Antelope Creek Assets pursuant to the
provisions of section 10 below rather than recovering CEPI's share of project
costs pursuant to the provisions of this section. PGP shall make such election
within thirty (30) days from the determination that CEPI is a Non-Funding Party
hereunder.
6. Termination of Interest. In the event CEPI ceases contributing its
-----------------------
share of project costs before it has contributed a total of Fifteen Million Four
Hundred Forty-Four Thousand Seven
- 5 -
<PAGE>
Hundred Fifty Dollars ($15,444,750), CEPI's interest in the Antelope Creek
Assets shall terminate pursuant to the provisions of section 10 below. PGP
shall have the option of treating CEPI as a Non-Funding Party and recovering the
balance of CEPI's share of project costs pursuant to the provisions of section
5 above rather than terminating CEPI's interest as provided in this section;
provided, however, that such option shall not apply if CEPI ceases contributing
- -----------------
its share of project costs pursuant to the provisions of section 4 above.
7. Development After Completion of Initial Development. At least sixty
---------------------------------------------------
(60) days prior to completion of the Secondary Plan, POCI shall submit a plan
for the proposed development of the Antelope Creek Field during the six (6)
months following completion of the Secondary Plan to CEPI and PGP for approval.
Subsequent six (6) month plans shall be submitted to CEPI and PGP by POCI, with
each plan to be submitted at least sixty (60) days prior to completion of the
previous plan. POCI shall consult with both CEPI and PGP in formulating each
development plan. CEPI and PGP shall each be entitled to submit a development
plan in the manner set forth in this section. In no event shall a plan
submitted pursuant to this section provide for the drilling of more than thirty
(30) wells during the six (6) month period covered by the plan. Each plan will
include the estimated costs to be incurred during the period covered by the
plan. CEPI and PGP shall, within thirty (30) days after receipt of each
development plan, each give written notice of its intent to participate in the
development contemplated by the plan. The failure to give such notice of intent
to participate shall be deemed an election not to participate. In the event a
party elects not to participate in a proposed development plan (the "Non-
Consenting Party"), POCI shall advise the party electing to participate (the
"Consenting Party"), and the Consenting Party shall have the right, but not the
obligation, to go forward with the proposed development. In the event there are
more than two owners of the leases comprising the Antelope Creek Field, the
Consenting Parties shall carry their proportionate part on a working interest
basis of any Non-Consenting Party's interest.
In the event the Consenting Party desires to proceed with the proposed
development, the entire cost and risk of conducting operations pursuant thereto
shall be borne by the Consenting Party. The Non-Consenting party shall be
deemed to have relinquished to the Consenting Party, and the Consenting Party
shall own and be entitled to receive all of the Non-Consenting party's interests
in the Antelope Creek Field and share of production therefrom, until the
proceeds of the sale of such production (after deducting production taxes,
excise taxes, royalty, overriding royalty, and other interests payable out of or
measured by the production accruing to the Non-Consenting Party's interest until
it reverts (except interests which burden only Non-Consenting Party's interest))
shall equal the total of the following:
- 6 -
<PAGE>
a. One hundred percent (100%) of such Non-Consenting Party's share of the
cost of any newly acquired surface equipment beyond the wellhead connection
(including, but not limited to, stock tanks, separators, treaters, wellhead
pumping equipment, dehydrating equipment, heaters, ), plus one hundred
percent (100%) of such Non-Consenting Party's share of the cost of
operation of the new wells drilled pursuant to the development plan
commencing with the first operations and continuing until such Non-
Consenting Party's relinquished interest shall revert to it hereunder, plus
one hundred percent (100%) of the share of costs allocated to the new wells
of both operating and constructing and equipping any facility beyond the
wellhead which is for the common benefit of some or all of the lands and
production from the Antelope Creek Field. It is agreed that Non-Consenting
Party's share of such costs and equipment will be that which would have
been chargeable to it had it participated in the development plan; and
b. Three hundred percent (300%) of that portion of the costs and
expenses of drilling, reworking, deepening, plugging back, testing, and
completing of wells for either production, water source, or injection
purposes, and three hundred percent (300%) of any portion of the cost of
newly acquired equipment in the wells (to and including wellhead
connections), water injection equipment, piping, compression equipment,
pipelines, gathering systems, or other facilities necessary to the
production and/or marketing of oil and/or gas, which would have been
chargeable to such Non-Consenting Party if it had participated in the
development plan.
During the period of time a Consenting Party is entitled to receive a Non-
Consenting Party's share of production or the proceeds therefrom, the Consenting
Party shall be responsible for the payment of all production, severance, excise,
gathering, and other taxes, and all royalty, overriding royalty, and other
burdens applicable to the Non-Consenting Party's share of production, except
interests that burden only Non-Consenting Party's interest. Both the Non-
Consenting Party and the Consenting Party hereby authorize POCI to collect or
receive Non-Consenting Party's share of production from the Antelope Creek Field
or the proceeds therefrom directly from the purchaser and to disburse said
proceeds to the Consenting Party.
With respect to operations concerning wells already in existence at the
time a Non-Consenting Party elected not to participate in a development plan,
Consenting Party shall be permitted to use, free of cost, all casing, tubing,
and other equipment, but the ownership of all such property shall remain
unchanged; and upon the abandonment of any such well, the Consenting Party shall
account for all such property to the owners
- 7 -
<PAGE>
thereof, with each party receiving its proportionate part in kind or in value,
less cost of salvage.
During the period of time that a Non-Consenting Party's share of production
from the Antelope Creek Field or the proceeds therefrom is subject to recoupment
of Non-Consenting Party's share of costs incurred under a development plan,
Consenting Party shall be free to alter, amend, or otherwise change the
development plan to meet and/or address any newly acquired information, whether
geologic, engineering, or otherwise, directly affecting the leases and lands
covered by such development plan, to the extent necessary for POCI to operate
the Antelope Creek Field in accordance with the reasonably prudent operator
standard.
Within sixty (60) days after the completion of a development plan, POCI
shall furnish Non-Consenting Party with an inventory of the equipment in and
connected to the newly created wells, together with any new or additional
equipment placed on or in wells in existence prior to the commencement of the
development plan, and an itemized statement of all costs chargeable to Non-
Consenting Party's interest. Each month thereafter, during the time Consenting
Party is being reimbursed as provided above, POCI shall furnish Non-Consenting
Party with an itemized statement of all costs and liabilities incurred in the
operation of the Antelope Creek Field, together with a statement of the
quantities of oil and gas produced therefrom and the amount of proceeds realized
from the sale of such production during the proceeding month.
If and when the Consenting Party recovers from Non-Consenting Party's
relinquished interest the amount provided for above, the relinquished interest
shall automatically revert to Non-Consenting Party and, from and after such
reversion, Non-Consenting Party shall own the same interest in the Antelope
Creek Field, including new wells drilled pursuant to the development plan, and
the production therefrom, as Non-Consenting Party would have been entitled to
had it participated in the development plan. Thereafter, Non-Consenting Party
shall be charged with and shall pay its proportionate part of the further cost
of operation of the Antelope Creek Field, including new wells drilled pursuant
to the development plan. Notwithstanding any other provision in this Agreement
to the contrary, the parties agree that a Non-Consenting Party shall have the
right, at any time prior to the recoupment of the sums provided for herein, to
pay in cash to Consenting Party the balance of the sums then due the Consenting
Party under the terms of this section 7, including the amounts set forth in
paragraphs "a" and "b" above, to afford full recoupment of such Non-Consenting
Party's share of costs and expenses. If such payment is made, Non-Consenting
Party shall then be entitled to its rights in the Antelope Creek Field in the
same fashion as though it had participated in the development plan.
- 8 -
<PAGE>
8. Operating Overhead Rates. The parties agree that, in connection
------------------------
with the formulation of each six-month plan of development prepared pursuant to
the provisions of section 7 above, PGP, CEPI, and POCI will negotiate in good
faith concerning the adjustment of the "Drilling Well Rate" and "Producing Well
Rate" set forth in section III.1.A of Exhibit 2 ("Accounting Procedure") to the
Operating Agreement; provided, however, that no adjustment to the Drilling Well
Rate and Producing Well Rate shall be made until sixty (60) wells have been
drilled under the Operating Agreement since the prior adjustment of such rates
(or, in the case of the first adjustment, since the Effective Date). The parties
anticipate that such adjustments shall result in the adjustment of the Drilling
Well Rate and Producing Well Rate no higher than the rates shown in following
table:
<TABLE>
<CAPTION>
No. Wells Drilled Drilling Well Rate Producing Well Rate
- --------------------- ------------------ -------------------
<S> <C> <C>
1 - 120 $5,000 $500
121 - 180 $4,500 $450
181 - 240 $4,250 $425
241 - 300 $4,000 $400
</TABLE>
provided, however, that such adjustments shall take into account the actual
- -----------------
operating costs, including overhead expenses, incurred by POCI, and that in no
event shall the Drilling Well Rate and Producing Well Rate be lowered to amounts
that would cause POCI to operate at a loss.
9. Back-In After Payout. At such time as CEPI has received Net Proceeds
--------------------
equal to its cumulative total project capital expenditures contributed pursuant
to the provisions of this Agreement, CEPI shall execute and deliver to PGP an
assignment of an undivided eight percent (8%) interest in and to the Antelope
Creek Assets, after which, assuming no further change in ownership, PGP shall
own fifty-eight percent (58%) and CEPI shall own forty-two percent (42%) of the
working interest in and to the Antelope Creek Assets.
10. Termination of CEPI's Interest. In the event CEPI's interest in the
------------------------------
Antelope Creek Assets terminates pursuant to the provisions of sections 4, 5
or 6 above, any and all interests in the Antelope Creek Assets previously
assigned to CEPI, including the Net Profits Interest, shall immediately be
reassigned by CEPI to PGP. In the event CEPI's interest in the Antelope Creek
Assets terminates, CEPI shall reassign to PGP all of its interests in the
Antelope Creek Assets, and PGP shall grant to CEPI, and CEPI shall be entitled
to receive, the "Termination Net Profits Interest." The "Termination Net
Profits Interest" shall be an interest in the
- 9 -
<PAGE>
production of the Antelope Creek Assets equal to a percentage of Net Proceeds
determined by the following formula:
$7,305,250 + total capital
expenditures contributed x 50%
by CEPI
--------------------------
$22,750,000
Such Termination Net Profits Interest shall be effective from the date CEPI's
interest in the Antelope Creek Assets ceases, and shall terminate at such time,
if ever, that CEPI has received all amounts previously contributed to the
Antelope Creek Assets, less the Net Proceeds received by CEPI from the Effective
Date through the date CEPI's interest in the Antelope Creek Assets ceased. PGP
shall assign to CEPI the Termination Net Profits Interest pursuant to an
assignment in the form attached hereto as Exhibit "D".
11. Operating Agreement. The Operating Agreement, a copy of which is
-------------------
attached hereto as Exhibit "E", shall govern operation of the oil and gas leases
comprising the Antelope Creek Field; provided, however, that in the event of any
conflict between a provision of the Operating Agreement and a provision of this
Agreement, this Agreement shall control.
12. Duchesne Field. PGP agrees that, in the event it intends to proceed
--------------
with the development of certain oil and gas leases owned by PGP and located in
Township 4 South, Range 4 West, Duchesne County, Utah, which leases are referred
to as the "Duchesne Field," PGP shall negotiate in good faith with CEPI for the
sale of an interest in the Duchesne Field to CEPI.
13. Area of Mutual Interest. PGP and CEPI 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 non-producing, farmouts or other
similar contracts which affect lands and minerals, located within the area
described on Exhibit "F" hereto ("Mineral Interest"), it shall notify the other
party (the "Non-Acquiring Party") of such acquisition. The notice shall include
a copy of all instruments of acquisition, including without limitation, copies
of leases, abstracts, agreements, title memos, assignments, subleases, farmouts
and other contracts affecting the Mineral Interest. The Acquiring Party shall
also enclose an itemized statement of the actual cost and expenses incurred by
the Acquiring Party in acquiring such Mineral Interest, excluding, however,
costs and expenses of its own personnel ("acquisition costs"). For thirty (30)
days after receipt of the notice of acquisition, Non-Acquiring Party shall have
the right to acquire its proportionate interest in the acquisition, by notifying
Acquiring party of its desire to share in the acquisition, and paying to the
Acquiring Party its proportionate share of the cost of acquisition, or in the
case of a farmout or other similar
- 10 -
<PAGE>
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. If the Mineral Interest covers lands both within and outside of the
area of mutual interest, the Non-Acquiring Party's option to acquire an interest
therein shall extend only to those lands within the area of mutual interest.
For purposes of this section, "affiliate" shall mean, with respect to each party
hereto, an individual or entity that, directly or indirectly, through one or
more intermediaries, controls, or is controlled by, or is under common control
with such party. With respect to PGP, it shall include, without limitation,
POCI and Petroglyph Energy, Inc. With respect to CEPI, however, it shall not
include any affiliate that is a public utility.
14. Net Proceeds. As used in this Agreement, "Net Proceeds" shall mean
------------
gross proceeds from the sale of production from the Antelope Creek Field
(excluding any proceeds received pursuant to sections 5.a, 5.b, 7.a, and
7.b) less (a) royalties and overriding royalty interests payable therefrom,
except interests that burden only one party's working interest, (b) operating
expenses, (c) severance and like taxes arising from such production, and (d)
other costs and expenses related to the operation and maintenance of the
Antelope Creek Assets customarily incurred in the operation and maintenance of
oil and gas properties, excluding capital expenditures.
15. Relationship of Parties. PGP and CEPI acknowledge and agree that
-----------------------
their legal relationship to each other is one of tenants in common or undivided
interest owners, and not one of partnership; that the liabilities of the parties
shall be several and not joint or collective; and that each party shall be
solely responsible for its obligations. The parties agree, however, to be taxed
as a partnership pursuant to the provisions of Exhibit "G" attached hereto.
16. Miscellaneous Provisions.
------------------------
a. 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.
b. Governing Laws. The laws of the State of Utah shall govern this
--------------
Agreement in proceedings in court (law and/or equity) and proceedings in
arbitration.
c. Waiver. Any party's failure or delay in protesting, taking legal
------
action, or demanding arbitration upon the other
- 11 -
<PAGE>
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.
d. Titles of Articles, Sections and Subsections. The titles and
--------------------------------------------
subtitles of Articles, Section and Subsections of this 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.
e. Notices. Any and all written notices hereunder shall be delivered
-------
in person or via registered mail, return receipt requested, postage
prepaid, to the following individuals at the following address:
PGP: PETROGLYPH ENERGY, INC.
Attn: Robert C. Murdock
6209 North Highway 61
P. O. Box 1839
Hutchinson, KS 67504-1839
FAX: 316-665-8577
CEPI: CoENERGY ENHANCED PRODUCTION, INC.
Attn: Manouch Daneshvar
150 W Jefferson Avenue, Suite 1900
Detroit, MI 48226
FAX: 313-963-3778
Such agents and/or addresses may be unilaterally altered by either party
upon providing written notice thereof to the other party.
f. Triplicate Originals. This Agreement shall be executed in
--------------------
triplicate originals, with CEPI, PGP, and POCI each receiving an original.
g. 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.
- 12 -
<PAGE>
h. 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.
i. Assignment. This Agreement may not be assigned by either PGP or
----------
CEPI without the written consent of the other, which consent shall not be
unreasonably withheld, until PGP and CEPI have contributed their required
shares of project costs to the development of the Antelope Creek Field
pursuant to the provisions of section 1 above. After PGP and CEPI have
contributed such required shares of project costs to the development of the
Antelope Creek Field pursuant to the provisions of section 1 above, this
Agreement may be assigned by either party without the other's written
consent; provided, however that the assignee of any party shall be bound by
all terms and provisions of this Agreement and the Operating Agreement.
This Agreement shall be binding on the parties hereto and their respective
successors and assigns.
j. 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.
k. 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.
l. 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.
m. Arbitration. All claims, counterclaims, disputes, and other
-----------
matters in question arising out of or relating to this Agreement or the
breach hereof, or any transactions contemplated hereby, will be decided by
arbitration in accordance with the Rules of the American Arbitration
Association then in effect. This agreement to arbitrate will
- 13 -
<PAGE>
be specifically enforceable under the prevailing laws of any court having
jurisdiction.
Notice of Demand for Arbitration must be filed in writing with the
other party to this Agreement and with the American Arbitration Association
within a reasonable time after the claim, dispute, or other matter in
question has arisen. In no event may the Demand for Arbitration be made
after the time when institution of legal or equitable proceedings based on
such claim, dispute, or other matter in question would be barred by the
applicable statute of limitations.
Within thirty (30) days of the filing of Notice of Demand for
Arbitration, the parties shall jointly select a single arbitrator to hear
any dispute arising under this Agreement. If the parties are unable to
agree on an arbitrator, the arbitrator shall be appointed by the Senior
Judge for the Federal District Court for the District of Utah.
All arbitration proceedings shall be had in the city of Salt Lake
City, Utah. In all proceedings under this Agreement, the arbitrator shall
be bound by the Federal Rules of Evidence in effect at the time of
arbitration. Any award of the arbitrator shall be in writing and shall
state the findings of fact, the conclusions of law, and the reasons for the
award. A decision of the arbitrator shall be binding.
The costs of any proceeding shall be shared equally by the parties.
Each party shall otherwise bear its own costs, including without limitation
any attorneys' fees.
IN WITNESS WHEREOF, the parties have executed this Agreement this 26 day
of June, 1996, but effective as of the 1st day of June, 1996.
PGP: PETROGLYPH GAS PARTNERS, L. P.
By: PETROGLYPH ENERGY, INC.
its general partner
By /s/ Robert C. Murdock
---------------------------------
Name: Robert C. Murdock
Title: President
CEPI: CoENERGY ENHANCED PRODUCTION, INC.
By /s/ P. E. Doohan
---------------------------------
Name: P. E. Doohan
Title: Attorney-in-Fact
POCI: PETROGLYPH OPERATING COMPANY, INC.
By /s/ Robert A. Christensen
---------------------------------
Name: Robert A. Christensen
Title: Vice-President
- 14 -
<PAGE>
Exhibit 10.15
-------------
ANTELOPE CREEK UNIT OPERATING AGREEMENT
---------------------------------------
THIS AGREEMENT is entered into as of the 1st day of June, 1996, by and
among PETROGLYPH GAS PARTNERS, L.P., a Delaware limited partnership, CoENERGY
ENHANCED PRODUCTION, INC., a Michigan corporation, and PETROGLYPH OPERATING
COMPANY, INC., a Kansas corporation.
WHEREAS, the Parties or their predecessors in interest have entered into
that certain Cooperative Plan of Development and Operation for the Antelope
Creek Enhanced Recovery Project, Duchesne County, Utah dated February 17, 1994
(the "Unit Agreement"), by and among Petroglyph Gas Partners, L.P., Inland
Resources Inc., Petroglyph Operating Company, Inc., Ute Indian Tribe ("the
Tribe"), and Ute Distribution Corporation ("UDC"), as approved by the Bureau of
Indian Affairs, governing the development and operation of the lands described
on Exhibit 1 attached hereto, which lands are hereinafter referred to as the
"Unit Area"; and
WHEREAS, the Parties desire to enter into this agreement pertaining to the
operation of the Unit Area.
NOW, THEREFORE, in consideration of the mutual agreements herein set forth,
it is agreed as follows:
ARTICLE 1
DEFINITIONS
1.1 Other Defined Terms. The definitions contained in Exhibit 1.1
attached hereto are adopted for purposes of this agreement.
1.2 "Unit Operator" means Petroglyph Operating Company, Inc. and its
successors, acting in that capacity and not as a Working Interest owner.
1.3 "Party" means a party to this agreement, including the Party acting as
Unit Operator when acting as a Working Interest owner.
1.4 "Costs" means all costs and expenses incurred in the development and
operation of the Unit Area pursuant to this agreement or the Unit Agreement and
all other expenses that are herein made chargeable as Costs, determined in
accordance with the accounting procedure set forth in Exhibit 2 attached hereto,
which shall govern in all matters covered thereby, except that in the event of
inconsistency between said accounting procedure and this agreement, this
agreement shall control.
1.5 "Committed Working Interest" means a Working Interest which is shown
on Exhibit 1.5 attached hereto as owned by a Party and which is committed to the
Unit Agreement.
1.6 "Participating Interest" of a Party means the proportion (expressed as
a percentage) that the acreage of its Committed Working Interest or Interests
bears to the total acreage of all the Committed Working Interests of the
Parties; for the purposes of this definition (a) the acreage of the Working
Interest in a tract within the Unit Area shall be the acreage of such tract as
set forth in Exhibit 1.5 attached hereto and (b) if the Working Interest in a
tract is owned by two or more owners, the acreage of such tract shall be
apportioned among them in proportion to their respective Working Interests
therein.
1.7 "Beneficial Interest" of a Party means the proportion (expressed as a
percentage) that the net acreage of its Committed Working Interest or Interests
bears to the total net acreage
<PAGE>
of all the Committed Working Interests of the Parties; for the purposes of this
definition the net acreage of the Committed Working Interest owned by a Party in
a tract shall be calculated by multiplying the acreage of such tract by the
percentage of the oil and gas which, if produced from such tract in the absence
of the Unit Agreement and this agreement, would accrue to such Committed Working
Interest after deducting all Lease Burdens.
1.8 "Lease Burdens" means the royalty reserved to the lessor in an oil and
gas lease, an overriding royalty, a production payment and any similar burden,
but does not include a carried working interest, a net profits interest or any
other interest which is payable out of profits and does not include any interest
that does not burden the entire working interests in a lease.
1.9 "Available Production" means all Unitized Substances produced and
saved from the Unit Area except so much thereof as is used in the conduct of
operations under the Unit Agreement and this agreement and so much thereof as is
delivered in kind to owners of Lease Burdens entitled to delivery thereof in
kind.
1.10 "Drilling Party" means the Party or Parties obligated to contribute to
the Costs incurred in Drilling, Deepening or Plugging Back a well in accordance
with this agreement.
1.11 "Non-Drilling Party" means a Party not obligated to contribute to the
Costs incurred in Drilling, Deepening or Plugging Back a well in accordance with
this agreement.
1.12 "Drill" means to perform all operations reasonably necessary and
incident to the drilling of a well, including preparation of roads and drill
site, testing and, if productive of Unitized Substances, completing and
equipping for production, including flow lines, treaters, separators and
tankage, or plugging and abandoning, if dry.
1.13 "Deepen or Plug Back" means to perform all operations reasonably
necessary and incident to deepening or plugging back a well, testing and, if
productive of Unitized Substances, completing or recompleting and equipping for
production, including flow lines, treaters, separators and tankage, or plugging
and abandoning, if dry.
[1.14 and 1.15 intentionally omitted.]
1.16 "Salvage Value" of materials and equipment means the value of such
materials and equipment determined in accordance with Exhibit 2, less the
reasonably estimated costs of salvaging the same.
1.18 Each party is herein referred to by the neuter pronoun "it."
ARTICLE 2
APPORTIONMENT OF COSTS AND OWNERSHIP OF
AVAILABLE PRODUCTION AND PROPERTY
2.1 Apportionment. Except as otherwise specified herein, (particular
reference being made to Sections 9.3 Taxes, and 25.3 Rights and Obligations of
Non-Abandoning Party):
A. All Costs incurred by Unit Operator in the conduct of operations
pursuant to this agreement shall be borne by the Parties in proportion to
their respective Participating Interests.
ANTELOPE CREEK UNIT OPERATING AGREEMENT - Page 2
<PAGE>
B. All Available Production shall be owned by the Parties in
proportion to their respective Beneficial Interests.
C. All materials, equipment and other property, whether real or
personal, acquired by Unit Operator, and the cost of which is chargeable as
Costs pursuant to this agreement, shall be owned by the Parties in
proportion to their respective Participating Interests.
2.2 Revision of Apportionment. Upon termination or other removal of a
Lease Burden which is an encumbrance upon a Committed Working Interest, the net
acreage of such Committed Working Interest and the Beneficial Interests of all
Parties shall be revised, but Unit Operation shall not be required to recognize
the change in Beneficial Interests resulting from such revision until the first
day of the month next succeeding the termination or other removal of such Lease
Burden. No other change shall be made in the Beneficial Interests of the
Parties and no change shall be made in the Participating Interests of the
Parties, except for transfers of Committed Working Interests and except as
otherwise specified herein (particular reference being made to Sections 4.2
Failure to Pay Rentals.
ARTICLE 3
UNLEASED INTERESTS
3.1 Treated as Leased. If a Party owns in fee all or any part of the oil
and gas rights in a tract within the Unit Area, free from oil and gas lease or
other contract in the nature thereof, such Party shall be deemed to own a
Committed Working Interest in such tract, and also a royalty interest in such
tract, in the same manner and with like effect as if such Party's oil and gas
rights in such tract were covered by the form of oil and gas lease attached
hereto as Exhibit 4 and as if such Party owned both the royalty interest
reserved in such lease and the interest of the lessee under such lease.
However, such Party shall have the right to take in kind all Unitized Substances
accruing to the royalty interest deemed owned by it in such tract, in the same
manner as it is entitled to take in kind its proportionate share of Available
Production.
3.2 Execution of Lease. In any provisions hereunder where reference is
made to an assignment by any Party of its Committed Working Interest to any
other Party, such reference as to any Party owning an unleased interest shall be
interpreted to mean that such Party shall execute an oil and gas lease to such
other Party in the form attached hereto as Exhibit 4, which shall satisfy the
requirement for assignment of a Committed Working Interest.
ARTICLE 4
RENTALS AND LEASE BURDENS
4.1 Payment of Rentals. The Unit Operator shall pay, on or before the due
date thereof, each installment of rental becoming due and payable under any
lease, unless and until surrender of such lease, which shall be charged as Costs
and borne by the Parties in proportion to their respective Participating
Interests.
ANTELOPE CREEK UNIT OPERATING AGREEMENT - Page 3
<PAGE>
4.2 Failure to Pay Rentals. If an oil and gas lease covering a tract
within the Unit Area is terminated by failure to make proper payment of rental
required to be paid by Unit Operator in accordance with Section 4.1, Unit
Operator shall make a bona fide effort at the Parties' expense to obtain a new
lease covering the same interest in such tract as that covered by the terminated
lease.
4.3 Lease Burdens Payable by Unit Operator. Any and all payments
(including minimum royalties) accruing to Lease Burdens on the effective date
hereof, (including any such Lease Burdens not committed to the Unit Agreement)
in respect of Unitized Substances, shall be made by Unit Operator for the
account of the Parties. All such payments made by Unit Operator shall be
charged to and borne by the Parties in proportion to their respective Beneficial
Interests, except that all such payments made in respect of Unitized Substances
produced from a well owned by less than all the Parties shall be charged to and
borne by the Party or Parties owning such well in the proportions that such
Parties share in the Available Production therefrom. Also, Unit Operator shall
deliver Unitized Substances to owners of Lease Burdens who have the right and
who elect to take the same in kind.
4.4 Lease Burdens and Other Interests Payable by Parties. If a Committed
Working Interest is subject to a carried working interest, net profits interest
or any other interest which is payable out of profits, or any interest that does
not burden all Committed Working Interests, the Party owning such Committed
Working Interest shall be solely responsible for, and shall bear the entire
burden of, any and all payments accruing thereto in respect of Unitized
Substances.
ARTICLE 5
COMPENSATORY ROYALTIES
5.1 Payment and Apportionment. Whenever demand is made in accordance with
the Unit Agreement for the drilling of a well for the protection of the Unit
Area from drainage, or for the payment of compensatory royalties in lieu
thereof, Unit Operator shall give written notice thereof to each Party. If
payment of such compensatory royalties is Approved by the Parties, Unit Operator
shall make payment thereof. All payments so made by Unit Operator shall be
charged as Costs and borne by the Parties in proportion to their respective
Participating Interests.
[ARTICLE 6 intentionally omitted.]
ARTICLE 7
SUPERVISION OF OPERATIONS BY PARTIES
[7.1 - 7.5 intentionally omitted.]
7.6 Audits. From time to time, but not more often than once each year an
audit may be made of Unit Operator's records and books of account pertaining to
operations hereunder.
ANTELOPE CREEK UNIT OPERATING AGREEMENT - Page 4
<PAGE>
Each such audit shall be made by auditors in the employ of Parties requesting
the audit and all costs of the audit shall be borne by such Parties.
7.7 Extraneous Projects. Nothing contained in this agreement shall be
deemed to authorize the Parties, by vote or otherwise, to act on any matter or
authorize any expenditure unless such matter or expenditure relates to the
conduct of operations authorized by the Unit Agreement or this agreement.
ARTICLE 8
UNIT OPERATOR'S POWERS AND RIGHTS
8.1 In General. Subject to the limitations provided for in this agreement
all operations authorized by the Unit Agreement and this agreement shall be
managed and conducted by Unit Operator. Unit Operator shall have exclusive
custody of all materials, equipment and other property owned by the Parties
jointly.
8.2 Employees. All individuals employed by Unit Operator in the conduct
of operations hereunder shall be the employees of Unit Operator alone, and their
working hours, rates of compensation and all other matters relating to their
employment shall be determined solely by Unit Operator.
8.3 Non-Liability. Unit Operator shall not be liable to any other Party
for anything done or omitted to be done by it in the conduct of operations
hereunder except in case of bad faith, gross negligence or willful misconduct.
8.4 Force Majeure. The obligations of Unit Operator hereunder shall be
suspended to the extent that, and only so long as, performance thereof is
prevented by fire, action of the elements, strikes or other differences with
workmen, acts of civil or military authorities, acts of the public enemy,
restrictions or restraints imposed by law or by regulation or order of
governmental authority, whether federal, state or local, inability to obtain
necessary rights of access, or any other cause reasonably beyond control by Unit
Operator, whether or not similar to any cause above enumerated. The Parties
further agree that any delays caused by the failure of the Tribe or UDC to
respond when required pursuant to this Agreement or the Unit Agreement, or
delays by the United States in granting any permit, shall temporarily excuse
performance hereunder for the period of such delay. Whenever performance of its
obligations is prevented by any such cause, Unit Operator shall give notice
thereof to the other Parties as promptly as reasonably possible.
8.5 Lien. Each of the other Parties hereby grants to Unit Operator a lien
upon its Committed Working Interests, its interest in all jointly owned
materials, equipment and other property and its interest in all Available
Production, as security for payment of Costs and Lease Burdens chargeable to it,
together with any interest payable thereon. Unit Operator shall have the right
to bring any action at law or in equity to enforce collection of such
indebtedness with or without foreclosure of such lien. In addition, upon
default by any Party in the payment of Costs or Lease Burdens chargeable to it,
Unit Operator shall have the right upon ten (10) days notice to each Party to
collect and receive from the purchaser or purchasers thereof the proceeds of
such Party's share of Available Production, up to the amount owing by such Party
plus interest at the rate set forth in the Accounting Procedures until paid;
each such purchaser shall
ANTELOPE CREEK UNIT OPERATING AGREEMENT - Page 5
<PAGE>
be entitled to rely on Unit Operator's statement concerning the existence and
amount of any such default.
8.6 Advances. Unit Operator, at its election, shall have the right from
time to time to demand and receive from the other Parties payment in advance of
their respective shares of the estimated amount of the Costs to be incurred in
operations hereunder during any month, which right may be exercised only by
submission to each such Party of a properly itemized statement of such estimated
Costs, together with an invoice for its share thereof. Each such statement and
invoice for the payment in advance of estimated Costs for any month shall be
submitted on or about the twentieth (20th) day of the next preceding month. The
amount of each such invoice shall be payable within thirty (30) days after the
mailing thereof, and thereafter shall bear interest at the rate set forth in the
Accounting Procedure until paid. Proper adjustment shall be made monthly
between such advances and Costs, to the end that each Party shall bear and pay
its proportionate share of Costs incurred and no more. Unit Operator may
request advance payment or security for the total estimated Costs to be incurred
in a particular Drilling, Deepening or Plugging Back operation and shall not be
obligated to commence such operation unless and until such advance payment is
made or Unit Operator is furnished security acceptable to it for the payment
thereof by the Party or Parties chargeable therewith.
8.7 Use of Unit Operator's Drilling Equipment. Any Drilling, Deepening or
Plugging Back operation conducted hereunder may be conducted by Unit Operator by
means of its own tools and equipment provided that the rates to be charged and
the applicable terms and conditions are set forth in a form of drilling contract
Approved by the Party or Parties chargeable with the Costs incurred in such
operation, except that in any case where Unit Operator alone constitutes the
Drilling Party, such drilling contract shall be approved by the Parties.
8.8 Rights as Party. As an owner of Committed Working Interest, the Party
acting as Unit Operator shall have the same rights and obligations hereunder as
if it were not the Unit Operator. In each instance where this agreement
requires or permits a Party to give a notice, consent or approval to the Unit
Operator, such notice, consent or approval shall be deemed properly given by the
Party acting as Unit Operator if and when given to all other Parties.
ARTICLE 9
UNIT OPERATOR'S DUTIES
9.1 Specific Duties. In the conduct of operations hereunder, Unit
Operator shall:
A. Drilling of Wells. Drill, Deepen or Plug Back a well or wells
only in accordance with the provisions of this agreement;
B. Compliance with Laws and Agreements. Comply with the provisions
of the Unit Agreement and all applicable laws and governmental regulations
(whether federal, state or local);
C. Consultation with Parties. Consult freely with the other Parties
concerning operations hereunder, and keep them advised of all matters
arising in operations hereunder which Unit Operator deems important, in the
exercise of its best judgment;
ANTELOPE CREEK UNIT OPERATING AGREEMENT - Page 6
<PAGE>
D. Payment of Costs. Pay all Costs incurred in operations hereunder
promptly as and when due and payable, and keep the Committed Working
Interests and all jointly owned property free from liens which may be
claimed for the payment of such Costs, except any such lien which it
disputes, in which event Unit Operator may contest the disputed lien upon
giving to the other Parties written notice thereof;
E. Records. Keep full and accurate records of all Costs incurred,
Lease Burdens paid and controllable materials and equipment, which records,
and receipts and vouchers in support thereof, shall be available for
inspection by authorized representatives of the other Parties at reasonable
intervals during usual business hours at the office of Unit Operator;
F. Information. Furnish to each of the other Parties upon request
therefor (1) copies of Unit Operator's authorization for expenditure, (2)
itemizations of estimated expenditures in excess of $25,000, (3) copies of
all drilling reports, well logs, basic engineering data, tank tables, gauge
reports and run tickets, (4) reports of stock on hand at the first of each
month, (5) samples of cores or cuttings taken from wells drilled hereunder,
to be delivered at the well in containers furnished by the Party requesting
same, and (6) such other or additional information or reports as may be
requested by the Parties. Upon request, Unit Operator shall promptly
advise the other Parties of the date on which any well is spudded or the
date on which drilling operations are commenced;
G. Access to Unit Area. Permit each of the other Parties, through
its duly authorized employees or agents, but at its sole risk and expense,
to have access to the Unit Area at all times, and to derrick floor of each
well drilled or being drilled hereunder, for the purpose of observing
operations conducted hereunder and inspecting jointly owned materials,
equipment or other property and to have access at reasonable times to
information and data in the possession of Unit Operator concerning the Unit
Area;
9.2 Insurance.
A. Unit Operators. Unit Operator shall comply with the Workmen's
Compensation law of the state in which the Unit Area is located. Unit
Operator shall also maintain in force at all times with respect to
operations hereunder such other insurance, if any, as may be required by
law. In addition, Unit Operator shall maintain such other insurance, if
any, as is described in Exhibit 5 hereto attached or as is Approved from
time to time by the Parties. Unit Operator shall carry no other insurance
for the benefit of the Parties except as above specified. Upon written
request of any Party, Unit Operator shall furnish evidence of insurance
carried by it with respect to operations hereunder.
B. Contractors. Unit Operator shall require all contractors engaged
in operations under this agreement to comply with the Workmen's
Compensation law of the state in which the Unit Area is located and to
maintain such insurance as Unit Operator may be Directed by the Parties to
require.
C. Automotive Equipment. In the event Automobile Public Liability
insurance is specified in said Exhibit 5 or is subsequently Approved by the
Parties, no direct charge shall be made by Unit Operator for premiums paid
for such insurance for Operator's fully owned automotive equipment.
ANTELOPE CREEK UNIT OPERATING AGREEMENT - Page 7
<PAGE>
9.3 Taxes. Any and all ad valorem taxes payable upon the Committed
Working Interests (and upon Lease Burdens which are not payable by the owners
thereof), or upon materials, equipment or other property acquired and held by
Unit Operator hereunder, and any and all taxes (other than income taxes) upon or
measured by Unitized Substances produced from the Unit Area which are not
payable by the purchaser or purchasers thereof or by the owner of Lease Burdens,
shall be paid by Unit Operator as and when due and payable and shall be charged
and borne as follows:
A. Taxes upon materials, equipment and other property acquired and
held by Unit Operator hereunder shall be charged to and borne by the
Parties owning the same in proportion to their respective interests
therein.
B. All other taxes paid by Unit Operator shall be charged to and
borne by the Parties in proportion to their respective Beneficial
Interests, except that in the case of a well owned by less than all the
Parties, such taxes shall be charged to and borne by the Party or Parties
owning such well in the same proportions that they share in the Available
Production therefrom. All reimbursements from owners of Lease Burdens,
whether obtained in cash or by deduction from Lease Burdens, on account of
any taxes paid for such owners shall be paid or credited to the Parties in
the same proportions as such taxes were charged to such Parties.
C. In the event of a transfer by one Party to another under the
provisions of this agreement of any Committed Working Interest or of any
interest in any well or in the materials and equipment in any well or in
the event of the reversion of any relinquished interest as in this
agreement provided the taxes above mentioned assessed against the interest
transferred or reverted for the taxable period in which such transfer or
reversion occurs shall be apportioned between such Parties so that each
shall bear the percentage of such taxes which is proportionate to that
portion of the taxable period during which it owned such interest. Each
party shall promptly furnish Unit Operator with copies of notices,
assessments, levies or tax statements received by it pertaining to the
taxes to be paid by Unit Operator. Unit Operator shall make such returns,
reports and statements as may be required by law in connection with any
taxes above provided to be paid by it and shall furnish copies to the
parties upon request. It shall notify the Parties of any tax which it does
not propose to pay before such tax becomes delinquent.
9.4 Non-Discrimination. Unit Operator shall not discriminate against any
employee or applicant for employment because of race, creed, color or national
origin, and an identical provision shall be incorporated in all contracts made
by Unit Operator with independent contractors; provided, however, that this
provision shall not require Unit Operator to violate any regulations of, or
agreements with, the Ute Indian Tribe.
ANTELOPE CREEK UNIT OPERATING AGREEMENT - Page 8
<PAGE>
ARTICLE 10
LIMITATIONS ON UNIT OPERATOR
10.1 Specific Limitations. In the conduct of operations hereunder, Unit
Operator shall not, without first obtaining the approval of the Parties:
A. Change in Operations. Make any substantial change in the method
of operation of any well, except in the case of an emergency and except in
accordance with any development plan.
B. Limit on Expenditures. Undertake any project reasonably
estimated to require an expenditure in excess of Twenty-five Thousand
Dollars ($25,000); provided, however, that (1) Unit Operator is authorized
to make all usual and customary operating expenditures that are required in
the normal course of producing operations or that are included in a
development plan approved by the Parties, and (2) whenever Unit Operator is
authorized to conduct a Drilling, Deepening or Plugging Back operation, or
to undertake any other project, in accordance with this agreement, Unit
Operator shall be authorized to make all reasonable and necessary
expenditures in connection therewith and (3) in case of emergency, Unit
Operator may make such immediate expenditures as may be necessary for the
protection of life or property, but notice of such emergency shall be given
to all other Parties as promptly as reasonably possible.
C. Partial Relinquishment. Make any partial relinquishment of its
rights as Unit Operator or appoint any suboperator.
D. Settlement of Claims. Pay in excess of Ten Thousand Dollars
($10,000) in the settlement of any claim (other than Workmen's Compensation
claims) for injury to or death of persons, or for loss of or damage to
property.
ARTICLE 11
TITLES
11.1 Representations of Ownership. Each Party represents to all other
Parties that its ownership of Working Interests in the Unit Area is that set out
in Exhibit 1.5 attached hereto. If it develops that any such representation of
ownership is incorrect the rights and responsibilities of the Parties shall be
governed by the provisions of this Article 11, but such erroneous representation
shall not be a cause for cancelling or terminating this Agreement.
11.2 Title Examination. Title examination may be made on the drill site of
any proposed well prior to commencement of drilling operations if deemed
advisable by Unit Operator. At Unit Operator's request, each Party shall
furnish to Unit Operator all abstracts, title opinions, title papers, and
curative materials in its possession. All additional abstracts and other title
papers not in the possession of or made available to Unit Operator by the
Parties, but necessary for the examination of title, shall be obtained by Unit
Operator. Unit Operator shall cause title to be examined by outside attorneys,
and copies of all title opinions shall be furnished to each Party at the Party's
request. The costs incurred by Unit Operator in obtaining title examinations
shall be charged as Costs and borne by the Parties in proportion to their
respective Participating Interests. Such curative work as is performed to meet
title requirements concerning
ANTELOPE CREEK UNIT OPERATING AGREEMENT - Page 9
<PAGE>
a Committed Working Interest shall be performed by and at the expense of the
Party claiming such interest.
[11.3 - 11.10 intentionally omitted.]
11.11 Failure of Title to Approved Interest. If title to any Committed
Working Interest has been approved and subsequently fails in whole or in part,
the following shall be the consequences:
A. Effect upon Committed Parties. Such title failure shall not cause
any change in the proportion in which the Parties to this agreement at the
date of such title failure as among themselves bear Costs and share in
Unitized Substances, whether or not the true owner of the interest to which
title failed joins in the Unit Agreement and this agreement.
B. Damages. Any loss, liability, damage or expense arising by reason
of such failure of title, except liability to third parties for damages on
account of prior production of Unitized Substances, shall be charged as
Costs and borne by the Parties to this agreement at the date title failure
in proportion to their respective Participating Interest on such date.
C. Accounting for Unitized Substances. Any liability to third
parties for damages on account of prior production of Unitized Substances
shall be borne by the Parties in the same proportions in which they shared
in such prior production.
11.12 Joinder by True Owner. The true owner of a Working Interest which
has ceased to be subject to this agreement because title is disapproved or
because title has failed may, upon such terms and conditions as are Approved by
the Parties, join this agreement or enter into a separate operating agreement.
[ARTICLE 12 intentionally omitted.]
ARTICLE 13
ADDITIONAL DRILLING AND DEEPENING OR PLUGGING BACK
13.1 No Liability Without Consent. No Party shall be liable for any
portion of the Costs of Drilling any well or for any portion of the Costs
incurred in Deepening or Plugging Back a well unless it elects to participate in
such operations as hereinafter provided.
[Articles 14 - 23 intentionally omitted.]
ANTELOPE CREEK UNIT OPERATING AGREEMENT - Page 10
<PAGE>
ARTICLE 24
TRANSFERS OF INTEREST
[24.1 and 24.2 intentionally omitted.]
24.3 Assumption of Obligations. No Party shall make any transfer of
Committed Working Interests without making the same expressly subject to the
Unit Agreement and this agreement and requiring the transferee in writing to
assume and to agree to perform all obligations of the transferor under the Unit
Agreement and this agreement insofar as relates to the interest assigned, except
that such assumption of obligations shall not be required in case of a transfer
by mortgage or deed of trust as security for indebtedness.
24.4 Effective Date. A transfer of Committed Working Interests shall
not be effective as between the Parties until the first day of the month ext
following the delivery to Unit Operator of the original or a certified copy of
the instrument of transfer conforming to the requirements of Section 24.3, along
with evidence satisfactory to Unit Operator of approval by the governmental
authority having supervision over the Committed Working Interest transferred,
where such approval is required. In no event shall a transfer of Committed
Working Interests relieve the transferring Party of any obligations accrued
hereunder prior to said effective date, for which purpose any obligation assumed
by the transferor to participate in the Drilling, Deepening or Plugging Back of
a well prior to such effective date shall be deemed an accrued obligation.
ARTICLE 25
ABANDONMENT OF PRODUCING WELLS
25.1 Consent Required. A well which has been completed as a producer
of Unitized Substances shall not be abandoned and plugged, nor shall the
operation of such well for production from the formations or zones in which it
has been completed be discontinued, except with the written consent of all
Parties then owning the well.
25.2 Abandonment Procedure. If the abandonment of a well which has
once produced is approved by the Parties Unit Operator shall give written notice
thereof to each party then having an interest in the well. Any Party who
objects to abandonment of the well (herein called non-abandoning Party) may give
written notice thereof to all other Parties (herein called abandoning Parties)
then having interests in the well, provided such notice is given within thirty
(30) days after receipt of the notice given by Unit Operator. If such objection
is so made the non-abandoning Party or Parties shall forthwith pay to the
abandoning Parties their respective shares of the Salvage Value of the
materials and equipment in or appurtenant to the well, less the reasonably
estimated cost of plugging the well. Upon the making of such payment the
abandoning Parties shall be deemed to have relinquished unto the non-abandoning
Party or Parties all their working interest in the well and the area prescribed
for such well by spacing order of state or governmental authority, or if there
is no such order, the area established for such well by the spacing pattern then
in use in the field, or, if there is no such order or spacing pattern, then the
forty (40) acre legal subdivision, or fractional lot or lots approximating the
same, embracing such well, but only with respect to the formation or zone in
which it is the
ANTELOPE CREEK UNIT OPERATING AGREEMENT - Page 11
<PAGE>
completed, and all their interest in the materials and equipment in or
appurtenant to the well. If there is more than one non-abandoning Party each
shall be deemed to have acquired the operating rights and working interest so
relinquished in the proportion that the Participating Interest of each such
Party immediately prior to such relinquishment then bears to the total
Participating Interests of all non-abandoning Parties.
25.3 Rights and Obligations of Non-Abandoning Party. After the
relinquishment above provided for such well shall be operated by Unit Operator
for the account of the non-abandoning Party or Parties, who shall own all
Available Production therefrom and shall bear all Lease Burdens and Costs
thereafter incurred in operating the well and plugging it when abandoned, and
also other Costs of any additional tankage, flow lines or other facilities
needed to measure separately the Unitized Substances produced from the well;
said operating costs shall include an overhead charge computed at the highest
per well rate applicable to the operation of a single producing well in
accordance with Exhibit 2, if such rate is provided. Non-abandoning Parties
shall bear the costs of any separate metering necessary.
[ARTICLES 26 - 28 intentionally omitted.]
ANTELOPE CREEK UNIT OPERATING AGREEMENT - Page 12
<PAGE>
ARTICLE 29
SEVERAL, NOT JOINT LIABILITY
29.1 Liability. The liability of the Parties hereunder shall be
several and not joint or collective. Each Party shall be responsible only for
its obligations as herein set out.
29.2 No Partnership Created. It is not the intention of the Parties
to create, nor shall this agreement or the Unit Agreement be construed as
creating a mining or other partnership or association between the Parties, or to
render them liable as partners or associates.
ARTICLE 30
NOTICES
30.1 Giving and Receipt. Except as otherwise specified herein, any
notice, consent, Approval, Direction or statement herein provided or permitted
to be given by Unit Operator or a Party to the Parties shall be given in writing
by United States mail or by facsimile, properly addressed to each Party to whom
given, with postage or charges prepaid, or by delivery thereof in person to the
Party to whom given. A notice given under any provision hereof shall be deemed
given only when received by the Party to whom such notice is directed, except
that any notice given by United States registered mail or by facsimile, properly
addressed to the Party to whom given with all postage and charges prepaid, shall
be deemed given to and received by the Party to whom directed forty-eight (48)
hours after such notice is deposited in the United States mails or twenty-four
(24) hours after such notice is transmitted by facsimile and confirmed
electronically, and also except that a notice to Unit Operator shall not be
deemed given until actually received by it.
30.2 Proper Addresses. Each Party's proper address shall be deemed
to be the address set forth under or opposite its signature hereto unless and
until such Party specifies another post office address within the continental
limits of the United States by not less than ten (10) days prior written notice
to all other Parties.
ARTICLE 31
EXECUTION IN COUNTERPARTS AND RATIFICATION
31.1 Counterparts. This agreement may be executed in counterparts
and all such counterparts taken together shall be deemed to constitute one and
the same instrument.
31.2 Ratification. This agreement may be executed by the execution
and delivery of a good and sufficient instrument of ratification, adopting and
entering into this agreement. Such ratification shall have the same effect as
if the party executing it had executed this agreement or a counterpart hereof.
ARTICLE 32
SUCCESSORS AND ASSIGNS
ANTELOPE CREEK UNIT OPERATING AGREEMENT - Page 13
<PAGE>
32.1 Covenants. This agreement shall be binding on and inure to the
benefit of all Parties signing the same, their heirs, devisees, personal
representatives, successors and assigns, whether or not it is signed by all the
parties listed below. The terms hereof shall constitute a covenant running with
the lands and the Committed Working Interests of the Parties.
ARTICLE 33
HEADINGS FOR CONVENIENCE
33.1 Headings. The table of contents and the headings used in this
agreement are inserted for convenience only and shall be disregarded in
construing this agreement.
ARTICLE 34
EFFECTIVE DATE AND TERM
34.1 Effective Date. This agreement shall become effective on June 1,
1996.
34.2 Term. The term of this agreement shall be the same as the term
of the leases subject hereto; provided, however, that upon the termination of
any lease shall cease to be subject hereto.
34.3 Effect of Termination. Termination of this agreement shall not
relieve any Party of its obligations accrued hereunder before such termination.
Notwithstanding termination of thus agreement the provisions hereof relating to
the charging and payment of Costs and the disposition of materials and equipment
shall continue in force until all materials ad equipment owned by the Parties
have been disposed of and until final accounting between Unit Operator and the
Parties. Termination of this agreement shall automatically terminate all rights
and interests acquired by virtue of this agreement in lands within the Unit Area
except such transfers of Committed Working Interests as have been evidenced by
formal written instruments of transfer.
34.4 Effect of Signature. When this agreement is executed by two
Parties, execution by each shall be deemed consideration for execution by the
other and each Party theretofore or thereafter executing this agreement shall
thereupon become and remain bound hereby until the termination of this
agreement.
ARTICLE 35
SUBSEQUENT JOINDER
[35.1 intentionally omitted.]
35.2 After Commencement of Operations. After commencement of
operations under the Unit Agreement, subsequent joinder in the Unit Agreement
and in this agreement by any owner of Working Interest in land within the Unit
Area who is not a Party shall be permitted upon such reasonable terms and
conditions as may be approved by the Parties.
ANTELOPE CREEK UNIT OPERATING AGREEMENT - Page 14
<PAGE>
[ARTICLE 36 intentionally omitted.]
ARTICLE 37
RIGHT OF APPEAL
37.1 Not Waived. Nothing contained in this agreement shall be deemed
to constitute the waiver by any Party of any right it would otherwise have to
contest the validity of any law or any order or regulation of governmental
authority (whether federal, state or local) relating to or affecting the conduct
of operations within the Unit Area or to appeal from any such order.
ARTICLE 38
OTHER PROVISIONS
38.1 Unit Participation Agreement. The Parties hereto are parties to
that certain Antelope Creek Unit Participation Agreement dated June 1, 1996 (the
"Participation Agreement"), the provisions of which are incorporated herein by
reference. To the extent any provision contained in the body of this agreement
is inconsistent with any provision of the Participation Agreement, the
provisions of the Participation Agreement shall control.
38.2 Cooperative Plan. The development and operation of the leases
comprising the Unit Area are in part governed by that certain Cooperative Plan
of Development and Operation for the Antelope Creek Enhanced Recovery Project,
Duchesne County, Utah dated February 17, 1994, by and among Petroglyph Operating
Company, Inc., Inland Resources Inc., Petroglyph Gas Partners, L.P., Ute Indian
Tribe, and Ute Distribution Corporation, as approved by the Bureau of Indian
Affairs (the "Cooperative Plan"). To the extent any provision contained in the
body of this agreement is inconsistent with any provision of the Cooperative
Plan, the provisions of the Cooperative Plan shall control.
38.3 Standard of Conduct. Unit Operator shall conduct its activities
under this agreement as a reasonable prudent operator, in a good and workmanlike
manner, with due diligence and dispatch, in accordance with good oilfield
practice, and in compliance with applicable laws and regulations, but in no
event shall it have any liability as Unit Operator to the other parties for
losses sustained or liabilities incurred except such as may result from gross
negligence or willful misconduct.
38.4 Resignation or Removal of Unit Operator and Selection of
Successor.
38.4.1 Resignation or Removal of Unit Operator. Unit Operator
---------------------------------------
may resign at any time by giving notice thereof to the other Parties.
If Unit Operator terminates its legal existence or is no longer
capable of serving as Unit Operator, Unit Operator shall be deemed to
have resigned without any action by the other Parties, except the
selection of a successor. Unit Operator may be removed only for good
cause by the affirmative vote of Parties owning a majority interest
based on ownership as shown on Exhibit "1.5" remaining after excluding
the voting interest of Unit Operator and its affiliates, if any; such
vote shall not be deemed effective until a written notice has been
delivered to the Unit Operator by the other Parties detailing the
alleged default and Unit Operator has failed to cure the default
within thirty (30) days from its receipt of the notice or, if the
ANTELOPE CREEK UNIT OPERATING AGREEMENT - Page 15
<PAGE>
default concerns an operation then being conducted, within forty-eight (48)
hours of its receipt of the notice. For purposes hereof, "good cause"
shall mean not only gross negligence or willful misconduct but also the
material breach of or inability to meet the standards of operation
contained herein or material failure or inability to perform its
obligations under this agreement. Such resignation or removal shall not
become effective until 7:00 o'clock A.M. on the first day of the calendar
month following the expiration of ninety (90) days after the giving of
notice of resignation by Unit Operator or action by the other Parties to
remove Unit Operator, unless a successor Unit Operator has been selected
and assumes the duties of Unit Operator at an earlier date. A change of a
corporate name or structure of Unit Operator shall not be the basis for
removal of Unit Operator.
38.4.2 Selection of Successor Unit Operator. Upon the resignation or
------------------------------------
removal of Unit Operator under any provision of this agreement, a successor
Unit Operator shall be selected by the other Parties. The successor Unit
Operator shall be selected from the Parties owning an interest in the Unit
Area at the time such successor Unit Operator is selected. The successor
Unit Operator shall be selected by the affirmative vote of Parties owning a
majority interest based on ownership as shown on Exhibit "1.5" and not
affiliated with Unit Operator; provided, however, if a Unit Operator owning
an interest in the Unit Area, which has been removed or is deemed to have
resigned fails to vote or votes only to succeed itself, the successor Unit
Operator shall be selected by the affirmative vote of the Parties owning a
majority interest based on ownership as shown on Exhibit "1.5" remaining
after excluding the voting interest of the Unit Operator that was removed
or resigned and its affiliates. The former Unit Operator shall promptly
deliver to the successor Unit Operator all records and data relating to the
operations conducted by the former Unit Operator to the extent such records
and data are not already in the possession of the successor Unit Operator.
Any cost of obtaining or copying the former Unit Operator's records and
data shall be charged in the joint account.
38.4.3 Effect of Bankruptcy. If Unit Operator becomes insolvent,
--------------------
bankrupt or is placed in receivership, it shall be deemed to have resigned
without any action by the other Parties, except the selection of a
successor. If a petition for relief under the federal bankruptcy laws is
filed by or against Unit Operator, and the removal of Unit Operator is
prevented by the federal bankruptcy court, all Parties shall comprise an
interim operating committee to serve until Unit Operator has elected to
reject or assume this agreement pursuant to the Bankruptcy Code, and an
election to reject this agreement by Unit Operator as a debtor in
possession, or by a trustee in bankruptcy, shall be deemed a resignation as
Unit Operator without any action by the other parties except the selection
of a successor. During the period of time the operating committee controls
operations, all actions shall require the approval of two (2) or more
Parties owning a majority interest based on ownership as shown on Exhibit
"15". In the event there are only two (2) parties to this agreement,
during the period of time the operating committee controls operations, a
third party acceptable to the Parties and the federal bankruptcy court
shall be selected as a member of the operating committee and all actions
shall require the approval of two (2) members of the operating committee
without regard for their interest in the Unit Area based on Exhibit "1.5".
ANTELOPE CREEK UNIT OPERATING AGREEMENT - Page 16
<PAGE>
38.4.4 Diminution of PGP's Share of Capital Expenditures. If at any
-------------------------------------------------
time the total capital expenditures contributed to the development of the
Unit Area by PGP and its successors in interest, attributable to the fifty
percent (50%) Working Interest owned by PGP at the date of execution of
this Agreement, shall be less than one-third (1/3) of the total capital
expenditures contributed to the development of the Unit Area by all Working
Interest Owners, CEPI shall have the option of acquiring the operating
rights under this Agreement and replacing POCI as Unit Operator. CEPI
shall exercise such option by sending written notice of its intent to
exercise its option to PGP and POCI, and CEPI's acquisition of the
operating rights and its replacement of POCI as Unit Operator shall be
effective on the date CEPI shall specify in its notice, which date shall
not be earlier than thirty (30) days after PGP's and POCI's receipt of such
notice. In the event CEPI exercises its option under this section, CEPI
shall assume and accept assignment of any and all third party, unaffiliated
contracts entered into by POCI on behalf of the Working Interest Owners,
and CEPI and POCI agree to negotiate in good faith concerning CEPI's
purchase from POCI of all property not already owned by the Working
Interest Owners, but used in the operation of the Unit Area, including
without limitation material, equipment, vehicles, real and personal
property leases, and other real and personal property, for the fair market
value of such property. In the event of a transfer of operations to CEPI
pursuant to this section, PGP and POCI agree to execute such documents,
furnish such information and data to CEPI, and take such other actions as
are reasonably necessary to effect such transfer of operations. PGP and
POCI specifically agree that they will assist CEPI in obtaining the consent
of the Ute Indian Tribe and the Ute Distribution Corporation. For purposes
of this section, at such time as PGP and CEPI have jointly contributed
Twenty Million Five Hundred Ninety-Three Thousand Dollars ($20,593,000)
(with CEPI contributing seventy-five percent (75%) of such amount and PGP
contributing twenty-five percent (25%) of such amount) to the development
of the Unit Area pursuant to the provisions of section ____ of the
Participation Agreement after the Effective Date of such Participation
Agreement, PGP and CEPI shall each be deemed to have contributed Twenty-Two
Million Seven Hundred Fifty Thousand Dollars ($22,750,000) in capital
expenditures to the development of the Unit Area.
38.4.5 Sale of PGP's and POCI's Operating Rights. In the event PGP
-----------------------------------------
and POCI desire to sell their operating rights or such operating rights are
assigned by law (by merger, stock acquisition or otherwise) in and to the
Unit Area to an unaffiliated third party (in one or a series of
transactions), they must receive CEPI's prior consent to such transfer, or
such transfer shall be void. CEPI's consent shall not be unreasonably
withheld by CEPI. In determining whether the withholding of consent is
reasonable, the factors to be considered shall include, without limitation,
the proposed purchaser's experience in the operation of oil and gas
properties, secondary recovery expertise, and financial ability to carry
out its duties and obligations under this Agreement, and specific facts
known to CEPI related to prior acts of the proposed purchaser constituting
dishonesty, misrepresentation, or fraud. For purposes of this section,
"unaffiliated third party" shall mean a party which is not controlled by
one or more of the owners of Petroglyph Energy, Inc., as of the date of
this agreement; and "control" (including the terms "controlling,"
"controlled by" and "under common control with") means the
ANTELOPE CREEK UNIT OPERATING AGREEMENT - Page 17
<PAGE>
possession, direct or indirect, of the power to direct or cause the
direction of the management, development, and operation of the Unit Area,
whether through the ownership of voting securities, by contract, or
otherwise.
38.5 Competitive Rates and Use of Affiliates. All wells drilled on the
Unit Area shall be drilled on a competitive contract basis at the usual rates
prevailing in the area. If it so desires, Unit Operator may employ its own
tools and equipment in the drilling of wells, but its charges therefor shall not
exceed the prevailing rates in the area and the rate of such charges shall be
agreed upon by the parties in writing before drilling operations are commenced,
and such work shall be performed by Unit Operator under the same terms and
conditions as are customary and usual in the area in contracts of independent
contracts who are doing work of a similar nature. All work performed or
materials supplied by affiliates or related parties of Unit Operator shall be
performed or supplied at competitive rates, pursuant to written agreement, and
in accordance with customs and standards prevailing in the industry.
38.6 Custody of Funds. Unit Operator shall hold for the account of the
Parties any funds of the Parties advanced or paid to Unit Operator, either for
the conduct of operations hereunder or as a result of the sale of production
from the Unit Area, and such funds shall remain the funds of the Parties on
whose accounts they are advanced or paid until used for their intended purpose
or otherwise delivered to the Parties or applied toward the payment of debts.
Nothing in this section shall be construed to establish a fiduciary relationship
between Unit Operator and the other Parties for any purpose other than to
account for the Parties' funds as herein specifically provided. Nothing in this
paragraph shall require the maintenance by Unit Operator of separate accounts
for the funds of the other Parties unless the Parties otherwise specifically
agree.
38.7 Taking Production in Kind. Each Party may take in kind or separately
dispose of its proportionate share of all oil produced from the Unit Area,
exclusive of production which may be used in development and producing
operations and in preparing and treating oil and gas for marketing purposes and
production unavoidably lost. Any extra expenditure incurred in the taking in
kind or separate disposition by any Party of its proportionate share of the
production shall be borne by such party. Any Party taking its share of
production in kind shall be required to pay for only its proportionate share of
such part of Unit Operator's surface facilities which it uses. Any Party taking
its share of production in kind shall provide a comprehensive plan approved by
the Unit Operator for such taking in kind. Unit Operator's approval shall not
be unreasonably withheld. Each Party shall execute such division orders and
contracts as may be necessary for the sale of its interest in production from
the Unit Area, and except as provided otherwise herein shall be entitled to
receive payment directly from the purchaser thereof for its share of all
production.
ANTELOPE CREEK UNIT OPERATING AGREEMENT - Page 18
<PAGE>
IN WITNESS WHEREOF, this agreement has been executed by the undersigned
parties to be effective the 1st day of June, 1996.
Unit Operator: PETROGLYPH OPERATING COMPANY, INC.
By: /s/Robert A. Christensen
------------------------------
Name: Robert A. Christensen
Title: Vice-President
Working Interest Owners: PETROGLYPH GAS PARTNERS, L.P.
By: PETROGLYPH ENERGY, INC.,
its general partner
By: /s/Robert C. Murdock
------------------------------
Name: Robert C. Murdock
Title: President
CoENERGY ENHANCED PRODUCTION, INC.
By: /s/P.E. Doohan
------------------------------
Name: P.E. Doohan
Title: Attorney-in-Fact
ANTELOPE CREEK UNIT OPERATING AGREEMENT - Page 19
<PAGE>
Exhibit 10.16
-------------
WATER AGREEMENT
---------------
THIS WATER AGREEMENT ("Agreement") is entered into as of the 1st day of
October, 1994, by and between EAST DUCHESNE CULINARY WATER IMPROVEMENT DISTRICT
(hereinafter referred to as the "Water District") and PETROGLYPH OPERATING
COMPANY, INC. (hereinafter referred to as "Petroglyph").
WHEREAS, the Water District maintains a water pipeline facility (the
"System") which provides culinary water to industrial, commercial and
residential customers in Duchesne County, Utah; and
WHEREAS, the parties have entered into an agreement ("Option Agreement")
dated as of the 2nd day of April, 1994, giving Petroglyph the option to reserve
sufficient capacity and deliverability on the System so as to allow Petroglyph
to take, at Petroglyph's election, an amount of water not to exceed 210,000
gallons per day; and
WHEREAS, Petroglyph has given notice within the Option Period (as that term
is defined in the Option Agreement) in accordance with the terms of such Option
Agreement of its intention to purchase all of the reserved capacity and
deliverability; and
WHEREAS, the parties wish to further define the terms of their agreement as
set forth more fully herein.
NOW, THEREFORE, for and in consideration of the premises, the parties
hereby covenant and agree as follows:
1. Original Term. This Agreement shall continue for a term of ten (10)
-------------
years, commencing on October 1, 1994, and ending on September 30, 2004 A.D. (the
"Original Term").
2. Renewal Term. Provided that Petroglyph has complied with the terms and
------------
provisions of this Agreement throughout the Original Term and any prior Renewal
Terms, this Agreement shall automatically renew for additional periods of one
(1) year each ("Renewal Term"), unless either party shall terminate this
Agreement by giving written notice to the other at least 12 months prior to the
expiration of the Original Term or any preceding Renewal Term (the "Termination
Date"). The Agreement shall continue during each Renewal Term upon the same
terms and conditions contained herein applicable to the Original Term, except as
specifically modified by the mutual agreement of the parties prior to the
Termination Date. As used herein, the "Term" of this Agreement shall refer,
collectively, to the Original Term and all Renewal Terms.
<PAGE>
3. Capacity and Deliverability. During the Term of this Agreement, the
---------------------------
Water District shall reserve sufficient capacity and deliverability on its
System so as to allow Petroglyph to take from time to time, at Petroglyph's
election, and the Water District shall deliver, up to 420,000 gallons of water
per day ("Reserved Volume") at a rate not to exceed 291.6 gallons per minute.
Petroglyph shall from time to time give the Water District reasonable notice
prior to any significant change in the volumes it intends to take up to and
including the Reserved Volume. Notwithstanding anything in this Agreement to
the contrary, the Water District shall at no time be obligated to deliver
quantities of water in excess of the physical capacity of the System at the time
of delivery.
4. Capacity Charge. Petroglyph shall pay a monthly capacity charge
---------------
("Capacity Charge") of $300.00, payable on the first day of each month.
Petroglyph shall not be required to take any quantity of water during any month,
but it shall nonetheless pay the Capacity Charge each month during the Term of
this Agreement. The failure to pay the Capacity Charge when due shall not
effectuate a forfeiture of Petroglyph's rights under this Agreement, unless the
same has not been paid within 10 days after written demand has been made
therefor by the Water District.
5. Price per Gallon. There shall be no charge for the first 88,000
----------------
gallons of water taken by Petroglyph during any month, the price for which is
included in the Capacity Charge (which Capacity Charge shall be paid regardless
of whether or not Petroglyph takes any or no amount of water). Any usage of
water by Petroglyph beyond 88,000 gallons per month will be billed by the Water
District at a rate of $1.00 per 1,000 gallons. This rate is based upon the
Water District's commercial rate for a 4-inch compound meter connection. This
price shall be subject to any district-wide rate increases for the class of
users to which Petroglyph belongs, with a 30-day notice to Petroglyph.
6. Delivery Point. Petroglyph may at its option install and operate
--------------
buried pipelines at or near one or more delivery points set forth in the "Water
Supply Feasibility Study for Petroglyph Operating Company, Inc. - 1994" (the
"Study") prepared by Sunrise Engineering, Inc. (a copy of which has been
provided to the Water District, and which is incorporated herein by this
reference). Upon construction of one or more such buried pipelines and
Petroglyph's notification thereof, the Water District shall deliver the
requested quantities of water up to the Reserved Volume to such delivery point
or points. In addition to the delivery points identified in the Study,
Petroglyph may request delivery at or through one or more points where the Water
District's System connects to a third-party water pipeline, in which case the
Water District shall deliver the requested quantities of water up to the
Reserved Volume at the connection with such third-party water pipeline.
- 2 -
<PAGE>
7. Connection and Meter Requirements. The Water District shall provide
---------------------------------
Petroglyph one or more connections to its System and install a meter capable of
measuring volumes of water delivered at rates of from 25 gallons per minute to
300 gallons per minute. The connection to the System and meter shall be at the
delivery point or points requested by Petroglyph. Except to the extent
connections and meters are already present at the requested delivery point, for
each delivery point requested by Petroglyph, Petroglyph shall pay the Water
District $6,000 for the cost of connecting Petroglyph's pipeline to its System
and the installation of the meter. The 4-inch compound meter shall be capable
of delivering water from 1 gallon to 700 gallons per minute. Petroglyph shall
provide a dual check backflow preventor between the Water District's meter and
Petroglyph's pumps.
8. Sufficient Capacity. The parties agree and acknowledge that the
-------------------
volumes of water to be taken by Petroglyph hereunder shall be used for purposes
of general oil and gas field operations and for the secondary recovery of oil
through waterflooding in Duchesne County, Utah. The Water District represents
and warrants that it has sufficient volumes of water and capacity for delivery
dedicated to and of the class and type of user, whether industrial, commercial
or other class or type, to deliver to Petroglyph the quantities of water
reserved herein up to the Reserved Volume. The Water District furthermore
represents and warrants that Petroglyph shall not be required to pay any
additional charge or fee for the intended use of the water delivered hereunder
to any person or governmental agency.
9. Further Assurances. The Water District agrees and covenants that it
------------------
will take no action nor enter into any agreement that would in any way impair or
reduce its ability to deliver the Reserved Volume of water or otherwise to fully
perform its obligations under this Agreement.
10. Assignability. The rights and obligations under this Agreement may be
-------------
assigned and delegated in part or whole by either party to another party capable
of performing hereunder, but only upon 10 days written notice by such assigning
and delegating party to the other party.
11. Notices. All notices and communications required or permitted under
-------
this Agreement shall be in writing and addressed as set forth below. Any
communication or delivery hereunder shall be deemed to have been duly made and
the receiving party charged with notice i) if personally delivered, when
received, ii) if mailed, three business days after mailing, either first class
mail or certified mail, or iii) if sent by overnight courier, one day after
sending. All notices shall be addressed as follows:
- 3 -
<PAGE>
to the Water District:
---------------------
East Duchesne Culinary Water
Improvement District
P. O. Box 319
Duchesne, Utah 84021-0319
to Petroglyph:
-------------
Petroglyph Operating Company, Inc.
P. O. Box 1807
Hutchinson, Kansas 67504-1807
12. System Shortages. In the event of a shortage of water in the System
----------------
requiring the restriction of water use, it is understood that the Water District
may not be able to deliver the quantities of water specified in this Agreement.
It is understood and agreed that the Water District shall give preference to its
residential water customers or other customers having a higher usage priority
than Petroglyph as is in the best interest of the health and welfare of the
residents residing within the service area of the Water District.
13. Binding Effect. This Agreement shall inure to the benefit of and be
--------------
binding upon the parties hereto, their successors, heirs, devisees,
administrators, executors, and assigns.
14. Entire Agreement. This Agreement constitutes the entire agreement of
----------------
the parties hereto and supersedes all prior oral and written agreements and
understandings with respect to the subject matter hereof.
15. Headings. The headings contained in this Agreement shall be deemed to
--------
be for the convenience of the parties only and shall not be considered in
construing this Agreement.
16. Amendments. No amendments or additions to this Agreement shall be
----------
binding unless in writing and signed by the parties hereto, except as herein
otherwise provided.
17. Force Majeure. Neither party shall be liable for any error, failure
-------------
to perform or delay in performance if such error, failure or delay is not due to
such party's negligence and arises from actions of civil or regulatory
authorities, national emergency, labor difficulty, fire, flood or other
catastrophe, act of God, insurrection, war, riot, power supply failure,
unavoidable malfunctions or difficulties with equipment, inability to obtain
materials or supplies, or any other cause which could not reasonably have been
foreseen and provided against.
- 4 -
<PAGE>
Executed as of the day and year first above written.
WATER DISTRICT: PETROGLYPH:
EAST DUCHESNE CULINARY WATER PETROGLYPH OPERATING COMPANY, INC.
IMPROVEMENT DISTRICT
By: /s/ John A. Swasey By: /s/ Robert C. Murdock
-------------------- -------------------------
John A. Swasey, Robert C. Murdock,
Chairman Vice President
- 5 -
<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:
-4-
<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 21
EXHIBIT 21
Upon consummation of the offering,
the subsidiaries of the Company will
be as follows:
SUBSIDIARIES OF PETROGLYPH ENERGY, INC.
---------------------------------------
Petroglyph Operating Company, Inc.,
a Kansas corporation
PGP II, L.P.,
a Delaware limited partnership
Spanish Peaks Gathering, L.L.C.,
a Colorado limited liability company
Petroglyph Energy, Inc.,
a Kansas corporation
Petroglyph Gas Partners, L.P.,
a Delaware limited partnership
<PAGE>
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
<PAGE>
[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
August 22, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM PETROGLYPH
ENERGY, INC.'S CONSOLIDATED BALANCE SHEET AND INCOME STATEMENT AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> YEAR 6-MOS
<FISCAL-YEAR-END> DEC-31-1996 JUN-30-1997
<PERIOD-START> JAN-01-1996 JAN-01-1997
<PERIOD-END> DEC-31-1996 JUN-30-1997
<CASH> 1,577,632 372,452
<SECURITIES> 0 0
<RECEIVABLES> 1,661,942 2,911,600
<ALLOWANCES> 0 0
<INVENTORY> 1,064,802 1,742,567
<CURRENT-ASSETS> 4,182,921 4,991,884
<PP&E> 17,966,532 23,287,329
<DEPRECIATION> (5,083,655) (5,785,851)
<TOTAL-ASSETS> 17,470,107 23,544,607
<CURRENT-LIABILITIES> (4,723,673) (5,987,635)
<BONDS> (51,800) (5,034,910)
0 0
0 0
<COMMON> 0 0
<OTHER-SE> (12,694,634) (12,522,062)
<TOTAL-LIABILITY-AND-EQUITY> (17,470,107) (23,544,607)
<SALES> (5,457,689) (2,238,131)
<TOTAL-REVENUES> (5,457,689) (2,307,089)
<CGS> 0 0
<TOTAL-COSTS> 6,394,741 2,505,025
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 40,580 19,009
<INCOME-PRETAX> 487,294 (172,572)
<INCOME-TAX> 190,044 0
<INCOME-CONTINUING> 297,250 (172,572)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 297,250 (172,572)
<EPS-PRIMARY> 0 0
<EPS-DILUTED> 0 0
</TABLE>
